**Statement of**

**Ron Gettelfinger, President**

**International Union, United Automobile, Aerospace and**

**Agricultural Implement Workers of America (UAW)**

**Before the**

**U.S.-China Economic and Security Review Commission**

**September 23, 2004**

Mr. Chairman, members of the Commission, my name is Ron Gettelfinger. I
am the president of the International Union, United Automobile,
Aerospace and Agricultural Implement Workers of America (UAW). I
appreciate the opportunity to present the UAW's views on the impact of
U.S.-China trade and investment on the automobile and automotive parts
industries.

The UAW first became deeply concerned about automotive trade with China
in the mid-1990s, when China announced an industrial policy for the
automotive industry that established it as a "pillar industry" of the
Chinese economy. The announcement in June of this year of a new
"Development Policy" that identifies the auto industry as a "backbone
industry" has only added to our concerns. China is now the world's third
largest market for vehicles and the fourth largest producer. The plans
for future development of the industry by the Chinese government and the
world's automotive companies will have a profound effect on the location
of production around the world and the jobs and incomes of UAW members
and other American workers in this critically important industry.

We have seen automotive imports from China grow at a rapid pace in the
past ten years. We are deeply concerned about the impact on U.S.
automotive production and employment that will occur if the Chinese
government's goals for the continued rapid development of the industry
are achieved. The objectives of China's automotive policy include
becoming the world's largest automobile manufacturer and a producer of
its own brands of vehicles and parts for international markets by 2010
\-- that is only five short years away. The size of recent investments
in vehicle and parts production capacity that have taken place and been
announced makes these projections quite realistic. If all of the
additional vehicles and parts were consumed in China, there would be a
relatively small impact on workers and produces in other countries. The
question that must be answered, though, is whether demand in China will
grow fast enough to consume all that production. We believe that such
growth is not at all likely.

While the new Chinese auto policy has eliminated several of the 1994
policy's obvious violations of international trade rules (for example,
local content requirements, quotas on imports, limits on distribution
rights, and more), it still shows a bias toward local production over
imports and forced investment in order to participate in the local
market. Those who argue that such provisions cannot be required and
cannot be enforced are not familiar with the auto industry's history of
development internationally or with China's governmental and industrial
structure.

China is not the first country to aspire to a major role in the
international auto industry. Government industrial policies propelled
the Japanese companies in the 1970s and 1980s and Korean companies in
the 1990s into successful international producers. Brazil's industrial
policies encouraged massive investment there in the 1990s and now the
same strategy is being pursued in China. The result has been an
accumulation of global excess capacity that allows the shrinking number
of major producers to threaten their workers in every country with the
loss of jobs and plant closings unless they become "competitive." With
the rise of China as a major auto producing country, being "competitive"
means compensation of as low as a dollar an hour, no independent union
rights and broad government intimidation of the pursuit of workers'
legal rights. These conditions have become the new standard of
competition for companies around the world, to the detriment of workers
everywhere.

The less restrictive rules in China's new auto development policy are
not comforting to us because the course of U.S.-China automotive trade
has been largely set by the decisions already made by the Chinese
government and the multinational corporations that dominate the global
industry. Under the terms of the 1994 Chinese auto industrial policy,
companies invested in China, made alliances with Chinese companies, made
commitments to high levels of Chinese content in their vehicles and
agreed to set up R&D and technical centers to transfer the latest
technology. This led to substantial Chinese investment by the global
auto parts companies, often in joint ventures with Chinese firms, that
mirrors the assemblers' investments. The elimination of the specific
Chinese government requirements in the newly adopted industrial policy
will not alter this pattern at all. The U.S.-based assemblers and
suppliers will only export products from their U.S. and other global
production facilities to China until their local production and local
sourcing arrangements are fully in place. The huge investments in
Chinese production ensure that the companies will not want to add to
competition in the Chinese market by importing any more than they must.
We have seen the same pattern develop in Mexico, Brazil and other
countries that established tight rules for participating in perceived
high-growth markets and then let those rules fade away as they were no
longer needed to produce the desired result.

Since 1993, the U.S.-China automotive trade balance has moved from a
surplus of more than \$500 million to a 2003 deficit of \$2.2 billion.
Through June 2004, the deficit grew by more than 25 percent from last
year, indicating a 2004 deficit of \$2.8 billion. That would result in a
doubling of the deficit in only three years. Recent announcements by the
Big 3 auto companies of additional exports of vehicles to China over the
next couple of years will not be enough to keep the U.S. auto trade
deficit with China from growing. Past experience with announcements of
this sort, which are intended to distract attention away from the
soaring U.S. trade deficit with China rather than to fundamentally
change that imbalance, makes us skeptical that the exports will actually
be made.

Though U.S. exports of automotive products to China have increased
significantly in the past two years, they are still no match for the
increase in U.S. imports. The growth in exports is consistent with a
rapid increase in production of new models in China. In the past, the
local content of Chinese-assembled vehicles has increased over time, in
line with the commitments of U.S.-based companies that have formed joint
ventures with state-owned Chinese companies. With more than 30 new model
launches last year and this year, Chinese imports of auto parts have
been substantial. However, most of the imported parts come from other
countries, limiting the benefit of the joint ventures for U.S.
production and employment.

In 2003, according to Automotive News ("U.S. suppliers miss boat in
China," April 12, 2004), a Chinese auto industry group reported that
China's imports of auto parts totaled \$9.5 billion, with Germany
supplying \$3.13 billion, Japan \$2.92 billion and the U.S. a mere \$268
million. GM's claims that it exported \$1.4 billion in parts and
machinery to China in 1995-2002 and will ship \$1.3 billion in 2004-2005
do not seem consistent with the official U.S. export numbers. In
addition, some of GM's parts imports into China come from its
traditional suppliers in Europe, Brazil and elsewhere in Asia.

Using U.S. Department of Commerce trade data, it is clear that modest
increases in U.S. auto parts exports will not come close to offsetting
climbing parts imports from China. The U.S. deficit in automotive parts
trade with China has grown from \$121 million in 1993 to \$1.4 billion
in 2000 and to \$2.3 billion in 2003, even though U.S. auto parts
exports increased from \$218 million to \$510 million from 1993 to 2003.
Through June 2004, the U.S. parts deficit with China jumped by an
additional 24 percent despite an 87 percent increase in exports -- the
value of imports grew to \$1.8 billion from \$1.4 billion, while exports
were up by only \$165 million. Over time, we are confident that
Chinese-made parts will replace the limited U.S. parts exports. The
number of auto parts companies that are establishing new plants in China
assures that U.S. exports will be displaced and that U.S. imports of
auto parts from China will continue to grow rapidly.

The escalating U.S. deficit in automotive trade with China must be
viewed in the context of the overall U.S. automotive trade picture. The
worldwide U.S. vehicle and parts trade deficit was \$128 billion in
2003; through June 2004, it was up 11 percent and should be above \$140
billion for the full year. We now have deficits of more than \$40
billion each with Japan and with our NAFTA partners, Canada and Mexico.
If China achieves its ambitions, it will join this club of countries
with huge automotive trade surpluses with the U.S. and undermine the
jobs of UAW members and other American workers in this critical U.S.
industry.

Looking at what has happened to U.S. automotive sales, production and
trade since NAFTA and China's auto industrial policy went into effect
provides a sobering picture of the impact of globalization on the U.S.
industry and its workers. In 1993, when the U.S. economy was slowly
coming out of a recession, U.S. vehicle production was nearly 11 million
and sales were nearly 14 million. The auto trade deficit was \$50
billion at a time of depressed sales and a relatively weak dollar.
Imports from outside North America accounted for 15.5 percent of sales.
Ten years later, U.S. sales had increased by three million, or more than
20 percent, but U.S. production increased by only 1.1 million -- more
than 60 percent of the increase in sales came from imported vehicles, as
the non-North American import share jumped to nearly 20 percent. The
automotive trade deficit reached \$128 billion. Employment of American
auto workers was left at about the same level as in 1993, despite the
increase in U.S. production and the larger increase in U.S. sales. NAFTA
contributed a significant part of this deterioration in trade -- the
deficit with Canada and Mexico of \$13.1 billion in 1993 grew to \$41.0
billion in 2003. The deficit with Japan grew from \$33.4 billion to
\$43.9 billion.

Much of this damage, though, has occurred in the past three years. From
2000 to 2003, when the U.S. economy fell into recession and a barely
visible "recovery," U.S. production fell, and imports from Japan,
Germany, Korea and other countries increased. And, contrary to past
experience with recessions, the trade deficit increased despite the
decline in U.S. sales. Employment in the industry has fallen by more
than 100,000 jobs during that time, and the auto trade deficit continued
to climb. The same pattern has continued this year -- during the first
half of 2004, employment is down, along with U.S. production, but sales
of imports are up and so is the trade deficit. Most of those job losses
have been in the auto parts industry and thousands of workers in Ohio
and other states have been the victims.

While the automotive industry is an important contributor to the
nation's economic well-being, it is especially important to Ohio's. The
downward pressure on the wages and working conditions of American auto
workers that results from increasing competition from Chinese products,
especially auto parts, has had a serious negative impact on the
employment opportunities available to workers in Ohio and to the
compensation that they can hope to earn. The auto parts industry
accounts for the majority of the jobs in the automotive industry and it
is in this area that intense price competition has led to intense cost
competition between producers. That competition has led many companies
to search for lower and lower labor costs; many of those companies have
moved their production to China. Pressure from the assemblers has also
contributed to some companies deciding to move production to China.

Just one company, Delphi, which has numerous Ohio production facilities,
has invested \$500 million in China during the past decade, setting up
14 operations and, soon, a research and development center in Shanghai.
By 2009, Delphi expects to have 1,400 employees at its technical center.
They will be added to the 7,000 current Delphi employees in China. And
what are the savings to Delphi from setting up a local technical
facility? A young electrical engineer in China earns less than \$400 a
month, while a new U.S. engineer earns about \$4,000 month.

While it is very difficult to pin down the compensation of auto industry
production workers in China, manufacturing workers in Shanghai, where GM
and other auto producers are concentrated, earn about \$1.50 per hour in
wages and benefits. That is about half of what Mexican auto workers are
paid and as little as five percent of the compensation of an American
auto worker.

That is one of the reasons why assemblers from around the world invested
\$6.3 billion in Chinese facilities in the past two years and have
promised to spend another \$10 billion in the next three years. And it
is why GM expects to purchase \$4 billion a year in parts from China for
its operations around the world.

The announcements by General Motors and Ford that they expect to source
\$10 billion annually in parts from China within three to six years
sends a compelling message to their suppliers that they had better make
investments in China in order to retain the business of their
traditional customers. The losers in that race to China are the American
workers who are making high-quality products in highly efficient
production systems, using high-technology equipment. This pressure
undermines their jobs and their skills. It also eliminates the
livelihoods of the workers who make materials and components for those
products that are now made in China and it impoverishes the communities
where those workers live.

The Chinese government has reinforced this process. A Vice Minister has
announced that China expects to export between \$70 billion and \$100
billion in automotive products, 40 percent of total production, by 2010.
Last year, China's exports were \$4.7 billion and the government's
target for 2005 is \$15-20 billion. The growth rate of exports that is
being pursued is simply staggering. Every objective observer has
acknowledged that hundreds of thousands of American jobs will be lost if
these projections are on the mark.

According to a recent report by the International Metalworkers'
Federation, automotive production in China will double by 2007, but
demand for vehicles will increase far more slowly. The result will be
excess capacity in China that adds to the excess capacity that exists
already around the globe. But what market will be open to receiving the
extra vehicles and parts that can be produced in China? Will Korea,
which has resisted imports from all over the world for more than 20
years, open up to imports from China? Will Japan accept the displacement
of local production, or Thailand, or India? Even Europe is unlikely to
accept large numbers of vehicles from China. But the U.S., with its
history of running huge automotive trade deficits with all major auto
producing countries, seems like the obvious dumping ground for Chinese
excess capacity.

Even today, excess capacity in China is visible. With vehicle sales
slowing down this year (as pent-up demand is exhausted, banks cut back
on loans), JPMorgan reported that excess supply for this year will be 11
percent and it will grow to 23 percent next year. And that is before
much of the new capacity begins to operate. The finances of the
companies could change dramatically as a result. The high prices of
vehicles that were fed by the scarcity of modern vehicles are
disappearing as more and more new models hit showrooms and lower tariffs
make imports more competitive. High profits will be squeezed and the
pressure to keep plants running at capacity will be even stronger. The
companies also have memories of Brazil firmly in mind. In the late
1990s, multinational auto companies saw rapid sales growth in Brazil and
responded with massive investments in new capacity. The spillover of the
Asian financial crisis put a hole in Brazilian sales and Argentina's
economic crisis eliminated a major export market. About half of
Brazilian capacity has been idle, and the auto companies cannot afford
for that to happen again in China. They will be under intense pressure
to keep their Chinese plants profitable. And that will mean large
Chinese exports of vehicles and parts to the markets that are open to
them.

Before starting to examine how the U.S. government should respond to the
current and future automotive trade problems with China, it is important
to identify two important factors that intensify the U.S.-China
automotive trade imbalance -- the exchange rate and the absence of
independent Chinese trade unions. It is accepted by virtually all
analysts that China manipulates the yuan-dollar exchange rate to keep it
fixed at 8.2781 yuan to a dollar. China's central bank has bought
billions of dollars of government bonds to maintain the fixed exchange
rate as China's trade surplus with the U.S. has exploded. The
undervalued yuan subsidizes China's exports and overprices U.S. exports.
While the Chinese government has paid lip service to the need to
upwardly revalue the yuan, it has taken no action to achieve it. The
purchases of U.S. assets continue and the trade imbalance continues to
expand. This situation sustains China's exports to the U.S. and Chinese
economic growth, while it undermines the strength of the U.S. economy
and extends the adverse impact of the trade imbalance with China into
ever more U.S. industries.

The absence of any action by China to reverse the absolute repression of
independent trade unions demonstrates the continuing repressive nature
of China's social and economic system. The most fundamental of worker
rights, freedom of association, is brutally repressed in China, as are
the other worker rights covered by the International Labor
Organization's Fundamental Principles and Rights at Work. A petition
filed under Section 301 of U.S. trade law by the AFL-CIO on behalf of
the UAW and other U.S. unions provided a stunning picture of the depths
of that repression and its devastating impact on Chinese workers. The
large profits reported by many of the automotive joint venture companies
in China are the result, in part, of the inability of Chinese workers to
form independent labor organizations that can represent the interests of
workers in receiving a fair share of the value of their contribution to
the production process. The widespread evidence of health and safety
problems is another indicator of the harm done to Chinese workers as a
result of the repression of independent unions.

Along with other unions, we have focused attention on the cases of Yao
Fuxin and Xiao Yunliang as examples of the intensity of the attacks on
workers' rights in China. They were arrested, charged with subversion
and convicted for leading peaceful protests against the failure of a
shuttered Ferro-Alloy factory to pay pensions and other benefits legally
due to former workers. Yao was sentenced to seven years in prison and
Xiao to four years for exercising basic rights that are legal in China.
Both men suffer from serious illnesses and should be released from
prison on medical grounds, but they remain imprisoned despite an appeal
by the Freedom of Association Committee of the International Labor
Organization for their release. The Chinese government's behavior in
these cases, and in countless others, is shameful and inexcusable. We
will carry on our efforts on behalf of Yao and Xiao and all other
workers and their advocates who have the courage to stand up for the
rights of Chinese workers.

Are there effective solutions to the threat of sharply higher Chinese
auto and auto parts exports to the U.S. in the future? We believe there
are at least five ways to address this problem, but they require making
up for lost time. The U.S. government should have included these
measures in the WTO accession negotiations with China.

First, the Administration must also take decisive action to bring about
the upward revaluation of China's currency. The current exchange rate
does not reflect the competitiveness of China's industries in general,
and the automotive industry in particular. For international trade to be
fair and balanced, the exchange rate must adjust; China's policy of
fixing the value of the yuan to the dollar eliminates the pressure for
that adjustment to take place. The reluctance of the U.S. Treasury
Department to tackle this issue, in deference to China's large purchases
and holdings of U.S. government securities, is simply unacceptable.
China is preventing an upward revaluation of the yuan in order to ensure
that it can continue to increase its exports to the U.S. and keep its
factories humming. The resulting displacement and injury in the U.S.
requires action by our government to remedy the situation and eliminate
the unfair currency advantage that China creates. The currency
manipulation that is taking place is actionable under U.S. trade laws
and action must be taken.

Second, to address the routine abuses of workers' rights in China,
renegotiation of the WTO accession agreement or a new set of
negotiations is required. The Section 301 worker rights petition
demonstrated that the effect on the prices of Chinese-made goods of the
violation of workers' rights is substantial. As a start, that petition
must be accepted for review next year when a new Administration takes
office. However, it is also necessary to move beyond that case. We
cannot achieve a level playing field for U.S.-China trade without
ensuring that China will implement internationally recognized worker
rights or allowing the U.S. to retaliate against abuses through a
non-discretionary procedure, similar to the handling of anti-dumping
charges. Just as a special safeguard procedure was recognized as
appropriate for trade with China, a special worker rights provision is
needed as well.

The UAW and other unions must also take advantage of corporations'
commitments to comply with fundamental worker rights through the
negotiation of International Framework Agreements (IFAs). These
agreements apply to a company's own operations and to those of its
business partners and suppliers. And they apply in countries where those
rights are not legally protected as well as in those where they are.
IFAs have already been negotiated with several automotive firms
(DaimlerChrysler, Volkswagen, Bosch), opening the possibility of
insisting on their Chinese workers, and the workers of their joint
venture partners and suppliers, being able to exercise the right to
freedom of association, to form a union of their own choosing. We will
be looking for opportunities to take advantage of IFAs to improve the
lives of Chinese workers, through higher compensation, improved health
and safety conditions and a voice for workers in the organization of
their work.

Third, vigorous enforcement of China's trade agreements must be
implemented. The Bush Administration has failed to pursue clear
violations of intellectual property rights protections, including the
counterfeiting of auto parts and the illegal appropriation of vehicle
designs by Chinese companies. China's market opening commitments must
also be fully enforced so that the inadequate level of U.S. exports is
not limited even further by discrimination against imports at the border
or in distribution channels. While the Bush Administration has created
"offices" for monitoring and enforcement of China's trade commitments,
there has been precious little action to achieve results.

We strongly urge the Bush Administration to advise all companies doing
business in China that they should report any inappropriate or illegal
behavior by Chinese public officials or corporate officials. This should
apply to communications that contradict China's trade obligations or
that promise special treatment in return for certain behavior, such as
investing in China rather than supplying the market with imports,
meeting "suggested" local content levels rather than importing parts.
The Bush Administration must follow up on any of these activities by
insisting on Chinese government action to reverse them.

Fourth, the Administration must be willing to invoke the special
safeguard provisions in China's WTO accession agreement and strengthen
the U.S. measures that protect domestic industries against injury caused
by surges of imports. The potential for rapid increases of imports from
China, of vehicles and parts, should be clear from the rate of expansion
of production capacity there. The U.S. government must be ready to
respond if the U.S. industry and its workers are threatened with injury
by such imports. Recent experience with the U.S. import surge
protections of Section 201 of the trade laws has shown that they must be
strengthened to be effective.

Fifth, the U.S. government must penetrate the lack of transparency in
China's industrial policies to identify all government programs, at the
national, provincial and local levels, that promote local production,
discourage imports and reward exports. There are provisions in the new
automotive industrial policy that are intended to accomplish this
result, but they have not been spelled out clearly. The U.S. government
must press the Chinese government to obtain that information. A variety
of other government policies, such as taxes applied to foreign-owned
enterprises that discriminate in favor of those producing for export,
must also be examined. Because of the complex set of inter-governmental
relationships in China, it is critical to have information about the
policies in place at each level of government and about their
interactions in practice. We have not seen any evidence that the Bush
Administration has spent the necessary effort to investigate these
policies.

Mr. Chairman, members of the Commission, thank you for coming to Ohio to
get a first hand look at the serious economic problems facing workers in
America's heartland and for your interest in the impact of the
U.S.-China trade relationship on the U.S. auto industry and its workers
as well as the denial of workers' democratic rights in China. Your past
efforts to bring the challenges created by U.S.-China trade to the
attention of the public and to policy-makers have made a valuable
contribution to their understanding of what is at stake in our economic
and security relationship with China. We urge you to support our
proposals for government action. In the weeks and months ahead, we look
forward to assisting the Commission's examination of the industry and
answering any questions you may have.

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