[Congressional Record (Bound Edition), Volume 151 (2005), Part 9]
[Extensions of Remarks]
[Pages 13101-13102]
[From the U.S. Government Publishing Office, www.gpo.gov]




                       HOW MUCH TO FEED A DRAGON

                                 ______
                                 

                             HON. TIM RYAN

                                of ohio

                    in the house of representatives

                         Friday, June 17, 2005

  Mr. RYAN of Ohio. Mr. Speaker, I rise today to share with you an 
article written by Scott Lilly, the former Democratic Staff Director to 
my distinguished colleague and Ranking Member of the Committee on 
Appropriations, David Obey. Scott, a longtime friend and valued 
resource to Members and staff on both sides of the aisle, left Capitol 
Hill last year after 32 years of distinguished service. His departure 
was and continues to be deeply felt by many of us, but as the article 
below reveals, Scott remains a tremendous resource for this institution 
as we work to deal with serious policy issues that impact our 
constituents, our communities and our nation.
  In this article, How Much to Feed a Dragon, Mr. Lilly discusses the 
extremely important issue of the threat of China to the United States 
as an economic and world power. As Scott articulates so well, the time 
to act against China and its currency undervaluation is now I urge my 
colleagues in the House to heed the warnings detailed in this article 
and to stop the rhetoric. We must act immediately and decisively to 
address the serious risk China poses to the American way of life--our 
nation's future depends on it.

                       How Much To Feed a Dragon

       A few weeks ago the Bush administration took action to cap 
     the growth of Chinese textile imports to no more than 7.5 
     percent a year, professing grave concern for what is left of 
     America's textile industry. The controversy generated by that 
     move largely obscured a far more profound decision by the 
     administration only a week earlier. In a formal report to 
     Congress, Treasury Secretary John Snow refused to designate 
     China as a currency manipulator despite massive evidence of 
     China's continuous intervention in global currency markets--
     keeping the yuan at levels far below what most economists 
     believe is its true value. Snow stated that Chinese officials 
     ``have repeatedly vowed'' to move toward ``a more flexible'' 
     currency. When they will move or how far they will move is an 
     issue that Snow will apparently continue to leave to the 
     discretion of China's central planners.
       While this issue sounds arcane, it may also rate as one of 
     the most important economic issues of this generation. The 
     intense manipulation of the Chinese yuan impacts greatly on 
     numerous problems facing American households, ranging from 
     high gas prices to weak job growth and stagnant wages. It has 
     materially contributed to the problem of our growing foreign 
     debt, the weakness of the dollar and a potential worldwide 
     currency crisis that could lead to global depression. In 
     addition, it has serious implications for the balance of 
     global power in the decades ahead.
       How has China impacted U.S. gasoline prices? World demand 
     for energy grew by more than 3.4 percent last year-the 
     largest yearly increase since the gas lines of the 1970s and 
     more than twice the average yearly growth over the past two 
     decades. Furthermore, it is clear that the big players in 
     world energy markets see this spike in demand as anything but 
     temporary. They are not only buying up oil futures and the 
     shares of companies that own and sell oil but companies that 
     explore and drill for oil as well.
       The reason for this rapid growth in oil demand is 
     attributable to one single fact: Oil consumption in China is 
     growing at astronomical rates. During 2004 Chinese 
     consumption of oil averaged more than one million barrels a 
     day above the previous year, an increase of 19.3 percent, or 
     eight times faster than the growth of energy consumption in 
     the rest of the world. Without China, the global growth in 
     oil consumption during 2004 would have been just 2.2 
     percent--a rate that the normal expansion of world oil 
     exploration and production can accommodate without 
     significant upward pressure on oil prices. Even in per capita 
     terms, China's oil consumption is growing three times faster 
     than the rest of the world.
       Why is China guzzling so much petroleum? China's 
     skyrocketing demand for energy is largely a function of the 
     nation's skyrocketing rate of economic growth. For several 
     years China has been growing at a rate of more than 9 percent 
     per annum even after accounting for inflation. Some experts 
     expect growth in the 8 to 10 percent range for the indefinite 
     future. This rate of growth drove China last year to consume 
     40 percent of the globe's increased demand for crude oil in 
     2004--more than the rest of the developing world combined.
       How can China maintain such a rapid pace of growth? The 
     answer to that is also relatively simple. According to a 
     report released in Beijing last month by the State 
     Information Center, foreign trade is the major driving force 
     of China's economy. In particular, China's net exports, or 
     trade surplus with the rest of the world, are credited with 
     bringing strong growth to the nation. The report discloses 
     that Chinese exports totaled $156 billion in the first 
     quarter of 2005 while imports totaled only $143 billion. More 
     than 60 percent of Chinese surplus came at the expense of the 
     United States. Last year, the U.S; bilateral trade deficit 
     with China exceeded $162 billion, while the rest of the world 
     actually ran a trade surplus with China. As a result, it is 
     almost entirely the Chinese trade surplus with the United 
     States that is providing the country with this extraordinary 
     pace of expansion.
       What makes China so competitive with U.S. and other foreign 
     producers? It is important to remember that China is not a 
     market economy. Prices in a particular sector can easily be 
     manipulated by central economic planners. This goes for all 
     inputs: labor, land, capital and energy. If China wants to 
     compete and be the low price producer for a particular 
     product, no other producers functioning in a market economy 
     with fixed prices can match the price at which China will be 
     able to sell.
       But even more important has been China's manipulation of 
     its currency, the yuan. The central government has gone to 
     extraordinary lengths to cap the value of the yuan to no more 
     than 8.3 to the dollar. As Secretary Snow points out, leaders 
     in Beijing have talked at great lengths about future plans to 
     allow the yuan to trade more freely on world currency 
     markets.
       But they have taken no such action and the rapid export-led 
     growth of the Chinese economy would drop back to more normal 
     levels if they did. Since rapid growth is seen by the 
     leadership in Beijing as central to the nation's economic, 
     political and geopolitical goals, it is hard to imagine that 
     significant change will occur without strong external 
     pressure. Since the United States alone represents nearly all 
     of China's net trade surplus, the lever to force revaluation 
     of the yuan is almost entirely in the hands of the United 
     States.

[[Page 13102]]

       Isn't China's growth good for the world? It depends on what 
     part of the world you are talking about. Oil producing 
     countries are having a bonanza. Saudi Arabia, a country in 
     danger of not being able to make payments on its foreign 
     debts just a few years ago, is now raking in revenues at a 
     rate that dwarfs even the oil price boom of the 1970s.
       Oil executives in this country are also prospering. The 3 
     million shares of Exxon Mobil held by Board Chairman and CEO 
     Lee R. Raymond are now worth about $170 million, up more than 
     $62 million or about 59 percent from the level such shares 
     would have sold for only 18 months ago. Raymond is only one 
     of thousands of oil company executives enjoying the new 
     prosperity that China's demand for petroleum has created for 
     the industry.
       There are also other domestic winners in the unbalanced 
     trade relationship between the U.S. and China--at least over 
     the short term. Companies ranging from Mattel to Boeing have 
     increasingly moved production operations from the U.S. to 
     China in recent years. They reap two benefits in such 
     transactions. First, the lower wages paid in the Chinese 
     factories provide savings that go largely to the bottom line 
     on corporate balance sheets. Chinese workers make about one-
     twentieth of what U.S. workers make.
       But secondly, the mere threat of moving more production to 
     China keeps downward pressure on wages paid to U.S. workers. 
     Since 2001, the hourly output of U.S. workers has increased 
     by more than 16 percent, but the average wage production and 
     non-supervisory worker wage remained virtually flat after 
     adjusting for inflation. Corporate profits, on the other 
     hand, have jumped by about 58 percent since the beginning of 
     2001 despite slower than normal economic growth. Not since 
     the 1920s have workers' wages fallen so far behind their 
     increases in productivity and at no time in the post-World 
     War II era have corporate profits accounted for such a large 
     portion of the growth in national output.
       So while American corporations have at least thus far been 
     winners in U.S. acceptance of China's trade and currency 
     policies, U.S. workers have been major losers. Not only have 
     wages been stagnant, but so have the number of jobs. The 
     number of Americans with manufacturing jobs has dropped by 
     2.8 million, or 16 percent, since January of 2001. At the 
     same time, the U.S. population has continued to grow. About 
     12 million more individuals are now being supported with 
     paychecks that are no bigger in either size or number.
       Whether or not U.S. corporations--outside the oil patch--
     will be long-term winners in this arrangement is a matter of 
     increasing concern on Wall Street. Many on the street are 
     expressing concerns that U.S. corporate profits cannot grow 
     over the long term if American families have less and less 
     income with which to make purchases. Since production and 
     non-supervisory workers make up about 80 percent of the total 
     workforce, the long-term health of the U.S. consumer is 
     inextricably linked to the earning power of the U.S. worker.
       There are also losers in other countries around the world. 
     Underdeveloped countries with large pools of low-wage and 
     underutilized labor are among those who suffer the most. 
     Their dreams of development have been stymied by China's 
     export gluttony and they have not only lost out in the 
     struggle to attract industry and earn hard currency, but they 
     now live in a world where the winner has driven the cost of 
     energy they need for their own development to prices they can 
     no longer afford.
       But there are implications to our unbalanced trading 
     relationship with China that may be grimmer than the impact 
     it is having on the U.S. and world economy. Those 
     implications involve China's geopolitical ambitions, which 
     are clearly less benign than proponents of unbridled U.S.-
     Chinese trade would want us to believe.
       While the CIA may have overestimated Iraq's military 
     capabilities, it has consistently underestimated (at least 
     until recently) the pace of Chinese military modernization. 
     China has taken the politically painful steps of slimming 
     down its uniform forces to levels compatible with high-tech, 
     modern, Western military doctrine. It has invested heavily in 
     the development of highly capable fighter planes, air-to-air 
     missiles, radars, landing craft and other military resources 
     needed to confront U.S. forces in the Formosa Straits and 
     eventually in other parts of Asia.
       China now has hundreds of nuclear weapons which are both 
     strategic and tactical in type. It maintains at least twenty 
     intercontinental ballistic missiles capable of hitting 
     targets in the western United States and is believed to have 
     recently recommissioned a submarine capable of launching 
     nuclear missiles from waters off U.S. coasts. China is 
     working on the DR-41 missile, believed to have greater range, 
     accuracy and a shorter launch time than existing Chinese 
     ICBMs. They are believed to be working on between four to six 
     new submarines capable of launching nuclear armed missiles.
       As Thomas Kane wrote last year in Parameters, a publication 
     of the U.S. Army War College, ``Nuclear weapons allow the 
     People's Republic of China to take diplomatic and military 
     positions with a much greater level of confidence.''
       China's booming economy also has geopolitical implications 
     beyond the mere contribution it makes to military 
     modernization. If China's economy continues to experience 
     real growth in the 9 percent range, it could surpass the 
     United States as the world's largest economy within a single 
     decade, even if GDP growth in the United States remains 
     relaively strong. As the magnitude of China's economy grows, 
     so will its geopolitical will. One does not need to go to 
     Asia to find examples. Brazil has become a major source for 
     Chinese raw materials and in turn China is discussing 
     financing the construction of a long sought after road from 
     the Amazon basin across the Andes to ports on the Pacific. 
     Korea is becoming something of a ``Silicon Valley'' for 
     Chinese industry, and even old adversaries such as India and 
     Japan have to rethink how to accommodate the new reality that 
     a rapidly growing China presents.
       Some of these changes are inevitable. China needs to grow 
     and will grow almost regardless of U.S. policy. But does 
     China have the political maturity to absorb such a rapid 
     increase in economic, political and military power and use it 
     wisely? Its record on human rights, democratic reform and the 
     treatment of its own citizens should raise serious doubts. We 
     should want a growing economy and rising prosperity for the 
     world's most populous nation, but we should question whether 
     the current torrential rate of growth--growth driven almost 
     entirely by huge net export surpluses with the United 
     States--is a positive for the economic well-being of our own 
     citizens or the prospects for world peace over the coming 
     decades.

                          ____________________