[Congressional Record Volume 151, Number 88 (Tuesday, June 28, 2005)]
[Extensions of Remarks]
[Pages E1382-E1385]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
LEGISLATION COMPELLING VOTES OF THE EX-IM BOARD OF DIRECTORS IS BAD
POLICY
______
HON. MICHAEL K. SIMPSON
of idaho
in the house of representatives
Tuesday, June 28, 2005
Mr. SIMPSON. Mr. Speaker, I rise today to raise my concerns about a
proposal being floated that would compel the Ex-Im Board of Directors
to bring up and vote on every proposal for Ex-Im Financing, whether or
not the proposal met the basic--congressionally mandated--conditions
for approval.
This would be a bad policy in general, and particularly with respect
to industries which affect our national security, such as, the
semiconductor industry.
Legislation compelling the Board of Directors to vote on a particular
application for Ex-Im financing--and one that the Chairman has
carefully considered and rejected--is bad policy and threatens to
subvert the structure, policies, and procedures of the Export-Import
Bank. The Chairman is responsible for bringing financing proposals
before the full Board of Directors and ensuring that only those
financing proposals which meet the statutory criteria are presented for
a vote. If a deal fails to meet the basic criteria for financing, then
it should not be brought up for a vote. To do otherwise would ignore
Export-Import Bank legal requirements and procedures, and completely
and inappropriately politicize Ex-Im financing.
[[Page E1383]]
Earlier this year, Ex-Im Chairman, Phillip Merrill carefully
considered a proposed $770 million financing package for a Chinese
semiconductor manufacturer, SMIC, and ultimately determined not to
bring the proposal before the Board of Directors. Because the proposal
clearly failed the statutory requirements, the Chairman was completely
justified in that decision. As Mr. Merrill noted at a hearing before
the House Small Business Committee on April 6, 2005, ``It is my job to
take the case to the board if we believe the case does not violate the
mandate of Congress.''
In this case, the proposed SMIC financing failed two separate and
independent statutory requirements for Ex-Im approval: namely, the
``economic impact'' requirement, and the ``additionality'' requirement.
First, in evaluating the ``economic impact'' requirement, Ex-Im is
required by statute to consider any serious adverse effect financing
might have on the competitive position of U.S. manufacturers. Ex-Im is
expressly prohibited from making a loan or guarantee if its analysis
concludes that the competing domestic industry would be adversely
affected because either (i) the product supported by the financing will
compete with a U.S. producer, or (ii) the commodity is in oversupply.
In reviewing this case, the Ex-Im Chairman evaluated a study that
demonstrated that the products made in SMIC's Chinese fabrication
facilities--DRAM and other types of semiconductors--would compete with
U.S. producers and were in serious oversupply, and that if the deal
went through it would result in the loss of thousands of high-paying
technology jobs in the U.S. semiconductor sector. The study also
pointed out the economic and political folly of having U.S. taxpayers
finance the export of high-tech jobs and technology to China,
particularly given the current exodus of U.S. manufacturing jobs to
that country and the massive trade deficit the U.S. has with China.
Based on this unrebutted evidence, the Chairman correctly concluded
that the SMIC financing proposal failed the ``economic impact''
requirement.
The SMIC financing proposal also failed the separate
``additionality'' test. The Chairman is required to ensure that no
proposal is submitted for vote when the proposal merely duplicates
available private sector financing. The ``additionality'' test can be
met if there is a confirmed competing loan guarantee on the table from
a foreign export credit agency or if there is some sort of market
failure and the transaction would otherwise not go forward without the
Bank's involvement. Neither of those circumstances is present in the
SMIC financing proposal. Indeed, recent developments confirm beyond any
doubt that SMIC has no need for a guarantee funded by the United States
taxpayers. Only two weeks ago, SMIC announced that it obtained a $600
million loan from Chinese banks--all without an Ex-Im guarantee. The
Chairman correctly concluded that the SMIC financing proposal failed
the ``additionality'' requirement.
China Does Not Need U.S. Government Assistance to Develop Its
Semiconductor Industry
There is a significant danger in sending advanced semiconductor
manufacturing equipment to China, especially if those exports are
taking place as a result of subsidized support from the U.S. Export-
Import Bank.
The economic costs of providing advanced manufacturing equipment to
China are high. A recently-released report quantifies job displacement
in the United States as a result of the United States' rising trade
deficit with China since 1989: 20,000 lost jobs associated with the
production of communications equipment; 64,400 lost jobs associated
with the production of home audio and video equipment; and 53,300 lost
jobs associated with the production of computers and office equipment.
In addition, more than 46,200 jobs were estimated to have been lost in
the semiconductor industry since 1997. Job losses in these electronics
industries accounted for more than one-quarter of total job
displacement documented in this report.
Another significant concern relates to the migration of high-tech
production to China because of the strategic importance of this
technology, and the ability of the Department of Defense to maintain an
edge in the development and deployment of advanced communications,
command and control and weaponry. According to a recent report by the
Defense Science Board, the area of greatest concern is in the U.S.
microelectronics sector which supplies defense, national infrastructure
and intelligence applications.
Dependence on China for supplies of semiconductors and other
microelectronics would leave the United States very vulnerable.
Significant risks of supply interruptions exist and include natural
disasters like earthquakes but also heightened tension between China
and Taiwan could lead to significant disruptions of critical parts and
supplies.
China also has taken steps to provide WTO-inconsistent subsidies to
unfairly promote their semiconductor industry. China has adopted
aggressive policies to promote domestic manufacture of semiconductors.
Income tax incentives include a 5 year tax holiday plus 5 years at
half-tax for reinvested capital with the clock starting when profits
start. It is providing free land for industrial parks. Until recently,
China applied a 17 percent value added tax (VAT) to imported chips, but
not to those made in China. Agreements with the World Trade
Organization on VAT may have negated the impact of the full 17 percent
on imported chips however while amounts over 3-6 percent are still
rebated for Chinese-made chips.
The number of engineering graduates in China is far outpacing U.S.
totals so that students no longer have to come to the U.S. to attend
school.
u.s. taxpayer support for the chinese semiconductor industry:
unjustified on any grounds
There is no economic justification for the United States government
to be underwriting investments in the Chinese electronics industry.
China has an extremely competitive and rapidly expanding electronics
sector. Moreover, the Chinese government already offers a host of
incentives for investing in integrated circuit (``IC'') production
facilities. The U.S. Semiconductor Industry Association (``SIA'') has
in fact raised repeated concerns regarding the level of government
assistance to China's IC firms.
History has shown that the movement of electronics manufacturing to
lower-wage countries has had deleterious effects on U.S. employment.
Recently, it is higher-valued manufacturing activity that has exited
the United States for China and other low-wage production sites.
Electronics industry sources highlight that the exodus of advanced
manufacturing has negative implications for engineering and R&D
activity in the United States.
A just-released report quantifies job displacement in the United
States as a result of the United States' rising trade deficit with
China since 1989: 20,000 jobs lost associated with the production of
communications equipment; 64,400 jobs associated with the production of
home audio and video equipment; and 53,300 jobs associated with the
production of computers and office equipment. In addition, more than
46,200 jobs were estimated to have been lost in the semiconductor
industry since 1997. Job losses in these electronics industries
accounted for more than one-quarter of total job displacement
documented in this report.
The financing incentives contemplated by the Export-Import Bank are
neither necessary nor appropriate. The Chinese IC industry has already
been extremely successful in attracting investments through commercial
channels, and the Chinese government already provides a wide range of
incentives. In addition, assistance to the Chinese semiconductor
industry will disadvantage a U.S. industry that provides high-value
jobs and other economic benefits in the United States.
china is highly competitive in the global electronics sector
China has major advantages in electronics manufacturing. For one,
China's labor pool is inexpensive, skilled, and highly motivated.
Production worker wages are as low as $120 a month, and skilled IC
designers make on average $2,000 a month. In sophisticated electronics,
direct labor in China costs less than 10 percent of total costs of
production. The number of trained engineers increases by 350,000
individuals annually. Young workers and managers willingly put in 12-
hour days and work weekends. As for inflationary pressure on wages, the
chief Asia-Pacific economist at Morgan Stanley notes that China's
``vast pool of surplus labor . . . keep down labor's pricing power.''
China also provides a huge and booming internal market that will
further spur domestic production efficiencies. China's gross domestic
product increased 9.1 percent in 2003, and the country emerged as the
world's largest and most rapidly growing market for semiconductors. The
existence of multiple suppliers creates intense domestic competition,
further contributing to low wages and prices.
Electronics manufacturing in China began with finished consumer
appliances, and now their component parts are also increasingly
manufactured in China. The IC industry is one of the newer boom
industries in China. A Chinese industry sources note that more than 10
fabs started operations in China in 2002.
Most of the early Chinese IC operations used the smaller 6-inch
wafers, lagging the 8-inch and larger wafer technology common in the
United States, Europe, and Korea. That is changing. SMIC is now at the
forefront of global production technology for semiconductors by
bringing a 12-inch wafer fab on line in 2004. SMIC plans four more 12-
inch fabs to come on line by 2006.
The proposed equipment financing is substantial not only for SMIC but
for the Chinese IC industry as well. China's 10th Five-Year Plan, which
is in effect for the period 2001-2005, anticipates investments totaling
$10.3 billion in new IC production lines. SMIC's new equipment
purchases represent more than 10 percent of the entire amount
anticipated to be invested in China over the course of 5 years.
[[Page E1384]]
Moreover, China's revenue from fab operations was approximately $400
million in 2002. The proposed financing is thus three times the value
of fab revenues in a recent year.
In 2003, China is estimated to have spent three times the amount on
new fab construction as all of North America. China accounted for about
5 percent of existing fab capacity in 2003, ranking seventh in the
world; however, China accounted for fully 33 percent of fab
capacity under construction in 2003, ranking first in the world. Taiwan
and Korea followed somewhat distantly, accounting for 14 percent and 13
percent, respectively of fab capacity under construction the same year.
In other words, China is rapidly emerging as a major semiconductor
producer with some of the most modern and advanced facilities in the
world. As Harvard University economist Richard B. Freeman has observed,
``China . . . can compete both with very low wages and in high tech. .
. . Combine the two, and America has a problem.''
There is simply no economic need for U.S. taxpayers to be
underwriting investments in the Chinese electronics industry. Every
indication is that industry is booming, with investment flowing from a
variety of sources. One industry source estimates that China already
produces one-third of the world's electronics, and that will rise to
one-half by 2010 or 2012.
China offers a host of incentives for investing in the IC industry.
China emerged as a contender in the global electronics industry as
recently as the late 1990s. One product launched during China's Ninth
Five-Year Plan (1996-2000) was the 909 Project, administered by China's
Ministry of Science and Technology. Investments under the 909 Project
totaled over $1.2 billion. The primary beneficiary was the Shanghai
Hauhong NEC Electronics Co., with was formed to design and produce both
memory and logic ICs.
In advance of China's joining the World Trade Organization (which
occurred in 2001), a number of investment incentives were introduced in
2000. For example, in June 2000, State Council Document 18, entitled
``Policies to Encourage the Development of the Software and IC
Industries,'' established a framework to attract investment to the
Chinese IC industry. These incentive applied primarily to fab
operations, and were effected through the reduction of effective value-
added tax (``VAT'') rates.
In December 2000, Shanghai's Document 54, entitled ``Policies and
Regulations Related to the Development of the Software and IC
Industries,'' expanded the Document 18 incentives to design, packaging,
and test facilities. As noted further below, the U.S. Semiconductor
Industry Association subsequently raised concerns that China's VAT
incentives provided discriminatory treatment.
Also in 2000, the Chinese central government updated its list of
industries for which foreign investment is encourages, including more
advanced IC production operations. China's Ministry of Science and
Technology also designated the IC industry as a high priority in its
863 Program, which supports key technologies through research and
development. Within a few years, the 863 Program had provided grants to
more than 100 IC design centers, which had more than 1 billion RMB in
annual sales.
China ratified its Tenth Five-Year Plan in March 2001, and the
government stated at that time that its goal was to invest $120 billion
in the IC industry by the end of 2005. Also in 2002, State
Administration of Taxation Document 70 authorized VAT reductions for
the IC industry, and State Council Document 51 added incentives for
venture capital investments in the same industry.
In additional to incentives from the central government, regional
authorities compete to attract investment in IC facilities. The
Shanghai region is a leading area for semiconductor activity. Even
within this region, however, localities offer competing incentives.
SMIC is located in the Zhangjiang High-Technology Park in the Pudong
District. Incentives available to enterprises in Pudong include the
following:
Subsidies for interest rate payments;
Investment tax credits for infrastructure expenses;
A variety of rebates of VAT taxes;
Allowance for deduction of salaries and training costs for corporate
income tax purposes;
Additional subsidies allowed for new post-graduate positions created;
and
Special tax incentives for fabs producing below the .25 micron level,
including exemptions on any production and testing equipment.
the u.s. semiconductor industry association has repeatedly raised
concerns about chinese semiconductor industry incentives
SIA has voiced numerous concerns about Chinese practices that
discriminate against U.S. suppliers. As recently as December 21, 2004,
SIA summarized its most pressing concerns in comments to the U.S. Trade
Representative on foreign trade barriers. These comments highlighted
the following:
China's VAT rebate scheme imposes a cost penalty on imported
semiconductors. Such a scheme strongly suggests that China is not
honoring the national treatment commitments required under Article III
of the GATT, to which China is bound as a member of the World Trade
Organization.
China had planned to implement a proprietary wireless encryption
standard. According to SIA, ``It was planned for implementation even
though the technical details of the Chinese requirements were not
readily available to international firms. Later reports indicated that
Chinese authorities would require foreign firms to engage in value-
added production with a select list of local firms to obtain import
permits in order to sell wireless LAN equipment in China. Products
already in-country would have also required permits. If enacted, such
requirements would have set a dangerous precedent by imposing
technology transfer and local content requirements that China committed
to eliminate with WTO accession.'' China has delayed implementation but
there is still significant pressure for a unique Chinese standard.
There have been other attempts to create unique Chinese standards,
including for DVDs, HDTV, RFID, digital cameras, and electronic imaging
for cellular phones. According to SIA, ``Standards in China are often
developed by government authorities through a nontransparent process,
and without input of key stakeholders, in particular neglecting
international ones. Unique Chinese requirements in many cases would
require product redesign, creating additional costs to U.S. firms in
development expenses and lost revenue.''
China's intellectual property laws have serious deficiencies--to the
point that China's compliance with the WTO TRIPs Agreement is in
question. China's legal system hampers IP enforcement by making it more
difficult both to bring, and to succeed in, cases against IP violators.
SIA calls on China to enact legislative reforms in this area.
SIA also notes concerns as regards transparency in China's rule-
making procedures. SIA questions, for example, whether environmental
regulations are not in fact more trade barriers.
In October 2003, SIA also released a comprehensive review of Chinese
incentive programs benefiting semiconductor producers. SIA concluded as
follows:
Maintaining U.S. leadership in microelectronics is
critically important to the economy and national security of
the United States. Government policy measures in any country
or region which induce significant migration of the U.S.
microelectronics infrastructure--capital, enterprises,
individuals--warrant careful scrutiny by U.S. policymakers.
Several aspects of China's current developmental effort in
microelectronics are problematic because they could erode the
U.S. microelectronics infrastructure and contribute to an
eventual loss of U.S. leadership in this field.
Historical impact of the loss of electronics manufacturing in the
United States
The U.S. electronics industry has been migrating slowly to off-shore
manufacture for many years. According to a study by the Bureau of Labor
Statistics, U.S. competitiveness in consumer electronics began to slip
in the 1960s. Television production was one of the first industry to
migrate off-shore. Jobs in the U.S. television industry dropped by half
from 1971 to 1981. Innovations were increasingly introduced by foreign
television makers, and this is evident in the leading position of non-
U.S. brand name domination of high-definition and digital television at
the present time.
According to the National Advisory Committee on Semiconductors, U.S.
electronics manufacturers lost nearly 15 percent of the global market
in the second half of the 1980s. This translated into more than $100
million in lost revenues for U. S. companies during that period--a loss
has since grown considerably given enormous expansion in global
electronics markets.
A 1997 survey of electronics manufacturing in the Pacific Rim
observed that ``the rapid development of electronics manufacturing in
East Asia poses a challenge to overall U.S. manufacturing
competitiveness as the United States becomes increasingly dependent on
Asian suppliers. . . . In this survey, China was already observed to
attracting a great deal of component manufacture. Initially, China drew
manufacturing from neighboring Asian countries, that could no longer
compete on labor costs. U.S. electronics manufacturing has also been
affected. The U.S. printed circuit board industry is losing jobs to
China as U.S. producers have seen sales slump from $11 billion to less
than $5 billion since 2001. Meanwhile, printed circuit board exports
from China have doubled.
Semiconductor device production remained a leading U.S. electronics
industry even as more labor-intensive assembly operations relocated to
low-wage countries. One key has been the retention of high-value-added
activities in the United States. But numerous voices are now concerned
about the attraction of China for advanced electronics manufacturing.
[[Page E1385]]
The President's Council of Advisors on Science and Technology
supports policies that encourage R&D and advanced manufacturing in the
United States. A January 2004 report notes that the computer and
electronics sector is a leading employer in the United States, and
ranks very high in terms of value-added. The report notes as well the
rise of China as an electronics producer:
. . . China's rise as a high tech manufacturer has caused
increasing concerns. China is a large emerging market and its
industrial and economic policies associated with expanding
this sector are likely to continue indefinitely.
This report also notes the variety of Chinese programs aimed at
expanding the electronics sector, including numerous tax incentives,
currency valuation policies, industrial parks, and employment
incentives.
The U.S. Semiconductor Industry Association shares this concern. SIA
recently urged U.S. policy makers to keep chip fabrication in the
United States by ``insuring that the U.S. remains an attractive
locations for chip manufacturing. . . . If leading edge moves offshore
because foreign governments have created more attractive investment
environments, over time R&D facilities for manufacturing processes are
likely to follow.''
SIA has documented the substantial contributions of U.S.
semiconductor manufacture to the U.S. economy, in a number of reports,
including as in the following illustration:
The semiconductor industry, which is the largest value-
added sector in the U.S. economy, provides high quality
employment to hundreds of thousands of U.S. citizens and is
projected to grow at a compound annual rate of fifteen
percent for the next several years. The growth will create
opportunities for new applications that will spawn new
industries and it will ensure the continued vitality of many
of the information technology industries.
SIA officials emphasized the potential of China in particular to
attract leading edge semiconductor manufacturing in recent testimony
before the U.S.-China Economic and Security Review Commission:
Semiconductors are the building blocks for American
competitiveness in a broad range of high technology goods--
from computers to medical technology. A strong and vibrant
semiconductor manufacturing industry is a key part of a
healthy information technology ecosystem--it supports
everything from research and development to a robust
university capability in microelectronics. . . . the members
of SIA also believe it is vital to retain leading edge
manufacturing capability here in the United States. . . .
China is growing into a major force in the information
technology arena both as a customer and as a competitor.
Given the size, growth, and potential of the Chinese market,
it is essential that U.S. semiconductor firms have the
chance to compete fairly.
A new report prepared for the U.S.-China Economic and Security Review
Commission finds that 1.5 million U.S. job opportunities have been lost
as a result of the ballooning U.S. trade deficit with China. As noted
at the outset in this paper, more than one-quarter of job losses during
2001-2003 were in electronics. China's higher-value electronics
exports, along with other products that require more skilled labor and
advanced technologies, are growing much more rapidly than are China's
lower-value, labor-intensive exports. The report notes that China's
exports to the United States reached $32 billion, a figure that
corresponds to the entire U.S. trade deficit in advanced technology
products. Indeed, the U.S. exports and imports of advanced technology
products as a whole are in balance; however, the U.S. has a significant
and rising trade deficit in such products with China.
u.s. taxpayer subsidies to the chinese semiconductor producers are
unjustified on any grounds
As discussed above, the Chinese semiconductor industry does not need
U.S.-taxpayer- supported financing. The Chinese industry benefits from
advantageous labor costs, a dynamic internal market, a critical mass of
component and finished goods production, and a multiplicity of Chinese
government supports. The industry is literally booming, with investment
flowing from a multitude of sources. SMIC in particular is a formidable
competitor on a global scale.
In addition, from a policy perspective, what is the U.S. interest in
hastening the pace of expansion within the Chinese electronics sector?
This expansion comes at considerable costs to U.S. industries. U.S.
policy makers have in fact long recognized the value to the broader
economy of maintaining high-value manufacturing and their associated
R&D activities in the United States. This Administration has
consistently been given this advice by its senior science and
technology specialists.
The economic reality may be that China's electronics industry will
continue to strengthen, but that outcome should be market-driven. U.S.
taxpayer subsidies to enhance advanced Chinese semiconductor
manufacturing capabilities are unjustified on any grounds.
____________________