[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]



                  U.S.-CHINA RELATIONS: MAXIMIZING THE
          EFFECTIVENESS OF THE STRATEGIC AND ECONOMIC DIALOGUE

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

                                HEARING

                               BEFORE THE

                 SUBCOMMITTEE ON ASIA, THE PACIFIC AND
                         THE GLOBAL ENVIRONMENT

                                 OF THE

                      COMMITTEE ON FOREIGN AFFAIRS
                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                           SEPTEMBER 10, 2009

                               __________

                           Serial No. 111-43

                               __________

        Printed for the use of the Committee on Foreign Affairs

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 Available via the World Wide Web: http://www.foreignaffairs.house.gov/

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                      COMMITTEE ON FOREIGN AFFAIRS

                 HOWARD L. BERMAN, California, Chairman
GARY L. ACKERMAN, New York           ILEANA ROS-LEHTINEN, Florida
ENI F.H. FALEOMAVAEGA, American      CHRISTOPHER H. SMITH, New Jersey
    Samoa                            DAN BURTON, Indiana
DONALD M. PAYNE, New Jersey          ELTON GALLEGLY, California
BRAD SHERMAN, California             DANA ROHRABACHER, California
ROBERT WEXLER, Florida               DONALD A. MANZULLO, Illinois
ELIOT L. ENGEL, New York             EDWARD R. ROYCE, California
BILL DELAHUNT, Massachusetts         RON PAUL, Texas
GREGORY W. MEEKS, New York           JEFF FLAKE, Arizona
DIANE E. WATSON, California          MIKE PENCE, Indiana
RUSS CARNAHAN, Missouri              JOE WILSON, South Carolina
ALBIO SIRES, New Jersey              JOHN BOOZMAN, Arkansas
GERALD E. CONNOLLY, Virginia         J. GRESHAM BARRETT, South Carolina
MICHAEL E. McMAHON, New York         CONNIE MACK, Florida
JOHN S. TANNER, Tennessee            JEFF FORTENBERRY, Nebraska
GENE GREEN, Texas                    MICHAEL T. McCAUL, Texas
LYNN WOOLSEY, California             TED POE, Texas
SHEILA JACKSON LEE, Texas            BOB INGLIS, South Carolina
BARBARA LEE, California              GUS BILIRAKIS, Florida
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
MIKE ROSS, Arkansas
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
JIM COSTA, California
KEITH ELLISON, Minnesota
GABRIELLE GIFFORDS, Arizona
RON KLEIN, Florida
                   Richard J. Kessler, Staff Director
                Yleem Poblete, Republican Staff Director
                                 ------                                

      Subcommittee on Asia, the Pacific and the Global Environment

            ENI F.H. FALEOMAVAEGA, American Samoa, Chairman
GARY L. ACKERMAN, New York           DONALD A. MANZULLO, Illinois
DIANE E. WATSON, California          BOB INGLIS, South Carolina
MIKE ROSS, Arkansas                  DANA ROHRABACHER, California
BRAD SHERMAN, California             EDWARD R. ROYCE, California
ELIOT L. ENGEL, New York             JEFF FLAKE, Arizona
GREGORY W. MEEKS, New York
               Lisa Williams, Subcommittee Staff Director
           Daniel Bob, Subcommittee Professional Staff Member
             Nien Su, Republican Professional Staff Member
                       Vili Lei, Staff Associate






                            C O N T E N T S

                              ----------                              
                                                                   Page

                               WITNESSES

Mr. David Shear, Deputy Assistant Secretary, Bureau of East Asian 
  and Pacific Affairs, U.S. Department of State..................    10
Mr. David Loevinger, Executive Secretary and Senior Coordinator 
  for China Affairs, and the Strategic and Economic Dialogue, 
  U.S. Department of Treasury....................................    18
Mr. John Podesta, President and Chief Executive Officer, Center 
  for American Progress..........................................    33
Mr. Fred Bergsten, Director, Peterson Institute for International 
  Economics......................................................    48
Mr. Randall G. Schriver, Partner, Armitage International, L.C. 
  (former Deputy Assistant Secretary for East Asian and Pacific 
  Affairs, U.S. Department of State).............................    57

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

The Honorable Eni F.H. Faleomavaega, a Representative in Congress 
  from American Samoa, and Chairman, Subcommittee on Asia, the 
  Pacific and the Global Environment: Prepared statement.........     5
Mr. David Shear: Prepared statement..............................    13
Mr. David Loevinger: Prepared statement..........................    21
Mr. John Podesta: Prepared statement.............................    36
Mr. Fred Bergsten: Prepared statement............................    51
Mr. Randall G. Schriver: Prepared statement......................    60
The Honorable Donald A. Manzullo, a Representative in Congress 
  from the State of Illinois: Prepared statement.................    68

                                APPENDIX

Hearing notice...................................................    78
Hearing minutes..................................................    80
The Honorable Diane E. Watson, a Representative in Congress from 
  the State of California: Prepared statement....................    81
The Honorable Eni F.H. Faleomavaega: Material submitted for the 
  record.........................................................    83
Mr. Fred Bergsten: Material submitted for the record.............   101

 
U.S.-CHINA RELATIONS: MAXIMIZING THE EFFECTIVENESS OF THE STRATEGIC AND 
                           ECONOMIC DIALOGUE

                              ----------                              


                      THURSDAY, SEPTEMBER 10, 2009

              House of Representatives,    
              Subcommittee on Asia, the Pacific    
                            and the Global Environment,    
                              Committee on Foreign Affairs,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 1:09 p.m. in 
room 2172, Rayburn House Office Building, Hon. Eni F.H. 
Faleomavaega (chairman of the subcommittee) presiding.
    Mr. Faleomavaega. The subcommittee hearing will come to 
order. This is a hearing by the Foreign Affairs Subcommittee on 
Asia, Pacific and the Global Environment. The general theme of 
our discussion this afternoon is ``U.S.-China Relations: 
Maximizing the Effectiveness of the Strategic and Economic 
Dialogue.''
    I will get to introducing some of our fantastic witnesses 
that we have today for this afternoon's hearing. In place of 
our ranking member, the gentleman from Illinois, Mr. Manzullo, 
we have one of our senior members of not only the subcommittee, 
but the full committee, my good friend, the Congressman from 
California, Mr. Rohrabacher, as acting ranking member this 
afternoon.
    I will begin with my opening statement and then give time 
for the ranking member for his opening statement. There may be 
other members who will be coming in, and I will give them the 
opportunity to do the same. After that I will introduce our 
witnesses.
    At a bilateral meeting on the sidelines of the G-20 
Financial Summit in London in April of this year, President 
Obama and Chinese President Hu agreed that the United States 
and China would work together to build a positive, cooperative 
and comprehensive U.S.-China relationship for the twenty-first 
century.
    Central to building that relationship would be the United 
States-China Strategic and Economic Dialogue, or S&ED, composed 
of a strategic track led by Secretary of State Hillary Clinton 
and Chinese State Councilor Dai Bingguo and an economic track 
led by Secretary of the Treasury Timothy Geithner and Chinese 
Vice Premier Wang Qishan.
    The S&ED would aim to deepen mutually beneficial 
cooperation on a range of bilateral, regional and global 
matters from economics, trade and the global financial system 
to law enforcement, science and technology, education, culture 
and health.
    In addition, the S&ED would bring together senior officials 
to work cooperatively in settling conflicts and reducing 
tensions contributing to regional and global instability, 
including the nuclear programs of North Korea and Iran, 
problems in Afghanistan and Pakistan and humanitarian issues in 
other parts of the world.
    Finally, President Obama and President Hu agreed that the 
new dialogue would intensify cooperation on energy, the 
environment and climate change, with a specific focus on energy 
efficiency, renewable and clean energy technologies and the 
achievement of a successful international climate change 
agreement.
    The broad scope of topics to be covered by the S&ED was to 
be matched by a wide breadth of participation across government 
agencies. The S&ED was thus an expansion of the strategic 
economic dialogue initiated by the previous administration and 
organized under the Department of the Treasury, which had 
focused primarily on economic and environmental matters.
    The S&ED would also provide a comprehensive framework for 
the more than 50 ongoing United States-China governmental 
dialogues and working groups that covered issues ranging from 
aviation and nonproliferation to food safety.
    The first round of the S&ED was held in July of this year 
in Washington, DC, and included senior officials from the State 
Department, the Treasury, the White House and 12 other 
departments and agencies of the U.S. Government, as well as 
senior counterparts from 15 Chinese Government agencies.
    President Obama opened the meeting by noting that, and I 
quote, ``The relationship between the United States and China 
will shape the twenty-first century, which makes it as 
important as any bilateral relationship in the world.''
    The Chinese clearly viewed the initial meeting of the S&ED 
as a great success. In meetings I participated in last month in 
Beijing, a number of senior Chinese officials all gave very 
positive assessments of the first dialogue. Vice Premier Wang 
Qishan said the meeting allowed the two sides to better define 
further steps they needed to take in responding to the global 
financial crisis. He called it a huge success.
    Mr. Wu Bangguo, the chairman of the Standing Committee of 
the National People's Congress, noted the unprecedented depth, 
scope and representation on the two sides, and said the 
positive work of the first S&ED would allow China and the 
United States to move forward more effectively on a wide range 
of issues.
    Our Secretary of State, Hillary Clinton, also pointed to a 
number of positive achievements resulting from the S&ED. In her 
closing remarks at the Dialogue she noted the United States and 
China agreed to promote stability in northeast Asia, resume the 
Six-Party Talks and implement U.N. Security Resolution 1874, 
address ongoing threats of violent extremism and nuclear 
proliferation, encourage Iran to live up to its international 
obligations and work toward peace and stability in Afghanistan, 
Pakistan and the Middle East.
    Secretary Clinton also noted that as a result of the S&ED, 
bilateral talks on counterterrorism would be held, military-to-
military relations would be expanded, and progress was made on 
a global nuclear summit that President Obama plans to convene 
early next year.
    In addition, the two countries signed an MOU to enhance 
cooperation on climate change, energy and the environment, 
which commits both sides to achieving a successful 
international climate change agreement, cooperating on 
adaptation strategies and developing practical solutions for 
both countries.
    On the economic track, Secretary Geithner announced 
agreement on a framework for cooperation on macroeconomic and 
structural policies designed to ensure more balanced and 
sustainable global growth, the building of more resilient 
financial and regulatory systems, the reaffirmation of the two 
countries' commitment to an open, rules-based trade and 
investment regime and a pledge to work together in ensuring 
that international financial institutions are provided the 
necessary tools and resources to respond adequately to 
international financial challenges.
    Beyond the issues themselves, the Congressional Research 
Service notes that the S&ED is one of the few venues in which 
the Chinese Ministers interact with one another across 
departmental jurisdictions, which is a major benefit. Chinese 
Government bureaucracies traditionally have been stove piped, 
with little interdepartmental interaction or coordination.
    The interdepartmental nature of the S&ED is important as 
China's own policy making process has become more complicated 
now that the bureaucracy does not speak with a single voice and 
the government must take some account of the views of the media 
and the public.
    Clearly the Strategic and Economic Dialogue covers an 
impressive array of issues and challenges, and it now stands at 
the very center of the bilateral relationship.
    The United States is now the world's largest economy, while 
China will soon be second. We are the world's two biggest 
trading nations and the two leading emitters of greenhouses 
gases. China is the top surplus country, while the United 
States, unfortunately, is the largest deficit country. We thus 
represent the opposite sides of the global imbalances that 
contributed significantly to the worst financial crisis in 
generations.
    While our two countries may have differences, including a 
petty dispute over tire imports from China, I believe that 
Washington and Beijing share interests on most of the important 
regional and global issues. More to the point, there is no 
problem in the world that can be addressed adequately without 
bilateral cooperation, whether it be achieving lasting economic 
recovery and financial stability or overcoming the substantial 
threat of climate change and achieving a clean and secure 
energy future. These are the problems we must address 
cooperatively.
    Fortunately, the bilateral relationship today is in 
excellent shape. In my view, the first meeting of the S&ED has 
laid the groundwork for the sort of positive, cooperative and 
comprehensive relationship both sides seek, and from which both 
countries, as well as the region and the whole world, will 
benefit.
    Maintaining open channels of dialogue between the United 
States and China, which the S&ED does, is essential. At the 
same time, since the S&ED covers such a wide range of topics 
and involves so many government agencies, unless the process is 
well managed, it may fail to achieve its promise.
    The purpose of today's hearing is to review the results of 
the first meeting of the S&ED and to examine how the Dialogue 
can best achieve its worthy goals on the many issues that are 
currently under discussion between the United States and China.
    I would like to turn the time now to my colleague for his 
opening statement, Mr. Rohrabacher.
    [The prepared statement of Mr. Faleomavaega follows:]
    
    
    
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. Before 
I move forward, let me just note that I believe that the people 
of China are America's greatest hope for a better world and the 
comments that I have about the government that controls them 
has nothing to do with the people of China.
    The people of China, we need to see those people as our 
very important allies against the authoritarian government that 
controls them, which I believe that government, the 
dictatorship in Beijing, represents the greatest threat to 
America and to the western democracy's security and prosperity 
in the future.
    Mr. Chairman, China is playing a rogue's role in the world. 
It has become the ally of criminal governments and criminal 
gangs that control various controls on various parts of the 
planet, whether we are talking about Burma, whether we are 
talking about Sudan, Cambodia or any list of the other rogue 
states of the world.
    They are all buddies of China, and you will find that the 
Chinese are arming their friends and they are robbing the 
resources of people like the people of Burma where they are 
letting that regime destroy and dissipate the natural resources 
in exchange for weapons that are then used to suppress the 
people, and the profits from those natural resource rip offs 
are going into the pockets of a very corrupt few.
    This is a pattern throughout the world, whether it is Sudan 
or Cambodia or Burma. It shows that the Chinese Government does 
not reflect the values that we would expect from a country that 
would have a place that we would talk to them as equals among 
nations.
    China continues to be the world's greatest human rights 
abuser, whether we are talking about suppression of the Uighurs 
and this slow motion genocide that the Chinese have put in 
place to try to destroy the Uighur nation or whether it is the 
people of Tibet, the same slow motion genocide operation 
against the people of Tibet.
    Or whether we are talking about the Falun Gong who are 
still being arrested by the hundreds at times, perhaps at times 
by the thousands, and thrown into prison with no due process. 
People just disappear and, worse, we find that the prisons 
which they are thrown into have an unexplainable source of body 
parts and which they are then selling to western buyers.
    This ghoulish regime needs to be recognized for what it is 
and not be given the status that some people would like to give 
it simply because it is powerful and simply because it is a 
force to be reckoned with. No, that does not mean you give 
someone who runs the government like that, you don't give 
gangsters, just because they are powerful, the same respect 
that you would pay to democratic nations.
    We need to look at China as potentially America's worst 
enemy. It is not an enemy today, it is an adversary, but it is 
building itself to the point where it could be the most 
threatening enemy that we have ever faced.
    First of all, when we look at the economic relationship 
that has been established with China it has been a disaster for 
the people of the United States and a boon for those people who 
control the levers of power in Beijing. What we have had is an 
unfair trade relationship that we have winked and nodded and 
permitted, a partnership between America's corporate elite and 
the gangsters that run China for the benefit of our corporate 
elite and the benefit of those gangsters, to the detriment of 
the American people.
    The American people have lost millions upon millions of 
jobs, of manufacturing jobs, that have been sent off to China 
in order to be done by slave labor by people who have no right 
to form a union and people who would be thrown in jail or 
murdered if they tried to form a union in the company, not to 
mention the environmental things that you have mentioned today.
    China, of course, there is no democratic process in which 
the people of China will try through their government to limit 
the exploitation of the environment, unlike in other democratic 
societies, so the gangsters who run that country can simply do 
what they please in terms of the environment. We have had a 
one-way free trade policy with them, which again has cost us 
millions.
    We have the theft of American intellectual property rights 
on a huge scale being conducted by the Chinese Government. They 
are using our own technology to put us out of work and put 
America into a position where our safety and security is being 
jeopardized. We now see that in the expansion of the Chinese 
military and we see that in the expansion of the Chinese 
military's insistence on building rockets and missiles which 
are demonstrably aimed at taking out America's satellites.
    Mr. Chairman, what we need to do is face reality when it 
comes to this potential threat and this potential enemy in 
Beijing and we must side--we must make sure that the people of 
China know that in their endeavors against this tyranny the 
American people are on their side and that those corporate 
leaders in the United States who have made their alliance do 
not represent the values and the policies of the people of the 
United States.
    Thank you very much.
    Mr. Faleomavaega. I just want to make sure that it is 
corrected in the record for my good friend from California. You 
don't mean small business owners. It is the big, corporate 
multinationals that are the ones.
    Mr. Rohrabacher. Certainly. If I said small business owners 
I meant big, corporate nationals.
    Mr. Faleomavaega. Okay. Very good. I thank the gentleman 
from California for his statement. This is what makes America 
such a beautiful democracy where you can openly dissent or 
disagree on any given issues that you want.
    Mr. Rohrabacher. Unlike in China where they will throw you 
in jail.
    Mr. Faleomavaega. I do thank the gentleman nevertheless.
    We have two distinguished members representing the 
administration at our hearing this afternoon. Mr. David Shear 
is currently the deputy assistant secretary for East Asia and 
Pacific affairs at the Department of State. He formerly worked 
as director of Chinese and Mongolian affairs in the East Asia 
and Pacific Affairs Bureau, has been a Foreign Service officer 
since 1982, and served in postings in Tokyo, Beijing, Kuala 
Lumpur and Sapporo, Japan.
    Mr. Shear was also deputy chief of mission at our Embassy 
in Kuala Lumpur. He was a minister counselor at our Embassy in 
Tokyo and deputy director of Korean affairs. An excellent 
gentleman by career. He is fluent in both Chinese and Japanese. 
I only wish I could be as well.
    We also have with us Mr. David Loevinger. He is currently 
the executive secretary and senior coordinator for China 
Affairs and the Strategic and Economic Dialogue at the United 
States Treasury Department. Previous to that Mr. Loevinger 
served as a U.S. minister counselor for financial affairs to 
the People's Republic of China.
    Also at the Treasury Department, he was the first permanent 
representative in China. He was responsible for deepening 
United States-China engagement on financial and macroeconomic 
issues, including monetary, fiscal and exchange rate policies.
    He played a leading role in the establishment of the United 
States-China strategic economic dialogue, the precursor of the 
current U.S.-China Strategic and Economic Dialogue. This is all 
semantics it seems to me. He worked closely with Chinese 
regulators to open new markets for United States financial 
service firms. The list goes on.
    Prior to his service in Beijing the gentleman was also 
deputy assistant secretary at the Treasury for Africa, Middle 
East and Asia where he advised the Secretary of the Treasury 
and other senior Treasury officials on United States policies 
regarding the IMF, the World Bank and regional development 
banks.
    Prior to that position he served as a staff economist, 
including also as a special assistant. My gosh. The list goes 
on forever on this guy. Mr. Loevinger, we are indeed very happy 
that you are able to come and join us. He worked with the IMF 
and is a graduate of Dartmouth University. He completed his 
master's at Harvard in public policy at the Kennedy School.
    Very, very distinguished careers for both of these 
gentlemen. I look forward to hearing your testimony. Mr. Shear?

   STATEMENT OF MR. DAVID SHEAR, DEPUTY ASSISTANT SECRETARY, 
 BUREAU OF EAST ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF 
                             STATE

    Mr. Shear. Thank you very much for the nice introduction, 
Mr. Chairman, and thank you, Mr. Rohrabacher, and thank you 
also for inviting me today to appear before you to discuss the 
first United States-China Strategic and Economic Dialogue held 
at the end of July.
    I would like to provide an overview of the role of the S&ED 
as we call it in our bilateral relations with China, the 
primary goals of the first S&ED and the issues discussed in the 
S&ED strategic track, which was chaired by Secretary Clinton.
    My colleague from the Treasury Department, David Loevinger, 
will speak to the economic track, and my colleague from the 
State Department Bureau of Oceans, Environment and Science, 
Jeff Miotke, will be prepared to take questions regarding the 
Memorandum of Understanding (MOU) on climate change discussed 
during the S&ED.
    The Strategic and Economic Dialogue establishes the 
framework for the United States-China relationship under the 
Obama administration. We recognize the importance of engaging 
China as an important partner in addressing complicated global 
challenges, including the recent economic crisis, climate 
change and threats to international security. It is critical 
that China meets its responsibilities as a global stakeholder 
and contributes to the solution to these problems.
    The S&ED brings together top United States and Chinese 
political and economic leaders to outline opportunities for 
cooperation and engage in frank discussions of priorities for 
our bilateral relationship. The dialogue enables us to work 
together to build trust, strengthen cooperation and resolve our 
differences. And we have no illusions about our differences; 
all of these activities serve our common interests.
    The S&ED is not the beginning of a G-2 structure. Both 
countries recognize that we can't solve the world's problems 
bilaterally. What the Dialogue does is provide a framework for 
the United States and China to deal with these challenges as 
responsible global cooperators and open up paths of 
communication on global issues of common concern.
    We had three primary goals for the first S&ED, all of which 
I think we achieved. First, the S&ED served as a prime 
opportunity for our senior officials to get to know their 
Chinese counterparts, a necessary first meeting that will lay 
the foundation for effective cooperation for the next 4 years.
    The first dialogue allowed face-to-face interaction among 
not only the four co-chairs--Secretary Clinton, Secretary 
Geithner, Vice Premier Wang Qishan and State Councilor Dai 
Bingguo, but also over 20 officials of cabinet rank from each 
side. We held frank discussions on a variety of issues, 
including those sensitive to the Chinese such as human rights, 
Xinjiang and Tibet.
    Secondly, by mobilizing the whole of government on each 
side, the S&ED enabled discussions on issues that cut across 
agencies, including the full range of economic, regional, 
global and environmental challenges
    Third, the S&ED set the agenda for our future engagement 
with China by giving our senior officials the opportunity to 
convey priorities of the Obama administration. The S&ED set the 
tone and framework for our major bilateral initiative with 
China, including a number of subdialogues.
    With regard to the strategic track, it basically consisted 
of four areas. We discussed bilateral relations; international 
security issues such as nonproliferation and counterterrorism; 
global issues, including health, development, energy and global 
institutions; and regional security issues in North Korea, 
Afghanistan, Pakistan and Iran. Climate change, clean energy 
and the environment were addressed in separate special 
sessions.
    Some of the key highlights of the strategic track include 
first, the climate change, energy and environment MOU which 
elevates the importance of climate change in our bilateral 
relationship.
    Second, both sides agreed to enhance efforts in promoting 
regional stability. On North Korea, we affirmed the importance 
of the Six-Party talks and continuing efforts to achieve 
denuclearization of the Korean Peninsula. On Afghanistan and 
Pakistan, the two sides pledged to increase coordination to 
jointly promote stability and development in the region. On 
Sudan, both sides expressed our willingness to increase 
coordination and consultation to jointly seek an early and 
enduring comprehensive political settlement of the Darfur issue 
and promote the north/south peace process.
    In discussions on international security issues, both sides 
noted their shared opposition to terrorism and agreed to hold 
the next counterterrorism subdialogue this week actually, 
September 14 and 15. We discussed the upcoming 2010 Nuclear 
Nonproliferation Treaty Review Conference and the Conference on 
Disarmament and exchanged views on the Global Nuclear Security 
Summit proposed by the United States for March of next year.
    On other global issues of common concern, both sides agreed 
to further dialogue in cooperation on promoting global 
sustainable development, including strengthening global 
institutions and government, addressing public health 
challenges and future discussion of cooperation on poverty 
alleviation around the world.
    The two sides held frank discussions on human rights. 
Secretary Clinton raised U.S. concerns about recent violence in 
Xinjiang and discussed ways to enhance mutual understanding and 
positive cooperation on human rights issues. Both sides agreed 
to reconvene the U.S.-China legal experts dialogue and will 
seek to hold the next human rights dialogue before the end of 
the year.
    We have no illusions about how the Chinese treat their 
people. We have a strong interest in improvement of human 
rights in China, and we make our views crystal clear--
absolutely clear--to the Chinese at every possible opportunity, 
and we took that opportunity during the S&ED to do so this time 
around and will do so in the future as well.
    On bilateral military-to-military relations, the two sides 
welcomed recent improvements in military-to-military relations 
and agreed that the two militaries would expand exchanges at 
all levels.
    Over the next year, U.S. senior officials will take full 
advantage of a packed bilateral political calendar to follow 
through on S&ED objectives. High level bilateral engagements 
over the next few months include the President's visit to 
Beijing in November, several energy and environment meetings 
leading up to Copenhagen and technical consultations on 
counterterrorism and human rights.
    The Strategic and Economic Dialogue has created both a 
strategic guideline and a catalyst for the United States and 
China to address complex global challenges. I would like to 
conclude my remarks here, Mr. Chairman, and thank you again for 
the opportunity to testify today on this important topic.
    [The prepared statement of Mr. Shear follows:]
    
    
    

    Mr. Faleomavaega. Thank you, Mr. Shear.
    Mr. Loevinger, for your testimony?

   STATEMENT OF MR. DAVID LOEVINGER, EXECUTIVE SECRETARY AND 
  SENIOR COORDINATOR FOR CHINA AFFAIRS, AND THE STRATEGIC AND 
         ECONOMIC DIALOGUE, U.S. DEPARTMENT OF TREASURY

    Mr. Loevinger. Thank you, Mr. Chairman, Congressman 
Rohrabacher. I want to thank you for the invitation to come and 
speak to you today about the United States-China Strategic and 
Economic Dialogue and more broadly our bilateral economic 
relationship.
    The S&ED that President Obama and President Hu initiated in 
April recognizes that cooperation between China and the United 
States is vital not only for the well being and prosperity of 
our two nations, but also for the health and stability of the 
global economy.
    Given that my colleague, David Shear, has talked about the 
strategic dialogue, I am going to focus my remarks on the 
economic track of the S&ED. The economic track provides a 
framework for promoting productive bilateral economic 
engagement in core U.S. interests. As Secretary Geithner told 
the Chinese at the S&ED, the United States and China may not 
always agree on economic issues, but the S&ED provides a 
platform for narrowing our differences and reinforcing our 
common interests, both bilaterally and in setting the 
multilateral economic agenda.
    The first meeting of the economic track of the S&ED was one 
of the largest delegations from any foreign country in the 
history of our foreign relations, involving 12 United States 
cabinet officials and agency heads and 15 Chinese ministers, 
vice ministers and agency heads. Both sides agreed on a 
framework for cooperation on economic issues based on four 
pillars: First, promoting a strong recovery and achieving more 
sustainable and balanced growth; second, promoting more 
resilient, open and market oriented financial systems; third, 
strengthening trade and investment; and, fourth, strengthening 
the international financial architecture.
    On the first item, promoting a strong recovery and 
achieving more sustainable and balanced growth, both sides 
agreed to undertake macroeconomic and structural policies to 
ensure a more sustainable and balanced trajectory of global 
growth.
    China committed to policies to adjust its demand and 
relative prices that will lead to more balanced trade and 
growth. To achieve this, it will promote more domestic demand 
led growth and pursue policies to increase the share of 
consumption in its GDP. It also committed to greater 
development of its services sector, which will reduce its 
dependence on exports in heavy industry and support its 
transition to a greener economy.
    Second, we focused on building more resilient and market 
oriented financial and regulatory systems. China agreed to a 
range of measures, including promoting consumer finance, 
allowing foreigners to invest more in China's capital markets, 
increasing the number of foreign joint venture securities 
companies and allowing foreign banks incorporated in China to 
underwrite corporate bonds on China's interbank bond market.
    This will not only create market opportunities for United 
States financial services firms, but by creating a more 
developed and market oriented financial system it will boost 
the incomes of Chinese households and contribute to more 
consumption led growth.
    The two sides also agreed to strengthen their cooperation 
on anti-money laundering and countering the financing of 
terrorism, and we will continue to encourage the Chinese to 
strengthen their efforts to counter the threat of North Korea 
and Iran's nuclear weapons programs through their financial 
sector.
    The third item was strengthening trade and investment, and 
the United States and China each reaffirmed their commitment to 
open and rules-based trade and investment. China committed to a 
range of measures that over time will create new opportunities 
for United States firms and workers.
    This includes further opening of its services markets to 
private investment, decentralizing its foreign investment 
reviews, and China also clarified that products produced in 
China by foreign invested enterprises will be treated the same 
under China's Government procurement regulations as products 
produced by Chinese producers. China also agreed to intensify 
its effort to join the WTO Government Procurement Code.
    Lastly, the United States and China recognized the critical 
role that the international financial institutions play in 
preventing and responding to crises and ensuring more balanced 
global growth. The global economy has changed fundamentally 
since the historic gathering of Bretton Woods and so too must 
the global architecture that bears its name.
    Both sides committed to work together to ensure that the 
international financial institutions have the requisite 
resources and tools to address today's challenges, and we will 
work together with China to ensure China's full engagement and 
representation in the design of key multilateral arrangements 
and groupings, including the G-20, the Financial Stability 
Board and the international financial institutions.
    As Mr. Shear said, while the S&ED is going to meet 
annually, having agreed on priorities and broad policy 
commitments, the word of the S&ED is going to continue 
throughout the year. On the economic side we will work closely 
with our colleagues at Commerce and USTR on the Joint Committee 
on Commerce and Trade and through a range of other deputy level 
and staff level groupings.
    Throughout the year we intend to consult with and seek the 
advice of Congress, including members of this committee and 
your staff, U.S. businesses, labor and other groups affected by 
United States-China relations. Thank you.
    [The prepared statement of Mr. Loevinger follows:]
    
    
    
    Mr. Faleomavaega. Thank you, Mr. Loevinger.
    We are joined this afternoon also by one of our 
distinguished members, Mr. Inglis. I wanted to ask him if he 
has an opening statement he would like to share with us?
    All right. We are going to open now with questions, and I 
will defer to my good friend, the gentleman from California. At 
a later time I will ask my series of questions.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman.
    Mr. Shear, and I appreciate your addressing my specific 
points on human rights in your opening statement, and you 
seemed rather adamant about that we are actually serious about 
human rights in the complaints we make to China. Can you tell 
me what consequences the regime in Beijing suffers?
    What have we put forward to say you know, these are human 
rights abuses and because you are doing that you are paying 
this consequence for it? What have we offered them as a 
suggestion that we really are serious about it rather than just 
using words?
    Mr. Shear. Thank you, Congressman. We made it clear to the 
Chinese that, for example, in the case with regard to religious 
freedom that all modern, civilized countries implement 
religious freedom vigorously and that countries that do not 
suffer in terms of openness and the vitality of their society 
and their economies as well.
    We have made it clear to the Chinese that the restriction 
of information on the internet, for example, not only results 
in a society which is less well informed, but in an economy 
that is less efficient.
    Mr. Rohrabacher. But we haven't said there is no direct 
correlation between the Chinese regime continuing to commit 
these human rights abuses and any specific policy of the United 
States Government. There is no correlation there at all. Is 
that correct?
    Mr. Shear. My understanding, Congressman, is that, for 
example, the Chinese still remain under the Tiananmen Sanctions 
Act, which limits a variety of exchanges with the Chinese, 
including some exports of United States law enforcement 
equipment and commercial space cooperation as well, so in that 
regard the Chinese have seen some consequences with regard to 
their treatment of human rights.
    On the general question----
    Mr. Rohrabacher. Right.
    Mr. Shear [continuing]. We are very strong in making 
representations on these subjects to the Chinese. I think that 
we have achieved some successes.
    Mr. Rohrabacher. Pardon me. I only have a very short period 
of time to ask questions, and I have to go to----
    Mr. Shear. Understood.
    Mr. Rohrabacher. I would suggest that talking strong and 
not following up with a specific consequence has exactly the 
opposite impact that diplomats would like us to believe.
    Unless there is something that backs up somebody's words, 
if we continue to talk tough but there are no further 
consequences other than what happened right after Tiananmen 
Square and at the same time Americans are stumbling over 
themselves to invest capital in and build an economy in China, 
don't you think that basically gives the Chinese the opposite 
impression that really Americans are just using a bunch of 
words when in reality all they care about is making money?
    Mr. Shear. We don't let up on the Chinese on human rights 
issues, Congressman. The Chinese understand very clearly what 
we think on these issues, and I think our exchanges with them 
on this subject have had positive effects.
    I think Chinese rule of law has improved over the past 
several decades. They have a long way to go in this regard.
    Mr. Rohrabacher. Right. Are there any opposition parties in 
China?
    Mr. Shear. There are no legitimate opposition parties.
    Mr. Rohrabacher. Is there a free press in China?
    Mr. Shear. The press is highly restricted.
    Mr. Rohrabacher. Okay. Is the Falun Gong free to have their 
organization without having their members thrown in jail?
    Mr. Shear. No, it is not.
    Mr. Rohrabacher. All right. So I don't think we have seen 
very much, and yet at the same time we have seen massive 
increases and exchanges of money, of people investing money 
from the United States in building a manufacturing base which 
puts our people out of work and enriches that regime. That is 
kind of a bigger message than all the words we can use.
    Let me ask you about that. The President last night said 
that we have been losing 750,000 jobs a month in our current 
economic situation. How many of those jobs have been going to 
China?
    Mr. Shear. I can't answer that question, Congressman, but I 
know that the $73 billion in exports we sent to China last year 
also accounted for thousands of American jobs.
    Mr. Rohrabacher. Sure. And what was the offset there? It 
was $73 billion or $43 billion we are exporting, and how much 
is it we importing?
    Mr. Shear. I think we imported $256 billion in Chinese 
goods last year.
    Mr. Rohrabacher. All right. And you think that didn't cost 
any American jobs? Well, I think that we could suggest that.
    Why is it that they have gotten away with that so long? Why 
is it that for so long we have had a one-way free trade policy 
that has permitted, from what you just described, a five to one 
ratio--it may be even more than that--of exports or imports to 
exports?
    Mr. Shear. Just a general point, Congressman, and then I 
would like to turn the microphone over to Mr. Loevinger, but 
this administration is committed to doing everything we can to 
foster American industry and help the American worker.
    We have taken action both within the WTO and bilaterally on 
trade issues with China, and, as I say, we have had some 
successes.
    Mr. Rohrabacher. You will have my support at that point. My 
last question----
    Mr. Faleomavaega. Will the gentleman yield?
    Mr. Rohrabacher. Certainly.
    Mr. Faleomavaega. I recall that it was in 2007 China 
exported to the United States over $340 billion worth of goods.
    And I am curious. Mr. Loevinger will help us. Out of those 
goods that were manufactured in China, how many United States 
multinationals were involved in the manufacturing process in 
terms of the number of jobs that were sent overseas, sponsored 
heavily by our own multinationals?
    I am curious. Of that $340 billion of Chinese imports, how 
much was that percentage produced by our own American corporate 
entities that are doing business in China because of cheap 
labor and all this other stuff that comes with it?
    Mr. Loevinger. Thank you, Mr. Chairman. Roughly about 60 
percent of China's exports are produced by multinational 
corporations. My impression is the biggest foreign investors 
are from Taiwan, Japan and Korea, but also the United States is 
a very important foreign investor in China.
    But more broadly to the point you made and the point that 
Congressman Rohrabacher made, we are concerned about these very 
big trade imbalances, and this was the focus of the economic 
track of the S&ED. The message to China is that its growth 
model is going to have to change because there are changes 
going on in the United States.
    U.S. households are changing their savings behavior--we 
have seen savings going up--and that if China wants to grow it 
is not going to be able to depend on the United States consumer 
in the way it has in the past. It is going to have to produce 
its own home grown growth model. Very simply, China is going to 
have to consume more and save less because the United States 
consumer is saving more.
    So how are we going to bring that about? The S&ED talked 
about, and it wasn't just talk. We got commitments from China 
over the course of the next several years. That was our intent 
going in was to build a framework for engagement for the rest 
of the administration on ways China can bring down its very 
large trade imbalances.
    The exchange rate is an important part of that equation, 
and we had serious and frank discussions on the exchange rate, 
but the exchange rate is only one tool. We also talked about 
things China can do in the financial sector creating what we 
call a social safety net.
    China has to establish its own health care reform, its own 
unemployment insurance, its own way of financing education so 
Chinese households feel more secure so they can save less and 
consume more.
    Mr. Rohrabacher. I am very happy to hear that we have had 
so much talk, and I would hope that the administration, unlike 
the past administration and the administration before that and 
the administration before that who also talked about many of 
the very same issues, will decide to do something specific in 
which the Chinese will feel a consequence if they are not, for 
example, giving us the type of reform on currency reform that 
we are talking about and the same type of trade restrictions 
that we face and they themselves are engaged, the government 
itself is engaged.
    Let me ask that as a basic question. Is not the Chinese 
Government engaged in a great effort in the United States to 
steal American technology? We are talking about espionage, 
economic espionage. I mean, I understand there have been about 
50 such situations in the last few years that we have uncovered 
from China where you have----
    Mr. Faleomavaega. The gentleman has one more question.
    Mr. Rohrabacher. Am I incorrect in that?
    Mr. Loevinger. Okay. What I can tell you is we had frank 
discussions. There are policies that we have concerns about in 
China. There are issues that the Chinese raise with us.
    They think our export control policies are too tough. They 
think our Sisyphus process is too tough, and we were very frank 
with them that in Sisyphus we are going to protect our national 
security. In our export control policies that are implemented 
both by the Commerce Department and by the State Department we 
are going to ensure that militarily critical technologies and 
dual use technologies are protected.
    Mr. Rohrabacher. Well, to the degree that you guys are 
doing that more than talking you will have my support. I wish 
you luck, and we will be watching real closely, won't we, Mr. 
Chairman?
    Mr. Faleomavaega. Yes. I find it somewhat ironic that here 
we have a country that is basically Socialist Marxist ideology 
in applying free market systems since Deng Xiaoping made that 
announcement in 1978, and yet somehow they do a better job in 
working their economy in a free market system when we are 
supposed to be the better ones to understand how capitalism, 
how a free market, should work in such a way that we find 
ourselves in a worse situation than the Chinese.
    Am I missing something here? Because it seems that the 
Chinese are telling us how to properly implement a free market 
system because, apparently, despite all this world crisis, 
economic crisis, China's economy seems to be the most stable. 
Yet it is a not a capitalistic society. Could you help me 
reconcile this irony?
    Mr. Loevinger. I would be happy to. Without a doubt the 
growth that China has achieved since Deng Xiaoping instituted 
the reforms 30 years ago has been one of the most notable 
economic success stories in history. Without a doubt, the 
Chinese people, their lot has been improving. More people now 
are richer in China than they have ever been.
    At the same time, I respectfully disagree that I don't 
think when you compare the United States to China we have to 
give anything to the Chinese. The big imbalances we see in 
China are as much an indication of their weaknesses that 
Chinese households can't consume. They feel they have to save 
because they don't have the whole set of systems that we have 
set up in the U.S.
    Mr. Faleomavaega. What I meant, Mr. Loevinger, is that I am 
not an economist, but the financial crisis that we find 
ourselves in, something happened on Wall Street. The 
derivatives and all this came about, lack of regulatory 
authority on the part of government to enforce what was 
supposed to be to keep an eye on greed, if that is a better way 
of saying it. I suppose the extreme of capitalism, you become 
greedy and you forget the rules and that is how we ended up 
where we are.
    Now, I may be wrong in my laymen's terms of defining that. 
I mean, you have to give some credit to the Chinese for their 
success in doing whatever they have done in making their 
economy now second or near second now only to our economy, so 
that is what I am trying to say here.
    They seem to have done a better job in not only controlling 
the economic situation with the annual growth rate now at 8 
percent, and we are suffering right now in terms of all the 
jobs lost, the recession and all of that, so I was just trying 
to dig into that.
    Mr. Loevinger. Yes. Let me make three quick points.
    Mr. Faleomavaega. Yes.
    Mr. Loevinger. Obviously a lot of mistakes were made in the 
U.S. and Secretary Geithner is going to work very closely with 
Congress on reforming our financial supervision and regulation 
to make sure those mistakes don't happen again.
    Secondly, China did not have the financial crisis, but part 
of the reason is China's financial sector is much less 
developed than ours, and that has its own problems for Chinese 
households. It is much harder to go to a store and pay with a 
credit card. It is much harder to get a loan to buy a home or 
finance schooling in China than it is in the United States.
    Mr. Faleomavaega. I think that is understandable. I think 
our overall GDP right now is about $19 trillion to China's 
what, $3 trillion or $4 trillion, so understandably, our 
economy is still number one in the world.
    On the S&ED, it sounded more like a G-2 that we are taking 
all the world's issues it seems. Are you sensing any sense of 
resentment maybe from some of our closest allies? Do they ask, 
``How come we are not part of the team?''
    Is there a sense of exclusivity involved here where now 
only China and the United States are solving the world's 
problems and without consultations with our allies or the other 
forums that may have similar problems?
    Are we taking too much into this or are we streamlining it 
better, defining our priorities? Not just for China. We are 
talking about regional issues. We are talking about world 
issues. Shouldn't others also be active participants in the 
process?
    Mr. Shear. Mr. Chairman?
    Mr. Faleomavaega. Mr. Shear?
    Mr. Shear. Secretary Clinton has said that we are not in a 
multipolar world now; we are in a multipartner world. And 
China, as one of the world's great powers, one of the world's 
great trading nations, is one of those essential partners in 
our efforts to address issues like climate and the global 
financial crisis.
    But it is not the only partner. We will be working together 
closely particularly with our allies in Europe and in East Asia 
to address these issues as well. In East Asia we will be 
working closely with our Japanese, our South Korean and our 
other allies, particularly as the new Japanese Government comes 
in.
    We will be consulting with them closely. We will be 
cooperating with them intensively, and we will be keeping them 
fully informed of what we are doing with our other partners, 
including China.
    Mr. Faleomavaega. I was in Korea recently, and I noticed 
with interest the fact that there is no other country that has 
more influence on the situation in North Korea than China. 
There is no other country in the world that has more influence 
on the situation in South Korea than the United States.
    So my question: Where does it say in the Bible that there 
must be Six-Party Talks? Why not just China and the United 
States and two Koreas? Where does Russia have an interest in 
the process? Japan now is introducing a collateral issue that 
has nothing to do with denuclearization, which to me kind of 
puts a puncture there on the process of Six-Party Talks. Do you 
care to comment on that?
    Mr. Shear. All members of the Six-Party Talks----
    Mr. Faleomavaega. And by the way, how do you denuclearize a 
country that already has in its possession 10 nuclear bombs 
like North Korea? Did we do that to Pakistan? Did we do that to 
India? Why are we singling out North Korea to denuclearize when 
it already has the nuclear bomb, may I ask?
    Mr. Shear. On your first question with regard to Six-Party 
Talks, we think that all parties with a vital interest in peace 
and stability and denuclearization on the Korean Peninsula 
should be involved in this process. The six parties are the 
countries closest to the Korean Peninsula and with the 
strongest interest in these issues.
    I think we have worked closely through the Six-Party 
process. We want the Six-Party process to continue. The Chinese 
do as well. The Chinese have a variety of interests on the 
Korean Peninsula, including the denuclearization of North 
Korea, but also including stability and avoiding a large flow 
of North Korean refugees across the border.
    We have addressed all these issues within the context of 
the Six-Party process. We hope the North Koreans will come back 
to the Six-Party table as soon as possible as we rigorously 
implement the sanctions under Security Council Resolution 1874.
    Mr. Faleomavaega. My apologies. My time is up.
    Mr. Royce?
    Mr. Royce. Thank you, Mr. Chairman. Let us stick on that 
issue for a minute with respect to North Korea because China is 
North Korea's gateway to the outside world, right? I mean, 
China props up North Korea. That is the reality.
    Now, you say that China recognizes the latest U.N. Security 
Council resolution. I am trying to figure out what that means. 
Does that mean that China is giving us adequate assistance on 
North Korean financial activity? Because it doesn't look that 
way.
    Mr. Shear. I will defer to Mr. Loevinger on the subject of 
financial activity, but in general terms China worked with us 
in the Security Council to produce one of the strongest 
sanctions resolutions on North Korea yet. That is the result of 
lengthy cooperation and consultation with the Chinese within 
the Security Council on a succession of Security Council 
resolutions on this subject.
    With regard to implementation, we have consulted closely 
with the Chinese on this. We have urged them to implement the 
sanctions vigorously. I think the Chinese have done that, and 
we are working with them on other measures they can take.
    Mr. Royce. They are with us right up to pulling back on 
economic support and propping up North Korea.
    Mr. Shear. The Chinese have restricted energy to North 
Korea in the past.
    Mr. Royce. But for very short periods of time, and we had 
some success for a very short period of time in terms of the 
Banco Delta Asia. That was an example of how you get North 
Korea's attention, but that requires the cooperation of China.
    The only point I am going to make is that your report was 
light in terms of how we have tried to leverage China on North 
Korea. What I would suggest to you is you spent a lot of time 
on these issues with China, a whole host of them. I think we 
are missing the big picture right now, which is proliferation. 
Once it reaches the Euphrates River and North Korea is building 
reactors in Syria we have a proliferation problem. China is 
sort of the linchpin of this.
    But that takes me to another concern that I have, and I 
will go to David's testimony here. Mr. Loevinger, you said in 
your testimony that China and the United States each reaffirmed 
their commitment to open and rule-based trade in investment. 
That seems to me a stretch because I don't see China--I can see 
them reaffirming its commitment. I just don't see any practice 
of it.
    One of the reasons I say that, I am from California and 
have met with many Chinese, Vietnamese-American, American 
investors, people all over the map who are trying to do 
business in China, and it is always the same story about 
corruption.
    So after so many of these cases and reading so many of them 
in the press as well, it is clear that American investors get 
used and abused in China and you have officially sanctioned 
corruption there. So what is the United States going to do 
about that? We have got American investors basically being 
pinatas, you know, and Chinese corruption just takes a whack at 
them.
    And what is more bothersome is that the U.S. Government, 
more specifically, the Commerce Department, very deceptively 
promotes China. I can't tell you how many complaints I get from 
investors. So you go to one of the many conferences they hold, 
and you would think China was nirvana as they pitch this, an 
investor's paradise. That it is ripe for the picking.
    These conferences are a real shame because they give 
disinformation, and our commercial advocacy at the embassies 
and the consulates, which are then absolutely necessary once 
anybody invests, that is very, very feeble. For those of us who 
have worked on constituents' cases to try to get any justice 
done, you and I know there is no justice in that system.
    So I would like to hear from you what this trade and 
investment dialogue was like with the Chinese, given the fact 
that some of us know what the process is really like for those 
involved in trade and investment. You know, did it deal with 
the reality that thousands of American investors are getting 
wronged in China, or was it just happy talk, or what happened 
during that dialogue?
    Mr. Loevinger. Thank you, Congressman Royce. Frankly, you 
bring up a lot of good points.
    I just spent 3\1/2\ years at the embassy in Beijing, and 
every week I heard from U.S. companies, a lot of U.S. financial 
services firms, talking about how tough it is to do business, 
so I can tell you it is no nirvana. On the other hand, frankly, 
as you guys mentioned, there is a lot of United States 
investment going into China because even though it is not a 
nirvana businesses are making money and they are growing their 
business.
    When we say we want to promote rule-based investment in 
trade and we want a Chinese commitment to rule-based investment 
in trade, we are going to start with the WTO. You have seen 
this administration and the previous administration bring 
several WTO cases to China, and we have won several WTO cases 
and we are going to continue to bring cases to the WTO when 
China is not adhering to its commitment.
    Secondly, we want to expand the international commitments 
on trading investment that China is part of, so we spent a lot 
of time talking about the WTO government procurement agreement 
and how it didn't matter in the 1980s when the agreement was 
signed whether China was in or out because who cared because 
China was a small purchaser and a small supplier. Now it 
matters a lot.
    And we also talked about when the administration finishes 
its review of policies toward bilateral investment treaties 
moving forward on a bilateral investment treaty with China 
again to put our trade and investment relations under more of a 
rule-based framework.
    Mr. Royce. Thank you, Mr. Chairman.
    Mr. Faleomavaega. Thank you. I wondered if the gentleman 
from California desires to do a second round. We have another 
panel pending.
    Mr. Rohrabacher. No.
    Mr. Faleomavaega. Okay. I do want to say thank you both, 
gentlemen, for coming. My subcommittee looks forward to working 
with you both in the coming weeks and months as we try to 
unravel a lot of the fundamental issues affecting the Asia-
Pacific region, over which it has jurisdiction. I sincerely 
want to thank you both for being here this afternoon.
    Mr. Shear. Thank you, Mr. Chairman.
    Mr. Faleomavaega. Thank you.
    We have in our next panel my dear friend, a distinguished 
gentleman in his own right, Mr. John Podesta. Here with us also 
are Mr. Fred Bergsten and Mr. Randall Schriver.
    Mr. Podesta is currently president and CEO of the Center 
for American Progress. Under his leadership, the Center has 
become a notable leader in development of and advocacy for 
progressive policies. In 2003, Mr. Podesta served as White 
House chief of staff to President Bill Clinton and served on 
the President's Cabinet and was a principal on the National 
Security Council. While in the White House, he also served as 
both assistant to the President and deputy chief of staff.
    Recently, Mr. Podesta served as co-chair of President 
Obama's transition team, where he coordinated the priorities of 
the incoming administration, oversaw the development of policy 
and spearheaded the appointment of major Cabinet secretaries.
    Additionally, he has held numerous positions on Capitol 
Hill as an aide to the former Democratic leader, Senator Thomas 
Daschle, and as counsel to the Senate Agriculture Committee and 
Judiciary Committee.
    A Chicago native and a graduate of Knox College and 
Georgetown Law School, he currently is a visiting professor of 
law, authored several books, and the list goes on and on. John, 
welcome. Very glad to have you.
    Mr. Podesta. Thank you, Mr. Chairman.
    Mr. Faleomavaega. Dr. Fred Bergsten is currently the 
director of the Peterson Institute of International Economics, 
formerly known as the Institute for International Economics in 
its creation in 1981. The Institute is the only major research 
institution in the United States devoted solely to 
international economic issues.
    It has been called the most influential think tank on the 
planet. The first comprehensive survey of some 5,465 think 
tanks around the world recently concluded that the Peterson 
Institute was tied for top-rated think tank in the world with 
the Brookings Institution, I understand. It has a staff of 
about 60 and has moved to an award winning new building right 
now. Dr. Bergsten was the most widely quoted think tank 
economist in the world in 1997 and 2005, and his tremendous 
work continues on.
    Also he was assistant secretary for international affairs 
at the U.S. Department of Treasury from 1977 to 1981, also as a 
major economic assistant to Dr. Henry Kissinger at the National 
Security Council. Dr. Bergsten has authored, co-authored and 
edited over 40 books and hundreds of articles. My gosh, the 
list goes on and on. I could spend the whole day here listening 
to this gentleman.
    Dr. Bergsten received his doctorate and his master's from 
the Fletcher School of Law and Diplomacy and graduated magna 
cum laude from Central Methodist College. He has contributed 
tremendously to U.S. and international economic policy, 
analyses of a wide range of global economic issues, and 
provided a vision for a G-2, now known as the Strategic and 
Economic Dialogue.
    Mr. Randall Schriver is one of the founding partners of 
Armitage International, a consulting firm that specializes in 
international business development and strategies. Mr. Schriver 
served as deputy assistant secretary of State for East Asia and 
Pacific affairs where he was responsible for the People's 
Republic of China, Taiwan, Mongolia, Hong Kong, Australia, New 
Zealand and the Pacific Islands.
    Prior to that, he served as chief of staff and policy 
advisor to then Deputy Secretary of State Richard Armitage. He 
formerly served for 4 years in the Office of the Secretary of 
Defense, was an active Naval intelligence officer for 3 years, 
foreign policy advisor on the McCain Campaign for President 
last year and was on the Bush-Cheney defense transition team.
    Mr. Schriver has won numerous military and civilian awards. 
He hails from the state of Oregon. He holds a master's degree 
from Harvard and a bachelor's from Williams College.
    Gentlemen, this committee is truly honored to have all 
three of you for taking your precious time to come and testify 
before the subcommittee on this issue, which I think is very, 
very important not only to me, but also to my colleagues on the 
Foreign Affairs Committee.
    I would like to start with Mr. Podesta, if you would, and 
see where we can go from there.

 STATEMENT OF MR. JOHN PODESTA, PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, CENTER FOR AMERICAN PROGRESS

    Mr. Podesta. Thank you, Mr. Chairman. You have an extensive 
written statement, so let me try to summarize.
    Mr. Faleomavaega. Without objection. All your statements 
will be made part of the record, as well as any other materials 
you want to add.
    Mr. Podesta. I will just try to hit some key points. I am 
honored to be here with you, Mr. Chairman, Mr. Rohrabacher. I 
just returned from China where I led a high level delegation 
that included former leader of the Senate, Tom Daschle, John 
Deutch and former Ambassador Wendy Sherman, and I just came 
back last week so my observations are at least fresh, if not 
accurate, but they are at least fresh.
    Our conversations with very senior members of the Chinese 
Government convinced me that the relations between China and 
the United States are on a solid footing. For example, State 
Councilor Dai Bingguo told us that the government hoped 
President Obama's visit in November would rival the 
significance of President Nixon's visit and introduce an era in 
which the United States and China could build a positive, 
cooperative and comprehensive relationship, which you quoted in 
your opening statement, Mr. Chairman.
    Look, I am not naive about China. I understand the human 
rights issues, the issues around support for states like Sudan 
and Burma, but I think that we don't have the luxury of either 
ignoring or not getting along with China at this moment in 
history.
    We have pressing global challenges that need to be 
addressed with China, so I think it is time to move beyond what 
has been usually referred to as engaging in hedge framework of 
China policy and take an approach that is openly premised on a 
strategy that maximizes opportunity and tries to manage the 
risk.
    The new format of the Strategic and Economic Dialogue will 
be instrumental to shaping our relationships going forward, as 
well as making progress on a number of global challenges. I 
thought I might comment based on again our conversations 
recently in China on some aspects of the national security 
relationship and then talk a little bit about climate change 
and clean energy.
    On North Korea, you may know, Mr Chairman, I recently 
accompanied President Clinton to Pyongyang, making me I guess 
one of the few Americans who have been there in recent years, 
and our discussion in Beijing I think suggests that China 
remains committed to a denuclearized Korean Peninsula, and they 
will work to reengage the DPRK in multiparty communications.
    China's recent enforcement, as Mr. Royce was suggesting, of 
U.N. sanctions against Pyongyang I think is actually an 
encouraging sign of their position. They view this as a 
strategic I think threat in the region, and I think they are 
being cooperative on that question.
    On Iran, China has acknowledged that Iran should not 
possess nuclear capabilities, but it has declined to use its 
leverage on the issue. The United States Government I think 
needs to continue to press China on Iran, given our mutual 
interest in avoiding a regional arms race and promoting long-
term stability. I think in that regard, the Chinese 
investments, particularly with respect to developing the 
Iranian capacity to develop gasoline, I think are troubling. I 
think we need to keep pressing on that front.
    With respect to military cooperation, we met with General 
Ma, who is the vice chairman of their Joint Chiefs. Cooperation 
and confidence between China and the United States militaries I 
think has lagged behind that of other state apparatuses. I 
think both sides view this as being marked by a kind of stop/
start/restart quality that has not always been helpful to 
either side.
    I think both sides actually, both the United States 
military and the Chinese military, are looking to bring 
cooperation and confidence to levels consistent with other 
areas of the United States-China relations, and senior leaders 
of our two militaries need to continue to engage in regular and 
candid dialogue on issues of mutual concern.
    The resumption of our formal bilateral defense dialogue is 
an important first step, and there are a number of other 
activities I think that could follow on. For example, our ships 
are battling pirates side-by-side right now off the coast of 
Somalia, and I think that is symbolic of the way we can develop 
a stronger mil-to-mil relationship.
    We also discussed pandemics. I think China learned its 
lesson from SARS and are actively cooperating with the World 
Health Organization particularly with respect to H1N1. While 
they have made some mistakes in that regard, I think they are 
basically in a cooperative mode and a positive mode.
    Let me just say a word about climate change. During our 
meetings in Beijing, we were assured that China will do its 
part with respect to addressing its skyrocketing emissions 
rates. As my testimony goes over, they have very, very 
significant investments in clean energy, very major investments 
in solar and wind, developing the clean energy technologies and 
industries of the future. I think they will be a competitive 
player in that regard. In fact, I think we are at risk of 
falling behind.
    The MOU that was referenced in the first panel I think is a 
significant movement whereby we can begin to understand and 
move forward to demonstrate that their energy policy will 
indeed result in emissions reductions capabilities in a 
measurable, reportable and verifiable way, so I think it is a 
very important part of the Dialogue and has been made central 
under this administration to the Dialogue.
    We, along with the Asia Society, have developed a kind of 
road map on how we can cooperate on CCS, carbon capture and 
sequestration, which I think they are quite interested in, our 
own Government is quite interested in, and it may be a way of 
carrying out demonstration of that vital technology to both 
countries in a way that is cost effective and will result in 
reduced emissions again in both countries.
    My time is up, and I will turn back the microphone.
    [The prepared statement of Mr. Podesta follows:]
    
    
    
    Mr. Faleomavaega. Thank you, Mr. Podesta.
    Dr. Bergsten?

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

    Mr. Bergsten. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify. I will make five basic points and try 
to do so quickly.
    First, as you have already indicated, the United States and 
China are clearly the two most important national economies in 
the world. It is therefore clear that effective international 
policy coordination requires the closest possible cooperation 
between the United States and China.
    The two countries do not have to agree on every issue, let 
alone pursue identical policies, but they must be willing and 
able to work constructively together if enough agreement is to 
ensue to permit progress across the entire range of crucial 
international issues ranging from recovery from the current 
crisis to creating a new global regime to counter global 
warming.
    The punch line of that dual leadership is that the United 
States-China relationship must focus increasingly in the future 
on the wide range of global economic issues rather than the 
narrow bilateral frictions that we have traditionally 
emphasized in the past.
    Second, in anticipation of those conditions, and as you 
indicated, I proposed 5 years ago that the United States and 
China work toward creating an informal G-2 that could provide 
effective leadership of the world economy. The idea is to 
develop a close working relationship that would supplement, not 
supplant, the other Gs--G-7, G-20--and the IMF and WTO.
    Somebody mentioned that other countries are miffed that the 
United States and China might be working on these issues 
together. If the U.S. plays it right, all the other countries 
will be consolidated and engaged too, and if the United States 
and China can agree, and they have to agree to make progress, 
the outcomes will be superior and the other countries ought to 
welcome it. The idea is not to supplant but to supplement and 
make the system work better. And without these two, whether we 
like it or not, there has to be agreement or we won't get much 
progress.
    My assessment of the initial meeting of the Strategic and 
Economic Dialogue and its future prospects is governed largely 
by an assessment of whether it is helping to create such a G-2. 
I think it is moving clearly in that direction, despite the 
denials of the Secretary of State earlier on, and holds 
considerable promise for so doing. I thus strongly endorse the 
initiative, praise the Chinese for participating so actively in 
it, and offer a few suggestions for how it can best proceed.
    Third, to create and sustain an effective G-2, and to have 
an S&ED that works, the United States and China have to engage 
in a wide ranging and continuing conversation on their 
respective roles in the world economy and the global economic 
system.
    As you mentioned, Mr. Chairman, they weren't even in it 
until 30 years ago. The whole system was created before they 
were even engaged. They were not present at the creation. They 
had nothing to do with the rules and institutions. So it is not 
a shock that as they become the second largest economy in the 
world they might raise some questions about what they are 
getting into.
    Therefore, we have to talk with them very seriously on 
world views about the global economy, the same way my old boss, 
Henry Kissinger, and President Nixon talked to Zhou Enlai and 
Mao Zedong back almost 30 years ago in opening up the United 
States-China relationship. And in a way that is even more 
important in the economic sphere because, as I say, they 
weren't involved in the system when it was created and 
developed, yet it is critically important to bring them into 
it.
    So that would be point 3. The S&ED, by providing a full day 
or two of intensive interaction between key ministers of the 
two countries, can and should play an active role in that 
process.
    Point 4. Heads of government and top officials will become 
impatient with lengthy discussions of world views and such 
unless there are some deliverables on issues of immediate 
concern. And I think it is therefore imperative the S&ED tackle 
the media topics. There are at least two issues where I think 
they did so effectively, and you heard about it early from the 
government representatives.
    On the world economy, China and the United States have led 
the global recovery with fiscal and monetary stimulus. China in 
fact grew at an annual rate of 15 percent in the second quarter 
of this year, clearly was the first country to recover, clearly 
is leading the global recovery. The U.S. has not bottomed out. 
Our recovery has probably begun, and so I think we are on the 
way to a joint leadership of the recovery process.
    What is critically important, however, and David Loevinger 
from Treasury emphasized it, is not only recovery of growth, 
but reshaping the composition of that growth and therefore the 
direction of both countries' strategies. China has been running 
huge, and in my view, unacceptable and unsustainably large 
trade surpluses, over 10 percent of its GDP. They have 
manipulated the exchange rate.
    Mr. Rohrabacher didn't even mention that one, which I think 
is the most important problem. The Chinese have manipulated 
their exchange rate aggressively and massively. That has given 
them a huge competitive advantage and built up these trade 
surpluses. That just can't continue.
    As Loevinger said, you have to put that in the context of a 
restructured growth strategy. Already, and this is not widely 
realized, China's trade surplus this year will be cut in half 
from where it was just 2 years ago.
    The U.S. trade deficit is already cut in half from where it 
was 3 years ago so there is good progress, but the issue is to 
keep that going, build on it, use the S&ED and other devices in 
order to restructure the growth pattern in the way that 
Loevinger was discussing. I can elaborate on that if you wish.
    The other big issue is global warming, and I do believe 
that this Memorandum of Understanding, which was the most 
tangible result from this S&ED meeting 6 weeks ago, could turn 
out to be a breakthrough in terms of United States-China 
cooperation and China's commitment to deal with that global 
problem.
    Fifth and finally, there are some things they did not do 
and have to do in the future. China has expressed great anxiety 
about its dollar holdings. Well, they didn't really talk about 
that. The United States is very concerned, rightly, about a 
seeming revival of industrial policy initiatives in China. I am 
not aware that they talked about that very much either, and the 
Chinese have this very aggressive policy of keeping the 
exchange rate undervalued. That boosts their trade surpluses 
and enhances their competitiveness unfairly.
    Loevinger said they had long talks about it, but the truth 
is both Treasury and the IMF have backed away from any 
effective counter to that Chinese policy, which is very adverse 
not just to our economic interest, but to the stability of the 
whole global system.
    So I think the S&ED is a good step down the line toward a 
G-2 to talk about global issues, and they made good progress on 
two of the big ones. But there are several others that remain 
to be addressed so they have a big agenda for the future that I 
hope they will continue to address.
    [The prepared statement of Mr. Bergsten follows:]
    
    
    
    Mr. Faleomavaega. Thank you very much, Dr. Bergsten.
    Mr. Schriver?

    STATEMENT OF MR. RANDALL G. SCHRIVER, PARTNER, ARMITAGE 
INTERNATIONAL, L.C. (FORMER DEPUTY ASSISTANT SECRETARY FOR EAST 
      ASIAN AND PACIFIC AFFAIRS, U.S. DEPARTMENT OF STATE)

    Mr. Schriver. Thank you very much, Mr. Chairman. Thank you 
for the invitation and thank you also for seating me along side 
people I respect and admire so much. I know we are somewhat 
judged by the company we keep, and I know my reputation is 
enhanced today. Thank you for giving me that opportunity.
    Talking about a particular format or dialogue, I think it 
is important that we ground this in our impressions of the 
overall relationship because even the best modalities won't 
produce results if the fundamentals aren't there in the 
relationship. And the reverse is true as well. If the 
fundamentals are in place the form of dialogue will only 
marginally affect the outcomes.
    I guess I would take a bit more of I don't want to be 
pessimistic, but maybe in my view at least a sober minded view 
of where things stand. I think although it is undeniable that 
our interests are converging in many ways, there are still very 
profound differences between the United States and China. Many 
of those issues have already been mentioned--human rights, the 
security of Taiwan, proliferation and so forth.
    So I think even if we are extremely creative and come up 
with the best modalities, I think these profound differences 
will mean that the outcomes and the deliverables and the 
products I think will necessarily be modest, and I think that 
was frankly borne out in the first round of the S&ED. That 
doesn't mean the Dialogue shouldn't take place, but we should 
think carefully about how we characterize this dialogue and 
what our expectations are.
    In fact, when the Chinese raised the prospects of holding a 
strategic dialogue, my boss at the time, then Deputy Secretary 
Armitage, agreed to a senior dialogue only. He said we reserve 
strategic dialogue for allies and people who share our views 
and share our interests, and I think that is an important point 
to keep in mind.
    I think many of the advantages of this forum have already 
been discussed. I would underscore several of them. I do think 
it is useful to the interagencies on both sides. People have 
noted the Chinese interagencies are stove piped. I might hasten 
to add that is a problem on our side as well at times, and this 
format with so many cross-cutting issues does help 
interagencies on both sides interact and deal constructively on 
a range of these issues.
    Obviously having a flagship dialogue of this magnitude can 
be an important action forcing event that can incentivize 
governments into action, and obviously having a format of this 
nature when things are said they are almost by definition 
authentic, authoritative and it is a great platform for 
communicating clear messages.
    I think between the United States and China that single 
goal of clear communication to the extent it helps us avoid 
differences and conflicts and miscommunications, that in and of 
itself is important, but let me focus on what I think are a few 
of the potential downsides, and I do so at the risk of sounding 
overly negative, but I want to use the time to be constructive 
and talk about what I think some of the potential pitfalls are.
    Number one, I think we have inadvertently placed China in a 
place of priority or predominance that they haven't quite 
earned. I would note that Japan still has the second largest 
economy in the world. We have other major trading partners in 
Asia.
    We have trading partners around the world who are more 
closely aligned to the United States, share our values, share 
our views, but yet, as was noted earlier, there has never been 
anything like this in terms of high level engagement with any 
of these countries, so I think inadvertently we have given the 
impression that China has a place of priority, which I don't 
think they quite frankly have earned through their actions and 
through their policies.
    I think that segues into a second concern I have. We often 
place value differently on the outcomes of dialogues of this 
nature. China often judges success or failure based on 
symbolism, status. People say face in Asia. I think we run the 
risk sometimes of loading six or seven Cabinet secretaries on a 
plane, touching doing in Beijing, and the Chinese have already 
accomplished their objectives in the meeting without having to 
actually produce.
    If they perceive they are already the great strategic 
partner of the United States, my feeling and based on my 
experience of interacting with China, that may actually 
decrease the possibilities that they will engage in 
constructive cooperation, and in fact there are a range of 
things we can and should be doing with our allies that are not 
only the right things to do with respect to those relationships 
and for our United States interests, but also is the smart 
thing to do in terms of engaging China.
    I mentioned that it is a useful action forcing event, but 
the reverse could also be true. China often holds in abeyance 
initiatives and deliverables and outcomes until the next round 
of a major dialogue, so I think there is a potential downside 
of this diluting many of the other interactions we have; for 
example, the so-called JCCT, the Joint Commission on Commerce 
and Trade.
    Another downfall and potential downside I would note is a 
lack of priority and a very unwieldy agenda in the S&ED format. 
I have noted what the representatives of the administration 
have said about prioritization. I take them at their word. I 
have a great deal of respect for both of them, but it is, very 
frankly, hard to see from the outside that there were clear 
U.S. priorities being conveyed in the S&ED. I think that that 
has the potential to dilute the possibility of achieving 
outcomes on what are truly the most important and strategic 
issues for the United States.
    Finally, I worry a little bit about a sense of complacency; 
that we have so many ministers, so many Cabinet secretaries 
that we will be under the impression we are talking to all the 
right people and we have a vehicle that is sufficient for all 
the work that needs to be done in the United States-China 
relationship.
    And in this regard it certainly underscores something Mr. 
Podesta said about the military-to-military relationship. I 
think if we could get PLA operators into a room to talk about 
safety on the high seas, that in and of itself would be just 
about equal value to what we are getting with all these Cabinet 
secretaries and ministers.
    I know my time is running very short. Let me just quickly 
conclude with some recommendations. I don't want to only cast 
aspersions. I think high level dialogue, senior dialogue, with 
China is important. I think it can be improved.
    Number one, I think we should step up our cooperation with 
our allies. I think we should conclude CORUS, I think we should 
enhance our TIFA talks with Taiwan, and I think we should 
really take advantage of this fiftieth anniversary of the U.S.-
Japan alliance coming up for a robust security declaration. 
Again, the right thing to do, but I think it actually helps us 
to engage China.
    Number two, I think we need much greater clarity on the 
agenda for the S&ED so that we can really work on issues of 
true priority and the number of Cabinet secretaries and 
ministers adjusted accordingly if we are able to do that and 
focus on a more concrete and specific agenda.
    Again, number three, other fora. We shouldn't be complacent 
about this S&ED as being all the right people, all the right 
issues. I do think military-to-military is extremely important.
    And then finally, I do think we have created an impression, 
and I will only say that, that human rights is lower on the 
agenda than I feel it should be with China. I take the 
administration and Mr. Shear, again who I respect greatly. I 
take him at his word about the vigor with which these issues 
are pursued, but I did note China coming out of the S&ED almost 
thanking the United States for not raising the Uighurs and 
Xinjiang with greater intensity and forcefulness.
    I don't take that as a good sign when we are being 
congratulated for things like that, and so I think some things 
should be done to re-energize those issues in the United 
States-China relationship. Thank you.
    [The prepared statement of Mr. Schriver follows:]
    
    
    

    Mr. Faleomavaega. Thank you very much, gentlemen.
    The gentleman from California for his questions.
    Mr. Rohrabacher. Thank you very much, Mr. Chairman. Let me 
note in terms of a little comment on your original comment, 
which was how China has had such stability, economic stability, 
when there has been such economic chaos going on in the United 
States and the western markets.
    I think that if you live in a country where they have 
killed the lawyers and jailed all the union organizers and cut 
off all free press and political opposition, it would appear to 
be a stable regime.
    Mr. Faleomavaega. Will the gentleman yield?
    Mr. Rohrabacher. And you could actually make sure the 
profit is directed toward the right people. Yes, sir.
    Mr. Faleomavaega. I think it was one of the great writers, 
a fellow by the name of William Shakespeare, who said the first 
thing we do is kill all the lawyers.
    Mr. Rohrabacher. Well, the Chinese have certainly read that 
one all right.
    So let us note that that is the kind of society. There is a 
facade of stability and strength, but I think that underneath 
that is you have millions and millions of Chinese people who 
long for the same things that we long for, and that is to be 
able to live in freedom and to have better lives for our 
children and to express ourselves and to be able to worship God 
as they see fit.
    I think these are not things that only westerners want. I 
think that the Chinese people, I see them as our greatest ally, 
and they right now have a boot on their face and it does not do 
us any good or the world any good to ignore that fact and to 
just talk about how we can cooperate with the guy who has the 
boot on his foot and that boot is on the face of their own 
people.
    So with that said, let me ask a question because the first 
two witnesses seemed very optimistic about cooperation. As a 
matter of fact, your whole testimony was about how we cooperate 
with this regime. Pardon me for being cynical here, but do 
either one of your groups receive contributions or have clients 
from business that are making profit from the China market?
    Mr. Podesta. I will let Mr. Bergsten answer for his group. 
We take small corporate contributions at the Center for 
American Progress generally in the vicinity of $25,000, but 
never for any work that we do, and so I think that we have no 
economic stake in the people that----
    Mr. Rohrabacher. By the way, $25,000 does not sound like a 
small contribution to me.
    Mr. Podesta. Well, we take contributions from corporations 
as part----
    Mr. Rohrabacher. But do you make a profit from China-to-
China trade? More than $5,000?
    Mr. Podesta. You know, we do no work on their behalf and we 
take no corporate contributions to do particular studies, Mr. 
Rohrabacher.
    Mr. Rohrabacher. Okay. I understand. You do take 
contributions.
    Mr. Podesta. We take union contributions. We take 
individual contributions, and we take corporate contributions.
    Mr. Rohrabacher. There it is. Okay. I am just asking. 
People need to know who is talking. We have a group that takes 
$25,000 contributions from people who are doing business with 
gangster regimes.
    Now, what about your organization?
    Mr. Bergsten. About a third of our funding comes from 
philanthropic foundations, about a third from individuals, 
about a third from companies, some of which certainly have 
business in China.
    Mr. Rohrabacher. All right.
    Mr. Bergsten. They of course have businesses in hundreds of 
countries, and we take----
    Mr. Rohrabacher. Sure.
    Mr. Bergsten [continuing]. Funding for our China related 
projects----
    Mr. Rohrabacher. Okay.
    Mr. Bergsten [continuing]. From companies that are involved 
in----
    Mr. Rohrabacher. And what size? We heard about $25,000 is 
the biggest contribution from any business that does business 
in China from his organization. What about the biggest 
contribution from a company that does business in China for 
your organization?
    Mr. Bergsten. Well, we are much better fundraisers than 
Podesta so we get more than that from some companies.
    We get $10,000 from some, $5,000 from some. But I suspect--
I would have to check the record--we get $50,000 or more from a 
couple of companies----
    Mr. Rohrabacher. All right.
    Mr. Bergsten [continuing]. That have business in China.
    Mr. Rohrabacher. All right. So we understand, okay? No one 
is saying that what you are saying is untrue or that you don't 
believe it, but that is the environment in which you are 
working.
    So with that said, and again you are focused on 
cooperation. I will have to say I am a little flabbergasted by 
someone who would suggest that the United States be viewed in 
the world as a partner with the world's worst human rights 
abuser and that in some way is going to have a positive impact 
with the G-2, but let me ask this question of you all.
    Mr. Bergsten. Could I answer that directly?
    Mr. Rohrabacher. Yes, you may. Go right ahead.
    Mr. Bergsten. Because you raise a very fundamental 
question. It comes up all the time in our debates on how to 
organize the world. There are two conflicting schools of 
thought.
    One would say, and that is what I have said, that when 
another country is the world's second largest economy, second 
most important economy, and you can't really make progress on 
any global economic issues without it. You have to deal with 
them as effectively as you can.
    Your view is that despite all that if their values are not 
ones we share----
    Mr. Rohrabacher. Yes.
    Mr. Bergsten [continuing]. That you stay distant.
    Mr. Rohrabacher. Right.
    Mr. Bergsten. And I think one has to reconcile the two as 
best one can, but one has to ultimately choose which way you 
lean.
    I think honest people can disagree, but I don't see how we 
can promote our economic interests unless we deal effectively 
and extensively with the world's second largest and most 
important economy.
    Mr. Rohrabacher. Well, as Mr. Schriver pointed out, Japan 
for a long time was the world's second largest and we never 
tried to afford them the type of prestige that you are 
suggesting we move forward with China.
    Mr. Bergsten. Not actually true, Mr. Rohrabacher.
    Mr. Rohrabacher. Okay. Let me move forward with a couple 
things here.
    Mr. Bergsten. We were very close with Japan with many, 
many----
    Mr. Rohrabacher. Okay. Let me just note this. First of all, 
I have heard from the business community for year after year 
after year, for decades now, that if we just deal with these 
people in a cooperative spirit and really treat them as friends 
that there will be a liberalization going on.
    I have not seen any liberalization going on in the Chinese 
Government throughout this expansion of economic relationships, 
and I believe that the hug-a-Nazi-make-a-liberal theory has not 
worked. We have hugged them, we have kissed them, we have put 
our investment money in their pockets, we have helped build 
their economy, and they still have a fascist regime in Beijing.
    One last question, and that is right now which do you 
believe to be the worst threat to the stability and peace of 
the world, the Somali pirates or China's claim to almost the 
entire South China Sea?
    Which one, the Somali pirates or this major massive power 
laying claim to all of the trade routes through which Japan has 
to bring all of its oil into almost all the entire South China 
Sea? Do you think that claim is a belligerent, arrogant act on 
the part of the Beijing?
    Mr. Podesta. If you are forgiving the Somalia pirates, I 
don't know why.
    Mr. Rohrabacher. Okay.
    Mr. Podesta. I mean, it seems to me that we need to deal 
with both questions or both security issues, but, you know, you 
see the world as black and white and I see it I guess in shades 
of gray, Mr. Rohrabacher.
    Mr. Rohrabacher. Okay.
    Mr. Bergsten. I would like a few more choices. You just 
gave two choices and which is the greatest threat.
    Mr. Rohrabacher. Okay. What about for you, Mr. Schriver?
    Mr. Bergsten. There are a number of countries, 
incidentally, that claim portions of the South China Sea and 
the Spratlys and all that----
    Mr. Rohrabacher. Right.
    Mr. Bergsten [continuing]. So it is not only China. It is 
literally last count I think eight or 10 countries in Asia 
that----
    Mr. Rohrabacher. I will have to say, when the Philippines 
go out there with their little putt-putt patrol boat and say 
yes, we own this much of the South China Sea it doesn't seem as 
threatening as when the Chinese claim the whole thing.
    What about you, Mr. Schriver?
    Mr. Schriver. Well, I wouldn't hesitate to say that China 
represents the greatest potential threat to the United States.
    It doesn't imply necessarily the full policy prescription 
of what we do about it, nor does it say that there aren't 
potential opportunities as well, but I think their trajectory, 
we have to be very sober minded about that.
    Mr. Rohrabacher. Thank you, Mr. Chairman.
    Mr. Faleomavaega. Thank you. We are joined now by our 
distinguished ranking member, the gentleman from Illinois, my 
good friend, Mr. Manzullo. If he has an opening statement or a 
series of questions he would like to----
    Mr. Manzullo. I ask that my opening statement be made part 
of the record.
    Mr. Faleomavaega. Definitely. Without objection.
    [The prepared statement of Mr. Manzullo follows:]
    
    
    Mr. Manzullo. You know, we have been working with China 
ever since I came here in 1993. I served as the first chair of 
the U.S.-China Interparliamentary Exchange, have been to China 
several times, helped entertain the Chinese here in the United 
States, and one of the impressions that I get it is very hard 
to refer to the ``Chinese'' as one people just as it is hard to 
refer to Bergsten and Podesta as people of like mind.
    And I say that facetiously because depending upon the area 
of China with which you are dealing or the individual we have 
found some extraordinary open people that have really in 
individual cases gone to bat for United States companies that 
were getting clobbered by the Chinese themselves in various 
parts of that country, so I find it----
    I know we are still dealing with a country that is closed 
and I am disappointed it is not more open than we anticipated 
in light of the different laws that we have passed regarding 
China's trade obligations, et cetera, but one of the things 
that I want to explore with you, and this comes as a person who 
also sits on the Financial Services Committee.
    I am really concerned that the Chinese, which owe over $800 
billion in U.S. notes, the first part of April at the G-20 had 
talked about a bag of currencies, cache of currencies, whatever 
it is, to supplant the U.S. dollar as a currency of reserve for 
international trade purposes.
    On April 2, the G-20 signed an extraordinary agreement that 
sort of indicated that, and prior to that Secretary of Treasury 
Geithner had made some remarks that perhaps he hadn't studied 
talking about this substitute for the U.S. reserve. China now 
of course wants more of a say so in the G-20 because they are 
putting more money around the world.
    My question to the three of you is what implications would 
happen if the U.S. dollar no longer is the international 
currency of reserve? That is an easy question. Who wants to 
start with that? Fred?
    Mr. Bergsten. Let me start. Sure. First of all, the Chinese 
holdings of dollars are probably more like $1.5 trillion now, 
almost double what you said. We can only record about $800 
billion of their direct holding of U.S. Government paper, but 
the estimated total is close to double that and rising very 
rapidly, whatever they may say about their unhappiness about 
dollars.
    I made the point before that they have intervened massively 
in the currency markets to keep their exchange rate undervalued 
to improve their trading competitiveness. The way they do that 
is to buy dollars. They buy dollars, sell renbinmi. It holds 
the price of the renbinmi down against the dollar, gives them 
more price competitiveness.
    The financial consequence is their dollar reserves keep 
rising so whatever anxieties they may enunciate they keep 
piling up dollars more and more. So one can understand that 
they want the best of all worlds. They want to be able to keep 
their currency down, but also get some kind of takeout for the 
dollars that they hold. I don't think they are likely to get 
that.
    I am not sure what you referred to in the G-20 in April, 
but it may have been the decision to create a large amount of 
special drawing rights at the IMF to supplement global 
reserves. In an indirect way you might say or might interpret 
that as a response to the anxiety of China and some other 
countries incidentally--Russia and some others--about their 
large dollar holdings, but I think the G-20 viewed that, and 
rightly, as part of the response to the global crisis.
    The idea of creating special drawing rights through the IMF 
is to add to the reserves of all member countries around the 
world. That gives them more wherewithal to buy imports, restore 
the level of international trade, which has dropped so sharply, 
and thereby contribute to the global economic recovery. It is 
legitimate to say a side effect is to slightly decrease the 
role of the dollar in world finance.
    The SDRs up until now have accounted for something like 0.2 
percent of all global financial reserves. The decision at 
London--it has now been implemented, incidentally, August 28 by 
the IMF--takes the SDR share of total reserves up to 5 percent 
not by reducing the amount of dollars but simply by increasing 
an alternative asset.
    Now, what would happen if the dollar no longer becomes the 
key reserve asset? First of all, that could not possibly happen 
for a very, very long time. The dollar is the currency of 
international commerce. It is used in variously estimated 70-80 
percent of all international transactions, including by 
countries far away from us geographically, so there is not much 
risk that its role is going to diminish any time soon. There 
just wouldn't be any technically feasible way to do that.
    I may shock you, however, when I suggest that a gradual and 
orderly reduction of the dollar's role might not be such a bad 
thing for the United States. Why do I say that? First of all, 
the dollar enables us to finance our huge trade deficits much 
more easily. That is generally viewed as its main benefit. We 
can live beyond our means. We can buy more from abroad than we 
sell because the foreigners are willing to pile up dollars, 
finance our debit card as if nobody was collecting on 
principal, and so we can live beyond our means. In the short 
run that is attractive.
    But it also means that we often pursue policies that are 
not greatly in our own interest, and I would submit that the 
huge foreign financing of our huge trade deficits was an 
important cause of the current crisis. Why? All those dollars 
came in from China and elsewhere. They kept our interest rates 
very low. They kept our monetary conditions very lax. They kept 
our liquidity extremely high.
    The Chinese did not force our banks to make stupid subprime 
loans, but the conditions, the monetary conditions, that ensued 
were an open invitation to overleveraging, underpricing of 
risk, all the things that brought on the crisis. In short, the 
great financing of our big deficits and all that wonderful 
foreign capital inflow created conditions that really rose up 
to bite us.
    There is a second reason why it is not such a great thing 
for the United States to have all this foreign dollar 
financing, and my China example describes it. The Chinese 
manipulate their exchange rate because they can buy dollars in 
the currency market and keep their currency low. That 
overvalues our currency, makes us less competitive in world 
trade, brings on those big trade deficits and to some extent 
job losses here. We don't control our own exchange rate because 
of the international role of our currency.
    So it is a mixed bag. I don't want to be totally negative. 
There are advantages and disadvantages. It is a complicated 
business. I wrote a book on it a long time ago. I have just 
done a big article for the next Foreign Affairs issue 
addressing that whole set of topics.
    But I for one would believe that over time as we move into 
a more multipolar world economy where the euro is rising as a 
national currency, where the IMF can create this alternative 
asset, it is probably a good thing for the United States to 
have that greater variety.
    The United States in fact was the country that initiated 
the idea of special drawing rights in the IMF 40 years ago and 
again strongly supported the G-20 action to create the $250 
billion just in the last few weeks, and I think that is a 
constructive course for U.S. policy.
    Mr. Podesta. Mr. Chairman, could I just add one word to 
that?
    Mr. Faleomavaega. Please.
    Mr. Podesta. I defer to Fred's expertise on this, but it 
seems to me that he is laying out a solution that the 
implication may be that the course should be to weaken the 
dollar and weaken the reserve position of the U.S. dollar, and 
it seems to me that the more effective way to approach this 
problem is actually to get our macroeconomic policy right and 
fix our own economy and retain the strength of the dollar as a 
reserve asset by doing things like returning to fiscal 
discipline and creating a macroeconomic policy that is going to 
have wage growth happen in the United States so that the 
pressure to kind of borrow our way into prosperity is reduced 
as people's incomes rise.
    Mr. Schriver. Well, I am not an economist, but as a China 
watcher I would say that I think much of their actions and 
statements are actually driven by insecurity. They never 
invested in U.S. dollars and held U.S. dollars out of affinity 
for us or love of us or because they wanted to be nice to the 
United States. It is the best place for them to keep wealth and 
hold wealth.
    And they are nervous. They are nervous by our profligate 
spending. They are nervous by the trajectory of things right 
now, and I would completely agree that the best thing we can do 
is return to fiscal discipline as soon as possible. Otherwise 
this dynamic will surely continue.
    Mr. Bergsten. Just to be clear, that is exactly the same 
policy conclusion I come to and stress in the upcoming article, 
but I do have a somewhat different view on whether the 
international role of the dollar is a great thing for the 
United States.
    Mr. Manzullo. I appreciate your answers on all of those, 
and as somebody who spends probably 60 percent of his time in 
Congress working on manufacturing issues--I think I am the only 
member who has gone to warehousing school--I am concerned over 
the drift actually started with Chairman Greenspan, who never 
thought the loss of manufacturing jobs was significant. 
Fortunately, Chairman Bernanke takes the opposite view and is 
concerned about every single job that we lose to a foreign 
competitor and very sincere and very earnest in that.
    I think it is a matter of how you look at this thing. Mr. 
Podesta, I don't know how the United States can get its 
macroeconomic house in order. I don't think we could sit down 
and all agree to wear the same color tie on alternative 
Wednesdays. Excuse me, Mr. Chairman. Or bolo ties or whatever 
we are going to wear.
    You know, you could take piecemeal what we see going on in 
manufacturing in this country, and I see often times a company 
will say either--a large company will tell a supplier either 
you are going to knock out so much per dollar or we are going 
to take it to China, and often times there is no supplier from 
China. It is used as a paper dragon, if I could use that term. 
Many of the suppliers say all right, if you want to buy that 
thing from China, and then there is a pause and a hesitancy.
    What I see going on is a lot of these jobs are going to 
China. A lot of the price to the suppliers is being forced down 
by the manufacturer who threatens that. I don't think you can 
develop a macroeconomic policy when China is used both as a 
source of manufacturing and as a threat of source of 
manufacturing. I just don't see how we can overcome that except 
to make U.S. manufacturing more competitive.
    There are any number of ways that could be done through the 
work we are doing on export controls and things of that nature, 
but I had just asked for a comment. I didn't really ask for a 
solution because I know none is here. I appreciate the comments 
of each of the three of you.
    Mr. Bergsten. Just to say very briefly, I very much agree. 
The reason I have railed rather adamantly against China's 
exchange rate policy is because it contributes very importantly 
to the erosion of United States manufacturing and job base that 
you indicated.
    Certainly we have to do everything we can domestically in 
terms of fiscal policy, as John said, and in terms of tax 
policy to maintain a competitive base here for the 
manufacturing sector and job creation.
    Mr. Manzullo. If I could quote, when Madame Wu Yi was here 
this was April 22, 2004, the U.S.-China Business Council--I 
think, Fred, you were at that meeting--she made the most 
extraordinary statement, so extraordinary I had to record it 
forever in my Blackberry.
    She said China has a ``market based managed unitary 
floating exchange rate.'' I thought I had heard that wrong, and 
then she had actually put out an English translation. Actually 
she spoke in English. I said how could you have a market based 
managed unitary floating exchange rate, but that is their 
definition of their fair currency.
    I thought you would enjoy that, Chairman. Do you like that? 
Thank you.
    Mr. Bergsten. It is a double oxymoron.
    Mr. Manzullo. Well, whatever it is.
    Mr. Faleomavaega. Unfortunately my good friend from 
California has had to leave, but I wanted to just share with 
him a little sense of my perspective about our relationship 
with China.
    China is not a perfect country, but neither is the United 
States or any other country in the world for that matter. And I 
say with a sense of a historical perspective, that at the 
height of the Cold War we had a major adversary almost to the 
brink of using nuclear annihilation if you will.
    But something happened in 1972--to President Nixon's and 
Mr. Kissinger's credit--to have a dialogue with the most 
powerful Communist country, I guess the most populous at that 
time. Mao Zedong and Zhou Enlai, literally changed not only the 
balance of power in the world, but probably in my humble 
opinion made a better world. The fact is that this historical 
event in my humble opinion was due to China's willingness to 
deal with us, a matter of power politics, if you will, but they 
did.
    They were willing to dialogue to the point where we 
eventually established a formal diplomatic relationship. So I 
wanted to share that with my friend from California, but maybe 
next time.
    Gentlemen, I know it has been a long afternoon and 
certainly want to commend all three of you for your most 
eloquent statements and opinions in terms of this very 
important issue.
    I just wanted to ask Dr. Bergsten. I think it was at one 
time China wanted to propose an idea of an international 
currency rather than using the dollar as the basis of all other 
currencies. What do you think of that idea?
    Their concern comes about because of what we have done in 
terms of our own economic recession, which has literally 
affected the entire world economy, including their own, I 
suppose, as being worried about almost a $1 trillion investment 
in the United States. Japan almost a $900 billion investment.
    What do you think of the idea? Why don't we have an 
international currency rather than just relying on the dollar 
or other forms of currency?
    Mr. Bergsten. The IMF currency that I mentioned before, the 
special drawing rights are actually an international currency, 
and, as I said, with the creation of a large new amount in the 
last few weeks it has now become at least a modestly 
significant component of monetary reserves held by national 
governments.
    However, there are no private markets in that currency. 
When it was first created in the early 1970s there were in fact 
some nascent efforts to create a private market, and it was 
used to denominate some contracts and some bonds and things 
like that, but it never caught on.
    It could. It could become used in the private sector if 
individual financial institutions and companies decided they 
wanted to do so, and that would move us toward a more 
internationalized monetary and economic system. As I said 
before, I do not think that is likely.
    The dollar has huge advantages of convenience. The United 
States is by far, for all its recent problems, the deepest and 
broadest financial market in the world, so right through the 
crisis, countries and private actors around the world have 
continued to build their dollar balances.
    In fact, one of the most interesting and some would say 
ironic elements of the crisis, which was of course initially 
caused in the United States, was that the exchange rate of the 
dollar strengthened very sharply throughout the crisis. Why was 
that? In the depths of the problems and fears about economic 
security and financial stability there was a flight to quality 
and the safe haven of U.S. Treasury securities and the dollar.
    Therefore, our interest rates went to virtually zero. Our 
exchange rate strengthened. All that was a result of world 
demand for dollars in the teeth of a crisis largely caused by 
the United States.
    Now, that does indicate that the dollar is not about to go 
away any time soon as a global currency, but if one wanted to 
move incrementally toward a bigger role for an international 
asset, that move has already begun and could be elaborated.
    Mr. Faleomavaega. Mr. Schriver, you indicated earlier that 
you don't think China has earned her stripes of being in 
standing with the United States not necessarily as a co-equal 
economically, but substantively in any other way that it seems 
to be.
    Can you elaborate a little further by saying what does she 
have to do to earn being a co-equal partner with the United 
States that you seemed to have reservations about?
    Mr. Schriver. Well, my own opinion is that it goes beyond 
the size of the economy and the size of the population in terms 
of how you interact with another country.
    Undeniably, I wouldn't question anything that was said 
earlier about the importance of working with China to deal with 
the whole swath of global and regional issues. It is far easier 
to get things done if China is on board and I daresay almost 
impossible in some cases, depending on the issue, to get things 
done if they are an adversary to you on those issues. But I do 
think symbolism matters in international relations and I do 
think tactics in terms of how you approach another country can 
be consequential.
    As I said in my testimony, I think elevating China to this 
position before they have earned it, and I will add a thought 
or two on that, actually can create the wrong kinds of 
incentives or disincentives for them to cooperate 
constructively because they do value that symbolism and that 
status much more than other countries.
    So I have always not pulling back on how we engage China, 
but to ensure that our allies are properly positioned, we are 
doing all the things like to create a United States free trade 
agreement, TIFA talks with Taiwan, a robust security 
declaration with Japan and so forth so that China understands 
we still have close allies and valued allies and we are doing 
things with them, in addition to what we are doing with China.
    I would suggest actually, and maybe this is out of line 
with other panelists and the administration, but I think the 
cupboard is actually very bare on United States-China 
cooperation if you want to really talk about meaningful 
consequential outcomes.
    And I know there is a range of issues people point to. 
North Korea, for example. I think the cupboard is very bare 
there. Proliferation, global climate change. I think we have 
really yet to see truly constructive behavior from China and 
constructive cooperation. On top of that, I think you have some 
pretty irresponsible behavior in the international community, 
and much of that was mentioned earlier, so what I am really 
talking about is tactics and how to get the right kinds of 
outcomes.
    I am not suggesting we shouldn't be engaging in China at a 
high level, nor am I suggesting it is unimportant to do so. It 
is just, how do you get the outcomes you want?
    Mr. Faleomavaega. Mr. Podesta?
    Mr. Podesta. Well, I would probably come down someplace in 
between Mr. Bergsten and Mr. Schriver. I think the G-2 is a bad 
construction. I don't think the Chinese want that. I don't 
think the United States wants it. Maybe it is a kind of glib 
construction. I don't know, Fred.
    But it seems to me that the relationship--we should not be 
sending the signal to the rest of our partners that somehow 
China and the United States are going to kind of control or 
dominate the international architecture on either the economy, 
security or the environment as we have talked about, but we 
need China in all those relationships, in all those arenas, and 
I think that the Strategic and Economic Dialogue opens the door 
to strengthen that relationship, strengthen the partnership.
    I think that a number of the potential outcomes have 
already been mentioned. We have spent a lot of time thinking 
through again the energy and climate aspect. If you take the 
two countries together, there is more than 40 percent CO2 
emissions globally from the United States and China.
    If we both don't move forward, both independently but also 
together, then I think the world faces tremendous challenges 
again across all those dimensions: On the environment with 
respect, but there is also an extreme security dimension to the 
impacts, potential impacts of climate change, and obviously 
there is tremendous economic impacts as well from severe storms 
from the other consequences that have been well noted.
    I think we need particularly in that arena, if you will, we 
need cooperation for sure on the research and development side, 
on the technology deployment side, but we also need diplomatic 
cooperation to ensure that the world moves forward. I think the 
same is true with respect to the security arrangements.
    I actually think that particularly this year the Chinese 
have actually been, and I say this from the perspective of not 
just listening to what I have heard in the United States and in 
Beijing, but actually what I heard in the DPRK. I think that 
the Chinese have surprised to some extent the North Koreans in 
the vigor with which they reacted to the missile launch and to 
the nuclear test.
    So I think they are an important player globally and we 
need to strengthen our relationship, and clearly from the 
economic perspective we could find ourselves in a very 
unfortunate rapid delinkage I suppose in the near term, but 
what we need to do I think is find a way forward that is going 
to work for the United States fundamentally, and that is going 
to require the Dialogue that I think you heard from the first 
panel.
    Mr. Faleomavaega. In fairness to the administration, the 
first meeting was held in July, and I think in fairness to what 
they are trying to do they are trying to sieve through what 
exactly the issues that are relevant and important. And I 
suppose the more we get the results of that dialogue that we 
can probably make a better judgment of how this concept is 
being taken by both countries.
    But I do, as I am sure my colleagues will take a tremendous 
interest in where the S&ED is taking us for the future. And I 
kind of like to follow Dr. Bergsten's idea of being positive 
and constructive, and I think this is what I believe honestly 
in my dialogues with the leaders of China is their desire as 
well.
    I suppose it all comes down to one word, gentleman, and 
that word is trust. Ideologically different, but I don't think 
you will find the Chinese any different in terms of their 
desire to have the same things that we want in life here in our 
society.
    You gentlemen have been so patient and so kind to give us 
your precious time. I sincerely hope that this hearing has been 
good for the public and especially for my colleagues. All your 
statements have been made part of the record. Without 
objection, if you wish to submit any additional materials to be 
made part of the record, I would welcome it.
    Gentlemen, I am sorry I don't have any Kalua pig to give 
you for this afternoon, but maybe on another occasion. Thank 
you so much for coming.
    The hearing is adjourned.
    [Whereupon, at 3:16 p.m., the subcommittee was adjourned.]
                                     

                                     

                            A P P E N D I X

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               Material Submitted for the Hearing Record



                               __________
Additional material submitted by the Honorable Eni F.H. Faleomavaega, a 
     Representative in Congress from American Samoa, and Chairman, 
      Subcommittee on Asia, the Pacific and the Global Environment



                               __________
Additional material submitted by Mr. Fred Bergsten, Director, Peterson 
                 Institute for International Economics




                                 
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