[Senate Hearing 111-914]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-914

                             RATE POLICIES



                               before the

                              COMMITTEE ON
                          UNITED STATES SENATE


                             SECOND SESSION


                       CHINA ON THE U.S. ECONOMY


                           SEPTEMBER 16, 2010


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               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii              JIM DeMINT, South Carolina
SHERROD BROWN, Ohio                  DAVID VITTER, Louisiana
JON TESTER, Montana                  MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin                 KAY BAILEY HUTCHISON, Texas
MARK R. WARNER, Virginia             JUDD GREGG, New Hampshire

                    Edward Silverman, Staff Director

        William D. Duhnke, Republican Staff Director and Counsel

                   Julie Chon, Senior Policy Adviser

                 William Fields, Legislative Assistant

            Mark Oesterle, Republican Deputy Staff Director

                    Andrew Olmem, Republican Counsel

                 Jeff Wrase, Republican Chief Economist

                       Dawn Ratliff, Chief Clerk

                     Levon Bagramian, Hearing Clerk

                      Brett Hewitt, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor


                            C O N T E N T S


                      THURSDAY, SEPTEMBER 16, 2010


Opening statement of Chairman Dodd...............................     1

Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................     4
    Senator Brown
        Prepared Statement.......................................    40


Timothy F. Geithner, Secretary, Department of the Treasury.......     7
    Prepared statement...........................................    41
    Response to written questions of:
        Senator Brown............................................    61
        Senator Bunning..........................................    62
        Senator Vitter...........................................    62
C. Fred Bergsten, Director, Peterson Institute for International 
  Economics......................................................    32
    Prepared statement...........................................    46
Lynn Brown, Senior Vice President for Sales and Marketing, Hydro 
  Aluminum North America.........................................    34
    Prepared statement...........................................    52
Charles W. Freeman, III, Freeman Chair in China Studies, Center 
  for Strategic and International Studies (CSIS).................    35
    Prepared statement...........................................    54


                             RATE POLICIES


                      THURSDAY, SEPTEMBER 16, 2010

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee convened at 10:07 a.m. in room SD-538, 
Dirksen Senate Office Building, Hon. Christopher J. Dodd, 
Chairman of the Committee, presiding.


    Chairman Dodd. The Committee will come to order. Let me 
welcome all who are gathered in the Committee room this morning 
and welcome my colleagues. We had a very good hearing yesterday 
on covered bonds. It didn't draw an overflow crowd, the subject 
matter, but nonetheless, we had a very good hearing for a 
couple of hours and I welcome back our colleagues who could 
attend yesterday, and those who were not able to be here 
yesterday, I welcome them back to the remaining days before the 
elections in November.
    I am going to make some brief opening comments. I will turn 
to Senator Shelby for any opening comments he may wish to make, 
and then I am going to move directly to the Secretary, and the 
reason is this, the following. One is, one, the Secretary is 
going to appear before the Ways and Means Committee, I believe 
this afternoon at two. We have got a series of votes, I think, 
on the floor at 10:45. The Foreign Relations Committee, which 
several of us here are members of, are voting on the START 
agreement downstairs on that matter, so we may be pulled out 
periodically. So it is going to be a little truncated, this 
process. So normally I would invite my colleagues to make 
opening statements, but in this case, I would ask your 
indulgence to have the two of us make opening statements, go 
right to the Secretary, and then I am going to try and limit 
questions to about 5 minutes apiece and be fairly rigid with 
the gavel when it comes to that so we give everyone a chance to 
be heard on the matter.
    So with that, the hearing, of course, this morning is on 
the Treasury Department's International Economic Exchange Rate 
Policy Report. And again, we are delighted to have our 
witnesses here with us this morning. We have a very good second 
panel, as well, but obviously we want to welcome the Secretary 
of the Treasury back to this Committee as we discuss this 
report, specifically the findings regarding China, our nation's 
largest trading partner. After 19 months working with you, Mr. 
Secretary, and our colleagues here to stabilize and reform the 
financial system, we are all eager to hear about the 
international dimensions of the economic recovery.
    As we meet today, our nation is still recovering from the 
worst economic crisis in almost 80 years. Millions of American 
families have lost their homes to foreclosure. Millions of 
American workers have lost their jobs to market forces way 
beyond their control. And while the United States has weathered 
recessions in the past, many of the jobs lost this time around, 
as all of us painfully have to acknowledge, are just not going 
to come back.
    There are many causes of our current predicament, but there 
is no question that the economic and trade policies of China 
represent clear roadblocks to our recovery, in my view. China 
is the world's single largest economy and is our largest 
trading partner. Both our nations have benefited from this 
relationship over the past few decades. However, too often, a 
disturbing pattern of behavior has emerged, which is deeply 
troubling to the United States and many of our allies around 
the world. This behavior goes way beyond China's well 
documented policy of manipulating currency values.
    We have seen the Chinese government display an inability to 
protect intellectual property rights of foreign innovators, 
from software developers to Hollywood film makers. We have seen 
calculated acquisitions of natural resources in developing 
nations in Africa and elsewhere, including regimes with deeply 
troubling records on human rights. We have seen double-digit 
increases in military spending, even during the 2009 global 
recession. And we have seen violations of international trade 
agreements, unfair dumping of underpriced goods on our shores, 
and anticompetitive subsidies that threaten to undermine the 
development of alternative and green energy here in our own 
    This is an election year. We are all aware of that, 
obviously, in the coming days. And there is no shortage of 
political rhetoric when it comes to this subject matter, as we 
have seen over the years, particularly on the subject of China. 
However, as all of my colleagues know here and others, as well, 
I am not on the ballot this year, and so my views here are not 
designed in any way to reflect some sort of political 
opportunity but rather to express my deep frustrations after 30 
years in this chamber in dealing with the matter before us 
    So what I say here this morning is motivated only by a 
conviction that the time for action has long since come. In 
fact, it is long overdue. For three decades, I have served on 
this Committee and I have listened to every Administration, 
Democrats and Republicans, from Ronald Reagan to the current 
Administration, say virtually the same thing, producing the 
same results. China does basically whatever it wants while we 
grow weaker and they grow stronger.
    And so this Administration, in my view, must be the one who 
takes a stand, and I know the Secretary will lay out some 
things that have occurred and actions they are taking. But we 
clearly need concrete action here. This is not to engage in 
hostile conversation, but to recognize very clearly what this 
is and the dangers posed by a continuing path we are presently 
    For years, the Department has relied on a strategy of 
dialogue which has yielded some meaningful reforms, but clearly 
not enough. It is clearly time for a change in strategy. It is 
time to move beyond just the talking that we have heard and 
action, serious action.
    In the last financial crisis, we learned that what you 
don't know can hurt you. The arcane financial instruments on 
Wall Street can cause real pain for families and businesses who 
have never seen or heard of a credit default swap. The 
interconnection goes beyond the familiar Wall Street-Main 
Street divide. Something as seemingly abstract as Chinese 
currency policy can mean a shuttered factory in Ohio, a 
bankrupt small business in Alabama, or a foreclosed home in 
    The report we are considering today is one important tool 
for the U.S. Government to address this problem. Treasury is 
required to issue this report by law and it requires testimony 
from the Secretary. Yet for years, year after year, 
Administration after Administration, Treasury has declined, in 
my view, to identify currency manipulation and take real formal 
remedial steps.
    The latest report was released in July, following a report 
from China's central bank that it would enhance currency 
flexibility after a 2-year period of preventing appreciation. 
The Treasury Department called this announcement a significant 
development, yet China's currency has appreciated only by 1.5 
percent since the June announcement and analysts estimate that 
the currency remains undervalued at least by 20 percent, and 
many argue much higher than that. Years of maintaining an 
undervalued currency, of course, as we all know, has resulted 
in lost jobs and a widening trade deficit for the American 
    Today's hearing also takes place just days after the 
Japanese government intervened in currency markets for the 
first time in 6 years to halt the appreciation of the yen. It 
is too early, obviously, to tell what effects Japan's action 
will have on U.S. economic interests, but one thing is very 
clear. Unilateral currency intervention by Japan, China, or any 
other nation represents a gap in international cooperation on 
exchange rate policy, a centerpiece of the Bretton Woods 
framework for global economic governance.
    A key objective of the International Monetary Fund is to 
avoid, and I quote, ``competitive exchange depreciation among 
its members.'' Yet the IMF has only sent two special missions 
to investigate exchange rate issues in the last quarter of a 
century, one to Sweden in 1982 and one to Korea 23 years ago, 
in 1987.
    And while we have accomplished much to harmonize financial 
reforms through the G-20 and the recent announcement news out 
of Basel, this venue has also produced limited, very limited 
results in the area of exchange rate policy. More must be 
achieved at the November G-20 meeting in Seoul to strengthen 
domestic and international exchange rate surveillance. We must 
begin to recognize and remedy exchange rate policies that are 
inconsistent with international standards and harm our nation's 
    As I mentioned so many times during the financial reform 
debate, we need to have a system in place to deal with the next 
crisis, which surely will come, not just the previous crisis. 
Balanced global growth and job creation are critical to 
building a sustainable recovery.
    Many of my colleagues on both sides of the proverbial 
political aisle and in both chambers represented in this 
building have put forth proposals to remedy this situation. 
Members of this Committee, Senator Schumer and Senator Brown, 
Senator Bunning on this Committee have pursued legislation for 
years. Senator Shelby and I worked very closely on S. 1677, the 
Currency Reform and Financial Markets Access Act of 2007, which 
passed out of this Committee, I might add, by a vote of 17 to 4 
in August of 2007.
    So I am eager to hear this morning, Mr. Secretary, as I am 
sure my colleagues are, other ideas from not only you but other 
witnesses and plans for the upcoming G-20 summit and learn how 
this Committee and the Congress can help to ensure the 
continued international competitiveness of the United States.
    For years, American workers have not been able to compete 
on a level playing field because of China's policies, and now 
they are struggling to secure jobs in the midst of a slow 
recovery from the global economic crisis. While it is clear 
China's currency is undervalued, the Treasury has been 
reluctant, in my view, to label China a currency manipulator. 
So, Mr. Secretary, with so many Americans out of work, 
struggling to make ends meet, we are eager to hear an 
explanation for this continued reluctance to act. It is 
imperative that this Committee and the American people 
understand what additional tools we clearly need, domestically 
and internationally, to combat these problems.
    And with that, I turn to my colleague from Alabama.


    Senator Shelby. Thank you, Mr. Chairman. There is no 
question in my mind that China manipulates its currency in 
order to subsidize Chinese exports. The only question is, why 
is the Administration protecting China by refusing to designate 
it as a currency manipulator? I think that is the central 
question here.
    Although the previous Administration engaged unsuccessfully 
with China to resolve the resulting imbalances, this 
Administration insists on staying the course, doing the same 
thing. Make no mistake, the Chinese will continue to negotiate 
as long as they deem it in their interest to do so.
    Mr. Chairman, I believe that the time for talking has long 
passed and the time for action has arrived. It is time for this 
Administration to recognize the consequences of China's 
manipulation for American workers and manufacturers and for the 
stability of the global financial and economic system.
    Because the Chinese continue to manipulate their currency, 
thousands of Americans are out of work. American workers can 
compete with any workers in the world, but they should not have 
to compete against foreign firms that receive massive 
    Unfortunately, the U.S. relies heavily on Chinese 
investment, which we use to finance our exploding debt. Our 
deficit last year was more than $1.4 trillion, close to 10 
percent of our GDP. This year's deficit is projected perhaps to 
even be higher. Nevertheless, the acolytes of Keynesian 
economics advocate further doses of economic stimulus funded by 
additional debt which would most likely be purchased by the 
Chinese, further weakening our position overall.
    I ask, what has the recent stimulus produced besides 
further indebtedness to the Chinese? The unemployment rate has 
risen to 9.6 percent from 8.2 since the stimulus was enacted, 
and 3.2 million payroll jobs have been lost. The housing market 
languishes and the consumer and business confidence remain low.
    The Omnibus Trade and Competitiveness Act of 1988 requires, 
as we all know, the Treasury Secretary to report on exchange 
rate policies of major U.S. trading partners, hence the meeting 
today. Under the Act, Treasury must consider whether countries 
manipulate exchange rates for purposes of preventing balance of 
payments adjustments or gaining unfair trade advantage. There 
is clear evidence that whatever China's stated intent might be, 
the result of China's currency manipulation has been an unfair 
advantage to them in international trade.
    Many of my colleagues and I, on behalf of a growing 
population of unemployed U.S. workers, Mr. Secretary, want to 
know why Treasury refuses to act. Mr. Secretary, this 
Administration promised to usher in an era of change, and while 
your ideas of positive change have rarely coincided with mine, 
in this particular instance, a significant change would be 
    I continue to be confused by the Administration's 
reluctance to take action here. Labeling a country as a 
currency manipulator does not require draconian action under 
the Omnibus Trade and Competitiveness Act. The immediate 
repercussions are merely stepped-up monitoring and greater 
vigilance and dialogue.
    In the face of the previous Administration's failure to 
take effective action, Senator Dodd, as he mentioned, and I 
introduced legislation back in 2007 to improve the situation. 
We may have helped marginally. Our legislation tightened the 
definition of currency manipulation, imposed specific 
timeframes and benchmarks, and required the Administration to 
take more stringent actions the longer a country's currency 
manipulation continued. Since this Administration, I believe, 
has decided to follow in the Bush administration's footsteps 
and not take Chinese currency manipulation seriously, it may be 
time for new legislation, Mr. Chairman, to ensure that Treasury 
looks out for American workers and not Chinese creditors.
    It is a bit unclear to me why the Administration has chosen 
to isolate this particular issue from its change agenda. Just 
prior to the recent Presidential election, then-candidate Obama 
wrote the following to textile organizations, and I will quote. 
He said:

        The massive current account surpluses accumulated by China are 
        directly related to its manipulation of its currency value. The 
        result is not good for the United States, not good for the 
        global economy, and likely to create problems in China itself.

    In addition, Secretary Geithner, you, in response to the 
Senate Finance Committee questions during your 2009 
confirmation hearing right here, you stated that President 
Obama, and I quote, ``backed by the conclusions of a broad 
range of economists believes that China is manipulating its 
currency.'' Strong words.
    Unfortunately, once in office, the Administration showed 
that it was all bark and no bite. It is clear that when the 
Administration had to choose between protecting its 
relationship with its Chinese creditors so that it could grow 
the size of government and protecting American workers from 
unfair trade practices, American workers got the short end of 
the stick.
    It is time, I believe, that the Administration reorder its 
priorities. American workers are tired of hearing about 
delicate international dialogue between global ministers at 
resort cities. They want jobs, and they are right. American 
manufacturers are tired of losing out to subsidized foreign 
imports while Treasury continues to buck an overwhelming 
consensus that China manipulates its currency for unfair trade 
advantage. The American public, Mr. Secretary, is tired of 
hearing about the sophisticated nuances of international 
diplomacy. They want the Administration to fulfill its promise 
of balanced international trade and they want us to overcome 
our addiction to Chinese funded debt. American households and 
businesses are acting to restore balances in their finances and 
they expect us to do the same.
    Nevertheless, Federal spending continues to grow 
unrestricted. Unemployment remains, as you know, far too high, 
and the Administration refuses to take actions against a 
currency manipulator. I think it is high time, Mr. Secretary, 
that we see a little bit of that hope and change that you 
promised. Thank you.
    Chairman Dodd. Thank you, Senator Shelby.
    I was thinking as Senator Shelby was speaking of the very 
first hearing that I ever held as Chairman of this Committee in 
January of 2007, when I became Chairman of the Banking 
Committee, was on this very subject matter.
    Senator Shelby. It was.
    Chairman Dodd. Hank Paulson came up to testify. He wasn't 
happy about coming, I recall. I say that respectfully, but he 
wasn't overly enthused about coming up.
    Senator Shelby. You didn't have to subpoena him.
    Chairman Dodd. I didn't have to subpoena him, though. He 
came up----
    Chairman Dodd. He came up, and----
    Senator Shelby. But he knew you would.
    Chairman Dodd. So when I hear my good friend, Dick Shelby, 
talking about--as I said earlier, this is from Administration 
to Administration. I mean, Hank Paulson did a dance at that 
table on manipulation going back to the days of Ronald Reagan 
and that Administration. So this is nothing new. It just goes 
on. Whoever is in town on this issue basically ends up with the 
same script, and there is something clearly needed more than a 
new script. We need some new policies here. It gets worse by 
the hour, and all of us up here, those of you who will be here 
and those of us who are leaving, just hope at some point here 
we are going to see some change. And we are not looking for 
some huge battle with China. But if we continue down this path, 
it poses huge, huge issues for our ability to have any kind of 
meaningful recovery.
    So, Mr. Secretary, the floor is yours.


    Secretary Geithner. Mr. Chairman, Ranking Member Shelby, 
and Members of the Committee, I appreciate the chance to come 
talk to you about China today, and I just want to say at the 
beginning that we share your concerns, we share your 
objectives, and we look forward to discussion about how best we 
can better accomplish those objectives. You are going to find 
us in strong agreement with the concerns you expressed today. 
And, of course, I want to say that your concern about this 
issue is welcome and helpful. It is helpful for people to hear 
it not just from us but from Members of Congress on both sides 
of the aisle, Republicans as well as Democrats.
    We have very significant economic interest in our 
relationship with China. U.S. companies and industries across 
the country, from high-tech to agriculture, are playing a major 
role in supplying China's growing economic needs. U.S. exports 
to China are growing very rapidly, much more rapidly than our 
exports to the rest of the world and supporting a growing 
number of American jobs. The goods we sell to China have risen 
in value about 36 percent so far this year, which is one reason 
why manufacturing has been so much stronger than other parts of 
the American economy in the early stages of this economic 
    Now, we also face very substantial challenges in this 
relationship with China. I am going to provide today a candid 
assessment of where we are making progress, where progress is 
inadequate, where we are going to focus our efforts in the 
months and years ahead, and today, I want to focus in my 
opening remarks on two of those challenges.
    First, on the exchange rate, China took a very important 
step on June 19, earlier this year, when it announced it would 
renew the reform of the exchange rate regime and allow the 
exchange rate to move higher in response to market forces. In 
the roughly 3 months since that announcement, however, the 
Chinese have allowed their currency to appreciate against the 
dollar by only 1.5 percent and the currency has actually 
depreciated against the weighted average of the currencies of 
its trading partners.
    The pace of appreciation since September 2 has accelerated. 
That is welcome. If it were sustained, that would be 
meaningful. But in the period since the initial announcement, 
China has continued to intervene in the exchange markets on a 
very substantial scale to limit the upward pressure of market 
forces on the Chinese currency.
    Now, it is the judgment of the IMF that in view of the very 
limited movement in the Chinese currency, the rapid pace of 
productivity and income growth in China relative to its trading 
partners, the size of its current accounts surplus, and the 
substantial level of ongoing intervention in exchange markets, 
that the Chinese currency is significantly undervalued. We 
share that assessment and we are concerned, as are many of 
China's trading partners, that the pace of appreciation has 
been too slow and the extent of appreciation too limited.
    We will take China's actions into account as we prepare the 
next Foreign Exchange Rate Report, and we are examining the 
important question of what mix of tools, tools available to the 
United States and what multilateral approaches might help 
encourage the Chinese authorities to move more quickly.
    Now, two key factors worth highlighting in evaluating 
progress should be the pace and extent of appreciation and the 
level of ongoing intervention required to slow the rate of 
appreciation. As the exchange rate gets closer to a level that 
reflects underlying economic fundamentals, the level of 
intervention should decline. Continued heavy intervention, in 
contrast, would support the judgment that the currency remains 
    Now, during the last period in which Chinese authorities 
allowed the currency to move higher, it appreciated by about 20 
percent against the dollar and about 13 percent on a real 
trade-weighted basis.
    The second major challenge we face is that China has for a 
long time combined the pursuit of an export-driven growth 
strategy with a very substantial set of protections and 
preferences for its domestic industries, and we are committed 
to working with you to help level the playing field. It is a 
simple principle of fairness to the American firms competing in 
China's markets should have the same rates enjoyed by Chinese 
firms in the American market. We should be able to compete on a 
level playing field in China just as Chinese firms compete on a 
level playing field in the United States.
    China pursues industrial policies to promote what it calls 
indigenous innovation, aimed at promoting innovation and 
technological advancement in China in ways that potentially 
discriminate against U.S. firms, their products, services, and 
technology. The Chinese government still plays a very, very 
large direct role in the economy through state-owned 
enterprises and in the allocation of credit and the provision 
of other inputs that are important to production. China has yet 
to sign onto the disciplines provided by the World Trade 
Organization, the WTO's government procurement arrangement, and 
even with recent improvements in Chinese law designed to 
protect intellectual property, piracy and theft of intellectual 
property are widespread.
    We are very concerned about the negative impact of these 
policies on our economic interests and we are pursuing a 
carefully designed targeted approach to address these problems. 
Last year, we won two WTO cases against China related to 
intellectual property rights and settled a third. We took 
action in 2009 under Section 421, the first time ever by any 
Administration, to address a surge in Chinese imports in a 
particular sector. Our antidumping and countervailing duty 
regimes provide very substantial protections for U.S. companies 
against unfair trade practices, and we will continue to enforce 
those laws to safeguard the rights of America's firms and 
    Yesterday, Ambassador Kirk announced the filing of two new 
WTO cases against China, one involving discrimination by China 
against suppliers of electronic payment services and the second 
challenging China's imposition of CVD, countervailing duties, 
on U.S. exports of a high-tech steel product known as grain-
oriented electrical steel.
    We are in the process of reviewing carefully the evidence 
presented in the Section 301 petition filed by the United 
Steelworkers Union challenging a wide range of Chinese policies 
in the renewable energy sector. We are exploring ways to 
encourage a substantial improvement in intellectual property 
protection in China.
    Now, we are pursuing these important objectives at the 
highest levels of the U.S. Government with a careful assessment 
of priorities led by the White House using all available tools 
that are consistent with our WTO obligations. We are making 
some progress. We welcome the recent assurances by the Chinese 
government, including Premier Wang's statement this week that 
China will afford national treatment to U.S. companies 
operating in China, but we want to see that commitment to a 
level playing field extended to U.S. exporters that sell to 
China from the United States. This is the basic premise of the 
multilateral trading system from which China and the United 
States have benefited so greatly.
    Now, Mr. Chairman, we welcome your attention to these 
issues and we will work closely with this Committee and with 
your colleagues in both Houses of Congress to find ways to best 
advance and protect our economic interests in this important 
    China has a very substantial stake in continued access to 
the U.S. market and China has benefited greatly from the rules 
and protections that underpin the multilateral trading system, 
and we, the United States, have a very strong interest in a 
more level playing field in the Chinese market so that U.S. 
businesses and U.S. workers do not face unfair trading 
practices. We need a more balanced economic relationship. This 
is imperative for us, but it is important for China, as well.
    Thank you very much.
    Chairman Dodd. Well, thank you very much, Mr. Secretary, 
and I appreciate the comprehensiveness of your statement and 
again recognize some of the steps that have been taken, and we 
welcome those.
    Let me, if I can, I will ask the Clerk here to keep this 
clock on that 5 minutes, so we can move through as many members 
as we can with their questions.
    Mr. Secretary, I mentioned in my opening comments about how 
the G-20 actually played a pretty important role in the 
financial reform area. They outlined in April, I believe it 
was, of 2008 some 20 principles that they thought ought to be 
pursued in the financial regulatory structure. While we did not 
write a bill written by the G-20, candidly, we did follow those 
principles to a large extent.
    And I notice with some interest that the last couple of 
days the European Union has established some principles dealing 
with derivatives that virtually take almost every dotted I and 
crossed T of our work in the derivatives section on this bill 
and copied it--a form of compliment, I suppose, to the efforts 
here but also the harmonization that has been so critically 
    Yet, the global economic issues, such as exchange rate 
reform, we have not seen the same degree of progress achieved 
through the G-20.
    And obviously that meeting coming up in November in Seoul, 
what do you intend? What does the Administration intend to try 
and do on this issue at the G-20?
    Secretary Geithner. A very important question, and you are 
right to highlight the very important role that the G-20 played 
in advancing the broader international reform agenda, and the 
broad principles that they agreed in April of 2009 were largely 
embodied in the financial reform bill that this Congress passed 
in July.
    The focus of these discussions at the G-20 in Korea will be 
on ways to help strengthen and reinforce this global recovery, 
and how to make sure that on the financial reform agenda we 
have a strong set of global standards in place, so that again 
we have a level playing field that applies to all the global 
institutions, financial institutions that compete in global 
    Now in the broader discussion about the economic recovery, 
we expect there to be a significant focus of attention, as 
there has been in these previous meetings, on China's exchange 
rate policies because this is a multi-lateral issue. It is 
about the broad interests of all of China's trading partners in 
a level playing field. There is very broad multilateral concern 
with the impact of these policies. It is not just concerns that 
we have in the United States. It is in our interest as a 
Country to maximize the chance that other countries express 
these concerns directly to China, so that China feels more of 
an interest in moving in response.
    Reform of the Chinese exchange rate regime allows the 
market to move that currency higher over time, would be good 
for global economic growth, very important for growth of the 
United States, good for growth in China over time as well, and 
we are going to maximize the chance we can use that G-20 
process to try to mobilize support around the world for 
progress on these issues.
    Chairman Dodd. Well, I appreciate that, and obviously we 
are watching to see what happens there. But I notice as well, 
as I mentioned in my comments here, the International Monetary 
Fund, as you well know, was established for the very core 
objectives of avoiding competitive exchange rate policies. That 
is their primary function, their central function. Yet, I 
mentioned there were only two actions taken, in one case almost 
thirty years ago, in the case of Sweden, and one twenty-three 
years ago in the case of Korea, and that has been it. Other 
than that, some rhetorical concerns being raised by them.
    You said in your testimony that Treasury shares the IMF's 
assessment with China's current, that China's currency is 
significantly undervalued. However, apart from issuing reports 
on the subject matter, the IMF has not taken any formal steps, 
despite the fact this has been egregious manipulation of 
currency by China. So, one, I would ask you how you assess the 
IMF's performance in fulfilling its core objective, given the 
paltry examples of its intervention.
    And second, I know that on the agenda of G-20 and the 
upcoming IMF/World Bank meetings are the IMF's governance 
reforms. It has been reported recently in the press that some 
reforms are necessary. Now I think we pay about 17 or 18 
percent of the IMF funding. That is based on, although many 
argue that, some nations have less importance economically 
today and so there should be some greater participation by 
others. One is, of course, the argument that China will have a 
greater role in the IMF because of its growing economic 
    And I know there is an argument that somehow by providing 
China with a greater say in the IMF that this may encourage 
improved behavior on behalf of China. Frankly, there are 
historical examples where that kind of approach has not 
produced the best results. And I am curious as to why we would 
even be talking about enhancing their role, given the fact that 
they have been so recalcitrant, and I am being polite in using 
that word, when it has come to currency manipulation over the 
past number of years.
    So tell me, if you will, why it is that there are those who 
believe that by increasing China's stake in the IMF it will 
have the positive impact on appreciating the currency.
    Secretary Geithner. Well, Mr. Chairman, I just want to say 
at the beginning that I agree with you that the members of the 
IMF and the IMF itself have not covered themselves in glory on 
this. The IMF is an institution of its members. It is designed 
in a way--the comparisons with the Senate are not fair, but in 
many ways it is designed in a way that it is hard to do some 
things without the consent of its members, and I think that is 
the principal reason why you are not seeing more effective 
action by the IMF in this area
    Now it is very important though that the IMF, because it is 
an international institution and its job is to provide 
objective assessments of things like whether a country is 
running an undervalued exchange rate, that the IMF continue to 
provide that assessment. That helps a lot because they can be a 
better independent arbiter of that basic question, and them 
saying it helps our basic objectives.
    And you know fundamentally it is also true that even though 
many other countries share our concerns with China, frankly 
they are reluctant to pursue them as aggressively as we have 
been, and to be as open and direct with the Chinese authorities 
about them in the hopes, frankly, that we will deliver those 
changes for them.
    So the multilateral process is important to use, but as you 
have seen it is not delivering greater leverage or impact. We 
would like that to change, and we are working hard to do that, 
but it is not something we can bring about on our own.
    Now you are right to say that we have supported a set of 
changes to the governance structure of the IMF, and let me 
explain why we are doing that.
    The IMF, as you know, which was set up in the wake of World 
War II, still has a very unbalanced governance structure where 
a set of countries, principally European countries, have eight 
seats on the board and they have a much more disproportionate 
share of votes in the IMF than is commensurate with their 
relative economic strength in the world. And to try to make 
sure that all emerging market economies in countries around the 
world feel a stake in making the IMF work on questions like 
this, we support a change in the balance of power to catch up 
to this big shift in global activity. With this shift, 
countries, the most rapidly growing emerging economies, 
including China but a range of other countries as well, will 
get, and they need to get, a somewhat larger increase in their 
relative vote in the institutions.
    I think that is very strongly in our interest and in the 
interest of the IMF, but of course that is not going to bring 
about, on its own, big changes in how countries perceive their 
interest in the IMF. But I think they are important things to 
    So we are going to continue to use the G-20 as much as we 
can, the IMF as much as we can, to make sure there is broad-
based multilateral attention to these issues. We think that 
will help reinforce our issues, our interest, but we share your 
frustration with the impact and effectiveness of those 
institutions and fora to date.
    Chairman Dodd. Senator Shelby.
    Senator Shelby. Thank you.
    Mr. Secretary, in my opening statement, I referred to a 
letter that President Obama wrote to the textile organizations 
during his Presidential campaign, where he wrote, and I quote 
again, and he said, ``The massive current account surpluses 
accumulated by China are directly related to its manipulation 
of its currency value.''
    I also referred in my opening statement, Mr. Secretary, a 
few minutes ago, to something you wrote in response to 
confirmation hearing questions put before you by this 
Committee. You stated the following, and I quote: ``President 
Obama, backed by the conclusions of a broad range of 
economists, believes that China is manipulating its currency.''
    As I said earlier, these are strong words. You and the 
President made clear you believe that China, and you both 
specifically used the word ``manipulation.'' Yet, when the 
Obama Administration and you, the Secretary of the Treasury, 
have had the opportunity to take formal action and label China 
a manipulator, you have refused. That is hard to explain. Are 
you denying reality? Are you worried about China?
    To the three and a half million jobs, I do not say we can 
attribute all of that to China, but a lot of it you could. It 
is baffling to the American worker and to the American people.
    Could you explain, if you are not going to label them a 
currency manipulator when you know and have said before, you 
and the President both, that you know they are--we know they 
are, everybody in the world knows they are--why do you not do 
it? Explain.
    Secretary Geithner. Thank you, Senator. I have said 
consistently in public, and I believe and I said again this 
morning, that the Chinese currency is significantly 
undervalued. It is also unambiguously true that China is 
intervening, and has intervened aggressively, to maintain that 
practice. Even though China has begun to allow the exchange 
rate to appreciate again and even though that process has 
accelerated in the last few weeks, it does not change the basic 
judgment that the currency is undervalued, and we would have to 
see a very substantial change over time for that judgment to 
change. That is my view.
    Now you, in your opening remarks, raised concerns with the 
law as it is written, and I think that is really the answer to 
your question because the way the law is written it requires a 
different set of judgments than the one I just said. And we do 
not believe, as you noted, as my predecessor have reached the 
same judgment over time, that those set of practices meet the 
test in the law.
    Now they may meet the test in the law at some point, but 
the way that law is written, how should say, does not make it a 
particular effective tool at the moment for advancing our basic 
interest in trying to get the exchange rate to move up over 
    Senator Shelby. Mr. Secretary, in the area of systemic 
risk, you, the Secretary of the Treasury, under the Dodd-Frank 
Act established a Financial Stability Oversight Council which 
is chaired by you and contains nine other voting members. This 
new oversight body is intended to monitor the U.S. and global 
financial system for systemic risk. Many analysts have warned 
of systemic risk stemming from global imbalances, which stem in 
large part from China's huge trade imbalances and exchange rate 
policies. Do you believe as Secretary of the Treasury that 
China's exchange rate policies create systemic risk for the 
U.S. financial system or could create systemic risk?
    Secretary Geithner. I do not. I do not now in current 
conditions, but they are very substantial economic policy 
problems for us and for the world economy and for China, and 
that alone makes it a worthy focus of attention by this 
Committee and by policies of this Administration. But I do not 
think I would say that in these conditions today that they 
present systemic risk to the U.S. financial system.
    Senator Shelby. Secretary Geithner, the Fed Chairman, 
Chairman Bernanke, has identified China's exchange rate 
policies as effective trade subsidies, favoring Chinese exports 
to the United States. Do you disagree with Chairman Bernanke's 
    Secretary Geithner. I would not use exactly that term 
because, as you know, that is a technical term with deep 
meaning in the WTO context, and it is not my judgment to make 
that kind of conclusion. But I would say, and it is 
    Senator Shelby. Do you disagree with his language, his 
    Secretary Geithner. I agree with the Chairman of the Fed on 
almost every issue, but on this particular question I would say 
it this way, Mr. Senator: China is running a set of policies 
that are designed to keep the currency undervalued.
    Senator Shelby. Right.
    Secretary Geithner. It is undervalued. They are moving to 
let it rise, but not very quickly.
    Senator Shelby. Not very much too.
    Secretary Geithner. Not very much either. And the impact of 
that has the effect of providing a relative disadvantage to 
companies that compete with products that the Chinese make. 
That is the effect of the policy. That is why we are worried 
about it. That is why we would like to see it changed over 
    Senator Shelby. My last question, since the beginning of 
2000, 10 years, there has been a loss of close to 5.6 million 
payroll job in manufacturing in this Country, as you well know. 
Secretary Geithner, what is your estimate of the share of 
America's manufacturing job losses that can be attributed 
somewhat to China's manipulation of the currency?
    Secretary Geithner. You know, I think that is a good 
question, but I think you should direct that question to the 
economists you are going to be discussing this issue with over 
time. I have not seen particularly good estimates. I can tell 
you that I think that it is a material economic problem.
    Senator Shelby. That is a question that should be answered, 
should it not?
    Secretary Geithner. I think it is a reasonable question to 
deal with. You are going to have a hard time finding--
economists, you know, do not agree on anything. You are going 
to have a hard time finding a credible assessment of that, but 
I would say this; it is material.
    Senator Shelby. Are you claiming that you are not an 
    Secretary Geithner. I definitely am not an economist.
    Senator Shelby. We are not too. We know that, and we are 
not either.
    Thank you, Mr. Chairman.
    Chairman Dodd. Thank you very much.
    Senator Johnson.
    Senator Johnson. Some analysts suggest China's current 
policy has cost the United States 1.4 million jobs and that if 
China did not undervalue its currency we could add about half a 
million jobs and reduce our current deficit by at least $50 
billion. What do you think of this assessment and at what rate 
would appreciate have to happen to have a positive impact on 
the U.S. Government?
    Secretary Geithner. Senator, I think the overall impact of 
China's economic policies, including its exchange rate policy, 
have these two--it is important to look at both--sides of it.
    Again, we export a lot to China. Our exports are growing 
very rapidly. They have been growing much more rapidly than our 
imports from China over the last 5 years or so. That has huge 
benefits to the United States and to American workers. There 
are more jobs today in America because of the opportunities we 
face in that market, and that is true in spite of these 
concerns we have, very substantial concerns we have, with their 
exchange rate practice and their trade policies.
    However, the exchange rate policies and the broad trade 
practices I described to you have a material adverse effect on 
our economic interests, and we would like to see those changed 
overtime. I do not know how to quantify them. I have seen the 
estimates you said. I do not know if those are fair or not, but 
I can tell you they are material enough to matter to us, and we 
should care about it.
    But on your second question, which is how large a change in 
the value of the currency would be necessary to correct for 
this evaluation, this is an issue again where there are a lot 
of ranges of estimates out there. This is not something you can 
know with precision, but I would just offer the following 
observations that I did in my opening statement.
    The last time the Chinese authorities allowed their 
currency to move, they allowed it to move by 20 percent against 
the dollar over a period that was roughly 2 years, in terms of 
the most rapid pace. That was a very substantial move, not 
adequately obviously, which is why we are still discussing this 
question, but we would like to see a sustained period of 
appreciation at a pace that offers the prospect of correcting 
the degree of undervaluation that still exists.
    Senator Johnson. While it is only a few months since the 
report, the July report, is there any new data that would shed 
light on the impact of China's decision to allow limited 
    Secretary Geithner. I think it is as it looks. It offers 
the possibility of another period of a sustained appreciation 
of the currency, but not enough confidence in the action they 
have taken so far that that is going to be forthcoming again on 
a pace that is appropriate to us. So you cannot tell from the 
path they have adopted so far whether they are going to let it 
loose far enough. That is why I said the ultimate test of this 
reform is going to be how far and how fast do they let the 
currency move, and that is something we are going to have to be 
watching very closely.
    Of course, the virtue of this, you can see every day what 
they are doing. They have let it move up almost 1 percent in 
just the last 10 days or so, which is a good and encouraging 2 
weeks. But what matters is what they do over a long period of 
time because, again, it has only been 1.5 percent.
    Senator Johnson. Yes. What steps have been proven effective 
in getting China to address problems that U.S. companies face 
in its market?
    Secretary Geithner. Frankly, it has been extraordinarily 
difficult. The approach we take is every time we hear about a 
particular concern about discrimination, in fact or in policy 
or in promise, we raise that issue with the Chinese authorities 
and tell them it is important to us that we fix those problems. 
Sometimes that makes a difference. It has not made enough 
difference, frankly, to us. But I think the only way to do this 
is to make sure that we are relentless in raising these 
concerns when we hear them, when they have merit, with the 
Chinese authorities, and we use every tool we have available 
under U.S. law and in the WTO to convince them to end those 
practices. That is the most important approach.
    But as I said in my opening remarks, in intellectual 
property piracy, in subsidies, in government procurement, in 
these policies they call indigenous innovation, we are seeing a 
pattern of practices that we think have substantial adverse 
effects on our economic interests as a Country. I think they 
are basically unfair and they are unacceptable to us, and we 
need to make sure that we will continue to look for ways, 
working with you, to encourage China to address them more 
    Senator Johnson. Thank you, Secretary Geithner.
    Chairman Dodd. Thank you, Senator.
    Senator Bennett.
    Senator Bennett. Thank you very much, Chairman, and 
welcome, Mr. Secretary.
    We have had a lot of discussion about currency 
manipulation, and I am not sure I can add anything to that 
discussion, so let me take advantage of your being here and 
this subject and ask some related questions about China and the 
impact of China on our economy.
    First, what do you see with respect to property rights, 
particularly intellectual property protection of China? At one 
point, that was a very major problem. I would like your 
assessment of how it is affecting our exports and our 
    I share with you this anecdotal circumstance when I was in 
Vietnam, and the Vietnamese said: You should not be trading 
with China. You should be trading with us because we are 
    Then some experts said to me: And the Vietnamese are 
driving the Chinese crazy over the issue of intellectual 
property rights because the Vietnamese are knocking off things 
that come from China, and China is beginning to learn how 
important intellectual property rights really are.
    As you view the whole question of U.S.-China trade, what is 
your sense on this question of intellectual property rights.
    Secretary Geithner. I think it is a huge problem and, to be 
fair, progress has been uneven. Their laws are better, but 
enforcement is very uneven. Some companies and some industries 
report that things are really getting substantially better over 
the last decade, but in a lot of industries, I will mention 
computer software for one, people have not seen a material 
improvement in the level of piracy.
    I will give you one example from my written statement which 
is that every year of course we seize at the U.S. border goods 
that have pirated or stolen intellectual property, or infringe 
on U.S. property rights. In 2009, 80 percent of those goods 
seized were Chinese goods. So it is a very substantial problem 
    And frankly, it is a terrible problem for China. I mean how 
do you as a country encourage innovation, encourage future 
growth if you do not give your innovators the property rights 
that come with their ideas. So, for that reason, there is a lot 
of people in China very worried about this too. But as they 
would admit, I believe, they are not doing enough to enforce 
their own laws, and their own laws probably need to be stronger 
as well.
    Senator Bennett. We talk about the Chinese as the second 
largest economy in the world now, having passed the Japanese, 
and part of that of course is the Japanese economy has been 
stagnant while the Chinese economy has been growing. But I have 
a sense that part of the fact that the Chinese economy is 
growing so rapidly is that they may very well be setting 
themselves up for a bubble that will burst, particularly again 
in the area that hit the United States so hard which is real 
estate. Now you do not have the housing kind of boom in real 
estate that you did in the United States, but you have 
commercial real estate.
    What is your sense of the stability of the Chinese growth? 
Can it continue at the present very, very attractive rates?
    And while you are commenting on that, comment on the 
accuracy of the economic data coming out of China. I am very 
suspicious of an economy that tells on the 31st of December 
what it has done in the previous year. It takes our economy 
months to sift through all of the data.
    If you could address those two questions, I would 
appreciate it.
    Secretary Geithner. Let me start with the last question. 
You are right that there----
    Chairman Dodd. Mr. Secretary, I want to just interrupt you 
for 1 second. The second bells have started. We are going to 
head over. When Senator Bennett finishes up, quickly a response 
to this question, I am going to recess until 11:30. We have two 
votes. We will come back here and pick up with Senator Bunning 
and Senator Bennet who have also been in the room.
    Secretary Geithner. Senator, you are right that there have 
been a lot of concerns expressed by independent economists 
about the integrity, reliability, accuracy of that data. China 
is not unique in that way, of course.
    My own sense is that China's growth looks very resilient 
now. It looks actually quite strong, and we are seeing 
encouraging signs of them shifting away from the export-
intensive model of growth in the past toward a growth strategy 
more led by domestic demand and consumption, which would be 
very much in the interest of our interests in bringing about a 
more balanced global economy. But they are just at the 
beginning of that transition, and they need to do a lot of 
things to reform basic practices to sustain that progress. But 
the recovery there looks very strong.
    They are very concerned and have talked publically about 
concern that they see a rise in asset prices, real estate 
prices that could threaten their recovery, and they have taken 
a number of actions to slow the growth of credit, bank credit 
and to reduce the risk again that they see the kind of bubbles 
in asset prices that were so damaging in the United States. 
That is one reason why they have restarted this reform of the 
exchange rate system.
    And that is one reason why there is a lot of support in the 
Chinese government for trying to move further on the exchange 
rate, and it is for the following reason: If you tie your 
monetary policy as a country to the Federal reserve's monetary 
policy, then it is harder for you to run a set of policies that 
are designed to contain inflation, provide more balanced growth 
domestically and resist this risk of asset price bubbles. So 
the longer they tie their currency to ours, the harder it is 
going to be more for them to contain the risks that you 
referred to of future asset price bubbles. The more they care 
about making sure that growth is sustainable, to take this risk 
out, the more important it is for them to move on the exchange 
rate, so they can run an independent monetary policy that is 
more suited to China's challenges.
    And again, that is why it is fundamentally in China's 
interest to move, that is why they began the process again in 
June, and that is why I believe that you are going to see a 
pretty sustained, significant movement over time. It will come 
gradually, but it will come.
    Senator Bennett. [Presiding.] The Chinese middle class, I 
am told--and I would just get your reaction to whether or not 
this information is correct--is about 300 million people. The 
total American population is 300 million people. So you could 
say in that circumstance our economies are beginning to reach 
    Now that means they have another 800 million people who are 
still living at the level of $2 a day, and that kind of 
    Back to your point that they are going to start talking 
more about the domestic economy, are those numbers roughly 
accurate and do we have a domestic economy of 300 million 
people? And can that economy continue to grow at, say, 8 
percent, or with the drag of the other 800 million people is 
the growth going to start to slow down in your view?
    Secretary Geithner. Those numbers sound broadly right to 
me, and again I think if you--there is no science to this and a 
lot of uncertainty around it, but I think most economists would 
say China is likely to be able to grow at a rate like 8 percent 
for a sustained period of time because they have a long way to 
go to bring those people from agriculture into industry and to 
take advantage of the huge gap they still face between how 
people produce stuff in China and the frontier of technology. 
So that process of catching up would for China--it is true for 
India too, for many emerging markets--justify some confidence 
of quite high levels of growth rate for a long period of time.
    But what matters to us and to the world economy is the 
shape of growth, the pattern of growth, how they grow the 
growth strategy. And for that to work for them over in China, 
it is going to have to come from a rising middle class and from 
stronger domestic demand. It cannot come from the export-
intensive model of the past. It is just not a tenable strategy 
for them. They are beginning that shift, but they are just at 
the beginning of that shift.
    Senator Bennett. Thank you very much. As the Chairman said, 
we are adjourned until 11:30.
    Secretary Geithner. Thank you.
    Senator Reed. [Presiding.] Mr. Secretary, if you could take 
your seat. Senator Bunning is in order to ask his questions. 
Senator Bunning?
    Senator Bunning. Thank you, Mr. Chairman.
    You made a statement recently, but I totally disagree with 
it. The problem is not with the law on currency as it is 
written. The problem is with the twisted way that the 
administrations have interpreted it. So even if we rewrote the 
law, you would interpret it as you choose.
    Now, I am going to ask you some questions about your own 
testimony. I am going to read you a couple of sentences that 
you wrote in your testimony and then I am going to ask you if 
you actually believe they are true.
    First, you said the Administration is using all available 
tools to ensure that American firms and workers can trade and 
compete fairly. So let us do a fact check. The Currency Report, 
the subject of today's hearings, by the way, is one of the most 
powerful tools in your toolbox. First, you violated the law by 
missing the report's April 15 deadline by almost 3 months. Then 
when you actually issued the report, you ignored reality and 
refused to tell the truth about a Chinese currency 
manipulation. And if you had just told the truth and cited 
China as a manipulator, it would have simply triggered 
negotiations, not a trade war. You left one of America's best 
tools on the table. Do you still stand by the statement that 
the Administration is using all tools available?
    Secretary Geithner. I do.
    Senator Bunning. You do?
    Secretary Geithner. And we will continue to do it. I mean, 
Senator, what Senator Shelby said was, I think, correct, which 
is to say that a number of Senators have looked at that law in 
the wake of events since it was written and explored ways to 
improve it and strengthen it, and I think that recognizes that, 
as is true with many laws, they are not perfect and they are 
exploring ways to figure out a way to make it a more effective 
tool in this context. I don't think it has been a particularly 
effective tool. It doesn't mean it can't be----
    Senator Bunning. The International Monetary Fund should 
have nothing, absolutely nothing to do with whether you or any 
Secretary of the Treasury designates China as a currency 
    Let me read you another statement from your testimony.
    Secretary Geithner. I think I agree with that, by the way, 
just to say, and I don't think they need to. I think the only 
thing I said is that when they conclude that a country is 
running a significant valid exchange rate, that matters. It is 
important. It is the judgment that has some weight.
    Senator Bunning. Let me read you another statement from 
your testimony. We are aggressively using the full set of trade 
remedies available to the United States under U.S. law to 
address unfair trade practices and safeguard the interest of 
U.S. workers. So let us do another fact check. Countervailing 
duties are a trade remedy. They are supposed to protect U.S. 
workers and businesses from unfair trade subsidies.
    Two separate countervailing duty cases were brought before 
the Commerce Committee recently by U.S. workers and businesses. 
By the way, we will hear from the businesses on the next panel, 
one of them. In the aluminum case, the Commerce Department 
refused to even investigate China's currency manipulation as a 
trade subsidy, even though that is exactly what it was. How can 
you say that the Administration is aggressively using the full 
set of trade remedies when the Commerce Department won't even 
investigate the use of a trade remedy to protect U.S. workers? 
Do you think the witnesses from Hydro Aluminum on the next 
panel will agree that you are using the full set of trade 
    Secretary Geithner. Well, I don't know what they will say, 
but I will say that that is our policy and we will continue to 
do that. I can't speak--you should ask Commerce about the 
factors that informed their judgment, but I think as you know, 
Senator, they are making a judgment that I think is consistent 
with almost every other similar case in the past. It doesn't 
mean they won't change that in the future, but you should let 
them speak to that judgment.
    Senator Bunning. Yes, but Mr. Secretary, if you understand 
the 24 years of frustration I have had up here on every Banking 
Committee, House and Senate, for 18 years, we have tried to get 
five Administrations to act on this and they have all sat on 
their hands. You are not by yourself. There are four 
predecessors of yours, maybe more--probably more--that have 
done the exact same thing that you have done, not indicated 
that China is a currency manipulator when all the facts, when 
all the facts indicate otherwise. And I am frustrated, and I 
know my colleague, Senator Schumer, is frustrated. We are 
trying to act in the best interest of our workers and the 
United States of America. Thank you.
    Chairman Dodd. [Presiding.] Thank you, Senator.
    Jack, you have not been heard, have you?
    Senator Reed. I have not been heard.
    Chairman Dodd. Senator Reed.
    Senator Reed. Thank you. Thank you, Mr. Secretary. This is 
an issue, and all of my colleagues have said that at this 
point, it has been years where we have been negotiating with 
the Chinese, and frankly, I think we are all coming to the 
conclusion that they don't believe we are serious. As a result, 
they will listen to you politely, but they will not take any 
effective action.
    I think the only way that we will begin to be viewed more 
seriously is if we start moving legislation here in this 
Congress that has more teeth, et cetera. That in and of itself 
might provide an opening for more constructive talks. We have 
been ritualistic berating Secretaries of the Treasury. I think 
we probably have to do a lot more with our own house to get it 
done. But it would be helpful if the Administration would 
signal that a legislative response would be useful, maybe even 
in a procedural sense of making your presentation more serious. 
Any reaction, Mr. Secretary?
    Secretary Geithner. I would just say the following. I think 
it is very important for people to understand how strong the 
sentiment is here in the Congress on both sides of the aisle. 
It is very important for them to know it is bipartisan. It is 
very important to know that there is very strong concern not 
just among Democrats, but among Republicans. And as I said, we 
will be happy to work with you to figure out ways to get more 
effective approaches to reinforce our interests.
    We are in strong agreement with you on the problem, on the 
concerns, but as you have said, the challenge is trying to find 
a way to make more progress on these things and we are open to 
    Senator Reed. Let me open up another perspective, I think, 
on this issue. My impression, for what it is worth, is that 
China has a definite economic strategy. It is jobs. Anything 
they can do to maintain employment in the country, they will 
do, and this currency has been handed to them through the 
international system as a great way to give advantages to their 
employers. I do not think, and this is not a reflection on the 
Obama administration, this goes back through multiple 
administrations, in fact, probably even more pronouncedly in 
the Bush administration, where the strategy was not about jobs, 
or not about jobs and manufacturing jobs on Main Street in 
    We have to not only counter this currency inflation, we 
have to come up with a jobs strategy, and in doing that, we are 
going to be face to face with the Chinese on a number of issues 
in addition to currency. So again, could you comment on that, 
Mr. Secretary?
    Secretary Geithner. I would just offer the following. The 
most important factor which will determine how effective we are 
in competing with China, how effective we are in raising income 
growth in this country, in bringing people back to work, are 
the things we are going to do in the United States to 
strengthen incentives for investment, for innovation, long-term 
investment, those types of things, and we are, as you know, 
with support of the Congress, because we need Congress to do 
it, are making the largest investments in basic research, in 
research and development. We have proposed--the President 
proposed over the last 2 weeks a set of much stronger, much 
more powerful incentives to business investment than we have 
considered in a very long period of time.
    Doing those things to encourage investment here in the 
United States in ways that are fiscally responsible, that are 
consistent with our objective of bringing down our long-term 
deficits, reducing our reliance on borrowing overseas, are the 
most important things we need to do.
    Now, those are not enough. Alongside those things, we have 
to be aggressively making sure we are going after unfair trade 
practices in China and other countries around the world. But 
you are right to emphasize that, overwhelmingly, the obligation 
on us is to find ways to strengthen incentives for investments 
for innovation, for job creation here, not just in 
manufacturing, but across the board. And again, we face an 
enormously difficult challenge as a country.
    We have got a long way to go to dig out of the mess caused 
by this crisis. But look at what has happened to manufacturing 
just over the last 12 months. Look at what has happened to high 
tech. Look at what is happening to exports. There are very 
encouraging signs of growth and dynamism in those areas and our 
job is to reinforce those.
    Senator Reed. Well, just--and I will finish, and I think 
you are right, because when I talk to my manufacturers, they 
are doing well, they would do much better if they didn't have a 
built-in barrier of Chinese currency to overcome. And there is 
another issue----
    Secretary Geithner. I agree with you. I completely agree 
with you.
    Senator Reed. And so that is another reason why that might 
be, rather than simply saying they are doing great here, that 
is a strong signal that we could do a lot, lot better.
    The other thing, too--two quick points, because my time is 
running out. I fully concur with you and the investment that 
the President has done, fully supported, it is the future. But 
what we see is if you have a high-tech investment process 
coming out of a university research lab, et cetera, well, that 
is generating jobs, Ph.D., Master of Science, et cetera. We 
have scores of Americans that need to get employment that don't 
have those skills, won't have them even if they go back to 
school for 4 or 5 years. We need those now.
    And the other point about investment, you are right about 
the investment has to be in the United States, because 
candidly, there are major American companies that have 
significant positions in China who, I would presume, have some 
ambivalence about what we do with respect to the Chinese 
government, their economic policies, particularly the currency 
policy. Do you sense that, and are you getting push-back by 
American interests that have these positions?
    Secretary Geithner. Two very thoughtful questions, so let 
me try to respond to both of them. You are absolutely right 
that you need to do more than just provide better incentives 
for businesses to invest in research and development, buy 
equipment, increase capital expenditures here in the short-
term. We need to do things that help provide long-term 
sustained support for public infrastructure. That is one of the 
most important things we can do to help bring people back to 
work, and if you invest sensibly in public infrastructure, you 
are going to have stronger growth in the future and you help 
create new opportunities for jobs for many of the people that 
are affected most directly by the crisis.
    Now, what China has been doing, and I think it is fair to 
say it this way, is for a long period of time, it has been 
running a strategy that had the following basic dimensions to 
it. If you want to come sell in this large growing market, we 
would like you to come invest here and produce here. If you 
come invest here and produce here, we want you to transfer 
technology to Chinese companies. If you want to continue to 
invest here, produce here, and sell to our markets, we want you 
to export to the United States from these production facilities 
to the United States, and they have been systematically over a 
long period of time very openly pursuing that basic strategy.
    Now, for many reasons, we find that untenable and we want 
to deter them from pursuing that and change that strategy. It 
does put U.S. companies in a difficult position, because, as I 
said, they are substantially expanding and growing at a very 
rapid pace what they are selling to the Chinese market. It is 
very, very rapid growth. It is billions and billions of dollars 
of things that matter a lot to our incomes here in the United 
States, jobs in the United States. But they are reluctant to be 
associated with aggressive use of U.S. trade laws because of 
fear the Chinese will retaliate against them, and if they don't 
say that in public to you, they will say it in private to you. 
You know that is the truth.
    So part of our challenge in finding ways that have some 
more leverage is to find things that we think will be effective 
in changing Chinese behavior. And again, the best way we can do 
that is try to underscore how important it is to China that 
they continue to enjoy access to this open multilateral trading 
system and access to this market in the United States. But that 
is the challenge we face.
    Senator Reed. Thank you, Mr. Chairman. Thank you.
    Chairman Dodd. Very good. Thank you.
    Senator Schumer.
    Senator Schumer. Thank you, Mr. Chairman, and thank you, 
Mr. Secretary. You know, my words are going to be tough, but I 
have tremendous respect for you on every issue, maybe except 
this one.
    Secretary Geithner. Always a pleasure.
    Senator Schumer. First, let me say, 5 years--6 years ago, 
Senator Graham and I came up with the idea of doing something 
about manipulation of currency. At first, everyone said, oh, 
no, this is not a problem. So the only progress I think we feel 
we have made is now everyone admits it is a problem, you do and 
everyone else, but no one does anything about it. No one does 
anything about it.
    You laid out the policy China has, which is mercantilism, 
not free trade. And when we ask that people do something about 
it, whatever Administration, they shrug their shoulders and 
say, well, nothing much we can do. Not so. At a time when the 
U.S. economy is trying to pick itself up off the ground, 
China's currency manipulation is like a boot to the throat of 
our recovery and this Administration refuses to try and pick 
that boot--take that boot off our neck. China's overt and 
continuous manipulation of its currency to gain trade advantage 
over its trading partners is about as close to a fact in 
economic policy as you can get.
    Now, those of us on the Committee, some of us--very few, 
actually--disagree about what to do about it, and maybe there 
are some who think even though it is a problem, we shouldn't do 
anything about it. But Mr. Secretary, although there may be 
some modest disagreement about what to do, I am increasingly 
coming to the view that the only person in this room who 
believes China is not manipulating its currency is you.
    And so the question I ask is, what is the Administration 
afraid of when every month we lose jobs and wealth that we will 
never recover? It diminishes America, our standard of living 
here in America, and America as a world power, for a reason 
that just about everybody admits is wrong.
    Now let me ask you, are you afraid that if the Chinese, if 
we cite the Chinese, they will retaliate by limiting access to 
their market for U.S. firms, or their central government will 
provide billions of dollars of financial assistance to state-
owned domestic enterprises? It can't be that. They do already.
    Are you afraid that if you cite the Chinese, they will 
retaliate by stealing our intellectual property? Don't they do 
that already?
    Are you afraid that if you cite the Chinese, their 
government will force U.S. firms to give up technological 
secrets in the future in return for access to their market? 
They do that already.
    Are you afraid if you cite the Chinese, they will respond 
by selling some of the trillions of dollars of Treasuries they 
hold? But by doing that, they would cut their nose to spite 
their face.
    So, Mr. Secretary, you are vowing today to take a tougher 
stance against China's currency manipulation. In all due 
respect, I will believe it when I see it. I will believe it 
when I see it. Each Administration thinks it can resort to 
diplomacy. Let us go over and talk. It can persuade the Chinese 
it is in their best interest to move to a market-based regime. 
But each time, it is rather like a bad China currency 
``Groundhog Day'' movie, except the difference is the alarm 
clock wakes us up each morning and we do the same thing over 
and over again. We don't learn our lesson. We don't change our 
tactics. And the Chinese have taken advantage of this for close 
to 10 years now.
    What is the Administration afraid of? You know we are 
right. You know the United States is put at a terrible 
disadvantage. You refuse to act. What are you afraid of?
    Secretary Geithner. Senator, strong words, and you said 
them before, and I share many of your concerns. And as I said 
before, the attention you and your colleagues have brought to 
this issue over time has helped. I mean, China did allow the 
currency to move up 20 percent in that period between 2002 and 
2008 in part because so many people at that time were so 
effective in bringing persuasive power or argument to bear.
    But let me just make one comment in response to your 
question, and this is for a longer discussion about what is a 
more effective strategy in terms of tools, but----
    Senator Schumer. Do you think your present strategy has 
been effective?
    Secretary Geithner. As I said before, and is unambiguously 
the case, and I have said this consistently, China has not 
allowed the currency to move meaningfully even since the June 
19 decision that they were going to reform it.
    Senator Schumer. So----
    Secretary Geithner. Absolutely, and that is not acceptable, 
but I just want to say one thing, Senator. You, understandably, 
want to make sure that we are using the law as effectively as 
possible. The only observation I make is when you look at the 
terms of that law, what happens when a Secretary of the 
Treasury decides that the precise definition of the law that 
determines manipulation is met? What happens? What happens is I 
am required to go talk to the Chinese authorities, which, of 
course, we have been doing with a substantial intensity at the 
highest levels of the U.S. Government on that.
    So the only thing I would observe is wishing something does 
not make it so and issuing a report that requires me to go 
consult changes nothing. So what we need to do and why we are 
here having this conversation is trying to figure out ways to 
alter incentives in a way that might induce better changes in 
behavior, and we are happy to continue to work with you on how 
best to do that.
    Senator Schumer. I just would say, Mr. Chairman--my time is 
up, and I would hope we will have a second round, I don't know 
if we will--but it is a lot different talking to them without 
having any strength. Our legislation would give you strength, 
and I would bet my bottom dollar if this legislation passed and 
you talked to them, you would find a lot more changes than just 
talking to them without any--by going into them disarmed, which 
you are now.
    Secretary Geithner. I was only--I wasn't speaking to that 
other potential legislative option. I was just making the 
observation that in the terms of the current law, and I respect 
very much the objectives of that law and the intents of its 
architects, but just to point out--many of you have said this--
issuing a report can change little. A simple judgment of an act 
that requires us to go talk to somebody doesn't change 
    Senator Schumer. You know the legislation----
    Secretary Geithner. And we----
    Senator Schumer. Excuse me. You know the legislation does 
more than that. You know that. You know it allows--there is a 
Steelworkers case today. It would make it much easier for lots 
of companies and lots of organizations to use currency as a way 
to go and get relief, whether the Administration decided to do 
it or not.
    Secretary Geithner. No, you are absolutely right, Senator. 
There are legislative proposals pending that would change the 
tools available to us. What I am saying is that the law that we 
are discussing today that requires this semi-annual report on 
the exchange rate and a judgment about manipulation in itself 
has just one consequence, which is that we go talk some more. 
And we are doing a lot of talking. Talking is not our problem. 
We have to figure out ways to change behavior. I am happy to 
work with you on how best to do that.
    Senator Schumer. So help us change the law.
    Chairman Dodd. Thank you, Senator.
    I am going to ask my colleagues, as well, to try and stay 
within this time. We have got a second panel to go through and 
the witness has got to testify before the Ways and Means 
Committee. We have got two more votes coming up in the middle 
of all of this, as well.
    So Senator Menendez.
    Senator Menendez. Thank you, Mr. Chairman.
    Mr. Secretary, I want to follow up, maybe not as 
forcefully, but nonetheless, I share Senator Schumer's views 
and maybe----
    Senator Schumer. That is the difference between New York 
and New Jersey.
    Secretary Geithner. I share many of Senator Schumer's 
views, too, forcefully, as well, but we can't agree on 
    Senator Menendez. Well, you don't want to see my Jersey up, 
    Senator Menendez. In any event, let me follow up with the 
discussion. You know, our next panel, when they testify, are 
going to say that--Dr. Bergsten is going to say that he has 
estimated that eliminating China's effective subsidy, or 
undervalue, if you don't want to use the word subsidy, of its 
exports by manipulating its exchange rate would result in the 
creation of a half-million U.S. jobs and the reduction of the 
U.S. global trade deficit by $50 to $120 billion.
    Paul Krugman, he has a different estimate. It is much more 
robust. He says that it is about 1.4 million jobs over the next 
several years. So whichever estimate is right, or somewhere in 
between, there is an enormous number of jobs being affected by 
    And I can't think of a more critical time in the country's 
history when that specific issue, where we are all seeking to 
find ways to incentivize the private sector, where we are 
looking at what government can do to grow this economy, and 
here is one opportunity in which the actions of a foreign 
country directly affect families in this country.
    And so let me pick up where you left off with Senator 
Schumer. What is it that you need? If you don't have the tools 
now, then what is it that you need? By all means, let us know 
so we can work to give you the tools that are necessary to stop 
what is clearly an unfair balance.
    Secretary Geithner. Senator, as I said before, this is a 
very important economic issue. It has big economic effects. I 
don't know what the right numbers are on the impact on jobs, 
but it is material and it is a big deal, and it is very 
important for us, as it has been in the past.
    You are asking the vital question. There are a lot of ideas 
on the Hill that would change current law and some of them may 
offer the prospect of more leverage, more effective leverage. 
Anything that is going to work has to meet two tests. It has 
got to be consistent with our international obligations, 
because if it is not, it will have no positive impact. And it 
has to be effective in terms of offering us more benefits than 
it does risks. And again, we are open to working with you on 
better approaches that will help reinforce the amount of 
leverage we have.
    Ultimately, of course, China is going to have to decide it 
is in its interest, too, to move, and our job, of course, is to 
encourage them to reach that conclusion more quickly.
    Senator Menendez. You know, I think that the Chinese have 
learned the Texas two-step very well. They take a step forward 
when there is a lot of clamoring here, and then they take two 
steps backwards in this process. So it is pretty clear to me 
where their intention is. They continue to dance with us as 
long as they can dance, and they will continue to achieve what 
they want to achieve as long as, I think to some degree, we 
allow them to do that.
    So when I hear you say the first, I understand the 
international obligations. But the second, as long as there is 
more benefit than risks, outline to me what you consider the 
    Secretary Geithner. It is hard to know. It depends on the 
particular measure. But again, I would just offer the following 
perspective. The United States has more jobs today, is creating 
more jobs every week, including in manufacturing and high-tech, 
some of the most important industries for our future, in part 
because our exports to China are growing so rapidly and because 
our market share in China is so substantial and so growing, and 
I am very confident that is going to get substantially better 
for us over time.
    Now, that is not sufficient to us, because I think because 
of the currency and because of a range of unfair trade 
practices, we are being denied opportunities that we could take 
substantially greater advantage of, and what we want to do, of 
course, is to maximize the chance that that happens more 
quickly over time. That is what we are engaged in and we need--
again, it is not something we can do on our own. We need the 
support of you and your colleagues and we need the support of 
the American business community to make that work.
    Senator Menendez. Well, I want to observe the Chairman's 
request because I know you have to go to another hearing, but 
look, we need--is it Senator Schumer has legislation, I think, 
that is pretty good. But we need the specifics of what you 
think is going to both help you, help us to give it to you, and 
then to be able to achieve the goal that we want. But I hear a 
lot of generalities, but I would like to know and follow up 
with you on the specific tools that you need that can meet the 
two standards that you just described and that can help us 
change this dynamic.
    The last point I will make is that the Chinese are great at 
using all of our international obligations to the maximum of 
their advantage. They file more complaints, they file more 
challenges, and yet on a whole host of issues, they sit back on 
what their obligations are.
    Chairman Dodd. Thank you, Senator, and I might point out 
again that given the time constraints of the next few weeks, 
even with the lame duck session, but I would underscore the 
point that both Senator Schumer and Senator Menendez have 
raised. With the G-20 meeting coming up in Seoul, to the extent 
there could be at least some sort of piece of legislation that 
would enjoy both executive as well as legislative support, 
absent, obviously, anything passing up here in this timeframe, 
I think might enhance tremendously the leverage of the 
Administration at the G-20 meeting on these issues.
    So we have got about a month or so, not that you are going 
to pass a bill, probably, in that timeframe, given all the 
other problems we have got logistically, but nonetheless, the 
idea of a piece of legislation that enjoyed some both executive 
and legislative branch support could really be helpful to that. 
That is just a thought.
    Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and I think that 
is a very constructive suggestion and certainly one that I 
would support.
    I wanted to pick up, Mr. Secretary--welcome back--on the 
conversation you were just having. In the absence of that kind 
of legislation, the absence of making these kinds of changes, 
what we have seen over and over again is either no response or 
a very slow and limited response. Are you under the impression 
or do you think that the Chinese have incentives, their own 
economic incentives to actually begin to allow their currency 
to float? Is there some reason for hope there?
    Secretary Geithner. I think that China, like the United 
States, has complicated politics. There are people adamantly 
opposed to letting the exchange rate move over time for reasons 
you all understand. And there are people who think it is 
absolutely essential to China's interest to move over time, and 
as you can see, they are trying to work out the right balance 
    The question is, what is the case for moving. As I was 
saying in response to Senator Bennett's questions earlier while 
you were voting, the best case for China to move is that if 
they don't move, in a sense, what they are doing is letting the 
Federal Reserve of the United States run their monetary policy 
and that makes no sense for them. It makes it much harder for 
them to make sure that they are growing with low inflation, 
that they face less risk of financial asset price bubbles, 
financial crises in the future. They need to have the 
independence to run a set of policies that make sense for the 
very different conditions they face. That is the most 
compelling reason they have to break this link and allow the 
exchange rate to move in response to market forces.
    In addition to that, the longer they leave this currency 
practice in place, the more they are doing to encourage 
continued over-investment in relatively low value added 
assembly type work that is not--they are not particularly 
interested in preserving for the future. It doesn't create a 
lot of income growth for them. And it is not a sensible 
strategy for them. But, of course, people don't want to hear 
what we think is in their interest. They have to decide what is 
in their interests, and it is not probably enough for us to 
hope that it is in their interest over time for them to move in 
this case. We need to make it compelling to them because, 
frankly, they enjoy such huge benefits from continued access to 
our markets on this scale and to the global financial system.
    Senator Bennet. Well, it also seems to me that they are 
solving for that problem by taking our IP, as well. I mean----
    Secretary Geithner. Well, that is a terribly damaging 
ongoing problem for us and for companies in many, many sectors, 
and it is deeply unfair and it is completely unacceptable. I 
cannot believe that we are still in a position today where we 
are talking about egregious ongoing practices of piracy and 
theft of things that are--of U.S. ideas, U.S. property that is 
obviously so valuable.
    Senator Bennet. I mean, could you, just along those lines, 
share with the American people about what the scale of the 
nature of that problem is that we are facing?
    Secretary Geithner. Well, again, it is hard to know, but--
    Senator Bennet. Because it is the product, clearly, of 
completely unfair practices.
    Secretary Geithner. It is absolutely in the billions and 
billions of dollars.
    Senator Bennet. One of the things that I hear from my 
families in Colorado in this terrible economy that we are going 
through is once the political sound bites are done and the 
cable news and all that is sort of talked about and dealt with 
is a huge anxiety about where the jobs are going to come from 
as we emerge from this economic downturn. And I read the other 
day--I think the numbers are directionally right--that our 
largest single export from this country are aircraft. Thirty-
five billion dollars a year is what it represents to our 
economy. China's export of solar panels this year will 
represent about $15 billion to its economy, almost half of our 
largest single export, and to my knowledge, they didn't export 
a single solar panel 7 years ago and we invented the technology 
in the 1970s.
    You listen to a story like that, you hear a story like 
that, and you realize that it is not just about currency, 
although that is a big piece of it. It is not just about the 
fact that we have $13 trillion of debt on our balance sheet and 
they have a huge cash surplus that they are using to buy assets 
all over the world, and natural resources all over the world. 
It is not just about the fact that we have had a series of tax 
and regulatory policies that, at least in my view, has not 
driven innovation in the United States and not driven job 
creation in the United States.
    I wonder if you want to take the chance here to speak 
broadly about some of the policies that ended up putting us in 
the position of seeing technology we invented in the 1970s now 
being used to create enough market share that we may never be 
able to catch up on that question and what we need to do as a 
country, both in terms of our fiscal policy and our economic 
policy, to actually say, you know what? We are going to be the 
most competitive economy in the 21st century.
    Secretary Geithner. Senator, we are living through not just 
the devastating scars caused by the worst financial crisis, 
worst economic recession since the Great Depression, but a 
crisis that followed a long period of damaging under-investment 
in the middle class, in education, in public infrastructure, 
and a terrible erosion in the basic fiscal position of the 
country, because we borrowed hundreds of billions of dollars to 
finance programs we weren't prepared to pay for, tax cuts for 
the rich. Those sets of policies have been terribly damaging to 
our country and they are going to take time for us to fix.
    The only credible long-term growth strategy for us as a 
country is going to have to rely on stronger investment in the 
United States and stronger export performance over time, and 
that is not going to happen unless we restore what has been the 
great strength of the American economy over time, which is that 
the best place to innovate, the best place to come and build a 
company, the easiest place to come raise capital to finance 
some idea, and the best universities, highest levels of 
sustaining investment in basic science, research, and 
development, those are absolutely essential things for us to 
do. They are things the government is--better policy is central 
to doing, because governments have to set the incentives better 
and they have to provide a meaningful amount of targets for 
those sorts of things. That is what we are trying to do and we 
need some support over time from this body to make that 
    Chairman Dodd. We have got a clock and you have got a 
colleague sitting next to you. I apologize.
    Senator Bennet. Thank you, Mr. Chairman.
    Chairman Dodd. I thank you. Very good questions.
    Senator Bennet. Saving me from my colleague.
    Chairman Dodd. I know. I am trying.
    Senator Merkley.
    Senator Merkley. Thank you. I am certainly prepared to 
defer to you. That is a very interesting line of questions.
    Senator Bennet. May I just add one thing?
    Senator Merkley. Yes, please.
    Senator Bennet. Mr. Chairman, I am sorry. Just it seems to 
me that it is through that frame that we should be having all 
the conversations that we are having in this place, and we are 
not. We seem incapable of being able to do it. And the more we 
have this sort of siloed back and forth on this tax and that 
tax and this program and that program, and the less we are 
having a conversation about how to have the most innovative 
economy in the world, the less likely we are going to be able 
to have the most innovative economy in the world.
    Senator Merkley, I look forward to working with you on all 
of that. Thanks for the minute.
    Senator Merkley. Likewise with you.
    Chairman Dodd. Very good. Thank you, Senator.
    Senator Merkley. So my concern is that when China pegs its 
exchange rate artificially low, it results in a situation where 
they are able to sell their products at an artificially low 
price to the world, which means that they out-compete us, which 
means we lose manufacturing jobs in America. And if we don't 
make things in America, we don't have a middle class in 
America, and I feel like that is the path we are on.
    I just completed a tour around my State in the course of 
this year, all 36 counties, and I go to place after place where 
manufacturing facilities are shrinking and disappearing, 
largely or often in competition with China.
    So it seems fairly clear that China has pegged its rate 
artificially low in order to pursue this strategy. It gives 
them greater employment at home and it undermines their 
competitors. Is that a fair conclusion?
    Secretary Geithner. Yes. We are in agreement on that, and I 
think you said it right.
    Senator Merkley. So I want to understand a little better 
this definition of manipulation, because GAO said there were 
three standards for it. One is that there is a global current 
account surplus, that is, China would have to have, which they 
do. Second, they would have to have a significant bilateral 
trade surplus with the United States, which they certainly do. 
And the third is that they have designed their currency policy 
to gain a trade advantage, which seems unmistakable.
    So I am a little--I hear you saying, well, maybe the 
designation doesn't matter because it only requires 
negotiation, but don't they meet these three? Aren't these 
three standards met for finding manipulation?
    Secretary Geithner. Let me just try to say this as clearly 
as I can. It is not that a designation doesn't matter. It is 
that the designation itself has to meet a certain legal test in 
the Act, and the act of designation alone only requires that we 
go talk. So we have had a long time of experience with that 
particular law and those reports. You have seen how my 
predecessors have applied that law over a long period of time. 
You have seen the benefits and the limits of that basic 
    All I am trying to do is to say that whatever your 
definition of manipulation is, what matters is the currency is 
undervalued. They are intervening to hold it down. That 
adversely affects our economic interests. And there is an 
overwhelmingly compelling economic case for the world, for 
China's trading partners, for China, for us, to try to alter 
that basic practice, and that is what we are focused on doing. 
And what we should be focusing on doing is--and you all live in 
the real world--is to try to figure out things that are going 
to make a difference, not just require more talking.
    Senator Merkley. OK. So I understand your point, but from 
the viewpoint of folks back home, when they hear this three-
part test and it sounds like all three are met, they don't 
understand, because it does seem like a reluctance to respond 
to what the law seems to lay out and that that then translates 
into a sense that we are reluctant to really tackle this 
problem, and that the longer we don't tackle it, the more we 
lose our industrial manufacturing base, and the longer we lose 
that, the fewer families we have in the middle class, and that 
we see this happening before our eyes.
    It is a striking statistic to me that 1974 until now, 
American workers have essentially had a flat standard of 
living, and that is because of a huge divergence from the 
productivity curve, which wages used to track, and so for my 
entire--I graduated from high school in 1974, so in essence, my 
entire adult life, workers have not been participating as they 
had previously in increased productivity and wealth of our 
country, and at least it seems linked in part to this Chinese 
strategy. There are other things going on, certainly, and that 
is why it feels so important to people that we label it 
clearly, that we are determined to take it on. And I do think 
at least it would be a step in persuading the Chinese we are 
seriously, if we are willing to slap the label on it it so well 
    Secretary Geithner. If it meets the tests in the law and we 
think it would be effective in changing behavior, then 
absolutely, we will do that. But I just want to say that it is 
important to remember that the most important things we can do 
to make manufacturing strong in the United States, to make 
people invest more here rather than overseas, to improve the 
odds that income growth for average Americans improves over 
time, are going to be about the policies that we pursue in the 
United States, including by this body.
    Now, they need to be complemented by effective ways to 
address unfair trading practices like we have seen in the 
currency, like we see with China. But we could spend months and 
months debating the optimal design of a new report on China's 
exchange rate practices, and if we don't at the same time do a 
better job of passing policies that will help invest more in 
this country, we will have done nothing.
    So I would just say that please make sure that we put as 
much emphasis on things that are going to make us stronger as a 
country as in giving us authority to pursue unfair trading 
practice of our trading partners. We are in complete agreement 
about the concern and the objectives, and again, we are happy 
to work with you, Mr. Chairman, and your colleagues on how best 
to do that.
    Chairman Dodd. I thank you. Senator, I apologize, but I am 
afraid you are going to miss these votes.
    Mr. Secretary, we thank you. I am going to announce that we 
have got two votes, so I will come back here as quickly as I 
can for our second panel to hear them.
    I just want to raise, I want to check on one thing, because 
I am thinking about the unfair trade practices. Someone told me 
recently that China limits the amount of foreign films that can 
be imported in China to 19 a year, two of which come from this 
country out of the 19. I would like someone to verify if that 
is the case. But then simultaneously, the incredible pirating 
that goes on. So you get the dual effects of limiting access to 
a market and then simultaneously, of course, pirating the films 
themselves to market them at the expense of those who produce 
them. That is just one example. I don't know if that is an 
accurate one or not. It has been repeated to me on several 
occasions, but I would like to have some verification if that 
is the case. And that is what we are up against. It is 
something aside from the manipulation of the currency here, the 
manipulation of a marketplace poses some serious issues, as 
    Mr. Secretary, we thank you very much. You have been very 
    The Committee will stand in recess for two votes. I will 
come back as quickly as I can.
    Chairman Dodd. The Committee will come to order.
    My apologies. You are very patient, and I owe you, but 
obviously we cannot predict days in advance on a hearing what 
is happening on the floor of the Senate or the START Treaty one 
floor down being involved in extensive amendments and 
negotiations as well, and I serve on that Committee as the 
Ranking Democrat. So I am trying to get back and forth. So my 
apologies to our very distinguished witnesses.
    In fact, I want to express the apologies of other members, 
Bob Corker especially. He said he was up until 4 in the 
morning, reading your testimony and everything else, and of 
course he is very involved in the START talks, the START 
negotiations on the bill--and the number of other members who 
wanted to be here to listen to your testimony this morning.
    So we will begin by just asking you to share your thoughts 
with us as well, and I will introduce you. Some of you have 
been talked about already: Dr. Fred Bergsten, who is Director 
of the Peterson Institute for International Economics; Lynn 
Brown, Senior Vice President of Sales and Marketing, Hydro 
Aluminum; and Charles Freeman who is the Chair in China Studies 
at the Center for Strategic and International Studies.
    All three of you will begin in the order I have introduced 
you, and any documents or supporting evidence you will 
contribute to this discussion this morning I will include in 
the record. You are on.


    Mr. Bergsten. Thank you, Mr. Chairman. Let me first start 
by congratulating you on Dodd-Frank, a monumental achievement.
    Chairman Dodd. Thank you.
    Mr. Bergsten. And delighted to see it.
    Chairman Dodd. I would have had you up earlier if I knew 
you were going to say that.
    Mr. Bergsten. I will come back.
    Chairman Dodd. Thank you.
    Mr. Bergsten. There are two parts to my statement. One is 
an analysis of the issue, but you have already gone over that 
extensively. A number of my numbers were already quoted by you 
and others. So I will just skip over that and go right to the 
basic question you and your colleagues were raising, what 
should we do about this, and I think there are a number of 
things you can and should do about it and that the 
Administration could and should do.
    I think in your opening remarks you rightly stress the 
importance of multilateral cooperation. You cited how the G-20 
was helpful in moving on financial regulation. I think it can 
be in this issue too. But it is true, as you all said, the 
Administration itself needs to take stronger positions. So let 
me suggest three things that the United States ought to do and 
then conclude by how I think you in this Committee and the 
Senate might help push that process with legislation.
    Chairman Dodd. Good.
    Mr. Bergsten. First, we, and as many other like-minded 
countries as we can mobilize, should take China to the WTO. 
There is a WTO provision which proscribes countries from 
frustrating the intent of the agreement through exchange 
action. It has never been tested. The lawyers debate whether we 
could succeed or not.
    I think we should take the case. It would put the 
international spotlight on the China problem. It would give us 
an incentive to mobilize a multilateral coalition on this 
problem, which we have not really tried to do, and it uses the 
right mechanisms.
    Second, I think we should follow the economics of this 
countervailing duty and subsidy issue, not worry so much about 
debates over what is in the current legislation. I think the 
Department of Commerce made a mistake not to permit the 
countervailing in some of the current cases. But the Congress 
can easily change the relevant law, indicate explicitly that 
substantially and manipulated undervalued currencies are 
subsidies for purposes of applying U.S. countervailing duty 
law. I think we should do that. There is a bill in the House 
that was considered by Ways and Means yesterday. I am sure they 
will ask the Secretary about it in an hour or so. I think we 
should pursue that.
    Chairman Dodd. Yes.
    Mr. Bergsten. Third, a fairly new idea, although actually a 
version of it is in one of Senator Schumer's bills, on this 
topic, it is what I call countervailing currency intervention. 
Instead of countervailing import duties which apply case by 
case, sector by sector, only to imports, we really ought to 
countervail against the currency intervention of the other 
countries by currency intervention of our own. Japan's new 
intervention reminds us other countries set the exchange rate 
of the dollar against their currency; we do not. They 
intervene, they set the exchange rate; we sit back passively. I 
think we should countervail with currency intervention of a 
like magnitude.
    Senator Schumer, in his bill, calls it remedial 
intervention. I call it countervailing currency intervention, 
which I believe we could do under current authorities, which 
would have the United States sort of offset dollar for dollar 
what the other country does. I think very quickly they get the 
message, and cease and desist.
    I hasten to say there is a big technical problem in the 
Chinese case because the currency is not convertible. So we 
cannot go buy it the way we can buy yen, euros, most other 
currencies. But the principle is clear. In the case of China, 
we would have to find some proxies, and there are some. We 
would not be able to do it dollar for dollar, but I think we 
could send the message through.
    So three steps: Take them to the WTO, start countervailing 
against the subsidies and countervailing currency intervention.
    Final point on your legislative strategy, as I listened to 
Secretary Geithner and Secretary Paulson before him, they say 
that they are unwilling to label China a manipulator in part 
because it does not make any difference; all they have to do is 
submit a report.
    Well, I am with you, Senator Schumer. I think it would make 
a difference. But the answer to that is to beef up your law and 
explicitly link the manipulation designation to authorities to 
take the three kinds of actions I suggested.
    Chairman Dodd. And I think the Secretary was asking for 
that almost. He must have said at least on four or five 
different occasions, existing law only says we talk.
    Mr. Bergsten. Right.
    Chairman Dodd. Now we have been doing a lot of talking.
    Mr. Bergsten. So here are three responsible actions. In the 
case of the trade actions, I would say they have to be 
demonstrated to be consistent with our WTO, our multilateral 
obligations. Lawyers can debate that, but maybe change those 
rules too. But then the currency intervention, I do not think 
anybody could complain about.
    So add those three authorities to the law. Manipulation 
would then make a difference.
    You all are obviously right. Manipulation is a fact. It is 
a tragedy that we do not do it, and there is an operational 
implication. If we want to line up a multilateral coalition to 
take China to WTO, to countervail against its imports, to work 
against its currency, we are just not credible asking other 
countries to step up and take China to court if we are 
unwilling to indict them under our own law.
    So I think all this kind of hangs together and could move 
in the direction of a new policy, a new strategy, a new 
legislative initiative that would greatly both buck up the 
Administration to take action and strengthen it when it did.
    Chairman Dodd. Thank you for that.
    Mr. Brown.


    Mr. Brown. Mr. Chairman, I appreciate the opportunity to 
appear today, and I would like to speak about how my company 
and the U.S. aluminum extrusion industry has been impacted by 
Chinese exports of aluminum extrusions and particularly by the 
large and distortive subsidy that Chinese extrusion producers 
benefit from as a result of China's undervalued currency.
    Hydro is a major U.S. producer of soft alloy aluminum 
extrusions. We operate six aluminum extrusion facilities across 
the United States, primarily in smaller towns, and one 
dedicated fabrication facility. Approximately half of our 
facilities are unionized, with workers represented by the 
United Steelworkers, the Teamsters and the United Auto Workers. 
Currently, we employ about 1,500 workers--a dramatic reduction 
from the 2,300 workers that were on the payroll just 3 years 
    In 2006, we shipped over 250 million pounds of aluminum 
extrusions. In 2010, we expect to ship approximately 35 percent 
less. Imports of Chinese extrusions have created havoc in our 
industry, growing from a negligible factor a couple years ago 
to a market share of 25 percent today. During the time when the 
U.S. consumption of extrusions has fallen substantially due to 
the recession, Chinese imports have more than doubled.
    Earlier, I mentioned our six extrusion facilities. It used 
to be seven. We have already closed one in Ellenville, New 
York, with 150 jobs lost. In addition, we idled press lines at 
three of our plants in 2009. This, along with reductions in 
employees, in work shifts and in work weeks, has made it very 
difficult for my company and for our employees.
    But we are just one of over 70 extruders in the United 
States. There are similar stories throughout our industry.
    The flood of low-cost, low-priced Chinese imports caused 
Hydro, along with other members of the domestic industry and 
the United Steelworkers, to file anti-dumping and 
countervailing duty petitions covering aluminum extrusions from 
China. We did so on March 31 of 2010. In our countervailing 
duty petition, we listed a host of subsidy programs that 
benefited Chinese extruders, including an allegation covering 
China's undervalued currency.
    Much to our disappointment, and as was discussed earlier, 
the Commerce Department did not initiate an investigation of 
the currency allegation, claiming that our allegations were not 
legally sufficient. We disagree, but Commerce did not give us 
the opportunity to revise our allegation to address the 
concerns they had.
    Chinese extrusion producers have been able to lower prices, 
increase exports and gain U.S. market share in part because of 
the undervalued Chinese currency. The cost structure of our 
industry is based on global commodity prices for aluminum, and 
that makes it very difficult for U.S. producers to compete with 
imports, the imported prices from China. Over 70 percent of our 
cost structure is represented by the base aluminum, giving us 
very limited ability to respond to subsidized prices.
    Without the establishment of a level playing field, the 
U.S. industry faces major long-term problems. Our business at 
home is hampered, and the severe undervaluation of Chinese 
currency effectively imposes a 20 to 40 percent tax on 
potential exports from our U.S. facilities where we compete 
with the Chinese.
    This is an issue of basic fairness that needs to be 
addressed. The best outcome would be for China to allow its 
currency to float freely and reflect market forces. We have had 
much discussion this morning about the lack of success, 
however, in negotiating with China on its currency 
reevaluation, both bilaterally and multilaterally.
    Short of a freely floating currency, whose value is 
determined by market forces, we believe the best approach is 
for the Commerce Department to investigate China's undervalued 
currency as a countervailable subsidy, which it has thus far 
refused to do.
    Again, I appreciate the opportunity to appear today and 
would welcome any questions.
    Chairman Dodd. Well, thank you very much and I thank you, 
Mr. Brown, for your patience here this morning as well. I hope 
you found it interesting to hear some of this discussion that 
occurred over the last couple of hours.
    Mr. Freeman, welcome and thank you for being before the 
Committee, we are very grateful to you.


    Mr. Freeman. It is an honor, Mr. Chairman, and thanks for 
the opportunity.
    I think my job here is to provide a little sort of 
political context within China and to answer the question: Why 
do they do what they do? What will it take to get them to 
change that and what can we do to push them along the way?
    I think I should first say it is hard to over-estimate the 
fear of political instability that the Chinese leadership has. 
For them, they look out at a vast country with a huge number of 
staggering challenges, and they say, we are going to lose our 
jobs here unless we kind of keep the lid on this place.
    And they have done a back-of-the-envelope calculation about 
10, 15 years ago and said, we need about 8 percent annual 
growth in order to provide 50,000 new jobs a day to Chinese, 
and if we do that we can kind of keep the wolf from the door, 
the people from rioting in the streets, and we can all sit in 
Beijing and continue to be comfortable and in control.
    The currency is a big part of that and has been since the 
early 1980s when China moved to open its marketplace and become 
more integrated with the global system, to try to generate that 
kind of 8 percent return. What they did is they went from about 
a 1.5 renminbi to the dollar to about 8.62 in 1994 strictly so 
that they could have a competitive currency to allow them to 
export. That has been goal.
    And ultimately when you are looking out and you are saying 
you have to provide 50,000 new jobs a day, if it ain't broke, 
do not fix it. So their incentives at the basic level to 
continue to subsidize--I use that term advisedly--their 
currency, to subsidize exports, are designed to prevent 
political instability, plain and simple. And they, frankly, 
will do everything possible to resist U.S. pressure to change 
that policy.
    We should remember, of course, that China is not a monolith 
and there is no puppet master sitting in Beijing that is 
controlling every aspect of Chinese policymaking, in that there 
is a very fertile and active debate that has gone on for years 
between policymakers in China.
    I think when Treasury, when Secretary Geithner and his team 
go to China and they talk to members of the People's Bank of 
China or otherwise, they are frankly preaching to the choir. 
These are folks who say: Because of the fixed currency, because 
of the over-reliance on an export-driven growth, we are 
effectively handicapping our ability to move from the 20th 
Century to the 21st Century as an economy. We are essentially 
subsidizing investment into lower margin, over capacity in 
industries like Mr. Brown's here. We are effectively reducing 
our capacity to become more of a consumption-driven economy 
that they think they do need to grow to.
    So there are plenty of people within the Mandarins in China 
that understand that this is a policy they should move for 
their own purposes.
    The challenge of course has been that really since 2001 
these kind of pro-reform, pro-market people have been on the 
wane since China joined the WTO. The change in attitude and 
emphasis among policymakers in Beijing has gone to a very 
different approach and not one that is pro-reform.
    The other challenge that I think Secretary Geithner and 
others face when they go and talk to the Chinese is the fact 
that since the financial crisis, our credibility in trying to 
say this is the way markets should work, this is the way you 
should operate your economy has gone down a bit. There are 
plenty of Chinese that think: You know, the old Washington 
consensus of how to run an economy, how to develop is out the 
door. What we have now is a Beijing consensus, and the China 
model of state-directed capitalism is the one that is right. 
Why should we listen to you when our model works and yours does 
    Chairman Dodd. Yes.
    Mr. Freeman. I think the other part of that is that they 
understand since we have been telling them for 15 years, well, 
the trade deficit that we have with you is unsustainable, and 
we started saying that to them at $10 billion. They just do not 
believe it anymore.
    The one thing I will say in terms of this specific issue is 
I do not think the currency is a magic bullet. I agree with 
many of the Senators here and yourself that there are far more 
or there are many other issues that are out there, whether it 
is intellectual property protection, whether it is the 
indigenous innovation and industrial policies. And I think we 
need to, instead of just focusing so narrowly on the currency, 
really need to approach this holistically. There are ways to 
look at WTO remedies that deal with the nullification and 
impairment of China's overall commitments to the WTO, and I 
think we ought to look pretty seriously at those if we are as 
worried as we should be about China's role in the world trading 
    I do think multilateral approach is critical, to the 
currency issue in particular, but I do think that we have to 
show leadership and take the first step. No one is going to let 
us work in their wake.
    Thank you, Mr. Chairman.
    Chairman Dodd. Let me ask you if I can, Mr. Freeman, Mr. 
Bergsten made some suggestions. You heard them, these three 
suggestions he made. How do you react to those?
    Mr. Freeman. I am not an economist, but I have worked at 
USTR, and I am a little nervous about the strict WTO process as 
a lawyer and as having worked in the U.S. Trade Representative. 
I am not sure that that process gets you very far, and I am not 
sure that a WTO panel would particularly welcome that result.
    I think as a means to attract attention, it certainly would 
do that. Whether or not it would actually achieve the ultimate 
intent, I am not certain.
    Dr. Bergsten is also correct that certainly buying shares 
of renminbi would send an enormous signal and be enormously 
effective. It is hard to find those pools of renminbi 
available. There is some that is offshore in Hong Kong, but 
that would, I am afraid, dry up pretty quickly and not be 
available to continue to offset the dollar purchases.
    I am interested in the subsidy issue and how that would 
work, and I think that the challenge there is actually finding 
an appropriate valuation for the currency, but that is 
certainly something that learned economists like Dr. Bergsten 
can answer better than I.
    Chairman Dodd. Well, I agree with your point you made 
though, that this has to be far more than just a currency 
debate. And I think you added the point that Dr. Bergsten made 
out, and that is it also has to be multilateral. I mean there 
are many more issues affecting these questions of economic 
growth at home.
    I wonder if you might, Dr. Bergsten. How long do you think 
it will take to achieve a meaningful correction in the 
currency? We are seeing this. We listened to the Secretary now 
talk about the changes since June and that it has been slow. Do 
you anticipate this to be a pattern that will continue, even 
though it will not achieve getting close to the 20 percent for 
a long time or do you sense that is just sort of a token 
response to the pressures of the moment?
    Mr. Bergsten. Actually, I thought the most important thing 
the Secretary said this morning was when he almost endorsed as 
a goal what I said in my testimony, that we ought to seek a 
rise like the rise in the renminbi that occurred when they let 
it float last time, between 2006 and 2008. Over 2 years, it 
went up 20 or 25 percent, depending on how you calculate.
    Chairman Dodd. Right.
    Mr. Bergsten. He came pretty close to saying that is his 
goal, that is what he will measure it against.
    I would be satisfied with that. I think that would correct 
the current disequilibrium. I agree it should not be done 
overnight because that would be disruptive to them and to us. 
So if they got on a path that did 20 to 25 percent over a 
couple of years, I think that would be adequate.
    Chairman Dodd. Yes.
    Mr. Bergsten. So far, they have not done. So I am with you 
and the Committee members, taking some of the steps we have 
talked about here that would encourage the Chinese to 
accelerate that movement.
    Now you said back earlier this morning, when the Secretary 
was here you noted that the Chinese accelerated the 
appreciation of their rate when some things were happening here 
in the Senate.
    Chairman Dodd. Yes.
    Mr. Bergsten. I do not think that was an accident.
    Chairman Dodd. No.
    Mr. Bergsten. So if we could get them to move the annual 
rate up to something like 8 to 10 percent.
    Chairman Dodd. Yes, that would be large.
    Mr. Bergsten. Then I think we would be on. What we need to 
see is a down payment, enough of a move that it is credible and 
then keep it going, and ongoing pressure undoubtedly will be 
needed to achieve that.
    Chairman Dodd. Well, that is why I thought the possibility 
of working on some amendments to current law between now and 
November, the G-20 meeting, might have the positive effect, 
even though we would not have enacted something, showing some 
    Mr. Brown, there are those who argue that the appreciation 
of the currency is going to do little to nothing to improve the 
competitiveness of American companies, that actually our 
problems are more homegrown, and it is too easy to blame the 
Chinese for our problems. How do you respond to that?
    Mr. Brown. I think the currency is one issue. Of course, 
there are a host of other subsidies that Chinese extruders 
benefit from as well.
    You know, I can only really speak to my own company, but we 
have made a substantial effort over the last several years to 
continue to improve productivity. When possible, we invest in 
upgrading our facilities. But the reality is that with the 
subsidies that we face today we cannot continue to grow the 
business. We cannot replace business quickly enough, that is 
lost to the Chinese. So the industry gets smaller and smaller, 
my own company gets smaller and smaller. We are certainly 
willing and aggressively going forward to improve our position, 
but we cannot do that totally on our own.
    Chairman Dodd. Is it primarily steel? Is that your business 
    Mr. Brown. No. Our business product is aluminum, and the 
nature of it is such that typically 70 percent of my total cost 
structure is aluminum that is traded globally, traded in U.S. 
dollars on the LME, so that I have relatively, we have 
relatively small room in which to move.
    Chairman Dodd. Internationally, aside from the Chinese, who 
else is in this business? The Brazilians?
    Mr. Brown. It is a global business. There is a very, very 
active industry in Brazil, in Europe, throughout the world.
    And it tends to be a local business. In the United States, 
the conventional wisdom is you do not make much money more than 
300 miles from your plant. The reason for that is with that 
small manufacturing costs, transportation costs eat that up 
very quickly. So I go 2 hours from a plant and get beat by the 
Chinese by 30 percent, that does not make any sense at all.
    Chairman Dodd. Is that true of your peers and competitors 
internationally as well?
    Mr. Brown. It is. Let me be a little bit more specific. 
Certainly this was a major issue in Canada, and the Canadian 
extrusion industry brought a successful countervailing duty 
action against the Chinese extrusion industry for exactly the 
same reasons that we have initiated our action. It is also an 
issue of concern in the E.U. at this point and is a factor in 
other markets as well.
    Chairman Dodd. Well, listen, I thank all three of you, and 
this has been truncated obviously, but I appreciate your 
comments. And I will leave the record open, so my colleagues 
can submit some questions, too, which I think they like to do 
to complete the record, fill it out. So that will be helpful to 
us as well.
    You have been very, very supportive of our efforts up here, 
and this was an important hearing.
    The Secretary will be testifying before the Ways and Means 
Committee this afternoon. So we will get a full body of all of 
this before we are through.
    Again, I apologize for this morning. Again, I cannot 
control the events around here, how they unfold, but I am 
grateful to you for being here. Thank you all.
    The Committee will stand adjourned until further call of 
the Chair.
    [Whereupon, at 1:09 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]

                           September 16, 2010

    Thank you, Chairman Dodd. Thank you, Secretary Geithner, for being 
here today.
    I just attended the first meeting of the President's Export 
Council, of which I'm a member.
    We discussed how increasing exports is key to our economic 
    The President discussed the National Export Initiative and the goal 
to double exports over the next 5 years.
    This is a goal I think we all share.
    And it couldn't be more relevant to today's hearing, because unless 
we confront trade-related barriers to export success, it will be like 
paddling upstream with one oar in the water.
    We must not acquiesce to corrupt trade tactics that render 
legitimate competition impossible. And China's currency manipulation is 
at the top of the list of those trade tactics.
    By keeping the value of the RMB artificially low, China provides an 
incentive to foreign corporations to shift production there, because it 
reduces the price of investing in China and makes Chinese exports 
    This continued undervaluation--which most economists agree is in 
the range of 25 to 40 percent--has caused serious harm to the U.S. 
economy and has cost American jobs.
    Right now, Chairman Dodd, down the street from the Capitol, there 
is a hearing going on at the International Trade Commission (ITC) on 
coated paper from China.
    Workers in my State and dozens of other States are affected by the 
unfair subsidies the Chinese government gives this industry--including 
a virtually insurmountable currency advantage. Despite businesses in 
the coated paper industry and the aluminum extrusions industry 
presenting a solid case for why currency manipulation should be 
included in this investigation, the Commerce Department has chosen not 
to include it.
    If currency manipulation is a subsidy--and it certainly is--then 
our workers and producers deserve a trade remedy. It's not just a 
matter of fairness; it's a matter of pragmatism.
    Competition that is skewed by currency manipulation is not really 
competition--it's actually just a monopoly waiting to happen.
    U.S. corporations can out-compete their foreign counterparts on 
efficiency, on innovation, on quality, on productivity, on marketing 
strategy. The list goes on and on.
    But it's not realistic to expect them to overcome false price 
discounts deriving from currency manipulation and huge government 
    Still, this Administration has chosen not to include currency 
manipulation in the coated paper case.
    This is despite the facts being clear and the law being on their 
    Senator Schumer, Graham, Snowe, Stabenow, and I have a bill to make 
the law even more straightforward and clarify the process for taking 
action against countries that manipulate their currency.
    To not act is unjustifiable. It costs American jobs.
    Dr. Fred Bergsten of the Peterson Institute, one of our witnesses 
on today's second panel, estimates that eliminating this subsidy would 
result in the creation of half a million U.S. jobs and a reduction in 
the U.S. global current account deficit by $50-$120 billion.
    Paul Krugman estimates that China's currency policy--and resulting 
large trade surpluses--might end up costing about 1.4 million jobs in 
the U.S. in the next couple of years.
    I appreciate Secretary Geithner's work to address trade imbalances 
through the G20 and bilaterally with the Chinese.
    I agree we should continue to talk with the Chinese on this issue.
    But we cannot just talk when we have tools to address the imbalance 
caused by currency manipulation. We must act.
    I look forward to the testimony of Secretary Geithner and our 
second panel witnesses.
    Thank you.
                 Secretary, Department of the Treasury
                           September 16, 2010

    Chairman Dodd, Ranking Member Shelby, Members of the Committee, 
thank you for the opportunity to testify on Treasury's semiannual 
Report to Congress on International Economic and Exchange Rate 
Policies, and in particular on China.
    I want to focus today on the importance of the U.S.-China economic 
relationship and the challenges that we must overcome in order to 
secure the full benefit of this relationship for the American people.
    We have very significant economic interests in our relationship 
with China. With over 1.3 billion people and an economy continuing to 
grow at or near double-digit rates, China is our fastest-growing major 
overseas market. China's record of bringing hundreds of millions out of 
poverty, building a rapidly growing middle class, and now its efforts 
to encourage growth led by domestic demand, ultimately mean more demand 
for American goods and services. Increasing opportunities for U.S. 
firms and workers through expanded trade and investment with China will 
be an important part of the success of the President's National Export 
Initiative and our efforts to support job growth more broadly.
    U.S. exports to China have grown much faster than our exports to 
the rest of the world, and they have recovered much more quickly 
following the global crisis.
    So far this year, U.S. exports of goods and services to China 
exceed $53 billion. U.S. merchandise exports to China this year are up 
36 percent compared to 2009 and are 16 percent higher than comparable 
2008 (pre-crisis) levels. By comparison, merchandise exports to the 
rest of the world are still 8 percent below 2008 levels, highlighting 
the importance of the Chinese market as we continue our recovery.
    And China is a critical market for a broad range of American 
products, from agriculture, to manufacturing, to services. To name just 
a few examples, China was the largest market for U.S. soybeans last 
year, importing over $9 billion. In the manufacturing sector, the 
United States has already exported nearly $3.5 billion in aircraft to 
China this year alone, and U.S. exports of automobiles and parts to 
China have grown over 200 percent. In 2009 China was one of the top 
three merchandise export markets for nearly half of U.S. states, and 
nineteen states exported more than $1 billion to China. The 
Administration's policy is to ensure that American opportunities in the 
Chinese market expand as rapidly as possible.
    But we also face substantial challenges in this relationship with 
China. I want to provide a candid assessment of where we are making 
progress, where progress remains inadequate, and where we are going to 
concentrate our efforts in the months and years ahead.
    To address these challenges, we are focusing on three core 
objectives with China: encouraging China to change its growth model to 
rely more on domestic demand and less on exports; moving toward a more 
market-determined Chinese exchange rate; and leveling the playing field 
for U.S. firms, workers, ranchers, farmers, and service providers to 
trade and compete with China. With China's economy on a strong footing, 
it is past time for China to move.
    We are pursuing a comprehensive, proactive strategy to push China 
for progress. This includes direct engagement by President Obama and 
this Administration with China's senior leaders. It includes 
coordinated and intense engagement through the Strategic & Economic 
Dialogue (S&ED) and the Joint Commission on Commerce and Trade (JCCT), 
as well as multilateral channels like the G-20 and International 
Monetary Fund (IMF). It includes taking dispute settlement cases when 
China does not comply with World Trade Organization (WTO) obligations, 
and enforcing U.S. trade remedy law to safeguard the rights of American 
firms and workers. And it includes working closely with this Committee 
and your Congressional colleagues to make sure we are taking the best 
possible approach to shape a balanced and fair relationship.
China's Growth is Critical to Our Growth
    While the global financial crisis had little direct impact on 
China's financial system, China's leaders quickly recognized that the 
weak global economy would hurt demand for China's exports. China 
responded early and aggressively with a massive stimulus program 
designed to offset weaker exports with domestic demand, particularly 
fixed investment. Through its efforts to stimulate domestic demand, 
China maintained growth of about 8 percent in 2009. And the resulting 
boom in China's imports supported the global economy and contributed 
substantially to recovery around the world. With this boom in imports 
and its exports limited by the recessions in the United States, Europe, 
and China's other key export markets, China's external surpluses fell 
significantly in 2009.
    However, as growth in the rest of the world recovers and China 
returns to a more normal pace of growth, the factors that led to the 
decline in China's external surpluses are now reversing. It is critical 
for sustainable growth in China, the United States, and the rest of the 
world that China and the United States both do our part to prevent a 
return to pre-crisis global imbalances.
    Clearly, China's exchange rate must play an important role in this 
effort. However, exchange rate appreciation also needs to be 
complemented with structural reforms to reduce the gap between saving 
and investment in China in order to bring about a durable rebalancing.
    China responded to the financial crisis with several steps that, if 
sustained, would help to reduce its reliance on exports and stimulate 
domestic demand, including a large increase in spending on health care, 
education, and pensions that should reduce the need for Chinese 
households to save for precautionary reasons. Top priorities for 
further structural reform include liberalizing interest rates, lifting 
energy price subsidies, and removing barriers to investment in the 
service sector. Each of these measures would reduce the current bias in 
China's economy toward heavy manufacturing and exports and away from 
services and household consumption.
China's Exchange Rate Policy
    We share the concern of the Committee and many of your colleagues 
about China's exchange rate policy. After allowing the renminbi to 
appreciate over time against the dollar from mid- 2005 through mid-
2008, in July 2008, as the financial crisis intensified, China 
effectively ``repegged'' to the dollar, and there has been essentially 
no movement of the renminbi against the dollar over the past two-plus 
    On June 19, 2010 China took a very important step when it announced 
that it would renew the reform of its exchange rate and allow the 
exchange rate to move higher in response to market forces.
    In the roughly 3 months since that announcement, however, the 
Chinese have allowed their currency to appreciate against the dollar by 
only 1 percent, and the currency has actually depreciated against the 
weighted average of the currencies of its trading partners.
    During this same period, China has had to continue to intervene in 
the exchange markets on a very substantial scale to limit the upward 
pressure of market forces on the Chinese currency.
    Even with the appreciation of the renminbi against the dollar that 
has taken place since this process began in 2005, China's real trade-
weighted exchange rate is now only 4.9 percent stronger than it was on 
average from 1998-2002, an unjustifiably small change given that 
China's productivity doubled during that time.
    It is the judgment of the IMF that, in view of the very limited 
movement in the Chinese currency, the rapid pace of productivity and 
income growth in China relative to its trading partners, the size of 
its current account surplus, and the substantial level of ongoing 
intervention in exchange markets to limit the appreciation of the 
Chinese currency, the renminbi is significantly undervalued.
    We share that assessment. We are concerned, as are many of China's 
trading partners, that the pace of appreciation has been too slow and 
the extent of appreciation too limited.
    We will take China's actions into account as we prepare the next 
Foreign Exchange Report, and we are examining the important question of 
what mix of tools, those available to the United States as well as 
multilateral approaches, might help encourage the Chinese authorities 
to move more quickly.
    The undervalued renminbi helps China's export sector and means 
imports are more expensive in China than they otherwise would be. It 
undercuts the purchasing power of Chinese households.
    It encourages outsourcing of production and jobs from the United 
States. And it makes it more difficult for goods and services produced 
by American workers to compete with Chinese-made goods and services in 
China, the United States, and third countries.
    China needs to allow significant, sustained appreciation over time 
to correct this undervaluation and allow the exchange rate to fully 
reflect market forces.
    Specifically, in evaluating progress two key factors should be the 
pace and extent of appreciation and the level of ongoing intervention 
required to slow the rate of appreciation.
    During the last period in which the Chinese authorities allowed the 
currency to move higher it appreciated about 20 percent against the 
dollar and 13 percent on a real, trade-weighted basis.
    We recognize that this movement will not be a steady, uninterrupted 
path--there will be days when the exchange rate goes down, as one would 
expect as the exchange rate becomes more determined by market forces. 
And China is going to be careful to try to avoid creating a market 
expectation of a ``one-way bet'' that could cause a large speculative 
inflow. But the exchange rate must demonstrate a sustained, trend 
    As the exchange rate gets closer to a level that reflects 
underlying economic fundamentals, the level of intervention should 
decline. Continued heavy intervention, in contrast, would support the 
judgment that the currency remains undervalued.
    As China's leadership has acknowledged, a more market-determined 
exchange rate is in China's interest. A more flexible exchange rate 
will allow China to pursue a more independent monetary policy better 
suited to responding to China's economic conditions. It will provide 
greater ability to pursue needed structural reforms to encourage 
consumption with less fear of feeding inflation. And it helps China 
prepare for further opening and internationalization of its capital 
    Going forward, sources of global demand growth have to adjust to 
the new economic realities. China and other surplus countries like 
Germany and Japan will have to increase domestic demand as the United 
States and other deficit countries save more and consume less. By 
continuing to maintain a rigid exchange rate, China is impeding the 
adjustments needed to secure the strong, sustainable global growth we 
all need.
Creating a Level Playing Field for American Firms and Workers
    Beyond the exchange rate, China has for a long time combined the 
pursuit of an export-driven growth strategy with a substantial set of 
protections and preferences for its domestic industries. We are 
committed to leveling that playing field.
    It is a simple principle of fairness that American firms competing 
in China's markets should have the same rights enjoyed by Chinese 
companies, just as Chinese firms compete on a level playing field with 
U.S. companies here.
    For example, the government still plays a very large direct role in 
the economy, through stateowned enterprises, and in the allocation of 
credit and other inputs to domestic production. China pursues 
industrial policies to promote what it calls ``indigenous innovation,'' 
aimed at promoting innovation and technological advancement in China 
that potentially discriminate against U.S. firms and their products, 
services, and technology. China also has yet to meet its 2001 
commitment to sign on to the disciplines provided by the WTO Agreement 
on Government Procurement (GPA). And China continues to maintain 
investment barriers that prevent U.S. firms from having the same 
opportunities that Chinese firms enjoy in the United States.
    China's indigenous innovation policies include proposed government 
benefits for specific products designated by the Chinese government 
such as preferential access to China's government procurement market. 
These and other measures, if implemented, would threaten normal, 
commercial intellectual property-related transactions and undermine 
market competition.
    China, like all countries, has a legitimate interest in promoting 
domestic innovation and technological progress. At the same time, its 
policies should not disadvantage U.S. firms and workers.
    We have made some progress on this front but much more must be 
done. We are pursuing this through all available bilateral and 
multilateral channels. At the S&ED, China committed that its innovation 
policies would be consistent with the principles of nondiscrimination, 
strong intellectual property rights enforcement, market competition, 
and open trade and investment, as well as to leaving the terms and 
conditions of technology transfer to individual enterprises. China also 
agreed to a high- and expert-level process led by Office of Science and 
Technology Policy Director Holdren that includes all relevant U.S. and 
Chinese agencies, to address our unresolved issues so that American 
firms and their workers are not disadvantaged by these policies. This 
process was launched in meetings in Washington in July and we will hold 
the next meeting in China this fall.
    Under the leadership of Secretary Locke and Ambassador Kirk, we 
will address specific trade and investment issues relating to 
innovation in detail with China at the next meeting of the JCCT later 
this year.
    On intellectual property rights (IPR), rampant IPR violations and 
the overall level of IPR theft in China remain unacceptable. Even with 
recent improvements in Chinese law designed to protect intellectual 
property, piracy and theft of intellectual property are widespread. For 
example, the share of IPR-infringing product seizures just at the U.S. 
border that were of Chinese origin was nearly 80 percent in 2009. 
Despite recent positive steps by China, including the largest software 
piracy prosecutions in Chinese history and an increased number of civil 
intellectual property cases in the courts, widespread IPR infringement 
in China continues to impact U.S. products, brands, and technologies in 
a wide range of industries. IPR enforcement is an important economic 
issue, and robust enforcement provides incentives for innovation and 
creativity, crucial to our economy.
    We will continue to press China to strengthen its IPR enforcement 
and its prosecution of violations so that U.S. firms are not being 
undercut by pirated technology and counterfeit goods.
    When China fulfills its WTO commitment and completes the 
negotiations to join the WTO's rules-based GPA, as we have been 
pressing China to do, China's ability to use government procurement to 
pursue discriminatory policies, including China's proposed product 
accreditation system, will be limited. In line with its commitment to 
us in the S&ED, China submitted a revised offer in July to join the 
GPA. While improved, it is still insufficient, and we will continue to 
make clear to China that it must provide broad coverage consistent with 
that of other GPA members.
    Investment barriers continue to prevent or constrain U.S. firms' 
ability to invest in specific sectors of the Chinese economy. Reducing 
these barriers, as well as maintaining the longstanding open investment 
policy of the United States, is vital to creating more jobs for 
American workers.
    In many cases, foreign investment by U.S. firms, including in 
China, provides a major channel through which U.S. exports flow, and as 
a result contributes to creating jobs here at home at our exporting 
    Again, it is a simple matter of fairness that U.S. firms enjoy the 
same access in China that Chinese firms have here. We intend to hold 
China to its S&ED commitment to expand areas that are open to foreign 
investment, including certain services, high-technology goods, high-end 
manufacturing, and energy saving products, and will push for further 
opening to expand opportunities for U.S. firms.
    For our part, we are fully committed to welcoming foreign 
investment, including from China, consistent with safeguarding our 
national security. Foreign investment benefits the United States. It 
creates high-paying jobs, and brings new skills and technologies. 
According to the latest data available, 5.5 million Americans--
approximately 4.6 percent of U.S. private industry employment--are 
employed by U.S. affiliates of foreign firms.
U.S. Policy Options
    We are very concerned about the negative impact of these policies 
on our economic interests, and are pursuing a carefully designed, 
targeted approach to address these problems.
    The Administration is using all tools available to ensure that 
American firms and workers can trade and compete fairly with China. We 
are committed to promoting policies in both the United States and China 
to create new opportunities for Americans and grow jobs in the United 
States. And we are not leaving these outcomes to chance.
    We will continue to encourage China to rely to a much greater 
extent on domestic demand for growth--particularly by giving households 
the income and the confidence to spend more and enjoy higher living 
standards. We are urging China through all channels to allow 
significant, sustained appreciation of the renminbi over time to 
accurately reflect market forces and correct the distorting 
undervaluation. We are urging China to end discriminatory trade and 
investment measures, protect intellectual property, and adhere to 
international best practices in promoting innovation.
    We are working in multilateral channels, including the G-20, APEC, 
and the IMF to press China to achieve balanced, sustainable growth, 
particularly by allowing prompt, meaningful, and continuing 
appreciation of the renminbi. A more flexible renminbi is in the best 
interests of the entire global community. At the IMF, China allowed 
publication of the annual Article IV report for the first time since 
2006, a step we strongly encouraged. In the G-20, we expect China's 
commitment to rebalancing to be a key part of the agenda at the Leaders 
Summit in Seoul later this year.
    We are aggressively using the full set of trade remedies available 
to us under U.S. law to address unfair trade practices and safeguard 
the interests of U.S. workers. The Commerce Department has moved 
actively, consistent with WTO rules, to defend U.S. companies and 
workers from unfairly traded goods from China. And last year, the 
President imposed temporary import relief under Section 421 when 
imports from China disrupted the U.S. market.
    We also will continue to use all tools we have to hold China to its 
international trading obligations, including in the WTO. Yesterday, 
Ambassador Kirk announced the filing of two new WTO cases against 
China, one involving discrimination by China against U.S. suppliers of 
electronic payment services (EPS), and the second challenging China's 
imposition of countervailing duties on U.S. exports of a high-tech 
steel product known as ``Grain-Oriented Electrical Steel'' (GOES).
    Last year, the United States won two WTO cases against China 
relating to intellectual property rights--one on copyright and 
trademark protection and another on the importation and distribution of 
certain publications and audiovisual products--and successfully settled 
a third case in which we challenged what appeared to be prohibited 
export subsidies. China also repealed measures that discriminated 
against U.S. auto parts in order to come into compliance with a 
favorable WTO ruling obtained by the United States in another case.
    We are in the process of reviewing carefully the evidence presented 
in the Section 301 petition filed by the United Steelworkers Union 
challenging a wide range of Chinese policies in the renewable energy 
    And we are exploring ways to encourage a substantial improvement in 
intellectual property protection in China.
    We are pursuing these important economic objectives at the highest 
levels of the U.S. Government, with a carefully coordinated assessment 
of priorities, led by the White House, and using all available tools, 
consistent with our WTO obligations.
    Our commitment starts at the very top. President Obama has made 
clear to the highest levels of the Chinese government our economic 
priorities, including real progress on currency and indigenous 
innovation. He designated Secretary Clinton and me to lead the S&ED, 
through which we are pursuing an integrated and coordinated strategy to 
level the playing field; we do so together with our interagency 
colleagues as part of an Administration-wide effort.
    We are making some progress. We welcome the recent assurances by 
the Chinese government, including Premier Wen's statements this week, 
to afford national treatment to U.S. companies operating in China. But 
we want to see that level playing field extended to U.S. exporters 
selling to China. This is the basic premise of the multilateral trading 
system from which China and the United States have benefited greatly.
    Mr. Chairman, we welcome your attention to these issues. And we 
will work closely with this Committee and your colleagues in both 
houses of Congress to find ways to best advance and best protect our 
economic interests in this important strategic relationship.
    China has a very substantial economic stake in access to the U.S. 
market, and China has benefited greatly from the rules and protections 
that underpin the multilateral trading system. And we have a very 
strong interest in a more level playing field in the Chinese market, so 
that U.S. businesses and U.S. workers do not face unfair trading 
    I want to be clear: a strong and growing China benefits the United 
States, just as a strong and growing United States is good for China. 
The more level the playing field, the truer this is.
    Fundamentally, our ability to benefit from the U.S.-China 
relationship depends more than anything else on our own actions to 
strengthen the American economy. To take advantage of the opportunities 
presented by a growing China, we have to educate our children, teach 
and advance basic science, invest in R&D, and foster innovation.
    We are making very substantial investments to do just that--to 
develop our abilities in growing fields like new energy technologies 
and prepare our industry and workforce to remain global leaders.
    And we are committed to restoring fiscal sustainability as the 
economy continues to recover so that our own economic conditions 
support strong and sustained growth, at home and globally. To achieve 
this, the Administration's Budget puts a 3-year freeze on non-security 
discretionary funding. Congress established its own pay-as-you-go 
budgeting rules in 2007 and the President proposed and signed 
legislation making PAYGO a legal requirement last February. PAYGO 
played an important role in restoring fiscal discipline in the 1990s. 
And the President has appointed a bipartisan Fiscal Commission which 
will make further recommendations by the end of the year.
    Renminbi appreciation will not erase our global trade deficit, nor 
our deficit with China. Our bilateral trade deficit is likely to 
persist. But Chinese exchange rate adjustment is critical to removing a 
major distortion in the global economy, to rebalancing China's economy, 
and to ensuring strong, sustainable, and balanced global growth.
    We need a more balanced economic relationship. This is imperative 
for us, but it is important to China as well.
    I look forward to working closely with this Committee and your 
colleagues in Congress so that the American people get the full 
benefits of an open and fair economic relationship with China.
    Thank you.
      Director, Peterson Institute for International Economics \1\
                           September 16, 2010

A Proposed Strategy To Correct The Chinese Exchange Rate
Summary and Recommendations
  1.  The U.S. and Chinese global trade imbalances are increasing 
        sharply. This makes it considerably harder to reduce 
        unemployment and achieve a sustainable recovery in the United 
    \1\ Dr. Bergsten has been Director of the Peterson Institute for 
International Economics since its creation in 1981. He was previously 
Assistant Secretary of the Treasury for International Affairs (1977-81) 
and Assistant for International Economic Affairs to the National 
Security Council (1969-71). His 40 books include The Long-Term 
International Economic Position of the United States (2009), China's 
Rise: Challenges and Opportunities (2008), China: The Balance Sheet--
What the World Needs to Know Now about the Emerging Superpower (2006), 
and The Dilemmas of the Dollar: The Economics and Politics of United 
States International Monetary Policy (2nd edition, 1996).
  2.  China's currency remains substantially undervalued, importantly 
        due to that country's massive intervention in the foreign 
        exchange markets, and is a major cause of its large and growing 
        trade surplus. It has risen by less than 1 percent since the 
        announcement of a ``new policy'' in June.
  3.  China let its exchange rate rise by 20-25 percent during 2005-08. 
        Our goal should be to persuade it to permit a similar increase 
        over the next two to 3 years. This would reduce China's global 
        current account surplus by $350-$500 billion and the U.S. 
        global current account deficit by $50-$120 billion.
  4.  Elimination of the Chinese misalignment would create about half a 
        million U.S. jobs, mainly in manufacturing and with above-
        average wages, over the next couple of years. The budget cost 
        of this effective stimulus effort would be zero.
  5.  The United States should seek to mobilize a multilateral 
        coalition to press China to let its currency rise by the needed 
        amount. The European Union and a number of important emerging 
        market economies, including all three of the other BRICs, have 
        expressed deep concern over China's currency policy.
  6.  This currency realignment is an integral part of the global 
        rebalancing strategy adopted by the G-20 and laid out in detail 
        as part of its new Mutual Assessment Process. This strategy has 
        been agreed by the Chinese (as well as all other) member 
        governments. Further development and implementation of the 
        program is to be discussed, and hopefully adopted, at the next 
        G-20 summit in Korea in November.
  7.  To date, however, the efforts of the International Monetary Fund 
        to persuade China to move sufficiently have largely failed. The 
        Fund has no enforcement tools of its own. Hence the United 
        States and its allies should seek authorization from the World 
        Trade Organization to impose restrictions on imports from China 
        unless it allows its currency to adjust adequately.
  8.  To lead this effort credibly, the Administration must of course 
        designate China as a ``currency manipulator,'' as it has been 
        for at least 7 years. We can hardly ask the world, through the 
        IMF and WTO, to indict China if we are unwilling to do so 
        ourselves. The Committee, and the Congress more broadly, should 
        insist that the Administration do so--preferably at these 
  9.  In addition, the Administration should initiate a new strategy of 
        ``countervailing currency intervention'' (CCI) against Chinese 
        purchases of dollars by making offsetting purchases of Chinese 
        renminbi.\2\ China has been intervening at an average of about 
        $1 billion per day over the past several years, by purchasing 
        dollars with RMB to keep the price of our currency up and the 
        price of its currency down. This greatly enhances the price 
        competitiveness of Chinese products in world trade. The United 
        States should counter by buying corresponding amounts of RMB 
        with dollars, which we can of course create without limit. This 
        is technically challenging, since the RMB is not fully 
        convertible, so our authorities will have to find and buy 
        market proxies such as non-deliverable forward contracts for 
        RMB and RMB-denominated bonds in Hong Kong.
    \2\ I initially proposed this idea in testimony before this 
Committee on January 31, 2007. Senators Schumer and Graham have 
included a version of it in S. 1254 and S. 3134.
  10.  The United States should also henceforth treat currencies that 
        are substantially and deliberately undervalued as constituting 
        export subsidies for purposes of calculating and applying 
        countervailing duties (but not antidumping duties). They 
        clearly represent a subsidy (and an equivalent import barrier) 
        in economic terms and I believe the Department of Commerce 
        erred in its recent determination that they are not 
        countervailable under current U.S. law. As a result of 
        Commerce's decision, however, I recommend that Congress pass 
        that part of the Ryan-Murphy bill (H.R. 2378) that would 
        clarify that currencies that are substantially and deliberately 
        undervalued are to be treated as export subsidies subject to 
        U.S. countervailing duties.

The Global Imbalances
    The U.S. deficit and Chinese surplus have both moved substantially, 
first down and now back up, since the Committee last addressed these 
issues. Both declined sharply to 2009: our deficit fell from 6 percent 
of our GDP in 2006 to 3 percent, and China's surplus declined from an 
astounding 11 of its GDP in 2007 to 5 \1/2\ percent.
    There were two main causes for this improvement. The sharp decline 
in all world trade, due to the Great Recession, trimmed imbalances as 
well as overall trade levels because exports and imports both fell by 
roughly equivalent percentages. This meant that a country that started 
with an export surplus (China) experienced a drop in that surplus while 
a country that started with an import surplus (the United States) 
experienced a fall in its trade deficit.
    The sizable currency adjustments of previous years also had major 
positive effects. The dollar fell, in a gradual and orderly manner, by 
a trade-weighted average of about 25 percent from 2002 until early 
2007. The RMB, as already noted, was permitted by the Chinese 
authorities to rise by 20-25 percent from the middle of 2005 to the 
middle of 2008 (before they re-pegged it to the dollar). With the usual 
lags of 2 to 3 years, these currency corrections made important 
contributions to the subsequent adjustments in trade imbalances.
    Over the past 6 months or so, however, both countries' external 
imbalances have again been climbing sharply. The U.S. deficit in goods 
and services, which fell to $25 billion in May 2009, climbed back to 
$50 billion this June and remained above $40 billion in July, the 
latest months for which data are available. China's surplus, after 
almost disappearing earlier this year (for peculiar statistical 
reasons), has now soared to monthly averages of about $25 billion 
during the last 4 months (to August) for which data are available. 
These reversals are due partly to the recovery of international trade, 
in response to renewed economic expansion around the world. They are 
also due partly to the renewed rise in the dollar during the crisis 
period, as safe-haven investments into the United States, and to the 
Chinese authorities' termination of appreciation of the RMB.
    The outlook unfortunately is for more of the same. The IMF projects 
that China's surplus will rise back to 8 percent of its GDP by 2015 
(after foreseeing even higher levels in some of the earlier drafts of 
its latest forecast). In light of China's continued rapid economic 
growth, this number would reach almost $800 billion and far surpass its 
previous record high in absolute terms. It could also mean that China's 
global surplus would exceed the U.S. global deficit in dollar terms.\3\
    \3\ I refer throughout this statement solely to the global trade 
and current account positions of the two countries. The bilateral 
imbalance between them is analytically irrelevant in a multilateral 
world economy. As China's global surplus approaches the U.S. global 
deficit in absolute terms and as its share of the U.S. global deficit 
continues to rise, however, the bilateral number will be an 
increasingly accurate proxy for the global totals.
Exchange Rate Developments
    This renewed growth of the current account imbalances, under normal 
market conditions, would produce a renewed rise of the RMB and decline 
of the dollar. The dollar has indeed weakened a bit lately against most 
currencies, after strengthening earlier this year due to the flight 
from risk surrounding the European public debt crisis (as it did for 
similar reasons during 2008-early 2009 at the depth of the Great 
Recession), but not by enough to make much difference. The Chinese 
authorities apparently set the stage for an upward move of the RMB when 
they announced on June 19 a return to a more flexible and more market-
based exchange rate regime like that they had pursued during 2005-08.
    The results to date have been very meager, however. As of September 
10, the RMB had risen by less than 1 percent. If maintained over the 
coming year, this would amount to an annual rate of only 4 percent. 
Such appreciation would barely be enough to reflect the annual rise in 
productivity growth in China, compared with that of its trading 
partners, let alone reduce the large undervaluation accumulated over 
the last half decade.\4\
    \4\ William R. Cline. 2010. Renminbi Undervaluation, China's 
Surplus, and the U.S. Trade Deficit. Peterson Institute for 
International Economics Policy Brief 10-20, estimates that the RMB 
needs to rise by about 2 \1/2\ percent annually to prevent China's 
rapid productivity growth from generating steady increases in its 
external surpluses.
    Our Peterson Institute's latest calculations suggest that China 
would have to let the RMB appreciate by about 15 percent on a trade-
weighted basis and about 25 percent against the dollar to achieve 
equilibrium, defined as cutting the Chinese surplus to 3 percent of 
GDP.\5\ These numbers are less than the ``25-40 percent'' 
undervaluation that I and others have cited until recently \6\ because 
the IMF and most other projections of China's future current account 
surpluses, though still very high as noted above, have been reduced 
considerably from their earlier levels so less currency appreciation 
would be required to reach the current account target. If one believes 
that China should totally eliminate its surpluses, however, the 
required adjustment would still be on the order of those earlier 
numbers. A reasonable goal would be a rise of 20 percent in the trade-
weighted average of the RMB even the next couple of years, about the 
same amount the currency rose during its earlier period of appreciation 
in 2005-08.
    \5\ William R. Cline and John Williamson. 2010. Estimates of 
Fundamental Equilibrium Exchange Rates, May 2010. Peterson Institute 
for International Economics Policy Brief 10-15.
    \6\ See my testimony on that topic to the House Ways and Means 
Committee on March 24, 2010.
    It is obvious that China continues to intervene heavily in the 
currency markets to keep the RMB from rising much more rapidly. It does 
not publish intervention numbers and the latest data on its foreign 
exchange reserves cover only the second quarter, including only the 
first 10 days of the ``new policy.'' Through that period, however, the 
data on reserves suggest that intervention has averaged at least $1 
billion daily since 2005.\7\ This official buying of dollars keeps the 
price of the dollar artificially high and the price of the RMB 
artificially low, generating the currency undervaluation that adds 
substantially to China's international competitive strength. It is 
hugely ironic that China complains about the international role of the 
dollar but does far more than anyone else on the planet to further 
increase that role by adding such massive amounts to its, and thus 
global, dollar reserves.
    \7\ China's total foreign exchange reserves have now reached about 
$2.5 trillion. The next largest holder is Japan, at about $1 trillion. 
No one else exceeds $500 billion. The headline number for China's 
reserve increase in the second quarter was only $10 billion but this 
included a markdown of $70 billion in the dollar value of their euro 
holdings so intervention must have approximated $80 billion--more than 
$1 billion per working day.
    Hence it remains obvious that China is ``manipulating'' the value 
of its currency. This clearly violates both the international monetary 
rules of the IMF Articles of Agreement and the global trading rules of 
the WTO Charter. The latest report of the Treasury, while stating 
clearly that ``the RMB is undervalued,'' nevertheless again fails to 
label China a ``manipulator.'' One can understand Treasury's tactical 
desire to avoid further antagonizing China on the issue, even if 
disagreeing that doing so would reduce the prospect of its adopting 
more constructive policies, but it is violating both the letter and 
spirit of existing legislation as well as common sense by refusing to 
    \8\ See C. Randall Henning. 2008. Accountability and Oversight of 
U.S. Exchange Rate Policy. Washington: Peterson Institute for 
International Economics, especially pp. 44-52 on the report's treatment 
of manipulation in the case of China.
    Some critics still argue that currency adjustments would be 
ineffective in correcting the imbalances. To be sure, such adjustments 
must be considered in the context of complementary economic policies. 
This notably includes decisive U.S. action to correct our budget 
deficit over the next several years and expansion of domestic demand in 
China, as already undertaken via their huge fiscal and monetary 
stimulus programs, to offset the negative impact on growth of a 
declining external surplus. But this proviso is well understood and is 
imbedded in the G-20's rebalancing strategy. Moreover, the process 
demonstrably works: the earlier rise of the RMB during 2005-08 
contributed importantly to the subsequent sharp fall in China's 
surplus, as noted above, without denting China's rapid overall growth 
during the period.
    On the current accounts themselves, our latest studies show that 
every rise of 1 percent in the trade-weighted average of the RMB will 
cut China's global surplus by $17-$25 billion over the succeeding 2-3 
years and will cut the U.S. global deficit by $2 \1/2\-$6 billion over 
a like period. Hence the proposed RMB appreciation of 20 percent could 
be expected to reduce China's global surplus by $350-$500 billion and 
the U.S. global deficit by $50-$120 billion.\9\
    \9\ See William R. Cline. 2010. Renminbi Undervaluation, China's 
Surplus, and the U.S. Trade Deficit. Washington, Peterson Institute for 
International Economics Policy Brief 10-20.
A Proposed Action Plan
    Under current conditions of high unemployment, an improvement of 
$50-$120 billion in the U.S. trade balance would generate 300,000-
700,000 new U.S. jobs. About half of these would occur in manufacturing 
and pay wages well above the national average. The initiatives proposed 
here to achieve this outcome would have virtually zero budget cost. 
Hence RMB correction (and exchange rate adjustment more broadly) must 
be one of the most cost-effective stimulus measures now available to 
the U.S. Government.
    The cardinal issue remains what initiatives should be undertaken to 
promote the needed Chinese actions. Some of these steps range well 
beyond the currency issue itself. Most importantly, the United States' 
case would be much more credible, and much more effective in achieving 
its goals, if it would take tangible steps to address the imbalances 
from its own deficit side of the equation. The key step would of course 
be an effective program to reduce, and preferably eliminate, the budget 
deficit over the next three to 5 years. President Obama's National 
Export Initiative, to double exports over the next 5 years, is a 
laudable goal in this context but has yet to encompass any meaningful 
content--and will be impossible to achieve without substantial 
appreciation of the RMB and some other important currencies against the 
dollar. But it ``takes two to tango'' so China (and the other large 
surplus countries, notably Germany and Japan) must also adopt 
corrective policies to enable the needed adjustment to take place even 
if the United States were to do everything right.
    It is also essential to embed the exchange rate issue in the 
broader context of rebalancing the world economy, with the United 
States consuming less and exporting more while China consumes more and 
exports less. The G-20 has adopted such a strategy, the IMF has laid 
out the implementation details in its Mutual Assessment Process, and 
the U.S. and Chinese leaders have committed their countries to pursue 
    Most fundamentally, China will of course allow its currency to rise 
only if its authorities believe that doing so makes sense in terms of 
the country's own economic and international objectives. There is much 
debate around that issue but most analysts agree that it does. A 
stronger currency and smaller trade surplus, offset in growth terms by 
expansion of domestic demand, will rebalance the Chinese economy from 
capital-intensive investment and exports toward consumption and 
services. This in turn will promote a more rational allocation of 
capital, create more jobs, help check inflation, sharply reduce the 
country's need for energy and other raw materials, and cut 
pollution.\10\ Such adjustment will of course also reduce the risk of 
international conflict, caused by China's surpluses, and thus promote 
its broad foreign policy interests along with its economic goal of 
maintaining open markets for its exports.
    \10\ Nicholas R. Lardy. 2008. Sustaining Economic Growth in China 
in China's Rise: Challenges and Opportunities, C. Fred Bergsten et al. 
Washington: Peterson Institute for International Economics, and 
Nicholas R. Lardy. 2007. China: Rebalancing Economic Growth in The 
China Balance Sheet 2007 and Beyond, C. Fred Bergsten et al. 
Washington: Center for Strategic and International Studies and the 
Peterson Institute for International Economics.
    But the top Chinese authorities have clearly not accepted that 
diagnosis to date. Hence direct action on the exchange rate will be 
needed. One clear lesson of the recent past is that China is likely to 
respond more constructively to multilateral pressure than to bilateral 
pressure from the United States alone. The timing of its announced 
policy change in June, albeit of limited practical effort so far, was 
apparently motivated by the upcoming G-20 summit in Toronto and the 
need to comply at least nominally with the MAP being presented there by 
the IMF. The sharp criticism it had recently received from fellow 
emerging economies, notably Brazil and India, may have had some impact 
as well. Hence the United States should seek to mobilize as broad a 
coalition as possible, in terms of both the number and development 
level of countries, to support its efforts to achieve effective 
adjustment by China.
    There are two multilateral instruments for pursuing adjustment by 
China (or any surplus country), the IMF and the WTO, neither of which 
has been very effective historically.\11\ The IMF has been seized of 
the currency issue at least since 2005, with very modest results. When 
the Executive Board finally discussed the Fund staff's latest report on 
the country's economy (including the exchange rate), after China had 
delayed that conversation for 3 years, it could not even muster a 
majority to agree that the currency was ``substantially undervalued''--
as the IMF's Managing Director and staff have been saying repeatedly on 
the basis of their own in-depth analyses for some time. Close observers 
believe that only five or six of the Fund's 24 Directors, presumably a 
few (but not even all) of the Europeans as well as the United States 
and no developing countries, were willing to criticize China even to 
this very modest (and obvious) extent. Even if the IMF Board were 
willing to indict China, it has no power of enforcement and could only 
``name and shame''--which would be helpful, particularly in 
promulgating a WTO case (see below), but would certainly not guarantee 
a constructive response.
    \11\ John Williamson. Forthcoming 2010. Encouraging Adjustment by 
Surplus Countries. Peterson Institute for International Economics 
Policy Brief. Washington: Peterson Institute for International 
    Hence attention has turned toward the WTO, which can authorize 
member countries to erect barriers against imports from other members 
that violate its rules. The issue is whether current WTO rules do in 
fact effectively prohibit currency manipulation a la China at present. 
There are two routes to such action:\12\
    \12\ Gary C. Hufbauer, Yee Wong and Ketki Sheth. 2006. U.S.-China 
Trade Disputes: Rising Tide, Rising Stakes. Peterson Institute for 
International Economics Policy Analysis in International Economics 78. 
Washington: Peterson Institute for International Economics.

    A general indictment of China under Article XV, which 
        proscribes countries from ``frustrating the intent of the 
        provisions of this Agreement by exchange action,'' prosecution 
        under which would authorize members to retaliate against China; 

    Approval of case-by-action action by individual countries 
        that chose to regard China's currency undervaluation as an 
        export subsidy under the Code on Subsidies and Countervailing 
        Duties, which China would have to challenge to overturn.

    I recommend that the United States pursue both courses of action if 
China continues to resist adequate appreciation of the RMB. In both 
cases, it should seek to move in concert with as many other WTO members 
as possible. In both cases, it should be noted that the WTO will be 
guided on the exchange rate issue itself (as opposed to the trade 
policy responses) by the IMF.
    The Article XV action is preferable in principle because it would 
apply to Chinese exports of all products to all countries. However, the 
language and legislative history of the provision make it difficult to 
apply to the current Chinese case (or any other foreseeable currency 
case). Some observers therefore oppose invoking the article because 
they fear that a negative ruling would make it harder to challenge 
currency undervaluations in the future and might also undermine very 
valuable dispute settlement mechanism of the WTO. I would nevertheless 
urge its pursuit, including via a push from the Congress if necessary 
to convince the Administration, because doing so (1) would represent an 
impressive multilateral effort that (2) would publicize the need for 
Chinese action much more widely than at present and (3) highlight the 
desirability of reform of the WTO itself to handle such cases if the 
present language does in fact prove to be impotent. All this would play 
out over at least a couple of years, because WTO cases take that long 
to run their course, and would thus desirably keep the spotlight on the 
issue as long as it remained unresolved.
    In the meanwhile, the United States and as many allies as possible 
should act on their own to treat the RMB undervaluation as an export 
subsidy--as Fed Chairman Ben Bernanke has noted publicly that it is--
that must be included in calculating countervailing duties against 
Chinese products. The Department of Commerce has recently concluded 
that currency undervaluation is not actionable as a subsidy under 
current U.S. law so Congress should pass legislation, along the lines 
of H.R. 2378 (The Currency Reform for Fair Trade Act of 2009), to 
reverse that ruling.\13\ It is not clear whether this approach will 
pass WTO muster either but in this case, unlike the Article XV option 
under which the United States would take China to the WTO and seek 
authorization for action, the action would already be taken by the 
United States (and hopefully others) and China would have to take the 
United States to the WTO in an effort to remove the countervailing 
duties. This too would take a considerable period of time, during which 
the CVDs would be in place, and--again depending importantly on how 
many countries joined the U.S. initiative--would provide a powerful 
``shot across the bow'' to help induce China to let the exchange rate 
move substantially.
    \13\There are a number of technical problems with H.R. 2378 as 
currently drafted, however. For example, its threshold level of 5 
percent for an ``actionable undervaluation'' is far too low in light of 
the imprecision of all misalignment calculations; the number should be 
at least 10 percent. It muddies the waters by calling for parallel 
treatment of currency overvaluations, which do not require similar 
policy action. And it erroneously treats undervalued currencies, which 
reflect government export subsidies, as a source of discriminatory 
pricing of exports by private parties for antidumping purposes.
    Mobilization of an international coalition should be particularly 
feasible under the countervailing duty option. Other major importers 
would fear diversion of subsidized Chinese goods to their markets if 
the United States acted alone against its products. Hence they would 
almost certainly emulate the U.S. action very quickly and should be 
willing to act simultaneously with it. Chinese awareness of potential 
action by a large number of its key markets, especially the United 
States and the European Union as by far the two largest, would 
presumably provide maximum inducement for China to prevent the planned 
action by letting its exchange rate move substantially. Other countries 
might also be willing to join the Article XV, however, because only the 
plaintiffs in the case would be authorized under WTO rules to retaliate 
against the offensive Chinese practice.

A New Option
    There is one, directly monetary, measure that the United Stated 
should contemplate taking against China: direct purchases of RMB to 
counter China's direct purchases of dollars. It is absurd, especially 
from a U.S. national perspective but also from the standpoint of global 
financial stability, that other countries set the exchange rate of the 
dollar. This is a consequence of the international role of the dollar, 
one of several of which lead me to question whether that role remains 
in the national interest of the United States.\14\
    \14\ C. Fred Bergsten. November/December 2009. ``The Dollar and the 
Deficits,'' Foreign Affairs.
    In principle there could be little objection to such 
``countervailing currency intervention'' against manipulation by 
another country that was keeping its exchange rate substantially 
undervalued as a result. In practice, the United States could easily 
adopt such a policy against any currency that is generally convertible, 
such as the euro if it too became substantially undervalued (as 
appeared to be occurring several months ago).
    The United States has of course bought foreign currencies on many 
past occasions, most recently the euro in 2000 and the Japanese yen in 
1998. Those interventions were taken in close coordination, and via 
joint market operations, with the issuer of the other currency at its 
request because they believed (and the United States agreed) that it 
had become too weak. It would be very different for the United States 
to intervene against the desires of another country, especially to 
counter its intervention, but the market techniques would be identical. 
Moreover, the objective would be to push a specific exchange rate 
toward equilibrium levels and thus to reverse a misalignment that was 
distorting global trade and the world economy.
    There is a practical problem in the Chinese case. The absence of 
full convertibility for the RMB, and the existence of widespread 
Chinese capital controls, make it impossible for the U.S. authorities 
to enter well-functioning currency markets (as for the euro or yen) to 
buy RMB because no such markets exist. Hence the United States would 
have to identify proxy assets and buy them instead. Candidates would 
include non-deliverable forward (NDF) contracts for RMB and RMB-
denominated securities in Hong Kong. The magnitude of such 
interventions by the United States would be limited by the size of the 
relevant markets and thus to far less than the daily purchases of 
dollars by the Chinese authorities. But such an initiative by the 
United States would clearly indicate the seriousness of its concern 
over the misalignment of the RMB, provide an unmistakable and indeed 
dramatic signal to the markets themselves, and add further to the 
pressure on China to cooperate.
    There is nothing in U.S. law or the IMF Articles of Agreement that 
would prohibit the United States from undertaking such ``countervailing 
currency intervention'' today. However, the Congress might want to 
consider amending the relevant portion (Section 3004) of the Omnibus 
Trade and Competitiveness Act of 1988 to authorize Treasury to conduct 
countervailing currency intervention operations whenever it determines 
that a country is manipulating its exchange rate to gain an unfair 
competitive advantage. Such an authority would greatly strengthen the 
hand of the Treasury in conducting the negotiations to remedy an unfair 
currency practice as called for under the Act. A version of the idea is 
included in S. 1254 and S. 3134, proposed by Senators Schumer and 
    The exchange rate is of course an inherently international issue 
because it involves at least the two countries between whose currencies 
it provides a price. Hence the use of countervailing currency 
intervention by the United States, or by any other country, should be 
subject to review by the International Monetary Fund. Any country that 
believed it was being unfairly challenged by such a policy should be 
able to appeal to the Fund, and the countervailing country should be 
required to desist if its justification for the action was found to be 
inconsistent with the objectives and rules of that institution. This 
would parallel the treatment of countervailing duties by the WTO, 
described above, under which target countries can win disapproval of 
the countervailing action if they can demonstrate that their alleged 
subsidies are in fact not actionable under the rules of the 
    The United States would be in a strong position to defend itself 
against any such protest from China, however. The IMF Guidelines for 
Exchange Rate Policies call on member countries to ``take into account 
in their intervention policies the interests of other members, 
including those of the countries in whose currencies they intervene'' 
(italics added). There is no evidence that China has done so vis-a-vis 
the United States despite its massive intervention in dollars. Japan 
has interestingly just posed a similar question concerning China, 
complaining that the Chinese are driving up the exchange rate of the 
yen by buying Japanese bonds while blocking Japanese purchases of 
Chinese bonds that might have a counteracting effect.
    Countervailing currency intervention would be decidedly superior to 
countervailing duties to deal with the problem of manipulated exchange 
rates. Undervalued currencies subsidize all of the exports of the 
country in question and pose a barrier of equivalent magnitude to all 
of its imports. Countervailing duties, however, address only exports of 
individual products from such a country on a case-by-case basis and do 
not apply to its imports at all. The currency approach is monetary and 
comprehensive whereas the trade tool, useful as it is for its intended 
purpose, involves cross-retaliation and is very selective in its 

    The time has clearly come, indeed has long since passed, to devise 
effective strategies to achieve adjustment of the world's largest 
international imbalances: the U.S. deficit and the Chinese surplus. 
Continued failure to do so will generate increasing risks of renewed 
financial crisis, encourage new outbreaks of restrictive trade measures 
as countries respond to China's blatantly protectionist currency 
policy, trigger renewed transpacific tensions, and make it more 
difficult to reduce the U.S. unemployment rate as China exploits demand 
in other countries to create jobs at home.
    The proposed action program entails risks as well. The designation 
of China as a ``currency manipulator'' could increase its intransigence 
rather than promote constructive action. Appealing to the WTO on 
``exchange action'' enters new territory and could jeopardize that 
valuable institution. Expanding the scope for countervailing duty 
actions could lead to protectionist abuse of that safeguard device. 
``Countervailing currency intervention'' could trigger temporary 
instability in financial markets.
    But the risks of inaction, including to the open system of 
international trade and finance, are much greater than these and other 
possible costs of the measures proposed. I strongly recommend that the 
Congress work closely with the Administration to advance them and, if 
necessary, insist that the Administration do so.

             Senior Vice President for Sales and Marketing,
                      Hydro Aluminum North America
                           September 16, 2010

    Mr. Chairman, Mr. Shelby, and Members of the Committee:

    My name is Lynn Brown and I am the Senior Vice President of Sales 
and Marketing of Hydro Aluminum North America (``Hydro''). I have 14 
years of experience in the aluminum extrusion industry. I appreciate 
the opportunity to appear on this panel to discuss the Treasury 
Department's Report on International Economic and Exchange Rate 
Policies and its failure to name China as a currency manipulator. The 
U.S. aluminum extrusion industry has been adversely impacted by China's 
exports of aluminum extrusions, and in particular, by the large and 
distortive subsidy that Chinese aluminum extrusion producers benefit 
from as a result of China's undervalued currency.
    Hydro is a wholly owned subsidiary of Norsk Hydro, a leading global 
integrated aluminum company. We are one of the largest U.S. 
manufacturers of soft alloy aluminum extrusions. Hydro operates six 
extrusion facilities across the United States, including in Kalamazoo, 
Michigan; North Liberty, Indiana; Monett, Missouri; Belton, South 
Carolina; St. Augustine, Florida; and Phoenix, Arizona. We also have a 
stand-alone fabrication, or component manufacturing, facility in 
Sidney, Ohio. With our geographic scope, we have close to national 
market coverage.
    Approximately fifty percent of our facilities are unionized, with 
workers represented by the United Steelworkers, the Teamsters, and the 
United Autoworkers. Currently we employ about 1,800 workers, which is a 
significant reduction from the 2,300 workers that were on the payroll 3 
years ago. In 2006, we shipped approximately 250 million pounds of 
aluminum extrusions. In 2010, we expect to ship approximately 35 
percent less.
    Imports of Chinese extrusions have created havoc in our industry, 
growing from a negligible factor a few years ago to a market share of 
almost 25 percent. During a time when U.S. consumption of aluminum 
extrusions has fallen substantially due to the recession, Chinese 
imports have more than doubled. Earlier I mentioned our six extrusion 
facilities--it used to be seven. We have already closed one of our 
plants in Ellenville, New York, with 150 jobs lost. In addition, we 
idled press lines at three of our plants in 2009. This, along with 
reductions in employees, work shifts, and work weeks, have made it very 
difficult for my company and our workers. There are similar stories 
throughout our industry.
    The flood of low-priced Chinese imports caused Hydro, along with 
other members of the domestic industry and the United Steelworkers, to 
file antidumping and countervailing duty petitions covering aluminum 
extrusions from China. We filed these petitions on March 31, 2010. In 
the countervailing duty petition covering Chinese subsidies, we listed 
a host of subsidy programs that benefit Chinese aluminum extrusion 
producers, including an allegation covering China's undervalued 
    Our currency allegation provided information demonstrating that all 
three legal requirements for finding the existence of a countervailable 
subsidy were met: 1) that the Chinese government had provided a 
financial contribution, which 2) resulted in a benefit, and 3) which 
was specific to a particular industry or group of industries in China. 
With respect to the financial contribution, we explained that by 
requiring foreign exchange that is earned from export activities to be 
converted into Chinese yuan at a rate that is set by the Government, a 
rate which is universally recognized to be about 40 percent below its 
true value, Chinese exporters reap an enormous windfall. Specifically, 
Chinese exporters get 40 percent more yuan for every dollar that they 
exchange than they otherwise would absent Chinese government 
intervention in the foreign currency markets. This provides an 
enormous, continuing benefit to those exporters, and allows them to 
significantly under-price U.S. producers. We also alleged and 
documented that this subsidy was specific to exporters in China, 
because it is directly linked with exports and creates a powerful 
incentive for Chinese producers to export their products to the United 
States, rather than sell them at home.
    The Chinese currency is clearly undervalued. A January 2010 policy 
brief by the Peterson Institute estimated that China's currency is 
undervalued by 41 percent on a bilateral basis against the dollar. 
Other estimates are within this range.
    Petitioners in twelve different investigations have alleged that 
China's manipulation of its currency results in a countervailable 
subsidy. However, in each instance the Commerce Department has refused 
to initiate an investigation into these allegations. Commerce has 
claimed that domestic industries have failed to sufficiently allege 
that the receipt of the excess yuan is contingent on export or export 
performance--in other words that the subsidy was specific. But I am 
aware that the paper industry submitted a revised allegation in January 
of this year, this time providing an expert report from an independent 
economist which demonstrates that based on the Chinese government's own 
data, 70 percent of China's foreign exchange earnings from Current 
Account transactions and from long-term Capital and Financial account 
transactions were derived from the export of goods. The study concluded 
that no other category of foreign exchange inflows comes close to 
matching the $1.4 trillion foreign exchange earnings of Chinese 
exporters. Because Chinese exporters garner the overwhelming share of 
benefits from the undervaluation of the yuan, the subsidy benefit is de 
facto specific to exporters as a group.
    Our allegation was based on this revised methodology. And yet much 
to our disappointment, the Commerce Department did not initiate an 
investigation into our allegation, claiming that we did not 
sufficiently allege that China's currency undervaluation does benefits 
a specific group, enterprise, or industry in China. One of the more 
troubling aspects of the Commerce Department's determination was that 
it did not even give us the opportunity to remedy the deficiencies in 
our currency allegation, which would be normal procedure in most cases. 
It is our hope that Commerce will investigate and offset this unfair 
trade practice in the future, but we are unsure what more can be done 
to demonstrate that currency undervaluation, at a minimum, merits a 
comprehensive investigation.
    The Treasury Department's July 2010 report also was disappointing. 
The Treasury Report acknowledges that the Chinese Government purchases 
foreign exchange to limit the yuan's appreciation against the dollar 
and the yuan remains undervalued. And, despite a major Chinese 
Government announcement of allowing the yuan to float between a narrow 
band, the yuan has appreciated by less than 1 percent since July. As a 
businessperson whose company is trying to survive against import 
competition that benefits from a host of government subsidies--of which 
currency undervaluation may be the most significant--the Chinese 
government's assurances do not offer much solace.
    I think many people not involved in the extrusion industry would 
ask us, ``Why don't you just become more efficient and lower your 
prices so you can compete?'' It is not that simple, and that is why the 
extremely low Chinese prices are all the more unfair.
    The starting point for all pricing is the cost of aluminum, which, 
as you may know, is a globally traded commodity. In the markets that I 
work with the most, North and South America and Europe, aluminum is 
priced according to the London Metal Exchange (the ``LME'') in U.S. 
dollars and is publicly reported and known throughout the industry. In 
additional to the LME price, we have to pay delivery and handling, 
which, in the U.S. is referred to as the Midwest premium. But, anywhere 
you go, you have to pay delivery and handling.
    Once we get the aluminum, there are additional processes that must 
be done to cast the ingot into aluminum billet or aluminum log to 
create the feed stock for our extrusion process. Depending on the 
specific alloy, the price for this conversion varies. These commodity 
metal purchases and additional processes can account for over 70 
percent of our total cost of manufacture. Because these costs are 
virtually fixed, there is very little opportunity to negotiate or 
affect any of those metal costs.
    China's import prices are so low that we end up with extremely 
little room to negotiate on price--even though theoretically we should 
be paying roughly the same global commodity prices for the raw 
materials. We do have some advantages: We are within a day's drive of 
most of the continental U.S., which is a significant geographical 
advantage over imports from China; we participate in a wide variety of 
market segments, including solar energy, transportation, electrical, 
consumer goods, industrial, building and construction; and we offer 
excellent customer service. But we continue to lose sales to Chinese 
imports in every one of those markets. Why? Despite the absence of any 
comparative advantage, imports from China are able to undersell us by 
significant margins.
    Chinese extrusion producers have been able to lower prices, 
increase exports, and gain market share in the United States, in large 
part because of the undervalued Chinese currency. It is widely 
recognized that, despite the recent so-called ``revaluations'' of the 
yuan, China's currency is still undervalued by approximately 40 percent 
on a bilateral basis against the dollar. Chinese exporters get as much 
as 40 percent more yuan for every dollar they exchange than they 
otherwise would absent the Chinese government's intervention in the 
foreign currency markets. Along with other significant subsidies, the 
currency advantage provides an enormous, continuing benefit to those 
exporters, and allows them to significantly undersell U.S. producers.
    This has cost good, manufacturing jobs in the United States, and 
the profit necessary to justify the reinvestment in and upgrading of 
our facilities. Without the establishment of a level playing field, the 
U.S. extrusion industry faces major long-term problems. Not only does 
this injure our business at home, the severe undervaluation of China's 
currency effectively imposes a 40 percent tax on any potential exports 
from our U.S. facilities. This affects not only exports to China but 
also exports to other third markets where we compete with the Chinese.
    The best outcome would be for China to allow its currency to float 
freely and reflect market forces. Past efforts, however, to negotiate 
with China on its currency revaluation both bilaterally and 
multilaterally have not met with success. Therefore, we believe that 
the best approach is, at a minimum, for the Commerce Department to 
investigate China's undervalued currency as a countervailable subsidy, 
which it has thus far refused to do. We are hopeful that this issue can 
be resolved soon, and we would welcome any assistance the Congress can 
    On behalf of Hydro and the other companies in the U.S. aluminum 
extrusion industry, we appreciate the Committee's attention to this 
important issue.
                    Freeman Chair in China Studies,
         Center for Strategic and International Studies (CSIS)
                           September 16, 2010

    Mr. Chairman, esteemed members of the Committee, it is my honor to 
testify today on the factors in China that contribute to the 
undervaluation of the renminbi (RMB) and other economic policies that 
may act to disadvantage American businesses and their workers.
    Much has been written about the RMB and its value relative to the 
dollar and other major currencies. China has largely maintained a fixed 
exchange rate for the entire history of the People's Republic of China 
(PRC) since its foundation in 1949. For the first three decades of the 
PRC, the RMB was pegged at an absurdly overvalued rate of between 2.5 
to 1.5 RMB to the U.S. dollar. In the early 1980s, as China began to 
open to the outside world and the country became focused on export-
driven growth, the RMB was devalued to improve export competitiveness 
such that, by 1994, the RMB was valued at 8.62 to the dollar. Following 
the Asian financial crisis of the late 1990s, China maintained a peg of 
8.27 to the dollar from 1997 until 2005 when, in the midst of vocal 
international criticism (led in no small part by Congress), China 
announced an intent to gradually relax the peg.
    The decision in 2005 to loosen it exchange rate policy to allow 
appreciation certainly came in the midst of extraordinary international 
outcry, but it also followed a lengthy period of heated external debate 
within China. Many of China's financial regulatory officials had long 
argued that the peg was undermining China's efforts to create a modern 
financial system; that it misallocated investments domestically; and 
that it contributed to what was then just becoming a chronic global 
current account surplus. These financial mandarins have faced a 
recalcitrant and powerful set of interests committed to maintaining 
export competitiveness as a key pillar in China's economic policy. When 
the financial crisis took the world by storm in 2007, those Chinese 
officials determined to prop up exports put the brakes on additional 
appreciation so that global economic uncertainty would not undercut 
China's perceived export advantage conveyed by a competitively valued 
currency. For all the wringing of hands within China about a loss of 
competitiveness that significant RMB appreciation would yield, China's 
enormously impressive economic performance suggests that fears of RMB 
appreciation are misplaced.
    Despite the dramatic levels of economic and export growth behind 
China's frustrating refusal to meaningfully appreciate the RMB lays an 
almost stunning insecurity about China's political and economic 
stability. The PRC's leadership is deeply concerned about its ability 
to maintain domestic economic stability, given the challenges (many of 
which are admittedly staggering) of income and development disparity, 
and other factors. Since many in China's leadership consider economic 
growth and stability to be a sine qua non of political stability, 
maintaining any competitive advantage to drive economic growth is a 
political necessity: without growth, the Communist Party is out of 
power, or so the thinking goes. While many of China's economic 
policymakers are seeking to reduce the country's reliance on exports 
for economic growth, there remains much skepticism that alternative 
pathways--particularly through increasing the share of consumption in 
GDP--are available in the near term to export growth. Accordingly, 
maintaining an export advantage is part and parcel of maintaining 
political control. Small wonder that Chinese officials are loath to 
answer the entreaties of Treasury and Congress to remove the RMB's peg 
to the dollar. They fear the domestic consequences: a loss of jobs and 
competitiveness that will stir public antipathy and, ultimately, cost 
them their political authority.
    These concerns will no doubt be familiar to many in this body. To 
the extent concern in the United States public over Chinese economic 
policies can be said to reduce competitiveness, and lead to the loss of 
jobs and business opportunities, the Administration and Congress have a 
solemn responsibility to the American public to confront those 
policies. So in many respects Chinese officials are pursuing the same 
fundamental political goals we are. Their motivations, however, should 
not excuse policymaking behavior that undermines U.S. and global 
confidence in the fairness of the world's trade and financial 
architecture. More recently, this behavior has increasingly been 
bolstered by an increasing confidence among Chinese policymakers that 
their policies are right, and our concerns are misplaced.
    Not all is bad news in the U.S.-China trade and economic 
relationship. In 1979, total trade between the United States and China 
was $2.4 billion. 30 years later, by 2009, that trade had grown to $365 
billion. During this period China became the fastest growing export 
market in U.S. history; Chinese exports to the United States (which to 
an overwhelming degree did not compete directly with American 
production) enhanced the buying power of Americans, particularly those 
at lower income levels; and China became one of the most profitable and 
fastest-growing markets for the operations of American businesses. Not 
insignificantly, the commercial relationship between the United States 
and China has been an important area of common interest that has 
reduced bilateral tensions between two countries that are not, to say 
the least, natural political partners.
    Yet, more broadly, Chinese economic policymaking, whether acts of 
commission like industrial policies that disadvantage U.S. 
competitiveness in its market; or acts of omission like China's 
completely ineffectual system of intellectual property rights 
protection and enforcement, is unquestionably undercutting Americans' 
faith in the fundamental fairness of trade between the United States 
and China. On one hand, the fact that China, by the introduction to the 
global labor market of twenty percent of the world's potential workers, 
has come into conflict with other countries, is far from surprising. 
That the rise of China from less than a percentage point of global GDP 
to around 8 percent has created concerns among industrialized nations 
should further create challenges is hardly shocking either. However, in 
spite of all the misplaced outrage, the impact of China's rise in the 
global trading order has still created valid challenges that need to be 
confronted. Indeed, China presents a fundamental challenge to the 
nature of the global trading order and the U.S. role in that order 
going forward.

The Rise of the Beijing Consensus
    This most recent global economic crisis has left many Chinese 
feeling triumphant. China's economy, after a brief pause, is once again 
roaring at double-digit growth. China's financial system was 
underexposed to many of the ``toxic'' assets that were the bane of so 
many other countries', and its stimulus package was targeted and 
relatively efficient. Chinese media and internet chatting has been full 
of commentary that the United States was down and out as a result of 
the crisis and China is scaling new heights. There is a palpable sense 
among many Chinese that China's economic and political system has 
distinct advantages over that of the United States. Despite a long-time 
view that the U.S. model of development--based on the so-called 
``Washington Consensus''--had much to be admired, many Chinese now 
perceive that there is a distinct Chinese model of growth--based on 
``state-directed capitalism''--that has little to be learned from the 
American experience favoring open markets and a preference for private 
activity. As Chinese Vice Premier Wang Qishan said, tongue clearly in 
cheek, to a forum of American business and government leaders as the 
extent of the financial crisis became clear: ``We have learned that our 
teacher has some problems.''
    China's widespread perception that the U.S. economic model is 
inferior to that of the newer Chinese version has profound implications 
for both China and the United States. To begin with, it is based on a 
faulty supposition. China's twenty-five year run of breakneck growth is 
not the result of effective state-owned firms or savvy industrial 
policies. Rather, China's economy has largely grown by the government 
getting out of the way of entrepreneurial individuals and companies; by 
allowing the ambitions of Chinese private individuals to substitute for 
the will of the state. Rather than clever planning by Chinese 
government agencies, as many Chinese now seem to suppose, twenty years 
of intensive market reform policies that removed the Chinese government 
from active intervention in market activity have been the primary 
source of Chinese growth. Chinese state-owned enterprises are largely a 
drag on growth, consuming 70 percent of Chinese resources and producing 
only 30 percent of Chinese output. China's industrial planners, those 
ministries that are heirs to the disastrous economic policies of 
China's Maoist past such as the Great Leap Forward and other tragic 
missteps, were largely sidelined during much of the two decades leading 
up to the beginning of this century as China's leadership sought to 
replace bureaucratic decisionmaking with market principles. Fifteen 
years of painful negotiations with the United States and other 
economies leading up to Chinese entry into the World Trade Organization 
in 2001 was intended by those steering the Chinese economy during this 
period to force reform on an otherwise recalcitrant bureaucracy. The 
wisdom of Chinese leaders in developing China's economies has not been 
to construct careful economic plans, but to eschew constructing those 
plans and drastically reduce state control over the economy. 
Unfortunately for those in China counting on unabated and efficient 
economic growth, the new generation of Chinese policymakers seems to 
have forgotten this important lesson.
    The second problematic impact of a newfound Chinese economic 
triumphalism is on the ability of U.S. trade and economic officials to 
convince Chinese counterparts to revise or reverse policies that impact 
U.S. economic interests. In the past, examples from the U.S. economic 
experience were important teaching tools that our officials and 
businesspeople could deploy to demonstrate alternative policies that 
Chinese officials might choose as alternatives to problematic policies. 
In an era in which the U.S. model was a powerful case in point of how 
to get economic development right, Chinese officials were at least 
willing to provide some deference to these examples. Newly convinced of 
the superiority of the Chinese system, Chinese policymakers are less 
easily converted to replace offensive policies and practices by 
examples from the ``failed'' U.S. model. As a result, when attempting 
to ``fix'' problems in U.S.-China trade relations, U.S. trade officials 
are left with few alternatives and must seek Chinese concessions during 
high-level summitry like the Strategic and Economic Dialogue or the 
Joint Commission on Commerce and Trade; by seeking WTO dispute 
resolution; or through unilateral trade actions. Unfortunately, high-
level summitry isn't an efficient process by which to resolve multiple 
complex trade issues. WTO dispute resolution is slow and unwieldy, and 
few problems in the relationship are clear violations of China's WTO 
commitments. Finally, unilateral trade actions can run afoul of our own 
multilateral trade commitments.
    The final challenge placed by China's newfound sense of economic 
superiority has been to dramatically suppress the forces of reform in 
China. In 2001, with the goal of Chinese WTO accession realized, the 
forces of reform were relieved of their primacy in economic 
policymaking. The planning-oriented ministries and agencies that had 
been suppressed in the fifteen years of reform found overnight that 
they no longer were easily coerced by reform oriented ministries like 
Commerce and Foreign Affairs. The planning forces not only began to 
flex their muscles in ways that challenged U.S. economic interests, 
they did so with no small amount of resentment at the perceived heavy-
handedness of the forces of reform during the period of their dormancy. 
Paradoxically, much of the decentralization of power and authority 
throughout the bureaucratic system that was a hallmark of WTO reform 
effectively empowered bureaus and offices throughout the Chinese 
ministerial to come up with creative plans that challenged the spirit 
of reform that embodied China's WTO push. When these plans challenged 
U.S. economic interests, however, U.S. officials have been forced to 
take up their concerns with different ministries, namely Commerce and 
Foreign Affairs, that may be most sympathetic to our concerns, but 
without the power and authority that they enjoyed in previous years.\1\ 
Given the unique, stove-piped nature of the Chinese bureaucracy, the 
effectiveness of those agencies in over-turning policies generated in 
other ministries is highly limited, absent external intervention from a 
higher-level authority. In short, the United States has difficulty 
finding an official audience in China that is both sympathetic and has 
political capital sufficient to do something about our concerns.
    \1\ Neither the Ministry of Commerce nor Foreign Affairs has a 
direct representative on the Politburo, unlike previous years. 
Experience managing international affairs among China's most senior 
leadership is therefore in short supply.
    In order for you to approach challenges holistically I believe that 
it is also critical to address some of the economic and trade 
challenges not under the purview of the Banking Committee.

Intellectual Property Rights Protection and Enforcement
    Not all challenges in the U.S.-China trade relationship are a 
result of newfound Chinese self-confidence or date from the resurgence 
of Chinese economic planning. The most costly of China's trade policies 
to U.S. economic interests has been the same for nearly as long as the 
relationship began. The counterfeiting and piracy of U.S. intellectual 
property from software to celluloid to switching technologies has been 
rampant and virtually unchecked in China for over two decades. This 
despite China's implementation of a basically WTO-consistent legal 
framework of intellectual property rights (IPR) protection and 
enforcement. One of the primary challenges to those seeking to prevent 
the unopposed theft of their IPR is that China's extreme geographic and 
political decentralization makes it very difficult for rights-holders 
to pursue legal protection and enforcement of their rights without 
having to run a gamut of local and provincial officials and courts that 
are more likely to side with local violators with more local political 
clout. When rights-holders are successful at seeking legal redress for 
their grievances in court, they are frequently awarded damages that are 
de minimis--barely adequate to cover legal costs let alone serve as a 
deterrent of future IPR theft. For many recidivist IPR pirates and 
counterfeiters, legal fines are an unfortunate but bearable cost of 
doing business: the rewards for piracy far outweigh the risks.
    U.S. officials have, for years, attempted to establish with Chinese 
counterparts an understanding on the utility of an effective IPR regime 
for Chinese economic development. A primary complaint of Chinese 
economic policy officials is that China's economy, while it has grown 
exponentially in the past 30 years, remains on the low-end of 
industrial input values. Searching for a means to bring Chinese 
industry up the value chain, some of these policymakers have seized on 
an effective IPR regime as an important means to an end. If China can 
better protect IPR, so the theory goes, China's domestic inventors and 
entrepreneurs will have a greater incentive to build Chinese technology 
companies and brands. There is thus a highly energized cadre of Chinese 
officials that understand the importance of IPR to an innovative 
economy and are seeking to establish a more effective system of IPR 
protection and enforcement not because of an interest in protecting 
foreign business interests, but promoting domestic Chinese innovation.
    This cadre of officials is bolstered somewhat by the increasing 
attention of China's most senior leadership to the importance of 
innovation to China's future growth plans. China's desire for 
technological advancement is a longstanding obsession. As early as the 
mid-1970s, China's Premier Zhou Enlai espoused the goal of ``Four 
Modernizations'', among which technological modernization was 
prominent. In the 1980s and 1990s, China sought to increase its 
technology base through technology transfer, attempting through 
incentives to encourage Western companies to incorporate higher 
technology platforms into their production bases.
    But China's effort to seek technology transfer, through incentives 
or (occasional) coercion, has been less-than successful. Some Chinese 
individuals and firms, not necessarily with state sponsorship, have on 
occasion attempted to access higher technologies from the United States 
and other Western economies through industrial espionage. But in most 
cases, U.S. companies have largely abstained from large scale transfers 
of technology to China. Chinese officials in many cases suggest that 
the reason for such abstention is U.S. export control laws. In practice 
however, the reason for China's lack of success in encouraging 
technology transfer is not U.S. policy \2\ but rather a rational U.S. 
company approach to risks associated with exposure of technology to the 
Chinese market: intellectual property theft is so rampant that few, if 
any, companies are likely to expose their technologies to the Chinese 
    \2\ Statistics from the Department of Commerce suggest that only 
about $6 million in U.S. export licenses to China are denied each year, 
significantly undercutting Chinese official's insistence that export 
controls are a significant factor in both the lack of significant 
technology transfer and the U.S. trade imbalance with China as a whole.
    Part of the problem with China's approach to IPR is, as most 
Chinese officials will tell you, that Chinese society is undereducated 
about the role of IPR in a modern economy. A prevailing Chinese 
attitude with respect to IPR is that China's development requires the 
free transfer of Western technologies in order for China to ``catch 
up'' with the West. It is not uncommon for Chinese of varying 
sophistication to demand that the China-based development of gunpowder 
and paper, which was freely adopted by Western sources, is adequate 
justification for Chinese citizens' commandeering of such products as 
Microsoft Windows or other such products. This cultural reality is no 
excuse for China's failure to effectively enforce the laws on its 
books, but it does present a significant enforcement challenge. That 
China has yet to allocate the resources necessary to begin to overcome 
this reality suggests that the lack of appreciation for the importance 
of an effective IPR regime is not merely a problem with China's 
populace, but is a challenge that runs deep within China's officialdom 
as well. Perhaps, given the apparent fetish within the leadership for 
policies that encourage innovation, IPR protection may gain increasing 
acceptance as a necessary part of the equation. That remains, however, 
to be seen. Simply challenging the WTO consistency of China's IPR 
regime, however, is unlikely to achieve satisfactory results.

Industrial Policy
    As I discussed earlier, the return of industrial planning to the 
fore of Chinese economic policymaking is a major challenge to market-
oriented businesses in China, including U.S. businesses. Policies that 
encourage the development of one business sector to the disadvantage of 
another have long been a factor in Chinese economic policy. Each year, 
China's central government has published an ``investment catalogue'' 
that lists businesses that qualify for ``encouraged,'' ``accepted'' and 
``discouraged'' status. This catalogue has been a guide for local and 
provincial officials in seeking foreign direct investment. 
``Encouraged'' investments (typically in high technology, high-
employment businesses) have had preferences showered upon them. 
Subsidies in the form of tax, land and labor breaks as well as 
dramatically simplified regulatory processes and the easing of other 
legal burdens have made the process of favoring some businesses over 
others a fact of life in China's economic landscape. The process of 
encouraging and discouraging different businesses has developed into a 
high art in recent years. Various national and sub-national official 
groups within China, especially those charged with working with various 
domestic constituency industries, have increasingly sought to develop 
new industrial groups in China. On a number of occasions, these groups 
have developed individual policies, not necessarily with the broad 
consensus of the Chinese government, that aim to encourage the 
development of industries in China in ways that challenge or 
disadvantage American companies and their workers:

    Promotion of National Champions

    Certain Chinese companies, not necessarily state-owned companies, 
have in recent years found special favor as firms that may develop into 
distinctly Chinese multinational companies. The advantages conferred on 
these ``national champions'' vary, but the rationale for their 
promotion by parts of the Chinese government is straightforward. 
Chinese government officials, largely for reasons of national pride, 
favor the existence of Chinese national companies that operate on a 
world stage with a stature comparable to U.S., Japanese and European 
multinationals. When the interests of these companies compete with 
those of American companies, the Chinese companies are generally 
accorded a ``patriotic'' advantage. An area of particular concern at 
this point is in green technology, which many Chinese officials 
perceive to be a competitive international commercial battleground 
that, given the dramatic scale of China's domestic market for wind and 
solar power in particular, Chinese companies will be uniquely poised to 

    Technology Certification for Procurement (the ``Indigenous 
        Innovation'') Challenge

    As discussed earlier, China's desire to move up the industrial 
value chain by improving its technology base is based on largely benign 
motivations. Whether intended to fulfill the Technology leg of the Four 
Modernizations, or to cope with the demographic challenge of China's 
aging workforce because of the ``one child policy'', a desire to build 
a more technologically advanced industrial base is not necessarily 
threatening to U.S. interests. The push in recent years, led by Chinese 
Premier Wen Jiabao, to develop a Chinese ``indigenous innovation'' 
capacity, on its face, is hardly something about which the United 
States has license to object.
    However, since China's leadership opined on the broad parameters of 
an ``indigenous innovation'' push, Chinese industrial planners have 
actively developed operational policies that contradict the spirit of 
Chinese reform policies that led to China's accession to the WTO. These 
decisions unquestionably impact the ability of U.S. and other foreign 
companies to operate in the Chinese marketplace. In November 2009, a 
group of Chinese ministries collaborated on the development of a policy 
designed to provide advantages in China's procurement market to those 
companies that developed ``indigenous innovations.'' The resulting 
policy circular set off a firestorm of criticism among the foreign 
business community in China, who argued variously that the policy would 
shut them out of the market, command their transfer of technology into 
the market, or require their collaboration with domestic Chinese 
players in the market. Although Chinese officials have been quick to 
suggest that the policy is not intended to disadvantage foreign 
players, the effect of the policy has, at a minimum, established 
confusion at the direction of China's attitude toward foreign business 
operations. More specifically, the effort, if allowed to stand, would 
have posed fundamental challenges to the ability of U.S. and other 
foreign businesses to operate on equal footing with Chinese 
counterparts.\3\ The principle of ``national treatment''--by which a 
WTO member accords no less advantageous a business environment to 
foreign businesses as it does its own--is, after all, a basic guarantee 
agreed to by China under its WTO accession agreement. The use of 
Chinese procurement laws to affect the policy was allowed by WTO rules 
because China is not a member of the WTO's Government Procurement 
Agreement, giving the country the ability to use its procurement market 
for the purposes set forth in the indigenous innovation policy. That 
China agreed on WTO accession to join the GPA ``as soon as possible'', 
yet used its lack of membership to adopt a policy counter to the GPA, 
suggests that the forces of reform that stood behind WTO accession are 
in full retreat.
    \3\ At the meeting of the U.S.-China Strategic and Economic 
Dialogue this past May, China agreed to reduce the impact of the 
offending technology certification regulations. Whether those 
regulations or the spirit that motivated their creation are gone for 
good, or are just being held at bay, is uncertain.

    The Standards Trap

    Technical standards are another area in which certain Chinese 
agencies have made an effort to carve out parts of the Chinese 
marketplace for domestic firms. In some cases citing security concerns, 
in some cases citing safety, Chinese agencies involved in commercial 
areas as diverse as agriculture to wireless encryption technology have 
been active in promoting China-only standards, frequently in collusion 
with domestic Chinese firms seeking market advantages. Some of these 
standards issues have become significant sources of friction in the 
relationship, such as the WLAN Authentication and Privacy 
Infrastructure (WAPI), a unique wireless encryption standard that 
Chinese regulators originally insisted be mandatory for all wireless 
equipment providers. That standard and its progeny, despite numerous 
high-level interventions at the Vice Premier and Secretary level, 
continue to percolate under the surface of international trade 
relations. Numerous other standards in various stages of development, 
some seemingly created purely to confound the ability of American and 
other companies to compete with Chinese rival firms in the marketplace, 
will almost certainly prove to be a major source of commercial friction 
in the years to come.

Beyond the Bilateral: China's International FTA Push
    In addition to the ongoing bilateral trade considerations that 
serve to challenge U.S. companies and their workers, China's activist 
international trade liberalization agenda is of undoubted concern to 
America's long-term competitiveness. Chinese efforts to build free 
trade links with Southeast Asia and other parts of the world are 
increasingly developing as competitive challenges to longstanding U.S. 
commercial advantages in these regions. China is winning hearts and 
minds in these parts of the world through conferring trade advantages. 
While the United States is obviously of two minds at present on the 
question of free trade, the failure to use a liberalizing trade agenda 
with Southeast Asia is increasingly acting to cede that part of the 
world to Chinese economic dominance. Without a more assertive 
international trade policy posture, including the goal of promoting 
Free Trade Agreements, the United States risks alienating itself as a 
commercial power, and reducing its overall influence in the region.

Combating the Challenges
    Contrary to some suggestions that the U.S. trade agenda with China 
is occasionally captive to broader strategic considerations, in my 
experience the commercial relationship is appropriately treated 
separate and distinct from security and other matters involving China. 
The U.S. Trade Representative and Department of Commerce are active in 
pursuing enforcement cases against Chinese interests. USTR is quick to 
pull the trigger on WTO cases when winnable cases are presented. DOC is 
unflinching in applying American trade laws to protect American 
businesses and their workers from unfair trade practices when the facts 
present a compelling reason to take legal action. The fact remains, 
however, that not every Chinese trade policy that disadvantages 
American businesses and their workers presents an actionable WTO or 
U.S. trade law case. Most often, the most difficult circumstances arise 
when a Chinese trade policy or practice is technically within the 
bounds of China's WTO commitments. Convincing Chinese officials to 
nonetheless reverse that policy or practice requires considerable 
skill. At a time when (a) Chinese officials are less-inclined to give 
credence to American arguments because of a perception that the 
American model is no longer appropriate to China's conditions; and (b) 
the ministries who favor market-oriented reform are short on political 
capital, the usual U.S. approach--that of engaging primarily with the 
Ministries of Commerce and Foreign Affairs to solve problems in the 
U.S. trade relationship--is unlikely to be particularly effective in 
solving the broadest range of challenges in the relationship.
    In order to genuinely combat the challenges faced by American 
companies and their workers in the China market, the U.S. Government 
and our companies will need to increase the sophistication of their 
approach to the marketplace. Too often, we approach China as if it were 
a monolith; a government with a top-down hierarchy that is best 
approached from the top down. In fact, the Chinese society is home to 
diverse constituencies that rarely are in lock-step consensus. Relying 
on any one or several ministries to expend political capital in the 
Chinese system in order to fix ``an American problem'' is not a long-
term recipe for success. One thing that Americans need to get better at 
in China is understanding the array of forces in China that are aligned 
in favor and against a particular trade proposition, and working more 
closely with those forces that support an American position. China has 
come far in 30 years. It is now a complex business and policy 
environment with multiple interest groups commanding attention. The 
United States would do well to understand the complexity and diversity 
of this environment and begin developing alternative means for 
resolving problems in the environment that are not solely reliant on 
the strategies and tactics of years past.


Q.1. You delayed publication of Treasury's exchange-rate report 
in order to use the Strategic & Economic Dialogue and the G-20 
summit to encourage China to move on its currency. You 
acknowledge in your testimony today that the pace of China's 
RMB appreciation as too slow and too limited. You said the 
Administration is ``examining the important question of what 
mix of tools'' are available to encourage China to move more 
    Will the currency report be issued October 15, as required 
by the law? As far as examining tools to encourage China, does 
this include taking a case to the WTO?

A.1. Did not respond by publication deadline.

Q.2. Section 310 of the Trade Act of 1974, referred to as 
``Super 301,'' requires the Administration to establish 
enforcement priorities for opening foreign markets for U.S. 
exporters. Super 301 was renewed in the Clinton Administration. 
It lapsed in the Bush Administration. I have a bill to revive 
it, which I see as key tool to doubling our exports in the next 
5 years.
    In the 1980s, when perhaps the Federal Government was more 
aggressive in combating unfair competition and pressing trade 
partners for market access, Super 301 I was one of the tools 
used to address currency manipulation with Korea and Taiwan.
    Do you see trade tools, like 301, strengthening Treasury's 
bargaining position on exchange-rate matters?

A.2. Did not respond by publication deadline.

Q.3. The Commerce Department has delayed at best, and ignored 
at worst, consideration from the coated paper and aluminum 
extrusion producers that China's currency intervention is a 
countervailable subsidy.
    The law on this is pretty straightforward--it requires that 
the Department initiate an investigation to determine whether a 
countervailable subsidy is provided if the domestic industry 
``alleges'' and meets a relatively low threshold.
    Why has the Administration not made the decision to 
initiate an investigation on currency in these cases?

A.3. Did not respond by publication deadline.

Q.4. The Japanese Government unilaterally intervened in 
international currency markets to the tune of reportedly $12 
billion. in order to weaken the yen. And so far they succeeded. 
The yen moved from 82.8 on September 15 to over 85 on September 
16, obviously due to this large intervention. Here's another 
case of classic currency manipulation whose purpose is to 
weaken a currency to make its exports more competitive, again 
to the detriment of American workers and American jobs.
    What has the Treasury said about this latest blatant 
unilateral intervention? Did you put out a statement condemning 
this action? If not, why not? Is the absence of a strong U.S. 
statement going to be seen by the Japanese and the world as 
evidence that the United States is tacitly supporting this 
    In light of this intervention by Japan, can you reiterate 
for us what exactly is the U.S. policy toward large, unilateral 
currency interventions?
    Can we expect to see Japan cited in the next Treasury 
report on foreign exchange as a currency manipulator, under 
terms of the current U.S. law?

A.4. Did not respond by publication deadline.

                          F. GEITHNER

Q.1. Mr. Secretary, I want to ask about your role at the New 
York Fed because of new information about the AIG bailout. This 
summer the New York Times reported on the latest AIG outrage. 
As part of the agreement to cancel its derivatives deals and 
pay the counter-parties off at par, AIG also waived all legal 
rights to sue Goldman Sachs, Merrill Lynch, and others for 
fraud or other reasons on the mortgage-backed securities the 
big banks issued and AIG insured. Did you participate in this 
additional giveaway to the big banks at the taxpayers' expense 
while you were at the New York Fed, and do you believe this 
action was appropriate?

A.1. Did not respond by publication deadline.

Q.2. It is my understanding that in the past, when you were 
asked about elements of the AIG bailout, you claimed that you 
excused yourself from decisions about elements of the AIG deal 
and other major decisions in late 2008 because you were working 
with the Obama transition. During this time when you were not 
performing the major responsibilities of your job at the New 
York Fed, were still collecting your salary from the New York 

A.2. Did not respond by publication deadline.


Q.1. Though this hearing has focused on our relationship with 
China and the valuation of our currency, I would be remiss if I 
did not address the recent decline in the value of the U.S. 
dollar. This week the dollar is trading near a 5-month low 
against the euro and consumer confidence has dropped to its 
lowest point since February. In the past you have said, ``I 
believe deeply that it's very important for the United States 
and the economic health of the United States that we maintain a 
strong dollar.''
    What specifically are you doing, as Secretary of the 
Treasury, to support a strong dollar policy?

A.1. Did not respond by publication deadline.

Q.2. What impact do you think our nation's budget deficits play 
in the weakening dollar?

A.2. Did not respond by publication deadline.

Q.3. Do you think that our budget deficits are sustainable?

A.3. Did not respond by publication deadline.

Q.4. Do you believe the current state of the U.S. dollar on 
world currency markets is a cause for concern?

A.4. Did not respond by publication deadline.

Q.5. Do you believe that you should be doing or saying 
something to strengthen the dollar?

A.5. Did not respond by publication deadline.

Q.6. What role do you think the extraordinary debt issuance by 
the United States this year has played in the status of the 
U.S. dollar in world currency markets?

A.6. Did not respond by publication deadline.

Q.7. Some have described efforts to jawbone the Chinese to 
increase the value of their currencies to have the same result 
as a weak dollar policy--because their goods would become more 
expensive for U.S. consumers?

A.7. Did not respond by publication deadline.

Q.8. Who do you believe bears the responsibility for the dollar 
rests with, the Department of Treasury or the Federal Reserve?

A.8. Did not respond by publication deadline.

Q.9. What affect has the Federal Reserve's open checkbook, 
bailout response to the financial crisis had on the dollar?

A.9. Did not respond by publication deadline.

Q.10. How big of an impact would the Federal Reserve have on 
the strength of the dollar if it announced that it was closing 
its checkbook and ending plans for further quantitative easing?

A.10. Did not respond by publication deadline.