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

                          CHINA'S EXCHANGE RATE POLICY

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

                                    HEARING

                                   before the

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

                         ONE HUNDRED ELEVENTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 24, 2010

                                   __________

                               Serial No. 111-45

                                   __________

             Printed for the use of the Committee on Ways and Means

                      U.S. GOVERNMENT PRINTING OFFICE
    63-077                    WASHINGTON : 2011
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                          COMMITTEE ON WAYS AND MEANS

                   SANDER M. LEVIN, Michigan, Acting Chairman

    CHARLES B. RANGEL, New York          DAVE CAMP, Michigan
    FORTNEY PETE STARK, California       WALLY HERGER, California
    JIM MCDERMOTT, Washington            SAM JOHNSON, Texas
    JOHN LEWIS, Georgia                  KEVIN BRADY, Texas
    RICHARD E. NEAL, Massachusetts       PAUL RYAN, Wisconsin
    JOHN S. TANNER, Tennessee            ERIC CANTOR, Virginia
    XAVIER BECERRA, California           JOHN LINDER, Georgia
    LLOYD DOGGETT, Texas                 DEVIN NUNES, California
    EARL POMEROY, North Dakota           PATRICK J. TIBERI, Ohio
    MIKE THOMPSON, California            GINNY BROWN-WAITE, Florida
    JOHN B. LARSON, Connecticut          GEOFF DAVIS, Kentucky
    EARL BLUMENAUER, Oregon              DAVID G. REICHERT, Washington
    RON KIND, Wisconsin                  CHARLES W. BOUSTANY, JR.,
    BILL PASCRELL, JR., New Jersey       Louisiana
    SHELLEY BERKLEY, Nevada              DEAN HELLER, Nevada
    JOSEPH CROWLEY, New York             PETER J. ROSKAM, Illinois
    CHRIS VAN HOLLEN, Maryland
    KENDRICK B. MEEK, Florida
    ALLYSON Y. SCHWARTZ, Pennsylvania
    ARTUR DAVIS, Alabama
    DANNY K. DAVIS, Illinois
    BOB ETHERIDGE, North Carolina
    LINDA T. SANCHEZ, California
    BRIAN HIGGINS, New York
    JOHN A. YARMUTH, Kentucky

                 Janice Mays, Chief Counsel and Staff Director

                       Jon Traub, Minority Staff Director

    Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
    hearing records of the Committee on Ways and Means are also published
    in electronic form. The printed hearing record remains the official
    version. Because electronic submissions are used to prepare both
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    current publication process and should diminish as the process is
    further refined.

                                C O N T E N T S

                                   __________
                                                                       Page

    Advisory of March 24, 2010 announcing the hearing................     2

                                   WITNESSES

    Niall Ferguson, Ph.D., Professor, Harvard University, Cambridge,
      Massachusetts..................................................     9
    C. Fred Bergsten, Ph.D., Director, Peterson Institute for
      International Economics........................................    22
    Clyde V. Prestowitz, Jr., President, The Economic Strategy
      Institute......................................................    30
    Philip I. Levy, Ph.D., Resident Scholar, The American Enterprise
      Institute......................................................    39

                           SUBMISSIONS FOR THE RECORD

    Law Offices of Stewart and Stewart...............................   107
    The Committee to Support U.S. Trade Laws.........................   117
    The Fair Currency Coalition......................................   123
    Honorable Peter J. Visclosky, Representative of the State of
      Indiana........................................................   129
    Jack Davis, President, I Squared R Element Co., Inc..............   130
    Honorable Christopher J. Lee, Representative of the State of New
      York...........................................................   132
    Carnegie Endowment for International Peace.......................   133
    Coalition for a Prosperous America...............................   138
    Bill Bullard, CEO, Ranchers-Cattlemen Action Legal Fund, United
      Stockgrowers of America (R-CALF USA)...........................   143
    Daniel Ikenson, Associate Director, Center for Trade Policy
      Studies, CATO Institute........................................   148
    The Specialty Steel Industry of North America....................   154
    The Copper and Brass Fabricators Council, Inc....................   159
    Erik Autor, Vice President, International Trade Counsel, National
      Retail Federation..............................................   163
    Honorable Michael H. Michaud, Representative of the State of
      Maine..........................................................   172
    Robert Z. Aliber, Professor, University of Chicago...............   174
    American Iron and Steel Institute................................   184

                          CHINA'S EXCHANGE RATE POLICY

                                  ----------

                           WEDNESDAY, MARCH 24, 2010

                 U.S. House of Representatives,
                           Committee on Ways and Means,
                                                        Washington, DC.
        The Committee met, pursuant to notice, at 10:02 a.m. in
    1100 Longworth House Office Building, the Honorable Sander M.
    Levin [chairman of the committee] presiding.
        [The advisory of the hearing follows:]

    HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                      Chairman Levin Announces Hearing on
                          China's Exchange Rate Policy

    March 15, 2010

        Ways and Means Committee Chairman Sander M. Levin today announced a
    full committee hearing on the exchange rate policy of the Government of
    the People's Republic of China, and its impact on the U.S. and global
    economies. The hearing will take place on Wednesday, March 24, 2010, in
    the main Ways and Means Committee hearing room, 1100 Longworth House
    Office Building, beginning at 10:00 a.m.

        In view of the limited time available to hear witnesses, oral
    testimony at this hearing will be heard from invited witnesses only.
    However, any individual or organization not scheduled for an oral
    appearance may submit a written statement for consideration by the
    three Subcommittees and for inclusion in the printed record of the
    hearing.

    FOCUS OF THE HEARING:

        Economists generally agree that the Chinese currency (the
    renminbi--``RMB''--or ``yuan'') is substantially undervalued as a
    result of market intervention by the Government of the People's
    Republic of China. This policy artificially raises the price of imports
    into China and suppresses the price of exports from China. The purpose
    of this hearing is to consider: (1) the immediate and long-term impact
    of China's exchange rate policy on the U.S. and global economic
    recoveries and, more specifically, on U.S. job creation; and (2) steps
    that could be taken to address the issue.

    BACKGROUND:

        Since the global economic crisis began, some prominent economists
    have examined whether China's exchange rate policy contributed to that
    crisis and is continuing to impede progress on economic recovery and
    job creation in the United States and around the world.

        According to some recent estimates, the RMB may be undervalued by
    between 30 and 50 percent against the dollar. While there is a growing
    recognition that China's exchange rate policy is a serious concern and
    impediment to recovery, the issue itself is not new. The United States
    has been pressing China for years to allow the RMB to appreciate.
    President Bush raised the issue with President Hu more than six years
    ago. At that time, the Treasury Department expressed concern when
    China's foreign exchange reserves (accumulated as a result of its
    currency market interventions) rose to $346 billion. Today those
    reserves exceed $2.4 trillion.

        China allowed the RMB to appreciate somewhat beginning in July
    2005, but China has not allowed any appreciation since the summer of
    2008, when the global economic crisis caused China to redouble its
    efforts to stimulate exports. Robert Aliber, Professor Emeritus of
    International Economics and Finance at the University of Chicago,
    recently wrote in the Financial Times that: ``Americans have been
    patient--too patient--in accepting the loss of several million U.S.
    manufacturing jobs because of China's determined pursuit of mindless
    mercantilist policies. The absurdity of the current situation is that
    China's currency protectionism has more of an impact on American
    manufacturing employment than U.S. fiscal policy.''

    DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

        Please Note: Any person(s) and/or organization(s) wishing to submit
    for the hearing record must follow the appropriate link on the hearing
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    select ``Hearings''. Select the hearing for which you would like to
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    FORMATTING REQUIREMENTS:

        The Committee relies on electronic submissions for printing the
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        1. All submissions and supplementary materials must be provided in
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        2. Copies of whole documents submitted as exhibit material will not
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        3. All submissions must include a list of all clients, persons and/
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        The Committee seeks to make its facilities accessible to persons
    with disabilities. If you are in need of special accommodations, please
    call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
    business days notice is requested). Questions with regard to special
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    materials in alternative formats) may be directed to the Committee as
    noted above.

        Note: All Committee advisories and news releases are available on
    the World Wide Web at http://democrats.waysandmeans.house.gov.

        Chairman LEVIN. The Committee will come to order. I
    understand that two of our witnesses need to leave at 12:15. We
    will start on time. Mr. Camp and I will give opening
    statements.
        Anyone else who has a statement, we will issue it into the
    record, and then we will start the testimony asking each of you
    to take the customary five minutes.
        Chairman LEVIN. You will see the clock there. It will be
    helpful if you can condense your statements, which will be
    entered into the record, so that we can have full participation
    before several of you have to leave.
        As stated, I will give an opening statement and then Mr.
    Camp. I think you are ready.
        I guess we will start in the order that you are seated,
    with Dr. Ferguson, Dr. Bergsten, Mr. Prestowitz and Dr. Levy.
        It is with a sense of urgency that this committee is
    holding this hearing in the hopes that with the help of our
    witnesses we can shed light on the problems associated with
    China's foreign exchange rate policy and consider possible
    solutions.
        What seems undisputed, on this much disputed issue, is that
    China has a persistent economic strategy, a policy, a key to
    which is the pegging of its currency to the dollar at an
    undervalued rate.
        Since the mid-1990s, China has clearly pursued an export
    led growth strategy, focusing on addressing its needs, namely
    creating jobs and accumulating vast foreign reserves.
        Central to this export led growth strategy is China's
    policy of keeping its currency substantially undervalued. That
    policy keeps China's exports cheap in the U.S. market and makes
    imports into China substantially more expensive.
        China has combined its cheap currency policy with other
    policies, including most notably Government directed
    investments in its manufacturing sector, which in turn creates
    pressures to keep its currency artificially low in order to get
    rid of excess production by exporting.
        Chinese leaders have argued that these policies are
    necessary for its development, for its massive need to create
    jobs, although in recent years more and more economists are
    questioning that proposition.
        While China has had a clear economic policy, a clear
    strategy, the U.S. on the other hand has not. Why not? One
    reason is that like so many other trade issues, it gets caught
    up in the polarization that grips trade issues, ``free trade''
    versus ``protectionism,'' a grip that I have believed harmful
    and reject.
        An illustration of the futility of the polarization is
    China's argument that any action by the U.S. against China's
    policies or control of its currency would be ``protectionism''
    or would lead to, as stated recently, ``a trade war.''
        The easy polarization has helped handicap agreement on
    whether there is a problem. Increasingly, economists and other
    observers reject this.
        As Martin Wolf, the chief economics commentator for the
    Financial Times has stated, and I quote, ``The policy of
    keeping the exchange rate down is equivalent to an export
    subsidy and tariff at a uniform rate.''
        Last week, the New York Times Editorial Board, another
    somewhat conservative but cautious commentator on these
    economic issues, wrote and I quote ``China's decision to base
    its economic growth on exporting deliberately undervalued goods
    is threatening economies around the world. It is fueling huge
    trade deficits in the U.S. and Europe. Even worse, it is
    crowding out exports from other developing countries,
    threatening their hopes of recovery.''
        These comments are echoed in our trade deficit with China,
    which for the past three years has been over $220 billion
    annually, and is a central driver in our overall trade deficit.
        Some deny that it has serious consequences for American
    working families, but the alarm grows that it does indeed.
        One economist, Paul Krugman, estimates that China's
    exchange rate reduces U.S. employment by 1.4 to 1.5 million
    jobs at a time when the U.S. faces a crisis of unemployment.
        China's currency policy and export led growth policy are
    bad for the rest of the world, and I quote a recent statement
    by the Financial Times, and we can read it as I distribute this
    statement.
        ``While some disagree with the impact of China's policies
    and others view the issues through a lens that says `hands
    off,' is the answer to market disequilibrium and that it is
    best to let things resolve themselves, I think the status quo
    is not sustainable.
        The U.S./China relationship is a vital one for both
    countries. We are increasingly interdependent and there are
    vital policy considerations in addition to economic ones, but
    the China currency issue itself will not go away.''
        There is no easy answer to the problem, as is true with
    other important problems, but the answer is not to deny there
    is a problem.
        It has been difficult, and we know this, to make progress
    bilaterally. At times talks seem to produce some progress, but
    that progress then disappears.
        Some then suggested unilateral action, addressing China's
    currency manipulation under U.S. countervailing duty and anti-
    dumping trade remedy laws. Others have proposed the imposition
    of an additional duty on all imports from China.
        In two weeks, the Obama Administration faces again, as past
    Administrations have, an April 15 deadline to decide whether to
    label China a ``currency manipulator'' in the Department of
    Treasury's semi-annual report.
        The report requirements may well increase discussions about
    the use of multilateral forums to address the currency issue.
    The IMF is the most logical place for these discussions.
    However, to date, the institution has been unable to act
    effectively. Thus, some have suggested using multilateral
    negotiations through the G-20 to address the problem.
        Some have urged the U.S. to bring a case in the WTO, but
    the WTO Articles relating to currency have never been tested.
        Here we are. We are fortunate today to have with us four
    experts on China's exchange rate policy, and they will discuss
    the extent of the problem and alternative responses to address
    the problem.
        I will just mention who you are and then Mr. Camp, you will
    take over, and then starting with Dr. Ferguson, they will
    testify.
        Niall Ferguson is a Professor of History at Harvard
    University and Business Administration at the Harvard Business
    School.
        Fred Bergsten is a veteran of this room, Director of the
    Peterson Institute for International Economics.
        Another frequent visitor, Clyde Prestowitz, President of
    the Economic Strategy Institute, and Philip Levy, who is a
    Resident Fellow at the American Enterprise Institute.
        We welcome all four of you experts and you will start as
    soon as my friend, Mr. Camp, gives his opening statement.
        David.
        [The prepared statement of Mr. Levin follows:]

                   Opening Statement of Chairman Sander Levin

        It is with a sense of urgency that the Committee is holding this
    hearing in the hope that with the help of our witnesses, we can shed
    light on the problems associated with China's foreign exchange rate
    policy and consider possible solutions.
        What seems undisputed on this much disputed issue is that China has
    a persistent economic strategy, a policy, key to which is the pegging
    of its currency to the dollar at an undervalued rate.
        Since the mid-1990s, China has clearly pursued an export-led growth
    strategy focused on addressing its needs--namely, creating jobs and
    accumulating vast foreign reserves.
        Central to this export-led growth strategy is China's policy of
    keeping its currency substantially undervalued. That policy keeps
    China's exports cheap in the U.S. market, and makes imports into China
    substantially more expensive.
        China has combined its cheap currency policy with other policies
    including, most notably, government directed investments in its
    manufacturing sector, which in turn creates pressure to keep its
    currency artificially low in order to get rid of excess production by
    exporting.
        Chinese leaders have argued that these policies are necessary for
    China's development for its massive needs to create jobs--although in
    recent years, more and more economists are questioning that
    proposition.
        While China has had a clear economic policy, a clear strategy, the
    U.S. on the other hand has not.
        Why not?
        One reason is that like so many other trade issues, it gets caught
    up in the polarization that grips trade issues--``free trade'' vs.
    ``protectionism''--a grip that I have believed harmful and reject. An
    illustration of the futility of the polarization is China's argument
    that any action by the U.S. against China's policies of control would
    be ``protectionism'' or would lead to a ``trade war.''
        The easy polarization has helped handicap agreement on whether
    there is a problem.
        Increasingly, economist of various bents and other observers reject
    this.
        As Martin Wolf, the chief economics commentator for the Financial
    Times, has stated, ``[T]he policy of keeping the exchange rate down is
    equivalent to an export subsidy and tariff, at a uniform rate.''
        Last week, the New York Times Editorial Board, another somewhat
    conservative and cautious commentator on these economic issues, wrote
    that ``China's decision to base its economic growth on exporting
    deliberately undervalued goods is threatening economies around the
    world. It is fueling huge trade deficits in the United States and
    Europe. Even worse, it is crowding out exports from other developing
    countries, threatening their hopes of recovery.''
        And these comments are echoed in our trade deficit with China,
    which for the past three years has been over $220 billion annually, and
    is a central driver in our overall trade deficit.
        Some deny that it has serious consequences for America's working
    families. But the alarm grows that it does--Paul Krugman estimates that
    China's exchange rate reduces U.S. employment by 1.4 or 1.5 million
    jobs--at a time the U.S. faces a crisis of unemployment.
        China's currency policy and export-led growth policy are bad for
    the rest of the world as well, as a November 2009 Financial Times
    editorial concluded.
        While some disagree with the impact of China's policies, and others
    view the issue through a lens that says ``hands off'' is the answer to
    market disequilibrium, that it is best to let things resolve
    themselves, I think the status quo is not sustainable.
        The U.S.-China relationship is a vital one for both countries. We
    are increasingly interdependent and there are vital foreign policy
    considerations in addition to economic ones, but the China currency
    issue itself will not go away.
        There is no easy answer to the problem, as is true with other
    important problems, but the answer is not to deny there is a problem.
        It has been difficult to make progress bi-laterally. At times talk
    has seemed to produce some progress, but that progress then disappears.
        Some then suggested unilateral action addressing China's currency
    manipulation under U.S. countervailing duty and antidumping trade
    remedy laws. Others have proposed the imposition of an additional duty
    on all imports from China.
        In two weeks, the Obama Administration faces again, as past
    Administrations have an April 15th deadline, to decide whether to label
    China a currency manipulator in the Department of the Treasury's semi-
    annual report.
        The Report requirements may well increase discussions about the use
    of multilateral fora to address the currency issue. The IMF is the most
    logical place for these discussions; however, to date, the institution
    has been unable to act effectively. Thus, some have suggested using
    multilateral negotiations through the G-20 to address the currency
    problem.
        Some have urged the United States bring a case in the WTO, but the
    WTO articles relating to currency have never been tested.
        We are very fortunate to have with us today four experts on China's
    exchange rate policy and they will discuss the extent of the problem
    and alternative responses to address the problem.
        I now yield to ranking member Congressman Dave Camp for his opening
    statement.
        Mr. CAMP. Thank you very much, Mr. Chairman. I also want to thank
    our witnesses for being here today.
        In the 1970s, China injected itself with economic reforms. Now in
    2010, China appears inflicted by a menacing strain of that reform that
    is either constraining a global economic recovery or worse, capable of
    creating a new economic pandemic.
        While China's emergence as an economic powerhouse has rightly
    grabbed our attention, however, the trends are not new, and there are
    some predictable similarities between China's economy now and Japan's
    in the 1980s.
        It is critical that China address the serious flaws in its economic
    structure, but we should remember that we have seen this before, maybe
    perhaps not on this scale.
        This hearing is about China's currency policy and global
    imbalances. Like the IMF has, I can stipulate that China's currency is
    undervalued, plain and simple. I can also agree with G-20 leaders that
    the world has deep imbalances that must be corrected.
        Let's not lose sight of the fact that there are fundamental
    problems with China's economy and let's not pretend that China's
    intervention in the currency markets by itself is the root cause of our
    ten percent unemployment or of China's ten percent annual GDP growth.
        We will hear today from some pretty bright economists on the
    problems of China's economy, and I look forward to hearing what they
    have to say.
        My view going in is that China's deliberate and dangerous wealth
    transfer from everyday households to inefficient export platform
    factories is standing in the way of the domestic consumption that the
    Chinese and the rest of the world believe the Chinese and the rest of
    the world so desperately need.
        China must introduce global best practices into its banking sector,
    mature its financial markets, better protect intellectual property
    rights, and open more comprehensively to foreign direct investment.
        China also should open its markets much more fully to all goods and
    services, particularly those coming from the United States.
        An increase in the value of the RMB will facilitate some of these
    measures. For others, the much sought currency appreciation will be a
    happy but perhaps unintended offshoot of the broader reform.
        All of these measures will help China move toward liberalizing its
    capital account, which should be the ultimate goal for all of us,
    because none of us can know the true extent of RMB under valuation
    until the currency floats.
        In my view, however, when it comes to China, focusing on the
    currency valuation issue to the exclusion of the others is more likely
    to lead to a collective frustration and to any improvement in the
    health of the critical U.S./Chinese economic relationship.
        With that said, while we should not obsess over the value of the
    RMB, it would be an enormous mistake to give up on addressing it.
        To that end, I believe the Obama Administration should continue to
    address China's currency policy in high level bilateral summits, like
    the strategic and economic dialogue.
        I think the Administration should restart languishing bilateral
    investment treaty negotiations with China and prompt it to make
    progress on the currency and broader issues as part of the BIT process.
        I also believe the Administration should devote time and resources
    toward attempting to establish a robust multilateral process either in
    the G-20, IMF or elsewhere, so that other countries, particularly some
    of China's neighbors in Asia, can bring new points of pressure to bear.
        I would hope that China would commit to this multilateral process
    and participate in good faith. If China wants to be treated as a major
    international player, it has to own up to the responsibilities of that
    status.
        By a similar token, if the United States wants to maintain its
    status as the international leader, then we better make sure that
    whatever we do to address China's currency regime, we do it without
    losing sight of our international commitments and the over arching
    value of the multilateral trading system.
        I am weary of panicky approaches whose support are inconsistent
    with our obligations, but then try to justify those inconsistencies by
    casually asserting that the normally applicable rules just should not
    apply.
        So far, I have focused on China, and let me close by saying I fully
    admit the United States needs to get its own financial house in order.
    China would not be accumulating hordes of currency reserves in U.S.
    Treasuries if the United States stopped racking up debt at the current
    unsustainable pace.
        Thank you, Mr. Chairman, and I yield back.

        [The prepared statement of Mr. Camp follows:]

                 Opening Statement of the Honorable Dave Camp,
                   A Representative of the State of Michigan

        In the 1970s, China injected itself with economic reform. Now, in
    2010, China appears afflicted by a menacing strain of that reform that
    is either constraining a global economic recovery or, worse, capable of
    creating a new economic pandemic. While China's emergence as an
    economic powerhouse has rightly grabbed our attention, however, the
    trends are not new, and there are some predictable similarities between
    China's economy now and Japan's in the 1980s. It is critical that China
    address the serious flaws in its economic structure, but we should
    remember we've seen this before, although perhaps not on this scale.
        This hearing is about China's currency policy and global
    imbalances. Like the IMF has, I can stipulate that China's currency is
    undervalued, plain and simple. I can also agree with G20 leaders that
    the world has steep imbalances that must be corrected. But let's not
    lose sight of the fact that there are fundamental problems with China's
    economy, and let's not pretend that China's intervention in the
    currency markets, by itself, is the root cause of our ten percent
    unemployment or of China's ten percent annual GDP growth.
        We'll hear today from some pretty bright economists on the problems
    with China's economy. I'm looking forward to hearing what they have to
    say. My going-in view is that China's deliberate and dangerous wealth
    transfer from everyday households to inefficient export-platform
    factories is standing in the way of the domestic consumption that the
    Chinese (and the rest of the world) believe the Chinese (and the rest
    of the world) so desperately need. China must introduce global best
    practices into its banking sector, mature its financial markets, better
    protect intellectual property rights, and open more comprehensively to
    foreign direct investment. China also should open its markets much more
    fully to all goods and services, particularly those coming from the
    United States.
        An increase in the value of the RMB will facilitate some of these
    measures. For others, the much-sought currency appreciation will be a
    happy--though perhaps unintended--offshoot of the broader reform. All
    of these measures will help China move toward liberalizing its capital
    account, which should be the ultimate goal for all of us, because none
    of us can know the true extent of RMB undervaluation until the currency
    floats.
        In my view, however, when it comes to China, focusing on the
    currency valuation issue to the exclusion of the others is more likely
    to lead to collective frustration than to any improvement in the health
    of the critical U.S.-Chinese economic relationship. But, that said,
    while we shouldn't obsess over the value of the RMB, it would be an
    enormous mistake to give up on addressing it.
        To that end, I believe the Obama Administration should continue to
    address China's currency policy in high-level bilateral summits, like
    the Strategic and Economic Dialogue. I think the Administration should
    restart languishing Bilateral Investment Treaty negotiations with China
    and prompt it to make progress on the currency and broader issues as
    part of the BIT process. I also believe the Administration should
    devote time and resources toward attempting to establish a robust,
    multilateral process--either in the G20, IMF, or elsewhere--so that
    other countries, particularly some of China's neighbors in Asia, can
    bring new points of pressure to bear. I would hope that China would
    commit to this multilateral process and participate in good faith. If
    China wants to be treated as a major international player, it has to
    own up to the responsibilities of that status.
        By a similar token, if the United States wants to maintain its
    status as the international leader, then we better make sure that
    whatever we do to address China's currency regime, we do it without
    losing sight of our international commitments and the overarching value
    of the multilateral trading system. I am wary of panicked approaches
    whose supporters concede are inconsistent with our obligations, but
    then try to justify those inconsistencies by casually asserting that
    the normally applicable rules just shouldn't apply.
        So far, I've focused on China. Let me close by saying I fully admit
    the United States needs to get its fiscal house in order. China
    wouldn't be accumulating hordes of currency reserves and U.S.
    Treasuries if the United States stopped racking up debt at the current
    unsustainable pace.
        Thank you, Mr. Chairman, I yield back.

        Chairman LEVIN. Thank you very much.
        Dr. Ferguson, take over.

        STATEMENT OF NIALL FERGUSON, PH.D., PROFESSOR, HARVARD
                               UNIVERSITY

        Mr. FERGUSON. Mr. Chairman, Members of the Committee, it is
    a great honor and privilege to be invited to address you. Let
    me begin with a direct question and direct answer. Is China a
    currency manipulator? Yes. Is its currency fundamentally
    misaligned? Yes. In the absence of currency intervention by the
    Chinese monetary authorities, the exchange rate of the renminbi
    would be significantly different, I believe.
        Are we living through the end of what I have called with my
    colleague, Moritz Schularick, ``Chimerica's demise,'' by which
    I mean that fusion between China's and America's economy which
    has been the driving force of global economic growth for the
    past decade?
        How important has the Chinese currency policy been to
    China's growth?
        Mr. Chairman and Members of the Committee, China's gross
    domestic product has increased by a factor of roughly four over
    the past ten years, its exports by a factor of roughly five,
    its current account surplus with the rest of the world by a
    factor of roughly 17, its share of American non-commodity
    imports has gone up from 10 percent to 24 percent, and as you
    are all aware, its share of the U.S. current account deficit
    has also grown.
        In the period of the past ten years when China's exports
    led strategy was really crucial to its growth, there was
    minimal appreciation of the Chinese currency relative to the
    dollar, say about 15 percent between 2005 and 2008.
        For the rest of the decade, China pegged its currency
    firmly to the dollar. Why did it do this? One, because it made
    its exports more competitive in global markets. Two, because it
    allowed it to accumulate reserves as a kind of insurance
    against financial crises. The Chinese did not want to
    experience what much of the rest of Asia experienced in 1997/
    1998.
        Because the Chinese authorities have considerable control
    over their own banking system, this policy did not give rise to
    domestic inflation in the way that standard macroeconomic
    textbooks predicted it would.
        This kind of policy is not supposed to work according to
    economists. I have the advantage of not being an economist. I
    am a historian. I can assure you that it does work as long as
    reserve accumulation is sterilized by the monetary authorities
    and does not translate into domestic inflation.
        It is worth bearing in mind that there is a close link
    between China's currency policy and the massive financial
    crisis that we are still living through and have been since
    August 2007.
        Not only did China's policy squeeze other manufacturing
    exporters but, crucially, it also had the effect of depressing
    long term interest rates in the United States by between 100
    and 200 basis points. Without that stimulus, it is hard to
    believe the housing bubble in the U.S. would have been as large
    as it was in recent years.
        How does China compare with other countries that have
    pursued this kind of strategy in the past? That is one of the
    central points I make in my written testimony.
        The answer is that, compared with West Germany and Japan
    after World War II, this is a very different story. They had
    export led strategies but they did not accumulate reserves on
    this massive scale, nor did they resist pressure to appreciate
    their currencies.
        Between 1960 and 1978, the deutsche mark increased by 60
    percent, the yen appreciated by around 50 percent.
        China's under valuation is very significant today, however
    you measure it, and we all approach this in different ways.
        In our research, Moritz Schularick and I looked at a real
    exchange rate adjusted for unit labor costs, and we found that
    on that measure, China has made a competitive gain on the order
    of 40 percent relative to its trading partners, so that 15
    percent appreciation of the renminbi which we saw in the middle
    of this decade has not really countered that massive benefit
    which China gets from its productivity gains and its very low
    unit labor costs.
        Can this continue is the crucial question. Many people
    believe that it can. The U.S. deficit is back with the first
    green shoots of recovery. China's surplus never went away,
    although it is said it will disappear briefly this month. The
    U.S. is still borrowing, indeed borrowing on a much larger
    scale than ever before in peace time. The Chinese still need
    Americans to buy their goods.
        There are those people that think this strange
    disequilibrium can somehow be resumed in the aftermath of the
    crisis. I think this is wrong for two reasons.
        One, there is some limit to U.S. recovery as long as China
    and the other currencies that shadow China's currency policy
    over-value the dollar.
        Secondly, there is now a sign of dangerous overheating in
    China's economy. It is in their interest also to do something
    about this before they have a bubble, the consequences of which
    would not be confined to China.
        We not only need revaluation of the renminbi, we also need
    a significant change in Chinese policy in order to encourage
    domestic consumption and we urgently need serious fiscal reform
    in the United States to do away with the notion that this
    country can run trillion dollar deficits for the rest of time,
    which is of course the current implication of policy.
        I come in conclusion to what should be done. Yes, I think
    the Treasury should brand China a ``currency manipulator,'' but
    no, I do not think this is a good moment to threaten or impose
    retaliatory tariffs against China, and here is why I think
    that.
        I am an historian. This is not 2005 when Congress last
    threatened tariffs against China. We are in the middle of
    something that very nearly became a Great Depression, and we
    should remember how in the past, in 1930/1931, Congressional
    policy on protectionism deepened that depression, and some
    historians would say made that depression.
        There is a danger not only of a trade war or a tariff war,
    there is also a danger of a currency war, and we are already
    seeing other countries using unorthodox methods to drive their
    fiat currencies down below the dollar.
        Not everybody in Europe is shedding tears over the Greek
    tragedy as it weakens the euro and benefits European
    manufacturers. Brazil, too, is trying to soften its currency.
        Thirdly and crucially, I do not believe renminbi
    appreciation on its own will be of massive benefit to the
    United States. I am very skeptical about Paul Krugman's claims
    that it would significantly reduce unemployment in this
    country.
        The main beneficiaries of ending the renminbi/dollar peg
    would not in fact be the United States, but would be China's
    trade competitors in emerging markets, who are the real losers.
    They are the ones who have been losing market share when you
    look at the structure of U.S. imports.
        In conclusion, I think we also need to be very wary of the
    more aggressive and indeed pugnacious attitude of the Chinese
    today. Not only with respect to Google, but I believe across a
    broad range of issues from Taiwan to Tibet, the Chinese
    authorities are spoiling for a fight, and the United States
    Congress must be very, very careful about giving it to them.
        A best seller on economic policy in recent years in China
    has the title ``Currency Wars'' by Song Hongbing. I believe we
    are on the verge, maybe already in the middle of currency wars,
    and we should be careful that the market reaction to a trade
    war or currency war between the United States and China does
    not exceed in its negative effects the benefits which I believe
    would be minimal of renminbi revaluation. Chimerica is dying,
    but we must ensure that it is an amicable divorce and not a
    currency war.
        Thank you very much.
        [The prepared statement of Mr. Ferguson follows:]

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        Chairman LEVIN. Thank you. That was a Congressional eight
    minutes. Dr. Bergsten, do your best for five minutes if you
    would. There is so much interest here, we have almost a full
    Committee in attendance.
        Dr. Fred Bergsten. Welcome.

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

        Mr. BERGSTEN. Thank you, Mr. Chairman. It is a great
    pleasure to be back.
        I want to make six analytical points and suggest a three-
    part action program for the United States to deal with the
    problem.
        First, the Chinese renminbi is undervalued by about 25
    percent on a trade-weighted basis and about 40 percent against
    the dollar. That is on the basis of at least a dozen studies
    done at my institute and elsewhere. It is well established,
    and, if anything, a conservative number.
        Second, the Chinese authorities buy about $1 billion of
    dollars every day in the exchange markets. They sell their
    local currency and buy dollars. That keeps the price of the
    local currency cheap and undervalued in the exchange markets to
    maintain an artificially strong competitive position.
        It is very important to keep in mind that several of the
    neighboring Asian countries, Hong Kong, Singapore, Taiwan, and
    Malaysia, peg themselves de facto to the RMB. So it is not just
    China that is competitively undervalued, a lot of Asia is as
    well, and when you add the others, it almost doubles the ante
    in terms of global trade effects and impact on the United
    States.
        Third, this competitive undervaluation of the Chinese
    currency and the currencies of its neighbors is a blatant form
    of protectionism. It subsidizes all Chinese exports by the
    amount of the undervaluation, 25 to 40 percent. It equates to a
    tariff of 25 to 40 percent on all of those Asian imports,
    sharply discouraging purchases from other countries.
        It would thus be incorrect, and I echo you, Mr. Chairman,
    to characterize as protectionist a policy response to Chinese
    actions by the U.S. or other countries. Such actions, if
    skillfully chosen and properly carried out, should in fact be
    viewed as anti-protectionist.
        Fourth, China's global current account surplus soared to
    almost $400 billion, exceeded 11 percent of its GDP two years
    ago, an unprecedented imbalance for the world's largest
    exporting country and second largest economy.
        Its surplus, of course, dropped sharply during the
    recession, but the IMF has forecast that the number is going up
    again and by 2014 will exceed $700 billion and actually be
    bigger than the U.S. global current account deficit.
        This problem is not about to go away. If anything, it looks
    like it is getting bigger.
        Fifth, China's exchange rate policy violates all relevant
    international norms. Article IV, Section I (iii) of the IMF
    commits member countries to avoid manipulating exchange rates
    ``in order to prevent effective balance of payment adjustments
    or to gain unfair competitive advantage over other members.''
        Another IMF principle for Fund Surveillance over Exchange
    Rate Policies rules out protracted large-scale intervention in
    one direction in the exchange markets, exactly what China has
    been doing for seven years.
        Article XV of the in the World Trade Organization says:
    ``Contracting parties shall not by exchange action frustrate
    the intent of the provisions of this agreement.''
        China is violating all the international norms and rules.
        Sixth, the competitive undervaluation of the RMB and the
    neighboring Asian currencies does have--and here I differ with
    Niall Ferguson--a substantial impact on the United States.
        We have studied this very carefully. China needs an
    appreciation of 25 to 40 percent even to bring its global
    current account surplus down to 3 percent of its GDP, which
    would be $150 billion to $200 billion--still pretty high.
        The U.S. global current account deficit would be cut by
    somewhere between $100 billion and $150 billion per year. That
    is a lot of money. It is not our whole deficit, which is now on
    the order of $500 billion, but it would take something like a
    quarter to a third off it.
        If we use the number that the president and the
    administration have been using--6,000 jobs per billion dollars
    of exports--the correction in our trading balance due to
    Chinese revaluation would save or create 600,000 to 1.2 million
    U.S. jobs.
        I agree with Niall Ferguson that Paul Krugman's number is a
    little high, but I think the numbers would be very substantial.
        The U.S. economy is not a full employment economy. It has
    10 percent unemployment. There is plenty of un-utilized
    capacity. A lower dollar in response to a higher RMB would not
    mean inflation pressure, it would not mean crowding out; it
    would in fact mean more U.S. jobs, mainly high-paying
    manufacturing jobs.
        Since the budget cost of this action is zero, revaluation
    of the Chinese and other Asian currencies is the most cost-
    effective step that could now be taken to reduce unemployment
    in the United States.
        It certainly would be the most important part of the
    president's national export initiative.
        The case for a substantial increase in the RMB and the
    other Asian currencies is clear and overwhelming.
        I suggest a three-part strategy to achieve it. First, I
    agree with Niall Ferguson that Treasury should absolutely
    designate China as a ``currency manipulator'' in its report on
    April 15.
        The fact that the United States has been unwilling to apply
    the law of the land and call a spade a spade for at least five
    years has undermined any U.S. effort to get an effective
    multilateral approach to the problem.
        I agree with you, Mr. Chairman. The basic thrust has to be
    multilateral, but the U.S. has no credibility seeking that
    unless it is willing to be honest itself, follow the law of the
    land, and designate China a ``manipulator.''
        That would be step one, but, I would also take two major
    new multilateral initiatives. I would go to the IMF and seek
    agreement--it requires a simple majority of the weighted vote--
    to dispatch the managing director to Beijing on what is called
    in IMF parlance ``a special consultation'' or an ``ad hoc
    consultation'' to seek Chinese agreement to move the currency
    up. If they do not do it, then one can go to the Executive
    Board for a vote.
        The third step in the process is to go to the World Trade
    Organization. The United States has the right to seek a dispute
    settlement panel to look at China's obligations under the WTO
    that I cited before and ask for it to be declared a
    ``violator'' under the WTO rules.
        Final point, Mr. Chairman.
        In my experience, and here I differ a little bit with the
    historian, no country that has run large trade surpluses and
    had an undervalued currency has ever been willing to correct
    itself without external pressure. That pressure may come from
    the markets, but the Chinese block that through capital
    controls, or from other governments through political steps.
        President Nixon and John Connally had to break a lot of
    crockery back in 1971 to get the initial revaluation of the
    European currencies and the Japanese yen.
        Jim Baker went to the Plaza Agreement in 1985 on the basis
    of two bills passed by the U.S. House of Representatives that
    would have caused great pain to our trading partners had they
    not agreed to correct the currency imbalances of that period.
        I am afraid it is going to have to be external pressure
    again. The Chinese say they will never move in response to
    external pressure. I suggest they will never move without
    external pressure. If we do it skillfully, multilaterally and
    thoughtfully, we can fashion an effective strategy.
        [The prepared statement of Mr. Bergsten follows:]

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        Chairman LEVIN. Thank you very much.
        Clyde Prestowitz, welcome.

           STATEMENT OF CLYDE V. PRESTOWITZ, JR., PRESIDENT,
                    THE ECONOMIC STRATEGY INSTITUTE

        Mr. PRESTOWITZ. Thank you, Mr. Chairman. It is an honor and
    a pleasure to be back.
        Looking at my ``yes'' to Niall Ferguson and Fred Bergsten,
    yes, China is manipulating its currency. Yes, it is in
    violation of commitments to the IMF, to the World Trade
    Organization, and to the United States. Yes, it is harmful.
        It is harmful to many developing countries. Mexico being
    high on the list. It is also harmful to the United States.
        Fred has pointed out estimates of increased unemployment in
    the U.S. as a result of China's distortion of the markets. I
    would take it even further. I think that we have to look at the
    impact of the currency management not just in terms of trade
    but also in terms of investment.
        Companies make long term investment decisions on where to
    place factories. If they anticipate that a currency is going to
    be chronically undervalued, the tendency, particularly in the
    case of China, is going to be for them to locate their new
    investments in China, so this has an impact not only on
    employment but also on technology development and on the
    placement of capital investments.
        None of this is even in dispute. Virtually all analysts and
    economists who look at these numbers come to pretty much the
    same conclusions.
        I would just add that China is not alone. Japan pioneered
    this development model of export led growth fostered
    particularly by undervalued currencies, and there are a number
    of other countries that are currently participating or pursuing
    the same models.
        Nor is currency undervalue the only element in the model.
    Another very important aspect of it is subsidization of
    investment. For example, companies like Intel that have
    recently invested in China have calculated that because of the
    tax rebates, because of the capital grants and other financial
    investment inducements, they are able to save as much as $1
    billion over the lifetime of an investment.
        The financial investment incentives are twined with the
    currency under valuation to create a powerful incentive to move
    investment, technology and jobs out of the U.S. and out of
    Europe and out of other countries.
        What to do? First, I agree with Fred Bergsten that in my
    experience, which is about as long as his, no country that has
    been running a trade surplus has voluntarily agreed to take
    steps to reduce it unilaterally. It typically takes pressure
    from the outside and I am sure it will also in the case of
    China.
        Certainly, the initial thrust of any U.S. response needs to
    be multilateral. I agree, in fact, I would say in terms of the
    immediate question, should China be labeled a ``currency
    manipulator,'' I do not see how the President can avoid doing
    so. Everybody knows that China is manipulating its currency. If
    the President fudges that, he looks weak and dishonest. I do
    not see how he can really avoid that.
        Having said that, once he does it, where do we go?
    Obviously, first steps are to the IMF, to the WTO, in pursuit
    of persuading China to observe the agreements that it has
    already made in those bodies.
        I think we have to be realistic and anticipate those could
    be very difficult discussions, and they might not go anywhere,
    or they might not go anywhere very quickly.
        I think it is also important to anticipate that China might
    respond by some nominal revaluation of its currency. A
    revaluation of three, four, five percent might be presented as
    flexibility on the part of China, but it would have no real
    significance in terms of the distortion of the markets that we
    are talking about.
        I think we have to think very seriously about not only the
    time period but the size of revaluation or readjustments we are
    talking about, and I think we have to think not only about
    China but we have to think about the other countries that are
    involved in this restructuring, let's say, of globalization.
        A second step here is to think about things that we can do
    that we should be doing ourselves. Mr. Camp talked about steps
    that we need to take domestically to become more competitive. I
    wholeheartedly agree with that.
        I would add one very important point. Let me come back to
    this issue of financial investment incentives.
        Chairman LEVIN. Mr. Prestowitz, if you could do that
    quickly. I have been told we are going to have votes in about
    an hour.
        Mr. PRESTOWITZ. My last point is that the United States can
    and in my view should establish a war chest to match the
    investment incentive offers of countries like China and others
    who are using tax holidays and capital grants to induce
    investments that otherwise would not be made.
        Thank you.
        [The prepared statement of Mr. Prestowitz follows:]

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

       STATEMENT OF PHILIP I. LEVY, PH.D., RESIDENT SCHOLAR, THE
                     AMERICAN ENTERPRISE INSTITUTE

        Mr. LEVY. Thank you, Mr. Chairman. I very much appreciate
    the opportunity to appear here today and I will follow your
    suggestion and offer just a brief summary of my extended
    testimony.
        China's currency undervaluation is both real and
    problematic. The conclusion that the RMB is significantly
    undervalued has been reached by a wide range of analysts,
    including the IMF. The clearest indicator is the dramatic
    accumulation of China's foreign exchange reserves, now
    estimated at roughly $2.4 trillion.
        The most acute problems stemming from this policy appear in
    China itself. For that reason, the situation is vexing but not
    hopeless. It is in China's own interest to move toward an
    appreciated currency.
        China's undervalued exchange rate and mounting reserves
    post serious difficulties for controlling Chinese money supply
    and in turn inflation.
        One analyst recently argued that Chinese policy is
    cultivating a real estate bubble to compare with that of Japan
    before its bust in the 1990s.
        Under its policy, China has been extending large volumes of
    loans to the rest of the world. For a relatively poor country
    that is rapidly getting richer, such lending makes little
    economic sense.
        Of course, the primary concern of this committee and the
    Congress is the effect of Chinese practices on the United
    States. Whether or not Chinese currency practices hurt the U.S.
    is the subject of vigorous debate among economists and,
    apparently, historians as well.
        Even if one is convinced of the harm, we must be very clear
    on the likely costs and benefits of potential remedies. In
    normal times, there are strong arguments that China's exchange
    rate policies do not hurt the United States.
        As you mentioned, however, recent arguments made by Nobel
    laureate, Paul Krugman, make a contrary assertion. He links
    Chinese policies to U.S. unemployment and that linkage relies
    on the argument that the United States is temporarily in
    abnormal times.
        By this, he does not mean a steep recession, which is
    obvious, but a time when monetary policy has become completely
    ineffective, a so-called ``liquidity trap.'' It is during such
    a special situation that an increase in net Chinese demand
    could stimulate the U.S. economy, presumably in a way that the
    Fed is incapable of doing.
        By Krugman's reasoning, this offers a relatively short
    window of time in which a Chinese policy change could have any
    serious effect. Yet, none of the actions that China might
    plausibly undertake are likely to do this.
        A gradual currency appreciation of the sort China followed
    from 2005 to 2008 would not be large enough. A more sudden
    appreciation, on the order of 20 to 30 percent, could jolt the
    Chinese economy so seriously that it would not increase its
    demand for global goods, at least not in the short run.
        What determines whether China will act? There are two major
    sources of legitimacy for the Chinese regime: economic
    performance and nationalism.
        China's reluctance to revalue the renminbi hinges on
    worries of economic performance, specifically the potential
    demise of large numbers of low margin businesses in China's
    export sector.
        Nationalism, in turn, is likely to mean that China would
    not react well to unilateral U.S. pressure.
        In the interest of time, I would like to focus on just one
    major proposal to encourage change, the idea of an unilateral
    tariff on Chinese goods.
        Compared to other proposals, this would impose the most
    immediate economic pain on China, but it would also maximize
    the likelihood of a strong nationalist backlash within China
    that would preclude Chinese compliance with U.S. demands.
        By blatantly violating U.S. commitments under the WTO, a
    unilateral tariff would do lasting damage to the rules based
    multilateral economic system. This could be disastrous for a
    U.S. economy that is globally integrated. Nor should one
    expect, as Dr. Ferguson also said, that the breakdown in
    cooperation relationships would be limited to the narrow
    confines of trade and currency.
        Advocates of a tariff have set aside these long term
    consequences and argue that it could achieve U.S. short term
    goals whether or not China complies. This is highly dubious.
        Such a bilateral measure could be readily circumvented by a
    reordering of world trade flows, effectively reversing the
    shift in trade patterns that accompanied China's recent rise.
        For many of the low cost goods that China produces, its
    chief competitors are not U.S. firms but those in other
    developing nations.
        Even if the United States were to enter lines of business
    from which China had been excluded, such adjustments take time.
    Thus, there are few likely short term benefits to offset the
    potentially staggering long term costs.
        In contrast, multilateral approaches would be neither quick
    nor easy but would offer a better chance of eventual success.
    The United States could work through the WTO, the IMF, the G-7
    or the G-20. By avoiding the antagonisms of bilateral conflict,
    a multilateral approach could make it politically easier for
    China to accede to new rules.
        This is not really a choice between short term benefits and
    long term costs. It is hard to discern a feasible action that
    China might take that would significantly improve U.S.
    employment and output in the short run. It is even harder to
    imagine a scenario in which China would adopt such a policy
    under the unilateral threat of U.S. punishment.
        We would be wise to show patience and pursue an approach
    that relies upon multilateral diplomacy.
        Thank you, Mr. Chairman.
        [The prepared statement of Mr. Levy follows:]

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        Chairman LEVIN. Thank you to each of you for very
    stimulating testimony. I had my crack at the beginning and we
    have an hour, perhaps an hour and a half. Let me go right to
    Mr. Rangel and then Mr. Herger, and we will go down the line.
        Mr. Rangel.
        Mr. RANGEL. Thank you, Mr. Chairman. Let me thank this
    panel. At the end of my short questions, I will be asking you
    what do you suggest that the Congress of the United States do.
        There is no one here that doubts China is a manipulator.
    There is one here that doubts it has had an economic impact on
    the United States of America.
        Is there anyone here who truly believes that the United
    States and the Secretary of Treasury is prepared on April 15 to
    declare China a manipulator? Do you think they will be doing
    it? Do you believe that the United States really has provided
    the leadership to encourage other countries to join in this
    multinational effort?
        Lastly, and I want Dr. Bergsten to respond, I get the
    impression that we are playing good cop and bad cop. Our
    constituents, our business people, get frustrated. They come to
    us. We have to put some control over China's manipulation of
    currency. We get excited. We want to respond and we do, and
    then Treasury goes to China and we could write the press
    release before they leave. China is making an effort, we have
    to do this in a multinational way, they are very sensitive to
    American needs.
        At the same time, nothing really happens. My biggest
    concern is we cannot explain to the unemployed people of
    America why their dreams are shattered. We cannot explain how
    they lost their homes, their savings, tuition for their kids.
    It is tragic.
        It is not an economist or historian problem. It is really a
    threat to the national security and the hopes and dreams of
    Americans to be working.
        My question, as I said earlier, Dr. Bergsten, and I direct
    it to you because we can get a handle on you--if you are right,
    we will thank you, and if you are wrong, we know where to find
    you. You have been with us over all these years.
        What would be your direction to the Congress without
    causing a big conflict with our State Department or Treasury in
    terms of what we should be doing? What is our obligation in
    terms of sending a message to the People's Republic of China?
        Mr. BERGSTEN. My answer to your first premise is that the
    administration has not followed the law of the land, and you
    and the Congress have not really held their feet to the fire
    either.
        Under the Trade Act of 1988, the Treasury is supposed to
    label a manipulator, but the Congress is supposed to monitor
    them very closely. You are given the authority, and I would say
    the responsibility, to bring the Secretary of Treasury before
    you if he does not do what you think he should, hold his feet
    to the fire, ask him why he has not carried out the law of the
    land, and put substantial pressure on him to do so.
        I actually think there is a reasonable chance this time
    that the Treasury will designate China as a manipulator.
        The economic situation has changed. The U.S. is still
    facing high unemployment, but we are now sufficiently out of
    the crisis that an effort with the Chinese would not be viewed
    as wrecking the world economy or even the markets. I think
    people understand and actually expect the United States to
    pursue such an initiative.
        The fact that the Treasury has never been willing to
    designate China has in my view totally undermined its ability
    to engineer a multilateral strategy.
        I think you are quite right, Mr. Rangel and Chairman Levin
    as well, to be cautious for the reasons Niall Ferguson said.
    You do not want to launch a trade war, but as I said, it is the
    Chinese who are being protectionist here. If we can fashion a
    sensible strategy, it would be anti-protectionist.
        Between now and April 15, I hope you will strongly urge the
    Treasury to designate the Chinese and the other four Asian
    countries I mentioned but also simultaneously, and based on the
    promise they are going to do that, go to their allies, the
    Europeans, some of the other emerging markets, and many
    developing countries. We have all made the point that as badly
    as the U.S. is hurt by Chinese misalignment, other countries
    are hurt worse.
        This is a set up for a multilateral alignment. I mentioned
    the earlier cases, 1971 and 1985. Then it was the U.S. versus
    the world. The U.S. had a big deficit. The rest had a surplus.
    We wanted everybody else to revalue.
        Now, it is different. It should be the world against China.
    We should be able to mobilize a coalition of not just the
    willing but of almost everybody to join in the IMF and in the
    WTO to bring multilateral pressure to bear, and if that
    happens, the Chinese cannot ignore or resist it.
        If it becomes multilateral as it should and can be, I
    believe that changes the whole game. I do not believe we can
    launch that multilateral initiative unless we are willing to
    follow the law of the land, call a spade a spade, stand up
    ourselves, and then on that basis, go to the potential allies
    and mobilize the multilateral approach.
        Chairman LEVIN. That is a good place for a period.
        Mr. RANGEL. Thank you.
        Chairman LEVIN. The latest information is we may vote as
    early as 11:45. Let me go down the list. Sometimes we go to the
    Subcommittee chairs. Sometimes we just go down seniority. I
    think we will reach both.
        Mr. Brady, I think you have agreed to go after Mr. Herger,
    and Mr. Tanner, I think we will get to you. Is it all right if
    you wait your turn or do you want to go now?
        Mr. TANNER. That is fine.
        Chairman LEVIN. Next, Mr. Herger. Let's try to do it in
    three minutes. That way, almost all of us will have a chance.
    Then we are going to have a number of votes. If you could try,
    Mr. Herger, in three minutes. That means the four of you, if
    asked, will have to answer briefly.
        Mr. Herger.
        Mr. HERGER. Thank you, Mr. Chairman.
        Dr. Levy, there are a number of questions about whether an
    appreciation of the RMB would reduce U.S. trade deficits with
    China. During the Bush Administration, China allowed the RMB to
    appreciate by about 20 percent; is that correct?
        Mr. LEVY. Yes, sir.
        Mr. HERGER. Yet, China's bilateral trade deficit during
    that time increased from about $202 billion in 2005 to about
    $266 billion in 2008. Given this record, what do you think are
    the other factors that are impacting this trade imbalance and
    do you believe the exchange rate issue is the most pressing
    commercial issue between the United States and China?
        Mr. LEVY. Thank you for the question. I think you are
    entirely correct to suggest there are a number of factors that
    affect bilateral deficits. It is one reason economists
    frequently shy away from them, although obviously they are at
    the center of a lot of the political debate.
        What we have seen in trade flows with Asia is that while
    China's share of U.S. imports has skyrocketed, the share of
    Asian countries, including China, in U.S. imports has held
    fairly constant over an extended period of time.
        It encompasses not only the overall trade balances, which
    are what economists prefer to focus on, but also the shifting
    of trade flows within. This has the implication that we cannot
    be guaranteed that a change in the exchange rate would
    necessarily lead to an improvement in the bilateral balance,
    and as you suggest, that is not what we have seen in recent
    experience.
        On the other question that you posed, is this the most
    important factor, I would argue it is not. As I believe
    Chairman Levin said, there are a whole range of Chinese
    practices that go into stifling consumption and determine the
    overall outcome of Chinese policy.
        I think it would be strongly in the U.S. interest to focus
    on, for example, Chinese financial practices with directed
    credit, which can directly disadvantage U.S. competing firms.
        I think some of these are less sensitive issues where we
    might have greater results.
        Mr. HERGER. We have a number of issues here. It is not just
    this is placing all our apples into one basket here on this
    RMB. There are big associated problems that we have with China
    that we would be well to place our emphasis on as well, not
    just RMB.
        Mr. LEVY. Absolutely. Fixing the one problem does not
    necessarily fix the situation.
        Mr. HERGER. Thank you, Mr. Chairman.
        Chairman LEVIN. Mr. McDermott.
        Mr. MCDERMOTT. Thank you, Mr. Chairman.
        I represent the city that is the closest to China. It was
    the city where the first ship came in with goods after the 1977
    changes. People are deeply involved in my area on this whole
    question of China.
        I am a doctor and I believe in above all things, do no
    harm. The question that is going to come at me in a community
    meeting is going to be if we force the Chinese to revalue the
    renminbi, what happens to us and what happens to them. We know
    there is a real estate bubble in China. We know there is a lot
    going on over there. We know our own problems.
        Tell me how I answer my constituents in non-economic terms
    or economic garble.
        Mr. PRESTOWITZ. I think that is fairly straightforward.
    Right now, several people have used the term that we do not
    want to ``launch a trade war.'' We are in a trade war in a
    sense, as Mr. Bergsten pointed out.
        China has taken strongly protectionist measures. Those are
    distorting trade and distorting the global economy and causing
    damage to our economy, to your constituents, they are reducing
    wages, they are reducing jobs here and in many other countries.
        In a way, as I said, we are kind of in a trade war, and I
    agree with Dr. Levy, just changing the value of the RMB is not
    going to solve all these problems. It may not be a sufficient
    condition but it is a necessary condition to achieve the kind
    of shift that we want, and if it happens, it will have the
    tendency to create more jobs and higher wages for your
    constituents.
        Mr. BERGSTEN. Two points to answer your constituents. One,
    if they revalue, it is going to improve the U.S. competitive
    position and we are going to sell more goods through the Port
    of Seattle to China. That is straightforward and clear.
        Two, if they let the currency strengthen in value, it will
    help hold down inflation pressures in China. That is one of the
    main reasons they should do it now; they are worried about
    rising inflation. They are taking domestic steps against it. A
    rise in the value of their currency would help very much in
    that direction, and it would help head off property bubbles.
        It is win/win. I agree with what several people said.
    Revaluation of their currency is very much in China's own
    interest, particularly right now. They are leading the world
    recovery and are worried about inflation coming back. They can
    have a much more sustained expansion if they include currency
    appreciation as part of an overall re-balancing of their
    strategy.
        Mr. MCDERMOTT. If it is in their best interest, why have
    they not done it?
        Mr. FERGUSON. If I could answer that question, I think ``do
    no harm'' is a very good maxim, and I think we are perhaps in
    danger of underestimating the down side risks here off a
    Chinese revaluation.
        Their economy already has bubble like characteristics, and
    they are walking a very fine line between cooling it down and
    causing a major crisis in their own financial system.
        We must be very careful that we do not have to say to your
    constituents oh, we thought it would help U.S. unemployment but
    we kind of overlooked the possibility that it would tip China
    into a serious slow down or you might find yourself having to
    say to them we thought it would really help but we kind of
    overlooked the fact that the Chinese would stop buying a
    billion dollars of U.S. denominated securities every day and
    our long term interest rates went up and so did your mortgage
    rates.
        We kind of thought it would help if the dollar weakened
    slightly, but we did not realize it would weaken by so much and
    bring back the specter of stagflation.
        There are a lot of things that can go wrong in a global
    economy as complex as the one we have today.
        Back in the 1970s, which Fred Bergsten was talking about
    earlier, it was possible for the United States to say to the
    rest of the world, as John Connolly famously did, our currency,
    your problem.
        Right now, the Chinese are in a position to say that to us.
    That is kind of what they are saying. The reason they are not
    simply doing what we would like them to do is they have good
    reason to be cautious about what could go wrong in their
    economy.
        If something goes wrong in China right now, it is very bad
    news not only for the U.S. but for the whole world because
    China is now the engine of growth.
        Mr. MCDERMOTT. Thank you.
        Chairman LEVIN. Mr. Brady.
        Mr. BRADY. Thank you very much. Mr. Chairman, I would like
    to ask unanimous consent to submit a statement for the record.
        Chairman LEVIN. Without objection.
        [The prepared statement for Mr. Brady follows:]

        [GRAPHIC] [TIFF OMITTED] T3077A.038

        Mr. BRADY. Thank you for holding this hearing, very
    important. I think it is critical that on this issue America
    and Congress especially wield a scalpel, not a sledge hammer,
    in addressing it, to make sure the repercussions do not damage
    our consumers or our businesses.
        I do think along with this issue there are other issues,
    such as intellectual property rights, the directed credit and
    the government procurement that are also concerns in this re-
    balance of trade.
        I am skeptical that levying a 25 percent tax on American
    consumers, raising prices, limiting their choices, will be
    either fair or effective in reducing our trade deficit with
    China, because China imports so many of its components and
    inputs, assembles and sends out, appreciating the RMB simply
    reduces the cost of their inputs, I think it offsets the impact
    on that final product.
        Also, I wish I knew more about the products that the U.S.
    And China exchange with each other. I do not think there is a
    direct match up, to try to achieve a 25 percent reduction that
    Dr. Bergsten talked about, I would be interested from any of
    the panelists about how we match up in those products and
    services, so we can see where we would gain from that. I am
    very interested in that.
        Dr. Levy, on the issue of a new tax, a new duty on imports
    from China, there is debate about how effective that would be
    at the WTO level. If we impose a new duty that does violate our
    WTO commitments, does that help or hurt our ability long or
    short term to get China to live up to its commitments?
        Mr. LEVY. Thank you. I think it would seriously hurt our
    ability to get China to live up to its commitments. China has
    to date been fairly responsive to the findings of WTO dispute
    settlement panels, and if we were to demonstrate that one
    should simply not do that when one feels one has stronger
    concerns, we would be very unlikely to see more compliance.
        Mr. BRADY. Thank you, Dr. Levy. Dr. Bergsten, I am a big
    fan of yours, continue to be, not sure about the 25 percent
    duty.
        You make the point there are a couple of options on the
    multinational, but which one do you think stands the greatest
    chance of success?
        Mr. BERGSTEN. Just to be clear, I did not propose a 25
    percent duty. I was trying to get a currency realignment of 25
    percent.
        Mr. BRADY. Okay. Thank you. We are in good shape. Thank
    you.
        Mr. BERGSTEN. Just to be clear.
        Chairman LEVIN. Which do you prefer?
        Mr. BERGSTEN. We don't have to choose. We go to the IMF and
    to the WTO simultaneously. The point Phil Levy just made is
    correct. We want to go through the WTO rules, as you said.
    There is a clear provision, Article 15 of the WTO, that
    proscribes the kind of practices that China is now carrying
    out.
        Would it be effective to take a case? Would we win the
    case? It has never been tried. We don't know. I am not
    optimistic we would win the case in a legal sense. But using it
    to multilateralize the issue and publicize, name, and shame the
    Chinese for causing the problem ought to be part of our
    strategy.
        Mr. BRADY. Great. Thank you.
        Chairman LEVIN. Mr. Lewis.
        Mr. LEWIS. Thank you, Mr. Chairman. Thank you, Mr.
    Chairman, for holding this hearing. Thank you for being members
    of this panel.
        When we travel to the rest of the world, we hear people
    referring to China as using checkbook diplomacy. Dr. Ferguson
    and I think one or the other of you used a saying ``you should
    call a spade a spade.'' How can we--and what can we do to send
    China the strongest possible message?
        Mr. FERGUSON. Can I suggest that not only should China be
    branded a currency manipulator, but the United States should
    seek the G20 to consider the issue of currency alignments. I am
    not convinced the IMF or the WTO routes will deliver.
        But in the G20, there are many other countries represented
    that are losing out from China's policy. The more unilateral
    U.S. action is, the less effective it will be. If the U.S. acts
    in concert with other countries, including other emerging
    markets, who, as I have said, would be the principal
    beneficiaries of renminbi revaluation, then I think we stand a
    much better chance of success.
        Chairman LEVIN. Dr. Ferguson, do you think Japan is sharing
    lessons learned with China?
        Mr. FERGUSON. Well, the Japanese experience is one that the
    Chinese are very anxious to avoid. One of the arguments of the
    book that I mentioned, ``Currency Wars,'' is that the United
    States used currency policy to push Japan into recession and
    prevent Japan's bid for economic parity.
        The Chinese have learnt the lesson that if they are not
    careful, they will be put in that position, too, where currency
    appreciation will ultimately shift their economy into the
    situation that Japan's was in in the 1990s, that is, to have a
    lost decade or now two decades.
        I think that is one reason the Chinese are so reluctant to
    be seen to move. We had leverage over the West Germans and we
    had leverage over the Japanese that we don't have over the
    Chinese. After all, we had troops on the former losers of World
    War II's soil. This is not the situation with respect to China,
    and the Chinese look at the Japanese experience as one that
    they would very much like to avoid.
        Mr. LEWIS. Thank you, Mr. Chairman.
        Chairman LEVIN. Mr. Ryan.
        Mr. RYAN. Thank you, Chairman.
        Two questions. Dr. Ferguson, this is the first time I have
    met you. I have been reading your stuff lately. Walk us
    through--this is slightly off-topic, but walk us through the
    debt trajectory we are on, what that means for our currency,
    and how that is going to impact just the future sustainability
    of our system in one and a half minutes, if you could. And then
    I want to ask Fred a question.
        Mr. FERGUSON. Well, there are two trajectories that the
    Congressional Budget Office says we could follow, one in which
    current law stays as it is and the debt to GDP ratio rises
    towards 300 percent of GDP, and one in which you ladies and
    gentlemen behave in the way that you traditionally do, in which
    case the debt GDP ratio rises above 700 percent. Now, that is
    not going to happen because that is an impossible number.
        The United States is in a fiscally unsustainable position.
    Justifying this on the basis of Keynesianism is a fraud on the
    public because it conceals the fact that there is a structural
    crisis of public finance. This is of crucial importance to our
    discussion here because the Chinese have acted as a support for
    U.S. bond prices for some years now through their
    interventions.
        The big question which we have to ask ourselves is: Are
    they going to stop doing that? And would they be willing to
    take a hit on their large holdings of U.S. dollar-denominated
    bonds in order to teach us a geopolitical lesson?
        I believe this regime in Beijing is well capable of doing
    that when it feels the time is right. So I think, Congressman,
    you are very right to raise this issue. It is our fiscal
    improvidence that makes us vulnerable geopolitically as well as
    economically, and we would be much better advised to address
    the unsustainable fiscal position than to worry about the
    renminbi/dollar exchange rate.
        Mr. RYAN. That is----
        Mr. PRESTOWITZ. Could I just add, though, that I agree with
    what Dr. Ferguson says. But there is this point that in the
    global economy, there is one major consumer of last resort.
    That is us. So if we are going to get our fiscal house under
    control and increase our savings and become a more fiscally
    stable economy, we need China and some of the other----
        Mr. RYAN. Right. I want to get Fred a question.
        Mr. PRESTOWITZ [continuing]. Economies to play the game
    with us.
        Mr. RYAN. Fred, okay, your projections on jobs from
    revaluation--I am curious. So are you basically saying that a
    one-dollar drop in our current account deficit necessarily
    translates into a one-dollar increase in our exports, and then
    you translate the export to jobs?
        How is that a one-for-one replacement? I am not sure how
    that number adds up, necessarily the linkage between if the
    current account deficit goes down by a buck, it is going to
    necessarily translate into a dollar increase in exports.
        Mr. BERGSTEN. Technically it is an increase in net exports.
    And some of it would be on the import side, although for
    various technical reasons, most of the gain from currency
    realignments actually does come on the export side.
        But since we think there is a roughly equivalent number of
    jobs per billion dollars on the import-substituting side as on
    the exporting side, it works out about the same in terms of
    your job calculations.
        The number that the government is now using--the Secretary
    of Commerce has put it out; the President has used it--is quite
    conservative, I think, about 6,000 jobs per billion dollars of
    exports. That is an average across the whole economy, but I
    think it is a fair one to use.
        Mr. RYAN. All right. Thanks.
        Mr. RANGEL. [Presiding.] The gentleman from Georgia, Mr.
    Tanner, is recognized for five minutes. Tennessee.
        Mr. TANNER. Some people think it is all the same.
        Mr. RANGEL. How soon we forget.
        Mr. TANNER. Thank you. I will be humanely brief, Mr.
    Chairman, because you covered a couple of the questions that I
    had.
        To the panel: Thank you very much. Very enlightening and
    very informative. There was an article in the Wall Street
    Journal this morning about China expecting their first trade
    deficit in six years or so. Would you give us your
    interpretation of how that will affect the current issue under
    discussion here? Thank you.
        Mr. FERGUSON. If I might go first.
        First, this will give the Chinese a political advantage in
    their negotiations with us, and they will point to this as
    evidence that there is no need for significant revaluation.
        Secondly, I think they will probably introduce some minimal
    revaluation just to fob us off.
        The third point, which is really important, is that it
    tells us how China operates as an engine of growth in the wake
    of its very successful stimulus program. Yes, China has been
    growing very rapidly indeed despite the near-Great Depression
    in the western world.
        But it is very interesting to look at who have been the
    beneficiaries of China's increased imports because this is not
    a story of reduced exports; China's exports are at an all-time
    high. It is a story of massively increased imports.
        Unfortunately, it is not the United States that has been
    increasing its exports to China. It has been other Asian
    countries that have been the main beneficiaries--which,
    incidentally, gives China some real geopolitical leverage in
    that region. It is now clearly the engine of growth in Asia
    Pacific, and we are not.
        Mr. BERGSTEN. The simple answer is the number is an
    aberrant. It is because there were holidays in China during the
    February period due to Chinese New Year and such. There were a
    lot of days when work was not being done, moreso than in
    previous years because of the irregularities of the calendar.
    So I don't think it is to be taken seriously.
        They will use it, as Dr. Ferguson said. But I don't think
    we should be put off by that. I mentioned in my testimony that
    the IMF has now done a five-year projection of where Chinese
    trade is likely to go. And their projection, certainly not
    biased against the Chinese, is that the surplus is likely to
    again rise from this year forward and out to 2014; goes back to
    about 8 percent of the Chinese economy, something like $600
    billion; and would, by IMF's judgment, exceed the whole global
    U.S. current account deficit at that point. So on that metric,
    the Chinese trade problem is getting worse, not better.
        Mr. PRESTOWITZ. One other point. We focus a lot on the
    deficit. But, you know, bilateral deficits are not the whole
    point of the subject.
        Mr. BERGSTEN. No. I never mentioned bilateral deficits.
        Mr. PRESTOWITZ. I am not criticizing you, Fred. But the
    point I want to make is that if we had a trade surplus with
    China, this would still be a problem. The real issue here is
    distortion of trade. Let me give you an example.
        Applied Materials recently was in the newspapers: Major
    American company, leader in production of high technology, high
    capital-intensive semiconductor manufacturing equipment, moving
    significant production to China.
        Now, if you look at the thing in terms of comparative
    advantage, the kind of products that Applied Materials makes
    are products in which the United States has a comparative
    advantage. Therefore, you would expect, under normal market
    conditions, we would export those.
        But Applied Materials is moving that production to China.
    That would a problem even if we had a trade surplus with China
    because it would be distorting our trade and reducing our
    competitiveness.
        Chairman LEVIN. [Presiding.] Thank you.
        Mr. Nunes.
        Mr. NUNES. Thank you, Mr. Chairman.
        Dr. Ferguson, I am going to give you all of my three
    minutes, or what is remaining after I ask my question here. But
    you mentioned, in the early 1930s, steps that the Congress at
    that time took to take action on unemployment and joblessness.
        Do you see similar policies occurring now by the Congress?
    And also, do you see this potential trade war or currency war
    with China as contributing more to, you know, increased
    joblessness as we move forward? And I apologize, but we are
    giving you all the time that I have because I know that is a
    long--you could go on for 20 minutes on this. But thank you.
        Mr. FERGUSON. I will be more brief than that, Congressman.
    I think there is a serious danger that we overlook the
    parallels that still exist between our situation and that of
    the early 1930s. This is much more like the early 1930s than
    anything we have lived through.
        And one of the common mistakes I encounter time and again
    in the United States and in Europe is that people look back to
    the 1970s or the 1980s or the 1990s because they simply didn't
    experience the Great Depression.
        The Great Depression had two legs to it. There was a
    moment, in early 1931, when it looked as if it might be okay.
    And then there was another leg down owing to a financial
    crisis, interestingly, in Europe, the famous Creditanstalt Bank
    failure of 1931.
        I don't think we are entirely out of the woods in the sense
    that we could have another leg down in our near-depression or
    Great Recession. Whether you look at the possibility of
    retaliatory tariffs, which are implicit in the bill that is
    now, I believe, before the Senate, or whether you look at the
    more serious problem of currency wars, there is a danger that
    uncoordinated policy action, unilateral moves by countries--not
    only the United States but also European countries--could
    damage international financial confidence just as it is
    beginning to recover.
        And that is my great concern about this discussion. There
    is no question that China is a currency manipulator. But, one,
    we should not go around blaming China for all the unemployment
    that we have seen increase in the last two or three years. I
    think that would be a highly irresponsible and rather insincere
    way of handling this problem. And two, we must be aware of the
    law of unintended consequences.
        Talking about a trade war, pushing the Chinese into
    currency revaluation, in this fragile global economy runs the
    risk, in fact, of killing off the recovery that we are just
    beginning to detect and setting off a chain of competitive
    devaluations.
        In the world of fiat money that we entered after 1971, not
    all currencies can simultaneously weaken. But the way that I
    begin to look at governments around the world talking, they all
    seem to want that same thing. And that is a very dangerous
    situation, in my view. Thank you.
        Mr. NUNES. Thank you.
        Mr. BERGSTEN. Could I add just one point? And it is really
    important.
        Mr. NUNES. I control the time.
        Mr. BERGSTEN. I am sorry.
        Mr. NUNES. For now. Go ahead.
        Mr. BERGSTEN. Well, it is almost a question to Dr.
    Ferguson. I couldn't share more his concern about currency wars
    and competitive undervaluation. But here is the question: What
    is the lesson of the 1930s applied to today?
        China is competitively undervaluing. And, as I mentioned, a
    number of Asian countries have already emulated them and are
    undervaluing as well so they won't lose competitive position
    against China. Other countries, particularly emerging markets,
    are tempted to do the same thing, build up big war chests of
    reserves, follow neo-mercantilist policies.
        So the question is: What is the lesson of the 1930s? Is it
    better to let China and the others who are now following the
    competitive devaluation policies that we rightly say made
    things much worse in the 1930s stand or to take action against
    it before it spreads even further, and more and more countries
    join the parade, and we look back 30 years later and say China
    began a competitive devaluation race the same way the Americans
    did Smoot-Hawley in the 1930s, and it brought back the Great
    Depression?
        Chairman LEVIN. Okay.
        Mr. FERGUSON. May I answer, Mr. Chairman, very briefly?
        Chairman LEVIN. In 15 seconds.
        Mr. FERGUSON. Fifteen seconds? The lesson is that
    competitive devaluation can be the prelude to a geopolitical
    crisis. That is the real lesson of the 1930s. Get this stuff
    wrong and you end up with more than just a trade war on your
    hands.
        Chairman LEVIN. All right. It is good to have some back-
    and-forth, but we do have these time limits.
        Mr. Becerra, you are next.
        Mr. BECERRA. Thank you, Mr. Chairman.
        Gentlemen, thank you for your testimony. To be brief, let
    me just keep it to one question and preface it with a quick
    comment.
        You always see this happening when someone has been the big
    kid on the block for ages. All of a sudden some upstart comes
    around. You don't pay much attention to him. He looks too
    small. He seems to keep up with you a little bit here and
    there, but you can always somehow outrun him, outdo him, beat
    him up.
        All of a sudden the little kid starts to grow up and starts
    to catch up. Sometimes you get a little complacent, and to some
    degree, with our years and years of running deficits, years and
    years of having the opportunity to borrow wherever we wanted,
    years and years of having our industries feel that they were
    always number one, we are still the most innovative place in
    the world--sometimes you can't blame people for closing their
    eyes, sitting on the couch, watching TV a little bit too much.
        I think what is happening is the rest of the world is
    catching up. And China has done a very good job of figuring out
    how to do this, and they are a little bit more patient than
    most. They have been around ten times longer than we have as a
    developed society, and they figure in the last 20, 30 years,
    they have done a lot.
        But that is just a blink of an eye for them. And they are
    very patient and willing to wait another 40, 50 years before
    they overtake us, if they think that is what it will take. So I
    think all we are saying--we are pontificating here. We have got
    to get up, start doing some exercise, stretching, and
    recognizing that the rest of the world is catching up to us.
        But my question is this: Another part of the world that
    has, I think, developed a little bit of flab in the midsection
    is Europe. Europeans are very developed, like us. We are the
    first world portion of the globe.
        Give me your quick comment on how you think the Europeans
    are handling China, and how we can work with the Europeans to
    make sure that we work off some of that midsection to keep up
    with those upstarts that are catching up to us.
        Mr. FERGUSON. Well, the----
        Mr. PRESTOWITZ. The good thing, I think the Europeans are
    actually handling China better than we are, particularly if you
    look at Germany. Germany has a trade surplus with China. And
    until recently, Germany had the biggest--was the biggest
    trading--exporting country in the world.
        And while Europe does have its problems, and clearly the
    Greek financial crisis is causing very serious concern about
    the Euro, and you have kind of a two-speed Europe with Germany
    and the northern countries doing not so badly and the southern
    countries doing poorly--but with regard to China, actually what
    is interesting to me is that Europe, and particularly Germany,
    with strong currency and very high wages, have been able to
    compete with China.
        And I think that is something that we should take very
    seriously because it does indicate that there are other
    elements in this puzzle besides the currency. And they have to
    do with wage and price discipline. They have to do with
    coordination between government, labor, and industry.
        They have to do with investment incentives, with real
    strategies to maintain--for example, in Germany to maintain the
    engineering, the medium- and small-sized high-tech engineering
    companies. Germany has a real competitiveness strategy, and so
    do some of the other European countries. We, I think, could
    learn from them.
        Mr. BECERRA. Thank you. Thank you, Mr. Chairman.
        Chairman LEVIN. I think, under our rules, Mr. Davis is
    next.
        Mr. DAVIS OF ILLINOIS. Thank you, Mr. Chairman.
        Chairman LEVIN. No, no. I am sorry. Mr. Davis from
    Kentucky. I am sorry.
        Mr. DAVIS OF KENTUCKY. The other Mr. Davis.
        Chairman LEVIN. No. Good try, Danny. I am sorry.
        Mr. DAVIS OF KENTUCKY. I appreciate my colleague's
    initiative and creativity. Thank you, Mr. Chairman.
        When I look at the interconnectedness of the relationships
    that we have developed with China, I am sometimes stunned at
    the complexity of the growth, remembering, as an eighth grade
    student, watching President Nixon land in Beijing, and how far
    we have come. And those days, or my years in the military, the
    Military Academy.
        But coming to a conclusion, as I am entering old age, that
    sometimes relationships between two great powers can be kind of
    like a marriage of an old couple. Rarely does forcefulness by
    one spouse or the other tend to produce the desired result. And
    I have a question for Dr. Levy that I would like you to comment
    on, and just use the balance of your time on this.
        In your opening statement, you mentioned about the quiet
    diplomacy that had been undertaken in the last Administration.
    And I think, actually, that was building upon what had happened
    in the prior Administration. So it was, in a sense, a
    bipartisan view of trying to maintain this integrity of the
    American economy and balancing each other's interests.
        We saw a revaluing of the RMB by about 20 percent. I would
    like you, just for the context of us here who don't live in
    your world, if you could simply articulate maybe an example or
    two of other things that relate to the success of that approach
    if we were to stop from an immediate response, and maybe take a
    ten-year approach or a generational approach to this
    relationship.
        Mr. LEVY. Well, thank you, Congressman. As you rightly
    point out, we did have some movement, and it did come from
    quiet diplomacy. And there is a long tradition in U.S.
    diplomacy that reaches across both parties of trying to bring
    China--not only do this bilaterally, but bring China into
    multilateral institutions and get China to agree and to take on
    burdens and responsibilities with the rules.
        One of the things that I think I can--helpfully comment
    upon is the extent to which--it would be misleading to talk
    about China as a country which is sort of enjoying unmitigated
    success and a carefree growth and path to world dominance.
        In fact, I think the Chinese had many, many concerns, and
    that was the subject of a lot of this diplomacy. So it was not
    simply that the U.S. was saying, please, please, please
    appreciate your currency. It was dealing with questions, for
    example: If you have exporters who are used to a fixed exchange
    rate making contracts for delivery forward, what do you do when
    you don't have forward exchange markets?
        And it was these kind of things that our Treasury has
    worked with the Chinese to try and say, we can address those
    concerns. We can work together. There are very practical
    problems that come that one can address and gradually make
    progress and work constructively.
        Mr. DAVIS OF KENTUCKY. Thank you. I yield back, Mr.
    Chairman.
        Mr. DAVIS OF KENTUCKY. Mr. Doggett.
        Mr. DOGGETT. Thank you, Mr. Chairman. And thanks to each of
    you for your testimony.
        Dr. Bergsten, you have outlined a very specific three- or
    four-step plan that you think we should take that involves
    vigorous congressional oversight action with hearings like we
    are taking today, but as I understand it, does not involve any
    legislative action, passing any new laws by the Congress.
        Is it your position that it would be a mistake for Congress
    to take any legislative action in this area?
        Mr. BERGSTEN. I would prefer to try the approach I have
    outlined first because I think Congress can be a lot more
    activist, a lot more aggressive, and a lot more effective
    holding the administration's feet to the fire than you have.
        If that doesn't work, then you may have to legislate to try
    to get that kind of forceful action by the executive branch. It
    is feckless that the executive has not carried out the law when
    the manipulation is so obvious.
        Mr. DOGGETT. Thank you. Short answers: Do our other
    witnesses also agree that now is not the time for congressional
    legislative action?
        Mr. PRESTOWITZ. Yes. I agree with that. But I would say one
    other thing. In addition to labeling China as a currency
    manipulator and pressuring Treasury to do that, I think also
    you in the Congress have special oversight over trade, and you
    have a special relationship with the Office of the U.S. Trade
    Representative.
        And as we have pointed out, China is not only in violation
    of obligations in the IMF, but also possibly in the WTO as
    well. And so it might be worthwhile for the Congress to also
    have a chat with the Trade Rep about what action the Trade Rep
    might take in the WTO.
        Mr. DOGGETT. Dr. Levy, no legislation now?
        Mr. LEVY. Yes. I think there is nothing----
        Mr. DOGGETT. And Dr. Ferguson, I believe that is your
    position also?
        Mr. FERGUSON. That is correct.
        Mr. DOGGETT. Let me ask you: Trying to look at it from the
    effects on the Chinese economy which you have commented on, Dr.
    Ferguson, particularly, what would be the likely effect within
    China of, say, even a 10 or 15 percent revaluation now?
        Mr. FERGUSON. I recently heard a presentation by a Chinese
    economist on this subject, which imagined a revaluation closer
    to 25 percent. In that scenario, revaluation without
    significant changes to, for example, welfare policy designed to
    increase Chinese consumption would have a strongly negative
    effect on the Chinese GDP growth.
        And I took this presentation to be a pretty clear signal of
    what the regime in Beijing thinks. They regard revaluation
    alone as a very dangerous route to go down because it would hit
    their export industry so hard.
        Mr. DOGGETT. What do you believe will be the effect on the
    debt we already have with the Chinese and the debt we are
    likely to have in the future?
        Mr. FERGUSON. This is extremely hard to be sure about. Some
    data suggest that the Chinese have significantly reduced their
    purchases of U.S. Treasuries already in the sense that direct
    purchases are way down. 2009 direct purchases were something
    like 5 percent of new Treasury issuance.
        But they may be making purchases indirectly, and Dr.
    Bergsten and have corresponded on that question. It is very
    hard to know, in other words, quite how they will respond. But
    I want to revert to my earlier point.
        They have a lever that they can turn. It would cost them,
    no question. But they know that if they can gain some political
    advantage from turning that lever, it is there. And I don't
    think we have an equivalent lever.
        Mr. BERGSTEN. Could I just respond to you----
        Chairman LEVIN. Let's go on because we are going to run out
    of time. And hopefully others will ask questions that give you
    a chance to respond. This is so important.
        Mr. Reichert, you are next.
        Mr. REICHERT. Thank you, Mr. Chairman.
        I want to focus on intellectual property rights real quick.
    It is clear that China has tolerated an unacceptably high rate
    of piracy across technologies. U.S. copyright industries
    estimate that 85 to 95 percent of their members' copyrighted
    works sold in China were pirated. Despite repeated promises by
    the Chinese to step up enforcement, this problem persists and
    the dollar losses keep mounting to nearly 9 billion a year.
        If the exchange rate has the effect of lowering these
    costs, the costs of products, isn't it true that, intensified
    by China's theft of intellectual property in making these
    products at issue, will the exchange rate solve--I am sorry--
    will the exchange rate solve the competitiveness concerns for
    America's most innovative industries?
        And the last question: Shouldn't the Administration press
    the Chinese on these issues just as hard as the currency issue?
        Mr. PRESTOWITZ. The exchange rate won't have as big an
    impact on some of the leading edge industries as it might on
    more standard manufacturers or standard service providers. And
    so you are quite right.
        I think that the protection of intellectual property--and
    let me revert to my earlier point. The power of financial
    incentives--tax holidays, capital grants, free land, free
    infrastructure--that is extremely powerful, particularly in
    capital-intensive, high-tech industries. And some U.S. action
    on those fronts is extremely important.
        Again, let me underline my feeling that the U.S. government
    at the national level should put together some program to
    respond to the very aggressive financial incentives coming from
    not only China, but from many other parts of Asia and even
    Europe as well.
        Mr. REICHERT. Thank you. Dr. Ferguson, you have a comment
    on that?
        Mr. FERGUSON. No. It will have no effect. That is to say,
    exchange rate revaluation will have no effect on the problem of
    intellectual piracy, which is rampant, I agree. And yes, we
    should be pressing just as hard on that issue, where it seems
    to me China must be in contravention of international
    obligations.
        Mr. REICHERT. Thank you, Mr. Chairman.
        Chairman LEVIN. Thank you.
        Mr. Kind.
        Mr. KIND. Thank you, Mr. Chairman, and thank you for
    holding this very, very important hearing. I want to thank our
    witnesses for your testimony here today.
        Listen, I think we can all agree that the U.S./China
    relationship going forth in the 21st century is one of the most
    important for global economic stability and just for bilateral
    relations.
        And yet I think that if there is a message to the Chinese
    authorities and the Chinese people here today, it is that we
    recognize that the China today is not the China of 15 years
    ago, or 10, or even five years ago. And as they ascend as a
    true economic global power, and as a member of the WTO, that
    global power comes with global responsibility.
        And yet the patience is waning on our side. When you get
    more reports like the EPI briefing paper that recently came out
    about the job loss, given the current Chinese currency
    situation, and senators like Senators Graham and Schumer citing
    this report, this becomes more and more politically toxic in
    our country.
        And that is why I think the message is we have got to
    continue to work with them to figure out how they can assume
    their true global responsibilities that they have right now.
        Dr. Levy and Dr. Ferguson, let me ask you, and if we have
    time, the others can respond. But it is not unprecedented for
    China to take some revaluation in their currency. From 2005 to
    2008, they had about a 20 percent increase alone.
        What made it possible then, given the conditions then, that
    make it hard for them to do something comparable today? Dr.
    Levy.
        Mr. LEVY. I think that they did recognize the difficulties
    that came with what was really an unwise currency policy. And I
    think there was constructive U.S. diplomacy to help address
    some of the concerns that they had. I think it got stopped when
    they became frightened, during the financial crisis, of what
    they faced.
        The hope is that those pressures to change are still there.
    And they have described this stoppage as a temporary measure.
    The idea would be to work with them constructively to move to a
    more sensible path, which would be in appreciation.
        Mr. KIND. Dr. Ferguson.
        Mr. FERGUSON. The key point is the period of appreciation
    happened during the boom years, from 2005, when they could
    allow a creeping appreciation against a basket of currencies at
    really minimal cost to their exporters. Remember, as I tried to
    point out in my testimony, they were making much bigger gains
    in terms of unit labor costs than the losses that they were
    suffering through this appreciation.
        The second point, I think, is that--and I think this has
    been mentioned before, but let me say it again--it shows you
    how little we gained from that kind of appreciation. I mean,
    the payoffs in terms of the trade deficit were nonexistent. And
    that is why I think we must be careful not to pin too much
    faith on this particular policy.
        You know, a parallel was drawn earlier by Congressman Davis
    to a marriage. This is a kind of marriage, but one of those
    marriages between one partner who does all the saving and the
    other partner who does all the spending.
        And in my experience, those marriages tend to end rather
    unhappily. And I think that that is why this one is on the
    rocks.
        Mr. BERGSTEN. Two quick points, if I may. I disagree with
    Niall and what some others have said that the U.S. got nothing
    out of the earlier Chinese currency appreciation. Our current
    account deficit was cut in half between 2007 and 2009.
        A lot of it was recession, but part of it was improved
    competitive position. The dollar had come down in general and
    particularly against China. So we did get something out of it,
    and we can quantify that.
        I agree with Niall they did it in 2005 for a couple of
    years because they were enjoying a booming economy. That is why
    I argued in my statement now is the time they can resume it.
    Their economy is booming, and growth began already in the first
    half of last year. They have led the world recovery.
        Indeed, they are worried about overheating. They have been
    tightening reserve requirements of the banks. They have been
    cutting back on lending. They are worried about inflation. This
    is a natural step in that context. It would fit with their
    cyclical position. And it would be wholly consistent with the
    timing of their strategy in 2005.
        Chairman LEVIN. All right. Mr. Boustany.
        Mr. BOUSTANY. Thank you, Mr. Chairman.
        Let me start by saying, Dr. Ferguson, I deeply appreciate
    your admonitions that you laid out. But as we go forward, it
    seems to me that the broader problem is how do we get China to
    meet its WTO obligations, and what is our role in all of this,
    and how do we do it without running afoul of our obligations at
    WTO?
        And so as I look at this, I think the problem is bigger and
    much more complicated than just the currency issue. You know,
    in talking to the business community, we hear a lot about
    China's indigenous innovation policy, import substitution
    policy, and rule of law and IP issues as well.
        And of course, we hear the claim from China that they have
    now evolved to more of a middleman in all this, and that their
    export margins have narrowed down, and it has created more and
    more problems for them domestically and socially with regard to
    potential unemployment.
        So I guess my question is: I know we have all talked about
    a combination of bilateral diplomacy as well as multilateral
    approaches. One specific question: If we are going to do this,
    and all of you have outlined the first step being labeling
    China as a currency manipulator--except for you, Dr. Levy--
    should we perhaps, instead of taking that step, go broader and
    look at the other countries, particularly in Asia, that are
    also manipulating their currencies?
        I think, Dr. Bergsten, you have mentioned in your paper,
    your testimony, your written testimony, Hong Kong, Taiwan,
    Singapore, Malaysia. Would that be a more prudential approach
    for Treasury rather than just simply labeling China? And I will
    throw that question out for discussion.
        Mr. BERGSTEN. As I said, those other countries de facto
    track the Chinese currency. And they have also experienced huge
    increases in their reserves; they have manipulated. So it would
    be perfectly legitimate to name them.
        I think it would be much in the U.S. economic interest to
    name them and get them to revalue because when you add them up,
    they almost double the ante in terms of trade flows and
    potential payoff.
        I think it would also be politically good to group China
    with some others and not single out China. You would be
    singling out what I would call a de facto China bloc; you
    wouldn't call it that, but de facto you would do it.
        I don't actually think you have to do it because if the RMB
    rises, the others will go up along with it in practice. But
    again, to be honest, to carry out the law of the land and to
    double the ante from our standpoint, and maybe to make it a
    little easier for China by not singling it, I think it would
    make sense to name the several of them.
        Mr. BOUSTANY. Would this help China solve or face its
    problems? I mean, because, you know, given the evolution of its
    manufacturing to sort of this middleman approach as opposed to
    what has gone before because of their input costs coming from
    these other Asian countries, would it stimulate some of these
    other countries to go to a free float?
        Mr. BERGSTEN. Well, it would. It highlights the fact that
    the Asian countries do have a problem in their exchange rate
    relationships with each other. And here I would bring in Japan.
    They talk about coordinating their exchange rate and their
    monetary policies. They haven't been able to do it. They still
    view themselves as competitors more than cooperators.
        But they really do in fact need to work out an answer to
    that collective goods problem. Korea, for example, let its
    exchange rate go up sharply a couple of years ago and looked
    around and nobody else was there. They wound up on a limb,
    uncompetitive, and came back down.
        I have proposed an Asian Plaza Agreement, where the Asians
    get together and work out a common move in their own currencies
    so as to deal with the global rebalancing problem without
    beggaring each other in the way that otherwise could occur.
        Mr. BOUSTANY. Dr. Levy----
        Chairman LEVIN. Okay. No, your time is up. Okay. So others
    can--Mr. Boustany.
        So let me just--let's review where we are. We are not quite
    sure when the bells will ring. Mr. Neal, you are next under our
    rules, then Mr. Pascrell----
        Mr. CAMP. I have not questioned yet.
        Chairman LEVIN. Oh, all right. That is true. I skipped my
    questions, but you don't have to do that. All right. So Mr.
    Neal and then Mr. Camp, and then Mr. Pascrell, Mr. Crowley, Mr.
    Davis of Illinois, Mr. Etheridge, Ms. Sanchez, and then Ms.
    Schwartz. Oh, yes, Mr. Tiberi is here. All right.
        Mr. TIBERI. Thank you. Thank you, Mr. Chairman.
        Chairman LEVIN. No, no. Wait, wait. You are not--Mr. Neal
    is next. I think, because there are many more Democrats, we are
    going to take two at a time and--let's just go. It is going to
    work out.
        So next is--where are we? Mr. Neal is next, and Mr.
    Pascrell. You are a duo. Okay? Mr. Neal.
        Mr. NEAL. Thank you, Mr. Chairman.
        Chairman LEVIN. Three minutes.
        Mr. NEAL. Thank you. Thank you, Mr. Chairman.
        I guess what I am curious about is I agree with Dr.
    Ferguson that we don't want to ignite a currency war with the
    Chinese. But at the same time, how are the European Union
    members and Canada responding to China's position? I mean, the
    headlines are dominated, even over the last few days, on an
    array of issues. But how are the European Union members and
    Canada reacting?
        Mr. FERGUSON. I can't speak for Canada, but the European
    solution is an inadvertent one. When they had a conscious
    strategy of trying to engage China, when President Sarkozy took
    a hard line, it was a miserable failure.
        But they have solved the problem by having their own
    massive internal crisis. And the crisis of the Eurozone has the
    unintended consequence of weakening the Euro. This is part of
    the currency war story.
        You know, listen to those crocodile tears falling in
    Germany about the dreadful Greeks. In fact, German
    manufacturers are delighted that the Greeks are screwing up
    because it is finally weakening the Euro relative to the dollar
    and other currencies. So that is really the solution that they
    have inadvertently come up with.
        Mr. NEAL. And the pound?
        Mr. FERGUSON. The pound is going to be an even weaker
    currency than the Euro. I would expect you will be shopping in
    London with parity to the dollar any time--some time this year.
        Mr. NEAL. Let me just throw this out to the panel as well.
    How would the Chinese justify their current position?
        Mr. PRESTOWITZ. Well, they justify it on the basis that
    they are a developing country. They have to create I forget how
    many million--20 or 30 million--jobs a year just to absorb the
    population moving from the countryside to the cities.
        Mr. NEAL. To the urban areas?
        Mr. PRESTOWITZ. They have--you know, they are in catch-up
    mode. They also argue that they are only--they are the most
    dynamic economy. They are kind of contributing
    disproportionately to global growth, partly as a consequence of
    this policy.
        And, you know, they make the same arguments that we have
    heard here, that even if they revalued their currency, it
    wouldn't make any difference. They point to our deficits, our
    low saving rates, our declining competitiveness, and basically
    they tell us to pull up our socks.
        And this is very similar to discussion we had in the 1980s
    with Japan. You know, we complained in the 1980s that the
    Japanese were not fulfilling all their obligations,
    undervaluing their currency, and so forth, and they turned
    around and said, no. The problem is not us. It is you. And so
    the Chinese do the same thing.
        Mr. BERGSTEN. But the Chinese have implicitly admitted that
    they have to change their strategy. For six years, President Hu
    Jintao and Premier Wen Jiabao have said repeatedly, we agree
    with the need to rebalance our economic growth strategy, put
    less weight on export expansion and trade surpluses, and put
    more weight on increasing consumer demand and domestic services
    sectors.
        They have adopted it as policy. The move of the exchange
    rate for three years back in 2005 was part and parcel of that.
    Then they got cold feet in the face of the global crisis and
    put a halt to it. But they have essentially adopted a strategy,
    rhetorically at least, of changing the composition of their
    growth, part of which would essentially be a big change in the
    exchange rate.
        So I think they have accepted it implicitly. They have
    stopped it because of the crisis. The head of the central bank
    said recently that it was a temporary thing and they would go
    back to the exchange rate movement at some later point. So it
    is a matter of timing and how fast they go about it.
        One counsel to us would be to be patient and they will get
    to it. But the problem is a lot of crockery is broken in the
    meanwhile. But I think they have implicitly accepted, in the
    G20 and, in the IMF, a need to rebalance their growth strategy,
    which has to include an important currency dimension.
        Mr. NEAL. Thank you. Thank you, Mr. Chairman.
        Chairman LEVIN. Thank you.
        Mr. PASCRELL. Mr. Chairman, we need an Administration that
    for once will stand up to China. This is a very serious problem
    here, not only contributing to the trade deficit with currency
    manipulation, but this is an even bigger problem in terms of
    how our goods have become less competitive.
        And you tell this--you tell this to the computer industry,
    the electronic equipment industry in the United States, and
    parts industries that they will have to continue to wait and be
    destroyed as the textile industry was destroyed in this
    country, and we think we are going to solve all these problems
    diplomatically.
        I don't think that works. 2.4 million American jobs have
    been lost or displaced since China joined the WTO in 2001. As a
    result of the growing trade deficit with China, and in the
    state of New Jersey, we have lost in that period of time 68,800
    jobs. That is outlined very clearly in the EPI briefing case
    which was reported, which was referred to before.
        In my district, the 8th Congressional District alone, we
    lost 6,000 jobs, lost or displaced. Those numbers are
    significant. And when I go back--it will be interesting. When I
    go back to the district, I intend to talk to some business
    people about this who are very concerned that they cannot get
    their product into China, and want to deal with the exports.
        I am going to tell them, well, look. We are going to deal
    with this diplomatically because we don't want to perhaps cause
    a situation that occurred in the 1930s. And you know what
    happened then, wink wink.
        This is an absurdity. We also know that China exports five
    times as much to the United States as we export to China. We
    have leverage over China to ensure equity in our trade
    relations.
        And my question to you, Mr. Ferguson: What can the U.S. do,
    and what measures do you suggest, to protect the nation from
    any possible retribution from China?
        Mr. FERGUSON. Well, I think the first thing is to be very
    careful about assuming that all the lost jobs were lost because
    of Chinese competition. And it would be an even bigger mistake
    to assume that they would all magically come back if China's
    currency were revalued. These would be very misleading
    assumptions.
        I think an important issue that has been raised in our
    discussion this morning is what the best channel to go through
    might be. And we have expressed skepticism about legislative
    action, retaliatory tariffs, for good reason. You may dismiss
    the parallel with the 1930s as somehow irrelevant, but I can
    assure you any further blows to global demand dealt by errors
    of U.S. fiscal, monetary, or trade policy would harm your
    constituents even more severely than they have so far been
    harmed.
        If you had a choice between the IMF and the World Trade
    Organization--and this is really an important point that Dr.
    Bergsten has raised--the World Trade Organization is the better
    institution for two reasons. It is better at dealing with big
    guys, and it is better at dealing with surplus countries.
        Mr. PASCRELL. Let him finish the sentence.
        Chairman LEVIN. So we will follow the rules. Mr. Roskam is
    next. Mr. Tiberi, Mr. Roskam goes first under our procedures,
    and then all of the----
        Mr. PASCRELL. Mr. Chairman.
        Chairman LEVIN. Yes.
        Mr. PASCRELL. Couldn't we have at least allowed the
    gentleman to finish the sentence?
        Chairman LEVIN. I think he finished.
        Mr. FERGUSON. Just.
        Chairman LEVIN. Okay. Finish the sentence. I thought he
    had.
        Mr. FERGUSON. I did finish the sentence. Thank you, Mr.
    Chairman.
        Chairman LEVIN. Okay. So here we go. Mr. Roskam is next,
    and then under our rules Mr. Crowley, Mr. Davis of Illinois,
    Mr. Etheridge, Ms. Sanchez, then Mr. Tiberi and Ms. Schwartz.
    Okay? We are taking the two of you who came in after we
    started.
        So let's go. We may have 20 minutes. It is hard to tell.
    Mr. Crowley--no, Mr. Roskam.
        Mr. ROSKAM. Yes.
        Chairman LEVIN. I guess, Mr. Roskam, you will go next and
    then Mr. Crowley. Excuse me.
        Mr. ROSKAM. Thank you, Mr. Chairman. Mr. Chairman, thank
    you for this hearing. I have really found it insightful and
    helpful.
        Dr. Ferguson, maybe to finish your point from a minute ago,
    could you give your perspective on sort of the WTO, why it is
    that that--the subtlety there vis-a-vis the IMF? And could you
    comment, maybe, on Dr. Bergsten's approach? Would you--Dr.
    Bergsten's approach, if I understood it correctly, was
    designate China as a currency manipulator, and then do sort of
    a special envoy approach with the IMF and the WTO. Could you
    comment on that?
        Mr. FERGUSON. I don't think there is any harm in going to
    the IMF, but I don't think anything much will come of it. The
    IMF is only able to exert leverage over countries that are in
    deficit and in crisis, and they are usually smallish countries.
    And there are plenty of those it has to concern itself with
    right now.
        The difference is that the WTO is a body quite differently
    constituted that is able to impose decisions on the biggest
    countries, including the United States when it has violated its
    WTO obligations. The WTO is the most powerful of all the
    international economic institutions, and that is why it is
    actually our best channel.
        China has gained hugely from WTO membership, as I think was
    pointed out by Congressman Pascrell. But that puts it in a
    position of vulnerability if we pursue the letter of the law in
    the WTO. And that seems to me to be the best course of action
    to take. Is there----
        Mr. BERGSTEN. I agree with that and add one crucial point.
    Under the WTO rules, they ask the IMF for a judgment as to
    whether a currency is undervalued or overvalued. So
    technically, the WTO, given a case by the U.S., will ask the
    IMF for a finding.
        The managing director of the IMF has been going around the
    world saying the RMB is substantially undervalued. So I think
    the right advice would be provided. But that is the key reason
    why the IMF technically has to be involved in the process.
        Mr. FERGUSON. Very briefly, it is not just the currency
    issue that we should take to the WTO. There are many, many
    other issues where you could challenge China's compliance.
        Mr. ROSKAM. Is it a conditioned precedent to move forward
    to name them as a manipulator in April?
        Mr. BERGSTEN. Neither technically nor legally. The U.S. has
    those rights in the WTO or IMF. My point is, and I have heard
    this from people all over the world for five years, that if the
    U.S. is not willing to call a spade a spade itself, why is it
    asking them to stand up and be counted in a coalition of the
    willing?
        Mr. ROSKAM. I understand. Dr. Levy.
        Mr. LEVY. Yes, Congressman. If I may, I would just argue--I
    would take some issue with Dr. Ferguson. There is a serious
    downside risk to taking a case to the WTO, which is: We do not
    have clear language at the WTO delineating exactly which
    conditions are acceptable and which are unacceptable.
        The U.S. could lose either way. If it loses the case, we
    will never hear the end of it from China about how their
    practices have been justified. If we win the case, we will have
    established the precedent of panel overreach, that we are
    counting on dispute settlement panels to essentially legislate
    and come up with rules.
        Mr. ROSKAM. Thank you. I yield back.
        Chairman LEVIN. Thank you.
        Mr. CROWLEY. Thank you, Mr. Chairman.
        I am interested in hearing from all of you, I guess--I
    don't know if there is enough time for that--in terms of what
    your thoughts are if China--if you can carry through, if China
    would begin to or stop the purchasing of Treasury bills, what
    effect that would have in terms of our market share, what the
    reaction would be. I would like to hear, if you can give that.
        Before you answer that, let me just get the other two, both
    Drs. Ferguson and Bergsten. I believe you both have stated that
    you believe that the U.S. should declare China a currency
    manipulator. Is that correct?
        Mr. FERGUSON. [Nodded head up and down.]
        Mr. CROWLEY. What do you believe is the worst case scenario
    if the United States does not do that, and if we take no
    further action? I don't believe either one of you is suggesting
    we take further action in terms of congressionally. But at the
    minimum, you believe the U.S. should declare them manipulators.
        Many economists, and we have heard some reports already,
    have demonstrated the job loss that has taken place here
    because of--as a result of China's currency manipulation. Do
    you believe that that has peaked? Has it leveled off, or do we
    still--or are we still poised to possibly lose millions more
    jobs?
        Mr. BERGSTEN. I think the situation will get worse if we
    did nothing about it. If China maintains the exchange rate
    where it is now, but if the IMF forecast is right, its surplus
    rises again, and in absolute terms gets to about double where
    it is now, that simply means a bigger deficit for us and more
    job loss for us.
        So the worst case, in my analysis, is if we do not label
    China. We still have no credibility in trying to line up a
    multilateral coalition to take the preferred measures.
        Mr. CROWLEY. Dr. Ferguson.
        Mr. FERGUSON. Well, I think if we don't label China a
    currency manipulator, we will look like the wimps of the
    western world. So it is our credibility that will really be the
    biggest problem. And I think that is the most powerful
    argument.
        Your first question is a really important one. I was at a
    conference in London last week at which a leading Chinese
    economist said the following: ``My recommendation is that China
    should buy no more U.S. Treasuries, but should not sell them
    all at once.'' And when he said those words, there was a
    stunned silence in the room.
        That seems to me to indicate that there is a fundamental
    policy change underway, and it will put the pressure on the
    Federal Reserve to start buying Treasuries if China stops
    because otherwise there will be a significant runup, maybe of
    200 basis points, in 10-year yields. And that would really be
    devastating for the U.S. economy at this time of depressed
    demand and very high levels of debt.
        Mr. BERGSTEN. I strongly disagree with that, with all due
    respect. First of all, if they stopped buying Treasuries, like
    the guy said, we could declare victory. That is what we want.
    We want them to let the exchange rate of the renminbi go up.
    The way they keep it from going up is to buy dollars, to buy
    Treasuries.
        Now, what would be the effect on our monetary policy and
    our macro economy? First of all, since our deficit would come
    down, we wouldn't need to borrow as much foreign money. We
    would still have a budget deficit. Maybe it will put some
    healthy pressure on us to reduce our budget deficit.
        But in the meanwhile, other people would have to buy those
    Treasuries. The Fed itself would, at the end of the day, buy
    Treasuries, as it does now, under its zero interest rate and
    quantitative easing policies.
        Krugman has argued strongly that more of that could be done
    without much effect on interest rates. I don't think it would
    go up 200 basis points, but it would go up some. We have done
    analysis on it ourselves. We think maybe 50 basis points. There
    would be some effect on interest rates. There is no free lunch
    in getting these imbalances down, that is for sure.
        Chairman LEVIN. Mr. Davis of Illinois.
        Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.
        You know, I was just thinking that in the community where I
    live, out on the streets there is a saying that if you see a
    sucker, bump his head. And I guess if you translate that, it
    would probably mean if you see opportunity, exploit it or make
    use of it.
        My question really is: How much or what kind of impact do
    we see revaluation of China's currency helping to make up for
    the differential in labor and production costs which are
    enticing American companies and international corporations to
    flock to China in pursuit especially of consumer items?
        And how does the differential in consumption in China
    versus consumption of these goods in the United States impact
    our trade deficit?
        Mr. BERGSTEN. Well, it would help a lot on both counts. On
    the latter, remember, if they revalue the exchange rate, it
    makes imports a lot cheaper. Therefore, they will import more
    from us and everybody else. That is good for consumers in
    China. So if they really want to shift the economy more toward
    consumption, a big revaluation of the exchange rate is very
    helpful.
        In terms of relative labor costs, it also helps. It is not
    going to solve the whole problem; their labor costs will still
    be much lower than ours. But remember, their productivity is
    much lower than ours, too, and what counts is the relationship
    between the two.
        If the RMB were to go up by my full 40 percent, that is
    like reducing the gap between productivity differentials by
    about 40 percent. It wouldn't solve the whole problem, but it
    would help a lot in terms of U.S. competitiveness both in the
    Chinese market and domestically against products coming from
    China.
        Mr. DAVIS OF ILLINOIS. Anyone else?
        Mr. PRESTOWITZ. Well, that is--I agree essentially with
    what Fred said. But I would add this point. That is that much
    of what we sell--much of the dynamic you are talking about, the
    movement of U.S. productive factories and investment abroad, is
    not so much in response--it is partly in response to the
    currency. But it is also very much, as I said earlier, in
    response to these very aggressive investment incentives.
        And I think that is another issue that has to be addressed
    in this context. And I think it is something that can be done
    in the WTO, as Mr. Ferguson suggested.
        Mr. FERGUSON. A very brief remark on this. We would have to
    keep pressing them because they keep making productivity gains.
    And we must realize it is a very important point. This isn't a
    one-time quick fix.
        Even if there was a 40 percent revaluation, it wouldn't be
    long before we would find ourselves once again under pressure
    because the real gains are coming in the unit labor costs, not
    from the currency manipulation.
        Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman.
        Chairman LEVIN. Under our rules, Mr. Camp wants to inquire.
        Mr. CAMP. Thank you very much, Mr. Chairman.
        We hear a lot about China's foreign currency reserves. And
    Dr. Levy, could you help the committee understand the
    ramifications of holding those reserves? And certainly, you
    know, the impact on financial markets, for example, and some
    have argued they may have been the cause of the financial
    crisis, does this push down U.S. interest rates?
        Can they use them to subsidize manufacturing? And are there
    any other countries that, over time, have had either large
    foreign currency reserves or large trade surpluses, and what
    was the impact?
        So if you could just enlighten the committee in that area,
    I would appreciate it.
        Mr. LEVY. Yes. I would be happy to. There is a lot of
    material there.
        I would say I do not believe that China's accumulation of
    foreign currency reserves were a principal cause of the
    financial crisis.
        It does have the effect of increasing the pool of savings
    in the world, and that does have the effect of driving down
    interest rates.
        But I think for the U.S. as a major borrowing nation, in
    general seeing lower interest rates is a good thing. If we
    misuse the funds, that is not really China's fault.
        I think there are common misperceptions that the
    accumulation of reserves is some war chest for China to do
    whatever they please to, as you suggested, subsidize domestic
    manufacturers, is one common. In fact, it is a very limited
    pile of funds, and I would argue that it is in no sense a
    measure of Chinese success, that it is a growing problem for
    the Chinese.
        Were they to try to use these funds domestically, the first
    step would be that they would have to convert--whether it is
    dollars, Euros, yen--they would have to convert them into their
    currency, and that would bid up their currency.
        What they are faced with is as soon as that happens, they
    face a very serious capital loss. They can have a capital loss
    both because of the change in the currency and if interest
    rates were to rise. So it is actually a major point of
    vulnerability for China.
        Were there other points that missed?
        Mr. CAMP. No. I mean, that was generally it. I have a few
    seconds left. Is there anybody else who would care to comment?
        Mr. BERGSTEN. I think the Chinese fully understand that
    they are going to take big capital losses on their dollar
    holdings. They have viewed this all along as an export subsidy,
    which leads to a job subsidy. And they know that at some point,
    they are going to have to pay the price.
        It is actually ironic and almost humorous. The Chinese
    complain about the international value of the dollar and the
    international role of the dollar. But every day, as I
    testified, they are buying another $1 billion worth of dollars
    to keep their currency from rising. They are the ones who are
    propelling the dollar to an ever greater international role,
    all the while complaining about it.
        So I don't have too much sympathy for them. I think the
    thoughtful people there know that they are going to take a
    loss. They don't have to mark it to market, incidentally. It
    doesn't go into their budget. It doesn't go into any
    accounting. They will never have to pay any piper for it. But
    they know that as part of their development strategy, it is a
    price that they judge to be worth paying.
        Mr. CAMP. All right. Thank you. I see my time is expired.
    Thank you, Mr. Chairman.
        Chairman LEVIN. Thank you, Mr. Camp.
        Mr. Etheridge and then Ms. Sanchez.
        Mr. ETHERIDGE. Thank you, Mr. Chairman. Thank you for this
    hearing.
        Let me follow that a bit because if you look at it
    internationally and look at some numbers--I am looking on this
    chart--if you go back to 2000 on the foreign currency exchange
    reserves that China has accumulated, and with the amount of
    trade deficits they have accumulated at the same time, it is
    about a fivefold increase, you know, progressively. It keeps
    going.
        My question is this, though: Because as you look at the
    loss of jobs in this country in that same period and you look
    at how the products we manufacture have gone, and it is also
    having an impact, starting to have an impact, on our
    agricultural exports that we now still have a balance of
    payments in, my big question to you, in a state like mine in
    North Carolina, where we produce pork and poultry and a host of
    manufacturing textiles and technologies, give me some
    understanding of where we are headed with all this stuff.
        We have talked about it in the broader sense. But through
    the international or the large corporate entities, you know,
    they are moving stuff at that level. I want to know what
    happens on Main Street for the guy and gal who is out there
    working every day who is trying to make a living and don't
    understand all this stuff.
        Mr. BERGSTEN. Well, I did a quick calculation based on the
    data your staff aide gave me on North Carolina. And if I
    understand it right, your population is about 3 percent that of
    the country.
        Mr. ETHERIDGE. Correct.
        Mr. BERGSTEN. So if the averages pan out and my numbers are
    right, then eliminating the Chinese currency misalignment would
    create somewhere between 18,000 and 30,000 jobs in North
    Carolina. It actually might be a bit more than that because in
    agriculture and low-productivity industries like textiles, you
    actually get more jobs per billion. So you would probably be
    toward the upper end of that range.
        It would be significant in terms of job creation in a
    trade-oriented state like North Carolina.
        Mr. ETHERIDGE. Mr. Ferguson.
        Mr. FERGUSON. More jobs have been lost in the United States
    by the bursting of the real estate bubble and the loss of jobs
    in housing and construction than have been lost to competition
    with China in the last three years, far more.
        And we must beware of what would be a Pyrrhic victory, in
    Dr. Bergsten's terms. If we got a currency revaluation at the
    price of higher interest rates, then it would be very bad news
    indeed for the people in the housing and construction sectors
    so badly affected and so very far from a sustainable recovery
    right now.
        Mr. ETHERIDGE. So it is not a very simple answer?
        Mr. PRESTOWITZ. But, listen. The course that we are on at
    the moment, if the Chinese don't revalue and we stay on the
    track we are on, is unsustainable. And it results in continued
    erosion of U.S. competitiveness and U.S. standard of living,
    and it is just not a sustainable course.
        Mr. ETHERIDGE. Thank you, Mr. Chairman.
        Chairman LEVIN. Ms. Sanchez, you have the last crack, I
    think. Thank you for your patience.
        Ms. SANCHEZ. Thank you, Mr. Chairman. And I want to thank
    the witnesses for their patience.
        All of you seem to agree that China is artificially holding
    down the value of its currency in order to boost its exports
    and make imports more expensive there. And it is clear that the
    use of the favorable exchange rate policy hurts American farms
    and American workers.
        And estimates that are about 1.5 million jobs are lost due
    to the currency manipulation. And in fact, in the state of
    California, we have lost the greatest number of jobs due to
    unfair Chinese trade policies, and sadly, my district ranks No.
    32 of all 435 congressional districts in job loss due to unfair
    Chinese trade.
        And so, Mr. Chairman, I would ask unanimous consent to be
    able to submit the EPI briefing paper, ``Unfair China Trade
    Costs Local Jobs,'' for the record, if I may. Mr. Chairman?
        Chairman LEVIN. Without objection.
        [This information follows:]

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        Ms. SANCHEZ. Thank you. And in my limited time, I want to
    ask Mr. Prestowitz: In your written testimony, you conclude
    that tax holidays, capital grants, and other incentives used to
    bribe global corporations with regard to the location of their
    plants, labs, and headquarters have to be subject to common WTO
    and IMF discipline.
        And I was wondering if you could elaborate a little bit
    more on that.
        One set of countries is playing a game that I would call
    dirty free trade. The markets are pretty open. I mean, our
    market is pretty open. It is not fully open, but it is pretty
    open. And they are playing in terms of market outcomes being
    acceptable, legitimate outcomes.
        Another set of countries is playing the strategic, export-
    led catch-up game. It is like having two teams. One is playing
    football and one is playing baseball. But the premise of this
    discussion is everybody is playing baseball.
        The truth is, everybody is not playing baseball. And we
    have an incompatibility between these two systems. It manifests
    itself in the currency. It manifests itself in the current
    account imbalances. And it is driven not just by--it is driven
    by a whole set of factors.
        It is driven by one set of countries has strong incentive
    to save. The other set of countries tends to be high
    consumption. One set of countries manages its currency,
    provides export subsidies, offers aggressive investment
    incentives in order to attract investment, to attract
    technology flows, manages limits, restricts/guides entrance
    into its own market. The other set of countries allows pretty
    free entry.
        And we are having a clash of those two systems. And part of
    that clash needs to be addressed, in my view, through the
    currency problem, as we have discussed today. But the currency
    issue won't solve the whole clash.
        Intel, for example--if there is one product in which the
    United States has a classic competitive advantage, it has to be
    Intel's microprocessors. They make 85 percent of the world's
    computer microprocessors, and they make 80 percent of them in
    the United States. So we have a competitive advantage.
        Intel has just announced a major factory in China. Now, is
    the production cost of those microprocessors going to be less
    in China? Not really. It is not labor-intensive. It is capital-
    intensive. And Intel is getting a huge tax and capital package
    in order to induce a location of that factory.
        And that is not the only reason that Intel put the factory
    there, but it is an important one. And it is something that we
    have not been addressing. And yet if we do all the things that
    we think need to be done in terms of currency adjustment, that
    factor alone, that strong financial incentive, will continue to
    tend to draw competitive production facilities out of the U.S.
    into China and into other countries that pursue the same----
        Ms. SANCHEZ. Resulting in job losses here in the United
    States.
        With respect to--and I love the phrase that you used, dirty
    free trade, because I think that says it all. Do you think that
    the same might also be true for labor and environmental laws,
    i.e. countries that have much more lax laws can lure global
    companies to locate there at the cost of those who actually
    have decent labor standards and environmental standards?
        Mr. PRESTOWITZ. Yes. Certainly. That is a serious concern,
    yes.
        Ms. SANCHEZ. And doesn't that then pretty much create this
    race to the bottom of, you know, companies moving to the place
    with the least amount of----
        Mr. PRESTOWITZ. That is certainly a consideration in some
    of the shifts that are made in production locations, moreso in
    some industries than in other industries.
        Ms. SANCHEZ. So, I mean, in essence, if you follow that
    line of reasoning to its logical conclusion, it is not really
    workers that end up benefitting or end up, you know, doing
    better or having increased opportunities over the long run. You
    have people who have the ability to move capital and facilities
    that continue to profit off of----
        And the difficulty is that in the relationship between us
    and China and a number of other developing countries, we are
    playing as if we have deep integration, but we don't have the
    rules and the institutions to facilitate it.
        So if I could just pose one last question? An additional 15
    seconds? It is a yes or no question, so it should be----
        Mr. CAMP. She has been given double the time any other
    member has gotten.
        Ms. SANCHEZ. All right. I will submit in writing, and I
    will yield back.
        Chairman LEVIN. All right. Well, she was last and the most
    patient, so I thought she might have a few extra moments.
        Mr. CAMP. And she did receive them.
        Chairman LEVIN. So thank you very, very much. This has been
    especially illuminating, really. I think you have been able to
    outline what the challenges are, and to outline some
    alternatives, and to help us evaluate them.
        So I think, Mr. Camp, you join in thanking this
    particular--if you want to say a few words?
        Mr. CAMP. Yes. I just want to thank the panel for their
    testimony. It was a very good hearing. And I want to thank the
    chairman for holding it.
        Chairman LEVIN. We stand adjourned. We beat the bell. Thank
    you.
        [Whereupon, at 12:13 p.m., the committee was adjourned.]
        [Submissions for the Record follow:]

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