[Senate Hearing 110-1166]
[From the U.S. Government Publishing Office]
S. Hrg. 110-1166
U.S. TRADE RELATIONS WITH CHINA
=======================================================================
HEARING
before the
SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM
of the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
__________
JULY 25, 2007
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED TENTH CONGRESS
FIRST SESSION
DANIEL K. INOUYE, Hawaii, Chairman
JOHN D. ROCKEFELLER IV, West TED STEVENS, Alaska, Vice Chairman
Virginia JOHN McCAIN, Arizona
JOHN F. KERRY, Massachusetts TRENT LOTT, Mississippi
BYRON L. DORGAN, North Dakota KAY BAILEY HUTCHISON, Texas
BARBARA BOXER, California OLYMPIA J. SNOWE, Maine
BILL NELSON, Florida GORDON H. SMITH, Oregon
MARIA CANTWELL, Washington JOHN ENSIGN, Nevada
FRANK R. LAUTENBERG, New Jersey JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas JIM DeMINT, South Carolina
THOMAS R. CARPER, Delaware DAVID VITTER, Louisiana
CLAIRE McCASKILL, Missouri JOHN THUNE, South Dakota
AMY KLOBUCHAR, Minnesota
Margaret L. Cummisky, Democratic Staff Director and Chief Counsel
Lila Harper Helms, Democratic Deputy Staff Director and Policy Director
Christine D. Kurth, Republican Staff Director and General Counsel
Kenneth R. Nahigian, Republican Deputy Staff Director and Chief Counsel
------
SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM
BYRON L. DORGAN, North Dakota, JIM DeMINT, South Carolina,
Chairman Ranking
JOHN D. ROCKEFELLER IV, West JOHN McCAIN, Arizona
Virginia OLYMPIA J. SNOWE, Maine
JOHN F. KERRY, Massachusetts GORDON H. SMITH, Oregon
BARBARA BOXER, California JOHN ENSIGN, Nevada
MARIA CANTWELL, Washington JOHN E. SUNUNU, New Hampshire
MARK PRYOR, Arkansas
CLAIRE McCASKILL, Missouri
C O N T E N T S
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Page
Hearing held on July 25, 2007.................................... 1
Statement of Senator DeMint...................................... 2
Statement of Senator Dorgan...................................... 1
Statement of Senator Sanders..................................... 6
Witnesses
Brown, Hon. Sherrod, U.S. Senator from Ohio...................... 4
Hoffa, James P., General President, International Brotherhood of
Teamsters...................................................... 18
Prepared statement........................................... 21
Nichols, Robert S., President and COO, The Financial Services
Forum.......................................................... 56
Prepared statement........................................... 58
O'Shaughnessy, M. Brian, Chairman, CEO, and President, Revere
Copper Products, Inc........................................... 27
Letter, dated September 21, 2006, from Richard L. Wilkey; L.
Patrick Hassey; and M. Brian O'Shaughnessy to Hon. John
Engler..................................................... 29
Prepared statement........................................... 42
Paul, Scott N., Executive Director, Alliance for American
Manufacturing.................................................. 49
Prepared statement........................................... 52
Sanders, Hon. Bernard, U.S. Senator from Vermont................. 6
Spooner, Hon. David M., Assistant Secretary of Commerce for
Import Administration, U.S. Department of Commerce............. 8
Prepared statement........................................... 9
U.S. TRADE RELATIONS WITH CHINA
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WEDNESDAY, JULY 25, 2007
U.S. Senate,
Subcommittee on Interstate Commerce, Trade, and
Tourism,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:33 p.m. in
room SD-562, Dirksen Senate Office Building, Hon. Byron L.
Dorgan, Chairman of the Subcommittee, presiding.
OPENING STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. I'm going to call the hearing to order.
This is the hearing of the Subcommittee on Interstate Commerce,
Trade, and Tourism of the Senate Commerce Committee. Today
we're holding the second in a series of hearings that will
examine our country's trade policies. Our first hearing was in
the month of April. We looked at the general direction of trade
policies. Today we'll look at our trading relationship with
China, the country with which we have the largest trade deficit
that one nation has ever experienced with another.
I indicated at the last hearing that I'm in favor of trade
and plenty of it, but I demand that it be fair. And, we have a
trade circumstance in this country that is unfair in so many
ways and what has happened to us is we have seen the dramatic
growth of a trade deficit that is going to injure this country.
Let me just say with respect to China, when the United
States granted permanent normal trade relations with China in
the year 2000 our merchandise trade deficit with China was $83
billion a year. By last year, that trade deficit had exploded
to $233 billion. For every six dollars of merchandise we
purchase from the Chinese, the Chinese buy one dollar of
merchandise from us. That is a staggering indictment of a trade
policy, regrettably, that I believe is not fair trade and
reflects, I believe, a wide range of problems as well. Those
problems include vast intellectual property theft and piracy,
currency manipulation, unfair barriers against U.S. exports,
and an unfair playing field in which U.S. jobs go to China
because of sweat shop conditions, a subject on which we will
hold a future hearing as well.
Recently we read of a decision to begin importing cars into
this country from China and the decision to import an
automobile from China into this country is an interesting one,
because I have raised questions about bilateral automobile
trade. It is interesting to me that the circumstances of
bilateral automobile trade in this country are such that when
the Chinese automobiles come to our shore they will be assessed
a 2.5 percent tariff. By mutual consent, if we were to export
automobiles to China, China will impose a 25 percent tariff.
Now, think of that. A country with whom we have a $200-plus
billion trade deficit; we have agreed that on bilateral
automobile trade it's just fine for them to enact a tariff that
is ten times ours. That is unbelievably ignorant of our
economic well-being in my judgment. I use that as one small
example. I will describe others today.
But part of the problem is unfair trade from a trading
partner that does not own up to the rules of trade. Part of it
is our own incompetence in negotiating bad trade agreements.
But a significant part of it as well, the overlapping portion
of it is the mantra that we keep chanting in this country about
free trade that turns out to be so fundamentally unfair to this
country's economic interests.
It's interesting to me that there seems to be very little
interest or concern by those that support the current trade
policy, even as the evidence mounts with dramatic, increasing
trade deficits that this trade policy is a failure.
So we will have a good discussion about a range of issues
and solutions. We are joined today by the Ranking Member,
Senator DeMint, on this Subcommittee. I've invited Senator
Brown, who has written extensively, in fact written a book on
this subject. Senator Sanders had asked to be the opening
witness and we will hear from Senator Sanders before we go to
the list of the witnesses that we've also invited.
I want to mention that in addition, after Senator Sanders
has testified, we will hear from the Honorable David Spooner,
the Assistant Secretary of Commerce for International Trade
Administration, U.S. Department of Commerce; Mr. James Hoffa,
General President, International Brotherhood of Teamsters;
Brian O'Shaughnessy, Chairman and CEO and President of Revere
Copper Products in Rome, New York; Mr. Scott Paul, Executive
Director, Alliance for American Manufacturing; and Mr. Robert
Nichols, President and COO of Financial Services Forum. I
appreciate the witnesses coming today and let me call on my
colleague Senator DeMint.
STATEMENT OF HON. JIM DeMINT,
U.S. SENATOR FROM SOUTH CAROLINA
Senator DeMint. Thank you, Mr. Chairman. I appreciate you
holding the hearing today. China is a critical trading partner
and we should continually examine the relationship that we have
with them as well as the trade agreements, as you've mentioned.
As most of us know, China is the world's fourth largest
economy, likely to become the world's third largest economy
this year. More importantly, it's a rapidly developing country,
with 1.3 billion consumers, with a rapidly growing middle
class. While we export nearly the same amount of goods to China
as we do to Japan, Japan is a developed country whose
population is ten times smaller than China's. As we develop a
strong relationship with China, the market for American
products will grow exponentially when the Chinese middle class
matures and they begin to consume goods on a similar scale to
other developed countries like Japan.
But unfortunately, I don't think we are going to discuss
the opportunities available in China at today's hearing. I fear
we're going to spend a good portion of this afternoon attacking
the Chinese. I anticipate that some of my colleagues will
express concern about subsidies and frustrations about currency
issues, all as a foundation for taking action against China--
revoking permanent normal trade relations, levying onerous
duties, or some other creative form of punitive trade policy.
In the 1980s and early 1990s, we heard a similar call for
protectionism, protectionist measures, but then the Japanese
were the source of our woes. Today it's the Chinese, and
tomorrow maybe it will be the Indians. Before we blame some
foreign capital for our woes, maybe we should take the time to
examine what we're doing wrong at home that is making us less
competitive.
America has a legal system where trial lawyers rush to the
courthouse, litigating every little difference and sucking
massive amounts of productive energy out of our economy. The
United States tort system costs Americans over $245 billion
annually. It costs the average small business $150,000 a year.
This is money that could have been better spent conducting
research and development, hiring new staff, or finding
opportunities in new markets, and even lowering the price of
our goods abroad. Instead, this money was needlessly wasted
enriching trial attorneys.
If the drag on American competitiveness from an abuse-prone
tort system isn't enough, our byzantine tax system compounds
the problem. Individuals and businesses in the United States
spend over 6 billion hours a year complying with the Federal
income tax code. They waste over $250 billion annually just
making sure they fill out the forms correctly. And this is all
before they open their checkbooks and write a check to Uncle
Sam.
Regardless of whether someone is a supporter of big
government spending and high taxes or wants a lean, efficient
government, you should be appalled that the tax code forces
Americans to waste over 6 billion hours a year, the yearly
output of 3 million Americans, just filling out tax forms. Just
think of what a shot in the arm it would be for American
competitiveness if we unleashed the innovative and creative
energies of 3 million Americans.
After American companies have been squeezed by frivolous
lawsuits and burdensome taxes, they're faced with the high cost
of regulation. Businessmen around the country are worried every
day that their shop is going to be fined or closed down because
they've somehow run afoul of the minutia in some Federal
regulation. They're forced to spend money that should be spent
innovating on compliance officers who can protect them from the
threat of an OSHA audit.
The costs last year of regulatory compliance exceeded $1.14
trillion. Even if half of all regulations are useful and
necessary, there is still over $500 billion in productive
energy being sucked out of our economy by government
regulations each year.
Colleagues, Ross Perot famously described what he thought
would be a ``giant sucking sound'' of jobs from America being
shifted overseas. While he was wrong about the impact of NAFTA,
he was right that there is a giant sucking sound. The giant
sucking sound we hear is the sound of Washington sucking
creative energy out of the American economy in the form of
energy wasted filling out tax forms and complying with
burdensome regulations. There's a giant sucking sound of trial
lawyers sucking billions of dollars out of the pockets of
American companies in the form of frivolous lawsuits. And maybe
most troubling, there's a giant sucking sound of the big-
spending politicians here in Washington sucking billions of
dollars out of the pockets of families and businesses to pay
for their big government initiatives.
I'm sure this afternoon we're going to hear a chorus of
complaints about the Chinese. We'll hear all the stories about
how the Chinese are eating our lunch and how the plight of the
American worker is in peril. Many fingers will be pointed at
Beijing and much scorn will certainly be heaped upon the
People's Republic of China. But I would submit to you that
you're pointing the finger at the wrong capital. You need to
look no further than this body to find where fault lies. It's
the U.S. Government that has let the lawyers run wild, the U.S.
Government that has promulgated nearly 75,000 pages of Federal
regulation, and the U.S. Congress that has drafted an Internal
Revenue Code that is thousands of pages long and siphons
billions of dollars out of our economy each year.
Colleagues, American competitiveness is at stake, but it's
not because some foreign government is trying to stick it to
America. It's because America's government has decided that it
wants to stick it to business and make them shoulder an ever
greater burden from the government. If government would just
step back and lessen the burden on American businesses and
innovators, the impact on domestic jobs and international
commerce would be stunning.
I thank the Chairman for taking the time to hold this
hearing and I look forward to comments from the witnesses.
Senator Dorgan. Well, Senator DeMint, we are going to have
an interesting hearing indeed. I think--let me put up a chart I
didn't put up. You look at that chart, I think it's very hard
to be one of the blame America first crowd. That chart has
nothing to do with what's wrong with America. That chart has
everything to do with an imbalance in trade and unfair trading
practices. But we will have an interesting time, apparently,
discussing these issues. Your opening statement did not----
Senator DeMint. I've got some charts of my own.
Senator Dorgan. Your opening statement did not discuss
trade, but I'm happy also to discuss the economy and a range of
other issues that you have raised. At any rate, it'll be an
interesting afternoon.
Senator Brown?
STATEMENT OF HON. SHERROD BROWN,
U.S. SENATOR FROM OHIO
Senator Brown. Thank you, Mr. Chairman, and thank you,
Senator DeMint, for allowing me to sit in on this Committee, of
which I'm not a member, but have a burning interest, as Senator
Dorgan has, on trade issues, and as Senator Sanders has led in
his years in the House.
I remember back in the late 1990s when the CEO's of
America's largest companies wandered the halls of Congress in
the House at least. Typically, CEOs of that stature didn't stop
in the offices of ordinary, everyday members from Vermont and
Ohio. They went to the leadership offices. But in those days,
because PNTR was so important to the largest companies in this
country, they stopped in individual offices. And they continued
day after day, CEO after CEO, talking about how they couldn't
wait to have access to one billion Chinese consumers.
What they failed to mention is that they really had way
more interest in one billion Chinese workers, and that's what
fundamentally the issue was about in China PNTR. They told us
that PNTR would ensure China's move to more of a market
economy. They said it would help promote growth and opportunity
for the people of both our nations. Unfortunately, on both
counts they proved wrong.
Experts, including James Mann of the John Hopkins School of
Advanced International Studies, who ran the Beijing Bureau for
several years for a major American newspaper, have stated that
the argument used to pass the China trade deal was a false
paradigm. Eating at McDonald's and wearing blue jeans does not
make China a vibrant democracy. The word from the business
elite in this country and from the newspaper publishers of this
country is, if you can tell the difference, has been over and
over that the more we engage China economically that democracy
automatically would follow, and there has simply been no
evidence of that and the American public's on to that.
In addition, the Economic Policy Institute recently
reported, as Senator Dorgan suggested, on the trade deficit,
nearly 2 million lost U.S. jobs since China's admission to the
WTO. My state, one of the hardest hit, has lost somewhere in
the vicinity of 66,000 jobs directly attributed to Chinese--to
our relationship with China.
We know that what's happened to manufacturing is a national
security issue that as our manufacturing base declines our
ability to defend ourselves declines, especially in the steel
industry and especially in big manufacturing, if you will. And
we are giving away much of our technology. We know about the
Boeing deals. We know about Westinghouse. We give away much of
our technology to another country that's not necessarily a
friendly country.
I am particularly amused by my colleague from South
Carolina's discussion about regulation. To be sure, we have
more regulation in this country. We probably are less likely in
our country to have contaminated pet food, contaminated
toothpaste, toys like Thomas the Tank, tires that malfunction,
because we do in fact have a regulatory structure in our
country whose primary responsibility, in spite of efforts by
people perhaps of Senator DeMint's philosophy to undercut those
regulations and to weaken those protections, from consumer
product safety to OSHA to the EPA, American values to protect
our middle class and protect our people and protect our
families from unsafe food products and unsafe toys and our
children and all of that.
I would never trade our regulatory structure for the
Chinese regulatory structure. It's simply not a surprise--it
came as a surprise to none of us who have been skeptical of the
trade relationship between the United States and China that
China has sent us products that are unsafe, whether it's
vitamin C or toothpaste or pet foods. We know that when a
country is that wide open with no real safety and health and
food safety and health regulations that that kind of wide-open
trade policy, as we cut the number of inspectors at our
borders, that that's going to happen.
Basically, what we've had is free trade on the cheap. When
you have free trade on the cheap, you end up with less
environmental protection and less food safety.
I thank the Chairman.
Senator Dorgan. Senator Brown, thank you very much.
I know Senator Sanders has to leave to be at another
Committee. But Senator Sanders, you have asked to testify.
We're very much appreciative of your being here, and why don't
you proceed. We will by consent ask that the full statements of
the witnesses and the full opening statements of the panel will
be included in their entirety in the record.
STATEMENT OF HON. BERNARD SANDERS,
U.S. SENATOR FROM VERMONT
Senator Sanders. Thank you very much, Mr. Chairman, and
thank you for your work and Senator Brown's work in
highlighting an issue that in their guts the American people
understand, but has not yet permeated this institution or
certainly the corporate media.
We have got to ask some hard questions and that is why is
it that the middle class today is shrinking despite an
explosion of worker productivity and technology? Why is it that
since Bush has been President, five million more Americans have
slipped into poverty? Now, I don't think trade is the only
reason that the middle class is shrinking and poverty is
increasing, but it is certainly a major reason.
Mr. DeMint, I am not here to attack the Chinese government.
I am here to talk about what our government has done. The
Chinese government is doing its best to represent their people
and some of us would like to see our government do its best to
represent the working people of this country rather than just
the CEOs of large corporations, although I must say I do find
it interesting that not so many years ago many of our
conservative Republican friends were telling us how we had to
spend tens and tens of billions of dollars to oppose and fight
authoritarian communism, and now many of those same people in
Congress and in corporate America are telling us what a
wonderful country an authoritarian communist nation is.
The bottom line of this discussion is, Senator Brown has
indicated, is that we are in a race to the bottom. I would love
somebody to explain to me how free trade means forcing American
workers to compete against people who make 20 cents an hour, 30
cents an hour, 50 cents an hour, who go to jail when they talk
about democracy in their country, who go to jail when they try
to form a union. That to me is not anything having to do with
free trade. That is an effort to force a race to the bottom by
which American workers are seeing in many cases a decline in
their wages and in their standard of living.
Here's what we're looking at in America today. Eighty
percent of the toys sold in the United States are made in
China. Ninety percent of the vitamin C made in America is made
in China. Eighty percent of the footwear in this country is
made in China. It is estimated in a few years 90 percent of the
U.S. furniture production will be moved to China. Eighty-five
percent of the bikes are made in China.
As Senator Dorgan indicated, this alliance between Chrysler
and Chery where for the first time automobiles will be
manufactured in China that can be sold in the United States
could likely mean the end for all intent and purposes of the
automobile industry in this country. To my mind, the time is
long overdue for this Congress to stand up for the working
families of America, not just the CEOs of large corporations
and all of the campaign contributions that influence what we do
here.
Trade is an enormously important issue if we are going to
protect the middle class. All of us, as Senator Dorgan
indicated, believe in trade and plenty of it. But we believe
that there has got to be a level playing field and not a
process by which we race to the bottom.
So I want to congratulate Senator Dorgan for raising this
issue. I want to conclude by saying we're not just talking
about blue collar manufacturing jobs. We're talking about white
collar information technology jobs. And if we don't get this
issue right, the fate of the middle class in this country will
be very uncertain to say the least.
Senator, thank you very much.
Senator Dorgan. Senator Sanders, thank you very much. I
understand you have to be at another hearing. Thank you very
much for your testimony.
I would like to call up the other witnesses and, with
consent, I would like to ask the Honorable David Spooner,
Assistant Secretary of Commerce for International Trade
Administration, to come forward. Mr. Spooner, if you would sit
on the right side. I want to ask the other witnesses to come up
as well. We will ask you to testify first and if we have
questions of you we will ask those questions. Then I will hear
from the other witnesses. But I thank you very much for being
here.
Mr. Hoffa, if you would come to the witness table, the
General President of the International Brotherhood of
Teamsters. Mr. Brian O'Shaughnessy, the Chairman, CEO, and
President, Revere Copper Products, Inc., in Rome, New York; Mr.
Scott Paul, the Executive Director, Alliance for American
Manufacturing; and Mr. Robert S. Nichols, President and COO,
Financial Services Forum.
Let me thank all of you for being here today. I know some
of you have come some distance, and this is a very important
topic, one that people feel passionately about.
Mr. Spooner, you're coming to us from the U.S. Department
of Commerce. We appreciate your willingness to be here. You
have submitted your testimony previously. We would ask that you
summarize. The testimony of all of the witnesses will be
included in the record in their entirety.
Mr. Spooner, you may proceed.
STATEMENT OF HON. DAVID M. SPOONER, ASSISTANT
SECRETARY OF COMMERCE FOR IMPORT ADMINISTRATION,
U.S. DEPARTMENT OF COMMERCE
Mr. Spooner. Thank you, Mr. Chairman, Senator DeMint, and
Senator Brown. I'm pleased to be here today to share some
thoughts on the United States' trade relationship with China.
American companies face a number of challenges as they try to
compete with China, from market barriers and intellectual
property issues to unfair trade practices. Nevertheless, the
relationship with China is generally a positive one, with
benefits to U.S. manufacturers, farmers, service industries,
and consumers.
For 35 years it has been the policy of the United States
across every administration to engage China as it moves toward
market economics. The United States derives clear benefits from
trading with China and by doing so within a framework which
requires China to abide by international obligations. This
policy culminated in China's accession to the WTO in 2001, so
that for the first time China had both rights and
responsibilities in the international trading system.
U.S. exports to China are booming. China is our fastest
growing major export market and is now our fourth largest
overall export market. U.S. exports to China totaled $55
billion in 2006, up 32 percent from the prior year. U.S.
exports to China are now greater than U.S. exports to India,
Brazil, and France combined. Our companies and consumers derive
benefits from imports from China as well.
At the same time, we face real challenges with our trade
relations with China. To use one example, China is on the path
of creating global oversupply in the steel industry. Chinese
steel capacity is now greater than that of the U.S., Europe,
and Japan combined. Further, we have recently faced some
serious challenges regarding the safety of Chinese imports.
Challenges which the administration is addressing by
establishing an inter-agency working group on import safety, to
be chaired by the Secretary of Health and Human Services. The
working group will identify where improvements can be made and
ensuring the safety of imports through cooperation with
Federal, State, and local government agencies, foreign
governments, and U.S. importers.
Commerce is addressing these and other challenges with a
multipronged approach to bring about positive changes in
China's trade policies, regulations, and practices to level the
playing field. Commerce's China efforts fall into three general
areas: tough-minded negotiations to achieve better market
access, aggressive enforcement of our trade laws to fight
dumping and subsidies, and high energy trade promotion to help
U.S. companies compete and win in the Chinese marketplace.
Our negotiations take place primarily through the Joint
Commission on Commerce and Trade, which meets once a year and
is chaired by the Commerce Department and USTR, with high level
participation from USDA, and the Strategic Economic Dialogue
led by the Treasury Department. Because of our aggressive trade
enforcement, 27 percent of our antidumping duty orders are in
imports from China, and recently we preliminarily determined to
reverse a 23-year-old government policy by applying our anti-
subsidy law to China. Indeed, I was in China last week to lead
our on-the-ground investigation of subsidies and the rest of
the China team is still in China conducting verification and
will return to the United States at the end of this week. We
can and should remedy subsidies in China when they exist and
it's in our mutual interest to do so.
Our export promotion activity means that we devote more
personnel and activity to China than to any other market, with
substantial benefits to U.S. exporters. The Commerce China
team, a staff of 130 supported by our China trade specialists
in Washington and field offices throughout the United States,
work directly with companies, particularly small and medium
size enterprises, interested in exporting to China to develop
market opportunities, facilitate business, and to solve
problems.
We believe this threefold strategy provides the right mix
to help American workers and to help China continue on the path
of reform and to become a responsible stakeholder in the global
economy.
Thank you, Mr. Chairman, and I'm happy to take any
questions.
[The prepared statement of Mr. Spooner follows:]
Prepared Statement of Hon. David M. Spooner, Assistant Secretary of
Commerce for Import Administration, U.S. Department of Commerce
Mr. Chairman, Senator DeMint, Members of the Subcommittee, I am
pleased to be with you today to share some thoughts on the United
States' trade relationship with China. In our view, this relationship
is in general a positive one, with benefits to U.S. manufacturers,
workers, farmers, ranchers, and service providers. However, at the same
time, we recognize that U.S. companies face a number of challenges as
they try to compete in China, from market barriers and intellectual
property issues, to unfair trade practices in which Chinese companies
might engage in the U.S. or other markets. Further, we have recently
faced some serious challenges regarding the safety of Chinese imports.
Let me begin with an overview.
Overview of U.S.-China Relations
Since China started down the path of reform some thirty years ago,
it has enjoyed some of the highest rates of sustained economic growth
the world has ever seen. We welcome China's move toward market-based
economics.
Indeed, it has been the policy of the United States, across all
administrations to engage China politically and economically as it has
struggled to move toward market economics. In the 35 years since the
signing of the Shanghai Communique, U.S. economic policies have had two
main goals: to help China move to a rules-based system and to help
China internationalize its economy. These policies culminated with
China's accession to the WTO in 2001, which resulted in China's
membership in the world's primary forum for economic engagement. China
now has both the rights and responsibilities that come with membership
in the international trading system.
The U.S. has also benefited from this policy. China is one of our
fastest growing markets and is now our fourth largest export market.
U.S. exports to China totaled $55 billion in 2006, up 32 percent from
the previous year. To put this in perspective, U.S. exports to China
were greater than U.S. exports to India, Brazil and France combined.
According to industry surveys, U.S. companies in China are generally
successful and report solid sales in the China market. And our
companies and consumers derive benefits from imports from China as
well.
At the same time, we must recognize that there are a range of trade
and economic practices in China that most would consider unfair. For
example, the non-market driven growth of China's steel industry risks
creating global over supply, and China's efforts to legislate policies
that protect significant segments of domestic industry at the expense
of foreign competitors, as evidenced by the latest draft of China's
Anti-Monopoly Law, foster an unlevel playing field in China.
At the Department of Commerce our China work falls into three
general areas: tough-minded negotiations to achieve more access to
markets; aggressive enforcement of our trade laws to fight illegal
dumping and subsidies; and a strong commitment to trade promotion to
help U.S. companies compete and win in the Chinese marketplace.
Let me provide a description of some of the things we are doing in
each of these areas.
Commerce's Role in Trade Policy
The most important mechanism we have to promote policy change in
China is through trade negotiations. We regularly consult with China on
a range of trade policies, regulations, and practices in order to
improve the business environment in China for our companies and for
exported goods and services.
To achieve our objectives, we are engaging the Chinese through
bilateral consultations, chiefly the Joint Commission on Commerce and
Trade (JCCT), co-chaired by the Commerce Department and USTR, and the
Strategic Economic Dialogue (SED), led by the Treasury Department.
Joint Commission on Commerce and Trade (JCCT)
For almost 25 years, the JCCT has served as a bilateral
consultative mechanism to resolve specific trade concerns and promote
commercial opportunities. Since 2004, the JCCT has met at an elevated
level, with Secretary Gutierrez and U.S. Trade Representative Schwab
now chairing the U.S. side and Vice Premier Wu Yi chairing the Chinese
side. At the last JCCT in 2006, the U.S. and China reached agreement on
a number of matters, such as: (1) eliminating some redundant regulatory
requirements for medical device imports; (2) improving enforcement of
intellectual property rights by requiring installation of legitimate
operating systems software; (3) a deadline for China to commence formal
negotiations to join the WTO's Government Procurement Agreement; and
(4) reviewing export control cooperation. In addition, China announced
that its State Council issued a notice requiring that all laws,
regulations, and measures affecting trade be published in a single
official journal. We expect to hold the 18th session of the JCCT in
late fall in Beijing.
Chinese and U.S. officials meet in a number of JCCT Working Groups
throughout the year to address issues such as tourism, IPR, high
technology, subsidies and export controls. In addition, we continue to
engage China on rising steel imports through a dialogue on steel.
Strategic Economic Dialogue (SED)
The U.S.-China Strategic Economic Dialogue (SED) provides an
additional forum for advancing our trade agenda. The second meeting of
the SED was held May 22-23 in Washington, and the third will be held in
December in Beijing.
The SED is a mechanism for maintaining strong and mutually
beneficial economic and trade relations between the United States and
China. The Commerce Department works closely with Treasury, USTR, State
and other agencies to promote long-term structural change. At the
meeting in May, leaders from both countries agreed to liberalize air
services rights, undertake further financial sector reforms, work to
foster energy security, and take additional steps to protect the
environment and strengthen the rule of law.
Commerce's Enforcement Role: Enforcing Trade Laws and Agreements
The second area in our approach to China, the focus of my
responsibilities at Import Administration within the Department of
Commerce, is aggressive enforcement of our trade laws to ensure a
balanced playing field for American manufacturers, a task to which the
Administration is fully committed. Commerce currently maintains 62
antidumping duty orders on imports from China, including consumer
goods, steel products, agricultural products, seafood, and chemicals.
These orders represent 27 percent of the total antidumping duty orders
we currently have in effect globally and cover almost $6 billion in
imports.
Earlier this year, Commerce preliminarily modified a 23-year-old
government policy by applying the anti-subsidy law to China. In the
countervailing duty investigation of coated free sheet paper from
China, Commerce preliminarily determined that the current nature of
China's economy does not create the obstacles to applying the anti-
subsidy law that were present in the ``Soviet-style economies'' at
issue when we originally developed our policy more than 20 years ago.
China of 2007 is not the Soviet Bloc of 1984. Our preliminary
determination reflects the view that we can and should measure and
remedy subsidies in China when they exist. We will be issuing our final
determination in October of this year.
Just as China has evolved, so should the range of tools available
to make sure that China trades fairly. Indeed, I was just in China last
week for an on-the-ground investigation of subsidies to China's paper
industry. Additionally, my agency is now investigating subsidies to
China's steel industry.
To further ensure that China lives up to its trade commitments, the
U.S. also makes use of the WTO dispute resolution process. In January
2006, the U.S. warned China about the imminent filing of a WTO case
challenging an antidumping order imposing duties on imports of kraft
linerboard from the United States, and the Chinese side quickly
rescinded that order. We now have four WTO cases against China. In
2006, the United States, Europe, and Canada brought a WTO dispute
challenging China's discriminatory charges on imported auto parts. In
February 2007, the United States filed a case challenging China's use
of prohibited export and import substitution subsidies. In April 2007,
we filed two more WTO cases against China--one raised a number of IP
enforcement issues, and the other focused on market access restrictions
affecting U.S. copyright-intensive products such as publications, and
audio and video products. In addition, China remained on the Priority
Watch List in USTR's Special 301 report and subject to Section 306
monitoring based on their record of IP protection.
Clearly, a fair and tough-minded approach to enforcement of our
trade laws and agreements is a critical component of our engagement
with China.
Commerce's Trade Promotion Role: Assisting U.S. Exporters in China
Beyond negotiations and our trade enforcement work, the Commerce
Department's mission is to ensure that American companies can compete
and win in the Chinese market. Our Commerce team in China constitutes
our largest overseas presence, with a staff of 130. The China Team,
supported by our China trade specialists in Washington and our export
offices across the United States, work directly with companies,
particularly small and medium-sized enterprises (SMEs), interested in
exporting to China to develop market opportunities, facilitate business
and solve problems.
Developing Market Opportunities: Activities in China
Through our Commercial Service, we assist U.S. companies in areas
such as export counseling, customized market research, qualified
international contacts and trade leads, match-making, and trade events.
In response to a 2004 Congressional mandate, we have opened
American Trading Centers in 14 key cities. The American Trading
Centers initiative opens up large and growing, but underserved
markets, helping U.S. firms compete for major local
infrastructure projects and sell directly to Chinese importers.
These Centers provide targeted market research; counseling;
match-making with local Chinese buyers, importers, etc.; and
representation at trade shows.
The Commerce Gold Key Program helps U.S. companies find a
buyer, partner, agent or distributor. In FY 2006, 182 companies
participated in this program in China, up from 103 in 2005.
In 2006, the China team recorded 719 export successes
related to China, with a value of $3.1 billion, compared to 250
export successes in China, valued at $1.9 billion in 2001.
In 2006, the Department participated in 37 major trade shows
in China, compared with only four shows in 2004. Additionally,
we supported more than 50 trade missions in China in 2006.
Business Outreach: Activities in the United States
Commerce manages a range of outreach programs across the United
States: road shows, websites, webinars and a hotline. Through these
programs, Commerce assists companies of all sizes to enter the China
market and provides additional information on Federal resources and
assistance.
China Business Information Center: The China Business
Information Center (CBIC) provides China-related information to
enable U.S. exporters to promote products and services,
understand Chinese laws and customs, obtain market research,
and take steps to enter the Chinese market. Since its October
2004 launch, the CBIC has organized or participated in more
than 213 outreach events in 41 states, reaching almost 13,600
business executives with information, advice and direction on
exporting to China. The CBIC website attracts more than 1,400
visitors per day on average and has recorded more than 24
million hits.
Commerce works with industry associations and local
governments on a series of Doing Business in China seminars
targeting SMEs around the country. In 2006, Commerce hosted 70
outreach events, attended by 5,250 participants.
The Commerce Advocacy Center serves as a central U.S.
Government (USG) point of contact through which U.S. companies
can access government resources and request USG advocacy in
competing for international government tenders. To date in FY
2007, USG advocacy has already successfully assisted American
companies in winning tenders in China worth about $4.4 billion,
with more than $3.8 billion in U.S. export content.
To assist U.S. companies (particularly SMEs) in protecting
their intellectual property rights, Commerce has developed a
wide range of services to provide up-to-date information on
protecting and enforcing IPR at home and abroad, including
information on registration, border enforcement, and criminal
enforcement. A Commerce hotline, 1-866-999-HALT, allows U.S.
exporters to submit requests for assistance.
Commerce's China Office hosts free monthly webinars and
gives presentations on China IPR issues to assist U.S.
industry. More than 850 online participants have participated
in the 13 webinar programs, with more than 3,000 visits to the
archived programs. In 2006, our China Office and Office of
Intellectual Property Rights experts gave presentations in
cities across the United States providing guidance to SMEs on
how to protect their IPR abroad. Further, from 2005 to the
present, the United States Patent and Trademark Office (USPTO)
has also been actively engaged in assisting U.S. companies on
how to protect/enforce intellectual property rights through its
China Road Shows, 2-day seminars, and workshops conducted
throughout the U.S.
ITA's Office of Intellectual Property Rights has recruited
the expertise of the Patent and Trademark Office and the Small
Business Administration to develop an online training program
for SMEs to learn how to evaluate, protect, and enforce their
intellectual property rights. The program will be offered
online at StopFakes.gov free of charge, and is scheduled to be
launched in September 2007.
Problem-Solving in China
When U.S. companies encounter problems in China, our China team is
available to provide on-the-ground assistance. In addition to our trade
specialists who cover a wide range of trade issues, the Commerce
Department has experts dedicated to resolving IPR, subsidies, dumping,
and export control issues. With IPR problems, Commerce has developed
industry partnerships linking businesses with lawyers who have China
expertise, and a program with the Chinese Government to ensure that
specific IPR cases are passed to relevant Chinese agencies to be
resolved.
Commerce has posted two ``Intellectual Property (IP)
Attaches'' at our Embassy in Beijing, and an additional IP
attache will be joining the Consulate in Guangzhou. These IPR
attaches work with the Chinese government to ensure that China
is living up to its IPR commitments and to assist American
businesses in protecting their IPR in China. One of the key
tools they use to help U.S. industry is the ``IPR Case Referral
Mechanism'', where China's Ministry of Commerce serves as the
point of contact for individual IPR cases raised by the United
States. In addition, last year Commerce's China Office
effectively handled IPR concerns raised by U.S. SMEs by
partnering with industry associations on the China Advisory
Program--offering U.S. businesses free IPR consultation with an
attorney. Forty-seven companies have utilized the program since
its inception. The success of this program has led to expanded
advisory programs for SMEs doing business in Brazil, Russia,
India, Egypt, and Thailand.
Commerce has also posted two ``specialists in dumping and
subsidies law'' at our embassy in Beijing to assist our
Washington-based Trade Remedy Compliance Office, which
specializes in China trade remedy cases.
We have a Trade Facilitation Office at the U.S. Embassy in
Beijing which assists companies with compliance and market
access problems and hosts industry-specific IPR roundtables in
China with U.S. companies based in China to discuss the
protection and enforcement of IPR in China, and how the U.S.
Government and the private sector can work cooperatively to
address industry's specific IPR issues.
Commerce's Bureau of Industry and Security (BIS) has an
Export Control Officer posted in Beijing to conduct end-use
visits and work with Chinese government and industry on export
control issues. End-use visits help increase confidence that
sensitive U.S. technology is used for legitimate purposes and
therefore facilitates high tech trade.
Consumer Safety Issues
Finally, I would like to say a few words on the issue of the recent
high profile alerts and recalls by the FDA, Consumer Products Safety
Commission, and the National Highway Traffic Safety Administration
(NHTSA) as a result of imports from China. Safety, of course, is of
paramount importance to all of us. The Administration's response to
unsafe--imports has been aggressive. HHS recently announced the
creation of a food safety czar within FDA, the Administration is
working constructively with the Chinese and will continue doing so in
order to ensure the safety of all food, medicines and other products
imported from China, and on July 18 President Bush issued an Executive
Order establishing the Interagency Working Group on Import Safety, led
by HHS Secretary Leavitt and including Secretary Gutierrez and other
Cabinet Officials, to identify further steps we can take to enhance the
safety of all imports into the United States.
Closing
The engagement I have mentioned constitutes a multi-pronged
approach, designed to bring about positive changes in China's trade
policies, regulations, and practices to level the playing field. This
overall trade strategy is pursued by Commerce, USTR, State, Treasury,
and many other U.S. agencies involved in U.S.-China trade relations.
This integrated, mutually reinforcing strategy is the best way to
ensure successful outcomes in U.S.-China trade relations.
A strong, healthy trade relationship is essential for the benefit
of both our countries. We will continue to work to ensure that the
Chinese Government provides market access for U.S. firms, and lives up
to its international trade commitments. American companies, workers and
farmers can compete with anyone in the world, given a level playing
field, and we are committed to working with our Chinese counterparts to
achieve this goal.
As China continues to reform its economy, we believe our approach
will move China away from its reliance on industrial policies and
subsidies and toward greater adherence to its international trade
obligations and more progress on the path toward a market economy.
After all, a China that is part of the international trade community
and that is open and fair in its economic dealings, is very much in the
interests of the United States.
Thank you, Mr. Chairman. I am happy to take any questions.
Senator Dorgan. Mr. Spooner, thank you very much.
You indicated that exports are booming, to use your term,
to China. It is the case, isn't it, that imports are rising
even faster in dollar terms than exports?
Mr. Spooner. In dollar terms, yes, sir. In percentage
terms, our exports are growing more quickly. But in dollar
terms, imports are rising.
Senator Dorgan. If you have a very low amount of exports
from the United States to China and double it, you can say
we've doubled exports and they're booming, but it's not nearly
as consequential as taking a look at the bilateral trade
balance. The bilateral trade balance has mushroomed to a $130
plus billion deficit. Isn't that the case?
Mr. Spooner. That is certainly true. And indeed, I firmly
agree that it's our responsibility to level the playing field
to the extent we possibly can.
Senator Dorgan. I raised the question, and so did Senator
Sanders, about the bilateral automobile trade. We negotiated
this under Republican administrations and Democratic
administrations. You can put a blindfold on and not tell which
administration is speaking on free trade issues. We negotiate
deals, and let me describe the deal with automobiles. I said in
my opening statement, we said to the Chinese: If and when you
begin exporting automobiles, you can put them into our country
at 2.5 percent tariff and you're welcome to charge a 25 percent
tariff on U.S. cars we sell to China.
We did that with a country with whom we have a very large
trade deficit. Is there any justification for that that you're
aware of?
Mr. Spooner. I think the response to that, Mr. Chairman, is
that the WTO accession package with China or with any other
country, as you know well--I used to work on the Hill--is about
that thick [indicating] when it arrives up here, and it's a
package involving not only automobile tariffs but thousands of
tariff lines and all sorts of non-tariff commitments. And the
administration before they, whatever administration it is,
before they sign the deal makes the judgment that the package
as a whole is fair to the United States, and Congress in its
ultimate wisdom votes on the package itself.
Senator Dorgan. But the question, I'm just taking this as
an example, and I could use many examples. But on bilateral
automobile trade, the Chinese are ramping up an automobile
export market. They're very aggressive, they're very anxious to
move. My understanding is that Chrysler is going to introduce
into this country an automobile called the Chery, made by a
company called Chery, which is one letter away from ``Chevy,''
which is interesting because General Motors itself took Chery
to court, saying that they had stolen their production designs
for that car. It was settled out of court and you can't
determine what the settlement was because no one will say.
But nonetheless, we're apparently now going to get the
product of Chery imported into this country, in terms which
provide them a tariff that is one-tenth the tariff that we will
meet when we try to export cars to China. I mean, I don't think
there's anybody that can say, yes, that makes a lot of sense
from the standpoint of all those workers, all those companies
that are trying to produce U.S. automobiles.
Mr. Spooner. I agree. Again, I think the only response I
can give is that when we sign and then vote on the WTO
accession package it involves every tariff line, not only
automobile tariffs.
Senator Dorgan. Would you agree with this, that when we
signed and allowed, gave the green light to China to join the
WTO and reached a bilateral agreement, that at the time we
reached our bilateral agreement our trade deficit was $83
billion a year with China and now it is $230 billion a year?
Would you agree that's movement in the wrong direction?
Mr. Spooner. Yes, although--that's certainly correct, of
course, Mr. Chairman, although I would argue that it's not
necessarily the Government's role to artificially manage trade.
It's our role to make sure the playing field is level, that
China is living up to its commitments and that we enforce our
rights to the extent we can and negotiate better rights if our
rights aren't good enough.
Maybe the trade deficit is indicative of--it's indicative
of other things as well as trade enforcement. But it's our role
as the Government to enforce our rights as thoroughly as we
can.
Senator Dorgan. But if a bilateral trade agreement produces
from $83 billion to $230 billion, it seems to me that there's
something wrong.
Mr. Spooner. Sure, but the trade agreement is there or
China's WTO accession is there. It's a fact and, at least as an
administrator of the law, the Commerce Department's role is to
enforce our rights under that agreement as best we can.
Senator Dorgan. Do you think part of the reason we have
this big trade deficit is because we have regulations in this
country to protect the air and the water and won't allow
somebody to put poisons in pet food and so on? Is this a
regulatory problem?
Mr. Spooner. To be honest, that's a little bit out of my
lane because I handle trade. But on the flip side, I should
probably opine that it's frankly free trade agreements that
allow us to address labor and environmental issues in other
countries. I know we have a vigorous debate over trade and
environment provisions of FTAs, but right now we have no rights
at the WTO or anywhere else to improve the environment in
China, and should we engage China further on trade that might
give us additional rights to exercise.
Senator Dorgan. On the issue of the environment and the
rights of the workers, as you know, the administration has
opposed by and large up until this point putting anything in
with respect to those issues in trade agreements. The only
trade agreement in which anything was included with respect to
labor issues was the Jordan trade agreement, and we've had a
hearing in this Committee about that. In fact, although Jordan
has a provision which is good, that we've forced that in that
one trade agreement, and this administration has opposed that
ever since. In Jordan, we have testimony and pictures and
eyewitnesses and descriptions of workers being brought in by
the planeload to work in sweatshop conditions, paid pennies, in
some cases paid nothing, nearly imprisoned and beaten, the most
unbelievable circumstances you can imagine in sweatshops,
bringing in workers from Sri Lanka, textiles from China, to
produce sweat shop garments to be sold in our marketplace.
We're trying to shut all that down, but one of my great
concerns about all of these trade agreements is there's no
labor provision, there's no environmental provision in most
cases.
Mr. Spooner. I think that's a great point, Mr. Chairman. I
believe all of our free trade agreements contain some labor
provisions, although Jordan was very different than the other
FTAs that we've negotiated since 2001. And stating the obvious,
to say we have a vigorous debate over what those provisions
should be and whether they're adequate in our FTAs.
But the Jordan example is probably a good one because it
was our FTA with Jordan that enabled us to improve labor
conditions in Jordan. There was an allegation that Jordan was
violating the terms of our free trade agreement, but when those
allegations came to light and we threatened to exercise our
authority under the FTA Jordan supposedly has worked to clean
up its act.
Another good example is probably in a parallel agreement we
have with Cambodia that was negotiated back in 1998 that
allowed Cambodia to ship more apparel to the United States, but
sort of made the quotas or the amount of apparel contingent on
labor conditions in Cambodia. I think it's folks' unanimous
view that that trade agreement has significantly improved labor
rights in Cambodia.
Of course, to a certain extent when we trade with other
nations--and this is probably somewhat uncontroversial, but--
when we trade with other nations, American companies bring
their good labor practices to those other countries, and when
business conditions improve labor conditions improve.
Senator Dorgan. Senator DeMint?
Senator DeMint. Thank you, Mr. Chairman.
Thank you, Mr. Spooner. I understand--and I'm sure you're
familiar with the Commerce Department study that showed,
irrespective of labor costs, that the cost of doing business in
America, the cost of regulation, litigation, and taxes, is over
20 percent more than our leading trading partners. There is a
connection between the trade deficit if our products cost more.
Am I correct in my memory that the manufacturing output in
America is at an all-time high?
Mr. Spooner. Yes, sir, that is correct.
Senator Dorgan. That is true, and because of productivity
the employment side of it is certainly not growing, but it is
growing in other areas, because our unemployment rate is as low
as it has been in many, many years.
I need to correct my colleague who was here earlier. He was
trying to suggest that poverty is related to trade, when all
the research shows that it's directly related to our failing
government education system and the breakdown of our families.
I think on the food safety issue there have been many more
poisonings in this country from American-made, such as spinach
just a short while back. And the pet food that did come here
came through Canada, and the toothpaste never got here. So
layer after layer of regulation does not necessarily give us
safety, and certainly we can show that safety in this country
is as much suspect as it has been in China.
But Mr. Spooner, I want to direct one question to you
because this trade deficit figure is used a lot and it actually
misrepresents what happens. Some researchers at the University
of California--if you could just reference this particular
chart here. On just the Apple iPod, to find out where the
pieces came from, where the costs came from, if you look at the
iPod itself, the hard drive, which is about 25 percent of the
cost, $75, was made in Japan. About $15 worth came from the
U.S. of just parts itself; from other Asian countries, 20
percent; and the non-hardware, which is a lot of the marketing
research and development, most of that was done in the United
States.
So you've got a $299 Apple iPod. At the very bottom here,
this little yellow sliver that you can hardly see says two
dollars worth of the components of that Apple iPod were made in
China. Yet the product arrived here as a Chinese product and it
adds $150 to our trade deficit with China.
Now, what I don't understand is why the Commerce Department
doesn't update the way it collects its information and reports
it, because clearly this is not a $150 trade deficit with
China. But yet we're showing that. And we're compounding the
charts we're showing here year after year when a lot of
assembly is done in China, but we actually have more American
productivity in this iPod than China does. Yet it's a trade
deficit.
Now, can you explain why the Commerce Department hasn't
given us better information?
Mr. Spooner. Boy. Frankly, I can't. But I think you raise a
good point and I'll go back and try to see what we can do to
improve our data if it needs improving.
But I know what you say is true. You often hear that trade
has become the final assembly point for inputs that are made
throughout Asia and sometimes from our own country, and that
when the assembled product enters the United States from China
the total value of that product is accounted for in the trade
deficit, even though some of the production may have occurred
in Malaysia or even here.
But just to be frank, Senator DeMint, I should go back and
talk to our statistical folks to see how we can improve that if
possible.
Senator DeMint. Well, it would be very important, because,
as you know, economies are interwoven increasingly, and I can't
go into a plant in South Carolina that is not making things
from parts from all over the world. Many times they come from
another part of the world. Actually, one of our fastest growing
export countries is China, but we're exporting all over the
world material that came in from China. And we've got to be
real careful as a Congress when we start saying we're going to
penalize the currency, we're going to add 20 cents or 30 cents
or whatever we're talking about, which, first of all--do you
happen to remember the figure of how much each American family
saves each year from less expensive imports?
Mr. Spooner. I believe it's--although I'd have to verify
this number, sir, I believe it's $3,000 a year according to
the----
Senator DeMint. That's the figure that I remember. So it's
more complicated than just socking it to the Chinese by adding
a tariff that's going to affect American manufacturing as much
or more than Chinese manufacturing, and that will likely add to
the cost of living to American families.
So while the pursuit here I think is good, and I have
questions about some trade agreements as you do and certainly
the enforcement, which I don't think our government has been as
aggressive on enforcing as we should and hopefully we can
continue to improve, but there's more here than meets the eye
and there's a lot we can do as a Nation to reduce that deficit
and improve the quality of life of the American worker.
Thank you, Mr. Chairman.
Senator Dorgan. Senator Brown?
Senator Brown. I will be brief. I will add one thing to
Senator DeMint's comments about products maybe coming from
other Asian countries through China. It counts against the
Chinese trade deficit. Products sometimes assembled in China or
partially assembled where those components then go to Jordan
and then are sent to the United States counts against the
Jordan bilateral trade deficit. So I think it can cut a little
bit both ways there.
Just a question, and I'm really looking for ideas. I look
at what's happened with consumer products and food products
coming from China. We understand--and maybe Senator DeMint
thinks their regulatory system is better for the public at
large than ours. I can't really tell, reading between the lines
of his comments. But putting that aside, how big a concern is
it that this wide open trading system, where we've actually cut
the number of FDA inspectors from 30-some hundred to 20-some
hundred over the Bush years as we import significantly more
fruits and vegetables, as you can see in the supermarkets in
February and March in northern states like mine--how big a
problem is that and what should we do about that?
Is increasing the number of inspectors enough, or should we
even bother doing that? Is that going to cost too much, that
the President might veto the FDA legislation, the
appropriations? What should we do so we can say to our families
in Shelby, Ohio, and Hamilton, Ohio, that the food you buy and
the toys you get for your kids are safe?
Mr. Spooner. That's a great question, Mr. Senator. Indeed,
I should say as a father of a 2 year old and a 3 year old who
had some Thomas the Trains at home, I get an earful from my
wife about the importance of product----
Senator Brown. You should listen to her.
[Laughter.]
Mr. Spooner. But I can say it is a tremendous concern to
the administration. That's why the President assembled a panel
of 17 different Federal agencies that now are responsible in
some way for food and product safety together and directed them
to report to him within 60 days about--first we're supposed to
assess what each agency does, whether there's overlap, whether
we can do things better, and to report back in 60 days on how
we can improve.
But I can tell you--I frankly have attended initial
meetings of this group--that it is a tremendous concern.
Senator Brown. And they are considering sort of bilateral
trade issues, not just inspections at the border?
Mr. Spooner. Yes.
Senator Brown. Thank you.
Senator Dorgan. Mr. Spooner, thank you very much for being
with us. Are you able to stay for a bit?
Mr. Spooner. Yes, sir.
Senator Dorgan. If you're able to stay, I appreciate it in
the event we have a chance to ask further questions.
We will ask the other four witnesses to testify. We thank
you, Mr. Spooner, for being here to represent the Commerce
Department. Mr. Hoffa is President of the International
Teamsters. Mr. Hoffa, thank you for joining us. If you would
pull the microphone close, and your entire statement will be
made part of the record and we would ask you to summarize.
Thank you very much.
STATEMENT OF JAMES P. HOFFA, GENERAL PRESIDENT, INTERNATIONAL
BROTHERHOOD OF TEAMSTERS
Mr. Hoffa. Well, thank you, Chairman Dorgan and Ranking
Member DeMint and members of the Subcommittee. Thank you for
inviting me to testify today on behalf of the Teamsters and its
1.4 million members.
Ideally, trade and globalization policies should be used as
a tool to advance the priorities of the American people,
American foreign policy and our national safety interests. In
reality, the U.S. trade policies have achieved exactly the
opposite effect, especially with regard to trade with China.
Recently I visited China. I went to Hong Kong, Shanghai,
and Beijing. And while I don't hold myself out as an expert, I
saw a lot of things there that really make you reflect on what
our relationships are with that country. My clearest impression
with regard to China is that their number one priority is
economic progress, building up their nation. That's number one
and the people basically come second.
We visited the Shanghai deep water port and container
terminal, which by the way is brand new. It's a brand new
terminal that's the second largest terminal in the world, and
it was built within a short period of time. The port management
and union members that welcomed us very openly said that they
had set a world production record that day because they knew we
were coming, and it was a record that was set that was
unbelievable with regard to what we can do here in the United
States. It's amazing what you can do in a communist country.
We were briefed on a large scale about what they're doing
in their country with regard to the projects they're doing,
massive projects. They're building the world's largest dam.
They're building bridges and tunnels that would be in the
National Geographic if they were done here. They're building
railroads. They're doing amazing things in Beijing and
Shanghai.
When you go to their downtowns, it's like going to a
construction site. There are cranes everywhere and there is a
bustle everywhere. So we really see what's going on there.
We were supposed to see a dramatic improvement in workers'
rights in China according to those who are supporters of PNTR.
Unfortunately, that's not what has been the case. In fact,
increased trade and investment have only promoted the
continuation of workers' rights violations and the rising
unrest which we see throughout China.
We had extensive talks with the ACFTU, which is the All
China Federation of Trade Unions, and we talked about what
they're doing there as a trade union. They talked about the
contract labor law, which is a minor improvement to try and
basically raise the standard of living in that country. I was
shocked to find out and extremely disappointed that American
companies, the General Motors and all the big companies that
have moved over there, the Motorolas, the Microsofts, were
lobbying very hard against that law to dilute it so that the
workers wouldn't have any rights, the few small rights that
they have over there. U.S. multinational corporations have
resisted these changes and have been successful in watering
down many of the reforms.
An important action that Congress can immediately take to
remove any incentive a country may have to manufacture and
import goods under terrible working conditions is Senate Bill
367, the Decent Working Conditions and Fair Competition Act,
introduced by Senator Dorgan. Also, we must demand that any
future administration accept section 301 petitions on labor
rights in China. As you know, this administration has routinely
rejected section 301 petitions. If China does not comply with
basic internationally recognized workers' rights, the U.S.
should pursue remedies against China. It's as simple as that.
Today we see much in the paper about what's going on with
regard to workers. In 2000 when China PNTR passed, I said then
and I say it now: China PNTR has nothing to do with the access
of U.S. businesses to sell goods in China and everything else
to do with U.S. companies moving out of the United States and
moving over to China and then bringing their products back.
It's just like NAFTA.
Almost 60 percent of China's exports come out of foreign
investment firms. In other words, there are American companies
going over there setting up plants, and they're the ones that
are doing most of the work, 60 percent. Yet we have few laws on
the books that provide--we have laws on the books that actually
provide tax preferences for companies to move offshore. In
other words, we make it so they can make it better off if we
encourage people to leave. That must be stopped immediately.
That doesn't make any sense for America.
Proponents of China's entry into the WTO claimed that it
would create jobs in the United States, increase U.S. exports,
and improve the trade deficit with China. What have we seen?
The exact opposite. In fact, we have seen the closure of
thousands of U.S. factories and the disruption of our
manufacturing base here in the United States.
The U.S. trade deficit with China has increased from $50
billion in 1997 to $235 billion in 2006, an increase of $185
billion. This dramatic increase in the trade deficit with China
has displaced production that could have supported more than 2
million U.S. jobs.
We must really start enforcing our trade agreements. The
problem we have with China is not only that we have a one-way
trade relationship, but there is a disregard of the rule of law
and international commitments that China has made. And on our
part, we're just as much at fault because we haven't enforced
what is in WTO and in trade agreements. Since China entered the
WTO it has consistently refused to grant access to its markets
and has done so in a way that anybody else would call cheating.
The U.S. Government has allowed the cheating to occur, but
never utilized the legal action we have available to us to
address illegal subsidies, dumping, dangerous imports, and
currency manipulation. The U.S. Government should address
China's refusal to fully and faithfully implement its WTO
commitments. Also, before any additional preferences are given
to China or any other country in future WTO or Doha
negotiations, that country must live up to and implement the
very promises they made in the trade agreement.
We've all heard about the manipulation of the Chinese
currency. Foreign ownership of U.S. debt has reached more than
$3 trillion, a dangerous level that is another potential threat
to our very national security. China alone holds $353 billion
of U.S. Treasury securities. Conceivably, they could cash out
any time and cause a financial crisis in this country.
Unfortunately, some have used that very argument to say we
shouldn't enforce our laws because we're at their mercy. I say
we should enforce that and make sure there's fair trade. Our
indebtedness to China should not delay efforts to offset trade
imbalances aggravated by the exchange rate misalignment.
In essence, the China undervalued yuan is effectively a 40
percent tax on U.S. agriculture. There basically has been a
misalignment of currencies and the 40 percent difference
between their currency and ours gives a subsidy to their
exports to our market.
The Teamsters believe it is imperative that Congress pass
the Stabenow-Bunning-Bayh-Snowe bill, which is Senate Bill 796,
and its counterpart in the House, the Ryan-Hunter bill, H.R.
782. These bills recognize that undervalued exchange rate
misalignment by China or any other country is prohibited under
U.S. and international law and we can ensure that action will
be taken if these things happen.
The biggest things in the headlines recently have been
unsafe trade, unsafe pet food, poisonous toothpaste,
contaminated catfish, defective tires, and we mentioned Thomas
the Train with lead paint on it. These things have really risen
to the level now that everybody's talking about them. Why
aren't we inspecting what we have now? Senator Brown said how
we've cut the number of inspectors. Only 1 percent of the
products coming into this country from China, whether it's food
or anything else, is inspected, which means 99 percent is not
inspected.
We do, we do need increased inspections. We need to have
more consumer activity with regard to watching what is coming
in here and are we being poisoned by the very things we're
buying. Congress needs to pass legislation by Senator Brown and
Senator Durbin that gives the FDA the authority to approve or
disapprove of countries eligible to import into this country.
In conclusion, it's not that the Teamsters Union is against
trade, but we want fair trade. We want trade that is one that's
fair to everybody, that creates jobs in this country and does
not promote jobs leaving this country. When that is done, the
American labor movement will be for fair trade.
Thank you.
[The prepared statement of Mr. Hoffa follows:]
Prepared Statement of James P. Hoffa, General President,
International Brotherhood of Teamsters
Chairman Dorgan, Ranking Member DeMint, and Members of the
Subcommittee, thank you for inviting me to testify today on behalf of
the 1.4 million union members of the International Brotherhood of
Teamsters on this important issue. Under my leadership at the
International Brotherhood of Teamsters, the issue of trade and how it
impacts workers, families, and our national security has always been a
top priority. Our workers have seen directly the impact that our trade
policies, especially with China, have had on them. This hearing is
especially timely, not only because I have recently returned from my
first trip to China, but also in light of all of the alarming news
recently regarding Chinese imports, and the fact that China legislation
is expected to be considered soon.
Ideally, trade and globalization policies should be used as a tool
to advance the priorities of the American people, the worker, and
American foreign policy and national security interests. In reality,
U.S. trade policies have not achieved this; in fact, our trade policies
have achieved the opposite effect in all areas, especially with respect
to trade with China.
Visit to China
My fact-finding visit to China in May included stops in Hong Kong,
Shanghai and Beijing. Our delegation included Teamster Vice Presidents
Chuck Mack from Oakland, California and John Coli from Chicago as well
as Andy Stern of SEIU, Arturo Rodriguez from the United Farm Workers,
Edgar Romney from UNITEHERE, and Anna Burger and Greg Tarpinian from
Change to Win. I went because I wanted to learn first-hand about
challenges that working people face in China. I wanted to know more
about working conditions, pay and benefits, and worker organizations. I
know that corporations operating globally are profiting handsomely from
expanded operations in China, but what about workers?
China is now a global economic powerhouse and I wanted to take a
fresh look at what that means for Teamsters. I believe that a
constructive China policy can unite workers in the United States, China
and around the world, all of whom have an interest in stopping the race
to the bottom. Many of us in the labor movement are seeking
alternatives to the flawed ``free trade vs. protectionism'' debate
seeking new ideas about how the U.S. should respond to globalization.
We met with the All China Federation of Trade Unions--ACFTU, the
only legally sanctioned trade union body in China. We also met with
union leaders and academics that are critical of that union and of the
current government. We met with advocacy organizations that are
documenting the poor working conditions of millions of Chinese workers
in the special economic zones that are set up on China's east coast. We
met with Teamster employers with subsidiaries in China, and with the
American Chamber of Commerce in Beijing. We visited key infrastructure
facilities including Shanghai's new deep water port and air hub
distribution facilities.
We were only there for 10 days so by no means do I claim to be any
sort of expert, but I came away from the trip with some very clear
impressions.
My clearest impression is that economic growth is the top priority
for the Chinese government.
We visited the Yangshan Deepwater Port and Container Terminal. A
twenty-mile causeway from Shanghai leads to the port which was
inaugurated in 2005 and is now by some measures the second largest port
in the world. The Port management and union welcomed us by advising
that they had set a world production record the prior evening in our
honor. Our questions about what happened to the residents of the
fishing village that formerly occupied the island were simply not
understood. Any rights of those residents meant nothing in the push for
economic growth.
We were briefed on large-scale highway projects, bridges, tunnels,
electric generation plants, dams, and railways. Parts of Beijing seemed
like one big construction project as hotels and sports complexes were
being erected in preparation for the 2008 Olympics. But when we asked
about the residents whose homes and livelihoods were displaced by these
projects we were given vague, unconvincing answers about new housing
projects.
I had an image of folks all wearing the same design and color
clothes and riding bicycles. This was not the reality in the cities I
visited. I sat in heavy traffic with lots of late model cars. There are
clearly a number of Chinese benefiting from the growth in trade. My
impression was that while immigrants from the countryside to large
cities and manufacturing areas along the east coast of China were
living somewhat better than they did on the farm, Chinese workers
linked to the globalized export economy are not getting their fair
share of the wealth being generated.
While we met with some workers whose wages and benefits were
steadily improving, we also spoke to workers earning well below the
minimum wage while working sixty and more hours a week with no holidays
or vacations; all violations of local labor laws. The health care and
pension systems do not afford basic benefits to the vast majority of
workers and make it very difficult for workers to plan for the future.
China will overtake Germany as the world's third largest economy by
the end of this year, this growth was a great source of pride for the
government and union officials we met. We challenged our Chinese union
counterparts to seek improvements in the wages and benefits for their
members so prosperity is shared and growth can be sustained.
China is currently not building a middle class capable of
sustaining economic growth through a domestic consumer market. China is
setting the global norm for working standards around the world; my
conclusion is that those standards are much too low for workers in the
U.S. and workers in China. We plan to work with all of the worker
advocates we met to improve those standards.
We learned about very weak enforcement of laws and regulations and
that corruption in business and government are rampant and getting
worse. These conditions make it even harder for workers to organize and
demand their fair share in economic development.
Labor Law Reforms in China
China's repression of labor rights has suppressed wages, thus
subsidizing its exports and making them artificially cheap. This
Administration has consistently failed to raise the issue of workers'
rights violations in China. Worker's rights is just as much an economic
issue as currency manipulation or illegal subsidies. This was also an
area that we were supposed to see drastic improvement according to PNTR
supporters--workers rights and human rights would be improved with
China's accession to the WTO. Unfortunately, this has not been the
case. In fact, increased trade and investment have only promoted the
continuation of workers' rights violations, and rising worker unrest.
In China, we had extensive discussions regarding the recently
approved reforms to the Contract Labor Law. These modest reforms were
proposed to address the widespread exploitation of workers who are
often cheated out of wages due them. The reforms are intended to
enforce employment contracts, protect temporary workers, limit employer
rights to fire at will, enhance severance pay and require transparent
workplace rules.
I was extremely disappointed to learn that U.S. companies actively
opposed these modest changes. All of the corporate talk about raising
standards through investing in China is hollow rhetoric. Instead of
using their influence as a force for democracy and social justice, U.S.
companies are pursuing the low road. There was a time when U.S.
multinational companies joined with the labor movement to actively
oppose apartheid in South Africa and undermine military dictatorships
in Latin America. Worker organizing and unions were encouraged at their
facilities, unions were considered to be incubators for building
democracy.
And now there is a need, a movement to make drastic changes in
China's contract labor laws and yet U.S. multinational corporations
have resisted these reforms and have even been successful in weakening
the modest reforms. Some have even threatened to move to Vietnam,
another country that Congress recently granted PNTR status. Global
Labor Strategies has an excellent report on this issue titled ``Undue
Influence: Corporations Gain Ground in Battle over China's New Labor
Law''. I urge Senators to read the report.
An important action that Congress can immediately take to remove
any incentive a country, including China, may have to manufacture and
import goods made under terrible working conditions, is to pass S. 367,
the Decent Working Conditions and Fair Competition Act, introduced by
Senator Dorgan. This legislation bans the importation or sale of
products made in factories under sweatshop conditions. Such ``sweatshop
conditions'' include gross violations of the wages, hours, health and
safety laws of the country where the labor is performed.
Also, we must demand that any future Administration accepts a
Section 301 petition on labor rights in China. If China does not comply
with basic internationally recognized worker's rights, the U.S. should
pursue remedies against China. It is as simple as that, however this
Administration refuses to act.
Current U.S. Trade Policies with China Hurts U.S. Workers
While China's need for legal reform has hurt U.S. jobs, that is
only a piece of the challenges we face with respect to trade with China
and trade overall. Our nation's flawed trade policies contribute to the
anxiety and uncertainty many Americans feel about their jobs, their
future, and even their children's future.
The public has lost confidence in our trade policies. U.S. trade
policies lately seem to be more about the number of trade agreements
signed rather than the results they achieve.
Sound trade policy means job creation and strong communities. It
impacts whether or not we have an industrial base that can supply the
materials needed to defend our Nation or whether we need to depend on
other countries to do so for us; it impacts whether our communities
have a good public school for our children or one that is struggling
and in desperate need of basic resources because the town's factory has
shut down and moved offshore to China taking with it the community's
tax base; it impacts whether the future jobs of this country will be
technology based or burger flipping based.
Mostly as a result of our trade policies, especially with China, we
have lost more than 3 million manufacturing jobs since 2000. One in six
manufacturing jobs has disappeared. This poses a serious threat, not
just to the many families and communities who have been crushed as a
result of this loss, but also our research and development capacity as
a country. We are losing our capability to supply our military troops
with uniforms, ammunition, and other essential items. If this trend
continues, we will be completely dependent on other countries to
provide everything to us. Our manufacturing loss is, in fact, a matter
of national security. We are seeing first hand the limitations that our
energy dependence has created with respect to our foreign policy and
national security--we should not continue to follow down the same path
of dependence and depend on China and others to supply us with all of
our defense, food, and manufacturing needs.
In 2000 when China PNTR passed, I said it then and I say it now--
China PNTR has nothing to do with access for our U.S. businesses to
sell goods to China, and everything to do with moving U.S. companies
and jobs out of the U.S. and into China in order to take advantage of
workers in China and lax labor laws in China. It has always been about
investment there, no matter what the consequences brought upon our
workers. The crisis we face now is what I and the Chairman knew would
occur back in 2000 during the China PNTR debate.
Almost 60 percent of China's exports come out of foreign-invested
firms, not Chinese firms. And yet we have laws on the books that
provide tax preferences for companies to move offshore. These
preferences must be eliminated.
China's entry into the WTO was touted as a mechanism to bring it
into compliance with an enforceable, rules-based regime, which would
require that it open its markets to imports from the U.S. and other
nations. However the WTO and China's entrance to the WTO failed to
include the necessary protections to improve or even maintain labor or
environmental standards, which have resulted in an unfair playing field
favoring large multinationals against domestic workers. Proponents of
China's entry into the WTO, just like proponents of every Free Trade
Agreement from CAFTA to the pending Peru and Panama FTAs have claimed
that it would create jobs in the Unites States, increase U.S. exports,
and improve the trade deficit with China. We have seen only the
opposite occur. In fact, we have seen the global race-to-the-bottom
accelerate forcing the closure of thousands of U.S. factories, and the
decimation of our manufacturing base in the U.S.
The U.S. trade deficit with China has increased from $50 billion in
1997 to $235 billion in 2006, an increase of $185 billion. Between 1997
and 2001, before China's entry into the WTO, the deficit increased $9
billion per year on average. Between 2001 and 2006, after China entered
the WTO, the deficit increased $38 billion per year on average.
According to the Economic Policy Institute, growth in trade
deficits with China has reduced demand for goods produced in every
region of the United States and has led to job displacement. The
dramatic increase in the trade deficit with China between 1997 and 2006
has displaced production that could have supported 2,166,000 U.S. jobs.
More than 1.8 million of these jobs have been lost since China entered
the WTO in 2001.
The U.S. Must Enforce and Strengthen Our Trade Laws
The problem we have with China is not only that we have a one-way
trade relationship, but also there is a disregard of the rule of law
and international commitments that have been made, and a lack of
enforcement on our part, all of which have been devastating to workers.
China provides significant subsidies to its companies to give them
an advantage over all competitors which prevents our businesses from
selling their products to China and floods our markets with their
products. The U.S. Government must use existing trade enforcement rules
aggressively and apply the remedies. We have failed to do this.
When China entered the WTO it agreed to conditions, but it has
consistently refused to grant access to its markets that we provide to
it, and has done so in a way that one would call cheating. But the U.S.
Government is also guilty because it has allowed the cheating to occur
by never utilizing the legal actions we have available to address
illegal subsidies, dumping, dangerous imports, and currency
manipulation.
The U.S. Government should be bringing more cases to address
China's refusal to fully and faithfully implement its WTO commitments.
Also, before any additional preferences are given to China or any other
country in future WTO or Doha negotiations, countries must live up to
and implement their existing promises.
China Currency
Foreign ownership of U.S. debt has reached more than $3 trillion, a
dangerous level that is another potential threat to our national
security. China alone holds $353.6 billion of U.S. Treasury securities.
Conceivably, it could cash out anytime and leave us in a financial
crisis. Unfortunately, some have used this as a reason to not enforce
existing trade laws, specifically China's undervaluing of its currency.
Our indebtedness to China should not delay efforts to offset trade
imbalances aggravated by exchange-rate misalignment of the undervalued
yuan. This enables Chinese exporters to gain up to a 40 percent price
advantage over their competitors in the U.S. domestic industry. In
essence, China's undervalued yuan is effectively a 40 percent tax on
all U.S. agriculture and manufacturing exports and a 40 percent subsidy
for China's exports to our market.
The reason for inaction is not that we do not have rules in place.
We do have statutory and regulatory authority to address this problem.
The World Trade Organization (WTO) and the International Monetary Fund
(IMF) also have the rules in place to prevent countries from gaining an
unfair advantage through exchange rate action. Yet our own government
is not willing to implement the necessary provisions of the law to
protect our workers and our manufacturing sector because they do not
want to offend or upset China. This Administration has yet to even
identify China's currency manipulation as a problem.
The President rejected recommendations from the U.S. International
Trade Commission (USITC) under Section 421 of the Trade Act to grant
import relief to U.S. industries facing market disruption from Chinese
imports. As you are well aware, Section 421 of the Trade Act of 1974
was added to U.S. trade law during the China PNTR debate in order to
ensure protection to U.S. industries in the case of surging imports.
Specifically, Section 421 allows U.S. domestic industries to obtain
relief should an investigation by the USITC finds that Chinese products
are imported into the U.S. in such increased quantities as to cause a
market disruption.
Recently, the Administration has rejected for the third time since
2003 a Section 301 petition by lawmakers demanding action by the
Administration against China for subsidizing its exports by keeping its
currency exchange rate artificially low which is in violation of
international trade laws. As you are well aware, Section 301 of the
Trade Act of 1974 allows the Office of the U.S. Trade Representative to
initiate investigations of other countries' trade practices and impose
sanctions for discriminatory behavior.
The USTR and the Department of Treasury continue to tell us that
instead of acting to address China's currency manipulation, diplomacy
mechanisms need to be used to address this concern. Diplomacy has
obviously not worked. Congressional action is needed in order to ensure
that change occurs.
The Teamsters are a member of the China Currency Coalition. We
believe that it is imperative that Congress pass the Stabenow-Bunning-
Bayh-Snowe bill, S. 796, and its counterpart in the House, the Ryan-
Hunter bill, H.R. 782. These bills recognize that undervalued exchange-
rate misalignment by China or any other country is a countervailable
prohibited export subsidy under U.S. and international law, and ensures
that finally action will be taken. The bill does the following:
Recognizes currency manipulation as a government subsidy and
allows a U.S. industry to use the anti-subsidy (counterveiling
duty) law to seek relief from the injury caused by imports that
benefit from a subsidy in the form of foreign exchange-rate
misalignment. This is important because an undervalued currency
allows foreign producers to price their products more cheaply
than would be the case if the currency were properly valued.
This applies equally to any country, whether a market or non-
market economy, whose exchange-rate is found to be unfairly
aligned.
Clarifies that China's exchange-rate misalignment is a
condition to be considered under Section 421 of the Trade Act
of 1974. This holds China accountable to its market-disruption
agreements made as a condition to its accession into the WTO in
2001.
Protects our national security and defense industrial base
by prohibiting the Department of Defense procurement of Chinese
imports that compete with our domestic defense industrial base
if China's currency misalignment is determined to be
contributing to the disruption of the U.S. industry that
manufactures those products.
Requires the Secretary of the Treasury to analyze semi-
annually whether there is a fundamental misalignment or
exchange-rate manipulation by any trading partner, and bars the
Administration from supporting increased voting rights in
international financial institution such as the IMF for such
violators.
Strengthens the definition of misalignment in order to make
it tougher for the Treasury to avoid giving that label to
China's actions. This is critical in light of the fact that the
Treasury Department recently admitted that there exists ``heavy
foreign exchange market intervention by China's central bank to
manage the currency.'' Yet Treasury still refuses to officially
identify China as a currency manipulator, despite this evidence
that the Chinese government is continuing to undervalue its
exchange rate against the U.S. dollar. They fail to call it as
they see it and this provision ensures that this will no longer
be the case.
I understand that the House Ways and Means Committee plans to
introduce legislation and act on this issue in September. It should be
the Ryan-Hunter bill or at the minimum consist of all of the essential
provisions I have just listed. I am also pleased at the willingness of
both the Senate Banking and Senate Finance Committees to each act on a
currency bill. While both the Senate Finance and Senate Banking bills
are not perfect, they take a step in the right direction to ensure
action on currency manipulation bilaterally, at the IMF, and the World
Bank. However, we need to ensure that the President cannot just avoid
taking action on currency manipulation by creating loopholes that could
potentially leave us in the same bind we are in now, where the
Administration just does not act which is a potential problem in the
Baucus-Grassley bill. Also, both bills at the moment do not recognize
currency manipulation as a countervailing duty or subsidy which is
important in addition to using an anti-dumping remedy.
I am pleased to see that action on currency is imminent. It is
critical that whatever passes and finally becomes law is strong, real,
and not an attempt to placate our concerns or put a temporary
meaningless band-aid on a gaping wound--there is just too much at
stake. Ensuring that this issue is finally acted upon can make the
difference between having one's job disappear to China; the difference
of having health insurance provided for one's family, and quite frankly
about having an economically stable middle class.
Food and Product Import Crisis
Food imports constitute a growing share of what Americans eat and
what we see on the shelves of our grocery stores. I care about this
issue as a consumer, and as a President of a union that has food
processing workers and farmworkers.
Food imports are more than four times greater today than what they
were in 1996. Our Food and Drug Administration inspects less than 1
percent of imports. That means that 99 percent of our imports are
entering our Nation unmonitored. This is especially troublesome when
the bottom-line is put ahead of safety.
Senators on the Committee have heard the stories.
Family pets have died from pet food containing wheat gluten
that contained melamine.
Concentrations of carbon monoxide are found in seafood
imports coming in from Asia. Carbon monoxide treatment makes
seafood appear fresh, regardless of its condition. Residues of
antibiotics have also been found in seafood imports from China.
For now, the Food and Drug Administration has acted and banned
the imports of shrimp, catfish, and other seafood from China.
Poisoned toothpaste from China, laced with diethylene glycol
which is a chemical most often found in antifreeze and was
substituted for the more expensive ingredient glycerin, has
been imported into the U.S. I find it especially troublesome
that China has stated that in small doses diethylene glycol is
harmless, especially in light of the fact that cough syrup
laced with diethylene glycol from China killed 100 people in
Panama last year.
And its not just hazardous food and toothpaste being
imported--Thomas the Tank engines made in China have been
recalled for using lead paint.
As many as one million defective Chinese tires were sold in
the U.S.
China has taken extreme and shocking action recently by executing
its former head of its Food and Drug agency, Zheng Xiaoyu, as a
response to this crisis. This is by no means consoling or the end to
our troubles.
It is up to us to take responsibility and act thoroughly and
quickly. The U.S. Government has not done enough to keep dangerous
Chinese products out of the U.S.
Products manufactured in China have so far accounted for more than
60 percent of the Federal Consumer Product Safety Commission's 178
recalls so far in 2007. Congress needs to pass legislation by Senator
Brown and Senator Durbin that gives the FDA the authority to approve or
disapprove of countries eligible to import into the U.S.
We need to re-examine and make changes to our country-of-origin
rules. For example, the Netherlands is the principal source of wheat
gluten imports, but most of it initially comes in from China--actually
over 80 percent of wheat gluten in the world comes from China. The bags
of wheat gluten can simply state that the supplier was in Amsterdam-
Holland for example. Since food processors are not required to inform
consumers of the origin of its ingredients, it is especially difficult
for Americans to know where exactly the ingredients were produced and
to seek damages from companies that sell products whose ingredients
have harmed. And in cases where they do, the protections are not in
place to ensure consumer safety. This brings me back to the tire case.
When the National Highway Traffic Safety Administration told the
importer of defective tires that they must recall the tires, the
company declared bankruptcy. When U.S. distributors rely on cheap
imports to then sell back to U.S. consumers, they should be bonded to
ensure that our U.S. consumers are protected.
We need more comprehensive food and ingredient labeling on
products. Furthermore, the final purchasers of pet foods, meat, fish,
and all consumer goods quite frankly, should be provided with the
correct source of the goods. The FDA should implement new rules that
require all food, vitamins, and other consumer products to list out the
origin of all ingredients that come from outside the United States.
I was pleased to see that late last week the 2002 law requiring
country-of-origin labeling for meat might finally be implemented.
Animals born, raised, and slaughtered in the United States will be
labeled ``Product of the U.S.'' The 2002 Farm bill also requires
country-of-origin labeling for fresh fruits and vegetables--hopefully
this too will finally become a reality.
Only a minimal fraction of the 25,000 daily food shipments are ever
tested by a government laboratory. We need to ensure that shipments of
food and consumer products and ingredients are more readily tested,
which is currently not the case.
The U.S. Government has a responsibility to its people to ensure
that the safety and health of its families are not threatened by
contaminated and sub-standard bad food and product imports. The U.S.
Government has a responsibility that China's development does not come
at the expense of America's domestic workforce, and national security.
I hope to see immediate action taken to reflect this.
Conclusion
While the Chinese government may disagree, I believe that our
current trade relationship with China is not just bad for the U.S. and
our workers, but also bad for China. China has become dependent on the
U.S. consumer market for employment, has suppressed the purchasing
power of its own middle class with a weak currency, and have held
hundreds of billions of hard-currency reserves in low yielding, risky
assets, instead of investing them in public goods.
Unfortunately, the reality is that many of the U.S. jobs that have
been lost are not coming back. But addressing all of the concerns that
I have discussed and implementing actual reforms in China could help
create new jobs in the U.S.
It is not that the Teamsters Union or the American people are
against trade, its that the our major trading partners are not abiding
by the rules of trade, and we are not requiring them to either. Once we
finally see the field leveled, the right rules in place and enforced,
and actual good-paying jobs created, that will be a win-win for U.S.
workers and families. You can be guaranteed that the American people
will support expanded trade, but until this happens you will continue
to sense the unease that currently exists and the strong opposition
that we put forth when more FTAs are passed.
Congress must take bold steps and big initiatives to address this
current globalization crisis. Mr. Chairman, the title of your book
comes to mind with what our current trade policies are about--``Take
this job and Ship it--How Corporate Greed and Brain-Dead Politics Are
Selling Out America.'' U.S. families can no longer afford to continue
down this path of ``Shipping jobs'' and ``Brain-Dead Politics.'' We can
no longer allow our trade deficit with China to continue to skyrocket;
we can no longer allow rules to be broken, or fool ourselves that our
current trade policies will create jobs here at home when they are just
about investing abroad. Congress is actually set to pass two more Free
Trade Agreements with Peru and Panama using more or less the same model
that has been used. Yes, the labor chapter is improved and that is a
great and significant step, but that will not ensure the creation of
U.S. jobs, and certainly will not stem the loss of them.
It is China's right as a nation to develop and gain economically,
but it is our right and duty as a nation to ensure that if we are to
continue to have expanded trade with China to the extent that we do, we
must enforce our trade laws and implement new rules and protections
necessary for our own economic development. We need to demand access to
their markets because so far, it is just one-way trade. I like the
Chinese and wish them well, but I love and fight for U.S. workers and
it is time that this Administration and all of us in this room take
control of our globalization policies to ensure that our workers
benefit and our families are kept safe.
Thank you again for the opportunity to testify. I look forward to
your questions and comments.
Senator Dorgan. President Hoffa, thank you very much for
your testimony. We appreciate your being here.
Next we will hear from Brian O'Shaughnessy, the Chairman
and CEO and President of Revere Copper Products in Rome, New
York. Mr. O'Shaughnessy, you may proceed.
STATEMENT OF M. BRIAN O'SHAUGHNESSY, CHAIRMAN, CEO, AND
PRESIDENT, REVERE COPPER PRODUCTS, INC.
Mr. O'Shaughnessy. Good afternoon, Chairman Dorgan and
Ranking Member Senator DeMint. My company is Revere Copper
Products. We were founded in 1801 by Paul Revere and believe
we're the oldest manufacturing company in the USA. Our modern
copper rolling mill is in Rome, New York, and produces copper
and brass sheet, strip, and coil. Since 2000 about 30 percent
of the U.S. manufacturing facilities that were customers of the
mill have shut down or moved offshore.
One of Revere's largest remaining customers recently
presented Revere with a cost comparison of sourcing centrifugal
chillers from China versus the USA. Revere supplies copper
strip for these chillers. The first exhibit on the chart
boards, which is the same as Exhibit 6 attached to my written
testimony, shows how the costs would compare without the
protectionist currency manipulation by China.
Note that the total costs are about the same for both
countries. Indeed, if freight costs to the USA were added the
delivered cost of the chiller produced in China would be higher
than the chiller produced in the USA.
In the next exhibit, the cost of the product from China is
adjusted to reflect the currency manipulation by China of 40
percent. Then, as you can see in the third exhibit, products
from China also benefit from a 17 percent VAT rebate on exports
to the USA. This results in a price war that American factories
cannot win.
Indeed, China is waging a mercantile war on the world and
the world is sleeping. Why is the world sleeping? First we must
look at the role of the multinationals. Remember in the 1980s
when Japan was such a fierce competitor in so many U.S.
markets. The reaction, as has been stated today, by our largest
corporations was loud and largely one voice, calling for
tariffs and restraints. Contrast that with today as most of the
largest U.S. corporations are so much more international and
produce in or outsource components from China. Many of the
largest investment banking firms in the world are headquartered
on Wall Street, but derive half or more of their income from
foreign sources ranging from managing the reinvestment of U.S.
dollars flowing overseas to the construction of manufacturing
facilities in China. Unquestionably they are beholden to the
government of China.
If manufacturing in America must compete with the
protectionist policies of any foreign government, that is not
fair. And if meaningful corrective action by U.S. manufacturing
and investment banking firms who gain from such protectionism,
that's wrong.
CEOs of such multinational corporations are put in a very
difficult position when considering national trade policies.
They have to choose between their company and their country. So
who should America listen to for advice on trade and tax
policy? Obviously, none of the above.
The Members of this Committee should take note that
tomorrow the Senate Finance Committee is going to mark up
legislation by Senators Baucus and Grassley that appears to
address currency manipulation. It has several fatal flaws,
including making remedies contingent on the President, as well
as a Treasury Department finding that a country has, ``failed
to adopt appropriate policies to eliminate the fundamental
misalignment,'' of its currency. This is the same Treasury
Department that does such a good job of representing its
friends on Wall Street by consistently failing to cite China
for manipulating its currency.
Nor does the bill allow injured manufacturing companies in
the USA like Revere to file for countervailing duties to offset
the subsidization of China's currency. As such, the bill
represents a cruel hoax on the American factory worker who is
expecting real relief from the impact of the protectionist
policies of China.
I am making a public appeal to Senator Schumer. After 4
years of delay, now is the time to support effective
legislation for your Main Street upstate constituency, which is
in tatters. The current bill represents manufacturing workers,
but they're located in China, not the USA.
Tomorrow, Senators Stabenow, Conrad, Bunning, and Snowe are
going to introduce amendments that provide direct remedies to
industry and workers in the USA. Of course, Wall Street lawyers
say this amendment makes the bill noncompliant with WTO rules.
But I can assure you that the Main Street lawyers who you
should trust have the opposite opinion. I have here three such
opinions you can trust that I would like entered in the record.
[The material referred to follows:]
Fisher-Barton, Inc.
Watertown, WI, September 21, 2006
Hon. John Engler,
President and Chief Executive Officer,
National Association of Manufacturers,
Washington, DC.
Dear Governor Engler:
I and my fellow board members listed below have supported the
resolution passed at the June 27, 2006 meeting of the NAM IEPC that
will be reviewed at the meeting of the NAM Board of Directors next
week.
This letter is prompted by your September 15th letter forwarding to
NAM board members an opinion by Greenberg Traurig on the consistency of
H.R. 1498, the Ryan-Hunter bill, with the obligations of the U.S. as a
Member of the WTO. In your letter you state that the analysis by James
Bacchus and Ira Shapiro of that law firm ``shows that the provisions of
H.R. 1498 appear incompatible with WTO obligations.''
We respectfully disagree with that conclusion and feel it is only
right that an alternative analysis is presented to the entire Board on
this issue, especially since those of us who worked with the IEPC on
this legislation for over a year and a half have repeatedly asked for
specific legal issues with the bill and received none until this one at
the last minute. We concur with you that WTO legality is critical to
the NAM's support of any trade initiative. The Ryan-Hunter bill was
written to achieve consistency with the WTO's agreements, and we
believe that it succeeds in achieving that goal.
Indeed, in certain respects, the Greenberg Traurig letter is
supportive of the Ryan-Hunter bill (for example, in finding that
manipulative undervaluation of a foreign currency confers a ``benefit''
upon an exporter within the meaning of the WTO's Agreement on Subsidies
and Countervailing Measures (``SCM'')). In our judgment, however, the
Greenberg Traurig letter is flawed in other fundamental aspects (as
explained in more detail in the enclosed opinion by Kelley Drye Collier
Shannon):
Exchange-rate manipulation does involve a governmental
``financial contribution'' and is not a legitimate exercise of
a country's ``general regulatory powers'' for purposes of the
SCM Agreement.
The governmental ``financial contribution'' can be seen as a
direct transfer of funds or as a governmental provision of
goods or services to exporters. While not strictly required by
the SCM Agreement, there are real costs to the foreign
government in making this ``financial contribution'' (such as
the extensive costs entailed with ``sterilizing'' the foreign
government's currency).
Exchange-rate manipulation creates an incentive to export
and clearly benefits only those who export, so that this
subsidy is contingent upon exportation and prohibited under the
SCM Agreement. There is no requirement expressed in the SCM
Agreement that a subsidy must be exclusively tied to
exportation in order to be export-contingent and prohibited.
H.R. 1498 is an important, carefully crafted, and well-reasoned
effort to build on the clear intent and developing precedent of WTO law
to eliminate trade-distorting subsidies. The currency policy now
practiced by China and some other trading partners is the type of
export subsidy WTO agreements are meant to prohibit and to provide a
remedy against the resulting injury. We believe H.R. 1498 can be
successfully defended against any potential challenge at the WTO.
NAM members and other U.S. companies have every right to benefit
from trade with other countries and investment abroad. However, these
benefits cannot outweigh the injury done to domestic manufacturers
because of unfair trade advantages caused by prohibited currency
manipulation. For this reason, while we would prefer to work by
consensus, we value the NAM for providing an effective forum for U.S.
manufacturers to act decisively on critical issues like this and we
believe debate and voting are a healthy part of that process. The IEPC
resolution was passed due to the active involvement by many smaller NAM
members who have become activists because of the injury they are
experiencing from the unfair practices of some of our trading partners
and should be upheld by the NAM's Board.
Enclosed are two documents: (1) a legal memorandum from Kelley Drye
Collier Shannon regarding WTO consistency of H.R. 1498 (Ryan-Hunter);
and (2) a background memorandum about currency manipulation, the NAM's
policy positions, and the reasons why H.R. 1498 is the best available
policy response to currency manipulation.
We would appreciate your sending this letter with its enclosures to
the NAM's Board of Directors in advance of next week's meetings. Thank
you.
Very truly yours,
Richard L. Wilkey, L. Patrick Hassey, M. Brian O'Shaughnessy,
President, Chairman, President and President and Chief
Fisher-Barton, Inc. Chief Executive Executive Officer,
Officer, Revere Copper Products,
Allegheny Technologies Inc.
Incorporated.
Enclosure 1
Currency Undervaluation: What it Does, How it Violates NAM Principles,
and Why H.R. 1498 Is the Best Solution
As with other commodities, the value of a currency is a function of
supply and demand. When market forces are free to determine the value,
currencies move up and down as conditions change. However, when a
government intervenes in currency markets to maintain an undervalued
currency, it generates powerful and systematic advantages in its
international trade.
With regard to its exports, an undervalued currency conveys a
subsidy if and when a good is shipped across the border. As shown in
the attachment, the government by its intervention decides how much
extra domestic currency an exporter of goods or services (such as
tourism) will receive for each dollar it earns. That bonus is a subsidy
provided by the foreign government. Under WTO rules, a subsidy benefit
that is received contingent on export is prohibited. The prohibition
rests on the longstanding legal judgment that export subsidies are
inherently distortive and destructive of free and fair competition.
With regard to the country's imports, an undervalued currency
serves as a hidden tax on all imported goods and services. The
attachment shows clearly that undervaluation creates the need for
importers, or would-be importers, to pay extra in domestic currency to
purchase each dollar of foreign goods. Whether viewed as a hidden
tariff or a hidden tax, the undervalued currency undermines the level
playing field for imported products and distorts free and fair
competition.
The bottom line is that persistent currency undervaluation
maintained by government intervention is incompatible with free trade
and violates the letter as well as the spirit of the WTO agreements.
Currency Undervaluation Violates NAM Principles
In 2005, the Board approved two specific sets of priorities for
NAM--one an overall trade agenda; the other, a China-specific agenda.
The principles and specific objectives in those documents provide a
strong basis for condemning persistent currency undervaluation.
Specifically, NAM's established policy objectives include:
Eliminate trade-distorting subsidies & defend, preserve and
enhance the effectiveness of WTO-consistent U.S. trade law. As
noted above, export subsidies are prohibited because they are
the most distortive of free trade.
Elimination of artificially created and maintained
competitive advantages through WTO-inconsistent subsidization
or other means. As shown in the attachment, currency
undervaluation creates powerful advantages for a country's
exports as well as for domestic producers competing with
imports.
Revalue the Chinese Yuan to Reflect Economic Fundamentals.
The Board agreed that this step is viewed as ``essential to
creating more balanced and sustainable trade flows,'' ``giving
U.S. companies a more stable period to adjust to changing
economic relationships,'' and ``enabling other countries to
free their [undervalued] currencies to better reflect market
conditions.''
Immediate Revaluation of the Yuan by up to 40 Percent. This
objective was ratified by the Board in early 2005. Since then,
the yuan has strengthened vis-a-vis the dollar by only 4.46
percent through September 20, 2006, according to figures
published by NAM. In fact, this very modest, nominal
appreciation has been exceeded by China's inflation during this
same period, so that the yuan is actually weaker in real terms
than it was in July 2005.
Apply Countervailing Duty Laws to China to Offset the
Effects of Chinese Subsidies. The Board agreed that ``[t]he
size of China's industrial sector and its huge foreign exchange
reserves should dictate that greater subsidy discipline be
applied.'' The need for such legislation has been heightened by
China's failure to fulfill its commitment to eliminate all
export subsidies by the time of its accession to the WTO on
December 11, 2001.
Supporting a WTO-consistent remedy against persistently undervalued
currencies is a logical next step in NAM's traditional support for free
and fair trade, the rule of law in international trade, and the
elimination of trade-distorting subsidies. It would validate NAM's
leadership role on currency issues that led to the establishment of the
Coalition for a Sound Dollar and the Fair Currency Alliance. It would
underscore that WTO-consistent responses to mercantilism and
protectionism by our trading partners is a key step in strengthening
support in the United States for further trade liberalization.
Why H.R. 1498 is the Best Approach
H.R. 1498, introduced by Rep. Tim Ryan (D-OH) and Armed Services
Chairman Duncan Hunter (R-CA), is the only bipartisan, WTO-consistent
legislation that provides a remedy to persistent currency
undervaluation. Thus far, 176 House members have cosponsored the bill,
including 85 Republicans. As the 109th Congress draws to a close, H.R.
1498 stands out from all other currency legislation because:
Consistent with the anti-subsidy rules of the WTO, it makes
``currency manipulation''--undervaluation maintained by
government intervention in any country--an export subsidy
actionable under the U.S. countervailing duty law. The statute
would apply in a nondiscriminatory way to all countries. The
legislation addresses an unfair, mercantilist practice as a
matter of principle and does not single out any foreign country
for discriminatory treatment.
Consistent with the International Monetary Fund's standards,
a temporarily undervalued currency resulting not from
government interference but from an imbalance in market forces
would not be liable to CVD duties.
Consistent with established national trade law, domestic
producers would be required to prove material injury caused by
the subsidized imports to obtain offsetting duties. Frivolous
cases would be screened out.
Application of CVD remedies would be contingent on the
exporting country's continued intervention to maintain an
undervalued currency. Once the practice stops, the remedy
stops. Thus, good behavior is rewarded.
Enactment of H.R. 1498 would provide an avenue of relief for
injured industries, encourage foreign governments to desist in
the market interference to suppress the value of their
currencies, and act as a deterrent to this unfair practice in
the future.
H.R. 1498 is good policy and deserves NAM's endorsement.
______
The Simple Arithmetic of Currency Undervaluation: The Chinese Example
Assume:
A market value for RBM of $1 = 5 RMB
An administered value for RMB of $1 = 8 RMB
An identical product is produced in the U.S. and China at a
cost of US$100 or 500 RMB
A would-be Chinese buyer of the U.S. good would have to be able and
willing to pay:
500 RMB--market value of good
+300 RMB--currency penalty
_________
800 RMB
Result: Huge Cost Disadvantage for U.S. Exporter
A would-be Chinese seller to the U.S. would be able to sell it at:
500 RMB--market value of good
+300 RMB--currency bonus
_________
800 RMB
Result: Huge Cost Advantage for Chinese Exporter
Enclosure 2
Kelley Drye Collier Shannon
Washington, DC, September 21, 2006
Memorandum
To: Governor John Engler
From: David A. Hartquist
Jeffrey S. Beckington
Re: The WTO-Consistency of H.R. 1498, the Ryan-Hunter Bill
This memorandum is being sent to you on behalf of the China
Currency Coalition (``CCC'') and responds to an analysis provided to
Mr. Jim Jarrett in a letter dated September 12, 2006, by Messrs. James
Bacchus and Ira Shapiro of Greenberg Traurig, LLP. In their opinion,
H.R. 1498's treatment of manipulative undervaluation of a foreign
currency as a countervailable, prohibited export subsidy would likely
be found in dispute settlement to be WTO-inconsistent. The CCC
respectfully disagrees.
We would like to note at the outset that the Ryan-Hunter bill has
been crafted to comply with the rights and obligations of the United
States under the WTO's various agreements, including particularly the
Agreement on Subsidies and Countervailing Measures (``SCM Agreement'').
It also should be observed that any legal contest at the WTO on this
matter would be a case of first impression, so it cannot be known with
absolute certainty what the final result of such proceedings would be.
Nonetheless, H.R. 1498 has been scrutinized repeatedly since its
introduction in April 2005, and 176 Members of the House of
Representatives, virtually evenly split by party, have signed on as co-
sponsors.
Under the circumstances, having now been able to read Greenberg
Traurig's letter, we continue to believe that H.R. 1498 is WTO-
consistent. Indeed, Greenberg Traurig's letter in significant respects
supports or concurs with the reasoning that underlies the CCC's
position. In the limited areas of disagreement that exist and in its
outcome, Greenberg Traurig's evaluation is very much open to challenge.
On balance, by far the better view is that the Ryan-Hunter bill is WTO-
consistent. The CCC's further points follow.\1\
---------------------------------------------------------------------------
\1\ Importantly, at page 2 of Greenberg Traurig's September 12th
letter, H.R. 1498's definition of ``exchange-rate manipulation'' for
purposes of amending the U.S. countervailing duty statute has been
misquoted in a way that wrongly suggests that amendment would apply
only to China. In actuality, Section 3 of H.R. 1498 defines ``exchange-
rate manipulation'' as a countervailable, prohibited export subsidy so
as to apply in countervailing duty proceedings to any foreign country
(not just China) engaged in manipulative undervaluation of its
currency. The definition of ``exchange-rate manipulation'' cited by
Greenberg Traurig's letter concerns Section 4 of H.R. 1498, which deals
with the China-specific market disruption provisions in U.S. law based
upon China's Accession Agreement with the WTO. Any implication that
H.R. 1498 singles out China for discriminatory treatment under the U.S.
countervailing duty statute is erroneous.
The CCC agrees that a measure constitutes a ``subsidy''
under the SCM Agreement only if (a) there is a governmental
``financial contribution'' involved, and (b) a ``benefit'' to
---------------------------------------------------------------------------
the recipient is thereby conferred.
Greenberg Traurig's evaluation acknowledges that exchange-
rate manipulation likely would be found in dispute settlement
to confer a ``benefit.'' The CCC concurs. When a country's
currency is manipulatively undervalued in relation to the
United States dollar, goods from that country that are sold in
the United States will realize for the exporter--upon
conversion of the dollars into the exporter's home currency--
more of that country's currency than if that currency were
valued realistically in accordance with market forces. That
difference, resulting in additional funds for the exporter,
assuredly yields a ``benefit'' for the exporter.
Greenberg Traurig's opinion is that exchange-rate
manipulation would likely not be considered to be a
governmental ``financial contribution'' and so would not be a
``subsidy'' under the SCM Agreement. To the contrary, the CCC
submits that exchange-rate manipulation does constitute or
produce a governmental ``financial contribution'' either as a
direct transfer of funds by the foreign government to the
exporter or as a governmental provision of goods or services to
the exporter in which the foreign government is selling its
currency and buying U.S. dollars. The foreign government prints
the money and decides how much to give to each exporter.
In Greenberg Traurig's view, a governmental ``financial
contribution'' is not likely to be found (a) because the
foreign government's manipulative undervaluation of its
currency is an exercise of its ``general regulatory powers'';
and (b) because there is no ``real cost'' to the foreign
government from a transfer of economic resources, as there is
with an outright grant of governmental funds or a loan at
below-market rates. But these attempted claims should fail. The
vague yardstick of whether a measure is an exercise of
``general regulatory powers'' would wrongly excuse many
measures like grants and preferential loans that already are
recognized as governmental ``financial contributions.''
Moreover, not only is the notion of a ``real cost'' to the
foreign government not articulated or defined in the SCM
Agreement as a prerequisite for a governmental ``financial
contribution,'' but exchange-rate manipulation does actually
entail substantial costs for the foreign government. Such
manipulation requires an extensive and costly regulatory system
by the foreign government to maintain, not least the process of
``sterilizing'' the foreign government's currency to avoid
inflation. Again, there are solid grounds to treat exchange-
rate manipulation as a ``subsidy'' under the SCM Agreement that
involves both a governmental ``financial contribution'' and a
``benefit'' for the recipient.
Greenberg Traurig's analysis also argues that the third
criterion under the SCM Agreement for a prohibited export
subsidy would not be met and that payments to an exporter by a
foreign government's exchange-rate manipulation are not
``contingent'' upon export performance, if the exchange rate is
available to anyone who has U.S. dollars to be exchanged into
the manipulatively undervalued foreign currency. But the fact
remains that the foreign country's exporters can only receive
their home currency at the subsidized, advantageous rate by
exporting and obtaining U.S. dollars. Availability of the
subsidized rate to other groups, such as foreign investors or
tourists (who are importers of services, such as lodging and
transportation, as well as purchasers of goods to carry home),
does not at all dictate a conclusion that the subsidy is not
export-contingent. There is no requirement expressed in the SCM
Agreement that a subsidy must be exclusively tied to exports in
order to be export-contingent and prohibited. This distinction
has been recognized and prohibited export subsidization has
been found in dispute settlement at the WTO in similar
situations. The fundamental issue is whether the subsidy
creates an incentive to export; an undervalued currency clearly
benefits only those who export.
In summary, the CCC continues to believe that exchange-rate
manipulation is a countervailable, prohibited export subsidy and would
be considered as such in a dispute settlement at the WTO.
______
Wiley Rein & Fielding LLP
Re: Response to the Bacchus-Shapiro Analysis of the Consistency of
H.R. 1498, the Hunter-Ryan Bill, With the WTO Obligations of the
United States
In their letter to the National Association of Manufacturers
(``NAM'') dated September 12, 2006,\1\ James Bacchus and Ira Shapiro
comment on the consistency of H.R. 1498 with the WTO obligations of the
United States. They conclude that the Chinese exchange rate regime
``probably does not fall within the meaning of `subsidy' as defined by
the WTO Agreement on Subsidies and Countervailing Measures, and even if
it does, it is neither a prohibited nor an actionable subsidy under
that Agreement.'' (Letter at 11.) In this response, we evaluate the
Bacchus-Shapiro analysis and conclude, contrary to their views, that
there are persuasive reasons why H.R. 1498 could be deemed consistent
with the U.S. obligations under the Agreement on Subsidies and
Countervailing Measures (``SCM'') in the event it is challenged at the
WTO.
---------------------------------------------------------------------------
\1\ Letter from James Bacchus and Ira Shapiro of Greenberg, Taurig,
to Jim Jarrett, National Association of Manufacturers, September 12,
2006.
---------------------------------------------------------------------------
A. The Subsidy Defined by H.R. 1498
Before turning to their WTO analysis, we note that the Bacchus/
Shapiro Letter incorrectly describes the amendment to the
countervailing duty law proposed by H.R. 1498.\2\ While it is true that
the introduction to H.R. 1498 states that its purpose is to ``clarify
that exchange rate manipulation by the People's Republic of China is
actionable under the countervailing duty provision . . .,'' the actual
amendment proposed to the countervailing duty law would not be limited
to China. In the proposed amendment to the countervailing duty law,
H.R. 1498 states:
---------------------------------------------------------------------------
\2\ The Letter states that ``Exchange Rate Manipulation'' is
defined to mean ``protracted large scale intervention by the Government
of the People's Republic of China. . . .'' This definition is found in
the proposed amendment to the special safeguard provision.
[T]he term `exchange-rate manipulation' means protracted large-
scale intervention by an authority to undervalue its currency
in the exchange market that prevents effective balance-of-
payment adjustments or that gains an unfair competitive
---------------------------------------------------------------------------
advantage over any other country.
Thus, the amendment would apply to any country that manipulates its
exchange rate, not just China.
This is not an insignificant oversight. An amendment to the U.S.
countervailing duty law that is country specific would be
unquestionably WTO-inconsistent as a violation of the most-favored-
nation clause found in Article III of GATT-1994. This result is avoided
by H.R. 1498 by making the new countervailing duty provisions relating
to currency manipulation generic as they are required to be under the
MFN obligation.
B. The Definition of a Subsidy in the SCM Requires a Financial
Contribution and Benefit to the Recipient
We agree with the Bacchus/Shapiro conclusion that Article 1.1 of
the SCM provides that a subsidy exists only where there is both
``financial contribution'' and a ``benefit.'' And, we accept their view
that a WTO panel likely ``would find that `exchange rate manipulation'
does confer a benefit . . .'' provided there are facts sufficient to
demonstrate that an advantage exists as a result of such action by the
government authority. (Letter at 5.)
We do not, however, share the Bacchus/Shapiro expectation of
``difficulty'' in demonstrating that the Chinese currency regime
involves a financial contribution. Article 1.1(a)(1) provides that
there is a financial contribution by a government where, inter alia,
there are direct transfers to the recipient (such as grants, loans, and
equity infusions). Bacchus and Shapiro argue that the exchange of U.S.
dollars for RMB is not such a transaction and that none of the other
three practices defined in Article 1.1(a)(1) are applicable. In their
view, it is likely that the WTO would require persuasive evidence ``of
a real cost to the government from a transfer of economic resources,''
and that ``the existence of a financial contribution involves
consideration of the transaction through which something of economic
value is transferred by a government.'' (Letter at 7, quoting Softwood
Lumber (WT/DS 257/AB/R.)
We fail to see why the settlement of foreign exchange holdings does
not amount to a financial contribution. Under the Chinese currency
regime, foreign exchange is in many cases, including export receipts,
required to be settled through the People's Bank of China or a bank
authorized to carry on a foreign exchange business.\3\ In exchange, the
Bank provides RMB to the recipient at the prescribed rate of exchange.
As the banks function at the direction of the government, the financial
contribution would be deemed made by the government. See SCM Article
1.1(A)(1)(iv). This financial contribution from the government confers
a benefit--as conceded by Bacchus and Shapiro--because the dollars
exchanged are valued at a higher rate than would be the case in the
absence of exchange rate manipulation. That is, the recipient does not
pay ``market rates for what it receives.'' Canada-Dairy (WT/DS103/AB/
R), Para 87.
---------------------------------------------------------------------------
\3\ See Regulations on the Control of Foreign Exchange Settlement,
Sale and Payment, Promulgated by the People's Bank of China, June 20,
1996.
---------------------------------------------------------------------------
This scenario is indistinguishable from the situation where a
government transfers cash to a recipient in return for equity at a
price that is above the market value of the asset transferred by the
recipient. Such transactions are denied financial contributions because
they involve a transfer of cash; they amount to a subsidy because the
recipient benefits from the exchange of equity for more value than
would have been received from a profit motivated investor. In the case
of the Chinese currency regime, there is also a transfer of more cash
to the recipient then would be transferred under a market driven
exchange rate system, which Bacchus and Shapiro concede confers a
benefit.
The language of SCM Article 1.1(a)(1) does not indicate that the
definition of ``financial contribution'' includes an implicit
requirement that the transfer must involve a cost to the government.
The word ``transfer'' means simply that there has been a conveyance
from one party to another. This ordinary meaning of the word transfer
should preclude incorporation of additional criteria. See Article 31 of
the Vienna Convention on the Law of Treaties, which is the applicable
rule of interpretation for WTO dispute resolution.
C. The Subsidy Conferred by the Chinese Currency Regime Is Contingent
on Export
Bacchus and Shapiro conclude that even if there is a financial
contribution and benefit, the Chinese currency regime is not ``tied''
to exports. While conceding that the currency benefit is available to
exporters, they note that it is equally available to those who receive
U.S. dollars from the repatriation of profits and from the inflow of
foreign direct investment. Since the subsidy is not limited to
exporters, they argue that the WTO would not likely find that the
subsidy is contingent on export performance. (Letter at 10.)
Bacchus and Shapiro do make reference to the Appellate Body
decision in United States Upland Cotton (WT/DS 267/AB/R), where it was
determined that export contingency can exist even though the subsidy is
not limited to exporters. But, they argue, Upland Cotton is
distinguishable because in that case, the ``Statute and Regulations
clearly distinguish between exporters and domestic users.'' In
contrast, they argue, the terms of the Chinese currency regime does not
clearly distinguish between ``exporters and others. . . .'' (Id.)
While it is true that the Appellate Body did cite differences in
the domestic and export programs as a distinguishing feature in Upland
Cotton, it did not elevate the existence of a distinction to a
preclusive criteria. This interpretation is consistent with the
Appellate Body decision in United States-Tax Treatment for Foreign
Sales Corporations, Recourse to Article 21.5 of the DSU by the European
Communities (WT/DSBRO8/AB/RW, 14 January 2002), which states:
(a) 119. We recall that the ETI measure grants a tax exemption
in two different sets of circumstances: (a) where property is
produced within the United States and held for use outside the
United States; and (b) where property is produced outside the
United States and held for use outside the United States. Our
conclusion that the ETI measure grants subsidies that are
export contingent in the first set of circumstances is not
affected by the fact that the subsidy can also be obtained in
the second set of circumstances. The fact that the subsidies
granted in the second set of circumstances might not be export
contingent does not dissolve the export contingency arising in
the first set of circumstances. Conversely, the export
contingency arising in these circumstances has no bearing on
whether there is an export contingent subsidy in the second set
of circumstances. Where a United States tax player is
simultaneously producing property within and outside the United
States, for direct use outside the United States, subsidies may
be granted under the ETI measure in respect of both sets of
property. The subsidy granted with respect to the property
produced within the United States, and exported from there, is
export contingent within the meaning of Article 3.1(a) of the
SCM Agreement, irrespective of whether the subsidy given in
respect of property produced outside the United States is also
export contingent.
The same result should apply here where the foreign exchange regime
is applicable to more than exporters.
There is reason to believe that a WTO review of the Chinese
currency regime would take note of the fact there are numerous special
rules and exceptions applicable to holders of foreign currency other
than exporters. Not every dollar received in China must be settled in
the same fashion. For example, while the Regulations of the People's
Bank of China require settlement of foreign exchange earned by domestic
organizations from a variety of sources, including foreign exchange
earned from export, remission of profits from foreign assets, transfer
of patent rights, etc., there are numerous special regulations that
allow foreign exchange accounts that are not available to exporters per
se. Such accounts may be utilized by recipients of foreign exchange
from participation in overseas projects, for foreign agency services,
receipts of travel agencies and certain insurance premiums. In
addition, there are special regulations applicable to enterprises with
foreign investment which also allow foreign exchange accounts not
available to exporters.\4\ These differentials in the treatment of
foreign exchange receipts by domestic companies demonstrate that the
``subsidy'' is not simply tied to having dollars as Bacchus and Shapiro
contend. These differences indicate that the Chinese currency regime
does distinguish between exporters and others, which suggests that even
the most restrictive reading of Upland Cotton criteria would permit the
characterization of the Chinese currency regime as contingent on
export.
---------------------------------------------------------------------------
\4\ Regulations, Article 10.
---------------------------------------------------------------------------
______
Stewart and Stewart
Washington, DC, September 22, 2006
Re: Response to Bacchus/Shapiro Analysis of WTO--Consistency of
Hunter-Ryan Bill (H.R. 1498)
A. Introduction
The following analysis is offered to provide a response to the
September 12, 2006, memorandum prepared for NAM by James L. Bacchus and
Ira Shapiro (hereinafter ``Bacchus/Shapiro memo''). That memo concludes
that the Chinese exchange rate regime is not a prohibited (or
actionable) subsidy under the SCM Agreement and, therefore, H.R. 1498
(the Hunter-Ryan bill) is unlikely to be WTO-consistent at least as
applied to China. The authors are well-known and well-regarded trade
law practitioners, and their views on WTO matters should certainly be
respected. However, reasonable minds may disagree about issues such as
the WTO-consistency of proposed legislation where no directly similar
measure has previously been considered by a WTO dispute settlement
panel or the Appellate Body. In addition, the Bacchus/Shapiro memo
recognizes the seriousness of the problem and does not suggest that
nothing should be done to address it. Rather, they suggest that the
chances of a successful offensive challenge to the Chinese currency
regime based on a GATT 1994 Article XV:4 violation would be better than
the chances of a successful defense of H.R. 1498 in a WTO dispute. The
initiation of such an offensive challenge was, of course, the purpose
of the Section 301 petition filed by the China Currency Coalition
(``Section 301 petition''), which unfortunately was not accepted by the
Administration.
The Bacchus/Shapiro memo acknowledges that the question of whether
a measure is a prohibited (or actionable) subsidy under the SCM
Agreement requires a highly fact-specific analysis. The memo then
proceeds on the basis of the authors' understanding of the operation of
the Chinese currency regime without considering the practical
implications and effects of that regime on Chinese exporters. Bacchus/
Shapiro memo, at 2-3. Instead, the memo finds two fundamental problems
that they view are likely to weigh against a WTO panel finding that the
Chinese exchange rate regime is a prohibited export subsidy within the
meaning of Article 3.1(a) of the SCM Agreement. First, the memo
foresees difficulty in arguing that the regime provides a ``financial
contribution'' or ``income or price support'' and, thus, does not
provide a subsidy within the meaning of Article 1.1(a) of the SCM
Agreement. Second, the memo concludes that even assuming arguendo that
the regime does provide a subsidy, the subsidy is not contingent in
fact on export performance.
Because there are differing views on these fact-intensive issues,
as evidenced by the Section 301 petition, and because any challenge of
H.R. 1498 would be a case of first impression for the WTO, we provide
the following supplemental analysis, which concludes that, while the
WTO-consistency of any U.S. law is subject to possible challenge, there
are strong arguments that H.R. 1498 is consistent with U.S. obligations
under the SCM Agreement.
B. Financial Contribution
According to the Bacchus/Shapiro memo, the government's pegging of
the value of the yuan to the value of the U.S. dollar does not
``involve a transaction of the nature, or the kind of transfer of
economic resources, that constitutes a `financial contribution' under
any of the subparagraphs of Article 1.1(a)(1)'' of the SCM Agreement.
Bacchus/Shapiro memo, at 7. Likewise, the Bacchus/Shapiro memo finds
that exchange-rate manipulation would not be a form of income or price
support in the sense of GATT Article XVI and within the meaning of
Article 1.1(a)(2) of the SCM Agreement. Bacchus/Shapiro memo, at 8.
According to the memo, Article 1.1(a)(2) is likely to refer to
conventional income or price support programs for specific products
intended to maintain income or prices at levels higher than they
otherwise would be.\1\
---------------------------------------------------------------------------
\1\ Unlike the Bacchus/Shapiro memo, the Section 301 Petition
relies on the Second Report on AD/CVD Duties adopted in 1960 as well as
a panel report in Brazil--Aircraft to argue that a financial
contribution does not require a ``payment'' but can include ``measures
having an equivalent effect.'' Section 301 petition at 59-60, n. 67.
According to the Second Report on AD/CVD Duties, ``the word `subsidies'
covered not only actual payments, but also measures having an
equivalent effect.'' BISD 9S/194, 200, para. 34.
---------------------------------------------------------------------------
It is not clear, however, why the exchange of currency at an
undervalued rate would not be a ``direct transfer of funds'' or at the
very least government revenue foregone within the meaning of SCM
Agreement Articles 1.1(a)(1)(i) or (ii). According to the Appellate
Body, ``a `subsidy' involves a transfer of economic resources from the
grantor to the recipient for less than full consideration.'' \2\ \3\
US--DRAMS CVD, WT/DS296/AB/R, para. 125, n. 212, citing Canada--Dairy,
WT/DS103/AB/R, WT/DS113/AB/R, para. 87. While the Appellate Body in
US--Softwood Lumber IV recognized that ``not all government measures
capable of conferring benefits would necessarily fall within Article
1.1(a),'' it also recognized that a ``wide range of transactions'' and
``government measures'' fall within the meaning of that provision. WT/
DS257/AB/R., para. 20, n. 35. In other words, a ``financial
contribution'' is not limited to a governmental transfer of money
directly to the recipient.
---------------------------------------------------------------------------
\2\ See also US--Softwood Lumber IV, WT/DS257/AB/R, para. 19 (``The
concept of subsidy defined in Article 1 of the SCM Agreement captures
situations in which something of economic value is transferred by a
government to the advantage of the recipient'').
\3\ While the Bacchus/Shapiro memo, at 6, notes that the Appellate
Body in the US--DRAMS CVD dispute was reluctant to find that a Member's
exercise of general regulatory powers constituted a ``financial
contribution,'' the Chinese exchange rate regime is more than an
exercise of general regulatory powers. Moreover, the US--DRAMS CVD case
involved an alleged indirect financial contribution through a private
body under SCM Agreement Article 1.1(a)(1)(iv) not a ``direct transfer
of funds'' or government revenue foregone within the meaning of SCM
Agreement Articles 1.1(a)(1)(i) or (ii). US--DRAMS CVD, WT/DS296/AB/R,
para. 115.
---------------------------------------------------------------------------
For example, in US--Softwood Lumber IV, the Appellate Body
considered whether Canadian provinces provided a financial contribution
by ``provid[ing] goods'' within the meaning of SCM Agreement Article
1.1(a)(1)(iii). The Appellate Body explained that it was the
consequence of the transaction that must be considered in determining
whether or not the government has provided goods. Id. at para. 43. In
that case, stumpage arrangements gave tenure holders a right to enter
onto government lands, cut standing timber, and enjoy exclusive rights
over the timber that was harvested. The Appellate Body concluded that
the consequence of the transaction was that the government provided
harvesters with standing timber. Id. The Appellate Body further noted
that the evidence suggested that ``making available timber is the
raison d'etre of the stumpage arrangements.'' Id. Therefore, the
Appellate Body upheld the panel's finding that the U.S. determination
that the Canadian provinces provided a financial contribution in the
form of goods by providing standing timber to timber harvesters through
stumpage programs was ``not inconsistent'' with Article 1.1(a)(1)(iii).
Id. at para. 76.
The Appellate Body in the EC--Sugar case has also broadly construed
Agriculture Agreement Article 9.1(c), which imposes reduction
commitments on export subsidies provided through ``payments on the
export of an agricultural product that are financed by virtue of
governmental action. . . .'' The Appellate Body in EC--Sugar upheld the
panel's conclusion that the government's cross-subsidization of the
production of C sugar constituted a ``payment'' in the form of
transfers of financial resources on export financed by virtue of
governmental action resulting from the operation of the EC sugar regime
within the meaning of Article 9.1(c):
7.331 The Panel is thus of the view that EC sugar producers
finance sales of C sugar at below cost of production directly
by participating in the domestic market and making sales
internally at high prices as regulated by the European
Communities (and from the purchase of discounted C beet as
discussed earlier). The European Communities' governmental
action controls virtually all aspects of domestic sugar supply
and pricing. The European Communities provides this control
through a combination of guaranteed intervention prices,
production quotas and import restraints which limit the
quantity of quota sugar that may be sold in the internal
market, and the resulting high domestic price for A and B quota
sugar. The domestic sales offer lucrative and attractive
returns to producers. Government action controls the supply of
domestic sugar by way of quotas in pursuit of protecting high
domestic prices well above the intervention price.
Additionally, penalties levied against sugar producers that
divert C sugar production into the domestic market are evidence
of further governmental control. The collection of production
levies and distribution of export refunds also contribute to
the high degree of EC governmental control. Last, the
imposition of high import tariffs illustrates again
governmental action in the EC sugar regime.
7.332 Accordingly, the EC sugar regime uses the high profits
on A and B quota sugar to cover fixed costs for C sugar and,
most importantly, requires C sugar to be exported and diverted
from the domestic market. Again, the result of the EC sugar
system is not the production of C sugar in marginal or
superfluous amounts simply in the pursuit of ensuring quota
fulfillment. Rather, as the EC Court of Auditors stated, over
the past years, C production has varied between 11 and 21
percent of quota production, a significant portion of the
European Communities' entire sugar production.
7.333 In the Panel's view, the EC sugar regime and the cross-
over benefits that it creates are thus the direct and
foreseeable consequences of actions by the European
Communities, within the meaning of Article 9.1(c) of the
Agreement on Agriculture, not merely the decisions of private
sugar producers responding to market incentives.
7.334 Therefore, the Panel finds that the production of C
sugar receives a payment, through cross-subsidization resulting
from the operation of the EC sugar regime; there is a payment.
in the form of transfers of financial resources on export
financed by virtue of governmental action.
7.335 Pursuant to Article 10.3 of the Agreement on
Agriculture, the Panel finds that the European Communities has
not demonstrated that exports of C sugar that exceed the
European Communities' commitment levels since 1995 and in
particular since the marketing year 2000/2001, are not
subsidized. Consequently, the European Communities is acting
inconsistently with Articles 3 and 8 of the Agreement on
Agriculture.
WT/DS265/R, WT/DS266/R, WT/DS283/R, paras. 7.331-35 (emphasis added);
WT/DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, para. 278.
Likewise, in Canada--Dairy, the Appellate Body found that Canada's
dairy regime constituted an export subsidy under Agriculture Agreement
Article 9.1(c) because the provision of milk at reduced or below market
prices constituted ``payments'' within the meaning of Agriculture
Agreement Article 9.1(c). The Appellate Body specifically considered
whether the transfer of economic resources constituting a ``payment''
within the meaning of Article 9.1(c) had to be in the form of money or
could take other forms. WT/DS103/AB/R, WT/DS113/AB/R, para. 107. In the
Appellate Body's view, the payments could be made in a form, other than
money, that confers value, such as by way of goods or services, and
includes revenue foregone. Id. at 107, 112. The Appellate Body
explained that the ``foregoing of revenue usually does not involve a
monetary payment.'' Id. at para. 110 (citing Agriculture Agreement
Article 1(c)). The Appellate Body found that the provision of milk at
discounted prices to processors for export constituted non-monetary
``payments'' within the meaning of Article 9.1(c) in an amount equal to
the portion of the price not charged. WT/DS103/AB/R, WT/DS113/AB/R,
para. 113.
While Article 9.1(c) of the Agriculture Agreement is not identical
to Article 1.1(a) of the SCM Agreement, the Appellate Body's
recognition that a ``payment'' on the export of agricultural products
can occur through the effects of a government regime should not be
overlooked.
The plain language of Article 1 of the SCM Agreement and the WTO
case law to date confirm that a government need not issue a check to an
exporter to provide a ``financial contribution.'' As explained in the
Section 301 petition, China's currency regime provides a real financial
contribution to Chinese exporters through the exchange of currency at
an undervalued rate:
The Chinese government requires its citizens to exchange their
dollars for local currency, sets the rate of exchange by fiat,
and prints the money to fund the transaction. By directing the
conversion of U.S. dollars at an extremely undervalued rate of
8.28 Yuan for each U.S. dollar, the Chinese government provides
a financial contribution. . . .
Section 301 Petition, at 60. In other words, the Chinese exchange rate
regime requires banks to exchange U.S. dollars by overpaying them
Chinese Yuan. The additional Chinese Yuan received by exporters in the
form of cash represents a direct transfer of funds, within the meaning
of SCM Agreement Article 1.1(a)(i), or at the very least government
revenue foregone, within the meaning of Article 1.1(a)(ii).\4\ The
Section 301 petition also suggested that:
---------------------------------------------------------------------------
\4\ The Section 301 petition points out correctly that ``[t]o the
extent that the Chinese government entrusts or directs any private
bodies to assist in effectuating the yuan's undervaluation, which
assistance appears also to take place, the conclusion still holds under
Article 1.1(a)(1)(iv) that the Chinese government is providing a
financial contribution and service as defined by the SCM Agreement.''
Section 301 petition at 60, note 68.
China's currency manipulation further contributes financially
to Chinese exports to the United States and elsewhere by
shielding Chinese exporters from expenses involved with hedging
against foreign-exchange losses or purchasing guarantees to
guard against exchange-rate fluctuations. These costs are
avoided thanks to the Chinese government's guarantee of a
substantially undervalued, pegged-exchange rate that prevents
---------------------------------------------------------------------------
any currency fluctuations between the Yuan and the U.S. dollar.
Id. at 61. Moreover, the currency exchange can also be viewed as a
financial contribution because it provides Chinese exporters a
``service'' at non-market rates within the meaning of Article 1.1(a)(1)
(iii). Hence, while the Bacchus/Shapiro memo conservatively concludes
that the ``financial support'' requirement is not met, a review of the
WTO case law set out above supports a contrary conclusion, and the
particular facts at issue have never been considered in a WTO dispute
settlement proceeding.
C. De Facto Contingent Upon Export Performance
The Bacchus/Shapiro memo concludes that, assuming arguendo that the
Chinese currency regime is a subsidy, it is not a prohibited export
subsidy because its grant is not ``tied to'' exports. Bacchus/Shapiro
memo, at 9.
With respect to de facto export contingency, footnote 4 to Article
3.1(a) of the SCM Agreement states that the standard ``is met when the
facts demonstrate that the granting of a subsidy, without having been
made legally contingent upon export performance, is in fact tied to
actual or anticipated exportation or export earnings. The mere fact
that a subsidy is granted to enterprises which export shall not for
that reason alone be considered to be an export subsidy within the
meaning of this provision.'' Thus, the critical issue is whether or not
the grant of the subsidy is ``tied to'' actual or anticipated
exportation or export earnings.
There have been at least two adopted panel or Appellate Body
decisions finding de facto export contingency within the meaning of
Article 3.1(a): Australia--Automotive Leather II and Canada--Aircraft.
According to the adopted panel report in Australia--Automotive Leather
II, the sales performance targets set out in the grant contract
constituted export performance targets because (1) the government was
aware that the producer would have to continue and probably increase
exports to reach the targets, and (2) the Australian market was already
too small to absorb the producer's production, much less any expanded
production that might result from financial benefits accruing from the
grant payments and required capital investments which were to be
specifically for automotive leather operations. Australia--Automotive
Leather II, WT/DS126/R, paras. 9.67, 9.71. Therefore, the panel found
that the producer's ``anticipated export performance was one of the
conditions for the grant of the subsidies'' and was compelling evidence
of a close tie between anticipated exportation and the grant of the
subsidies. Id.
The Appellate Body in Canada--Aircraft upheld the panel's finding
that the TPC program was de facto export contingent. In doing so, the
Appellate Body explained that the legal standard to establish de jure
and de facto contingency was the same, but the evidence required to
establish their contingency differed. Specifically, proof of a de facto
export contingency is based on an inference from the ``total
configuration of the facts constituting and surrounding the granting of
the subsidy, none of which on its own is likely to be decisive in any
given case.'' Canada--Aircraft, WT/DS70/AB/R, para. 167. The Appellate
Body then agreed with the panel that the relevance of particular facts
will depend on the circumstances of the particular case and that
``there can be no general rule as to what facts or what kinds of facts
must be taken into account.'' Canada--Aircraft, WT/DS70/AB/R, para.
169.
Interpreting the language of footnote 4, the Appellate Body
explained that the words ``tied to'' in footnote 4 required that a
relationship of conditionality or dependence must be demonstrated.
Canada--Aircraft, WT/DS70/AB/R, para. 171. The Appellate Body also
interpreted footnote 4 as not permitting an affirmative finding based
solely on (1) evidence that a government granting a subsidy anticipated
that exports would result, or (2) evidence that a government knew that
a recipient's sales were export-oriented. Canada--Aircraft, WT/DS70/AB/
R, paras. 169-173. While evidence of these facts may be taken into
account, they cannot support an affirmative finding alone.
Applying the legal test to the facts in that case, the Appellate
Body affirmed the panel's finding that the TPC assistance to the
Canadian regional aircraft industry was de facto export contingent
based on consideration of the sixteen factual elements, including:
TPC's statement of its overall objectives; types of information called
for in applications for TPC funding; the considerations, or eligibility
criteria, employed by TPC in deciding whether to grant assistance;
factors to be identified by TPC officials in making recommendations
about applications for funding; TPC's record of funding in the export
field, generally, and in the aerospace and defence sector, in
particular; the nearness-to-the-export-market of the projects funded;
the importance of projected export sales by applicants to TPC's funding
decisions; and the export orientation of the firms or the industry
supported. Canada--Aircraft, WT/DS70/AB/R, para. 175.
The lack of the requisite ``tie'' in Canada--Aircraft II, however,
led the panel in that case to reject allegations of de facto export
contingency based on the size of the domestic market. Specifically, the
panel acknowledged that the government ``was very likely aware that the
Canadian domestic market was too small to absorb Bombardier
production'' but concluded that the program was not operated in a way
to suggest that the equity guarantees were de facto export contingent.
Canada--Aircraft II, WT/DS222/R, paras. 7.360, 7.377-78. In doing so,
the panel distinguished the TPC program discussed in Canada--Aircraft
which (1) required TPC employees to focus on the volume of export sales
resulting directly from the project, (2) involved TPC business plans
which recorded the proportion of the aerospace and defense industry's
revenue allocable to exports, and (3) involved firms exporting 80
percent of their shipments. Id.
In the case of China's currency regime, the subsidy is de facto
export contingent. As the Section 301 petition explained, ``the
subsidization would not occur if exports did not occur. In order for
the foreign-exchange program to operate, products must be traded
internationally. Without export performance, there would be no foreign
currency to exchange.'' Section 301 petition at 65. Thus, there is a
``relationship of conditionality or dependence.'' Canada--Aircraft, WT/
DS70/AB/R, para. 171. The granting of the subsidy is not based merely
on ``knowing that a recipient's sales are export-oriented.'' Canada--
Aircraft, WT/DS70/AB/R, para. 173. Without exportation there can be no
subsidization. Hence, the subsidy provided by China's currency regime
is ``tied to'' exports within the meaning of the SCM Agreement. This
conclusion is supported by WTO case law.
D. A Subsidy's Availability to Non-Exporters Does Not Dissolve the
Export-Contingent Nature of the Payments to Exporters
The Bacchus/Shapiro memo concludes that a WTO panel would not find
the currency regime to be a prohibited export subsidy that is de facto
contingent on export performance because it lacks the requisite ``tie
to'' exports. Bacchus/Shapiro memo, at 9-10. Instead, the memo explains
that any alleged subsidy is ``tied to'' having U.S. dollars, as a
result of foreign profits, foreign investments or from exports. The
memo also notes the lack of evidence indicating that exports are
singled out for special treatment or subject to different conditions.
Bacchus/Shapiro memo, at 10.
Yet, SCM Agreement Article 3.1(a) specifically states that a
subsidy can be contingent upon export performance ``whether solely or
as one of several other conditions.'' Indeed, the Appellate Body has
twice rejected arguments that receipt of subsidy payments by non-
exporters somehow dissolves export contingency for exporters. For
example, in US--Upland Cotton, the Appellate Body rejected the U.S.
argument that its Step 2 payments were not export contingent because
they were also available to domestic users. US--Upland Cotton, WT/
DS267/AB/R, paras. 564, 576. The Appellate Body explained that the fact
that a subsidy was also available to domestic users did not
``dissolve'' the export-contingent nature of the payments to exporters.
Id. at para. 578. Rather, the Appellate Body found that program to be
de jure export contingent because the statute and regulations (1)
distinguished between two types of recipients (eligible exporters and
eligible domestic users), and (2) established different conditions for
each type to receive payments, i.e., an exporter had to demonstrate
that the upland cotton had been exported to receive a payment. Id. at
paras. 576-77.
In doing so, the Appellate Body relied on its decision in US--FSC
(Article 21.5--EC). In US--FSC (Article 21.5--EC), the Appellate Body
found that the fact that subsidies may not be export-contingent in all
``situations'' in which they provide benefits did not affect its
conclusion that the subsidy was export-contingent in one of those
``situations.'' WT/DS108/AB/RW, at para. 119. In that case, the ETI
measure at issue contemplated two different factual situations, one
involving property produced within the United States and held for use
outside the United States, and the other involving property produced
outside the United States and held for use outside the United States.
Id. The Appellate Body observed that the conditions for the grant of
the subsidy with respect to property produced outside the United States
were distinct from those governing the grant of the subsidy in respect
of property produced within the United States. Id. at para. 114.
Therefore, the Appellate Body examined the two situations separately
and concluded that the first situation would require the exportation of
property produced within the United States to receive the tax
exemption. Id. at paras. 115, 119. The fact that the same measure
grants subsidies that might not be export contingent to those in the
second situation did ``not dissolve the export contingency arising in
the first set of circumstances.'' Id. at para. 119.
Thus, the simple fact that enterprises in possession of dollars
from inflows of foreign direct investment or repatriation of profits
earned abroad benefit from China's currency regime, along with
exporters, does not make the action of the Chinese government any less
of an export subsidy. In addition, the value of foreign direct
investment in China and Chinese overseas investment (and consequently
repatriation of profits) pales in comparison to the value of Chinese
exports. In 2005, the value of Chinese exports was US$762 billion,\5\
while the value of foreign direct investment in China was only US$60.3
billion \6\ and the value of Chinese overseas investment was just
US$6.92 billion.\7\ Moreover, as the recent WTO Trade Policy Review of
China explained, ``FDI has served as a platform, enabling China to
manufacture products that meet world-market specifications with regard
to quality, design, and technological content, thereby greatly
contributing to the export orientation of the economy.'' \8\ So, even
foreign direct investment is generally oriented toward export
production, which in turn leads to greater subsidization through
China's currency regime.
---------------------------------------------------------------------------
\5\ Trade Policy Review, Report by the Secretariat, People's
Republic of China, Revised, WT/TPR/S/161/Rev.1, at 257, Annex A1.1
(June 26, 2006) (``China TPR'').
\6\ China TPR, at 24, note 79.
\7\ Website of the Ministry of Commerce of the People's Republic of
China (MOFCOM),
http://english.mofcom.gov.cn/aarticle/statistic/foreigninvestment/
200607/20060702705397
.html (Accessed Sep. 21, 2006).
\8\ China TPR, at 5.
---------------------------------------------------------------------------
In any event, it cannot be the case that a program that primarily
benefits exports is deemed to not be an export subsidy simply because a
relative handful of non-exporting enterprises also benefit. As
explained, WTO case law supports this conclusion.
E. Conclusion
The Bacchus/Shapiro memo addresses the question of whether H.R.
1498 is consistent with the WTO Agreement. With various qualifications
which recognize that any actual WTO challenge of any U.S. law treating
China's foreign exchange regime as a subsidy would be dependent on the
facts of the case presented, the Bacchus/Shapiro memo nonetheless draws
the conclusion that such a law would likely be found WTO-inconsistent
if challenged by China. We respectfully disagree. While we agree with
much of the Bacchus/Shapiro memo's review of the basic elements
identified as needing to be addressed, we disagree with the conclusion
drawn. As this memo has reviewed, WTO case law supports the view of
those who support H.R. 1498. China's foreign exchange rate program
should be viewed as a financial contribution, the resulting subsidy is
tied to exports such that it is an export subsidy, and hence it is
prohibited under the SCM Agreement, or in the least it is actionable
and may be addressed by U.S. countervailing duty law.
As is true with any law or regulation adopted by a WTO member
government, no one can know with certainty that the law or regulation,
if challenged at the WTO, will not be found to violate some aspect of a
WTO Article or WTO Agreement. The same can be said with respect to
review by domestic courts of a law's consistency with the U.S.
Constitution or of a regulation's consistency with U.S. law. The
Bacchus/Shapiro memo acknowledges this uncertainty as do we. Such
uncertainty by itself is not a basis to oppose legislation where
existing WTO provisions and decisions provide a basis for believing
that the legislative approach would be WTO-consistent. The portion of
H.R. 1498 that deals with recognizing that currency manipulation is a
countervailable subsidy fairly can be viewed as WTO-consistent. The
concerns raised in the Bacchus/Shapiro memo are, in fact, addressable
under the facts of the situation as they pertain to China, and as
decided by adopted WTO panel and Appellate Body reports.
Sincerely,
Terence P. Stewart,
Amy S. Dwyer,
J. Daniel Stirk.
Senator Dorgan. Without objection.
Mr. O'Shaughnessy. I am requesting Senator Schumer as well
as Senators Rockefeller, Kerry, Cantwell, Ensign, and Smith of
this Committee to join Senator Snowe in supporting effective
trade legislation to offset currency manipulation with these
amendments.
Ladies and gentlemen, in conclusion, I feel a special trust
has been placed in me, handed down from Paul Revere, to
represent not only the workers in my company, but the workers
throughout the United States, the factory workers. There is no
company that more closely represents the interests of Main
Street and factory workers in the USA than Revere. Please
listen to us. Time is of the essence here as the damage to the
economic structure of our Nation and its industrial base
worsens every day and many domestic manufacturing companies
cannot hold on for much longer. This sense of urgency is no
less important to resolve tax issues as well as currency
manipulation as they are related and directly linked to the
competitive position of USA manufacturing in the world.
Mr. Chairman, thank you for this opportunity to testify.
[The prepared statement of Mr. O'Shaughnessy follows:]
Prepared Statement of M. Brian O'Shaughnessy, Chairman, CEO, and
President, Revere Copper Products, Inc.
Who should America listen to for trade and tax policy?
Three million manufacturing jobs have been lost in the USA since
the year 2000.
Some attribute it to increased productivity--but previous
recoveries typically resulted in a loss of about one million jobs in
spite of productivity increases. Even so, some economists cite data
that the manufacturing sector is doing just fine as it is producing
more than ever before. Such data is misleading and you should consider
the source. For example, U.S. produced products include Dell computers
which are assembled in the USA from components produced abroad. Foreign
outsourcing has a significant impact on productivity and renders the
data on productivity useless. Indeed, an article in Business Week
describes the ``Phantom GDP'' and states ``the growth of domestic
manufacturing (and productivity) has been substantially overstated in
recent years.'' This is directly linked by Business Week to foreign
outsourcing.
We could argue endlessly about this but the facts are the facts and
the fact is we have become a nation with a colossal trade deficit.
In 2005, for the first time in over a hundred years, our Nation
imported more food products than it exported and our trade deficit in
manufactured goods continues to soar. Indeed, our Nation's trade
deficit is growing by $2 billion a day! Some think it is our country's
responsibility to support fledgling economies because we are the
strongest, most powerful nation in the world. Some say we need to set a
good example and others will follow.
No matter how we try to rationalize it, millions of manufacturing
jobs are going overseas.
My company is Revere Copper Products. We were founded in 1801 by
Paul Revere and believe we are the oldest manufacturing company in the
USA. Our modern copper rolling mill is in Rome, New York and produces
copper and brass sheet, strip and coil. Many of our customers are
located throughout the USA and use our products to manufacture
industrial or consumer products.
Since 2000, about 30 percent of the manufacturing facilities that
were customers of this mill have shut down or moved offshore. It is
easy to see for yourself if you simply go to any big box store and look
at any item made of copper and brass. Turn the package over and you
will likely see that the product is now made in China. That's because
the cost of manufacturing in China is so much cheaper, you believe. At
least, that is what you have been told . . .
Once you start looking at the facts, however, you will see a very
different picture.
Let's say the production cost of a brass doorknob in China is 100
yuan. You can see in Exhibit 1 that if the exchange rate for converting
yuan to dollars is controlled by the government of China at 8 yuan to
$1, then the production cost is equivalent to $12.50. But if the
exchange rate was allowed to be set by free market forces, it would be
about 5 yuan to $1 and the production cost in China would be equivalent
to $20. So a company that produces that doorknob for $18 in the USA is
going to get driven out of the market and that factory in the USA is
going to shut down or move to China. Conversely, if the yuan were to
have an exchange rate based on market forces, U.S. companies would be
competitive.
Exhibit 1
In other words, the government of China manipulates its currency so
that it subsidizes the cost of manufacturing in China.
The current and the former U.S. administration have refused to take
any concrete actions against such manipulation by China and have chosen
instead to jawbone. The problem with this approach is that currency
manipulation by the Chinese Government is serving China's strategic
best interests at the expense of U.S. manufacturing and employment.
The manipulation of its currency reduces the competitiveness of
every other product, good and service in the world when compared to its
production in China.
This form of protectionism by China is reaping huge rewards as its
export-based economy is growing 3 or 4 times faster than the rest of
the world with factories being built at a pace beyond the imagination
of anyone just a few years ago. Meanwhile, factory jobs are
disappearing in the USA and throughout the rest of the world. Even
manufacturing plants in Mexico are moving to China.
But this is more than an economic battle.
Did you catch the statement by Congressman Tim Ryan of Ohio
concerning the strategic paper (``Unrestricted Warfare'') written by
two Chinese military strategists? They suggested that military
supremacy could be gained by undermining the manufacturing base of the
United States by maintaining its currency at artificially low levels to
gain an economic advantage for Chinese manufacturing and destroying the
manufacturing base of the United States. Seems to be working, doesn't
it?
The importance of a strong domestic manufacturing base to national
security and national defense cannot be overstated.
Shortly after the Revolutionary War, the U.S. Government became
concerned about the ability of the United States to respond to a second
war with the British. Many scoffed at such a thought but were sadly
mistaken when the War of 1812 erupted. Fortunately our forefathers had
foresight. They knew that the USS CONSTITUTION would need copper
sheathing to prevent barnacles from growing on its sides. Barnacles
slow down ships and lead to time consuming maintenance on shore. So
Paul Revere was offered a $10,000 U.S. Government loan to build a
copper rolling mill. The loan was paid back when Paul Revere built the
first copper rolling mill in the New World and rolled the copper sheets
that were used to sheath the USS CONSTITUTION which prepared it for the
War of 1812.
Personally, I admire the Chinese culture and believe that China
does not need such a disruptive currency policy to compete in the world
given its many other advantages. The Chinese economic policy is export
driven by taxing its citizens through currency manipulation which takes
away their disposable income. A market driven currency exchange rate
policy would drive China's economy toward domestic consumption and a
better life for its citizens.
But make no mistake about it, China is waging a mercantile war on
the world and the world is sleeping.
Why is the world sleeping? First, we must look at the role of the
multinationals. Remember in the 1980s when Japan was such a fierce
competitor in so many U.S. markets? The reaction by our largest
corporations was loud and largely one voice calling for tariffs and
restraints. Contrast that with today as most of the largest U.S.
corporations are so much more international and especially with their
investments in China. Many that do not have direct investments in China
buy substantial numbers of components from China's factories. Many have
set their strategic plans to produce components or products in China.
Today, many of the largest investment banking firms in the world
are headquartered on Wall Street but derive half or more of their
income from foreign sources. This ranges from managing the reinvestment
of U.S. dollars flowing overseas to the construction of manufacturing
facilities in China. Unquestionably, they have become beholden to the
government of China.
It may surprise you to learn that I don't have a problem with any
company that sets up or finances a plant offshore or imports components
or products. But if manufacturing in America must compete with the
protectionist policies of any foreign government . . . that is not
fair. And if meaningful corrective action by the U.S. Government is
thwarted by U.S. manufacturing and investment banking firms who gain
from such protectionism . . . that is wrong. CEOs of multinational
companies are put in a very difficult position when considering
national trade policies.
They have to choose between their company and their country. (See
Exhibit 2)
Exhibit 2
So who should America listen to for advice on tax and trade policy?
(See Exhibit 3.) Obviously, none of the above . . . Let me explain.
Earlier I mentioned that China practices a policy of managing its
currency at artificially low levels to gain a 40 percent competitive
advantage for any export products or services produced in China. Now,
you must realize a simple truth, a multinational corporation that
manufactures in China and benefits significantly from this advantage
doesn't want this to change.
Exhibit 3
At a 2006 meeting of an international economic policy committee of
an association of manufacturing companies, one domestic manufacturing
company said that it buys components from China and does not want the
currency to change. Now there's a breath of honesty. Maybe not
patriotic but at least he's honest.
Patriotic . . . why bring that word into the mix? Well, you see the
strength of manufacturing is an inherent strength of our country. Some
economists believe our country is in a transition from a manufacturing
economy to a service economy just as it transitioned from an
agricultural economy to a manufacturing economy years ago. But maybe
the manufacturing economy was simply layered on top of our agricultural
economy just as the service economy is layered on the manufacturing
economy. And it is certainly hard to argue against the proposition that
a weak manufacturing sector threatens our national security.
Sounds like our Nation needs some advice from the real world.
The measures that have not worked are jawboning the Chinese to
change . . . you know, throwing adjectives and words at them `til they
stop. The multinationals have endless arguments for stretching out the
process like. . . . ``We don't want to start a trade war now, do we?''
But we are already in a trade war, aren't we? Of course we are and we
are losing. We are pacifists in this war. How about this one by the
multinationals . . . your policies are protectionist! Yes, they
actually say that, can you imagine? Blame the victim is frequently
their approach. Often the accuser benefits from China's export
subsidies which are clearly prohibited by the WTO as protectionist.
The irony is that domestic manufacturing companies are the victims
of protectionism not the benefactors.
Another argument we hear is, ``What about their fragile banking
system?'' This one has been around for years and of course, it is
impossible to improve a banking system that depends on subsidies to
such an extent without removing the subsidy, isn't it? Besides, their
banks are owned by the same government that is holding almost a
trillion U.S. dollars. Maybe their banks are not quite as insolvent as
you have been lead to believe . . .
China's GNP has been growing about 10 percent a year since it
established a new system to manage its currency about 2 years ago while
the U.S. economy has been growing about 3 percent. This alone should
have translated into an appreciation of the yuan against the dollar of
at least 5 percent a year. Since this change, however, the government
of China has allowed its yuan to appreciate only about 4 percent a
year, thereby exacerbating the problem.
So, China has successfully continued to stonewall any real movement
of its currency thanks, in part, to the support of some prominent
multinationals and investment bankers.
That support is manifested in U.S. trade policy which is oriented
to process rather than results. Multinationals and investment bankers
are usually results oriented but not when it comes to China's currency
manipulation. But then again, the delaying tactics are good results
because this form of protectionism by China suits them just fine. At
any rate, they are certainly beholden to the government of China. So
their policy positions are in alignment with the policy of China.
There is no easy solution to this Chinese puzzle. Even I have
supported the verbal approach . . . for years. Our nation could simply
slap a tariff on all imports from China but I think we must take
measured concrete steps with each one increasing in severity. The final
step would be a tariff scheduled well in advance to force China to end
its currency manipulation.
It is important to understand that the end of currency manipulation
will not end the depreciation of the U.S. dollar against other
currencies including China's yuan.
For this reason, it is difficult and perhaps impossible to develop
a coherent trade policy to deal with China and the rest of the world
without considering the tax policies of our own country. In addition to
manipulating its currency, China and 138 other countries use Value
Added Taxes (VATs). VATs discriminate in favor of domestic production
of goods and services. (See Exhibit 4). The USA is the only major
trading nation which does not use VATs to protect its domestic
production of goods and services. (See Exhibit 5). VATs are a tax but
they are also a form of tariffs which are legally exempt from WTO
rules. VAT revenues are used to lower taxes on jobs and help fund
government programs such as national health care.
Exhibit 4
Exhibit 5
How can a manufacturing facility in the USA compete with a similar
facility in China or any other country if the U.S. facility must carry
the burden of the health care cost of its workers and its foreign
competitor does not?
One of Revere's largest remaining customers recently presented
Revere with a cost comparison of sourcing centrifugal chillers from
China versus the USA. Revere supplies copper strip for these chillers.
Exhibit 6 shows how the costs would compare without the protectionist
currency manipulation by China. Note that the total costs are about the
same for both countries and indeed, if freight costs were added, the
delivered cost to the USA of the chiller produced in China would be
higher than the chiller produced in the USA. In Exhibit 7, the cost of
the product from China is adjusted to reflect currency manipulation by
China of 40 percent. As you can see in Exhibit 8, products from China
also benefit from a 17 percent Chinese Government Value Added Tax or
VAT rebate on export to the USA. This results in a price war that
American factories cannot win.
Exhibit 6
Exhibit 7
Exhibit 8
Of course, if the U.S. producer shipped any product to China, it
would be hit with a 17 percent VAT on entry to China. China will use
revenues from that VAT tax to fund weapons systems and provide health
care benefits for its people. Just think about it, the U.S. factory
worker produces a product that must bear the health care cost of the
U.S. worker and the Chinese worker he competes against in order to
export. Of course, some will argue that the American worker or
management is to blame because the product made in the USA just can't
compete because we are so inefficient.
Market determined exchange rates simply put all nations back at the
starting gate for the race to determine who will win the battle to
produce competitive goods and services assuming all other things are
equal. Of course, all other things are not equal and because of this
our Nation's inability to compete with China and the rest of the world
simply means that our currency will continue to depreciate and the
standard of living of all Americans will decline and our Nation will
grow weaker.
The loss of manufacturing jobs to date in the USA is only the tip
of the iceberg. The impact of currency manipulation, VAT taxes and
health care costs are not limited to manufactured goods. Future losses
will go far beyond the continued loss of manufacturing jobs and extend
to the agriculture, food processing and service industries. Indeed,
Alan Blinder, former Federal Reserve Vice Chairman, was quoted in The
Wall Street Journal on March 28th saying that, ``. . . as many as 40
million American jobs (are) at risk of being shipped out of the country
in the next decade or two.''
So, the looming question is, ``What should be done to counter this
offensive and protective behavior by China and other nations?''
The first step in the battle to offset currency manipulation should
be to pass the Stabenow-Bunning-Bayh bill in the Senate and Ryan-Hunter
bill in the House that would define currency manipulation as an illegal
subsidy and allow the application of countervailing duties (CVDs) to
offset the impact of the currency manipulation for companies that are
being injured.
In addition, the remedies should not be contingent on Treasury
Department approval. This is the same Treasury Department that does
such a good job of representing its friends on Wall Street by
consistently failing to cite China for manipulating its currency.
Please lead Congress to represent Main Street not Wall Street and
factory workers in the USA not China.
These bills are designed to be compliant with the rules of the WTO.
That being said, if the WTO refuses for any reason to sanction the use
of CVDs to offset currency manipulation, we must assume that the system
that governs world trade is broken and must be fixed. Immediately! If
the use of CVDs to offset currency manipulation does not lead China and
other nations to stop manipulating their currency, then the USA must
take increasingly stronger measures, even if it means stepping outside
WTO rules.
At the same time, the USA must reform its tax system and institute
VATs on a scale that gives production of goods and services in the USA
a competitive advantage.
If you are competing with somebody else, you just don't look at
where they are. You try to figure out how to get ahead of them. That's
pretty simple, but that is how you develop a winning strategy.
So the competitive objective should be to beat the competition, not
simply match them.
In order to achieve this objective, the USA should eliminate all
national taxes, both corporate and personal, including income,
dividend, capital gain, estate, FICA and unemployment taxes as well as
lifting the burden of health care costs off employers who provide jobs.
(See Exhibit 9). A new national VAT system would replace these costs.
Exhibit 9
Notice these items are referred to as costs not revenues because
one must look at them as a burden on jobs.
The new system should be designed to be revenue neutral for all
classes. Adverse impacts on charitable and lending institutions need to
be considered by matching charitable grants and providing housing
subsidies which would help offset the regressive VAT system and make it
fair. The regressive nature of a VAT system would be further offset by
the provision of a national health care system funded by a VAT for the
USA.
This step is critical to the health of manufacturing in the USA.
A national health care system similar to that employed by Great
Britain has features that would appeal to Americans. It provides
universal health care for all but allows any citizen to opt out to
private care as long as they are willing to pay the cost. I am not
aware of the citizens of any nation that are considering having their
country adopt the system used in the USA which eats up twice as much
GNP per capita and burdens the domestic production of goods and
services to such an extent.
The lack of a VAT system in the USA allows European nations to gain
market share from the USA partially offsetting the impact of China's
manipulation of its currency on the production of goods and services in
Europe. That's one reason why Europe is less vocal about China's
mercantile war on the world.
When Paul Revere tried to rouse the countryside with his wake up
call, what did the people do? They certainly didn't go back to sleep.
Our nation is being destroyed by the international trade, tax and
health care policies of our own country. We all need to wake up and
listen. But we must be careful who we listen to . . .
Wake Up, America!
Senator Dorgan. Mr. O'Shaughnessy, thank you very much for
your testimony.
Next we will hear from Scott Paul, the Executive Director
of Alliance for American Manufacturing. Mr. Paul, you may
proceed.
STATEMENT OF SCOTT N. PAUL, EXECUTIVE DIRECTOR, ALLIANCE FOR
AMERICAN MANUFACTURING
Mr. Paul. Senator Dorgan, Senator DeMint, thank you for the
opportunity to testify this afternoon on our flawed trade
relationship with China. First I'd like to briefly introduce
you to the Alliance for American Manufacturing. We're a new
public policy organization formed by some of America's leading
manufacturers with their workers. We focus on issues like
China. Our goal is singular in purpose. It's to strengthen
American manufacturing and therefore our economic and national
security.
Mr. Chairman, this debate, the debate on China, on trade,
and on manufacturing, is portrayed by too many elites in a
fundamentally flawed way. You're either an enlightened free
trader or a jingoistic protectionist. Trade produces many
winners and a few unfortunate, unskilled losers who must be
retrained for the jobs of the future, or so the argument goes.
You'll hear assertions that our trade relationship with
China is a no-brainer and a win-win. These labels are
completely inaccurate. It's because our trade relationship with
China is no longer a matter of philosophy, speculation, or
forecasting, but rather one of cold hard facts. It's not anti-
China or protectionist to insist that we hold China and other
trade partners accountable for the commitments they made to
gain access to the U.S. market. In fact, it is shameful for
anyone to suggest that a blind eye be turned to market-
distorting practices that are harming America's workers,
businesses, farmers, and consumers.
Our trade deficit with China was a record $233 billion last
year. It was responsible for a staggering 42 percent of the
U.S. total non-oil trade deficit. China's exports to the United
States were six times greater than American exports to China,
as you have pointed out, which were $52 billion. In 2006 alone,
we saw a dramatic surge of imports from China in nearly every
category of goods. In steel the increase was more than 65
percent. In paper and wood products the increase was greater
than 30 percent. Even in computer and electronic goods, the
increase was more than 22 percent.
Every day we export more know-how, jobs, technology, and
intellectual property to China than high-value-added products.
Some of our fastest growing exports to China tend to be
unprocessed commodities and waste, like scrap metal. This one-
way trade relationship with China has simple yet devastating
consequences: lost American jobs and a declining American
manufacturing and innovation base. Our Nation has lost more
than 3 million manufacturing jobs over the past 6 years. More
than 40,000 manufacturing facilities have shut down, largely
because of import competition or shifts of production abroad,
but certainly not as a result of productivity.
A new study by the Economic Policy Institute helps
illuminate the egregious impact of our lopsided trade
relationship with China. The report, ``Costly Trade With
China,'' concludes that the trade deficit with China has
displaced 1.8 million American jobs since China joined the WTO
in 2001. Dr. Robert E. Scott, the report's author, found that
jobs were displaced in every state as well as the District of
Columbia and that nearly three-quarters of the job losses were
in manufacturing industries.
The study is critical because it is one of the few that
looks at the entire trade picture, that is both imports and
exports, and their consequences for employment.
Due to our trade deficit with China, states like New
Hampshire and North Carolina lost at least 2 percent of their
overall employment, while California shed an estimated 269,300
jobs and South Carolina an additional 29,900 jobs. In state
after state the story is the same. The losses from opening up
trade with China have far outweighed the gains for American
workers and manufacturers.
What has gone wrong? Dr. Peter Navarro of the University of
California at Irvine has documented the systematic undercutting
of prices by China, which has allowed its producers to
establish a dominant position in the manufacturing of many
consumer goods as well as strategic materials. Professor
Navarro estimates that lower labor costs, which include some
labor market forces but also widespread artificial factors,
including the nonenforcement of wage laws and migration
restrictions, account for nearly 40 percent of the price
advantage.
Export subsidies, which are illegal under the WTO, account
for an additional 17 percent of the price advantage.
Undervalued currency, the product of government manipulation,
which is illegal under our trade laws, accounts for an
additional 11 percent price advantage. Counterfeiting and
piracy add 9 percent and lax labor, environmental, health and
safety regulations contribute an additional 5 percent to the
price advantage and have made product safety a key issue that
must be addressed to safeguard American consumers.
It is well documented that China continues to follow a
policy of export-led growth to buildup its own manufacturing
base at the expense of other countries. Almost 60 percent of
Chinese exports come not from Chinese firms, but from foreign-
invested enterprises. Many of these multinational companies set
up operations hoping to serve the Chinese market, only to face
a web of policies and practices to limit the opportunities
there, instead finding incentives to export back to the United
States.
In industries ranging from telecommunications to steel to
machinery and many others, China's leaders have made it clear
that the state will continue to exert its control, making it
virtually impossible for American firms to compete against
massive governmental subsidies.
American company after company has been adversely affected
by a Chinese government policy that simply needs to be
described for what it is, cheating. China must be held
accountable. It agreed to certain conditions when it joined the
WTO, but time after time it has refused to grant the kind of
access to its markets that we provide to it and it has engaged
in unfair and predatory practices to increase its exports.
Subsidies, dumping, currency manipulation, violation of labor
rights, and lax or nonexistent environmental enforcement are
just some of the egregious practices that must be addressed.
But that is only half the story. The inability and in many
cases the unwillingness of the trade bureaucracy in Washington
to enforce current trade laws with respect to China has allowed
the deck to be stacked against U.S. manufacturers and workers.
The rules of international trade are just that, rules, not
suggestions. Unfortunately, they haven't been treated that way.
Quite literally, these laws--and President Hoffa mentioned this
as well--including our antidumping and countervailing duty
laws--when enforced can level the playing field. These laws
must be aggressively deployed and appropriately enhanced to
ensure that our workers and firms have the opportunity to
benefit in the global marketplace.
As the debate on China and trade policy continues this
summer, I'd urge you not to lose sight of the stark reality
that U.S. manufacturers and workers face when trade laws are
not enforced. A study we released in May entitled ``Enforcing
the Rules'' found that, for instance, from 2001 to 2003
American furniture manufacturers lost $333 million in revenue
as a result of wooden bedroom furniture dumped into the U.S.
market from China. Producers and workers in industries as
diverse as steel, ball bearings, cement, shrimp, raspberries,
semiconductors, and honey were all harmed by unfair and illegal
foreign trade practices and lost billions upon billions of
dollars.
The study concluded that there is a 50 to 1--that's 50 to
1--economic advantage to enforcing trade rules. The economic
losses suffered by communities battered by unfair trade more
than offset any minimal consumer gains that result from dumping
products at below cost on the U.S. market.
The time is long overdue for the U.S. to enforce our trade
laws and to hold China accountable for its unfair trade
practices. It's time for trade officials to stand up for
American workers and American manufacturers.
Mr. Chairman, we look forward to working with you to hold
the Chinese government accountable for its unfair trade
practices so that our workers and manufacturers will continue
to have the opportunity to strengthen the American economy.
Thanks for allowing me to testify today.
[The prepared statement of Mr. Paul follows:]
Prepared Statement of Scott N. Paul, Executive Director,
Alliance for American Manufacturing
Mr. Chairman and distinguished Members of the Subcommittee, I
commend you for taking the time to study America's trade relationship
with China and thank you for inviting me to testify on behalf of the
Alliance for American Manufacturing. I am honored to be before this
Subcommittee to discuss an issue of such importance to our economy and
our national security.
First, I would like to introduce the Alliance for American
Manufacturing (AAM) and our perspective on this topic. We are a new
partnership formed by some of America's leading manufacturers and their
workers to explore challenging public policy topics such as trade,
health care, retirement, energy, currency valuation, and other issues
of mutual concern. AAM works in a cooperative, non-partisan way,
bringing together labor and management, Democrats, Republicans and
independents, to work for one goal: strengthening American
manufacturing and therefore bolstering our Nation's economic and
national security. Our mission is to provide policymakers like you with
useful analysis of the issues, as well as innovative policy ideas to
move us toward effective solutions.
With respect to trade and currency, conscious policy choices and
crimes of omission--like the unwillingness of our trade bureaucracy and
the World Trade Organization (WTO) to enforce the rules of trade or to
apply new ones that were never negotiated--are damaging U.S. workers
and businesses in every state in the Nation. Our nation has lost more
than 3.2 million manufacturing jobs over the past 6 years. More than
40,000 manufacturing facilities have shut down nationwide; our annual
trade deficit stands at more than $764 billion.
The largest single source of our trade woes is China. China's trade
surplus was responsible for a staggering 42 percent of the United
States' total, non-oil trade deficit last year. Our trade deficit with
China skyrocketed for the sixth consecutive year in 2006, reaching a
record high of nearly $233 billion. China's exports to the United
States were six times greater than American exports to China, which
were only $52 billion.
In just the past year, we have seen a dramatic surge of imports
from China in nearly every category of goods. In steel, the increase is
more than 65 percent; in paper and wood products, greater than 30
percent; and in computers and electronic goods, over 22 percent. Every
day, we export more ``know-how,'' jobs, technology and intellectual
property to China than high-value added products, which we depend on
for good jobs and strong economic growth. Some of our fastest-growing
exports to China tend to be unprocessed commodities and waste like
scrap metal. The truth is, if you removed the names of the countries
and looked only at the underlying trade data, you might assume that the
United States was the low-cost, industrializing economy and China was
the powerful economic engine.
The consequences of illegal trade practices to American
manufacturers and workers are severe. For example, research conducted
for AAM found that from 2001 to 2003 American furniture manufacturers
lost $333 million in revenue as a result of wooden bedroom furniture
being dumped into the U.S. market from China.
A new study by the Economic Policy Institute helps illuminate the
egregious impact of this lopsided trade relationship. The report,
``Costly Trade with China,'' concludes that the trade deficit with
China has displaced 1.8 million American jobs since China joined the
WTO in 2001. Dr. Robert E. Scott, the report's author, found that jobs
were displaced in every state and the District of Columbia, and nearly
three-quarters of those jobs were in manufacturing industries. The
study is important because it is one of the few that looks at the
entire trade picture. It estimates the labor that would be required to
produce a given volume of exports, and the labor that is displaced when
a given volume of imports is substituted for domestic output. The job
losses in the study represent an estimate of what employment levels
would have been in the absence of our growing trade deficit with China.
Due to our trade deficit with China, New Hampshire and North
Carolina have lost at least 2 percent of their states' employment while
California shed an estimated 269,300 jobs. In state after state, the
story is the same: there may be scattered success stories of exporting
to China, but trade can both create and destroy jobs, and the losses
from opening up trade with China have far outweighed the gains for
American workers and manufacturers.
The flood of subsidized imports from China, aided by currency
manipulation by the Chinese government, has denied American workers the
opportunity to continue their own manufacturing careers, and has denied
their children the opportunity for a future career in manufacturing of
their own. While many of these workers are able to find new jobs, more
than one-third of workers displaced from manufacturing do not. Workers
who have lost their manufacturing jobs due to international trade are
able to find employment only in lower-paying industries, often without
many of the health and retirement benefits offered by manufacturing.
In industries as diverse as agriculture, computer chips and other
high-tech goods, strategic materials, steel, and many, many others,
American businesses and workers--who are highly productive and
efficient--are facing a torrent of subsidized products made by workers
in China who are paid artificially low wages in deplorable conditions.
There is nothing free about that sort of trade. American workers and
businesses need rules that are fair to everyone, and they need those
rules enforced.
The sheer size and structural nature of this trade deficit with
China raises serious questions about its causes, including to what
extent the deficit is driven by Chinese government interventions in its
own economy. In particular, China maintains numerous policies including
state-sponsored subsidies aimed at promoting investment, exports and
employment. Those policies have a direct role in increasing the U.S.-
China trade imbalance and negatively affect the well-being of our
domestically-based manufacturers, service providers and farmers.
Dr. Peter Navarro of the University of California at Irvine has
documented the systematic undercutting of prices by China, which has
allowed its producers to establish a dominant position in the
manufacturing of many consumer goods and some strategic materials.
Professor Navarro estimates that lower labor costs, which include
legitimate labor market factors as well as widespread artificial
factors including non-enforcement of wage laws and migration
restrictions--account for nearly 40 percent of the advantage. Export
subsidies--illegal under the WTO--account for 17 percent. Undervalued
currency, the product of government manipulation illegal under trade
laws--accounts for an additional 11 percent. Counterfeiting and piracy
add 9 percent and lax environmental, health and safety regulations
contribute an additional 5 percent.
Is this the free market at work? Of course not. It is a deliberate
strategy on the part of China's government to grow its economy,
providing incentive for many of the world's manufacturers to shift
their production to China. When China became a member of the WTO,
proponents argued just the opposite: that it would herald in a new age
of opportunity and expand market opportunities for American companies.
Unfortunately, China continues to follow a policy of export-led growth
to build up its own manufacturing base at the expense of other
countries. Almost 60 percent of China's exports come not from Chinese
firms, but from foreign-invested enterprises. Many of these companies
set up operations hoping to serve the Chinese market, only to face a
web of policies and practices to limit their opportunities there,
instead finding incentives to export their products back to their home
countries or other markets.
Just a few months ago, the director of the Chinese Government's
State-owned Assets Supervision and Administration Commission (SASAC),
announced a new policy that raises serious questions of governmental
control, involvement and intervention in a number of major industries.
In industries ranging from telecommunications to steel to machinery and
many others, China's leaders have made it clear that the state will
continue to exert its control, making it virtually impossible for
American firms to compete.
China also has provided massive subsidies to its companies to give
them an advantage over our farmers, workers and businesses trying to
sell their products to China, at the same time China is flooding our
market with its products. American company after American company has
been adversely affected by a Chinese government policy that simply
needs to be described for what it is: cheating.
China needs to be held accountable. It agreed to certain conditions
when it joined the WTO but, time after time, it has refused to grant
the kind of trade access to its markets that we provide to it and it
has engaged in unfair and predatory practices to increase its exports.
The result is one way free trade and, as noted above, skyrocketing
trade deficits. Subsidies, dumping, currency manipulation, violation of
labor rights, and lax or nonexistent environmental enforcement are just
some of the egregious practices that must be addressed.
It is regrettable that the choices on trade with China are often
presented to you as absolutes: you are an enlightened ``free trader''
who wants to engage China, or you are a jingoistic ``protectionist''
who seeks to shore up unproductive industries. These labels are not
helpful and they are not accurate. In fact, they needlessly cloud the
debate on China. America is demanding action on China; the calls for a
Congressional response are coming from Red States and Blue States, from
groups who have supported free trade agreements, as well as those who
have opposed them, and from Senators and Representatives who supported
permanent Normal Trade Relations with China, as well as those who
opposed it. Our trade relationship with China is no longer a matter of
philosophy, speculation and forecasting, but rather one of cold, hard
facts.
In an era when we expect increased accountability from our own
government, it is disgraceful for anyone to suggest that a blind eye
should be turned to international trade violations that are
contributing to an enormous loss of American jobs and income. Now, as
the Congress is considering measures to strengthen trade enforcement,
is the perfect time for Congressional consideration of appropriate
interventions.
To ensure that American manufacturers and workers have the same
opportunity as their competitors in the global marketplace, Congress
must exercise the responsibility given to it under Article 1, Section 8
of the Constitution, and ensure that international commerce is
appropriately regulated. The Alliance for American Manufacturing
commends the Chairman and the Subcommittee for being at the forefront
of these efforts.
Congress and the Administration have some tools already at their
disposal to ensure that businesses operating in the United States and
in China have the same opportunity to compete. Quite literally, our
trade laws--including anti-dumping and countervailing duty laws--when
enforced, level the playing field and allow individual companies, farms
and even whole industries in America to remain competitive. We believe
those trade laws should be steadfastly maintained, appropriately
strengthened, and aggressively deployed.
Some critics argue, however, that these trade laws are shortsighted
in this era of globalization and that the end results of these laws are
limits on consumer choice and thus higher prices. When China's illegal
practices have been challenged, alarm bells have been rung by those who
fear escalation into a ``trade war'' whose victims will be American
consumers.
Those fears are unfounded.
The Alliance for American Manufacturing's ``Enforcing the Rules''
study concludes that when our trade laws are enforced, our workers,
communities and businesses are able to contribute 50 times more to the
economy than any resulting increase in consumer prices.
The reality is that enforcing the law works. Imposing clear and
direct penalties on China for illegal activities is vital to ensuring
that we all have the same opportunity to benefit in the global economy.
The rules of international trade are just that--rules, not suggestions.
The time is long overdue for the United States to enforce our trade
laws and hold China accountable for its unfair trading practices. It is
time to stand up for American workers and American manufacturers.
Americans should expect--and deserve--nothing less.
The continued inability and sometimes the unwillingness of
policymakers in Washington to enforce current trade laws have allowed
the deck to be stacked against American manufacturers and workers in
too many cases. The Chinese government is clearly violating scores of
its WTO commitments without facing any real consequences in most cases.
As a result, our manufacturers are often forced to play by a different
set of rules than their competitors.
The Commerce Department has correctly allowed countervailing duty
laws to be applied to non-market economies such as China, which may
lead to some relief for American paper producers who have been
devastated by illegal subsidies. The Administration has initiated
dialogues with China on steel and currency and cases at the WTO on some
Chinese subsidies and its theft of some intellectual property. These
are important and significant first steps, but the size and scope of
the issues I have mentioned demonstrates the urgent need to do more.
Every nation in the world faces similar challenges from China, but
nearly all of our industrialized competitors have managed to maintain
an overall balanced current account. Germany, Japan, Korea, Brazil and
other industrialized nations understand the importance of a strong and
growing manufacturing base. So should we, before it is too late.
Manufacturing has been the engine that drives the American economy
for more than a hundred years, and it will continue to be well into the
21st Century.
Manufacturing in the United States generates about $1.4 trillion,
or 12 percent of our gross domestic product.
Manufacturing is responsible for nearly two-thirds of private
sector research and development in the United States. Nearly 80 percent
of all patents filed in the United States originate in the
manufacturing sector.
Over the past two decades, manufacturing productivity has increased
at twice the rate of the rest of the private sector.
Manufacturing is a vital part of the economies of most states. As a
share of gross state product (GSP), manufacturing in 2001 was among the
three largest private-industry sectors in all but ten states and the
District of Columbia. Manufacturing is the largest sector in ten states
and in the Midwest region as a whole. It is the second largest in nine
states and the third largest in 21 others.
Manufacturing directly employs 14 million Americans and supports
eight million more. Each manufacturing job supports anywhere between
four and seven other jobs, providing a boost to local economies. For
example, every 100 steel or every 100 auto jobs create as many as 700
new jobs in the rest of the economy. This contrasts with the retail
sector, where every 100 jobs generate 94 new jobs elsewhere, and the
personal and service sectors, where 100 jobs create 147 new jobs. This
multiplier effect reflects how manufacturing's linkages run deep into
the economy, providing the means that translate improvements in
manufacturing productivity to the economy as a whole.
We depend on domestic manufacturing to supply our advanced
materials for equipment like the Joint Strike Fighter, the Bradley
Fighting Vehicle, the Abrams Tank, and our naval fleet. If we continue
to lose our manufacturing base, our Nation's military could lose its
primary source of strategic resources, and we as a nation would become
dangerously dependent upon foreign sources of supply.
The Congress and the American people have become all too aware of
the limitations that dependency on foreign sources of energy creates
for foreign policy and national security purposes; it makes no sense to
exacerbate that problem by depending on China and other nations to
supply our critical defense needs. Just as our Nation is seeking to
achieve energy independence from the Middle East, we also should avoid
becoming more dependent on others to supply our national and homeland
defense needs.
Our Nation's flawed trade relationship with China unquestionably
contributes to the anxiety and uncertainty many Americans feel about
their jobs, their future, and perhaps most importantly for them, their
children's future. An effective and meaningful change in trade policy
with China can make a difference to the American people in the
following ways:
Whether tomorrow brings the layoff notice or the
productivity bonus;
Whether their community has a top-notch public school, or
one that is struggling to keep it doors open because the town's
factory--its largest source of tax revenue--shut down and
shifted production to the People's Republic of China;
Whether the jobs of the future for their children will be
flipping burgers or careers in nanotechnology and advanced
manufacturing; and
Whether their nation will have an industrial base that can
supply the critical materials that allow us to defend our
nation, or if we will be forced to depend on the goodwill of
other nations to do that for us.
AAM believes that America's leadership in the information age does
not mean that we have to accept defeat when it comes to manufacturing
and our trade relationship with China. On the contrary, the nation that
has the ideas and innovation, as well as cutting-edge technology and
manufacturing, is the nation that will win the global economic battles
of the future. That is why we look forward to working with you to
ensure that our nation puts into place policies that will allow
manufacturing to thrive well into the 21st century. America's future
growth, security and leadership in the global economy will depend on
the strength and viability of our manufacturing base.
Contrary to popular misconceptions, the industrial age is not over.
In fact, just the opposite is true. From nanotechnology and robotics to
lasers and biotechnology, we are on the cusp of incredible advances in
manufacturing. America must be the nation that leads the world into the
next stages of development. Manufacturing is, and will continue to be,
an integral part of the ``new economy.'' With manufacturing, the new
economy will thrive. Without manufacturing, much of this new economy
would not even exist. Federal Reserve Chairman Ben Bernanke recognized
this fact on February 28 when he said, ``Our economy needs machines and
new factories and new buildings and so forth in order for us to have a
strong and growing economy.''
Mr. Chairman and Members of the Subcommittee, we respectfully urge
you to enforce our trade laws and hold China accountable for its unfair
trade practices so that our workers and manufacturers will continue to
have the opportunity to strengthen the American economy. Thank you
again for the opportunity to testify today. I am happy to answer any
questions you may have.
Senator Dorgan. Mr. Paul, thank you very much.
Finally, we will hear from Robert Nichols, who is President
and Chief Operating Officer of the Financial Services Forum.
Mr. Nichols, welcome. You may proceed.
STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND COO, THE
FINANCIAL SERVICES FORUM
Mr. Nichols. Thank you. Chairman Dorgan and Ranking Member
DeMint, thanks for the opportunity to participate in this
important hearing. I appreciate your leadership and attention
to these timely issues.
The emergence of China will not only be one of the notable
economic stories of the 21st century, but one of the more
significant events in economic history, with profound
implications for U.S. economic growth and job creation. Given
the reality of China's continued emergence, the task before
Congress and other key U.S. policymakers is to ensure that
America participates constructively in China's development so
that this event takes place on terms that work for America, our
producers, our workers, and our consumers.
The Financial Services Forum is strongly of the view that a
more open, competitive and effective Chinese financial sector
is a prerequisite if China is to achieve its own economic
goals, but, more importantly, if the issues that have
complicated the U.S.-China economic relationship, particularly
the need for further currency reform and the trade imbalance,
are to be successfully addressed. Thus my comments today will
focus on the importance of market access and the benefits that
market access of U.S. financial services firms will bring here
to America.
Mr. Chairman, the rate of China's expansion and the impact
of its integration into the global trading system are quite
singular in the history of the world's economy. A couple of
data points to underscore that observation. One, their economy
has grown at an average annual rate of better than 9 percent
for the last 2 decades. As recently as 1999, China was the
world's seventh largest economy. Senator DeMint, as you noted,
it is now the world's fourth largest, likely to overtake
Germany as the third largest perhaps later this year. If their
growth rate is maintained, China could pass Japan as the
world's second largest economy by 2020. And of course, today
the U.S. and China already account for half the world's
economic growth.
Additionally, since China joined the WTO in 2001 trade
between the U.S. and China has nearly tripled. Exports to China
have grown at roughly five times the pace of U.S. exports to
the rest of the world and China has risen from our ninth
largest export market to our fourth largest.
China's continued economic development is important for the
U.S. economy in that a growing, more diversified Chinese
economy that emphasizes a more active Chinese consumer is more
stable, less dependent on exports, more in keeping with China's
responsibilities in the global trading system, and,
tremendously important, as an ever-expanding market for
American-made products and services.
But if China's economy is to continue growing and
diversifying and in doing so serving as an ever-increasing
source of U.S. economic growth and job creation, it needs a
more open, modern, and effective financial system.
Unfortunately, Mr. Chairman, at present China's non-modern and
ineffective financial system represents perhaps the greatest
threat to their continued development.
I'll expand a little more on the point I noted earlier,
namely that a more effective and efficient financial sector in
China lays the groundwork to successfully addressing the issues
that have complicated and provided significant friction in the
U.S.-China economic relationship, chief among them the need for
further currency reform and meaningfully reducing the trade
imbalance.
Regarding the currency, Chinese authorities have repeatedly
argued that an immediate shift to a fully market-determined
yuan is very difficult, given the underdeveloped state of their
capital markets. More specifically, Chinese 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.
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 a billion Chinese into the global economy, which is
roughly a fifth of the world's population which is not
participating in the global economy, in our view is the most
powerful remedy for the U.S.-China trade imbalance.
Chinese households, Mr. Chairman, historically save from a
third to as much as half of their income, as compared to the
single digit savings rates here in the U.S. and in Europe. This
pronounced propensity to save is related to 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 in this room take
for granted: personal loans, credit cards, mortgages, 401K's,
pensions, and life, property, health insurance products that
will eliminate the need for such precautionary savings and
facilitate consumption. We want to get into that market to
provide those.
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. 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 U.S.
manufacturer, exporter, and service provider wants--a China
that is less dependent on exports, more consumption-driven, and
therefore an enormously important and ever-expanding market for
American products and services.
Thank you very much for the opportunity to testify.
[The prepared statement of Mr. Nichols follows:]
Prepared Statement of Robert S. Nichols, President and COO,
The Financial Services Forum
Introduction
Chairman Dorgan and Ranking Member DeMint, thank you for the
opportunity to participate in this important hearing on the impact of
U.S.-China trade relations on American manufacturers, consumers, and
workers. The emergence of China will not only be one of the great
economic stories of the 21st century, but one of the most significant
events in economic history. The integration of a fifth of the world's
population into the global economy--not overnight, but over time--has
truly profound implications for U.S. economic growth and job creation.
Given the reality and inevitability of China's continued emergence, the
task before Congress and other U.S. policymakers is to ensure that
America participates constructively in China's development, and in ways
that work for American producers, workers, and consumers.
I am here as President and Chief Operating Officer of the Financial
Services Forum. The Forum is an association comprising the Chief
Executive Officers of 20 of the largest and most diversified financial
institutions with business operations in the United States. The Forum
works to promote policies that enhance savings and investment and that
ensure an open, competitive, and sound global financial services
marketplace. As a group, the Forum's member institutions employ more
than 1.5 million people and hold combined assets of more than $12
trillion.
In addition to our other activities, the Forum is also the chairing
organization of the ENGAGE CHINA coalition--a partnership among eight
financial services trade associations united in our view that active
engagement with China remains the most constructive means of ensuring
that our two nations mutually benefit from our growing economic
relationship.\1\ More specifically, the coalition is strongly of the
view that a more open, competitive, and effective Chinese financial
sector is a prerequisite if China is to achieve its own economic goals,
and if the issues that have complicated the U.S.-China economic
relationship--particularly further currency reform and the trade
imbalance--are to be satisfactorily addressed. I'll have more to say on
this topic in a few moments.
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\1\ American Bankers Association, American Council of Life
Insurers, American Insurance Association, The Council of Insurance
Agents & Brokers, The Financial Services Forum, The Financial Services
Roundtable, Investment Company Institute, and the Securities Industry
and Financial Markets Association.
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Importance of China to the Global and U.S. Economies
The 20 member CEOs of the Financial Services Forum meet twice a
year, our most recent meeting occurring this past April. At each
meeting, we conduct a survey regarding our members' outlook on the U.S.
and global economies. As part of the survey, we ask our CEOs to rate a
number of factors, including technological innovation, improved
education, freer and more open trade, and growth in a number of regions
around the world, to reflect their likely contribution to global
economic growth over the next decade. Our CEOs have consistently rated
China as the single most important source of growth for the global
economy.
Mr. Chairman, the rate of China's expansion and the impact of its
integration into the global trading system are unprecedented in the
history of the world's economy. As recently as 1999, China was the
world's 7th largest economy. China is now the world's 4th largest
economy and will likely overtake Germany as the 3rd largest later this
year.\2\ Government figures released last week showed that China's
economy expanded at an annualized rate of 11.5 percent in the first
half of 2007, its fastest rate of growth since 1994. China has grown at
an average annual rate of better than 9 percent for two decades. If
such growth is maintained, China could surpass Japan as the world's
second largest economy by 2020.\3\ Together, the United States and
China already account for half of the world's economic growth.
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\2\ See ``China Growth Revs Faster, Escalating Policy Pressure,''
The Wall Street Journal, July 20, 2007.
\3\ See ``China's GDP Poised to Top Germany's as Power Shift Speeds
Up,'' The Wall Street Journal, July 16, 2007.
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China's emergence is also stimulating growth and job creation in
the United States. Since China's joined the World Trade Organization
(WTO) in December of 2001, trade between the United States and China
has nearly tripled, exports to China have grown at five times the pace
of U.S. exports to the rest of the world, and China has risen from our
9th largest export market to our 4th largest.
It's important to point out that as staggering as these figures
are, they represent only the beginning of China's eventual impact.
Nearly all of China's economic activity is currently centered in the
large, industrialized cities of China's eastern coast, and involves
only about 35 percent of China's 1.3 billion people. More than 800
million people in China's central and western interior--an eighth of
the world's population--are poor subsistence farmers, completely
unengaged in the global economy. Even the 500 million people who live
in China's eastern cities, produce its manufactured goods, and comprise
China's rapidly growing middle and affluent classes have so far had a
somewhat muted impact on the global economy.
This is because Chinese households historically save anywhere from
a third to as much as half of their income, as compared to single-digit
savings rates in the United States and Europe. This pronounced
propensity to save is related to the declining role of the state and
the fact that most Chinese do not have access to the financial products
and services that we take for granted--mortgages, 401ks, pensions,
credit cards, and life, property, and health insurance products--that
would help them save, borrow, invest, insure against risk, and,
therefore, consume at higher levels.
If China's economy continues to grow and diversify, and if greater
availability to a wider range of modern financial products and services
helps to eliminate the need for such ``precautionary savings,'' China's
1.3 billion potential consumers will begin to consume at more normal
levels, with profound implications for global economic growth and job
creation, as the following comparison demonstrates:
Last year, the United States exported to Japan goods and services
worth $60 billion--approximately the same amount exported to China ($55
billion). But China's population of 1.3 billion is ten times Japan's
population of 127 million. In per capita terms, therefore, China
consumed one-tenth the amount of American goods and services as Japan.
If China's citizens were to eventually consume American-made goods and
services at the same rate that Japan's citizens did last year, the
United States would export more than $600 billion worth of goods and
services to China, 11 times what America exported to China last year,
an amount equivalent to 5 percent of America's GDP, and more than twice
what we imported from China last year--replacing the trade deficit with
a significant surplus.
China's Growth has Created Challenges--for China and the United States
Despite China's remarkable economic development over the last 25
years, the structure and pace of its economic growth has produced
significant problems, both economic and social. The country's fixed
investment- and export-driven development--more factories to produce
more goods for world markets--has left China vulnerable to economic
slowdown elsewhere in the world (particularly in the United States),
and to rising energy, materials, and labor costs. The manufacturing and
export focus of the economy has also led to widening disparities
between rich and poor, made worse by the closing or privatization of
state-owned enterprises, which had provided most healthcare services in
China. There are, in effect, two Chinas--a wealthy elite and a
developing middle class along the coast, and the 800 million poor in
the central and western interior.\4\ The worsening wealth gap and the
resulting social dichotomy have led to increasing political
instability. Reports indicate that as many as 100 significant incidents
of protest occur in China every day.
---------------------------------------------------------------------------
\4\ According to an unpublished report by the World Bank that has
been shared with the Chinese government, from 2001 to 2003, as China's
economy expanded by nearly 10 percent a year, average incomes of the
poorest 10 percent of Chinese households fell by 2.5 percent. See ``In
China, Growth at Whose Cost,'' The Wall Street Journal, November 22,
2006.
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Almost immediately after assuming leadership at the 16th Chinese
Communist Party Congress in 2002, President Hu Jintao and Premier Wen
Jiabao sought to distinguish themselves as the ``putting-people-first
administration.'' They also articulated the notion of a ``scientific
viewpoint of development,'' by which economic growth is to be balanced
with social priorities such as a more equitable distribution of income,
poverty reduction, education, improved medical care, and environmental
protection.\5\ Such adjustments were necessary, according to the new
leadership, to establish a more sustainable course for China's long-
term economic growth and to achieve a more ``harmonious''--which is to
say, a more equitable and stable--society.
---------------------------------------------------------------------------
\5\ See Wen Jiabao, closing speech at the Specialized Research
Course for Province-Level Cadres on ``Establishing and Implementing a
Scientific Developmentalist Viewpoint,'' February 21, 2004.
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These priorities became the framework of China's 11th Five-Year
Plan,\6\ which broadens China's development policy beyond simply
promoting rapid economic growth to include a clear emphasis on ``common
prosperity''--that is, an effort to extend westward the economic gains
enjoyed principally in China's east coast urban areas. The Five-Year
Plan seeks to address the twin problems of an economy perceived as
being too dependent on external demand and the social consequences of
the widening wealth gap by: (1) maintaining high rates of growth and
job creation; (2) encouraging a structural shift from industry to
services; (3) promoting the development of domestic consumer demand;
(4) reducing poverty; and, (5) ensuring a more equitable distribution
of opportunity and prosperity.
---------------------------------------------------------------------------
\6\ The Five-Year Plan, the 11th since 1953, was approved by the
fifth plenary session of the 16th Communist Party Central Committee in
October of 2005 and ratified by the National People's Congress this
past spring.
---------------------------------------------------------------------------
It is important to note that each of these goals is utterly aligned
and consistent with the interests of the U.S. economy and working
Americans. A growing, more diversified Chinese economy that emphasizes
a more active Chinese consumer is more stable, less dependent on
exports, more in keeping with China's responsibilities in the global
trading system, and an enormously important and ever expanding market
for American-made products and services.
But if China is to achieve these ambitious economic goals--and, in
doing so, serve as an ever-increasing source of U.S. economic growth
and job creation--it needs an open, modern, and effective financial
system. Unfortunately, Mr. Chairman, at present, China's primitive and
ineffective financial system represents perhaps the greatest threat to
the continued growth and diversification of the Chinese economy.
Critical Importance of Financial Sector Reform in China
Capital is the lifeblood of any economy's strength and well-being,
enabling the investment, research, and risk-taking that fuels
competition, innovation, productivity, and prosperity. The financial
system can be thought of as an economy's cardiovascular system--the
institutional and technological infrastructure for the mobilization and
allocation of the economy's lifeblood, investment capital.
As a financial sector becomes more developed and sophisticated,
capital formation becomes more effective, efficient, and diverse,
broadening the availability of investment capital and lowering costs. A
more developed and sophisticated financial sector also increases the
means and expertise for mitigating risk--from derivatives instruments
used by businesses to avoid price and interest rate risks, to insurance
products that help mitigate the risk of accidents and natural
disasters. Finally, the depth and flexibility of the financial sector
is critical to the broader economy's resilience--its ability to
weather, absorb, and move beyond the inevitable difficulties and
adjustments experienced by any dynamic economy. For all these reasons,
an effective, efficient, and sophisticated financial sector is the
essential basis upon which the growth and vitality of all other sectors
of the economy depend. It is the ``force multiplier'' for progress and
development, amplifying and extending the underlying strengths of a
growing economy.
Given the unique and critical role an effective and efficient
financial sector plays in any economy, reform of China's financial
sector is a prerequisite to China achieving its own economic goals.
Financial sector reform is also a prerequisite to meaningfully
addressing issues that have complicated the U.S.-China economic
relationship, particularly greater currency flexibility and reducing
trade imbalances.
Achieving China's Economic Priorities
Maintaining High Rates of Growth and Job Creation:
Maintaining exceptional rates of economic growth and job
creation in China increasingly depends on an effective system
for mobilizing investment capital. At present, China's weak
banking system intermediates nearly 75 percent of the economy's
total capital, compared to about half in other emerging
economies and less than 20 percent in developed economies.
Despite some improvements in recent years, Chinese banks'
credit analysis, loan pricing, risk management, internal
controls, and corporate governance practices remain inadequate.
Meanwhile, China's equity and bond markets are among the
smallest and least developed in the world. More fully developed
capital markets would provide healthy competition to Chinese
banks and facilitate the development and growth of alternative
retail savings products such as mutual funds, pensions, and
life insurance products. And by broadening the range of funding
alternatives for emerging companies, more developed capital
markets would greatly enhance the flexibility and, therefore,
the stability of the Chinese economy.
Shifting from a Manufacturing-for-Export to a Services-Based
Economy: Facilitating China's desired transition to a more
services-based economy will require that competitively priced
capital and credit be channeled to the most promising emerging
service businesses, and that the array of financial products
and services emerging businesses require--loans, letters of
credit, accounts management services, asset management, and
insurance products--be made available.
Activating the Chinese Consumer: Activating the Chinese
consumer requires the availability of financial products and
services--personal loans, credit cards, mortgages, pensions,
insurance products, and insurance intermediary services--that
will eliminate the need for such ``precautionary savings'' and
facilitate consumption.
In sum, a more modern, open, and competitive financial system would
greatly enhance the productive capacity and stability of the Chinese
economy and facilitate the achievement of China's economic goals, as
described in the 11th Five-Year Plan. Indeed, research conducted by
McKinsey indicates that genuine reform of its financial system would
expand China's economic output by as much as 17 percent, or an
additional $320 billion a year.\7\
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\7\ See ``Putting China's Capital to Work: The Value of Financial
System Reform,'' by Diana Farrell, Susan Lund, and Fabrice Morin, The
McKinsey Global Institute, May 2006.
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Addressing Issues with the United States
A more effective and efficient financial sector in China is also a
prerequisite to successfully addressing issues that have complicated
the U.S.-China economic relationship, particularly further currency
reform and meaningfully reducing the trade imbalance.
Market-determined exchange rate: As Chinese authorities have
repeatedly argued--reasoning generally acknowledged by most
foreign analysts--that a more rapid shift to a market-
determined yuan is not possible given the underdeveloped state
of China's 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.
Reduction of trade deficit: Reorienting the financial habits
of China's population from precautionary savings to a better
balance between savings and consumption--while progressively
bringing more than a billion Chinese into the global economy--
is the most powerful remedy to the U.S.-China trade imbalance.
Status of Financial Sector Reform in China
In addition to working to meet its WTO commitments, China has also
taken important steps to liberalize its financial sector and improve
financial regulation. For example:
The financial sector has been transformed from a single-bank
system to a more diversified system with a central bank--the
People's Bank of China--at the helm.
Meaningful steps have been taken to eliminate state-directed
policy lending, and amendments to the Law on Commercial Banks
and the Law on the People's Bank of China have laid the
foundations for commercially viable lending.
The China Banking Regulatory Commission (CBRC) was
established in April of 2003 to oversee all banks in China,
investigate illegal banking operations, and punish violations
of law.
Interbank, equity, and foreign exchange markets have been
established and important progress made toward implementing
monetary policy through market mechanisms rather than by
government fiat.
Despite these achievements, China's financial sector still faces
serious challenges:
Non-commercial lending to state-owned enterprises continues,
although on a diminishing scale.
The stock of nonperforming loans on banks' balance sheets
remains high.
Banks are undercapitalized and lending practices, risk
management techniques, new product development, internal
controls, and corporate governance practices remain inadequate.
Prudential supervision and regulation of the financial
sector is opaque, applied inconsistently, and lags behind
international best practices.
China's equity and bond markets remain small and
underdeveloped.
With these problems in mind, efforts to build on the progress
achieved to date should focus on:
The critical importance of open commercial banking,
securities, insurance, pension, and asset management markets to
promoting the consumption-led economic growth that China's
leaders seek;
The clear benefits to China of increased market access for
foreign financial services firms--namely the introduction of
world-class expertise, technology, and best practices--and the
importance of removing remaining obstacles to greater access.
Foreign investors in Chinese banks remain limited to 20 percent
ownership stakes, with total foreign investment limited to 25
percent. The China Securities Regulatory Commission (CSRC)
continues to limit foreign ownership of Chinese securities
firms to 33 percent and foreign ownership of Chinese asset
management companies to 49 percent. Worse, since December of
2005, a de facto moratorium on foreign investments in Chinese
securities firms has been imposed. Foreign life insurance
companies remain limited to 50 percent ownership in joint
ventures and all foreign insurers are limited to 25 percent
equity ownership of existing domestic companies.
While these caps were agreed to in the course of WTO accession
negotiations, the limitations are among the most restrictive of
any large emerging market nation and stand in the way of a
level playing field for financial service providers. Most
importantly, they limit access to the products, services, know-
how, and expertise that China needs to sustain high rates of
economic growth, and that China's businesses and citizens need
to save, invest, and create and protect wealth. For these
reasons, the United States and other WTO members have urged
China to relax these limitations.
China also continues to restrict access by foreign credit card
companies. Banks in China are permitted to issue cards with a
foreign logo only if they are co-branded with the logo of China
Union Pay (CUP), an entity created by the PBOC and owned by
participating Chinese banks. In addition, all yuan-denominated
transactions must be processed through CUP's network, while the
network of the foreign credit card company is used only to
process foreign currency transactions.
Non-discriminatory national treatment with regard to
licensing, corporate form, and permitted products and services.
Non-discriminatory national treatment with regard to
regulation and supervision.
Regulatory and procedural transparency.
Attracting sophisticated institutional investors to China's
capital markets through the expansion of the Qualified Foreign
Institutional Investor (QFII) and Qualified Domestic
Institutional Investor (QDII) programs.
Priority issues from the Transitional Review Mechanism that
remain unresolved.\8\
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\8\ China's WTO accession included the Transitional Review
Mechanism (TRM) as a means for ongoing review of China's compliance
with its obligations, and to provide those elements of the Chinese
government supportive of further economic reform with information and
evidence to urge full compliance with China's WTO commitments.
---------------------------------------------------------------------------
Conclusion
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. Foreign institutions
bring world-class expertise and best practices with regard to products
and services, technology, credit analysis, risk management, internal
controls, and corporate governance. In addition, the forces of
competition brought by foreign institutions would accelerate the
development of modern financial techniques and methodologies by China's
financial institutions.
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 China
develop an economy that is less dependent on exports, more consumption-
driven and, therefore, an enormously important and expanding market for
American products and services. In doing so, U.S. financial services
firms can help China become a more stable and responsible stakeholder
in the global economy and trading system.
Thank you very much for the opportunity to appear at this important
hearing.
Senator Dorgan. Mr. Nichols, thank you very much for being
here.
Let me thank all of you for your testimony and appreciate
the time you've taken to come. I'd like to ask a series of
questions. Regrettably, Senator DeMint had to leave for another
engagement. I appreciate his being here as well.
President Hoffa, let me ask you. You indicated you have
just returned from a trip to China. Describe for me again the
circumstances of what the Chinese government had advertised as
some sort of effort to allow the creation of what appeared to
be unions, but only unions that were government-sponsored or
government-controlled unions of some type, and then the
pushback by American firms against that and then the actions of
the Chinese government? Would you describe that for me again?
Mr. Hoffa. We had a chance to meet with the ACFTU, which is
the All China Federation of Trade Unions. It is the one union
for all of China and it's sponsored by the communist
government. It's part of the government. But they have chapters
in every major city. They claim 122 million members.
They are working basically on what's called a contract
labor law and it's something that is a reform. You have to
understand, over there they don't have anywhere near the
standard of living we do. These people are very, very poor,
especially in the rural areas. They're very relatively
primitive with regard to their lifestyles, and any kind of an
uptick is good for them.
I do believe that the contract labor law was intended to
try and stabilize working conditions with regard to hours of
work, with regard to some semblance of regulation on how hard
you work, whether you have days off, the number of hours, the
safety at work, job safety. It's not there, but at least it's a
start.
What we found when we were over there was that the American
Chamber of Commerce and all of the major companies--General
Motors, Microsoft, all these big companies--are over there
trying to water down these very basic improvements which were
contained in the contract labor law, which I found absolutely
appalling. First of all, the contract labor law was at least
something, and then we see American corporations, which do have
influence over there because they're 60 percent of what's being
made there, are actually working with the government and doing
everything they can to say we don't need this right now, leave
us alone, we'll take care of it, as we've always heard from
American business.
It was very indicative of even in China they're trying to
keep the standard of living down as they profit. I thought that
was appalling.
Senator Dorgan. Mr. Hoffa, thank you very much.
Mr. O'Shaughnessy, you indicated that the company that you
run was owned by Paul Revere, so that has some history.
Mr. O'Shaughnessy. Yes.
Senator Dorgan. Tell me about a Paul Revere-owned copper
company? Describe to me what you now produce and describe the
circumstances of the difficulty you have with China trade in
specific relationship to your company's marketing and your
company's production?
Mr. O'Shaughnessy. OK. There has always been a member of
the Revere family associated with Revere, and indeed the last
full-time employee, Paul Revere, the fifth generation direct
descendant, retired 10 years ago. His son Paul is an attorney
that we use.
We produce sheet, strip, and coil products not unlike if
you consider an aluminum rolling mill or a steel mill that
produces these big coils of steel or aluminum. We would produce
them made out of copper and brass. So our customers are OEMs,
other manufacturing companies in the United States that take
our product and produce other products. So for example, many of
our customers used to be companies that made lock sets in
California for doors. You know, you just go to any big box
store now and you see that those are made in China. But of
course the reason why they're made in China is because of
currency manipulation.
Labor costs are not as big a factor as you think they are.
Nucor makes the case that the cost of shipping a coil of steel
from China to the United States is greater than the cost, the
labor cost of producing that coil of steel in the United
States.
Revere is the same situation. We see our customers
disappearing because of China's currency manipulation.
Senator Dorgan. So because of currency manipulation your
customer base has migrated to China?
Mr. O'Shaughnessy. Correct.
Senator Dorgan. And they are customers of Chinese
manufacturing rather than U.S. manufacturing?
Mr. O'Shaughnessy. That's right. So they send over the
products to the United States that used to be produced by our
customers when they manufactured in the United States. When
they moved to China, they no longer look for us as a source
company to supply them.
Senator Dorgan. Let me, if I might, ask Mr. Nichols. You
talked about the China economy and all of us understand the
growth rate in China is substantial, 9, 10 percent. But you
described China's economy as being number 10, 6, 4, perhaps
number 2 at some point.
Isn't it the case, though, that you would better measure an
economy on GDP per capita, how much are you producing per
person? And by that measurement, my understanding is that China
ranks 87th, somewhere behind Belize, Macedonia, and many, many
others. So while one talks about the size of a country, one has
to understand there are 1.4 plus billion Chinese and you
allocate the production over the number of people and you have
a per capita GDP that is really not very substantial at all.
And you will grow this for many, many, many, many years before
you get anywhere near reaching a U.S. per capita GDP number; is
that not correct?
Mr. Nichols. Absolutely, Mr. Chairman. The broader point I
was trying to make was simply that it's a deep market, it's a
growing market. But certainly it is not a extremely
sophisticated economy, which is in part why we're trying to
achieve greater market access in there so they can start to
consume and we can start to export more U.S. goods there.
Senator Dorgan. And that gets to the point that my
colleague Senator DeMint made, and I respect that he's not
here. But he was talking about Japan and how Japan has matured
into a consumer economy. But it's also the case that it didn't
matter much to us that Japan matured into a consumer economy.
Last year the trade deficit with Japan was $88 billion because
they're engaged in managed trade, not free trade, and they're
very interested in having a very large trade surplus with us or
we a deficit with them, and that's the way they manage their
trade system.
So building a broad middle class and a consumer base in
another country does not mean that our producers will
necessarily have access to that and doesn't mean we won't have
a very large trade deficit with a country if we're playing
softball and they're playing hardball. If you have two
different kinds of trade, ours a so-called chanting free trade
and theirs is a managed trade economy with which they meet
their objectives.
Mr. Spooner, you described--and I wanted to run these
numbers by you--the robust boost in exports to China. But here
are the numbers. We increased our exports to China from $41
billion to $55 billion from 2005 to 2006. That's correct?
That's a pretty good increase, a $14 billion increase. The
increase in imports from China was a $45 billion increase.
So understand that the increase in imports was triple our
increase in exports. Now, I understand you used a percentage
and I understand why people do that. But it really is a pretty
meaningless percentage because you will never gain ground. You
will always lose ground measuring it that way if in fact we're
importing triple the quantity in real dollars of what we're
exporting. Do you agree with that?
Mr. Spooner. Mr. Chairman, I'd argue, though, that it's our
responsibility not to manage trade, but to make sure the
playing field is level. And we've heard testimony today about
tax breaks or breaks to foreign invested enterprises in China,
about export subsidies to Chinese companies, about dumping and
subsidies and all those sort of unfair trade practices. And I'd
argue that those are wrong and that the administration is
aggressively attacking those challenges. We have WTO cases
challenging tax breaks to FIEs, foreign invested enterprises,
and have WTO cases challenging China's subsidies, and we've
heard reference to furniture, paper, textiles, steel, shrimp,
honey industries being hurt by unfair trade from China. Well,
we have dumping orders protecting on behalf of all those
domestic manufacturers.
Senator Dorgan. Yes, there has been some recent action
there. The fact is we have not had the backbone we should have
had all of these years. We'll see what happens on recent
actions.
But my only point was that when we hear people say, gosh,
we've got robust growth of exports to China, one has to look at
the imports from China which are tripled in real dollars.
Let me make a point before I ask further questions. This
hearing is not about, nor are my comments ever about, being
anti-China. China is a big country. China is a country with
whom we have substantial interactions and relationships that
are very important. So it is portrayed sometimes as being anti-
China, some giant adversarial relationship. The fact is I
believe that our trade circumstances with China injure this
country, are unfair to this country, and are advantageous to
the Chinese. They know it. They manipulate it that way and we
ought to go after it.
But the fact is we will always have, I think, a substantial
amount of interaction with this big country and this important
country, and it's important to understand the difference about
what this hearing's about.
Mr. O'Shaughnessy, you wanted to make a comment.
Mr. O'Shaughnessy. Yes. Part of the increase in our exports
to China is the increase in scrap we ship over there. In other
words, we're shipping over raw materials, select copper scrap.
We're shipping over billions of dollars worth of copper scrap.
Ten years ago we shipped over less than $100 million worth of
copper scrap. So part of that export growth is not final
manufactured products.
Senator Dorgan. You're right about that, Mr. O'Shaughnessy.
I made an observation once that the largest export by volume
from this country to Asia is waste paper, and The Wall Street
Journal, some cute writer in The Wall Street Journal, said,
well, so what? Well, so what? Well, it's the largest by volume
export of our country, waste paper. It ought to tell you a
little something about the circumstances and the problems that
exist.
Mr. Paul, if I might and then I'll call on Mr. Hoffa. You
wanted to make a comment. Mr. Paul, you described the work by
Dr. Navarro from the University of California and you indicated
that his recent study talked about the undercutting of prices
by China, which has allowed their producers to have a dominant
position. You indicated that lower labor costs account for 40
percent of the advantage, export subsidies 17 percent,
undervalued currency 11 percent. These are at odds with Senator
DeMint's comments and also Mr. O'Shaughnessy's comments, I
think, in terms of what has been stated. I think Senator DeMint
was saying that the regulations in this country play a large
role. This study seems to suggest it is not a large role at
all, it's a relatively small role.
Mr. O'Shaughnessy, you indicated you believe it is not
labor costs that reflect the substantial difference. Mr. Paul,
how do you respond to that?
Mr. Paul. Well, I can explain the difference with Mr.
O'Shaughnessy's comments. It depends on the industry you're
looking at. In a resource-intensive industry like steel, the
labor costs are going to be a smaller percentage of the output
than, say, energy or raw materials. In a more labor-intensive
occupation like assembly, labor costs are going to be higher. I
think Dr. Navarro's study looked at a broad range of
industries, but it certainly does not conflict in fact with
what Mr. O'Shaughnessy argued.
The point that Dr. Navarro's study was making is that this
is not the free market at work. It's not simply levels of
development that are making Chinese products cheaper than the
United States. Part of it is because of a direct government
strategy to subsidize its domestic industry. Part of it is
based on an enforcement regime which is nonexistent. Part of it
is based on an artificially low labor cost based on, as
President Hoffa pointed out, the denial of basic worker rights
to the Chinese workforce, migration policies, and the
nonenforcement of wage. Up to 80 or 85 percent of Chinese
workers who should be getting the minimum wage are not in fact
paid the minimum wage, and there are no consequences at all.
The point that the study was trying to make is that this is
an artificial advantage that is market-distorting and it does
not reflect the free market, and that's what we're up against.
American companies can compete against foreign companies. They
just can't compete against foreign governments.
Senator Dorgan. Thank you, Mr. Paul.
Mr. Hoffa?
Mr. Hoffa. I'd like to also make the comment, as you did,
that my comments are not anti-China, because China is doing
what's best for them. The answer is we're letting them do it.
They're taking advantage of every crook in the law. They're
doing whatever they're doing. They're doing it because they're
very nationalistic, very mercantilistic. So that is their goal
and there's nothing wrong with doing that.
But what are we doing to protect Americans? I think that's
the flip side of it. We have basically lost that when we
negotiate these agreements, to make agreements that are so one-
sided, as you pointed out, a 2.5 percent tariff as opposed to
25 percent. It's ridiculous.
I'd like to make an observation that when I was in Shanghai
we met with the American Chamber of Commerce. So here we are in
China and we meet with a group of Americans that represent the
Chamber of Commerce. Amongst them were at least four or five
people, very bright, college-educated Americans, highly
educated, very attractive people. And I said: What do you do?
And they said: Well, we're consultants. Well, who do you
consult with? We basically consult with American corporations
that want to leave the United States and come to China, and we
basically facilitate them finding a manufacturer to manufacture
their product and to basically do everything we can so that
they can have the connection to have their product made so it
can be shipped back to the United States.
I think that was really a comment about what's going on,
that these are Americans taking advantage of our laws with
regard to basically moving jobs from the United States over
there. These are American consultants dealing with American
corporations, facilitating their leaving.
Also, as I talked about in my testimony, the fact is that
we actually give subsidies to companies that leave the United
States. That's got to come to an end.
The other point I'd like to make is when I was at the Port
of Shanghai, it is amazing to see these ships go out loaded to
the top with chain binders on containers so high you wonder if
the ship is going to be able to make it to the United States.
When the ships come back they are high out of the water, empty,
with just a few containers on top. That basically tells you
what the trade is.
When I was there I talked to the leaders, the people that
ran that port, and I tried to get out of them what percentage
of trade is export and import. They kept on dancing around.
They really didn't want to tell me. The best I got out of them
was 70-30 and I think it's a lot more than that. When you see
these ships go out, that's the answer. It's empirical. You can
see what's going out and when they come back they're empty.
Senator Dorgan. Mr. Hoffa, I have not talked about the
companies, but there are many companies that have just closed
shop in America and moved to China because China has become a
low-cost offshore platform to produce for manufacturing. Huffy
Bicycles are gone to China. In fact, the Huffy story is a
fascinating story because it's a company that is now a, quote,
``Chinese company.'' The actual corporate shell was sold to the
Chinese. But people that made $11 an hour that made bicycles in
this country; they're now made for 20 cents to 30 cents an
hour. They're still sold in the same stores, Kmart, Walmart,
Sears, and so on. And the Huffy workers all lost their jobs and
the pensions for the Huffy workers have now been pawned off, as
I understand it, to the U.S. Pension Benefit Guaranty
Corporation, so the American taxpayers have the honor of paying
pensions for a company that left for China.
But it's not just Huffy. It's Little Red Wagon, made in
Chicago for 110 years, gone to China. The list goes on and on--
Levi's, all-American Levi's; Fruit of the Loom. I won't ask
who's wearing them here, but Fruit of the Loom underwear. You
know, the fact is we could go on forever talking about this.
Mr. Hoffa, you are correct, there is a pernicious and
unbelievable tax break that says fire your workers, close your
plant, move to China, move anywhere out of the country, we'll
give you a tax cut. I've tried four times to shut that down
here in the U.S. Senate and failed four times. For my
colleagues who might read this transcript, they should
understand there will be a fifth, sixth, and seventh time,
because one of these days I'm going to win. I got 42 votes the
first time, I think 44 votes the last time. In 20 years I'll
probably win this issue.
But we ought not under any circumstance provide tax breaks
to those who are willing to move their jobs overseas. I mean,
that's just, to use a word I used earlier, that is ignorant
public policy in my judgment.
Mr. Nichols, and let me ask a couple others of you the same
question. I've spoken to Warren Buffett a good many times about
this subject. I've invited him in to meet with my colleagues on
this subject. He has said and Mr. Greenspan, former Chairman of
the Federal Reserve Board, has said that the current trade
deficit is unsustainable. It is just unsustainable, and at some
point when you get to where we are, over 5 percent of GDP and
so on, at some point this thing's going to burst. Something's
going to happen.
It is just as with respect to every bubble. The law of
bubbles is that bubbles eventually burst. Just as it did with
the housing boom. The question is when, not whether.
So Mr. Buffett has given a number of speeches. I don't know
whether any of us have an idea of who's a better prognosticator
of what works and what doesn't than Warren Buffett, but I'd
like to hear any suggestions if there's a more informed or more
successful investor over 30 years in this country than Warren
Buffett. He warns that we are on an unsustainable path with
respect to these trade deficits.
You're in the financial industry and review all of these
things. Is it possible that one day someone will take a look at
the fundamentals of all of this, the well over $1 trillion in
combined real deficits per year at the Federal level, and say,
wait a second, and then the electronic herd moves against our
currency in a way that pulls the rug out from under and the
stilts out from under our currency, and has dramatic
consequences for our economy, and we stand around and all of us
scratch our head and say, man, why did we not see that coming?
Is that a possibility, or is that too pessimistic?
Mr. Nichols. I don't--I honestly don't know if that day
would come. I certainly hope it does not come. There are--while
I would say that generally speaking the underlying fundamentals
of our economy today are reasonably sound, there are some
things that we should think about, and you've pointed out some
of those. For one, the trade imbalance, the deficit. It is a
concern. It should be addressed. I've obviously outlined a way
that we think we can address that successfully.
I would also note that we as a Nation need to save more. I
mean, our savings rates, Mr. Chairman, I think are low, and
that's also a concern. So while we're in a reasonably positive
set of underlying fundamentals, there are some concerns, let
alone--and you've done a lot of work on this and the hearing's
not on it--but if we start talking about the unfunded
liabilities, looking out 20, 30 years, our Nation's balance
sheet has some significant concerns, as you well know better
than almost anybody.
So that would be my kind of initial observation to your
question. But I would just touch on a couple of things, going
back to a couple of earlier points you made. One is, the
imbalance with China which we want to address--and again, one
way we think is to activate the consumer, and there are some
estimates, Mr. Chairman, that there are roughly $2 trillion in
what we'll call mattress money. That's just sitting in China.
That's not being spent. We'd like them to stop saving that,
consume that. Certainly some of the consumption would occur
there, some would be in Europe, and some would be here,
providing deeper markets for our exporters.
Senator Dorgan. Mr. Nichols, might I interrupt you----
Mr. Nichols. Yes, sir.
Senator Dorgan.--and excuse myself for doing it. But isn't
it the case that, with respect to the middle class in China or
whatever the class is that has this mattress money, as you
describe it, isn't it also the case that the Chinese would very
much want them to spend that money on Chinese manufactured
goods? And take a look at Walmart in China. Walmart in China
has mostly Chinese goods and the Chinese don't want American-
produced goods in a Walmart in China.
Mr. Nichols. Right.
Senator Dorgan. So that's a serious problem in a trade
relationship, isn't it?
Mr. Nichols. That's absolutely something that we need to
pay attention to, that the people at USTR and Commerce and
those in Congress focus on, absolutely.
I would simply--what I wanted to note was that we do have
actually a surplus with China in the services area. It's small,
$3 billion last year, but that was up roughly 27 percent from
2005. We'd like to see that grow certainly because roughly 80
percent of our GDP is in the services sector, and roughly the
same percentage of our work force.
But no, we need to--there are a lot of things we need to
do. Let me not suggest our trading relationship with China is
perfectly rosy. There are a lot of things we need to do. But
having them integrated fully into the global trading system I
think is the right approach.
Senator Dorgan. Let me make one additional point and ask
your response to it, perhaps to Mr. Hoffa and Mr. O'Shaughnessy
especially. There are some who are part of the so-called ``free
traders,'' as they brand themselves--and branding is a very
important activity these days, in the last 2 or 3 decades. That
branding is assisted by institutions like The Washington Post
that will carry only one side of the argument, one side of the
debate.
So the branding has been successful, let me quickly admit.
Free trade, that's wonderful, that's like tourism, that's all-
American; and whatever the alternative is is some sort of
isolationist, xenophobic stooge that just can't see over the
horizon. You know, their thinking is back in the 1800s. So
that's kind of the thoughtless approach to how the debate on
trade has ensued.
But there are some who have swallowed all of this medicine
on free trade and they say: You know what, it's a world
economy, a global economy. You may not like it, but that's what
it is. And if your workers, by God, can't compete, then shame
on them, they deserve to lose their job. There are a billion
and a half people around this world that are willing to work
for 20 cents an hour. Good for them. Why shouldn't we move
manufacturing there and have an opportunity for the consumers
in this country to buy lower priced goods?
I mean, that's the argument. I think it's specious, but
that's the argument by some. It seems to me--and I'll ask you
this question. It seems to me that what that argument denies is
a century of struggle to lift American standards and to say:
Here's the standard for air, for water, for workers, for the
way we want to allow people to organize. And to ignore those
standards and to say whatever is around the world and it's a
global economy, so let's access whatever parts of it we wish
to.
Mr. Hoffa, you were just in China. I know you know and I
certainly know the names of people who are sitting in prisons
in China right now because they decided they wanted to form a
labor union. For that they're put in prison.
So give me your response to this notion that to the extent
that there are those of you who, I think Mr. O'Shaughnessy and
Mr. Hoffa among the group, believe that there's a problem with
this trade, you're kind of xenophobic here. What do you want to
do, withdraw from the world? Don't you understand it's a global
economy? I mean, that's what you'd be hit with.
Mr. Hoffa. Of course we hear that. But basically, other
countries aren't buying into that. The European Union isn't
buying into that. They protect their markets. We have to
protect our standard of living, and one of the goals of any
government is to protect their citizens. The fact that there's
somebody that will work for less does not mean that everybody
should lose their jobs, and that is part of what government is
about. Not only do you provide water and police, but basically
you provide a standard of living. That's why we have laws in
this country. That's why we have a minimum wage. That's why we
have supposedly good trade laws, which we haven't been doing.
Basically, the job of America and all countries is to avoid
this Darwinistic approach to trade, where if you can't compete
you lose your job and they throw you in the street. In another
time they would have thrown you into debtor's prison. Thank God
we've moved from there.
But basically I think that people realize that this country
has evolved where there are our standards that we are here, the
government is to protect its employees and basically protect
its citizens from unfair trade so that they can have the life
they deserve.
Senator Dorgan. Mr. O'Shaughnessy, some of the free traders
would say, you know what, tough luck, tough luck to you, you
and your company, you can't keep up.
Mr. O'Shaughnessy. Well, I'd say there's no such thing as
free trade, at least in today's world. If American workers have
to compete with workers who benefit from a 40 percent subsidy
because of currency manipulation and a 17 percent VAT tax,
you're adding up there almost a 60 percent cost difference. It
has nothing to do with free trade. It has everything to do with
the protectionism that China exhibits and practices and uses to
develop its own internal industry.
This is not a textbook scholar, let's discuss and debate
these issues. It's happening every day. Our workers can
compete. They're highly productive, they're getting better
every year, and we're producing better every year. But we
cannot compete under that regime.
Think about this. How can a factory in the United States
that has to pay the health care costs of its workers compete
with a factory overseas that doesn't pay for the health care
costs of its workers? So what this country needs in my opinion
is a VAT tax that eliminates all taxes on jobs, plus a leveling
of the playing field on currency manipulation, and then we will
compete big time and we will be successful.
Senator Dorgan. Mr. O'Shaughnessy, I think that every trade
agreement should have a shock absorber for currency
manipulation and currency fluctuations. We did a trade
agreement with Mexico and immediately following the trade
agreement where the negotiators said they sweat blood because
they were trying to reduce tariffs by 5, 10, 20 percent,
immediately following that the peso was devalued 50 percent. So
we lost ground rather than gained ground.
So I happen to think that every trade agreement ought to
have some sort of a shock absorber with respect to the issue of
currency fluctuation and manipulation.
Mr. Nichols?
Mr. Nichols. Mr. Chairman, if you'd indulge me, your
thoughtful question is a perfect segue. With your permission,
I'd like to enter something in the record. It's a report we
just commissioned at the Financial Services Forum called
``Succeeding in the Global Economy: A New Policy Agenda for the
American Worker.'' It's essentially a study that we had
commissioned. It just came out a couple of weeks ago and we
briefed people in the House and Senate leadership about it. The
point of the study simply, it makes the point that there are
large massive gains due to trade. That said, there are
dislocations associated with trade on the part of industries,
regions, and individuals; and we need to come up with a new set
of ideas for the private and public sector to work together to
help those who are facing dislocations and not feeling and
sharing in the full benefits of globalization.
So while there have been massive benefits to globalization
in terms of better standards of living, lower cost of goods,
things of that nature, there are some who are not feeling and
sharing in the full benefits, and we need to help those people.
So with your permission, I'd like to enter our study into
the record, please.
[The material referred to is retained in Committee files
and is available at http://www.financialservicesforum.org.]
Senator Dorgan. We will do that. Without objection, the
study may be made part of the record.
I was just thinking as you were speaking, Mr. Nichols, I
appreciate your testimony because I think the testimony on the
financial side is very important. But we use the term
``dislocation.'' That's a euphemism for somebody losing their
job, getting fired. It's somebody that comes home at night and
says, ``hey, Mildred, guess what. I got fired today. My job got
moved to China because they closed the plant.''
We call that dislocation, but it's much more serious. You
know, the fact is we've got some mainstream economists--Alan
Blinder, a mainstream economist, says that there are 42 to 56
million American jobs that are potentially, ``tradeable.'' He
says not all of them will be exported to low wage countries,
but even those that remain here will have downward pressure on
their income because others in other parts of the world would
be able to do that job.
Now, what I think has happened is we have galloped along on
globalization, but the rules have not kept pace. I believe this
country has every right to decide here is the method or here is
the way in which we will participate in the global economy. We
will participate in the global economy in a way that helps lift
others up, but we will not participate in a way that pushes us
down. We spent a century building standards that have made this
a great country and we will not spend the next decade trying to
push down those standards in order to compete with conditions
around the world which we should not be expected to compete
with or against.
So those are the issues. I think we've covered many of them
today. What we need to do as a Congress is try to evaluate
what's happening, what is the cause of it, and what are the
potential remedies. We have had a variety of opinions today. I
very much appreciate the time you have taken to come and share
with the Committee your thoughts. We'll have additional
hearings and then we will have additional recommendations and
legislative vehicles by which we try to address these issues.
This hearing is adjourned.
[Whereupon, at 4:18 p.m., the hearing was adjourned.]