[Congressional Record (Bound Edition), Volume 151 (2005), Part 11]
[Extensions of Remarks]
[Pages 14646-14649]
[From the U.S. 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.
  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

[[Page 14647]]

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. 
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

[[Page 14648]]

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.
  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

[[Page 14649]]

     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.

                          ____________________