[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



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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 
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                            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.''
      

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FORMATTING REQUIREMENTS:

      
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    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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