[Senate Hearing 112-707]
[From the U.S. Government Publishing Office]







                                                        S. Hrg. 112-707


        REVIEWING THE U.S.-CHINA STRATEGIC AND ECONOMIC DIALOGUE

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

                                HEARING

                               before the

                            SUBCOMMITTEE ON
              SECURITY AND INTERNATIONAL TRADE AND FINANCE

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

        REVIEWING THE U.S.-CHINA STRATEGIC AND ECONOMIC DIALOGUE

                               __________

                              MAY 23, 2012

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  TIM JOHNSON, South Dakota, Chairman

JACK REED, Rhode Island              RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York         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                 PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia             MARK KIRK, Illinois
JEFF MERKLEY, Oregon                 JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado          ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina

                     Dwight Fettig, Staff Director

              William D. Duhnke, Republican Staff Director

                       Dawn Ratliff, Chief Clerk

                     Riker Vermilye, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                 ______

      Subcommittee on Security and International Trade and Finance

                   MARK R. WARNER, Virginia, Chairman

           MIKE JOHANNS, Nebraska, Ranking Republican Member

SHERROD BROWN, Ohio                  MARK KIRK, Illinois
MICHAEL F. BENNET, Colorado
TIM JOHNSON, South Dakota

             Nathan Steinwald, Subcommittee Staff Director

         Brian Werstler, Republican Subcommittee Staff Director

                                  (ii)












                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MAY 23, 2012

                                                                   Page


Opening statement of Chairman Warner.............................     1

Opening statements, comments, or prepared statements of:
    Senator Johanns..............................................     2
        Prepared statement.......................................    27
    Senator Brown................................................     3

                               WITNESSES

Stephen S. Roach, Senior Fellow, Jackson Institute of Global 
  Affairs, Yale University.......................................     4
    Prepared statement...........................................    27
C. Fred Bergsten, Director, Peterson Institute for International 
  Economics......................................................     6
    Prepared statement...........................................    35
John R. Dearie, Executive Vice President for Policy, Financial 
  Services Forum.................................................     9
    Prepared statement...........................................    50
Dean C. Garfield, President and Chief Executive Officer, 
  Information Technology Industry Council........................    10
    Prepared statement...........................................    62

                                 (iii)

 
        REVIEWING THE U.S.-CHINA STRATEGIC AND ECONOMIC DIALOGUE

                              ----------                              


                        WEDNESDAY, MAY 23, 2012

                                       U.S. Senate,
                 Subcommittee on Security and International
                                         Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Subcommittee met at 2:03 p.m., in room SD-538, Dirksen 
Senate Office Building, Hon. Mark Warner, Chairman of the 
Subcommittee, presiding.

          OPENING STATEMENT OF CHAIRMAN MARK R. WARNER

    Chairman Warner. I would like to call to order this hearing 
of the Senate Banking Subcommittee on Security and 
International Trade and Finance entitled ``Reviewing the U.S.-
China Strategic and Economic Dialogue''. I would like to thank 
our four witnesses, who I will introduce in a moment, for 
joining us, and my good friend, Senator Johanns, and his staff 
for assisting in organizing this hearing.
    A few weeks ago, as Secretary of State Clinton and 
Secretary of the Treasury Geithner were heading to Beijing for 
the latest Strategic and Economic Dialogue, a diplomatic crisis 
emerged when the civil rights activist Chen Guangcheng escaped 
house arrest and made his way to the U.S. Embassy. We have all 
followed that story and his eventual departure for America. But 
one of the important outcomes of this episode was that both 
Nations were able to work with one another even though there 
was this diplomatic incident going on and to continue their 
economic dialogue.
    The U.S. relationship with China is complicated, as we all 
know, and there are many complex strategic economic and 
political differences that exist between our countries. 
However, I believe there is some evidence of progress on this 
issue and something I hope we are going to hear from our 
panelists today on, and that is what we are here to discuss.
    Obviously, many Americans, and I am glad to see Senator 
Brown and Senator Merkley joining us, are concerned about 
Chinese use of trade policy, including controlling the value of 
its currency, and the impact it has on American firms and 
workers. Americans look at the large Chinese holdings of 
American Treasuries and worry. They look at a trade deficit 
that has seemed to only grow for years and also they worry. I 
know we also want to hear today from your comments on the 
recent announcements in terms of China's ability to buy those 
Treasuries without any intermediary.
    I believe these are all important issues and all raise 
legitimate concerns, but I think that China's continued growth 
and deepening ties to the U.S. economy mean that there must be 
ways we can work to identify and work through the real issues 
that exist between our countries.
    We have seen recently China downgrade its growth 
projections to 8.2 percent--what we would do for 8.2 percent in 
this country at this point, but as we all know, with that 
emerging population, they may need that 9 to 10 percent just to 
stay even. So, again, we hope our panelists will talk about 
that.
    Reforming China's economic policies, modernizing its 
financial systems, and rebalancing its economy toward greater 
consumption present real opportunities for U.S. and China's 
economic relationship. Also, obviously, that would affect most 
American families, as well.
    I am going to turn to my colleague, Senator Johanns, for 
his opening comment, and then if--do you have openings? We will 
try to do those, if we could make them relatively short, 
because I know we have got a bunch of votes this afternoon. 
Senator Johanns.

               STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Well, thank you, Mr. Chairman. I 
appreciate the fact that you have decided to hold this hearing, 
and we have also appreciated the opportunity to cooperate with 
you on that.
    With the close earlier this month of the fourth Strategic 
and Economic Dialogue, I value the chance to review the 
progress that has been made with China over many years, what we 
must do to make sure that that progress continues and how that 
progress will eventually help American companies access the 
world's largest emerging market.
    China presents not only extraordinary opportunity, but, I 
believe, we would all acknowledge it also presents 
extraordinary challenges. I had the great fortune as Secretary 
of Agriculture to actually participate in the Strategic and 
Economic Dialogue process and engaged in bilateral trade 
negotiations with the Chinese. Our work in developing 
agricultural trade in goods like soybeans and corn and cotton, 
that would be one of the success stories of our relationship 
with China. And, of course, as a Senator from Nebraska, I am 
eager to figure out ways to expand the opportunities for trade 
in agricultural products.
    As we all know, more Chinese consumers equals more American 
exports which directly equals more American jobs. Last year, 
the U.S. exported about $130 billion in goods and services to 
China, supporting more than 600,000 jobs domestically. There is 
no reason why, working closely with Chinese to implement some 
much-needed reforms, last year's level of exports could not be 
doubled, maybe even tripled.
    I am very encouraged by recent news coming out of China 
that the leadership is beginning to understand the importance 
of a transition to a consumption-based society and the scope of 
the efforts necessary to achieve that kind of transition. But 
we all know that none of this is easy. It is probably not going 
to happen overnight. But there remain a few issues of major 
importance that must be worked out.
    Currency issues, of course, are always a subject of 
conversation with the Chinese. Great strides must be taken in 
even-handed and predictable enforcement of the law, 
specifically intellectual property rights. The regulatory 
system must become more transparent and treat entities fairly 
without regard to nationality.
    For example, an issue of great importance to Nebraska, 
China must stop discriminating against American-grown beef. And 
to touch on the focus of the hearing today, financial markets 
must be opened further to allow institutions with innovative 
new products that will greatly benefit the Chinese to have 
access to that market.
    So again, Mr. Chairman, I thank you. I look forward to 
hearing from the witnesses.
    Chairman Warner. Thank you, Senator Johanns.
    If any other Senator would like to make an opening 
statement. Senator Brown.

               STATEMENT OF SENATOR SHERROD BROWN

    Senator Brown. Thank you, Mr. Chairman, for holding this 
hearing, and thank you very much to the witnesses, especially 
Mr. Bergsten. Thank you for your insight and your wisdom and 
your guidance over the years, especially on currency issues, 
but on so much more, and I will be brief, Mr. Chairman.
    The latest round, as said, concluded earlier this month. It 
is important this Committee note how these talks are actually 
addressing or not addressing the imbalances in our trade 
relations with the People's Republic of China. The 
Administration and editorial pages argue over and over that 
China has to alter its economic approach to build domestic 
consumption, and we know what that would mean for us if they 
begin to do that better. That is good news in terms of the 
potential for them to focus on domestic growth rather than sort 
of a simple ongoing export-led approach. But if we do not get 
access in terms of our exports for their markets, this may 
undermine our recovery and undermine job creation here.
    For U.S. companies to get access to the Chinese market and 
to its consumers, they have had to set up operations there, as 
we know, the way China has done it. And all too often, they do 
so with joint ventures and technology transfer requirements, 
which I know mean a lot to Mr. Garfield. Now the Administration 
has announced a model bilateral investment treaty that in many 
ways will actually pave the way for more U.S. investment in 
China. But will that investment treaty actually promote exports 
from the United States to China and ensure new barriers that do 
not discriminate--that they do not discriminate against U.S. 
goods and services, including banking services? Those are some 
of the questions we need to ask.
    I think this is probably the first time in history, I 
believe, where a business, where a number of companies' 
business plans have included shutting down production in our 
country, moving it to another country, producing there, and 
selling back into our country. I do not think that is a 
business plan that works long-term for our companies and for 
our jobs and for our communities in this country and I think it 
is time we--we clearly are beginning to reexamine that. I think 
we need to continue that.
    Thank you, Mr. Chairman.
    Chairman Warner. Senator Bennet or Senator Merkley?
    All right. Let me go ahead. I have got a series of 
questions, as well, on that same subject that Senator Brown has 
raised. Let me get to the witness introductions, though, so 
that we can get to what I hope will be a good conversation.
    First, we have Mr. Stephen Roach, who is a Senior Lecturer 
and Senior Fellow of the Jackson Institute at Yale University. 
For over 30 years, he has been a highly regarded economist on 
Wall Street and globally. Just in February, he transitioned to 
academia--congratulations, I think--and full-time at Yale, 
following a distinguished career at Morgan Stanley Asia as 
Executive Chairman and Chief Economist.
    As Senator Brown said, a familiar face to many of us, Dr. 
Fred Bergsten has been Director of the Peterson Institute for 
International Economics since its creation in 1981. He has 
advised multiple Presidents on trade, international affairs, 
and economics since serving under Henry Kissinger at the 
National Security Council. Again, we thank you for joining us 
again, Dr. Bergsten.
    Mr. John Dearie has been Executive Vice President for 
Policy at the Financial Services Forum since 2001. He 
previously spent 9 years at the Federal Reserve Bank of New 
York and was appointed an officer of the Bank in 1996. Before 
joining the Federal Reserve, Mr. Dearie was Managing Director 
of the Financial Services Volunteer Corps, which helped build 
banking and financial service systems in developing countries.
    And then someone who I have had the opportunity to work 
with on a series of occasions, Mr. Dean Garfield was elected 
President and CEO of the Information Technology Industry 
Council in October 2008. Before joining ITI, Dean served as 
Executive Vice President and Chief Strategic Officer for the 
Motion Picture Association as well as Vice President of Legal 
Affairs at the Recording Industry Association. He has helped 
both industries manage global strategy, intellectual property, 
policy, and litigation.
    Good panel, so let us get to their testimony. Mr. Roach.

STATEMENT OF STEPHEN S. ROACH, SENIOR FELLOW, JACKSON INSTITUTE 
               OF GLOBAL AFFAIRS, YALE UNIVERSITY

    Mr. Roach. Thank you very much, Mr. Chairman. It is a 
pleasure and an honor to participate in this timely hearing 
this afternoon. There is no international economic issue that 
is of greater importance to you in the Senate and to your 
colleagues elsewhere in Washington than our economic 
relationship with China.
    I have participated in hearings like this for a number of 
years, as has my friend and colleague, Dr. Bergsten. Yet I have 
come to a somewhat different conclusion than he has, so we are 
going to thoroughly confuse you this afternoon, which is always 
the risk when you invite two economists to comment on anything.
    My conclusion is that over the past 7 years, there has been 
far too much emphasis in this great body on the currency issue 
as the principal way in which China needs to be addressed in 
the international economic policy arena. In particular, by 
focusing on the U.S.-China foreign exchange rate, you are 
implicitly presuming that there is a bilateral solution to what 
is really a much broader problem facing the United States. I 
think this approach has outlived its usefulness, and I think it 
is incumbent upon you to think of a new framework to address 
China. So what I would like to do in the next 3 or 4 minutes is 
simply to demonstrate to you why this approach is the wrong 
approach and what might be a more productive approach in the 
years ahead.
    First of all, there are four flaws in the Renminbi currency 
fixation syndrome which many suffer from today. Number one, our 
trade deficit is multilateral. We have trade deficits with 88 
countries. Yes, China is the biggest, 34 percent of the total 
U.S. multilateral imbalance since 2005. But by higher math, 
that means there are another 87 countries we that have deficits 
with. It is a multilateral imbalance in large part because we 
do not save as a Nation--reflecting our massive budget deficits 
and a sub-par household savings rate. So if we do not address 
the sources of our multilateral imbalance and focus solely on 
the Chinese piece, it is like stepping on a water balloon. The 
water just goes somewhere else, most likely to a higher cost 
producer. That would be the functional equivalent of a tax hike 
on middle-class American workers, which I know none of you 
would like to see. The bottom line here is you cannot fix a 
multilateral imbalance with a bilateral exchange rate.
    Number two, the currency constituency in the U.S. Senate, 
led initially by Senators Schumer and Graham in 2005, has been 
very focused on this ever since they initially demanded a 27.5 
percent revaluation of the Renminbi versus the dollar. The last 
time I checked, the Renminbi is up 31.4 percent against the 
dollar, so they should go home and declare victory. And, yes, 
China has done it gradually. Your colleague in the Senate have 
always wanted it to occur overnight. But it is not clear that 
the economics suggests that you get to a different place if you 
do a gradual or a large one-off revaluation. In any case, China 
is mindful of the horrible mistake that Japan made in listening 
to similar advice that we offered them in the mid-1980s when 
they actually did a one-off sharp revaluation of the Yen, Japan 
has been on its back ever since.
    Third, we hear repeatedly that a sharp revaluation of the 
Renminbi is the answer for global imbalances--that it will 
address China's trade surplus, America's current account 
deficit, and global imbalances. I think that view is just 
wrong. China's current account surplus is diminishing very 
sharply, from 10 percent in 2007 down to two-and-a-quarter 
percent this year by the IMF. So you need to update that view.
    Similarly, I think the Washington view on China's 
international imbalance, led by Fed Chairman Bernanke, has been 
to blame China's surplus savings glut as the source of many 
problems that the U.S. faces. This year, America's current 
account deficit of about $510 billion will end up being 2.8 
times the size of China's sharply reduced surplus. So the U.S. 
is actually a much more serious source of global instability 
today than the so-called savings glut in China.
    And then, finally, the idea that China is the world's 
factory needs to be updated. It is much more the world's 
assembly line. About 20 to 30 percent of all Chinese exports 
represents value added is made in China. The balance reflects 
value added made elsewhere in Asia. Sixty percent of Chinese 
exports come from Chinese subsidiaries of global 
multinationals. This is not a currency issue. This is just a 
manifestation of globalization. Think Apple, for example.
    I apologize I have gone over. Let me try to wrap it up in 
about two more minutes.
    I promised you not just to trash the currency constituency 
but also to stress--and this is my punch line--that you need to 
come up with a new framework in viewing China--not as a threat 
but as an opportunity. Several of you did correctly allude to 
the market access issue in that regard.
    I would just make four simple points here. Number one, the 
jobs in America are not being necessarily squeezed because of 
currency misalignments in the world. The U.S. dollar, broadly 
measured by the Federal Reserve Board, is down 25 percent since 
2002, and yet our job situation is terrible, as you know. I 
think that reflects less the currency misalignments and mainly 
the fact that our major source of aggregate demand, the 
American consumer, is on ice. Consumer spending, 71 percent of 
the economy, has grown six-tenths of a percentage point at an 
annual rate over the last 17 quarters. Without consumption, 
without demand growth, companies will not hire and they have 
not.
    So that brings me to my second point, which is we obviously 
need a new source of growth. I would agree with Senator Johanns 
that exports are at the top of the list. Goods exports are now 
10 percent of our GDP, which is a record. But I also agree with 
you, Senator--we can go a lot higher. China is our third 
largest and most rapidly growing export market, and with anemic 
growth of U.S. exports in Mexico and Canada, and, needless to 
say, a horrible outlook for Europe, we have got to look to 
China.
    And then, third, take a careful look at the ``Next China.'' 
It is not that they are just talking about changing the model. 
They have to change the model because an export-led demand 
growth model in China does not work in a treacherous and weak 
global environment. So when you think about China, you have got 
to think of a consumer-led growth model with great opportunity 
for manufactured goods producers in the U.S., but also for 
service companies--not just finance but a whole broad array of 
nonfinancial services in the distribution and transactions 
processing areas.
    So my conclusion is, you are right. Market access is the 
new issue. Currencies are the old issue. Get off that one. Do 
not waste your time on that. Do not keep fixating on China's 
need to revalue the Renminbi. They have done it and they are 
still doing it. But the next China is what you should be 
focusing on, not the last China. Take the high road, not the 
low road.
    Thank you very much.
    Chairman Warner. Thank you.
    Mr. Bergsten.

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

    Mr. Bergsten. Mr. Chairman, it is a great pleasure to be 
back before the Committee. Congratulations on holding the 
hearing. For the reasons I will indicate, I think this is very 
important stuff.
    I just want to make three main points. First, the critical 
need for the Strategic and Economic Dialogue. Second, tangible 
results to date--has it been worth it, has it been a success. 
And third, what is the future agenda. I will resist the 
temptation to get into an extensive dialogue with Mr. Roach 
about exchange rates. I think he is flogging a little bit of a 
dead horse for reasons that I will indicate.
    First point. I have been proposing for a number of years 
that the United States and China create an informal G2 to help 
steer the world economy. The reason is very simple. Progress is 
impossible on most important global economic issues today 
without agreement by these two global economic superpowers. 
Examples include exchange rates in the international monetary 
system, the world trade regime, climate change. There are many 
others.
    The G2 should be completely informal and even unannounced 
or even acknowledged by the two countries. As the Nike ad says, 
``Just do it.'' But they should seek to forge close working 
cooperation on the whole range of global issues, which is 
essential for achieving progress on bilateral problems or in 
implementing their global leadership responsibilities as the 
world's two largest economies.
    Now, the most overt and visible step toward creating a G2 
is the very frequent meetings between President Obama and the 
top leaders of China. Ever since President Obama has been in 
office, he has met every quarter with either President Hu or 
Premier Wen, and that is a movement toward a G2 by any name. 
But the Strategic and Economic Dialogue that we talk about 
today is by far the most extensive institutionalization of the 
concept. It brings cabinet officers together once a year. It 
has launched ongoing dialogue among many groups of officials on 
many topics.
    I, therefore, believe that the S&ED is a crucial component 
of U.S. foreign policy, national security policy, as well as 
economic policy. It must be continued and, indeed, 
strengthened. Its ever expanding agenda of topics and 
discussion forcing, if not yet action forcing nature, are 
extremely important. The Administration should be congratulated 
for the priority it has attached to the dialogue. It should 
continue and accelerate that focus in the future.
    Point two, abstract pursuit of a G2 or a cooperative 
relationship is unlikely to win widespread support now that it 
has been operating for 3 years. So the question is, have there 
been tangible results that suggest beneficial practical payoffs 
from the exercise?
    Now, the dominant issue of this period, though Steve Roach 
did not like it, has been the extensive currency manipulation 
for China. For at least 5 years, the Chinese blatantly 
intervened in the foreign exchange market by buying $1 to $2 
billion worth of dollars every single day to keep the price of 
our currency high and their currency low. That, of course, 
produced an enormous competitive advantage for China in world 
trade. It produced a global current account surplus for the 
Chinese that exceeded 10 percent of its whole economy at its 
peak 5 years ago and an unprecedented buildup of $3.3 trillion 
of foreign exchange reserves. So the U.S. has rightly focused 
on this issue at every meeting of the S&ED as well as in many 
other contacts with the Chinese.
    In recent years, and here I agree with Steve, it has 
embedded the currency issue in the broader rebalancing 
question, the need for China to alter its development strategy 
away from export-led growth in the direction of relying on 
domestic demand.
    My key point, however, is that it is now apparent, as Roach 
also said, that the U.S. strategy has succeeded to a 
substantial degree. China's global current accounts surplus has 
now declined to less than 3 percent of its economy. That is 
primarily due to the rise of more than 30 percent in the trade-
weighted average of the exchange rate since 2005, a rise of 
more than 40 percent against the dollar. I have attached to my 
statement an analysis by one of my colleagues, Bill Cline, that 
shows that if the Chinese continue to permit the currency to 
rise at the rate of the last 2 years, China's current accounts 
surplus could actually disappear over the next 2 or 3 years.
    So we should, indeed, declare at least an important degree 
of victory. Now, we have got to remain on the case because we 
cannot be assured China will let the rate continue rising. In 
fact, it should rise more to completely eliminate their current 
account surplus. That would be a desirable thing. But I do 
believe that the progress on this very difficult and highly 
contentious issue marks both a major step forward in the U.S.-
China economic relationship and a signal achievement for the 
S&ED itself.
    Finally, and very briefly, there are, of course, as Steve 
said, lots of other very important issues in this relationship. 
I talk about a couple of global economic issues. No time to 
discuss them now, the euro crisis and such. I am happy to come 
back to that later.
    But there are many bilateral, including trade, issues that 
have to be addressed. The S&ED did cover an impressive array of 
them. It is particularly important that China has agreed to 
negotiate new international rules on export finance over the 
next couple of years. This is a major area of international 
competition and contention. It is a big area of export 
subsidization. China is not part of the current rules because 
it is not in the OECD. The commitment to do a new arrangement 
in this area is very, very important.
    But my punch line here is that I think it is going to 
remain difficult to successfully resolve the large number of 
our bilateral trade conflicts as long as they continue to be 
addressed in a purely ad hoc manner. We can take some cases to 
the WTO, but that is minor stuff. In most cases, we do not have 
any agreed rules of the road.
    Therefore, I will make the breathtaking proposal that the 
U.S. and China should consider launching negotiations for a 
bilateral trade agreement to provide a comprehensive framework 
to deal with the daunting array of economic problems between 
them, a list that is likely to continue growing as the economic 
relationship deepens further. Such an effort could even aim to 
develop a U.S.-China Free Trade Agreement over a period of a 
decade or so, as has been proposed by some leading U.S. 
businessmen who have lots of experience in China. Another 
alternative would be to look for an early occasion to bring 
China into the negotiations on the Trans-Pacific partnership, 
which aims to create a Free Trade Area of the Asia Pacific.
    Any effort of that type would represent an extension of the 
G2 concept into the trade policy area, as I believe inevitably 
must occur at some point. The S&ED could productively begin 
that conversation, which, of course, carries major foreign 
policy as well as economic dimensions. So building on its 
considerable progress to date, I think the S&ED has a rich 
potential agenda for the years ahead and can be enormously 
valuable.
    Chairman Warner. Thank you.
    Mr. Dearie.

   STATEMENT OF JOHN R. DEARIE, EXECUTIVE VICE PRESIDENT FOR 
                POLICY, FINANCIAL SERVICES FORUM

    Mr. Dearie. Senators Warner and Johanns, thanks very much 
for holding this important hearing. It is vitally important. I 
very much appreciate the opportunity to be here.
    As you have heard already, the rate of China's economic 
emergence and the impact of its integration into the global 
economy are unprecedented in the history of the world's economy 
with profound implications for U.S. economic growth and job 
creation. But harnessing China's growth and job creation 
potential requires a number of important structural reforms in 
China, including financial reform and modernization. In my time 
with you today, I am going to try to help connect the dots 
between faster financial reform in China and jobs in the United 
States.
    Since China joined the WTO in December of 2001, U.S. 
exports to China have increased more than six-fold, growing at 
seven times the pace of U.S. exports to the rest of the world. 
China, as you heard earlier, is now America's third largest 
export market, the largest market for our products and services 
outside of North America.
    For your reference, I have provided in Exhibit A of my 
written testimony figures that show the growth in exports to 
China from each of the States represented by Members on this 
Subcommittee. As an example, Chairman Warner, exports from 
Virginia to China have increased nearly 800 percent since the 
year 2000, as compared with growth of just 42 percent in 
Virginia's exports to the rest of the world. Each of the other 
States represented on this Subcommittee have posted similarly 
impressive growth rates in exports to China.
    At the Financial Services Forum, we have estimated that if 
China's citizens were to eventually consume American-made goods 
and services at the same rate as their neighbors in Japan 
currently do, U.S. exports to China could grow to as much as 
$700 billion a year, nearly twice what we imported from China 
last year, potentially turning a $300 billion trade deficit 
into a $300 billion trade surplus and creating nearly three 
million new American jobs. That will not happen overnight, to 
be sure, but we believe that with the right reforms in place, 
it will happen over time.
    The good news is, as you have heard, is that after three 
decades of pursuing a manufacturing for export economic model, 
China's leadership now wisely seeks a more balanced economic 
model that relies less on exports and fixed investment and more 
on internal demand, primarily a more active Chinese consumer. 
But accelerating the shift to a more consumption-based Chinese 
economy requires a more modern and sophisticated financial 
sector. Chinese households, as you know, currently depend on 
their families and private savings to pay for retirement, 
health care, and the economic consequences of accidents or 
disasters, with the effect that they save anywhere from a third 
to even half of their incomes.
    Activating the Chinese consumer requires the broad 
availability of financial products and services, things that we 
take for granted, personal loans, credit cards, mortgages, 
pensions, insurance products and services, and retirement 
security products that will eliminate the need for this 
precautionary savings on the part of the Chinese and facilitate 
greater consumption. A recent report by the World Bank called 
``China 2030,'' among other findings, confirmed this 
observation.
    The S&ED was created in 2006 in large part to accelerate 
financial reform in China. Since then, as you just heard from 
Mr. Bergsten, incremental but meaningful progress has been 
accomplished. Still, China continues to impose substantial 
obstacles on U.S. financial institutions operating in China, 
including caps on investment by U.S. firms in Chinese financial 
institutions, nonprudential restrictions on licensing and 
corporate form, arbitrary restrictions on permitted products 
and services, and arbitrary and discriminatory regulatory 
treatment.
    The fastest way for China to get the modern financial 
system it needs, and as Mr. Roach indicated, they have already 
initiated this transition toward a more consumption-based 
economy, but the fastest way for them to get the financial 
sector that that shift requires is to open its financial sector 
to greater foreign participation by foreign financial services 
firms.
    By providing the financial products and services that 
China's citizens and businesses need to save, invest, insure 
against risk, raise standards of living, and, therefore, 
consume at higher levels, foreign financial institutions, 
including U.S. providers, will help China develop an economy 
that is less dependent on exports, more consumption-driven, 
and, therefore, an enormously important and expanding market 
for American-made products and services.
    Thank you very much.
    Chairman Warner. Thank you, Mr. Dearie.
    Senator Johanns pointed out that at least for Virginia and 
Nebraska, while those tremendous export growths were taking 
place, a certain two Senators were Governors there.
    [Laughter.]
    Chairman Warner. Mr. Garfield.

 STATEMENT OF DEAN C. GARFIELD, PRESIDENT AND CHIEF EXECUTIVE 
        OFFICER, INFORMATION TECHNOLOGY INDUSTRY COUNCIL

    Mr. Garfield. Thank you, Chairman Warner, Ranking Member 
Johanns. Thank you for hosting this hearing on this important 
issue. It is critically important not only to our companies, 
but also to the country.
    Before I jump into talking about China, I do want to 
compliment the Committee on the work that it has done on 
fostering entrepreneurship and innovation. The passage of the 
Jobs Act is something that we commend, as well as the 
introduction of the Start Up Act, Start Up 2.0, yesterday, is 
something that we strongly endorse. I hope those 30 seconds 
will not count against my time in talking about China.
    I would like to focus my testimony on two specific areas: 
One, our experience in China as it transitioned from a consumer 
export-driven economy to a more consumer demand-driven economy; 
and two, solutions for addressing the challenges that we are 
encountering on the ground in China.
    I am very pleased to be here representing the information 
and communications technology sector, a sector that is 
transforming the lives of millions of people around the world 
and that is a real driver for economic growth in the United 
States. When we saw the first touch screen portable electronic 
notebook 40 years ago in the movies, most people thought it was 
simply fanciful. Today, that is a reality that is integrated in 
all of our lives.
    China has been an important part of that innovation story. 
The large growth in China's GDP has led to a demand for the 
most innovative products around the world, many of those 
products that are developed, distributed by our companies. In 
addition, China, as a number of the panelists have noted, is an 
important part of the global supply chain, which has resulted 
in hundreds of thousands of jobs being created here in the 
United States.
    Unfortunately, it has not been a story of straight-line 
success. As China has transitioned into, or is beginning to 
transition into more of a consumer-driven economy, they have 
decided to put their thumb on the scale, particularly as it 
relates to innovation policy. There have been previous hearings 
here before on China's indigenous innovation policy, in 
particular. Through the work of the S&ED, there have been some 
successes against some of the most blatant offenses, including 
foreclosing important aspects of the economy related to State-
owned enterprises and Government agencies from competition from 
U.S. and foreign-based companies.
    In spite of the success on some elements of indigenous 
innovation, it continues apace. New movie or same movie with a 
new title. China has adopted some more sophisticated strategies 
for its indigenous innovation policies, but it continues apace.
    For example, in the fifth--I am sorry, the twelfth 5-Year 
Plan, China outlined an initiative to focus on advancing 
strategic emerging enterprises or industries, strategic 
emerging industries, and intends to do so through a number of 
means that are completely inconsistent with global norms, for 
example, advancing China-specific standards or putting in place 
local testing and regulatory requirements, or simply pumping 
resources into those strategic and emerging industries. In 
fact, China has announced a plan to spend $1.6 trillion 
directed at the industries that it has identified.
    And so the question--the challenge is not only what is 
happening within the borders of China, but the fact that many 
other major markets that are export opportunities for the 
United States are now mirroring the model that has been adopted 
within China. We see in India, Indonesia, Brazil, and all over 
the--all around the world, other countries adopting similar 
indigenous innovation policies which are quite problematic and 
will result in a stalling of job creation here in the United 
States.
    And so the question is, what do we do about it? We have 
three things to offer.
    One is building on what has been successful. As all of the 
panelists have noted, the Strategic and Economic Dialogues have 
been quite successful in our advocacy. I also recall in 2010, 
when the Senate held hearings on these issues, it had a 
significant impact. And so a unified U.S. position and a 
forceful position on trade and pushing back around these 
indigenous innovation policies, not only in China but around 
the globe, is critically important.
    Second is identifying people and agencies within China, and 
companies, who have a shared interest with the United States. 
There are a number of players in that market who share our 
interest, and taking steps to bolster those players is 
critically important.
    Third and final, I think it is important that we take the 
opportunities that exist, whether it is the G2, as Mr. Bergsten 
has suggested, or the G20, which is coming up very soon, to 
highlight these onerous mercantilist policies as it relates to 
China but more broadly.
    Thank you for the time.
    Chairman Warner. Thank you, Mr. Garfield, and I appreciate 
everybody's testimony.
    We will do 5-minute rounds because I want to make sure 
everybody gets a chance, at least one or two rounds.
    I want to actually--I am going to move from some of the 
macro questions I have, because I am sure some of my colleagues 
may raise some of them, but I want to actually start where you 
left off, Mr. Garfield, which is this question of China 
creating its own standards, I think, in some of the telecom 
areas they are looking at, such as, a separate Chinese WIFI 
standard----
    Mr. Garfield. Yes, WAPI.
    Chairman Warner. ----different from the international 
standards, which, in effect, almost becomes a competitive 
barrier for American and other international firms entering 
into the marketplace. How do we slow that? How do we get them 
not to use their own national standards as really a trade tool?
    And something that has been suggested to me, and I would 
like your and anybody else on the panel's comments on this, is 
it has always scratched my head why it seems that China's 
ability to play off all of the rest of our countries, our EU 
partners, Japan and others, one against each other, 
particularly on the private sector side, where we do not seem 
to have as much unity of purpose. And one thing that was 
brought up to me is that there are antitrust and other 
international preconditions that do not allow some of our major 
partners to actually talk in a coordinated fashion about how 
they might take on a China that is dealing with not only 
individual standards, but in certain places State-owned 
enterprises which are simply clones for their Government policy 
or State-operated policy. Comments on that? Ideas on that?
    Mr. Garfield. Yes, I think you have alluded to some of the 
answers. The issue you identified around standards and the 
potential that it holds for closing the market to competitors, 
including competitors that I represent, is a significant 
problem. I think there are two strategies that immediately jump 
to mind.
    One is doing what we did with the S&ED, which is though we 
were consistent as a U.S. Government in our opposition with 
China, we also worked really hard to build a multinational 
commitment around the problem with indigenous innovation. And 
so I think it is important that we are consistent in our own 
advocacy and unified in our position and forceful in our 
position, but also we have got to work with our multinational 
partners to make clear that it is problematic.
    The second part of it is to realize that China is playing a 
game of chess, not checkers, and so we may see these standards 
like WAPI developing within China, but China is using 
international bodies to advance their same goals. For example, 
there is a whole discussion going on at the U.N. at the ITU 
around standards and what is the proper approach for 
establishing standards. It is important that the United States 
take a firm position there, but it is one person, one vote, and 
so we, again, have to collaborate with our international 
partners to push back against that kind of an effort.
    Chairman Warner. I want to make sure we get to everybody 
else weighing in on the panel on this. I also think your 
point--right before we were coming over here, we were hearing 
from the IT industry about India trying, not with standards but 
with other tools, to try to basically emulate China's 
restrictions. Does anybody else want to add in on this, 
particularly are there antitrust provisions? Somebody has 
raised this with me. I do not know if it is a valid concern or 
not.
    Mr. Bergsten. I do not know about that. I want to make two 
quick observations, though. You are absolutely right. The use 
of national standards to affect competitive positions is the 
protectionist device de jour. It is no longer tariffs, quotas. 
That is the kind of thing. That is why I am arguing we need to 
get China into some kind of trade agreement with us. Those 
things are not covered by the multilateral rules effectively.
    They will be included, to an important extent, in the 
TransPacific Partnership. That is one of the U.S. goals in that 
21st century agreement. And I think it would be strongly in our 
interest to find a way to bring China into a trade agreement 
where we could debate explicitly those kinds of rules of the 
road. It would be tough. There are lots of aspects to it. But 
that is one of the main reasons I propose that.
    On your question about the Chinese playing off the other 
countries, exactly right. It is our own stupidity. We talk all 
the time about intensifying trans-Atlantic relations. The U.S. 
and Europe should be getting together. If the U.S. and Europe 
should be getting together on anything, it is this, a common 
threat toward Europe. But what happens? When the European 
leaders go to Beijing, they want to sell Airbuses. When our 
leaders go, they want to sell Boeings. It is a competition 
rather than a cooperation. Now, with a little subtlety, you can 
do both, but we certainly should be coordinating with our 
allies.
    I think it is right. One of the reasons that at least the 
first version of the National Indigenous Innovation Policy was 
rolled back a bit was because it was a pretty coordinated 
approach from main trading partners of China coming in to 
harangue them on the issue. It can be done and we are simply 
short-sighted not to do it.
    Chairman Warner. I want to be sensitive to my colleagues' 
time, so maybe in a second round I will get Mr. Dearie's and 
Mr. Roach's comments on that.
    Senator Johanns.
    Senator Johanns. Well, let me thank each of you for being 
here, some excellent testimony.
    I am going to start with you, Mr. Bergsten. I find your 
proposal on a trade agreement sort of approach an interesting 
approach, but let me, if I might, offer a dimension to that and 
then maybe another approach that I would like your thoughts on.
    The dimension I would offer is that, as you know, trade 
agreement negotiations are painstakingly slow. They typically 
extend over many, many years. The world is changing so fast. 
This is an economy we want to access now as aggressively as we 
can. And then at the end of the day, they are hard to get 
passed. There are strong differences of opinion about the value 
of any trade agreement, and then you have individual interests 
that weigh in. So this gets to be a complicated process.
    It should not dissuade you. I support trade. I think I have 
supported every trade agreement in the last 20 years. But let 
me offer another thought, another approach, maybe, and again, I 
would like each panel Member's kind of quick comment on this.
    I thought the Strategic and Economic Dialogue actually 
worked quite well. I happened to be there at the meeting with 
the President when Secretary Paulson proposed it. It kind of 
caught my attention. I saw it come to fruition, participated in 
some of that. It actually worked well.
    If I had one concern about it, there was a tremendous 
amount of time and effort and preparation put into that on both 
sides, Chinese and the United States. You would have this 2-day 
meeting effort. Everybody would get their item on the list. We 
would talk through those items, work through it. But then you 
would not get back together again for a while.
    I often wondered if it was--as an addition to it, do an 
approach that basically said, look, there are certain areas--it 
might be telecom, it might be agriculture, it might be 
financial services--and literally have subsets of that that 
kind of filled in that interim period of time, where you could 
literally work through these issues like Mark has raised and 
then bring that back to the economic dialogue so you did not 
lose track as the months passed of these very, very significant 
items that could be make or break items for a given industry.
    Let me start with you. What is your reaction to that? And 
then if I could just go around the panel quickly.
    Mr. Bergsten. I think you are absolutely right, and that 
has, in fact, been the evolution of lots of international 
institutions over the years, as you know. G20 was preceded by 
G7, preceded by G5. They originally started with a single 
annual meeting, but then created sherpas to implement the 
process over the course of the year, set up subgroups of the 
type that you suggest.
    So I think that would be a natural evolution, would be 
highly desirable. It would go very much in the direction of my 
G2 because it would then foster habits of cooperation, channels 
of communication in which an official in Beijing could pick up 
the phone, call here when she or he had a concern and vice-
versa, and you develop that thick network of collaboration.
    We have that to a large extent with the European countries 
from having worked with them for so many decades. We need now 
to foster it with China, and your route, I think, would be a 
very promising one to pursue.
    Senator Johanns. Mr. Roach, what are your thoughts?
    Mr. Roach. I think that the collaborative network between 
U.S. and Chinese officials, of which I have actually been 
privileged to speak to senior officials on both sides for a 
number of years, is really gaining momentum. Under the auspices 
of what was initially the Strategic Economic Dialogue, now the 
Strategic and Economic Dialogue, the momentum is continuing.
    I think one of the most important things that has occurred 
over the last, now, 11 years with respect to China and the 
world has been China's accession to the rules-based WTO 
framework which is a means of accountability that we can now 
rely on. The Chinese will protest from time to time, as will 
we, if charges are brought against them or us. But the rules-
based framework that Fred has alluded to is a powerful one.
    I think, however, the politics and many of the reasons that 
you raise, Senator Johanns, on the pragmatic aspects of going 
for an FTA would really rule that option out. It is just not a 
realistic goal for the foreseeable future. Maybe someday we 
will get there, and I would be very much in support of that. 
But formalizing more of a secretariat type of arrangement where 
there is constant and formalized accountability of agreements 
that have been reached at various bilateral meetings would be a 
more productive avenue to pursue. I think it would be a very 
important and positive contribution.
    Mr. Dearie. Senator, I agree. As a general matter, I am in 
favor. As a general matter, I am very supportive of the 
ambitious ideas that Fred put on the table. I recognize some of 
the political practical issues that Mr. Roach is talking about. 
But any kind of high-level consistent engagement with China, I 
think, works entirely in our favor.
    I think that you make a very, very good point that that 
engagement also needs to be coordinated with Europe. There is 
very little doubt, based on my observation, that China does, or 
has in the past, played a, or pursued something of a divide and 
conquer strategy. And to the extent that we and the Europeans 
can coordinate our pressure and our demands on China, not only 
does that make more sense logically, but it has worked in the 
past, as Mr. Bergsten just described, in terms of some of the 
other problems in the past.
    So as a general matter, more areas of high-level engagement 
with China, coordinated with the Europeans, work very much in 
our favor.
    Your specific comment on the S&ED, I think, is also well 
taken, and I would point out--I am sure you know this--the 
original SED, Strategic Economic Dialogue, Number One was very 
focused on economics and finance, financial reform and economic 
reform in China, and it was twice a year. When the Obama 
administration came into office, they expanded the dialogue to 
be the Strategic and Economic Dialogue and included into the 
dialogue a lot of other issues, strategic issues, military 
issues, environmental issues, human rights issues. I am not 
quibbling with that. This bilateral relationship is very 
complex, to be sure. And then they reduced the number of 
meetings to once a year. And so the practical effect of 
expanding the range of issues on the table and limiting or 
cutting in half the number of times that you meet every year 
just has the practical effect of limiting, I think, or slowing 
down some of the progress that can be made.
    Clay Lowery, who served in the Treasury Department when the 
dialogue was the Strategic Economic Dialogue, happened to 
testify last week before the House Financial Services Committee 
and he spoke to this in very eloquent terms, and he spoke 
specifically about having a twice-a-year high-level engagement 
creates a much more of a momentum and puts firm markers out 
there on a more frequent basis in terms of when deliverables 
have to be accomplished. And then, just as importantly, you see 
the people on the other side of the table more often. And this 
element of trust, personal trust and personal engagement and 
getting to know your counterpart on the other side of the 
table, particularly in the context of our engagement with the 
Chinese, is very important.
    Mr. Garfield. Can I----
    Chairman Warner. I am going to have to call on Senator 
Merkley.
    Senator Merkley. Thank you, Mr. Chair. I have to go 
preside, so I am just--I had wanted to explore an issue. 
Unfortunately, I am just going to be able to raise it. Maybe my 
colleagues will explore it.
    After the group of 10 Senators, bipartisan delegation, went 
to China last year, and we heard a lot of insights from our 
foreign diplomatic personnel, economic analysts, our companies 
doing business there, it gave me a more comprehensive picture 
of the tilted playing field, and I would categorize that in 
really four components: The weak enforcement of labor and 
environmental laws; currency manipulation; direct subsidies; 
and nontariff barriers.
    And many of those pieces have been mentioned here. We have 
talked about technical standards that Senator Warner raised, 
nontariff barriers, indigenous innovation, which fits into that 
category. Not a lot of discussion of the direct subsidies. We 
did in the course of last year around the trade treaty debate 
raise the issue of the direct subsidy that China is supposed to 
report under the WTO. It has only done so only once in 10 
years.
    Shortly after we raised that and raised the concept of a 
bill that would require our Trade Representative to do 
counternotification as authorized under the treaty, our Trade 
Representative went ahead and did counternotification, raised a 
list of 200 subsidies that China does directly to its 
companies, items for export, and it was a fascinating list. If 
I could stay, I would get your insights on that list. But the 
fact that it revealed a huge energy strategy, a paper strategy, 
a famous brands strategy, all of which have not been raised or 
discussed in this conversation and really merits exploration. 
Take these four areas together and all the subcomponents and 
China has a comprehensive approach.
    And as we look out across America, we see a loss of 
millions of jobs over the last 10 years, and if we do not make 
things in America, you really do not have a middle class. And 
so we have to wrestle with this in a comprehensive fashion. 
Unfortunately, my Committee Members are going to continue 
pondering that along with all of you, and thank you very much.
    Chairman Warner. Thank you, Senator Merkley.
    Senator Bennet.
    Senator Bennet. Thank you, Mr. Chairman, and thank you for 
holding the hearing, and thank you for your excellent 
testimony. It really has been a fascinating discussion.
    Mr. Garfield, I wanted to start with you on your second 
proposed solution, as I recall, which was the notion that we 
should be finding companies in China that have, as I understood 
it, aligned self-interests with some of the things that we 
want. I wonder if you could say a little more about that. I 
guess that might be actors that want a strong IP regime or--is 
that what you have in mind?
    Mr. Garfield. Exactly. It actually connects with the point 
that the Ranking Member was making earlier about doing a side 
dialogue. As it turns out, in the innovation hearing that is 
occurring, and the way that it is happening is with expert to 
expert around innovation, the challenge we have is when you 
only have China at the table, it is hard to bring international 
pressure or additional pressure beyond the United States.
    One of the things that I have identified and we have found 
generally as a sector in operating in China is that it is a 
huge country and a huge bureaucracy, if you will, and there are 
agencies and provinces that have ambition of driving innovation 
and driving growth, but doing it in a way that is consistent 
with global norms. And so identifying those emergent companies 
as well as those emergent players within the country, I think, 
is important, an important part of our strategy.
    Senator Bennet. Are there--putting the geography aside for 
a second, although that is a very interesting insight--are 
there particular industries that you think we could go farthest 
fastest with in terms of creating a regime that actually would 
work better?
    Mr. Garfield. I think one is certainly our sector because 
of the opportunities globally. The other thing about our sector 
is it evolves so quickly----
    Senator Bennet. Right.
    Mr. Garfield. ----and so players in China see the global 
opportunity and they are also adversely impacted, not on a 
grand scale, but there are some companies within China that are 
impacted by the policies that are put in place that are 
intended to promote and advance those sectors. And so I would 
say that our sector is one to look at as an opportunity for 
finding aligned interests.
    Senator Bennet. I wanted to follow up on one of the 
implications of Jeff Merkley's question, since he had to leave, 
and I wanted to do it in the context of solar panels. There are 
two interesting sides to this argument. The Commerce 
Department, I think, recently announced that it was raising 
tariffs on solar panels because it found the Chinese were 
dumping them into the global market. I have observed over the 
last couple years that our largest single export from the 
United States is the aircraft, $30 billion a year. I think the 
solar panel exports from China is about $15 billion a year. 
That is not trivial. It is half of our largest single export.
    And you have people that look at this and say, well, this 
is good because this is going to mean that our manufacturing 
sector is now going to be able to manufacture solar panels 
again, which some of us believe were actually invented not just 
in the United States but in the great State of Colorado. But 
then there are other people that say, you know, if the Chinese 
are willing to subsidize this to this degree and our interest 
really is in trying to move into alternative sources of energy 
and be able to do better conservation and be able to do the 
sorts of retrofits in our buildings, that is where the jobs 
really are and that is where the wage growth really is.
    I wonder if you have a perspective, just as a--not 
necessarily on that case or solar panels, even, but how we as 
policy makers should think about this relationship with China 
in the context of wanting to create jobs here in the United 
States, wanting rising wages here in the United States, and 
wanting to recouple our own economic growth with job growth and 
wage growth.
    Mr. Roach. Can I just tackle that, because it is a critical 
issue. I will comment briefly, and I will do it at the macro 
level. I am sure my fellow witnesses can bore in on a little 
bit more specifically.
    You are talking here really about two totally different 
systems of economic organization. We protest a lot about, as 
Senator Merkley said, about the subsidies, the plan, the energy 
plan. China is in the midst, as several of us have said, of 
their twelfth 5-Year Plan. This is a Soviet-style structure 
that was first developed in the early 1950s. The first four or 
five of these 5-Year Plans were total unmitigated disasters. It 
was not until the late 1970s with, I believe, the fifth 5-Year 
Plan that was formulated by Deng Xiaoping in the aftermath of 
the Cultural Revolution, when China was on the brink of total 
failure as an economic system, that they got their act 
together.
    In the subsequent six or seven 5-Year Plans, they have 
moved their model forward to what they call a socialist market-
based system, and the twelfth 5-Year Plan is far more market-
based, far more consumer-based, and, therefore, far more in our 
interest as an exporter than China has ever been.
    They have done an extraordinary job of taking an economy 
that was on the brink of failure 32 years ago to what is today 
the world's second-largest economy, but they have got miles to 
go. Their per capita income is 10 percent of ours. They still 
have got 600 million people living in relatively impoverished 
levels in the rural countryside.
    So is their system wrong for them? It is not our system. It 
is not right for us. But the question that Senator Merkley 
seemed to be alluding to is that we should take tremendous 
exception at the system that they have put in place to drive 
economic development. With all due respect to the Senator, I 
think that system has worked extremely well for them in getting 
to this point, but it will not work that well in the future. 
The Chinese have said that. They know that. They are changing.
    And that goes back to the comments that I made at the 
outset. We have got to look at where China is going and gear 
our own strategy, whatever that is, to thinking strategically 
about how we can really take advantage of the growth 
opportunities and the job opportunities that we can derive from 
where China is headed--not from where it has been.
    Mr. Bergsten. I would like to give a simpler but 
complementary answer to your question. Economists agree on very 
few things. You can see it here today. But practically all 
economists agree on the virtues of free trade. And the answer 
to your question, the tradeoff between getting cheaper goods 
for our consumers versus avoiding an unlevel playing field, 
really goes to that fundamental truth. Free trade is good for 
our economy, but when the other country cheats, you want to 
counter it because that violates the very principles of free 
trade, and that is the need, then, for international rules of 
the game, the WTO, but it does not cover a variety of these 
subsidies we are talking about today.
    So I think the presumption, in answer to your question 
about solar panels or anything else, is that we want to have 
maximum openness of trade, but if the other country is 
cheating, through manipulating the currency or subsidized 
credit or any of a variety of practices which are an inherent 
part of the Chinese system, as Steve outlines, then you have 
got to counter that, and over time, try to get to systemic 
changes to rectify it.
    Mr. Garfield. I also think when the other country is 
cheating, we cannot do things to shoot ourselves in the foot. 
And so there are a number of initiatives that are on the docket 
for this Congress that could help to make the U.S. more 
competitive, whether it is tax reform, immigration reform where 
we educate our best and brightest and then ask them to leave 
the country or make it very difficult for them to do, cyber 
security and making our systems more secure. And so we do not 
have to look very far to see a list of policy priorities that 
can make the U.S. a lot more competitive.
    Mr. Bergsten. If I could just add one more sentence, there 
is a well known theorem in economics called the Theory of the 
Second Best. If the other guy is subsidizing and you cannot get 
him to stop, there is a very strong case for your subsidizing 
to match him. That is the issue of export credits. We do not 
really love, I think, having an Export-Import Bank or other 
procedures that subsidize our export finance, but since the 
other guys do it, you have to match. And, in fact, if you do 
not match, then there is no way of getting them to desist. So 
you want to have a two-track strategy. You want to match, but 
then you want to use that leverage to try to get them to roll 
back, and that is the case across the board and you have to 
implement it item by item. But those are the basic principles, 
I think, that need to apply. Thank you.
    Mr. Roach. And just for the record, I strongly object to 
the word ``cheat'' to characterize China's behavior as a 
developing economy.
    Mr. Bergsten. I want to reiterate it.
    Chairman Warner. That would be where I want to start the 
second round, and again, the witnesses have all got great 
information. I would ask you to please--we have got----
    Mr. Dearie. I will be brief.
    Chairman Warner. We are interested questioners and we would 
really appreciate if you could try to keep your answers a 
little briefer.
    I do think it is curious that some of what Senator Bennet 
and others were talking about kind of falls under the rubric of 
industrial policy, and some of our colleagues who abhor any 
notion of America having an industrial policy then say, and 
look how we are getting beat by China. An interesting 
contradiction.
    I want to come back, because I probably more fall closer to 
Dr. Bergsten than Mr. Roach on some of these issues, because I 
do have concerns and I would like to give Mr. Dearie and Mr. 
Roach an opportunity to answer the last question. Are we 
missing opportunities for American enterprises to collaborate 
with Europe, Japan, others, in having an organized approach 
vis-a-vis China?
    I would like, as well, then, as others answer in on this, I 
will try to get all my questions into one, because I know you 
all even with that admonition are going to go longer on your 
answers. The whole notion--and one of the things that Treasury 
recently announced that State-owned enterprises in China are 
about to increase their dividends. What does that mean for 
Chinese consumers? Will that move, again, a good sign toward 
consumption, or does it mean that this is again playing on an 
unlevel playing field because the State-owned enterprises are 
getting additional support systems?
    And one thing that has been touched on by Dean briefly but 
not really hit on, and this is where, Mr. Roach, I will take 
exception to your characterization, because whether it is State 
sanctioned or quasi-State sanctioned, the amount of 
intellectual property theft and cyber attacks that are being 
generated by China, I think, are outrageous and in direct 
opposition to any kind of ascension to world standards.
    So let us start with Mr. Dearie and Mr. Roach, and with the 
admonition that I have only got 3 minutes before Senator 
Johanns is up.
    And I also want to add, I think Senator Johanns's comments, 
and we are talking already about seeing how we might formalize 
some of those efforts to make sure the S&ED becomes this 
ongoing process. I think you raised an excellent point.
    Mr. Dearie and Mr. Roach first.
    Mr. Dearie. I will be as brief as I can be because I 
understand the time constraint. I think that your point about 
greater international cooperation vis-a-vis the Chinese is an 
excellent one. I would note very specifically with regard to 
the U.S. Strategic and Economic Dialogue with China, Europe has 
its own similar Strategic Economic Dialogue. I think they call 
it the High Level Dialogue or something to that effect. I am 
not sure if I have the words correct, but still, it is modeled 
after our S&ED and so they have an independent line and format 
of negotiation.
    There certainly must be opportunities for greater 
coordination between we and the Europeans and potentially even 
the Japanese, as you suggest. I do not have any specific ideas 
about how we might accomplish that. I will give that some 
thought and get back to you----
    Chairman Warner. Are there any things that are precluding 
that cooperation at this point?
    Mr. Dearie. I do not----
    Chairman Warner. Anything that is formalized?
    Mr. Dearie. I am not aware of anything that would preclude 
it, no, except for the inherent complexity associated with 
doing a multilateral approach, but we have done that before. So 
I will give that some thought, and if we come up with ways that 
we can accomplish that, we will certainly share those with you.
    In terms of your specific question with regard to the 
higher dividends being paid by State-owned enterprises, we 
actually think that that is a good thing. There is a tremendous 
amount of money that is locked up in the State-owned 
enterprises in China. This is part of what has been called a 
financial repression of the Chinese consumer. Interest rate 
regulations are part of that, as well. But certainly as the 
State-owned enterprises begin to increase their dividends, 
begin to pay out a lot of this money out to Chinese consumers 
who might be shareholders in State-owned enterprises, it will 
certainly be a step in the right direction in terms of 
increasing consumer consumption.
    Chairman Warner. Mr. Roach.
    Mr. Roach. Just a couple of quick things: One, rightly or 
wrongly, the Chinese feel that over the last 150 to 200 years, 
they have been maligned severely by the West. This goes back to 
the Opium Wars of the mid-19th century. I think the idea that 
we should forge a grand coalition between ourselves and Europe 
and gang up on the Chinese probably would not go over very well 
in that respect. There are international forums like the WTO 
that are very appropriate for addressing the Chinese.
    Second, the Chinese are doing this pro-consumption 
transformation. They need enormous help, and that help is our 
opportunity. If there is one thing that we know how to do in 
the United States, it is how to take a consumption model to 
excess. We are the world's greatest consumers, unfortunately, 
to a fault. We have gone well beyond what economic fundamentals 
suggest we should have done. But we have built up industries 
and systems in goods and services that could be of enormous 
benefit to the Chinese.
    And I would stress here services in particular--retail 
trade, wholesale trade, domestic transportation, supply chain 
logistics. The infrastructure in those areas in China is tiny 
compared to the scale of their economy. These are opportunities 
of enormous scope and scale that could be hugely beneficial to 
us in taking advantage of this transformation.
    Chairman Warner. Thirty seconds, only, Dr. Bergsten and Mr. 
Garfield, on State-owned enterprise, dividend policy as well as 
any brief comment on IP or some of the cyber issues.
    Mr. Bergsten. Yes. I think the dividend policy is a big 
step forward. The State-owned enterprises are still largely 
retrograde dinosaurs. To the extent that they keep their own 
profits and keep reinvesting them in things they should not be 
investing them in, it makes it harder to rebalance the economy.
    Conversely, when those very large amounts of money do get 
transferred to the central Government, it gives them more 
resources to do the kind of rebalancing, building of safety 
nets, that will help reduce the reliance on heavy investment, 
export-led growth. So I think that is something we at my 
Institute have called for for quite a long time. We are very 
pleased that it is now moving that way.
    Mr. Garfield. I will simply comment on the multinational 
coalitions and say that no one is really focused on ganging up 
on China. It is more working with multinational partners much 
in the way that we did in 2010 around indigenous innovation to 
get China or convince China that acting consistent with global 
norms is completely consistent with its overall goals 
domestically.
    Chairman Warner. Senator Johanns.
    Senator Johanns. Again, thanks to each and every one of you 
for being here. I am starting to pay attention to the clock 
because I, myself, have a meeting that I have to get to here 
pretty quickly. So let me, if I might, end my participation in 
the hearing with just a thought or two.
    I am fascinated, Mr. Roach, by your description of a new 
China, a China that is based upon a consumer approach. The more 
China ties itself and its future to an export market, the more 
you have to realize that that market is going to be fickle at 
times. It is going to ebb and flow and that is going to have an 
impact on your economy. Their movement in that direction, I 
think, does provide great opportunities for us to try to meet 
some of the needs. We are already seeing in some areas, like 
food, they are very happy to buy our food and we are happy to 
sell it.
    The second point I wanted to make today is that as that 
relationship continues to expand and grow, it does occur to me 
that there is a need for yet another step. We started with the 
Economic Dialogue. Then it became the Strategic and Economic 
Dialogue. I had no problem with that. I think that makes sense. 
But I think there is a next step out here, and here is why.
    You know, if you think about China, it was not all that 
long ago in human history that this was a closed society. We 
did not do business with China. We did not go to China. There 
was not really a relationship with China until Nixon took a 
bold step and said, we need to create this relationship.
    What has happened since then is that the Chinese are 
especially entrepreneurial and that economy has taken off, and 
my impression has been that it has grown faster than the 
ability of the Government to manage that. So you do run into 
these kinds of irritating trade issues, like why are you not 
buying Nebraska beef, and there are so many of those kinds of 
things that you run into. But part of the challenge they have 
is growing their infrastructure fast enough to manage good 
trade policy.
    The final point I will make about that, though, is that 
that in itself creates a remarkable opportunity for cooperation 
with the United States, I believe. It seems to me that we have 
the ability to partner with them, and I am not talking about 
foreign aid or anything like that, but I am talking about 
technical expertise from the United States and from China 
sitting down and working through these issues in a way that is 
positive in terms of opening up markets and hopefully avoiding 
those problems before they develop, because there is--it just 
seems there is always a long list of irritants that--and they 
really are. They are irritants that we need to work our way 
through.
    Now, again, because of time, I cannot go around to each 
person, but if you would, call us on the phone or write us a 
letter. I would love to hear your thoughts on that.
    And I will end by just saying how much I appreciate really, 
really provocative testimony, very thought provoking 
information that you have provided. Thank you very much.
    Mr. Roach. Thank you.
    Mr. Bergsten. Thank you.
    Mr. Dearie. Thank you.
    Mr. Garfield. Thank you.
    Chairman Warner. Thank you, Senator Johanns. Let me also--I 
am getting close on the time constraint, too, so I want to make 
a couple of final comments, as well, echoing a lot of what you 
said, Mike, and agree that we have got to figure out a way to 
get this right, this relationship right. The notion of formal 
or informal--probably better informal, Dr. Bergsten--of a G2 
idea, I think, makes enormous sense.
    I want to again thank the panel, as well. It has been a 
really provocative hearing. I particularly appreciate, Mr. 
Roach, some of the comments you made at the outset in terms of, 
I think, outlaying where we have gone on this currency 
discussion. It is a helpful point that needs to be made, and I 
did not even see Fred kind of--I even think I heard him agree 
with you on parts of that.
    [Laughter.]
    Chairman Warner. You know, what I am concerned about is 
some of these efforts, and again, I may be a little too 
industry-specific, but that China--we have a potential, still, 
to blow this relationship, and China, as they try to move 
toward, I think we all agree, toward this consumption-based 
approach. My sense is, and this is--I may actually ask a quick 
response on this--I have a sense that a number of not just 
American-based companies but other companies, international 
large brand companies, went into China with stars in their eyes 
in terms of access to a huge, huge market, in certain times may 
have made sacrifices on their own standards and procedures as 
the price of entry of getting into that market. They have now 
been there for, most of them, a decade-plus, continue to sink 
in enormous amounts of resources, and have not seen the ability 
to necessarily either take back profits made or have found real 
challenges on some of the joint ventures, but rather see the 
Chinese regime and Government being less than a level playing 
field, kind of sucking sometimes out the intellectual content 
of property and then setting up either State-owned or other 
competitors that do not allow, again, a level playing field. I 
think we are seeing it on standards. I think we have seen it on 
intellectual property. I think we are starting to see it on an 
enormous up ramp on cyber.
    And as someone--and I will take Mr. Roach's view of this is 
an extraordinarily important relationship. How do we make sure 
we do not get it wrong? How do we make sure that we continue to 
press the Chinese to be full active partners? They are an 
emerging Nation, but at some point, it seems like they are 
playing as an emerging Nation when the circumstances fit or a 
first-tier Nation with the economic clout that they bring to 
bear, and I just would like, again, with the request for some 
level of brevity, if anybody has got a response to either 
Senator Johanns's or my--and since he left, I am more 
interested in a response to my point--you know, that this is 
still a relationship in transition and that, we could get it 
wrong, but the Chinese could get it wrong, too. What if these 
enterprises that continue to invest in China do not feel they 
are playing on a level playing field? I think Mr. Dearie's 
numbers were revealing to me. I know they had gone up, but I 
did not appreciate how much that export opportunity had risen. 
So how do we get it right? And again, we will just go down the 
panel.
    Mr. Roach. Yes, just briefly. I think, Senator Warner, your 
concern about the fact that this relationship could still be 
blown is, I think, a very important and a very legitimate 
concern. We have one of the candidates for Presidency who has 
made a solemn promise to the American public that on the day 
that he is sworn in, he will declare China guilty of currency 
manipulation. That underscores your risk.
    I would just like to second, and I believe it was Mr. 
Dearie's comment, that one of the risks here is that we have 
gone from holding the Strategic Dialogue with China twice a 
year to once a year. As such, it has become an exercise in 
event planning. Both sides breathe a great sigh of relief when 
each meeting ends, and they do not have to do it again for 
another year. I actually think the more frequent the meetings 
are, the greater the degree of engagement and the less the risk 
that we will blow it. So I would be very much in favor of going 
back to the former frequency of at least twice a year--and 
possibly even more.
    Mr. Bergsten. Just two quick points. Just to underline your 
fear that we could still blow it is the fact that China is a 
sui generis, unique global economic superpower. It is the first 
global economic superpower in history that is at the same time 
a poor country, does not have a market economy, and is not a 
democracy. And so on the one hand, we have to treat it and act 
with it like a more or less equal global economic power. On the 
other hand, it has got these profound differences. And so 
finding a way to relate to it, very different from the 
Europeans in the past or the Japanese now.
    That is why I think two things that have been discussed 
today are of uppermost importance. One is to use the 
multilateral system. I mean, the Chinese are responsive to 
external advice and even pressure. But if it looks like they 
are responding to external pressure, then they get their backs 
up and, in fact, it is counterproductive. So the way in which 
you do it is critical. Using the multilateral institutions, as 
Steve said, where they are a full member, full participant, is 
absolutely crucial to the strategy. Now, that, of course, 
raises the weakness of the multilateral institutions, the IMF 
on currency, the WTO does not cover a lot of things, but you 
have to use them as much as possible.
    But then my second point, you have got to go beyond that, 
and particularly the U.S. as the other big superpower has to go 
beyond it, and that is why I am calling for a G2. Informal, 
yes, not intended to substitute for the G20 let alone the IMF 
or WTO, indeed, to make them work better, but by developing 
really thick networks of cooperation between us and the 
Chinese. Not easy. Not easy for them. Not easy for us. But I 
really think if we are going to meet the main challenge of this 
century, that has got to be a central part of it.
    Chairman Warner. Mr. Dearie.
    Mr. Dearie. Very quickly, to your point about the 
possibility of blowing it, I think the possibility exists on 
both sides. There is absolutely no question that certainly 
within the financial space that there is profound frustration 
at not being able to operate on a level playing field. We have 
already seen a couple of large financial institutions either 
reduce substantially or, in fact, unwind their operations in 
China. There is still tremendous interest in being there. I 
mean, it is the second-largest economy in the world, the 
fastest growing economy in the world. But they want to be there 
on a national treatment basis.
    On the Chinese side, I think that there are still large 
elements of--certainly at the senior political level in China 
and even at the senior commercial level in China, there is 
still--and I think this gets to what Mr. Roach was talking 
about, about China not wanting--culturally and historically, 
very sensitive to being seen as being pushed around and being 
influenced by foreigners. John Huntsman, our recent Ambassador 
to China, had an op-ed in the Wall Street Journal just recently 
in which he described China as being profoundly insecure in a 
sense, and there are elements in China that I think still see 
the U.S. and China relationship as something as a zero-sum 
game, that what is in our interest is not in their interest and 
vice-versa.
    So there is a lot of work to be done on the trust front, 
explaining and getting to know and learning more about each 
other, and that is why more frequent--more and more frequent 
high-level engagement with China is so important.
    The good news here, though, is that engagement works. If 
you look back over the last, you know, since 1979 and how we 
have engaged with China, sometimes it seems like it is not 
working because progress is always, you know, it is terribly 
incremental, the Chinese move at a pace that seems very 
unsatisfying. But if you look back in retrospect and look at 
what the United States and China have accomplished together 
since 1979, it is incredible. It is very important to 
understand, and I think this sort of threads through a number 
of our testimonies today, there is a happy alignment right now 
between U.S. interests and Chinese interests in terms of the 
economic space. They want to go where we want them to go, and 
so there is an enormous opportunity here.
    Last, Congress has an enormously important role to play. 
China cares about Congressional sentiment. They monitor 
Congressional sentiment very, very closely in terms of 
statements, in terms of hearings like this, and I would 
encourage this Committee, this Subcommittee, and Congress in 
general to bring the same kind of intensity and pressure that 
they have brought in recent years on the currency to these 
issues of engagement and expanded market access. Thanks.
    Chairman Warner. Mr. Garfield.
    Mr. Garfield. Two quick points. One, the relationship thus 
far, I think, both for the tech sector as well as the country, 
has been a net positive, but we are always recalibrating and a 
number of the issues we have talked about today moves it closer 
to being a close call on whether it continues to be a positive.
    Two, I think we have to continue to be consistent and clear 
in our opposition to the types of policies that we have been 
discussing, and the point that Mr. Dearie made about the role 
that Congress and the U.S. Government can play generally in 
spotlighting these issues and being clear about our opposition 
to policies that are inconsistent with global norms is 
critically important.
    Chairman Warner. Great. Well, thank you all very much. A 
very fascinating hearing. And with that, the hearing is 
adjourned.
    [Whereupon, at 3:30 p.m., the hearing was adjourned.]
    [Prepared statements supplied for the record follow:]
               PREPARED STATEMENT OF SENATOR MIKE JOHANNS
    Thank you, Mr. Chairman, I appreciate you holding this hearing 
today. With the close earlier this month of the fourth Strategic and 
Economic Dialogue, I value the chance to review progress that has been 
made with China, what progress must continue, and how that progress 
will eventually help American companies access the world's largest 
emerging market. To be sure, China presents not only extraordinary 
opportunity, but also extraordinary challenges.
    I had the great fortune, as Secretary of Agriculture, to 
participate in the Strategic Economic Dialogue process and engage in 
bilateral and multilateral trade negotiations with the Chinese. Our 
work in developing agricultural trade in goods like soybeans, corn, and 
cotton is one of the great success stories of our relationship with 
China, and I am eager to see our successes expand.
    As we all know, more Chinese consumers equals more American 
exports, which directly equals more American jobs. Last year, the U.S. 
exported nearly $130 billion in goods and services to China, supporting 
more than 600,000 jobs here domestically. There is no reason that, 
working closely with the Chinese to implement some much needed market 
reforms, last year's level of exports could not be doubled or tripled.
    I am very encouraged by recent news coming out of China that the 
leadership is beginning to understand the importance of a transition to 
a consumption-based society, and the scope of the efforts necessary to 
achieve such a transition. None of this is to say that reforms will be 
easy, or will come quickly.
    There remain issues of major importance that must be worked out. 
Great strides must be taken in even-handed and predictable enforcement 
of law, specifically intellectual property rights. The regulatory 
system must become much more transparent, and treat entities fairly, 
without regard to their nationality. For example, an issue of great 
importance to Nebraska, China must stop discriminating against 
American-grown beef. And, to touch on the focus of the hearing today, 
financial markets must be opened to allow institutions with innovative 
new products to access an ever-growing consumer base.
    I look forward to hearing from the witnesses, and to discussing 
their thoughts on the future of the U.S.-China relationship.
                                 ______
                                 
                 PREPARED STATEMENT OF STEPHEN S. ROACH
  Senior Fellow, Jackson Institute of Global Affairs, Yale University
                              May 23, 2012
    Mr. Chairman and Members of this important Subcommittee, I am 
delighted to weigh in on an international economic policy issue of 
enormous importance to the United States. Since its inception 6 years 
ago, the Strategic and Economic Dialogue between the U.S. and China has 
served the very useful purpose of elevating one of the world's most 
important economic relationships to the high level it deserves. 
Unfortunately, this dialogue has been misdirected by the combination of 
bad economic advice, a tough macroclimate bearing down on American 
workers, and a politically motivated blame game. It is high time to 
rethink the focus and role of this important framework of engagement.
    The United States has long allowed its fixation on China's foreign 
exchange rate to dominate the debate surrounding its economic 
relationship with China. Over the past 7 years, the U.S. Congress has 
repeatedly flirted with legislation purportedly aimed at defending 
hard-pressed American workers from the presumed threat of a cheap 
Chinese currency. Bipartisan support for such a measure initially 
surfaced when Senators Charles Schumer (a liberal Democrat from New 
York) and Lindsey Graham (a conservative Republican from South 
Carolina) reached across the ideological and party divide to cosponsor 
the first Chinese currency bill in 2005. Over the years, the drumbeat 
has only grown louder in seeking such remedies. By overwhelming 
bipartisan majorities, the House of Representatives passed a modified 
version of this bill in September 2010 and you in the Senate followed 
suit in October 2011. Fortunately, neither bill became law.
    Unfortunately, the argument for legislative action against China 
has become tantalizingly simple. It rests mainly on America's gaping 
trade deficit, widely thought to be a principal source of the acute 
pressures bearing down on U.S. jobs and real wages. At one level, 
that's certainly understandable: A loss of production and market share 
to foreign competition squeezes America's companies and their workers. 
The U.S. merchandise trade deficit has, in fact, averaged 4.4 percent 
of GDP since 2005--the largest and most protracted external gap in 
modern U.S. history. Moreover, China has accounted for fully 35 percent 
of the shortfall over this 7-year interval, by far, the largest portion 
of the overall U.S. trade deficit. The critics claim foul--maintaining 
that Chinese inroads into American markets are built on a blatant 
strategy of currency manipulation that is restraining the renminbi, or 
yuan, from rising to its ``fair'' market-determined value. The Chinese, 
insists a broad coalition of politicians, business leaders, and 
academic economists, must revalue immediately or face punitive 
compensatory sanctions to level the competitive playing field.
    This reasoning resonates with the American public. Opinion polls 
conducted in 2011 found that fully 61 percent of the citizens sampled 
believe that China represents a serious economic threat. Politicians 
have been quick to respond--and, unfortunately, stoke these fears. 
Indeed, the currency debate could well loom as a major issue in the 
upcoming U.S. presidential campaign. President Obama has drawn a line 
in the sand when he replied, ``Enough is enough,'' upon being queried 
on the contentious currency issue in the aftermath of his last meeting 
with Chinese President Hu Jintao. Governor Romney has gone even 
further--promising to declare China guilty of ``currency manipulation'' 
the day he takes office as America's next president. Nor should this be 
dismissed as normal election-year politics. As long as conditions 
remain tough for American workers--more likely than not in the years 
ahead--pressures for a Chinese fix to our problems will only intensify.
    However appealing this logic may appear to be on the surface, it is 
wrong. Currency adjustments--in effect, altering the relative price 
structures between Nations--are simply not the panacea that most 
economists used to think they were. According to Federal Reserve 
statistics, the broadest measure of the U.S. dollar is, in fact down 
about 25 percent in real effective terms from its February 2002 peak. 
Yet over the past decade, the angst of the American worker has only 
intensified. Contrary to conventional wisdom, shifts in currencies are 
not the answer for all that ails us. That is particularly true of the 
foreign exchange rate between the U.S. dollar and the Chinese renminbi. 
Several reasons come to mind:
    First, America's trade deficit is multilateral: the United States 
ran deficits with 88 Nations in 2010. A multilateral imbalance cannot 
be fixed by putting pressure on a bilateral exchange rate. It's like 
putting pressure on one end of a water balloon. Without addressing the 
sources of this multilateral imbalance, squeezing one of its bilateral 
pieces will merely redirect the trade imbalance elsewhere--quite 
conceivably to a higher cost foreign producer. In other words, this 
strategy would probably backfire--it would be the functional equivalent 
of imposing a tax hike on hard-pressed middle-class U.S. families.
    It's no dark secret as to the primary sources of our multilateral 
trade imbalance--an unprecedented shortfall of national saving. 
America's so-called net national saving rate--the combined 
depreciation-adjusted saving of individuals, businesses, and the 
Government sector--fell into negative territory in late 2008 and has 
remained near or below zero ever since. This is unprecedented in the 
annals of modern global history. Never before has the world's leading 
economic power run a negative net national saving rate. Lacking in 
saving and wanting to grow, the U.S. must then import surplus saving 
from abroad--and run massive current account and multilateral trade 
deficits in order to attract the foreign capital. That's where China 
and our other 87 trade deficits enter the U.S. macro equation.
    Yet you in the political arena choose to blame others for our 
sins--specifically, sins arising from outsize budget deficits and 
sharply reduced personal saving that have forced the United States to 
turn to foreign saving as a source of domestic growth. Pointing the 
finger at China merely deflects attention away from the heavy lifting 
that must be done at home. Scapegoating may be politically expedient 
but it won't work in addressing the fundamental problems of a saving-
short U.S. economy. In this vein, America's major threat is from 
within. If we don't want trade deficits--with China or with anyone 
else--we must face up to our chronic shortfall of saving. If we don't 
want to save--and many believe (myself excluded) that's the last thing 
postcrisis America needs--then we have to accept trade deficits as a 
steep price to pay for our profligacy.
    Second, the renminbi has now appreciated 31.4 percent against the 
dollar since mid-2005, when China started to reform its foreign 
exchange regime. That's well in excess of the 27.5 percent increase 
called for by the original Schumer-Graham bill. In other words, the 
currency hawks have pretty much gotten what they wanted all along. But, 
as underscored above, the problems bearing down on American workers 
have only become worse. You would think that might provide pause for 
thought in continuing to agitate for further Renminbi appreciation. But 
the periodic attempts of you in the Congress to enact anti-China 
currency legislation say otherwise.
    The advice from many leading academics--advice, I might 
disappointingly add, that has been well received in Congress--is that 
China should have moved quickly with a large one-off adjustment to 
bring its currency to fair value. While it is debatable as to whether 
the time path of any currency shifts makes much of a difference in the 
long run, the Chinese have long viewed a large one-off revaluation with 
understandable trepidation.
    And with good reason. Mindful of the painful lessons of Japan--
especially its disastrous concession on sharp yen appreciation that was 
the centerpiece of the so-called Plaza Accord of 1985--the Chinese have 
opted, instead, for a gradual revaluation. Significantly, the endgame 
is not in doubt. Recent moves toward the offshore internationalization 
of the renminbi, a more open capital account, and significantly wider 
currency trading bands leave little doubt that China is committed to 
establishing a market-based, fully convertible renminbi.
    Third, the currency hawks have long maintained that it is in the 
world's best interest for China to reduce its outside current account 
imbalance and use the currency lever to accomplish that critical task. 
They also believe that global imbalances--an ever-present threat to the 
world economy for the past couple of decades--have been largely made in 
China. The Washington consensus has been especially adamant in making 
this case, stressing that China's saving glut has been a major source 
of global instability. \1\ Without a sharp renminbi revaluation, they 
argue, the world will never come to grips with its dangerous 
imbalances.
---------------------------------------------------------------------------
     \1\ See, the March 10, 2005 speech by then Fed governor, Ben 
Bernanke, ``The Global Saving Glut and the U.S. Current Account 
Deficit''.
---------------------------------------------------------------------------
    Here as well, the political expedience of the blame game has 
hijacked this important element of the debate. First of all, the good 
news is that there has now been significant improvement in China's 
external imbalance. The International Monetary Fund estimates that 
China's current-account surplus will narrow to just 2.3 percent of GDP 
in 2012, after peaking at 10.1 percent in 2007. Unfortunately, it's 
hard to say the same for any meaningful improvement in America's gaping 
external imbalance. By the IMF's reckoning, the U.S. current-account 
deficit is likely to be about $510 billion this year--fully 2.8 times 
greater than China's surplus (see, Figure 1 on page 13, ``A Tale of Two 
Deficits''). Far from blaming China as a major source of global 
instability, you in the Congress should take a long and hard look in 
the mirror as to the role that America's persistent and outsize 
external imbalance is playing as a major source of global instability. 
Far from being a responsible steward of global economic prosperity, an 
unbalanced U.S. economy has been a major source of instability in a 
crisis-prone world.
    Finally, China's role in the global economy has changed 
considerably over the past 30 years. Specifically, it has evolved from 
the so-called world's factory to more of an assembly line. Research 
shows that no more than 20 percent to 30 percent of Chinese exports to 
the U.S. reflect value added inside China. Moreover, roughly 60 percent 
of Chinese exports represent shipments of ``foreign invested 
enterprises''--in effect, Chinese subsidiaries of global 
multinationals. This raises important questions about the intrinsic 
identity of the fabled Chinese export machine: Is it them, or us? Think 
Apple. The supply-chain logistics of globalized production platforms 
distort bilateral trade data between the U.S. and China, and have 
little to do with the exchange rate.
    In short, the Chinese currency is not the corrosive problem that 
you in the Congress have been led to believe over the past 7 years. By 
having the wool pulled over your eyes, you have missed a far more 
important story. Rather than vilifying China as the principal economic 
threat to America, the relationship needs to be recast as an 
opportunity. That's especially the case in a weak U.S. growth 
environment, plagued by unacceptably high levels of unemployment and 
underemployment. We need to spend far more time in trying to come up 
with new and creative solutions to this daunting growth problem. 
Related to that is the need to think of how China can become an 
important part of this solution.
    For starters, this requires an honest assessment of our own 
problems. Due to the recent crisis--and the years of excess that 
preceded it--America's growth calculus has been turned inside out. Over 
most of our modern history, we have relied on internal demand as the 
sustenance of economic growth and prosperity. That approach is now in 
tatters. The largest component of U.S. aggregate demand--the consumer--
is on ice. With households focused on the postcrisis repair of severely 
damaged balance sheets, inflation-adjusted private consumption has 
expanded at an anemic 0.6 percent average annual rate over the past 17 
quarters. Moreover, consumer deleveraging has only just begun, 
suggesting these headwinds are not about to subside. The U.S. is in 
desperate need of new sources of economic growth and job creation.
    Exports top the list of possibilities--a view underscored by Nobel 
Prize winning economist, Michael Spence, in a recent comprehensive 
study of America's job challenge. \2\ There are grounds for 
encouragement that an adaptable U.S. economy may already be rising to 
the challenge. Merchandise exports have now risen to a record of nearly 
10 percent of our GDP--up dramatically from the 6.5 percent share 
prevailing a decade ago (see, Figure 2 on page 14, ``America's 
Opportunity: The Export Revival''). The Obama administration has set 
the ambitious goal to double U.S. exports in 5 years. But with trend 
export growth to our largest external markets--Canada and Mexico--
hovering at close to 3 percent over the past 5 years and stagnation 
long evident in Japan and now likely in crisis-torn Europe, America's 
export-led growth agenda will need to turn to new markets.
---------------------------------------------------------------------------
     \2\ See, Michael Spence and Sandile Hlatshwayo, ``The Evolving 
Structure of the American Economy and the Employment Challenge'', a 
Council on Foreign Relations working paper, March 2011.
---------------------------------------------------------------------------
    China could well hold the key in meeting this challenge. It is now 
America's third largest and most rapidly growing export market. There 
can be no mistaking its potential to fill a growing portion of the void 
left by U.S. consumers. As such, Chinese domestic demand--not its 
currency--should be featured as a prominent element of America's new 
growth agenda. Yet congressional enactment of anti-China currency 
legislation could backfire in this regard--undoubtedly triggering 
retaliatory moves by China that would immediately choke off shipments 
to America's third largest export market. You in the Congress must be 
vigilant in guarding against this risk.
    The key to realizing the opportunities of America's new export-led 
growth agenda lies in market access--specifically, access to China's 
future sources of economic growth. This is precisely the time to focus 
on this issue--as China's own growth imperatives shift away from 
exporting into weakened U.S. and European consumer markets toward 
sourcing the demand for its own pro-consumption rebalancing. Unlike 
Japan, modern Asia's first growth miracle, China is far more likely to 
satisfy this incremental consumption growth from foreign production. 
Chinese imports have been running at 28 percent of GDP since 2002--
nearly three times Japan's 10 percent import ratio during its high-
growth era (1960-1989). As a result, for a given increment of domestic 
demand, China is far more predisposed to draw on foreign production.
    As the Chinese consumer emerges, demand for a wide variety of U.S.-
made goods--ranging from new-generation information technology and 
biotech to automotive components and aircraft--could surge. And this 
plays very much to America's competitive strengths: Capital goods and 
motor vehicles products currently account for 42 percent of total U.S. 
goods exports--the largest category of overseas demand for American-
made products. The key for U.S. trade negotiators is to make certain 
that American exporters in our leading industries have fair and open 
access to these new and potentially enormous Chinese markets.
    A similar opportunity is available in services. At just 43 percent 
of GDP, China's services sector is relatively tiny when compared with 
other major economies in the world (see, Figure 3 on page 15, ``The 
Potential in Chinese Services''). Services are, in many respects, the 
infrastructure of consumer demand, and the Chinese services share of 
its economy will only grow in the years ahead. By contrast, the United 
States is the world's quintessential services-based economy, with much 
in the way of process design, scale, and managerial expertise to offer 
China. There is enormous scope for America's global services companies 
to expand and partner in China, especially in transactions-intensive 
distribution sectors--wholesale and retail trade, domestic 
transportation, and supply-chain logistics, as well as in the 
processing segments of finance, health care, and data warehousing. The 
recent Strategic and Economic Dialogue made significant progress in 
opening up Chinese financial services to increased foreign investment. 
Attention now needs to be turned to nonfinancial services, as well.
    The U.S.-China trade agenda must be refocused toward expanded 
market access in these and other areas--pushing back when necessary 
against Chinese policies and Government procurement practices that 
favor domestic production and indigenous innovation. Some movement has 
occurred, but more is needed--for example, getting China to sign the 
World Trade Organization's Government Procurement Agreement. At the 
same time, the U.S. should reconsider antiquated Cold War restrictions 
on Chinese purchases of high technology-intensive items.
    The good news is that important progress was made on both of these 
counts at the just completed May 2012 Strategic and Economic Dialogue 
with China. As such, the focus must now shift to follow-through, 
implementation, and enforcement. Both of these breakthroughs have 
potentially important implications for the Chinese piece of America's 
export-led growth and employment agenda.
    The bottom line for a growth-starved United States: Insofar as 
America's economic relationship with China is concerned, the 
opportunities of market access far outweigh the misperceived perils of 
the currency threat. The time has come to deemphasize the latter and 
focus on the former. The long-dormant Chinese consumer is about to be 
unleashed, providing new markets for all the world's major exporters. 
This plays to one of America's greatest strengths--our zeal to compete 
and win share in new markets. Shame on us if we squander this 
extraordinary chance. This is not the time to dig in our heels and 
cling to the same timeworn approach in our trade relationships with 
China. We need to return to the high road of economic engagement and 
avoid the low road of the blame game.
    Accordingly, it is also time to rethink the basic thrust of our 
Economic and Strategic Dialogue with China--the subject of this 
important hearing today. Specifically, we need to recast this exchange 
as an integral piece of America's new growth agenda. The emphasis 
should be placed on opportunities--not on hollow threats. With respect 
to China, my recommendations are simple: End the currency fixation. 
Focus on market access as the key to U.S. growth and jobs.
    Thank you very much.


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                 PREPARED STATEMENT OF C. FRED BERGSTEN
        Director, Peterson Institute for International Economics
                              May 23, 2012
Toward a G2
    I have proposed since 2004 that the United States and China create 
an informal G2 to help steer the world economy. The reason is simple: 
progress is impossible on most important global economic issues without 
agreement by these two global economic superpowers. Examples including 
exchange rates and the international monetary system, the world trade 
regime and climate change. (The one notable exception is financial 
regulatory reform, where China is not yet an important player so most 
decisions remain with a subset of the membership of the Financial 
Stability Board.)
    There are now three global economic superpowers, the European Union 
along with China and the United States. But Europe, or even the more 
integrated eurozone, speaks with a single voice on very few issues. 
Moreover, its current economic weakness limits its influence on most 
topics. So a G2 is the only practical possibility for achieving 
effective global economic leadership.
    A number of other countries, including a growing number of emerging 
markets, are of course important as well. The G2 is not intended to 
replace the G7, G20 or the formal multilateral institutions like the 
International Monetary Fund and World Trade Organization. Its goal is 
in fact to make all of them work better. But even the G20 is too large 
to function effectively so a smaller steering committee is needed.
    The G2 should be completely informal and indeed unannounced, or 
even acknowledged, by the two countries. As the Nike ad says: ``Just do 
it!'' They should forge close working cooperation on the whole range of 
global economic issues, which is essential for achieving progress 
either on bilateral problems or in implementing their global leadership 
responsibilities as the world's two largest economies.
    The most overt and visible step toward creation of a G2 is the very 
frequent meetings between President Obama and the top leaders of China, 
President Hu Jintao and Premier Wen Jiabao, who have gotten together on 
average every quarter since President Obama took office. But the 
Strategic and Economic Dialogue (S&ED), following its predecessors, the 
Strategic Economic Dialogue and Senior Dialogue of the Bush 
administration, is by far the most extensive institutionalization of 
the concept. The S&ED brings cabinet officers together once a year and 
has launched ongoing dialogue among many groups of officials on many 
topics. They are learning who to call in each other's capital to 
address key problems, and how to deal with those officials, a central 
ingredient in international economic cooperation that has long ago been 
accomplished across the Atlantic and to a degree across the northern 
Pacific to Tokyo.
    I thus believe the S&ED is a crucial component of U.S. (foreign and 
national security as well as economic) policy and must be continued and 
indeed strengthened. Its ever-expanding agenda of topics and discussion 
forcing, if not yet action forcing, nature are extremely important. The 
Administration should be congratulated for the serious attention and 
priority it has attached to the Dialogue, and it should continue and 
accelerate that focus in the future. Any successor Administration 
should do so as well.
The Currency Issue
    Abstract pursuit of a G2, however important, is unlikely to win 
widespread support, however, now that the S&ED has been operating for 3 
years. Have there been tangible results that suggest beneficial 
practical payoffs from the exercise and from the associated U.S. policy 
initiatives toward China?
    The dominant economic issue of this period has been the extensive 
currency manipulation by China. For at least 5 years, the Chinese 
authorities blatantly intervened in the foreign exchange market by 
buying $1-2 billion every day to keep the price of the dollar high and 
the price of their renminbi (RMB) low. This produced an enormous 
competitive advantage for China in international trade, a current 
account surplus that exceeded 10 percent of its GDP in 2007 and an 
unprecedented buildup of almost $3.3 trillion of foreign currency 
(largely dollar) reserves.
    The United States has thus rightly focused on this issue at every 
meeting of the S&ED as well as in many other contacts with the Chinese, 
both bilaterally and in multilateral forums. In recent years, it has 
correctly imbedded the currency manipulation per se in the broader 
context of the need for China to rebalance its development strategy 
away from export-led growth, featuring unprecedented investment levels 
(almost 50 percent of GDP) and repressed domestic financial markets, in 
the direction of relying on domestic demand (especially consumption and 
services).
    It is now apparent that the U.S. strategy has succeeded to a 
substantial degree. China's global current account surplus has declined 
to less than 3 percent of its GDP. This is primarily due to the rise of 
about 30 percent in the trade-weighted value of the RMB since 2005, 
including its climb of more than 40 percent against the dollar. My 
colleague William Cline's new analysis (attached) suggests that China's 
current account surplus could even disappear over the next few years if 
it permits the RMB to continue strengthening at the pace of the last 2 
years since upward appreciation recommenced in June 2010 after a hiatus 
during the global recession.
    I believe that the S&ED has played a very useful role, and added an 
important pressure point, in persuading the Chinese authorities to 
gradually reduce their beggar-thy-neighbor currency policy. China of 
course had to come to believe that such a change was in its national 
interest but the S&ED, and related U.S.-China discussions, have been 
extremely important in at least two respects: convincing the Chinese of 
the (very powerful) case that a stronger exchange rate was in their own 
economic interest, and emphasizing constantly that China's (exceedingly 
important) relationship with the United States would be significantly 
affected by their behavior on this issue.
    The S&ED thus passes the critical test from the U.S. standpoint of 
having achieved, at least to a substantial degree, major progress on a 
clearly articulated central goal of the exercise. They will have to 
remain on the case because we cannot be assured that China will let the 
RMB continue rising, which is required to avoid recrudescence of the 
problem, and the rate has in fact remained essentially flat for the 
last 6 months. Moreover, it would be desirable for the currency to rise 
enough (and China to rebalance more broadly enough) to fully eliminate 
the current account surplus and indeed convert it into a modest 
deficit. There remains the vexatious, if economically irrelevant, issue 
of China's continuing large bilateral surplus with the United States--
which (on our numbers) exceeds their total global surplus (on their 
numbers) but is particularly misleading because only a small fraction 
of the value of exports recorded as coming to the United States from 
China is actually added in China itself. But I believe that the 
progress on this very difficult and highly contentious issue marks both 
a major step forward in U.S.-China economic relations and a signal 
achievement for the S&ED.
Other Issues
    There are of course a number of other important economic issues 
that the S&ED should help resolve. A true G2, for example, would play a 
central role in addressing two of the key macroeconomic issues now 
facing the world economy:

    resolution of the euro crisis and, specifically;

    creation of additional lending capacity at the 
        International Monetary Fund to reinforce the efforts of the 
        Europeans themselves in financing adjustment programs in the 
        eurozone and to help other countries that are sideswiped by the 
        euro crisis.

    China, as the world's largest holder of foreign exchange reserves 
and a major surplus country, should be a large (probably the largest) 
contributor to such enhanced lending capability at the IMF. I believe 
the United States, as the world's largest deficit and debtor country, 
is correct not to contribute to that facility itself. But the United 
States should be pushing hard for the creation of a maximum 
``firewall,'' in light of its own huge interest in a stable resolution 
of the crisis, so should be urging China to lend at least $500 billion 
to the Fund (and offering support for a corresponding increase in 
China's role in that institution).
    There are fleeting references to these issues in the fact sheet on 
the S&ED distributed by the Treasury Department. However, there is no 
indication that they received major attention and Under Secretary 
Brainard did not mention them in her report of May 16 to the House 
Financial Services Subcommittee on International Monetary Policy and 
Trade. Surely the world's two major economies should seriously address 
these pivotal global issues in their economic dialogue.
    Many bilateral, including trade, issues must be addressed as well. 
The S&ED apparently covered an impressive array of such topics. It is 
particularly important that China has agreed to negotiate new 
international rules on export finance by 2014. This is an important 
aspect of global competition that is often distorted by national 
subsidies and China is not a party to the current international 
agreement that is centered on the OECD because it is not a member of 
that organization.
    It will remain difficult to successfully resolve the large number 
of bilateral trade conflicts between the United States and China, 
however, as long as they continue to be addressed in a purely ad hoc 
manner. There are some cases that can be taken to the dispute 
settlement mechanism of the WTO, as both countries have done, but most 
of the trade issues cited in the S&ED fact sheet are not subject to 
agreed rules of the road. Disagreements are thus likely to fester, 
eroding both the bilateral relationship and, in light of the leading 
global position of the two countries, the international trading system 
as a whole.
    I thus believe that the United States and China should consider 
launching negotiations for a bilateral trade agreement to provide a 
comprehensive framework to deal with the daunting array of economic 
problems between them--a list that is likely to continue growing as the 
economic relationship deepens further. Maurice R. Greenberg, the long-
time CEO of AIG (long before its collapse in 2008) and one of this 
country's keenest and most experienced observers of China, has proposed 
that such an effort could aim to develop a U.S.-China free trade 
agreement over a period of a decade or so. Another alternative would be 
to look for an early occasion to bring China into the TransPacific 
Partnership, with its high standards for governing trade and investment 
in the Asia-Pacific region.
    Any such effort would represent an extension of the G2 concept into 
the trade policy area, as inevitably must occur at some point. The S&ED 
could productively begin that conversation, which of course carries 
major foreign policy as well as economic dimensions. It is already 
addressing possible components of a broader trade agreement such as a 
Bilateral Investment Treaty, Government procurement and reform of 
State-owned enterprises in China. Building on its considerable progress 
to date, the S&ED has a rich potential agenda for the years ahead.


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                  PREPARED STATEMENT OF JOHN R. DEARIE
     Executive Vice President for Policy, Financial Services Forum
                              May 23, 2012
Introduction
    Chairman Warner, and Ranking Member Johanns, thank you for the 
opportunity to participate in this important hearing regarding the 
recent round of the U.S.-China Strategic & Economic Dialogue (S&ED) and 
the need to expand foreign access to China's financial sector.
    My name is John Dearie and I currently serve as Executive Vice 
President at the Financial Services Forum, a financial and economic 
policy group comprised of the chief executive officers of 20 of the 
largest financial institutions with business operations in the United 
States. The Forum works to promote policies that enhance savings and 
investment and that ensure an open, competitive, and sound global 
financial services marketplace.
    The Forum also leads Engage China--a coalition of 12 financial 
services trade associations united in support of high-level engagement 
between the United States and China, with a particular emphasis on 
accelerated financial reform and modernization in China.
    Today's hearing is both timely, given the recent round of the S&ED 
in Beijing--and enormously important. The rate of China's economic 
emergence and the impact of its integration into the global economy are 
unprecedented in the history of the world's economy--with profound 
implications for U.S. economic growth and job creation.
Importance of Growing China to U.S. Growth and Job Creation
    As you will recall, China's economy has grown at an annual rate of 
nearly 10 percent for more than two decades. The world's 7th largest 
economy in 1999, China recently surpassed Japan to become the world's 
2nd largest economy.
    Since China's joined the World Trade Organization (WTO) in December 
of 2001, U.S. exports to China have increased more than six-fold-
growing at seven times the pace of U.S. exports to the rest of the 
world. China is now America's third largest export market, and the 
largest market for U.S. products outside of North America. According to 
a recent Washington Post article, exports to China from almost every 
U.S. State and Congressional district have grown dramatically in recent 
years. \1\
---------------------------------------------------------------------------
     \1\ ``U.S. Exports to China Boom, Despite Trade Tensions'', Keith 
B. Richburg, The Washington Post, March 11, 2012.
---------------------------------------------------------------------------
    For your reference, I have provided in Appendix A figures showing 
the growth in exports to China from each of the States represented by 
Members of this Subcommittee. \2\ As an example, Chairman Warner, 
exports from Virginia to China have increased 787 percent since 2000, 
as compared to growth of just 42 percent in Virginia's exports to the 
rest of the world. Each of the other states has posted similarly 
impressive growth. Clearly, fair and competitive access to China's 
fast-growing middle class and business sector represents an enormous 
commercial opportunity for American manufacturers, services providers, 
and farmers.
---------------------------------------------------------------------------
     \2\ Export statistics provided by the U.S.-China Business Council.
---------------------------------------------------------------------------
    Let me give you a quick sense of what an expanding China can mean 
for U.S. economic growth and job creation. Last year, U.S. exports to 
Japan totaled $66 billion, while U.S. exports to China totaled $104 
billion. But China's population is 10 times that of Japan. If China's 
citizens were to eventually consume American-made goods and services at 
the same rate as the Japanese do, U.S. exports to China would grow to 
about $700 billion annually.
    That's seven times what America exported to China last year, an 
amount equivalent to nearly 5 percent of U.S. GDP, and nearly twice 
what we imported from China last year--potentially turning a $300 
billion trade deficit into a $300 billion surplus.
    Perhaps more importantly, if we apply the Commerce Department's 
metric of 5,000 new American jobs for every $1 billion in additional 
exports, increasing exports to China to $700 billion a year would 
create some 3 million new American jobs. Now, that won't happen 
overnight. But we believe that with the right reforms in place, it will 
happen over time.
Critical Importance of Financial Sector Reform in China
    In our view, one of the most fundamental and important reforms 
necessary for the United States to harness the job-creation power of a 
rapidly growing China is modernization of China's underdeveloped 
financial system.
    Capital is the lifeblood of any economy's strength and well-being, 
enabling the investment, research, and risk-taking that fuels 
competition, innovation, productivity, and prosperity. As the 
institutional and technological infrastructure for the mobilization and 
allocation of investment capital, an effective and efficient financial 
system is essential to the health and productive vitality of any 
economy.
    As a financial sector becomes more developed and sophisticated, 
capital formation becomes more effective, efficient, and diverse, 
broadening the availability of investment capital and lowering costs. A 
more developed and sophisticated financial sector also increases the 
means and expertise for mitigating risk--from derivatives instruments 
used by businesses to avoid price and interest rate risks, to insurance 
products that help mitigate the risk of accidents and natural 
disasters. Finally, the depth and flexibility of the financial sector 
is critical to the broader economy's resilience--its ability to 
weather, absorb, and move beyond the inevitable difficulties and 
adjustments experienced by any dynamic economy. For all these reasons, 
an effective, efficient, and sophisticated financial sector is the 
essential basis upon which the growth and vitality of all other sectors 
of the economy depend.
    Unfortunately, the world's second largest and fastest growing 
economy is currently supported by one of the world's least developed 
and inefficient financial systems. Like a world-class athlete with 
cardiovascular disease, China runs an ever-mounting risk of 
catastrophic breakdown even as it continues to turn in robust economic 
growth performances.China's financial sector challenges are many. For 
example:

    China's financial system is very bank-centric, with banks 
        intermediating more than three-quarters of the economy's total 
        capital, compared to about half in other emerging economies and 
        less than 20 percent in developed economies.

    Meanwhile, China's equity and bond markets remain 
        comparatively small and underdeveloped. More fully developed 
        capital markets would provide healthy competition to Chinese 
        banks and facilitate the development and growth of alternative 
        retail savings products such as mutual funds, pensions, and 
        life insurance products. And by broadening the range of funding 
        alternatives for emerging companies, more developed capital 
        markets would greatly enhance the flexibility and, therefore, 
        the stability of the Chinese economy.

    Noncommercial lending--or ``policy lending''--to State-
        owned enterprises continues.

    As a result, the stock of nonperforming loans on banks' 
        balance sheets remains high.

    China's banks are undercapitalized and lending practices, 
        risk management techniques, new product development, internal 
        controls, and corporate governance practices remain inadequate.

    Prudential supervision and regulation of the financial 
        sector remains opaque, is applied inconsistently, and lags 
        behind international best practices.

    Simply stated, China's underdeveloped financial sector presents 
substantial risk to the continued growth and diversification of the 
Chinese economy--and, therefore, to the U.S. and global economies as 
well. \3\
---------------------------------------------------------------------------
     \3\ See, ``Why Financial Reform Is Crucial for China's Growth'', 
Arthur R. Kroeber, The Brookings Institution, March 19, 2012.
---------------------------------------------------------------------------
China's Commitment to Financial Reform
    In its twelfth 5-Year Plan, approved by the National People's 
Congress last March, China's leadership acknowledged that its 
manufacturing-for-export economic model of the past three decades has 
left it vulnerable to slow-downs in external demand. China's leadership 
now wisely seeks a more balanced economic model that relies less on 
exports and more on internal demand--primarily, a more active Chinese 
consumer.
    A more consumption-based Chinese economy is very much in the 
interest of the United States. As I noted earlier, a more active 
Chinese consumer will dramatically expand demand for U.S.-made products 
and services.
    But accelerating the shift to a more consumption-based Chinese 
economy requires a more modern and sophisticated financial sector. 
Chinese households currently save as much as half of their income, as 
compared to single-digit savings rates in the United States and Europe. 
This pronounced propensity to save is related to the declining role of 
the State, and the fact that most Chinese depend on their families and 
private savings to pay for retirement, health care, and the economic 
consequences of accidents or disasters.
    Activating the Chinese consumer requires the availability of 
financial products and services--personal loans, credit cards, 
mortgages, pensions, insurance products and services, and retirement 
security products--that will eliminate the need for such 
``precautionary savings'' and facilitate consumption.
    This observation was recently confirmed by an important report 
entitled ``China 2030,'' jointly issued on February 27th by the World 
Bank and China's Development Research Center. The report emphasized 
that achieving China's macroeconomic goal requires a number of urgent 
reforms, including ``commercializing the banking system, gradually 
allowing interest rates to be set by market forces, deepening the 
capital market, and developing the legal and supervisory infrastructure 
to ensure financial stability and build the credible foundations for 
the internationalization of China's financial sector.'' \4\
---------------------------------------------------------------------------
     \4\ ``New Push for Reform in China'', Bob Davis, The Wall Street 
Journal, February 23, 2012.
---------------------------------------------------------------------------
    Given the unique and critical role an effective and efficient 
financial sector plays in any economy, reform of China's financial 
sector is a prerequisite to China achieving its own economic goals.
    Fortunately, China's leadership recognizes the connection between 
faster financial reform and a more consumption-based economy. In a 
March 5th speech opening the National People's Congress, Premier Wen 
Jiabao confirmed that China seeks more balanced and sustainable 
development, stating ``we will move faster to set up a permanent 
mechanism for boosting consumption.'' Importantly, as part of the 
restructuring strategy, Wen also appeared to endorse further reform of 
China's financial system, stating: ``We will improve both initial 
public offerings . . . and ensure better protection of return on 
investors' money and their rights and interests.'' \5\
---------------------------------------------------------------------------
     \5\ ``China Premier Backs Blueprint for Financial Reform'', Dinny 
McMahon, The Wall Street Journal, March 5, 2012.
---------------------------------------------------------------------------
    The same day, Guo Shuqing, Chairman of the China Securities 
Regulatory Commission commented to reporters: ``Market risk is 
concentrated in the banking system. Developing equity financing . . . 
can reduce the burden on the Government, and open new investment 
channels to funds and wealthy citizens.''
    On March 21st, Zhou Xiaochuan, Governor of the People's Bank of 
China, wrote in China Finance magazine: ``Currently conditions for 
market-oriented interest rate liberalization are basically ripe. The 
People's Bank of China will actively push forward [with such 
reforms].'' \6\
---------------------------------------------------------------------------
     \6\ ``Conditions Ripe for China Interest Rate Reform--Central bank 
Chief Zhou'', Kevin Yao, Reuters, March 21, 2012.
---------------------------------------------------------------------------
    The fastest way for any developing economy to acquire the modern 
financial sector it needs is to import it--that is, to allow foreign 
financial institutions to establish in-country operations though the 
establishment of branches and subsidiaries, joint ventures with 
domestic institutions, and cross-border mergers and acquisitions. 
Foreign institutions--including U.S. institutions--bring to China 
world-class expertise and best practices with regard to products and 
services, credit analysis, risk management, internal controls, and 
corporate governance.
The U.S.-China Strategic and Economic Dialogue
    To enhance the management of the growing bilateral relationship, 
President George W. Bush and President Hu Jintao established the U.S.-
China Strategic Economic Dialogue (SED) in September of 2006. The SED--
led by then-Treasury Secretary Hank Paulson and Chinese Vice Premier 
Wang Qishan--created an unprecedented channel of communication between 
Cabinet-level U.S. and Chinese policy makers, and provided an 
overarching framework for the examination of long-term strategic 
issues, as well as coordination of ongoing bilateral policy discussions 
(e.g., the Joint Commission on Commerce and Trade, the Joint Economic 
Committee). A central focus of the SED was accelerating financial 
reform in China.
    Upon taking office, the Obama administration renamed the Dialogue 
as the ``Strategic & Economic Dialogue,'' broadening the talks to 
include other issues such as human rights, environmental issues, and 
diplomatic cooperation.
    Limited but significant progress has been made by way of the 
Dialogue:

    China has agreed to allow qualified foreign companies to 
        list on its stock exchanges by issuing shares or depository 
        receipts;

    China has expanded its Qualified Foreign Institutional 
        Investor (QFII) program and reduced the initial ``lock-up 
        period'' for certain investors, creating new opportunities for 
        foreign mutual funds and money managers to invest in China;

    China has agreed to allow nondeposit taking foreign 
        financial institutions to provide consumer financing;

    China has agreed to ease qualifications for foreign banks 
        to issue yuan-denominated subordinated bonds, which will allow 
        foreign banks to raise capital in China;

    China has issued regulations specifying requirements to 
        allow insurance companies--including foreign-owned companies--
        to invest assets overseas; and,

    Since July of 2005, the yuan has appreciated against the 
        U.S. dollar by more than 25 percent in nominal terms and almost 
        40 percent in real terms. China also recently announced that it 
        would widen its trading band to allow market forces to play a 
        greater role in setting the exchange rate. \7\
---------------------------------------------------------------------------
     \7\ ``The Outlook for China's Currency'', Laura D'Andrea Tyson, 
The New York Times, May 6, 2011. Also see ``China Bashing Is Popular 
But Could Do More Harm Than Good'', Editorial, Bloomberg, April 25, 
2012.

    Additional progress was achieved at the most recent S&ED meetings 
---------------------------------------------------------------------------
in May:

    China now has amended its regulations to implement last 
        year's S&ED commitment to allow U.S. and other foreign 
        insurance companies to sell mandatory auto liability insurance 
        in what is the world's largest market for automobiles.

    China committed that foreign and domestic auto financing 
        companies--currently dependent on China's State-owned banks for 
        funding--will be able to issue bonds regularly, including 
        issuing securitized bonds. This will help boost the competitive 
        edge in China of U.S. auto firms, which are global leaders in 
        auto financing.

    China committed to increase the total dollar amount that 
        foreigners can invest in China's stock and bond markets under 
        its Qualified Foreign Institutional Investor (QFII) program 
        from $30 to $80 billion. This will reduce restrictions on the 
        free flow of capital and increase opportunities for U.S. 
        pension and mutual funds and other investment management firms.

    China committed to allow foreign investors to take up to 49 
        percent equity stakes in domestic securities joint ventures, 
        going beyond China's WTO commitment of 33 percent. China also 
        agreed to shorten the waiting period (seasoning period) for 
        securities joint ventures to apply to expand into brokerage, 
        fund management, and trading activities that are essential to 
        building competitive securities businesses.

    China agreed to allow investors from the U.S. and other 
        economies to establish joint venture brokerages to trade 
        commodity and financial futures and hold up to 49 percent of 
        the equity in those joint ventures; and,

    China reaffirmed its intention to promote more market-based 
        interest rates, which will allow Chinese households to earn a 
        higher return on their savings, supporting greater household 
        consumption.
U.S. Institutions Still Confront Major Restrictions
    Despite such important progress, U.S. financial institutions 
continue to face a number of substantial obstacles in China:

    Investment by U.S. firms in Chinese financial institutions 
        is limited to minority interests and is capped. For example, 
        foreign investment in Chinese banks remains limited to 20 
        percent ownership stakes, with total foreign investment limited 
        to 25 percent. Foreign ownership currently amounts to less than 
        2 percent of the Chinese banking system. According to 
        Department of Treasury data, as of December 2011, only eight 
        U.S. banks were operating in China with a total of just 76 
        branches.

    Foreign-owned securities and asset management firms are limited to 
        joint-ventures in which foreign ownership is capped at 49 
        percent. Meanwhile, foreign life insurance companies remain 
        limited to 50-percent ownership in joint ventures and to 25-
        percent equity ownership of existing domestic companies.

    While these caps were agreed to in the course of WTO accession 
        negotiations, the limitations are among the most restrictive of 
        any large emerging market Nation and stand in the way of a 
        level playing field for financial service providers. More 
        importantly, they limit access to the products, services, know-
        how, and expertise that China needs to sustain high rates of 
        economic growth, and that China's businesses and citizens need 
        to save, invest, and create and protect wealth.

    Such investment caps also stand in stark contrast to the Federal 
        Reserve's recent decision to approve Industrial & Commercial 
        Bank of China's acquisition of the Bank of East Asia's U.S. 
        banking subsidiary, \8\ the Bank of China's application to 
        expand its U.S. operations to Chicago, \9\ and the application 
        by Agricultural Bank of China Ltd. to establish a branch in New 
        York. \10\
---------------------------------------------------------------------------
     \8\ The subsidiary has assets of $780 million and 13 branches in 
New York and California. ICBC, China's largest bank, already operates 
in the United States through a New York branch. Under the terms of the 
approval, ICBC, China Investment Corp. and Central Huijin Investment 
Ltd. will become bank holding companies. The Chinese Government owns 
70.7 percent of ICBC's shares. See, ``Fed Allows Three Chinese Banks To 
Expand in U.S.'', Greg Robb, MarketWatch, May 9, 2012.
     \9\ The Bank of China, China's third largest bank, currently 
operates two branches in New York City and a limited branch in Los 
Angeles.
     \10\ Agbank, China's fourth largest bank, currently operates a 
representative office in New York City.

    As strong proponents of cross-border trade and investment, the U.S. 
        financial services industry applauds the Fed's decision--but 
        also calls on China to lift remaining restrictions to U.S. 
---------------------------------------------------------------------------
        investment in China's financial system.

    Other remaining barriers to U.S. activity in China include:

    Nonprudential restrictions on licensing and corporate form;

    Arbitrary imitations of permitted products and services; 
        and,

    Arbitrary and discriminatory regulatory treatment.

    While China may be compliant with the letter of its WTO 
obligations, such restrictions and regulations--and the manner in which 
they are enforced--violate the spirit of China's WTO obligations by 
creating artificial and arbitrary barriers to greater foreign 
participation.
    With these problems in mind, U.S. effort within the S&ED and other 
bilateral exchanges should focus on:

    the critical importance of open commercial banking, 
        securities, insurance, pension, and asset management markets to 
        promoting the services- and consumption-led economic growth 
        that China's leaders seek;

    the clear benefits to China of increased market access for 
        foreign financial services firms--namely the introduction of 
        world-class expertise, technology, and best practices--and the 
        importance of removing remaining obstacles to greater access;

    nondiscriminatory national treatment with regard to 
        licensing, corporate form, and permitted products and services;

    nondiscriminatory national treatment with regard to 
        regulation and supervision;

    regulatory and procedural transparency; and,

    increasing institutional investors' participation in 
        China's capital markets by further expanding the Qualified 
        Foreign Institutional Investor (QFII) and Qualified Domestic 
        Institutional Investor (QDII) programs.

    For a more detailed discussion of the U.S. financial services 
industry's priorities in China, please see Appendix B.
Conclusion
    Mr. Chairman, the fastest way for China to develop the modern 
financial system it needs to achieve more sustainable economic growth, 
allow for a more flexible currency, and increase consumer consumption 
is to open its financial sector to greater participation by foreign 
financial services firms.
    By providing the financial products and services that China's 
citizens and businesses need to save, invest, insure against risk, 
raise standards of living, and consume at higher levels, foreign 
financial institutions--including U.S. providers--would help China 
develop an economy that is less dependent on exports, more consumption-
driven and, therefore, an enormously important and expanding market for 
American-made products and services. In doing so, U.S. financial 
services firms can help China become a more stable and responsible 
stakeholder in the global economy and trading system.
    It is importance to emphasize that Congress has an important 
contribution to make toward expanding market access generally, and 
encouraging faster financial reform in China specifically, by bringing 
the same kind of attention and pressure to these issues as it has to 
the relative value of China's currency. Chinese policy makers care what 
members of Congress think and carefully monitor the content of 
statements, speeches, and hearings as they gauge the state of the 
bilateral relationship. Senator Warner and Senator Johanns, the letter 
that you sent to Secretary Geithner on April 24th urging him to ensure 
that accelerated financial reform be a central aspect of the recent 
S&ED is a perfect example of the kind of pressure that makes a real 
difference. So thank you very much for send the letter.
    And thank you again for the opportunity to appear at this important 
hearing.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


                 PREPARED STATEMENT OF DEAN C. GARFIELD
President and Chief Executive Officer, Information Technology Industry 
                                Council
                              May 23, 2012
    The Information Technology Industry Council (ITI) appreciates the 
opportunity to provide testimony on developments regarding China's 
indigenous innovation and intellectual property (IP) policies at the 
latest Strategic & Economic Dialogue (S&ED), including the Third U.S.-
China High-Level Innovation Dialogue, which was held earlier this month 
in Beijing. ITI represents global leaders in innovation, from all 
corners of the information, communications, and technology sector, 
including hardware, software, and services. China, along with other 
emerging markets, is a critical market for ITI member companies. 
Hundreds of thousands of American high-tech jobs are directly tied to 
robust trade and business with China. In fact, some of the largest 
beneficiaries of that trade are American workers and businesses, many 
of them small businesses which manufacture electrical machinery and 
equipment or develop software that feeds into the tech industry's 
global supply chain.
    The ability to freely access foreign markets such as China and 
compete on equal terms has been critical to the health of the tech 
sector, and has underpinned the United States as an innovative economy. 
As our economy recovers from a severe recession, it is critical our 
companies be able to access the 95 percent of the world's consumers who 
live beyond our shores. More than 75 percent of the global growth in 
the tech market during the next 5 years is projected to take place 
overseas. Maintaining free and open global markets will support our 
economic recovery and help achieve a shared goal of promoting U.S. 
exports. Indeed, U.S. exports to China are on the rise. Last year, our 
exports to China were nearly $104 billion, up four-fold from a decade 
ago. Yet, U.S. tech companies operating in the China market continue to 
face increasingly challenging and complex market access barriers.
    To be clear, our industry welcomes efforts of China and other 
Nations to promote innovation. Where we have difficulties is when 
policies under the guise of innovation policy are developed and 
implemented in a manner that favors domestic companies at the expense 
of foreign players. Moreover, we are beginning to see some of this new, 
creeping protectionism being replicated in other parts of the world.
    Today, I would like to highlight that, despite some rollbacks of 
China's problematic policies, many challenges remain that continue to 
create market access barriers for U.S. technology firms. I would also 
like to underscore our concerns over how these policies are being 
mirrored by developing countries in such markets as India, Brazil, 
Russia, and other major markets our companies rely on for growth. 
Finally, I will provide thoughts on how our industry can work with the 
U.S. Government to address these challenges in both China and around 
the world.
China Continues To Champion Indigenous Innovation
    China's indigenous innovation policies have been around for some 
time, dating back to the 2006 Medium- and Long-Term National Plan for 
Science and Technology (MLP). The chief aim of this plan was to foster 
the development, commercialization, and procurement of Chinese products 
and technologies. More precisely, it was developed to give a leg up to 
domestic producers by compelling Chinese Government agencies and State-
Owned Enterprises (SOEs) to adopt rules and regulations favoring 
products and services that use Chinese-developed ideas and 
technologies. One of the most notable of China's policies to advance 
indigenous innovation was its effort to establish a national catalog of 
products to receive significant preferences for Government procurement. 
Among the many problematic criteria for eligibility were stipulations 
that products contain intellectual property (IP) developed and owned in 
China and that associated trademarks be originally registered in China. 
This was an unprecedented use of domestic IP as a condition of market 
access that no other country in the world requires, and one that made 
it nearly impossible for American companies to qualify. IP is developed 
all over the world, not just in one country.
    China has since backed away from this policy, and at the 2011 S&ED 
agreed to revise policies that link innovation and procurement. The 
rollback of this policy was due to the combined efforts of industry and 
like-minded Governments around the world, including our own. But the 
indigenous innovation policy drive extends well beyond the catalogs and 
is morphing into other similar policies under different nomenclature.
    Indeed, the Chinese Government has transitioned to support 
indigenous innovation approaches within a new policy under the twelfth 
5-Year Plan called ``the decision to develop Strategic Emerging 
Industries,'' (referred to as SEIs). In short, the SEI initiative can 
be seen as an important and sweeping program to develop indigenous 
technology at the expense of foreign industry. These developments come 
despite high-level commitments made by the Chinese Government to treat 
foreign-invested enterprises equally under the indigenous innovation 
program. Despite efforts to claim ``indigenous innovation'' is 
nondiscriminatory, China's leadership, as recently as December 2011, 
has referred to this initiative as ``one of self-reliance.'' Some would 
say SEI is now the new code word for indigenous innovation.
    In October 2010, shortly before the Chinese Government began to 
walk back from its indigenous product catalogs, it began to promote the 
concept of SEI's. In a high-level State Council decision, the 
Government selected seven strategic sectors including ``next-generation 
IT'' for renewed Government support. China also announced it will spend 
$1.5 trillion on the development of these seven sectors, through 2015. 
Should Beijing distribute the funds evenly among the seven industries 
over 5 years, this would mean China's tech industry would receive 
annual Government funding of roughly $42 billion each year through 
2015. To put a point to it, this support would all go to Chinese 
companies.
More Than Just Government Procurement Policy
    Our concern is that despite U.S. ``success'' in rolling back some 
of China's IP requirements and procurement catalogs, the Chinese 
Government continues on its path of discriminatory innovation policies 
in an increasingly sophisticated way. This includes a new web of 
indigenous innovation policies under the SEI banner, continuing lack of 
IP protection and enforcement, mandating local standards, and an 
alarming trend of using vague national security concerns related to 
information security to discriminate against foreign tech companies.
    In particular, the trend to promote and favor indigenous IP is a 
core aspect of the twelfth 5-Year Plan and Strategic Emerging 
Industries policies. The policies below are a sampling of those and 
other kinds of specific troubling policies China is now promoting under 
the SEI program:

    A new SEI ``core products and services catalogues'' being 
        drafted by the Chinese Government that will likely end up 
        guiding Government and SOE procurement decisions;

    A stated policy goal to satisfy 30 percent of domestic 
        semiconductor market demand with indigenously designed 
        semiconductors by 2015;

    Reaching an 80 percent self-sufficiency rate for flat panel 
        displays by 2015;

    Creating a ``Chinese Domestic Cloud'' based on indigenous 
        technologies and IP;

    Providing preferential public procurement incentives for 
        domestic information security technology manufactured in China; 
        and

    Providing $1.2 billion in subsidies in 2012 alone to 
        develop indigenous networking technology IP.

    Ironically, while China seeks to foster the development of its own 
IP, it also remains a persistent outlier when it comes to IPR 
infringement. Some progress was made in 2011 with the launch of a State 
Council Special Campaign and a related State Council level office to 
increase IP rights protection efforts, specifically targeting the usage 
of pirated software by Government agencies. There were also positive 
statements made at this month's S&ED that indicate China will extend 
this campaign to commercial enterprises. Despite these commitments, the 
trend lines still appear markedly negative. In addition, the United 
States Trade Representative (USTR) in its recent 2011 Special 301 
Report alluded to an ``alarming increase'' in trade-secrets theft of 
U.S. IP-intensive industries originating from China.
    Of equal concern to the global tech industry is China's drive to 
develop its own unique national standards outside the norms to which 
the industry has adhered during the last few decades. This includes not 
only mandating standards for the commercial market, but also doing so 
in ways that make it difficult to address problems through trade 
remedies. For example, while the Chinese Government agreed to ``suspend 
indefinitely'' at the 2005 U.S.-China Joint Committee on Commerce and 
Trade (JCCT) China's homegrown WIFI standard WAPI, it is now a de facto 
mandatory standard. China has managed to do this despite previous 
commitments by compelling its State-owned telecommunication carriers to 
include WAPI in commercial bidding documents for WIFI equipment.
    Since WAPI, our industry has seen China issue a plethora of 
problematic tech standards. UHT/EUHT is a good example, which is yet 
again another Chinese attempt at developing unique standards to compete 
with WIFI. Despite widespread opposition from both foreign Governments 
and industry, and compatibility issues with existing WIFI standards, 
the Chinese Government earlier this year approved the standard. UHT/
EUHT advanced as ``voluntary,'' but we have concerns that, like WAPI, 
it will become a de facto mandatory standard once the Government 
communicates its ``guidance'' to State-owned industry. Other examples 
include China's new standards for wireless 4G encryption, or various 
competing national standards for cable TV video-encoding, both of which 
we fear will likely end up as de facto mandates.
    We face myriad discriminatory opaque market access barriers for 
global companies looking to do business in China from these technical 
unique national standards. This is in stark contrast to the voluntary, 
industry-led and global standards which have helped to drive innovation 
and growth for our industry.
    Beyond standards, China continues to increase burdensome testing 
and certification regulations on tech products sold in both Government 
procurement and commercial markets that are inconsistent with global 
norms. We often see overlapping, unnecessary or onerous testing 
requirements related to safety and other product testing, most of which 
is conducted in Government-affiliated laboratories. The far-reaching 
Multi-Level Protection Scheme (MLPS), for example, places huge barriers 
on many high-tech products going into critical infrastructure systems 
in China. This includes unworkable testing mandates and domestic IP 
requirements. China's encryption rules are perhaps the most onerous. 
They bar foreign companies from selling key security technology that is 
now the bedrock to ensuring consumer and business trust in the 
Internet.
    In sum, while we have now have more official Government-to-
Government dialogues that cover these issues with China than with any 
other country, our success in rolling back problematic policies remains 
limited. China continues to mandate problematic standards, force the 
disclosure of sensitive IP, and enact preferences for local products in 
an increasingly sophisticated way. It is incredibly important to 
address this now, especially since such protectionist models are being 
replicated in other markets.
Mirroring China
    In recent years, the Chinese economic model of growth has become 
increasingly attractive to developing countries around the world. More 
troubling, a significant number of Governments have begun implementing 
new trade-restrictive policies similar to those of China. These 
policies continue to undermine the ability of American tech companies 
to compete fairly in critical markets. The spread of these policies has 
become particularly acute over the past couple of years as Governments 
wrestle with economic and political challenges at home.
    Specifically, these Governments, which now include the likes of 
India, Brazil, Argentina, and Russia, have begun implementing a number 
of policies designed to boost their domestic manufacturing, high-
technology and R&D capabilities, and services--often at the expense of 
foreign companies. We have seen India follow in the footsteps of 
Beijing through a recent national policy that mandates onerous local 
content requirements for electronic procurements. Or, take for example 
Argentina, which has put in place an import-licensing scheme that 
discriminates against foreign technology goods. Then there is Brazil, 
which has mandated the local sourcing of telecom equipment to be used 
to build out infrastructure to support new spectrum.
    These types of policies will reverse decades of global growth and 
innovation. The U.S. Government has been successful in reversing some 
discriminatory policies in several important markets. But these 
reversals appear more tactical than permanent, and discriminatory 
policies are continuing to proliferate. If left unchecked, these 
policies will lead to a crippling loss of competitiveness and global 
market share for our companies, undermining economic growth and job 
creation here in the United States.
The Solution: Let's Get China Right
    The first step in setting things on the right course is to ensure 
we get China right. China is obviously too big to ignore, and as we 
have seen, has created a new model for development which some call the 
``Beijing Consensus.'' The U.S. Government should continue concerted 
efforts to address specific trade barriers, as well as strategically 
address the broader, underlying trends of protectionism and promotion 
of Chinese national champions. We commend past efforts by our 
Government to address China's indigenous innovation policies, and we 
urge continued support of bilateral dialogues such as the S&ED, JCCT, 
and Innovation Dialogue. The Administration's role in pushing back 
numerous policies, including the indigenous innovation catalogs, has 
been instrumental. The United States should continue working closely 
with the private sector and with other Governments to develop a clear, 
coordinated strategy for encouraging China to adopt global norms. When 
we have been most successful in dealing with China, it has been the 
result of close cooperation among Governments and between our 
Government and the private sector. And this needs to be an ongoing, 
results-based effort.
    At the same time, we need to recognize that China does not speak 
with a single voice, and there are a growing number of actors that have 
begun to see the world as we view it. This includes increasingly global 
Chinese enterprises that are embracing global standards to help lower 
their costs to sell their products in overseas markets. Or 
sophisticated consumers that want the same products sold in developed 
markets, not the out-of-date and bland technology mandated by a 
Government bureaucrats. While it is not always easy to find these 
actors, and even challenging to get them to speak out, it must be done. 
Real change in China will only come when its own citizens realize the 
negative effects of its industrial policies.
Towards a Global Solution
    The time has finally come to develop a more comprehensive strategy 
to defeat these policies at a global level, promote the global benefits 
of effective policies that support open markets and nondiscriminatory 
innovation, and defend growth, innovation, and job creation. This 
strategy should focus on those countries where retrograde policies are 
most acute and serious, and are increasingly being recognized by 
developing Governments such as India and Brazil. While this effort 
needs to include a high-level, comprehensive tier of work, it must also 
be tailored for individual markets. Recent successful efforts by a 
broad array of private-sector coalitions to roll back discriminatory 
industrial policies in China and India can serve as effective models 
for these efforts.
    This means the U.S. Government, in collaboration with the private 
sector, must communicate to these Governments a clear vision for viable 
alternatives to which they can turn to achieve the results they want in 
fostering innovation and development. This includes understanding that 
Governments can and will continue an important role in fostering 
innovation, such as through promoting STEM education or creating tax 
incentive for R&D. At the same time, Governments must clearly recognize 
that most innovation comes from the private sector. In the short term, 
we suggest that the U.S. Government begin to address these concerns at 
the G20 to be held next month in Mexico City.
    Our industry is already working with the U.S. Government to 
identify and analyze the most pertinent challenges, and to provide 
other Governments possible solutions. More is needed, however, to raise 
the level of attention--both within the United States and with our 
trading partners--regarding the existence of these challenging problems 
and how to combat them creatively. These steps are necessary to ensure 
that American technological competitiveness remains strong.
    Thank you.
