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63–077 2011

CHINA’S EXCHANGE RATE POLICY 

HEARING 

BEFORE THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

MARCH 24, 2010

Serial No. 111–45 

Printed for the use of the Committee on Ways and Means 

( 


anorris on DSK5R6SHH1PROD with HEARING
ii 

COMMITTEE ON WAYS AND MEANS 

SANDER M. LEVIN, Michigan, Acting Chairman 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL, JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK B. MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

DANNY K. DAVIS, Illinois 

BOB ETHERIDGE, North Carolina 

LINDA T. SA ́ NCHEZ, California 

BRIAN HIGGINS, New York 

JOHN A. YARMUTH, Kentucky 

DAVE CAMP, Michigan 

WALLY HERGER, California 

SAM JOHNSON, Texas 

KEVIN BRADY, Texas 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PATRICK J. TIBERI, Ohio 

GINNY BROWN–WAITE, Florida 

GEOFF DAVIS, Kentucky 

DAVID G. REICHERT, Washington 

CHARLES W. BOUSTANY, JR., Louisiana 

DEAN HELLER, Nevada 

PETER J. ROSKAM, Illinois 

JANICE MAYS, Chief Counsel and Staff Director 

JON TRAUB, Minority Staff Director 

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records 

of the Committee on Ways and Means are also published in electronic form. The printed 

hearing record remains the official version. Because electronic submissions are used to 

prepare both printed and electronic versions of the hearing record, the process of converting 

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process 

is further refined. 


anorris on DSK5R6SHH1PROD with HEARING
iii 

C O N T E N T S 

Page 

Advisory of March 24, 2010 announcing the hearing ........................................... 2 

WITNESSES 

Niall Ferguson, Ph.D., Professor, Harvard University, Cambridge, Massachusetts ....................................................................................................................... 9 

C. Fred Bergsten, Ph.D., Director, Peterson Institute for International Economics ................................................................................................................... 22 

Clyde V. Prestowitz, Jr., President, The Economic Strategy Institute ............... 30 

Philip I. Levy, Ph.D., Resident Scholar, The American Enterprise Institute ..... 39 

SUBMISSIONS FOR THE RECORD 

Law Offices of Stewart and Stewart ...................................................................... 107 

The Committee to Support U.S. Trade Laws ........................................................ 117 

The Fair Currency Coalition ................................................................................... 123 

Honorable Peter J. Visclosky, Representative of the State of Indiana ............... 129 

Jack Davis, President, I Squared R Element Co., Inc. ......................................... 130 

Honorable Christopher J. Lee, Representative of the State of New York .......... 132 

Carnegie Endowment for International Peace ...................................................... 133 

Coalition for a Prosperous America ....................................................................... 138 

Bill Bullard, CEO, Ranchers-Cattlemen Action Legal Fund, United 

Stockgrowers of America (R–CALF USA) .......................................................... 143 

Daniel Ikenson, Associate Director, Center for Trade Policy Studies, CATO 

Institute ................................................................................................................ 148 

The Specialty Steel Industry of North America .................................................... 154 

The Copper and Brass Fabricators Council, Inc. .................................................. 159 

Erik Autor, Vice President, International Trade Counsel, National Retail 

Federation ............................................................................................................. 163 

Honorable Michael H. Michaud, Representative of the State of Maine .............. 172 

Robert Z. Aliber, Professor, University of Chicago ............................................... 174 

American Iron and Steel Institute ......................................................................... 184 


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anorris on DSK5R6SHH1PROD with HEARING
(1) 

CHINA’S EXCHANGE RATE POLICY 

WEDNESDAY, MARCH 24, 2010 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:02 a.m. in 1100 

Longworth House Office Building, the Honorable Sander M. Levin 

[chairman of the committee] presiding. 

[The advisory of the hearing follows:] 


anorris on DSK5R6SHH1PROD with HEARING
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HEARING ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

Chairman Levin Announces Hearing on 

China’s Exchange Rate Policy 

March 15, 2010 

Ways and Means Committee Chairman Sander M. Levin today announced a full 

committee hearing on the exchange rate policy of the Government of the People’s 

Republic of China, and its impact on the U.S. and global economies. The hearing 

will take place on Wednesday, March 24, 2010, in the main Ways and Means 

Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be heard from invited witnesses only. However, any individual or organization not scheduled for an oral appearance may submit a written statement for 

consideration by the three Subcommittees and for inclusion in the printed record of 

the hearing. 

FOCUS OF THE HEARING: 

Economists generally agree that the Chinese currency (the renminbi—‘‘RMB’’—or 

‘‘yuan’’) is substantially undervalued as a result of market intervention by the Government of the People’s Republic of China. This policy artificially raises the price 

of imports into China and suppresses the price of exports from China. The purpose 

of this hearing is to consider: (1) the immediate and long-term impact of China’s 

exchange rate policy on the U.S. and global economic recoveries and, more specifically, on U.S. job creation; and (2) steps that could be taken to address the issue. 

BACKGROUND: 

Since the global economic crisis began, some prominent economists have examined 

whether China’s exchange rate policy contributed to that crisis and is continuing to 

impede progress on economic recovery and job creation in the United States and 

around the world. 

According to some recent estimates, the RMB may be undervalued by between 30 

and 50 percent against the dollar. While there is a growing recognition that China’s 

exchange rate policy is a serious concern and impediment to recovery, the issue 

itself is not new. The United States has been pressing China for years to allow the 

RMB to appreciate. President Bush raised the issue with President Hu more than 

six years ago. At that time, the Treasury Department expressed concern when China’s foreign exchange reserves (accumulated as a result of its currency market interventions) rose to $346 billion. Today those reserves exceed $2.4 trillion. 

China allowed the RMB to appreciate somewhat beginning in July 2005, but 

China has not allowed any appreciation since the summer of 2008, when the global 

economic crisis caused China to redouble its efforts to stimulate exports. Robert 

Aliber, Professor Emeritus of International Economics and Finance at the University of Chicago, recently wrote in the Financial Times that: ‘‘Americans have been 

patient—too patient—in accepting the loss of several million U.S. manufacturing 

jobs because of China’s determined pursuit of mindless mercantilist policies. The absurdity of the current situation is that China’s currency protectionism has more of 

an impact on American manufacturing employment than U.S. fiscal policy.’’ 


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3 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://democrats.waysandmeans.house.gov, select ‘‘Hearings’’. Select the hearing for 

which you would like to submit, and click on the link entitled, ‘‘Click here to provide 

a submission for the record.’’ Once you have followed the online instructions, submit 

all requested information. ATTACH your submission as a Word or WordPerfect document, in compliance with the formatting requirements listed below, by close of 

business Wednesday, April 7, 2010. Finally, please note that due to the change 

in House mail policy, the U.S. Capitol Police will refuse sealed-package deliveries 

to all House Office Buildings. For questions, or if you encounter technical problems, 

please call (202) 225–1721 or (202) 225–3625. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing 

record. As always, submissions will be included in the record according to the discretion of the Committee. The Committee will not alter the content of your submission, 

but we reserve the right to format it according to our guidelines. Any submission 

provided to the Committee by a witness, any supplementary materials submitted for 

the printed record, and any written comments in response to a request for written 

comments must conform to the guidelines listed below. Any submission or supplementary item not in compliance with these guidelines will not be printed, but will 

be maintained in the Committee files for review and use by the Committee. 

1. All submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies on electronic submissions for printing the official 

hearing record. 

2. Copies of whole documents submitted as exhibit material will not be accepted for printing. 

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material 

not meeting these specifications will be maintained in the Committee files for review and use 

by the Committee. 

3. All submissions must include a list of all clients, persons and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

The Committee seeks to make its facilities accessible to persons with disabilities. 

If you are in need of special accommodations, please call 202–225–1721 or 202–226– 

3411 TTD/TTY in advance of the event (four business days notice is requested). 

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above. 

Note: All Committee advisories and news releases are available on the World 

Wide Web at http://democrats.waysandmeans.house.gov. 

f 

Chairman LEVIN. The Committee will come to order. I understand that two of our witnesses need to leave at 12:15. We will 

start on time. Mr. Camp and I will give opening statements. 

Anyone else who has a statement, we will issue it into the 

record, and then we will start the testimony asking each of you to 

take the customary five minutes. 

Chairman LEVIN. You will see the clock there. It will be helpful 

if you can condense your statements, which will be entered into the 

record, so that we can have full participation before several of you 

have to leave. 

As stated, I will give an opening statement and then Mr. Camp. 

I think you are ready. 


anorris on DSK5R6SHH1PROD with HEARING
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I guess we will start in the order that you are seated, with Dr. 

Ferguson, Dr. Bergsten, Mr. Prestowitz and Dr. Levy. 

It is with a sense of urgency that this committee is holding this 

hearing in the hopes that with the help of our witnesses we can 

shed light on the problems associated with China’s foreign exchange rate policy and consider possible solutions. 

What seems undisputed, on this much disputed issue, is that 

China has a persistent economic strategy, a policy, a key to which 

is the pegging of its currency to the dollar at an undervalued rate. 

Since the mid-1990s, China has clearly pursued an export led 

growth strategy, focusing on addressing its needs, namely creating 

jobs and accumulating vast foreign reserves. 

Central to this export led growth strategy is China’s policy of 

keeping its currency substantially undervalued. That policy keeps 

China’s exports cheap in the U.S. market and makes imports into 

China substantially more expensive. 

China has combined its cheap currency policy with other policies, 

including most notably Government directed investments in its 

manufacturing sector, which in turn creates pressures to keep its 

currency artificially low in order to get rid of excess production by 

exporting. 

Chinese leaders have argued that these policies are necessary for 

its development, for its massive need to create jobs, although in recent years more and more economists are questioning that proposition. 

While China has had a clear economic policy, a clear strategy, 

the U.S. on the other hand has not. Why not? One reason is that 

like so many other trade issues, it gets caught up in the polarization that grips trade issues, ‘‘free trade’’ versus ‘‘protectionism,’’ a 

grip that I have believed harmful and reject. 

An illustration of the futility of the polarization is China’s argument that any action by the U.S. against China’s policies or control 

of its currency would be ‘‘protectionism’’ or would lead to, as stated 

recently, ‘‘a trade war.’’ 

The easy polarization has helped handicap agreement on whether there is a problem. Increasingly, economists and other observers 

reject this. 

As Martin Wolf, the chief economics commentator for the Financial Times has stated, and I quote, ‘‘The policy of keeping the exchange rate down is equivalent to an export subsidy and tariff at 

a uniform rate.’’ 

Last week, the New York Times Editorial Board, another somewhat conservative but cautious commentator on these economic 

issues, wrote and I quote ‘‘China’s decision to base its economic 

growth on exporting deliberately undervalued goods is threatening 

economies around the world. It is fueling huge trade deficits in the 

U.S. and Europe. Even worse, it is crowding out exports from other 

developing countries, threatening their hopes of recovery.’’ 

These comments are echoed in our trade deficit with China, 

which for the past three years has been over $220 billion annually, 

and is a central driver in our overall trade deficit. 

Some deny that it has serious consequences for American working families, but the alarm grows that it does indeed. 


anorris on DSK5R6SHH1PROD with HEARING
5 

One economist, Paul Krugman, estimates that China’s exchange 

rate reduces U.S. employment by 1.4 to 1.5 million jobs at a time 

when the U.S. faces a crisis of unemployment. 

China’s currency policy and export led growth policy are bad for 

the rest of the world, and I quote a recent statement by the Financial Times, and we can read it as I distribute this statement. 

‘‘While some disagree with the impact of China’s policies and others view the issues through a lens that says ‘hands off,’ is the answer to market disequilibrium and that it is best to let things resolve themselves, I think the status quo is not sustainable. 

The U.S./China relationship is a vital one for both countries. We 

are increasingly interdependent and there are vital policy considerations in addition to economic ones, but the China currency issue 

itself will not go away.’’ 

There is no easy answer to the problem, as is true with other important problems, but the answer is not to deny there is a problem. 

It has been difficult, and we know this, to make progress bilaterally. At times talks seem to produce some progress, but that 

progress then disappears. 

Some then suggested unilateral action, addressing China’s currency manipulation under U.S. countervailing duty and anti-dumping trade remedy laws. Others have proposed the imposition of an 

additional duty on all imports from China. 

In two weeks, the Obama Administration faces again, as past Administrations have, an April 15 deadline to decide whether to label 

China a ‘‘currency manipulator’’ in the Department of Treasury’s 

semi-annual report. 

The report requirements may well increase discussions about the 

use of multilateral forums to address the currency issue. The IMF 

is the most logical place for these discussions. However, to date, 

the institution has been unable to act effectively. Thus, some have 

suggested using multilateral negotiations through the G–20 to address the problem. 

Some have urged the U.S. to bring a case in the WTO, but the 

WTO Articles relating to currency have never been tested. 

Here we are. We are fortunate today to have with us four experts 

on China’s exchange rate policy, and they will discuss the extent 

of the problem and alternative responses to address the problem. 

I will just mention who you are and then Mr. Camp, you will 

take over, and then starting with Dr. Ferguson, they will testify. 

Niall Ferguson is a Professor of History at Harvard University 

and Business Administration at the Harvard Business School. 

Fred Bergsten is a veteran of this room, Director of the Peterson 

Institute for International Economics. 

Another frequent visitor, Clyde Prestowitz, President of the Economic Strategy Institute, and Philip Levy, who is a Resident Fellow at the American Enterprise Institute. 

We welcome all four of you experts and you will start as soon as 

my friend, Mr. Camp, gives his opening statement. 

David. 

[The prepared statement of Mr. Levin follows:] 


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6 

Opening Statement of Chairman Sander Levin 

It is with a sense of urgency that the Committee is holding this hearing in the 

hope that with the help of our witnesses, we can shed light on the problems associated with China’s foreign exchange rate policy and consider possible solutions. 

What seems undisputed on this much disputed issue is that China has a persistent economic strategy, a policy, key to which is the pegging of its currency to 

the dollar at an undervalued rate. 

Since the mid-1990s, China has clearly pursued an export-led growth strategy focused on addressing its needs—namely, creating jobs and accumulating vast foreign 

reserves. Central to this export-led growth strategy is China’s policy of keeping its currency 

substantially undervalued. That policy keeps China’s exports cheap in the U.S. market, and makes imports into China substantially more expensive. 

China has combined its cheap currency policy with other policies including, most 

notably, government directed investments in its manufacturing sector, which in turn 

creates pressure to keep its currency artificially low in order to get rid of excess production by exporting. 

Chinese leaders have argued that these policies are necessary for China’s development for its massive needs to create jobs—although in recent years, more and more 

economists are questioning that proposition. 

While China has had a clear economic policy, a clear strategy, the U.S. on the 

other hand has not. 

Why not? 

One reason is that like so many other trade issues, it gets caught up in the polarization that grips trade issues—‘‘free trade’’ vs. ‘‘protectionism’’—a grip that I have 

believed harmful and reject. An illustration of the futility of the polarization is China’s argument that any action by the U.S. against China’s policies of control would 

be ‘‘protectionism’’ or would lead to a ‘‘trade war.’’ 

The easy polarization has helped handicap agreement on whether there is a problem. 

Increasingly, economist of various bents and other observers reject this. 

As Martin Wolf, the chief economics commentator for the Financial Times, has 

stated, ‘‘[T]he policy of keeping the exchange rate down is equivalent to an export 

subsidy and tariff, at a uniform rate.’’ 

Last week, the New York Times Editorial Board, another somewhat conservative 

and cautious commentator on these economic issues, wrote that ‘‘China’s decision to 

base its economic growth on exporting deliberately undervalued goods is threatening 

economies around the world. It is fueling huge trade deficits in the United States 

and Europe. Even worse, it is crowding out exports from other developing countries, 

threatening their hopes of recovery.’’ 

And these comments are echoed in our trade deficit with China, which for the 

past three years has been over $220 billion annually, and is a central driver in our 

overall trade deficit. 

Some deny that it has serious consequences for America’s working families. But 

the alarm grows that it does—Paul Krugman estimates that China’s exchange rate 

reduces U.S. employment by 1.4 or 1.5 million jobs—at a time the U.S. faces a crisis 

of unemployment. 

China’s currency policy and export-led growth policy are bad for the rest of the 

world as well, as a November 2009 Financial Times editorial concluded. 

While some disagree with the impact of China’s policies, and others view the issue 

through a lens that says ‘‘hands off’’ is the answer to market disequilibrium, that 

it is best to let things resolve themselves, I think the status quo is not sustainable. 

The U.S.-China relationship is a vital one for both countries. We are increasingly 

interdependent and there are vital foreign policy considerations in addition to economic ones, but the China currency issue itself will not go away. 

There is no easy answer to the problem, as is true with other important problems, 

but the answer is not to deny there is a problem. 

It has been difficult to make progress bi-laterally. At times talk has seemed to 

produce some progress, but that progress then disappears. 

Some then suggested unilateral action addressing China’s currency manipulation 

under U.S. countervailing duty and antidumping trade remedy laws. Others have 

proposed the imposition of an additional duty on all imports from China. 

In two weeks, the Obama Administration faces again, as past Administrations 

have an April 15th deadline, to decide whether to label China a currency manipulator in the Department of the Treasury’s semi-annual report. 

The Report requirements may well increase discussions about the use of multilateral fora to address the currency issue. The IMF is the most logical place for these 


anorris on DSK5R6SHH1PROD with HEARING
7 

discussions; however, to date, the institution has been unable to act effectively. 

Thus, some have suggested using multilateral negotiations through the G–20 to address the currency problem. 

Some have urged the United States bring a case in the WTO, but the WTO articles relating to currency have never been tested. 

We are very fortunate to have with us today four experts on China’s exchange 

rate policy and they will discuss the extent of the problem and alternative responses 

to address the problem. 

I now yield to ranking member Congressman Dave Camp for his opening statement. 

Mr. CAMP. Thank you very much, Mr. Chairman. I also want to thank our witnesses for being here today. 

In the 1970s, China injected itself with economic reforms. Now in 2010, China appears inflicted by a menacing strain of that reform that is either constraining a 

global economic recovery or worse, capable of creating a new economic pandemic. 

While China’s emergence as an economic powerhouse has rightly grabbed our attention, however, the trends are not new, and there are some predictable similarities between China’s economy now and Japan’s in the 1980s. 

It is critical that China address the serious flaws in its economic structure, but 

we should remember that we have seen this before, maybe perhaps not on this 

scale. 

This hearing is about China’s currency policy and global imbalances. Like the 

IMF has, I can stipulate that China’s currency is undervalued, plain and simple. 

I can also agree with G–20 leaders that the world has deep imbalances that must 

be corrected. 

Let’s not lose sight of the fact that there are fundamental problems with China’s 

economy and let’s not pretend that China’s intervention in the currency markets by 

itself is the root cause of our ten percent unemployment or of China’s ten percent 

annual GDP growth. 

We will hear today from some pretty bright economists on the problems of China’s 

economy, and I look forward to hearing what they have to say. 

My view going in is that China’s deliberate and dangerous wealth transfer from 

everyday households to inefficient export platform factories is standing in the way 

of the domestic consumption that the Chinese and the rest of the world believe the 

Chinese and the rest of the world so desperately need. 

China must introduce global best practices into its banking sector, mature its financial markets, better protect intellectual property rights, and open more comprehensively to foreign direct investment. 

China also should open its markets much more fully to all goods and services, 

particularly those coming from the United States. 

An increase in the value of the RMB will facilitate some of these measures. For 

others, the much sought currency appreciation will be a happy but perhaps unintended offshoot of the broader reform. 

All of these measures will help China move toward liberalizing its capital account, 

which should be the ultimate goal for all of us, because none of us can know the 

true extent of RMB under valuation until the currency floats. 

In my view, however, when it comes to China, focusing on the currency valuation 

issue to the exclusion of the others is more likely to lead to a collective frustration 

and to any improvement in the health of the critical U.S./Chinese economic relationship. 

With that said, while we should not obsess over the value of the RMB, it would 

be an enormous mistake to give up on addressing it. 

To that end, I believe the Obama Administration should continue to address China’s currency policy in high level bilateral summits, like the strategic and economic 

dialogue. 

I think the Administration should restart languishing bilateral investment treaty 

negotiations with China and prompt it to make progress on the currency and broader issues as part of the BIT process. 

I also believe the Administration should devote time and resources toward attempting to establish a robust multilateral process either in the G–20, IMF or elsewhere, so that other countries, particularly some of China’s neighbors in Asia, can 

bring new points of pressure to bear. 

I would hope that China would commit to this multilateral process and participate 

in good faith. If China wants to be treated as a major international player, it has 

to own up to the responsibilities of that status. 

By a similar token, if the United States wants to maintain its status as the international leader, then we better make sure that whatever we do to address China’s 


anorris on DSK5R6SHH1PROD with HEARING
8 

currency regime, we do it without losing sight of our international commitments and 

the over arching value of the multilateral trading system. 

I am weary of panicky approaches whose support are inconsistent with our obligations, but then try to justify those inconsistencies by casually asserting that the normally applicable rules just should not apply. 

So far, I have focused on China, and let me close by saying I fully admit the 

United States needs to get its own financial house in order. China would not be accumulating hordes of currency reserves in U.S. Treasuries if the United States 

stopped racking up debt at the current unsustainable pace. 

Thank you, Mr. Chairman, and I yield back. 

f 

[The prepared statement of Mr. Camp follows:] 

Opening Statement of the Honorable Dave Camp, 

A Representative of the State of Michigan 

In the 1970s, China injected itself with economic reform. Now, in 2010, China appears afflicted by a menacing strain of that reform that is either constraining a 

global economic recovery or, worse, capable of creating a new economic pandemic. 

While China’s emergence as an economic powerhouse has rightly grabbed our attention, however, the trends are not new, and there are some predictable similarities 

between China’s economy now and Japan’s in the 1980s. It is critical that China 

address the serious flaws in its economic structure, but we should remember we’ve 

seen this before, although perhaps not on this scale. 

This hearing is about China’s currency policy and global imbalances. Like the 

IMF has, I can stipulate that China’s currency is undervalued, plain and simple. 

I can also agree with G20 leaders that the world has steep imbalances that must 

be corrected. But let’s not lose sight of the fact that there are fundamental problems 

with China’s economy, and let’s not pretend that China’s intervention in the currency markets, by itself, is the root cause of our ten percent unemployment or of 

China’s ten percent annual GDP growth. 

We’ll hear today from some pretty bright economists on the problems with China’s 

economy. I’m looking forward to hearing what they have to say. My going-in view 

is that China’s deliberate and dangerous wealth transfer from everyday households 

to inefficient export-platform factories is standing in the way of the domestic consumption that the Chinese (and the rest of the world) believe the Chinese (and the 

rest of the world) so desperately need. China must introduce global best practices 

into its banking sector, mature its financial markets, better protect intellectual 

property rights, and open more comprehensively to foreign direct investment. China 

also should open its markets much more fully to all goods and services, particularly 

those coming from the United States. 

An increase in the value of the RMB will facilitate some of these measures. For 

others, the much-sought currency appreciation will be a happy—though perhaps unintended—offshoot of the broader reform. All of these measures will help China 

move toward liberalizing its capital account, which should be the ultimate goal for 

all of us, because none of us can know the true extent of RMB undervaluation until 

the currency floats. 

In my view, however, when it comes to China, focusing on the currency valuation 

issue to the exclusion of the others is more likely to lead to collective frustration 

than to any improvement in the health of the critical U.S.-Chinese economic relationship. But, that said, while we shouldn’t obsess over the value of the RMB, it 

would be an enormous mistake to give up on addressing it. 

To that end, I believe the Obama Administration should continue to address China’s currency policy in high-level bilateral summits, like the Strategic and Economic 

Dialogue. I think the Administration should restart languishing Bilateral Investment Treaty negotiations with China and prompt it to make progress on the currency and broader issues as part of the BIT process. I also believe the Administration should devote time and resources toward attempting to establish a robust, multilateral process—either in the G20, IMF, or elsewhere—so that other countries, 

particularly some of China’s neighbors in Asia, can bring new points of pressure to 

bear. I would hope that China would commit to this multilateral process and participate in good faith. If China wants to be treated as a major international player, it 

has to own up to the responsibilities of that status. 

By a similar token, if the United States wants to maintain its status as the international leader, then we better make sure that whatever we do to address China’s 

currency regime, we do it without losing sight of our international commitments and 


anorris on DSK5R6SHH1PROD with HEARING
9 

the overarching value of the multilateral trading system. I am wary of panicked approaches whose supporters concede are inconsistent with our obligations, but then 

try to justify those inconsistencies by casually asserting that the normally applicable 

rules just shouldn’t apply. 

So far, I’ve focused on China. Let me close by saying I fully admit the United 

States needs to get its fiscal house in order. China wouldn’t be accumulating hordes 

of currency reserves and U.S. Treasuries if the United States stopped racking up 

debt at the current unsustainable pace. 

Thank you, Mr. Chairman, I yield back. 

f 

Chairman LEVIN. Thank you very much. 

Dr. Ferguson, take over. 

STATEMENT OF NIALL FERGUSON, PH.D., PROFESSOR, 

HARVARD UNIVERSITY 

Mr. FERGUSON. Mr. Chairman, Members of the Committee, it 

is a great honor and privilege to be invited to address you. Let me 

begin with a direct question and direct answer. Is China a currency 

manipulator? Yes. Is its currency fundamentally misaligned? Yes. 

In the absence of currency intervention by the Chinese monetary 

authorities, the exchange rate of the renminbi would be significantly different, I believe. 

Are we living through the end of what I have called with my colleague, Moritz Schularick, ‘‘Chimerica’s demise,’’ by which I mean 

that fusion between China’s and America’s economy which has 

been the driving force of global economic growth for the past decade? 

How important has the Chinese currency policy been to China’s 

growth? 

Mr. Chairman and Members of the Committee, China’s gross domestic product has increased by a factor of roughly four over the 

past ten years, its exports by a factor of roughly five, its current 

account surplus with the rest of the world by a factor of roughly 

17, its share of American non-commodity imports has gone up from 

10 percent to 24 percent, and as you are all aware, its share of the 

U.S. current account deficit has also grown. 

In the period of the past ten years when China’s exports led 

strategy was really crucial to its growth, there was minimal appreciation of the Chinese currency relative to the dollar, say about 15 

percent between 2005 and 2008. 

For the rest of the decade, China pegged its currency firmly to 

the dollar. Why did it do this? One, because it made its exports 

more competitive in global markets. Two, because it allowed it to 

accumulate reserves as a kind of insurance against financial crises. 

The Chinese did not want to experience what much of the rest of 

Asia experienced in 1997/1998. 

Because the Chinese authorities have considerable control over 

their own banking system, this policy did not give rise to domestic 

inflation in the way that standard macroeconomic textbooks predicted it would. 

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mulation is sterilized by the monetary authorities and does not 

translate into domestic inflation. 

It is worth bearing in mind that there is a close link between 

China’s currency policy and the massive financial crisis that we are 

still living through and have been since August 2007. 

Not only did China’s policy squeeze other manufacturing exporters but, crucially, it also had the effect of depressing long term interest rates in the United States by between 100 and 200 basis 

points. Without that stimulus, it is hard to believe the housing 

bubble in the U.S. would have been as large as it was in recent 

years. 

How does China compare with other countries that have pursued 

this kind of strategy in the past? That is one of the central points 

I make in my written testimony. 

The answer is that, compared with West Germany and Japan 

after World War II, this is a very different story. They had export 

led strategies but they did not accumulate reserves on this massive 

scale, nor did they resist pressure to appreciate their currencies. 

Between 1960 and 1978, the deutsche mark increased by 60 percent, the yen appreciated by around 50 percent. 

China’s under valuation is very significant today, however you 

measure it, and we all approach this in different ways. 

In our research, Moritz Schularick and I looked at a real exchange rate adjusted for unit labor costs, and we found that on 

that measure, China has made a competitive gain on the order of 

40 percent relative to its trading partners, so that 15 percent appreciation of the renminbi which we saw in the middle of this decade has not really countered that massive benefit which China gets 

from its productivity gains and its very low unit labor costs. 

Can this continue is the crucial question. Many people believe 

that it can. The U.S. deficit is back with the first green shoots of 

recovery. China’s surplus never went away, although it is said it 

will disappear briefly this month. The U.S. is still borrowing, indeed borrowing on a much larger scale than ever before in peace 

time. The Chinese still need Americans to buy their goods. 

There are those people that think this strange disequilibrium can 

somehow be resumed in the aftermath of the crisis. I think this is 

wrong for two reasons. 

One, there is some limit to U.S. recovery as long as China and 

the other currencies that shadow China’s currency policy overvalue the dollar. 

Secondly, there is now a sign of dangerous overheating in China’s economy. It is in their interest also to do something about this 

before they have a bubble, the consequences of which would not be 

confined to China. 

We not only need revaluation of the renminbi, we also need a significant change in Chinese policy in order to encourage domestic 

consumption and we urgently need serious fiscal reform in the 

United States to do away with the notion that this country can run 

trillion dollar deficits for the rest of time, which is of course the 

current implication of policy. 

I come in conclusion to what should be done. Yes, I think the 

Treasury should brand China a ‘‘currency manipulator,’’ but no, I 


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do not think this is a good moment to threaten or impose retaliatory tariffs against China, and here is why I think that. 

I am an historian. This is not 2005 when Congress last threatened tariffs against China. We are in the middle of something that 

very nearly became a Great Depression, and we should remember 

how in the past, in 1930/1931, Congressional policy on protectionism deepened that depression, and some historians would say 

made that depression. 

There is a danger not only of a trade war or a tariff war, there 

is also a danger of a currency war, and we are already seeing other 

countries using unorthodox methods to drive their fiat currencies 

down below the dollar. 

Not everybody in Europe is shedding tears over the Greek tragedy as it weakens the euro and benefits European manufacturers. 

Brazil, too, is trying to soften its currency. 

Thirdly and crucially, I do not believe renminbi appreciation on 

its own will be of massive benefit to the United States. I am very 

skeptical about Paul Krugman’s claims that it would significantly 

reduce unemployment in this country. 

The main beneficiaries of ending the renminbi/dollar peg would 

not in fact be the United States, but would be China’s trade competitors in emerging markets, who are the real losers. They are the 

ones who have been losing market share when you look at the 

structure of U.S. imports. 

In conclusion, I think we also need to be very wary of the more 

aggressive and indeed pugnacious attitude of the Chinese today. 

Not only with respect to Google, but I believe across a broad range 

of issues from Taiwan to Tibet, the Chinese authorities are spoiling 

for a fight, and the United States Congress must be very, very 

careful about giving it to them. 

A best seller on economic policy in recent years in China has the 

title ‘‘Currency Wars’’ by Song Hongbing. I believe we are on the 

verge, maybe already in the middle of currency wars, and we 

should be careful that the market reaction to a trade war or currency war between the United States and China does not exceed 

in its negative effects the benefits which I believe would be minimal of renminbi revaluation. Chimerica is dying, but we must ensure that it is an amicable divorce and not a currency war. 

Thank you very much. 

[The prepared statement of Mr. Ferguson follows:] 


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f 

Chairman LEVIN. Thank you. That was a Congressional eight 

minutes. Dr. Bergsten, do your best for five minutes if you would. 


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There is so much interest here, we have almost a full Committee 

in attendance. 

Dr. Fred Bergsten. Welcome. 

STATEMENT OF C. FRED BERGSTEN, PH.D., DIRECTOR, 

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. BERGSTEN. Thank you, Mr. Chairman. It is a great pleasure to be back. 

I want to make six analytical points and suggest a three-part action program for the United States to deal with the problem. 

First, the Chinese renminbi is undervalued by about 25 percent 

on a trade-weighted basis and about 40 percent against the dollar. 

That is on the basis of at least a dozen studies done at my institute 

and elsewhere. It is well established, and, if anything, a conservative number. 

Second, the Chinese authorities buy about $1 billion of dollars 

every day in the exchange markets. They sell their local currency 

and buy dollars. That keeps the price of the local currency cheap 

and undervalued in the exchange markets to maintain an artificially strong competitive position. 

It is very important to keep in mind that several of the neighboring Asian countries, Hong Kong, Singapore, Taiwan, and Malaysia, peg themselves de facto to the RMB. So it is not just China 

that is competitively undervalued, a lot of Asia is as well, and 

when you add the others, it almost doubles the ante in terms of 

global trade effects and impact on the United States. 

Third, this competitive undervaluation of the Chinese currency 

and the currencies of its neighbors is a blatant form of protectionism. It subsidizes all Chinese exports by the amount of the 

undervaluation, 25 to 40 percent. It equates to a tariff of 25 to 40 

percent on all of those Asian imports, sharply discouraging purchases from other countries. 

It would thus be incorrect, and I echo you, Mr. Chairman, to 

characterize as protectionist a policy response to Chinese actions by 

the U.S. or other countries. Such actions, if skillfully chosen and 

properly carried out, should in fact be viewed as anti-protectionist. 

Fourth, China’s global current account surplus soared to almost 

$400 billion, exceeded 11 percent of its GDP two years ago, an unprecedented imbalance for the world’s largest exporting country 

and second largest economy. 

Its surplus, of course, dropped sharply during the recession, but 

the IMF has forecast that the number is going up again and by 

2014 will exceed $700 billion and actually be bigger than the U.S. 

global current account deficit. 

This problem is not about to go away. If anything, it looks like 

it is getting bigger. 

Fifth, China’s exchange rate policy violates all relevant international norms. Article IV, Section I (iii) of the IMF commits member countries to avoid manipulating exchange rates ‘‘in order to 

prevent effective balance of payment adjustments or to gain unfair 

competitive advantage over other members.’’ 

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tion in the exchange markets, exactly what China has been doing 

for seven years. 

Article XV of the in the World Trade Organization says: ‘‘Contracting parties shall not by exchange action frustrate the intent of 

the provisions of this agreement.’’ 

China is violating all the international norms and rules. 

Sixth, the competitive undervaluation of the RMB and the neighboring Asian currencies does have—and here I differ with Niall 

Ferguson—a substantial impact on the United States. 

We have studied this very carefully. China needs an appreciation 

of 25 to 40 percent even to bring its global current account surplus 

down to 3 percent of its GDP, which would be $150 billion to $200 

billion—still pretty high. 

The U.S. global current account deficit would be cut by somewhere between $100 billion and $150 billion per year. That is a lot 

of money. It is not our whole deficit, which is now on the order of 

$500 billion, but it would take something like a quarter to a third 

off it. 

If we use the number that the president and the administration 

have been using—6,000 jobs per billion dollars of exports—the correction in our trading balance due to Chinese revaluation would 

save or create 600,000 to 1.2 million U.S. jobs. 

I agree with Niall Ferguson that Paul Krugman’s number is a little high, but I think the numbers would be very substantial. 

The U.S. economy is not a full employment economy. It has 10 

percent unemployment. There is plenty of un-utilized capacity. A 

lower dollar in response to a higher RMB would not mean inflation 

pressure, it would not mean crowding out; it would in fact mean 

more U.S. jobs, mainly high-paying manufacturing jobs. 

Since the budget cost of this action is zero, revaluation of the 

Chinese and other Asian currencies is the most cost-effective step 

that could now be taken to reduce unemployment in the United 

States. 

It certainly would be the most important part of the president’s 

national export initiative. 

The case for a substantial increase in the RMB and the other 

Asian currencies is clear and overwhelming. 

I suggest a three-part strategy to achieve it. First, I agree with 

Niall Ferguson that Treasury should absolutely designate China as 

a ‘‘currency manipulator’’ in its report on April 15. 

The fact that the United States has been unwilling to apply the 

law of the land and call a spade a spade for at least five years has 

undermined any U.S. effort to get an effective multilateral approach to the problem. 

I agree with you, Mr. Chairman. The basic thrust has to be multilateral, but the U.S. has no credibility seeking that unless it is 

willing to be honest itself, follow the law of the land, and designate 

China a ‘‘manipulator.’’ 

That would be step one, but, I would also take two major new 

multilateral initiatives. I would go to the IMF and seek agreement—it requires a simple majority of the weighted vote—to dispatch the managing director to Beijing on what is called in IMF 

parlance ‘‘a special consultation’’ or an ‘‘ad hoc consultation’’ to seek 


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Chinese agreement to move the currency up. If they do not do it, 

then one can go to the Executive Board for a vote. 

The third step in the process is to go to the World Trade Organization. The United States has the right to seek a dispute settlement panel to look at China’s obligations under the WTO that I 

cited before and ask for it to be declared a ‘‘violator’’ under the 

WTO rules. 

Final point, Mr. Chairman. 

In my experience, and here I differ a little bit with the historian, 

no country that has run large trade surpluses and had an undervalued currency has ever been willing to correct itself without external pressure. That pressure may come from the markets, but the 

Chinese block that through capital controls, or from other governments through political steps. 

President Nixon and John Connally had to break a lot of crockery back in 1971 to get the initial revaluation of the European currencies and the Japanese yen. 

Jim Baker went to the Plaza Agreement in 1985 on the basis of 

two bills passed by the U.S. House of Representatives that would 

have caused great pain to our trading partners had they not agreed 

to correct the currency imbalances of that period. 

I am afraid it is going to have to be external pressure again. The 

Chinese say they will never move in response to external pressure. 

I suggest they will never move without external pressure. If we do 

it skillfully, multilaterally and thoughtfully, we can fashion an effective strategy. 

[The prepared statement of Mr. Bergsten follows:] 


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f 

Chairman LEVIN. Thank you very much. 

Clyde Prestowitz, welcome. 


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STATEMENT OF CLYDE V. PRESTOWITZ, JR., PRESIDENT, 

THE ECONOMIC STRATEGY INSTITUTE 

Mr. PRESTOWITZ. Thank you, Mr. Chairman. It is an honor 

and a pleasure to be back. 

Looking at my ‘‘yes’’ to Niall Ferguson and Fred Bergsten, yes, 

China is manipulating its currency. Yes, it is in violation of commitments to the IMF, to the World Trade Organization, and to the 

United States. Yes, it is harmful. 

It is harmful to many developing countries. Mexico being high on 

the list. It is also harmful to the United States. 

Fred has pointed out estimates of increased unemployment in the 

U.S. as a result of China’s distortion of the markets. I would take 

it even further. I think that we have to look at the impact of the 

currency management not just in terms of trade but also in terms 

of investment. 

Companies make long term investment decisions on where to 

place factories. If they anticipate that a currency is going to be 

chronically undervalued, the tendency, particularly in the case of 

China, is going to be for them to locate their new investments in 

China, so this has an impact not only on employment but also on 

technology development and on the placement of capital investments. 

None of this is even in dispute. Virtually all analysts and economists who look at these numbers come to pretty much the same 

conclusions. 

I would just add that China is not alone. Japan pioneered this 

development model of export led growth fostered particularly by 

undervalued currencies, and there are a number of other countries 

that are currently participating or pursuing the same models. 

Nor is currency undervalue the only element in the model. Another very important aspect of it is subsidization of investment. For 

example, companies like Intel that have recently invested in China 

have calculated that because of the tax rebates, because of the capital grants and other financial investment inducements, they are 

able to save as much as $1 billion over the lifetime of an investment. 

The financial investment incentives are twined with the currency 

under valuation to create a powerful incentive to move investment, 

technology and jobs out of the U.S. and out of Europe and out of 

other countries. 

What to do? First, I agree with Fred Bergsten that in my experience, which is about as long as his, no country that has been running a trade surplus has voluntarily agreed to take steps to reduce 

it unilaterally. It typically takes pressure from the outside and I 

am sure it will also in the case of China. 

Certainly, the initial thrust of any U.S. response needs to be 

multilateral. I agree, in fact, I would say in terms of the immediate 

question, should China be labeled a ‘‘currency manipulator,’’ I do 

not see how the President can avoid doing so. Everybody knows 

that China is manipulating its currency. If the President fudges 

that, he looks weak and dishonest. I do not see how he can really 

avoid that. 

Having said that, once he does it, where do we go? Obviously, 

first steps are to the IMF, to the WTO, in pursuit of persuading 


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China to observe the agreements that it has already made in those 

bodies. 

I think we have to be realistic and anticipate those could be very 

difficult discussions, and they might not go anywhere, or they 

might not go anywhere very quickly. 

I think it is also important to anticipate that China might respond by some nominal revaluation of its currency. A revaluation 

of three, four, five percent might be presented as flexibility on the 

part of China, but it would have no real significance in terms of 

the distortion of the markets that we are talking about. 

I think we have to think very seriously about not only the time 

period but the size of revaluation or readjustments we are talking 

about, and I think we have to think not only about China but we 

have to think about the other countries that are involved in this 

restructuring, let’s say, of globalization. 

A second step here is to think about things that we can do that 

we should be doing ourselves. Mr. Camp talked about steps that we 

need to take domestically to become more competitive. I wholeheartedly agree with that. 

I would add one very important point. Let me come back to this 

issue of financial investment incentives. 

Chairman LEVIN. Mr. Prestowitz, if you could do that quickly. 

I have been told we are going to have votes in about an hour. 

Mr. PRESTOWITZ. My last point is that the United States can 

and in my view should establish a war chest to match the investment incentive offers of countries like China and others who are 

using tax holidays and capital grants to induce investments that 

otherwise would not be made. 

Thank you. 

[The prepared statement of Mr. Prestowitz follows:] 


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f 

Chairman LEVIN. Thank you very much. 

Dr. Levy. 


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STATEMENT OF PHILIP I. LEVY, PH.D., RESIDENT SCHOLAR, 

THE AMERICAN ENTERPRISE INSTITUTE 

Mr. LEVY. Thank you, Mr. Chairman. I very much appreciate 

the opportunity to appear here today and I will follow your suggestion and offer just a brief summary of my extended testimony. 

China’s currency undervaluation is both real and problematic. 

The conclusion that the RMB is significantly undervalued has been 

reached by a wide range of analysts, including the IMF. The clearest indicator is the dramatic accumulation of China’s foreign exchange reserves, now estimated at roughly $2.4 trillion. 

The most acute problems stemming from this policy appear in 

China itself. For that reason, the situation is vexing but not hopeless. It is in China’s own interest to move toward an appreciated 

currency. 

China’s undervalued exchange rate and mounting reserves post 

serious difficulties for controlling Chinese money supply and in 

turn inflation. 

One analyst recently argued that Chinese policy is cultivating a 

real estate bubble to compare with that of Japan before its bust in 

the 1990s. 

Under its policy, China has been extending large volumes of 

loans to the rest of the world. For a relatively poor country that 

is rapidly getting richer, such lending makes little economic sense. 

Of course, the primary concern of this committee and the Congress is the effect of Chinese practices on the United States. 

Whether or not Chinese currency practices hurt the U.S. is the subject of vigorous debate among economists and, apparently, historians as well. 

Even if one is convinced of the harm, we must be very clear on 

the likely costs and benefits of potential remedies. In normal times, 

there are strong arguments that China’s exchange rate policies do 

not hurt the United States. 

As you mentioned, however, recent arguments made by Nobel 

laureate, Paul Krugman, make a contrary assertion. He links Chinese policies to U.S. unemployment and that linkage relies on the 

argument that the United States is temporarily in abnormal times. 

By this, he does not mean a steep recession, which is obvious, 

but a time when monetary policy has become completely ineffective, a so-called ‘‘liquidity trap.’’ It is during such a special situation that an increase in net Chinese demand could stimulate the 

U.S. economy, presumably in a way that the Fed is incapable of 

doing. 

By Krugman’s reasoning, this offers a relatively short window of 

time in which a Chinese policy change could have any serious effect. Yet, none of the actions that China might plausibly undertake 

are likely to do this. 

A gradual currency appreciation of the sort China followed from 

2005 to 2008 would not be large enough. A more sudden appreciation, on the order of 20 to 30 percent, could jolt the Chinese economy so seriously that it would not increase its demand for global 

goods, at least not in the short run. 

What determines whether China will act? There are two major 

sources of legitimacy for the Chinese regime: economic performance 

and nationalism. 


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China’s reluctance to revalue the renminbi hinges on worries of 

economic performance, specifically the potential demise of large 

numbers of low margin businesses in China’s export sector. 

Nationalism, in turn, is likely to mean that China would not 

react well to unilateral U.S. pressure. 

In the interest of time, I would like to focus on just one major 

proposal to encourage change, the idea of an unilateral tariff on 

Chinese goods. 

Compared to other proposals, this would impose the most immediate economic pain on China, but it would also maximize the likelihood of a strong nationalist backlash within China that would 

preclude Chinese compliance with U.S. demands. 

By blatantly violating U.S. commitments under the WTO, a unilateral tariff would do lasting damage to the rules based multilateral economic system. This could be disastrous for a U.S. economy 

that is globally integrated. Nor should one expect, as Dr. Ferguson 

also said, that the breakdown in cooperation relationships would be 

limited to the narrow confines of trade and currency. 

Advocates of a tariff have set aside these long term consequences 

and argue that it could achieve U.S. short term goals whether or 

not China complies. This is highly dubious. 

Such a bilateral measure could be readily circumvented by a reordering of world trade flows, effectively reversing the shift in 

trade patterns that accompanied China’s recent rise. 

For many of the low cost goods that China produces, its chief 

competitors are not U.S. firms but those in other developing nations. 

Even if the United States were to enter lines of business from 

which China had been excluded, such adjustments take time. Thus, 

there are few likely short term benefits to offset the potentially 

staggering long term costs. 

In contrast, multilateral approaches would be neither quick nor 

easy but would offer a better chance of eventual success. The 

United States could work through the WTO, the IMF, the G–7 or 

the G–20. By avoiding the antagonisms of bilateral conflict, a multilateral approach could make it politically easier for China to accede to new rules. 

This is not really a choice between short term benefits and long 

term costs. It is hard to discern a feasible action that China might 

take that would significantly improve U.S. employment and output 

in the short run. It is even harder to imagine a scenario in which 

China would adopt such a policy under the unilateral threat of U.S. 

punishment. 

We would be wise to show patience and pursue an approach that 

relies upon multilateral diplomacy. 

Thank you, Mr. Chairman. 

[The prepared statement of Mr. Levy follows:] 


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f 

Chairman LEVIN. Thank you to each of you for very stimulating 

testimony. I had my crack at the beginning and we have an hour, 

perhaps an hour and a half. Let me go right to Mr. Rangel and 

then Mr. Herger, and we will go down the line. 


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Mr. Rangel. 

Mr. RANGEL. Thank you, Mr. Chairman. Let me thank this 

panel. At the end of my short questions, I will be asking you what 

do you suggest that the Congress of the United States do. 

There is no one here that doubts China is a manipulator. There 

is one here that doubts it has had an economic impact on the 

United States of America. 

Is there anyone here who truly believes that the United States 

and the Secretary of Treasury is prepared on April 15 to declare 

China a manipulator? Do you think they will be doing it? Do you 

believe that the United States really has provided the leadership 

to encourage other countries to join in this multinational effort? 

Lastly, and I want Dr. Bergsten to respond, I get the impression 

that we are playing good cop and bad cop. Our constituents, our 

business people, get frustrated. They come to us. We have to put 

some control over China’s manipulation of currency. We get excited. We want to respond and we do, and then Treasury goes to 

China and we could write the press release before they leave. 

China is making an effort, we have to do this in a multinational 

way, they are very sensitive to American needs. 

At the same time, nothing really happens. My biggest concern is 

we cannot explain to the unemployed people of America why their 

dreams are shattered. We cannot explain how they lost their 

homes, their savings, tuition for their kids. It is tragic. 

It is not an economist or historian problem. It is really a threat 

to the national security and the hopes and dreams of Americans to 

be working. 

My question, as I said earlier, Dr. Bergsten, and I direct it to you 

because we can get a handle on you—if you are right, we will 

thank you, and if you are wrong, we know where to find you. You 

have been with us over all these years. 

What would be your direction to the Congress without causing a 

big conflict with our State Department or Treasury in terms of 

what we should be doing? What is our obligation in terms of sending a message to the People’s Republic of China? 

Mr. BERGSTEN. My answer to your first premise is that the administration has not followed the law of the land, and you and the 

Congress have not really held their feet to the fire either. 

Under the Trade Act of 1988, the Treasury is supposed to label 

a manipulator, but the Congress is supposed to monitor them very 

closely. You are given the authority, and I would say the responsibility, to bring the Secretary of Treasury before you if he does not 

do what you think he should, hold his feet to the fire, ask him why 

he has not carried out the law of the land, and put substantial 

pressure on him to do so. 

I actually think there is a reasonable chance this time that the 

Treasury will designate China as a manipulator. 

The economic situation has changed. The U.S. is still facing high 

unemployment, but we are now sufficiently out of the crisis that an 

effort with the Chinese would not be viewed as wrecking the world 

economy or even the markets. I think people understand and actually expect the United States to pursue such an initiative. 


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The fact that the Treasury has never been willing to designate 

China has in my view totally undermined its ability to engineer a 

multilateral strategy. 

I think you are quite right, Mr. Rangel and Chairman Levin as 

well, to be cautious for the reasons Niall Ferguson said. You do not 

want to launch a trade war, but as I said, it is the Chinese who 

are being protectionist here. If we can fashion a sensible strategy, 

it would be anti-protectionist. 

Between now and April 15, I hope you will strongly urge the 

Treasury to designate the Chinese and the other four Asian countries I mentioned but also simultaneously, and based on the promise they are going to do that, go to their allies, the Europeans, 

some of the other emerging markets, and many developing countries. We have all made the point that as badly as the U.S. is hurt 

by Chinese misalignment, other countries are hurt worse. 

This is a set up for a multilateral alignment. I mentioned the 

earlier cases, 1971 and 1985. Then it was the U.S. versus the 

world. The U.S. had a big deficit. The rest had a surplus. We wanted everybody else to revalue. 

Now, it is different. It should be the world against China. We 

should be able to mobilize a coalition of not just the willing but of 

almost everybody to join in the IMF and in the WTO to bring multilateral pressure to bear, and if that happens, the Chinese cannot 

ignore or resist it. 

If it becomes multilateral as it should and can be, I believe that 

changes the whole game. I do not believe we can launch that multilateral initiative unless we are willing to follow the law of the land, 

call a spade a spade, stand up ourselves, and then on that basis, 

go to the potential allies and mobilize the multilateral approach. 

Chairman LEVIN. That is a good place for a period. 

Mr. RANGEL. Thank you. 

Chairman LEVIN. The latest information is we may vote as early 

as 11:45. Let me go down the list. Sometimes we go to the Subcommittee chairs. Sometimes we just go down seniority. I think we 

will reach both. 

Mr. Brady, I think you have agreed to go after Mr. Herger, and 

Mr. Tanner, I think we will get to you. Is it all right if you wait 

your turn or do you want to go now? 

Mr. TANNER. That is fine. 

Chairman LEVIN. Next, Mr. Herger. Let’s try to do it in three 

minutes. That way, almost all of us will have a chance. Then we 

are going to have a number of votes. If you could try, Mr. Herger, 

in three minutes. That means the four of you, if asked, will have 

to answer briefly. 

Mr. Herger. 

Mr. HERGER. Thank you, Mr. Chairman. 

Dr. Levy, there are a number of questions about whether an appreciation of the RMB would reduce U.S. trade deficits with China. 

During the Bush Administration, China allowed the RMB to appreciate by about 20 percent; is that correct? 

Mr. LEVY. Yes, sir. 

Mr. HERGER. Yet, China’s bilateral trade deficit during that 

time increased from about $202 billion in 2005 to about $266 billion in 2008. Given this record, what do you think are the other 


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factors that are impacting this trade imbalance and do you believe 

the exchange rate issue is the most pressing commercial issue between the United States and China? 

Mr. LEVY. Thank you for the question. I think you are entirely 

correct to suggest there are a number of factors that affect bilateral 

deficits. It is one reason economists frequently shy away from 

them, although obviously they are at the center of a lot of the political debate. 

What we have seen in trade flows with Asia is that while China’s 

share of U.S. imports has skyrocketed, the share of Asian countries, including China, in U.S. imports has held fairly constant over 

an extended period of time. 

It encompasses not only the overall trade balances, which are 

what economists prefer to focus on, but also the shifting of trade 

flows within. This has the implication that we cannot be guaranteed that a change in the exchange rate would necessarily lead to 

an improvement in the bilateral balance, and as you suggest, that 

is not what we have seen in recent experience. 

On the other question that you posed, is this the most important 

factor, I would argue it is not. As I believe Chairman Levin said, 

there are a whole range of Chinese practices that go into stifling 

consumption and determine the overall outcome of Chinese policy. 

I think it would be strongly in the U.S. interest to focus on, for 

example, Chinese financial practices with directed credit, which 

can directly disadvantage U.S. competing firms. 

I think some of these are less sensitive issues where we might 

have greater results. 

Mr. HERGER. We have a number of issues here. It is not just 

this is placing all our apples into one basket here on this RMB. 

There are big associated problems that we have with China that 

we would be well to place our emphasis on as well, not just RMB. 

Mr. LEVY. Absolutely. Fixing the one problem does not necessarily fix the situation. 

Mr. HERGER. Thank you, Mr. Chairman. 

Chairman LEVIN. Mr. McDermott. 

Mr. MCDERMOTT. Thank you, Mr. Chairman. 

I represent the city that is the closest to China. It was the city 

where the first ship came in with goods after the 1977 changes. 

People are deeply involved in my area on this whole question of 

China. 

I am a doctor and I believe in above all things, do no harm. The 

question that is going to come at me in a community meeting is 

going to be if we force the Chinese to revalue the renminbi, what 

happens to us and what happens to them. We know there is a real 

estate bubble in China. We know there is a lot going on over there. 

We know our own problems. 

Tell me how I answer my constituents in non-economic terms or 

economic garble. 

Mr. PRESTOWITZ. I think that is fairly straightforward. Right 

now, several people have used the term that we do not want to 

‘‘launch a trade war.’’ We are in a trade war in a sense, as Mr. 

Bergsten pointed out. 

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age to our economy, to your constituents, they are reducing wages, 

they are reducing jobs here and in many other countries. 

In a way, as I said, we are kind of in a trade war, and I agree 

with Dr. Levy, just changing the value of the RMB is not going to 

solve all these problems. It may not be a sufficient condition but 

it is a necessary condition to achieve the kind of shift that we 

want, and if it happens, it will have the tendency to create more 

jobs and higher wages for your constituents. 

Mr. BERGSTEN. Two points to answer your constituents. One, 

if they revalue, it is going to improve the U.S. competitive position 

and we are going to sell more goods through the Port of Seattle to 

China. That is straightforward and clear. 

Two, if they let the currency strengthen in value, it will help 

hold down inflation pressures in China. That is one of the main 

reasons they should do it now; they are worried about rising inflation. They are taking domestic steps against it. A rise in the value 

of their currency would help very much in that direction, and it 

would help head off property bubbles. 

It is win/win. I agree with what several people said. Revaluation 

of their currency is very much in China’s own interest, particularly 

right now. They are leading the world recovery and are worried 

about inflation coming back. They can have a much more sustained 

expansion if they include currency appreciation as part of an overall re-balancing of their strategy. 

Mr. MCDERMOTT. If it is in their best interest, why have they 

not done it? 

Mr. FERGUSON. If I could answer that question, I think ‘‘do no 

harm’’ is a very good maxim, and I think we are perhaps in danger 

of underestimating the down side risks here off a Chinese revaluation. 

Their economy already has bubble like characteristics, and they 

are walking a very fine line between cooling it down and causing 

a major crisis in their own financial system. 

We must be very careful that we do not have to say to your constituents oh, we thought it would help U.S. unemployment but we 

kind of overlooked the possibility that it would tip China into a serious slow down or you might find yourself having to say to them 

we thought it would really help but we kind of overlooked the fact 

that the Chinese would stop buying a billion dollars of U.S. denominated securities every day and our long term interest rates 

went up and so did your mortgage rates. 

We kind of thought it would help if the dollar weakened slightly, 

but we did not realize it would weaken by so much and bring back 

the specter of stagflation. 

There are a lot of things that can go wrong in a global economy 

as complex as the one we have today. 

Back in the 1970s, which Fred Bergsten was talking about earlier, it was possible for the United States to say to the rest of the 

world, as John Connolly famously did, our currency, your problem. 

Right now, the Chinese are in a position to say that to us. That 

is kind of what they are saying. The reason they are not simply 

doing what we would like them to do is they have good reason to 

be cautious about what could go wrong in their economy. 


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If something goes wrong in China right now, it is very bad news 

not only for the U.S. but for the whole world because China is now 

the engine of growth. 

Mr. MCDERMOTT. Thank you. 

Chairman LEVIN. Mr. Brady. 

Mr. BRADY. Thank you very much. Mr. Chairman, I would like 

to ask unanimous consent to submit a statement for the record. 

Chairman LEVIN. Without objection. 

[The prepared statement for Mr. Brady follows:] 

f 

Mr. BRADY. Thank you for holding this hearing, very important. 

I think it is critical that on this issue America and Congress especially wield a scalpel, not a sledge hammer, in addressing it, to 


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make sure the repercussions do not damage our consumers or our 

businesses. 

I do think along with this issue there are other issues, such as 

intellectual property rights, the directed credit and the government 

procurement that are also concerns in this re-balance of trade. 

I am skeptical that levying a 25 percent tax on American consumers, raising prices, limiting their choices, will be either fair or 

effective in reducing our trade deficit with China, because China 

imports so many of its components and inputs, assembles and 

sends out, appreciating the RMB simply reduces the cost of their 

inputs, I think it offsets the impact on that final product. 

Also, I wish I knew more about the products that the U.S. And 

China exchange with each other. I do not think there is a direct 

match up, to try to achieve a 25 percent reduction that Dr. 

Bergsten talked about, I would be interested from any of the panelists about how we match up in those products and services, so we 

can see where we would gain from that. I am very interested in 

that. 

Dr. Levy, on the issue of a new tax, a new duty on imports from 

China, there is debate about how effective that would be at the 

WTO level. If we impose a new duty that does violate our WTO 

commitments, does that help or hurt our ability long or short term 

to get China to live up to its commitments? 

Mr. LEVY. Thank you. I think it would seriously hurt our ability 

to get China to live up to its commitments. China has to date been 

fairly responsive to the findings of WTO dispute settlement panels, 

and if we were to demonstrate that one should simply not do that 

when one feels one has stronger concerns, we would be very unlikely to see more compliance. 

Mr. BRADY. Thank you, Dr. Levy. Dr. Bergsten, I am a big fan 

of yours, continue to be, not sure about the 25 percent duty. 

You make the point there are a couple of options on the multinational, but which one do you think stands the greatest chance of 

success? 

Mr. BERGSTEN. Just to be clear, I did not propose a 25 percent 

duty. I was trying to get a currency realignment of 25 percent. 

Mr. BRADY. Okay. Thank you. We are in good shape. Thank 

you. 

Mr. BERGSTEN. Just to be clear. 

Chairman LEVIN. Which do you prefer? 

Mr. BERGSTEN. We don’t have to choose. We go to the IMF and 

to the WTO simultaneously. The point Phil Levy just made is correct. We want to go through the WTO rules, as you said. There is 

a clear provision, Article 15 of the WTO, that proscribes the kind 

of practices that China is now carrying out. 

Would it be effective to take a case? Would we win the case? It 

has never been tried. We don’t know. I am not optimistic we would 

win the case in a legal sense. But using it to multilateralize the 

issue and publicize, name, and shame the Chinese for causing the 

problem ought to be part of our strategy. 

Mr. BRADY. Great. Thank you. 

Chairman LEVIN. Mr. Lewis. 


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Mr. LEWIS. Thank you, Mr. Chairman. Thank you, Mr. Chairman, for holding this hearing. Thank you for being members of this 

panel. 

When we travel to the rest of the world, we hear people referring 

to China as using checkbook diplomacy. Dr. Ferguson and I think 

one or the other of you used a saying ‘‘you should call a spade a 

spade.’’ How can we—and what can we do to send China the 

strongest possible message? 

Mr. FERGUSON. Can I suggest that not only should China be 

branded a currency manipulator, but the United States should seek 

the G20 to consider the issue of currency alignments. I am not convinced the IMF or the WTO routes will deliver. 

But in the G20, there are many other countries represented that 

are losing out from China’s policy. The more unilateral U.S. action 

is, the less effective it will be. If the U.S. acts in concert with other 

countries, including other emerging markets, who, as I have said, 

would be the principal beneficiaries of renminbi revaluation, then 

I think we stand a much better chance of success. 

Chairman LEVIN. Dr. Ferguson, do you think Japan is sharing 

lessons learned with China? 

Mr. FERGUSON. Well, the Japanese experience is one that the 

Chinese are very anxious to avoid. One of the arguments of the 

book that I mentioned, ‘‘Currency Wars,’’ is that the United States 

used currency policy to push Japan into recession and prevent Japan’s bid for economic parity. 

The Chinese have learnt the lesson that if they are not careful, 

they will be put in that position, too, where currency appreciation 

will ultimately shift their economy into the situation that Japan’s 

was in in the 1990s, that is, to have a lost decade or now two decades. 

I think that is one reason the Chinese are so reluctant to be seen 

to move. We had leverage over the West Germans and we had leverage over the Japanese that we don’t have over the Chinese. 

After all, we had troops on the former losers of World War II’s soil. 

This is not the situation with respect to China, and the Chinese 

look at the Japanese experience as one that they would very much 

like to avoid. 

Mr. LEWIS. Thank you, Mr. Chairman. 

Chairman LEVIN. Mr. Ryan. 

Mr. RYAN. Thank you, Chairman. 

Two questions. Dr. Ferguson, this is the first time I have met 

you. I have been reading your stuff lately. Walk us through—this 

is slightly off-topic, but walk us through the debt trajectory we are 

on, what that means for our currency, and how that is going to impact just the future sustainability of our system in one and a half 

minutes, if you could. And then I want to ask Fred a question. 

Mr. FERGUSON. Well, there are two trajectories that the Congressional Budget Office says we could follow, one in which current 

law stays as it is and the debt to GDP ratio rises towards 300 percent of GDP, and one in which you ladies and gentlemen behave 

in the way that you traditionally do, in which case the debt GDP 

ratio rises above 700 percent. Now, that is not going to happen because that is an impossible number. 


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The United States is in a fiscally unsustainable position. Justifying this on the basis of Keynesianism is a fraud on the public because it conceals the fact that there is a structural crisis of public 

finance. This is of crucial importance to our discussion here because the Chinese have acted as a support for U.S. bond prices for 

some years now through their interventions. 

The big question which we have to ask ourselves is: Are they 

going to stop doing that? And would they be willing to take a hit 

on their large holdings of U.S. dollar-denominated bonds in order 

to teach us a geopolitical lesson? 

I believe this regime in Beijing is well capable of doing that when 

it feels the time is right. So I think, Congressman, you are very 

right to raise this issue. It is our fiscal improvidence that makes 

us vulnerable geopolitically as well as economically, and we would 

be much better advised to address the unsustainable fiscal position 

than to worry about the renminbi/dollar exchange rate. 

Mr. RYAN. That is—— 

Mr. PRESTOWITZ. Could I just add, though, that I agree with 

what Dr. Ferguson says. But there is this point that in the global 

economy, there is one major consumer of last resort. That is us. So 

if we are going to get our fiscal house under control and increase 

our savings and become a more fiscally stable economy, we need 

China and some of the other—— 

Mr. RYAN. Right. I want to get Fred a question. 

Mr. PRESTOWITZ [continuing]. Economies to play the game 

with us. 

Mr. RYAN. Fred, okay, your projections on jobs from revaluation—I am curious. So are you basically saying that a one-dollar 

drop in our current account deficit necessarily translates into a 

one-dollar increase in our exports, and then you translate the export to jobs? 

How is that a one-for-one replacement? I am not sure how that 

number adds up, necessarily the linkage between if the current account deficit goes down by a buck, it is going to necessarily translate into a dollar increase in exports. 

Mr. BERGSTEN. Technically it is an increase in net exports. 

And some of it would be on the import side, although for various 

technical reasons, most of the gain from currency realignments actually does come on the export side. 

But since we think there is a roughly equivalent number of jobs 

per billion dollars on the import-substituting side as on the exporting side, it works out about the same in terms of your job calculations. 

The number that the government is now using—the Secretary of 

Commerce has put it out; the President has used it—is quite conservative, I think, about 6,000 jobs per billion dollars of exports. 

That is an average across the whole economy, but I think it is a 

fair one to use. 

Mr. RYAN. All right. Thanks. 

Mr. RANGEL. [Presiding.] The gentleman from Georgia, Mr. 

Tanner, is recognized for five minutes. Tennessee. 

Mr. TANNER. Some people think it is all the same. 

Mr. RANGEL. How soon we forget. 


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Mr. TANNER. Thank you. I will be humanely brief, Mr. Chairman, because you covered a couple of the questions that I had. 

To the panel: Thank you very much. Very enlightening and very 

informative. There was an article in the Wall Street Journal this 

morning about China expecting their first trade deficit in six years 

or so. Would you give us your interpretation of how that will affect 

the current issue under discussion here? Thank you. 

Mr. FERGUSON. If I might go first. 

First, this will give the Chinese a political advantage in their negotiations with us, and they will point to this as evidence that 

there is no need for significant revaluation. 

Secondly, I think they will probably introduce some minimal revaluation just to fob us off. 

The third point, which is really important, is that it tells us how 

China operates as an engine of growth in the wake of its very successful stimulus program. Yes, China has been growing very rapidly indeed despite the near-Great Depression in the western 

world. 

But it is very interesting to look at who have been the beneficiaries of China’s increased imports because this is not a story of 

reduced exports; China’s exports are at an all-time high. It is a 

story of massively increased imports. 

Unfortunately, it is not the United States that has been increasing its exports to China. It has been other Asian countries that 

have been the main beneficiaries—which, incidentally, gives China 

some real geopolitical leverage in that region. It is now clearly the 

engine of growth in Asia Pacific, and we are not. 

Mr. BERGSTEN. The simple answer is the number is an aberrant. It is because there were holidays in China during the February period due to Chinese New Year and such. There were a lot 

of days when work was not being done, moreso than in previous 

years because of the irregularities of the calendar. So I don’t think 

it is to be taken seriously. 

They will use it, as Dr. Ferguson said. But I don’t think we 

should be put off by that. I mentioned in my testimony that the 

IMF has now done a five-year projection of where Chinese trade is 

likely to go. And their projection, certainly not biased against the 

Chinese, is that the surplus is likely to again rise from this year 

forward and out to 2014; goes back to about 8 percent of the Chinese economy, something like $600 billion; and would, by IMF’s 

judgment, exceed the whole global U.S. current account deficit at 

that point. So on that metric, the Chinese trade problem is getting 

worse, not better. 

Mr. PRESTOWITZ. One other point. We focus a lot on the deficit. 

But, you know, bilateral deficits are not the whole point of the subject. 

Mr. BERGSTEN. No. I never mentioned bilateral deficits. 

Mr. PRESTOWITZ. I am not criticizing you, Fred. But the point 

I want to make is that if we had a trade surplus with China, this 

would still be a problem. The real issue here is distortion of trade. 

Let me give you an example. 

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intensive semiconductor manufacturing equipment, moving significant production to China. 

Now, if you look at the thing in terms of comparative advantage, 

the kind of products that Applied Materials makes are products in 

which the United States has a comparative advantage. Therefore, 

you would expect, under normal market conditions, we would export those. 

But Applied Materials is moving that production to China. That 

would a problem even if we had a trade surplus with China because it would be distorting our trade and reducing our competitiveness. 

Chairman LEVIN. [Presiding.] Thank you. 

Mr. Nunes. 

Mr. NUNES. Thank you, Mr. Chairman. 

Dr. Ferguson, I am going to give you all of my three minutes, or 

what is remaining after I ask my question here. But you mentioned, in the early 1930s, steps that the Congress at that time 

took to take action on unemployment and joblessness. 

Do you see similar policies occurring now by the Congress? And 

also, do you see this potential trade war or currency war with 

China as contributing more to, you know, increased joblessness as 

we move forward? And I apologize, but we are giving you all the 

time that I have because I know that is a long—you could go on 

for 20 minutes on this. But thank you. 

Mr. FERGUSON. I will be more brief than that, Congressman. 

I think there is a serious danger that we overlook the parallels that 

still exist between our situation and that of the early 1930s. This 

is much more like the early 1930s than anything we have lived 

through. 

And one of the common mistakes I encounter time and again in 

the United States and in Europe is that people look back to the 

1970s or the 1980s or the 1990s because they simply didn’t experience the Great Depression. 

The Great Depression had two legs to it. There was a moment, 

in early 1931, when it looked as if it might be okay. And then there 

was another leg down owing to a financial crisis, interestingly, in 

Europe, the famous Creditanstalt Bank failure of 1931. 

I don’t think we are entirely out of the woods in the sense that 

we could have another leg down in our near-depression or Great 

Recession. Whether you look at the possibility of retaliatory tariffs, 

which are implicit in the bill that is now, I believe, before the Senate, or whether you look at the more serious problem of currency 

wars, there is a danger that uncoordinated policy action, unilateral 

moves by countries—not only the United States but also European 

countries—could damage international financial confidence just as 

it is beginning to recover. 

And that is my great concern about this discussion. There is no 

question that China is a currency manipulator. But, one, we should 

not go around blaming China for all the unemployment that we 

have seen increase in the last two or three years. I think that 

would be a highly irresponsible and rather insincere way of handling this problem. And two, we must be aware of the law of unintended consequences. 


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Talking about a trade war, pushing the Chinese into currency revaluation, in this fragile global economy runs the risk, in fact, of 

killing off the recovery that we are just beginning to detect and setting off a chain of competitive devaluations. 

In the world of fiat money that we entered after 1971, not all 

currencies can simultaneously weaken. But the way that I begin to 

look at governments around the world talking, they all seem to 

want that same thing. And that is a very dangerous situation, in 

my view. Thank you. 

Mr. NUNES. Thank you. 

Mr. BERGSTEN. Could I add just one point? And it is really important. 

Mr. NUNES. I control the time. 

Mr. BERGSTEN. I am sorry. 

Mr. NUNES. For now. Go ahead. 

Mr. BERGSTEN. Well, it is almost a question to Dr. Ferguson. 

I couldn’t share more his concern about currency wars and competitive undervaluation. But here is the question: What is the lesson 

of the 1930s applied to today? 

China is competitively undervaluing. And, as I mentioned, a 

number of Asian countries have already emulated them and are 

undervaluing as well so they won’t lose competitive position 

against China. Other countries, particularly emerging markets, are 

tempted to do the same thing, build up big war chests of reserves, 

follow neo-mercantilist policies. 

So the question is: What is the lesson of the 1930s? Is it better 

to let China and the others who are now following the competitive 

devaluation policies that we rightly say made things much worse 

in the 1930s stand or to take action against it before it spreads 

even further, and more and more countries join the parade, and we 

look back 30 years later and say China began a competitive devaluation race the same way the Americans did Smoot-Hawley in the 

1930s, and it brought back the Great Depression? 

Chairman LEVIN. Okay. 

Mr. FERGUSON. May I answer, Mr. Chairman, very briefly? 

Chairman LEVIN. In 15 seconds. 

Mr. FERGUSON. Fifteen seconds? The lesson is that competitive 

devaluation can be the prelude to a geopolitical crisis. That is the 

real lesson of the 1930s. Get this stuff wrong and you end up with 

more than just a trade war on your hands. 

Chairman LEVIN. All right. It is good to have some back-andforth, but we do have these time limits. 

Mr. Becerra, you are next. 

Mr. BECERRA. Thank you, Mr. Chairman. 

Gentlemen, thank you for your testimony. To be brief, let me just 

keep it to one question and preface it with a quick comment. 

You always see this happening when someone has been the big 

kid on the block for ages. All of a sudden some upstart comes 

around. You don’t pay much attention to him. He looks too small. 

He seems to keep up with you a little bit here and there, but you 

can always somehow outrun him, outdo him, beat him up. 

All of a sudden the little kid starts to grow up and starts to catch 

up. Sometimes you get a little complacent, and to some degree, 

with our years and years of running deficits, years and years of 


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having the opportunity to borrow wherever we wanted, years and 

years of having our industries feel that they were always number 

one, we are still the most innovative place in the world—sometimes 

you can’t blame people for closing their eyes, sitting on the couch, 

watching TV a little bit too much. 

I think what is happening is the rest of the world is catching up. 

And China has done a very good job of figuring out how to do this, 

and they are a little bit more patient than most. They have been 

around ten times longer than we have as a developed society, and 

they figure in the last 20, 30 years, they have done a lot. 

But that is just a blink of an eye for them. And they are very 

patient and willing to wait another 40, 50 years before they overtake us, if they think that is what it will take. So I think all we 

are saying—we are pontificating here. We have got to get up, start 

doing some exercise, stretching, and recognizing that the rest of the 

world is catching up to us. 

But my question is this: Another part of the world that has, I 

think, developed a little bit of flab in the midsection is Europe. Europeans are very developed, like us. We are the first world portion 

of the globe. 

Give me your quick comment on how you think the Europeans 

are handling China, and how we can work with the Europeans to 

make sure that we work off some of that midsection to keep up 

with those upstarts that are catching up to us. 

Mr. FERGUSON. Well, the—— 

Mr. PRESTOWITZ. The good thing, I think the Europeans are 

actually handling China better than we are, particularly if you look 

at Germany. Germany has a trade surplus with China. And until 

recently, Germany had the biggest—was the biggest trading—exporting country in the world. 

And while Europe does have its problems, and clearly the Greek 

financial crisis is causing very serious concern about the Euro, and 

you have kind of a two-speed Europe with Germany and the northern countries doing not so badly and the southern countries doing 

poorly—but with regard to China, actually what is interesting to 

me is that Europe, and particularly Germany, with strong currency 

and very high wages, have been able to compete with China. 

And I think that is something that we should take very seriously 

because it does indicate that there are other elements in this puzzle besides the currency. And they have to do with wage and price 

discipline. They have to do with coordination between government, 

labor, and industry. 

They have to do with investment incentives, with real strategies 

to maintain—for example, in Germany to maintain the engineering, the medium- and small-sized high-tech engineering companies. 

Germany has a real competitiveness strategy, and so do some of 

the other European countries. We, I think, could learn from them. 

Mr. BECERRA. Thank you. Thank you, Mr. Chairman. 

Chairman LEVIN. I think, under our rules, Mr. Davis is next. 

Mr. DAVIS OF ILLINOIS. Thank you, Mr. Chairman. 

Chairman LEVIN. No, no. I am sorry. Mr. Davis from Kentucky. 

I am sorry. 

Mr. DAVIS OF KENTUCKY. The other Mr. Davis. 

Chairman LEVIN. No. Good try, Danny. I am sorry. 


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Mr. DAVIS OF KENTUCKY. I appreciate my colleague’s initiative and creativity. Thank you, Mr. Chairman. 

When I look at the interconnectedness of the relationships that 

we have developed with China, I am sometimes stunned at the 

complexity of the growth, remembering, as an eighth grade student, watching President Nixon land in Beijing, and how far we 

have come. And those days, or my years in the military, the Military Academy. 

But coming to a conclusion, as I am entering old age, that sometimes relationships between two great powers can be kind of like 

a marriage of an old couple. Rarely does forcefulness by one spouse 

or the other tend to produce the desired result. And I have a question for Dr. Levy that I would like you to comment on, and just use 

the balance of your time on this. 

In your opening statement, you mentioned about the quiet diplomacy that had been undertaken in the last Administration. And I 

think, actually, that was building upon what had happened in the 

prior Administration. So it was, in a sense, a bipartisan view of 

trying to maintain this integrity of the American economy and balancing each other’s interests. 

We saw a revaluing of the RMB by about 20 percent. I would like 

you, just for the context of us here who don’t live in your world, 

if you could simply articulate maybe an example or two of other 

things that relate to the success of that approach if we were to stop 

from an immediate response, and maybe take a ten-year approach 

or a generational approach to this relationship. 

Mr. LEVY. Well, thank you, Congressman. As you rightly point 

out, we did have some movement, and it did come from quiet diplomacy. And there is a long tradition in U.S. diplomacy that reaches 

across both parties of trying to bring China—not only do this bilaterally, but bring China into multilateral institutions and get China 

to agree and to take on burdens and responsibilities with the rules. 

One of the things that I think I can—helpfully comment upon is 

the extent to which—it would be misleading to talk about China as 

a country which is sort of enjoying unmitigated success and a carefree growth and path to world dominance. 

In fact, I think the Chinese had many, many concerns, and that 

was the subject of a lot of this diplomacy. So it was not simply that 

the U.S. was saying, please, please, please appreciate your currency. It was dealing with questions, for example: If you have exporters who are used to a fixed exchange rate making contracts for 

delivery forward, what do you do when you don’t have forward exchange markets? 

And it was these kind of things that our Treasury has worked 

with the Chinese to try and say, we can address those concerns. 

We can work together. There are very practical problems that come 

that one can address and gradually make progress and work constructively. 

Mr. DAVIS OF KENTUCKY. Thank you. I yield back, Mr. Chairman. 

Mr. DAVIS OF KENTUCKY. Mr. Doggett. 

Mr. DOGGETT. Thank you, Mr. Chairman. And thanks to each 

of you for your testimony. 


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Dr. Bergsten, you have outlined a very specific three- or four-step 

plan that you think we should take that involves vigorous congressional oversight action with hearings like we are taking today, but 

as I understand it, does not involve any legislative action, passing 

any new laws by the Congress. 

Is it your position that it would be a mistake for Congress to 

take any legislative action in this area? 

Mr. BERGSTEN. I would prefer to try the approach I have outlined first because I think Congress can be a lot more activist, a 

lot more aggressive, and a lot more effective holding the administration’s feet to the fire than you have. 

If that doesn’t work, then you may have to legislate to try to get 

that kind of forceful action by the executive branch. It is feckless 

that the executive has not carried out the law when the manipulation is so obvious. 

Mr. DOGGETT. Thank you. Short answers: Do our other witnesses also agree that now is not the time for congressional legislative action? 

Mr. PRESTOWITZ. Yes. I agree with that. But I would say one 

other thing. In addition to labeling China as a currency manipulator and pressuring Treasury to do that, I think also you in the 

Congress have special oversight over trade, and you have a special 

relationship with the Office of the U.S. Trade Representative. 

And as we have pointed out, China is not only in violation of obligations in the IMF, but also possibly in the WTO as well. And so 

it might be worthwhile for the Congress to also have a chat with 

the Trade Rep about what action the Trade Rep might take in the 

WTO. 

Mr. DOGGETT. Dr. Levy, no legislation now? 

Mr. LEVY. Yes. I think there is nothing—— 

Mr. DOGGETT. And Dr. Ferguson, I believe that is your position 

also? 

Mr. FERGUSON. That is correct. 

Mr. DOGGETT. Let me ask you: Trying to look at it from the effects on the Chinese economy which you have commented on, Dr. 

Ferguson, particularly, what would be the likely effect within 

China of, say, even a 10 or 15 percent revaluation now? 

Mr. FERGUSON. I recently heard a presentation by a Chinese 

economist on this subject, which imagined a revaluation closer to 

25 percent. In that scenario, revaluation without significant 

changes to, for example, welfare policy designed to increase Chinese consumption would have a strongly negative effect on the Chinese GDP growth. 

And I took this presentation to be a pretty clear signal of what 

the regime in Beijing thinks. They regard revaluation alone as a 

very dangerous route to go down because it would hit their export 

industry so hard. 

Mr. DOGGETT. What do you believe will be the effect on the 

debt we already have with the Chinese and the debt we are likely 

to have in the future? 

Mr. FERGUSON. This is extremely hard to be sure about. Some 

data suggest that the Chinese have significantly reduced their purchases of U.S. Treasuries already in the sense that direct purVerDate Nov 24 2008 00:01 Jun 10, 2011 Jkt 063077 PO 00000 Frm 00073 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63077.XXX GPO1 PsN: 63077

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chases are way down. 2009 direct purchases were something like 

5 percent of new Treasury issuance. 

But they may be making purchases indirectly, and Dr. Bergsten 

and have corresponded on that question. It is very hard to know, 

in other words, quite how they will respond. But I want to revert 

to my earlier point. 

They have a lever that they can turn. It would cost them, no 

question. But they know that if they can gain some political advantage from turning that lever, it is there. And I don’t think we have 

an equivalent lever. 

Mr. BERGSTEN. Could I just respond to you—— 

Chairman LEVIN. Let’s go on because we are going to run out 

of time. And hopefully others will ask questions that give you a 

chance to respond. This is so important. 

Mr. Reichert, you are next. 

Mr. REICHERT. Thank you, Mr. Chairman. 

I want to focus on intellectual property rights real quick. It is 

clear that China has tolerated an unacceptably high rate of piracy 

across technologies. U.S. copyright industries estimate that 85 to 

95 percent of their members’ copyrighted works sold in China were 

pirated. Despite repeated promises by the Chinese to step up enforcement, this problem persists and the dollar losses keep mounting to nearly 9 billion a year. 

If the exchange rate has the effect of lowering these costs, the 

costs of products, isn’t it true that, intensified by China’s theft of 

intellectual property in making these products at issue, will the exchange rate solve—I am sorry—will the exchange rate solve the 

competitiveness concerns for America’s most innovative industries? 

And the last question: Shouldn’t the Administration press the 

Chinese on these issues just as hard as the currency issue? 

Mr. PRESTOWITZ. The exchange rate won’t have as big an impact on some of the leading edge industries as it might on more 

standard manufacturers or standard service providers. And so you 

are quite right. 

I think that the protection of intellectual property—and let me 

revert to my earlier point. The power of financial incentives—tax 

holidays, capital grants, free land, free infrastructure—that is extremely powerful, particularly in capital-intensive, high-tech industries. And some U.S. action on those fronts is extremely important. 

Again, let me underline my feeling that the U.S. government at 

the national level should put together some program to respond to 

the very aggressive financial incentives coming from not only 

China, but from many other parts of Asia and even Europe as well. 

Mr. REICHERT. Thank you. Dr. Ferguson, you have a comment 

on that? 

Mr. FERGUSON. No. It will have no effect. That is to say, exchange rate revaluation will have no effect on the problem of intellectual piracy, which is rampant, I agree. And yes, we should be 

pressing just as hard on that issue, where it seems to me China 

must be in contravention of international obligations. 

Mr. REICHERT. Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you. 

Mr. Kind. 


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Mr. KIND. Thank you, Mr. Chairman, and thank you for holding 

this very, very important hearing. I want to thank our witnesses 

for your testimony here today. 

Listen, I think we can all agree that the U.S./China relationship 

going forth in the 21st century is one of the most important for 

global economic stability and just for bilateral relations. 

And yet I think that if there is a message to the Chinese authorities and the Chinese people here today, it is that we recognize that 

the China today is not the China of 15 years ago, or 10, or even 

five years ago. And as they ascend as a true economic global power, 

and as a member of the WTO, that global power comes with global 

responsibility. 

And yet the patience is waning on our side. When you get more 

reports like the EPI briefing paper that recently came out about 

the job loss, given the current Chinese currency situation, and senators like Senators Graham and Schumer citing this report, this 

becomes more and more politically toxic in our country. 

And that is why I think the message is we have got to continue 

to work with them to figure out how they can assume their true 

global responsibilities that they have right now. 

Dr. Levy and Dr. Ferguson, let me ask you, and if we have time, 

the others can respond. But it is not unprecedented for China to 

take some revaluation in their currency. From 2005 to 2008, they 

had about a 20 percent increase alone. 

What made it possible then, given the conditions then, that make 

it hard for them to do something comparable today? Dr. Levy. 

Mr. LEVY. I think that they did recognize the difficulties that 

came with what was really an unwise currency policy. And I think 

there was constructive U.S. diplomacy to help address some of the 

concerns that they had. I think it got stopped when they became 

frightened, during the financial crisis, of what they faced. 

The hope is that those pressures to change are still there. And 

they have described this stoppage as a temporary measure. The 

idea would be to work with them constructively to move to a more 

sensible path, which would be in appreciation. 

Mr. KIND. Dr. Ferguson. 

Mr. FERGUSON. The key point is the period of appreciation 

happened during the boom years, from 2005, when they could allow 

a creeping appreciation against a basket of currencies at really 

minimal cost to their exporters. Remember, as I tried to point out 

in my testimony, they were making much bigger gains in terms of 

unit labor costs than the losses that they were suffering through 

this appreciation. 

The second point, I think, is that—and I think this has been 

mentioned before, but let me say it again—it shows you how little 

we gained from that kind of appreciation. I mean, the payoffs in 

terms of the trade deficit were nonexistent. And that is why I think 

we must be careful not to pin too much faith on this particular policy. 

You know, a parallel was drawn earlier by Congressman Davis 

to a marriage. This is a kind of marriage, but one of those marriages between one partner who does all the saving and the other 

partner who does all the spending. 


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And in my experience, those marriages tend to end rather unhappily. And I think that that is why this one is on the rocks. 

Mr. BERGSTEN. Two quick points, if I may. I disagree with 

Niall and what some others have said that the U.S. got nothing out 

of the earlier Chinese currency appreciation. Our current account 

deficit was cut in half between 2007 and 2009. 

A lot of it was recession, but part of it was improved competitive 

position. The dollar had come down in general and particularly 

against China. So we did get something out of it, and we can quantify that. 

I agree with Niall they did it in 2005 for a couple of years because they were enjoying a booming economy. That is why I argued 

in my statement now is the time they can resume it. Their economy is booming, and growth began already in the first half of last 

year. They have led the world recovery. 

Indeed, they are worried about overheating. They have been 

tightening reserve requirements of the banks. They have been cutting back on lending. They are worried about inflation. This is a 

natural step in that context. It would fit with their cyclical position. And it would be wholly consistent with the timing of their 

strategy in 2005. 

Chairman LEVIN. All right. Mr. Boustany. 

Mr. BOUSTANY. Thank you, Mr. Chairman. 

Let me start by saying, Dr. Ferguson, I deeply appreciate your 

admonitions that you laid out. But as we go forward, it seems to 

me that the broader problem is how do we get China to meet its 

WTO obligations, and what is our role in all of this, and how do 

we do it without running afoul of our obligations at WTO? 

And so as I look at this, I think the problem is bigger and much 

more complicated than just the currency issue. You know, in talking to the business community, we hear a lot about China’s indigenous innovation policy, import substitution policy, and rule of law 

and IP issues as well. 

And of course, we hear the claim from China that they have now 

evolved to more of a middleman in all this, and that their export 

margins have narrowed down, and it has created more and more 

problems for them domestically and socially with regard to potential unemployment. 

So I guess my question is: I know we have all talked about a 

combination of bilateral diplomacy as well as multilateral approaches. One specific question: If we are going to do this, and all 

of you have outlined the first step being labeling China as a currency manipulator—except for you, Dr. Levy—should we perhaps, 

instead of taking that step, go broader and look at the other countries, particularly in Asia, that are also manipulating their currencies? 

I think, Dr. Bergsten, you have mentioned in your paper, your 

testimony, your written testimony, Hong Kong, Taiwan, Singapore, 

Malaysia. Would that be a more prudential approach for Treasury 

rather than just simply labeling China? And I will throw that question out for discussion. 

Mr. BERGSTEN. As I said, those other countries de facto track 

the Chinese currency. And they have also experienced huge inVerDate Nov 24 2008 00:01 Jun 10, 2011 Jkt 063077 PO 00000 Frm 00076 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63077.XXX GPO1 PsN: 63077

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creases in their reserves; they have manipulated. So it would be 

perfectly legitimate to name them. 

I think it would be much in the U.S. economic interest to name 

them and get them to revalue because when you add them up, they 

almost double the ante in terms of trade flows and potential payoff. 

I think it would also be politically good to group China with some 

others and not single out China. You would be singling out what 

I would call a de facto China bloc; you wouldn’t call it that, but de 

facto you would do it. 

I don’t actually think you have to do it because if the RMB rises, 

the others will go up along with it in practice. But again, to be honest, to carry out the law of the land and to double the ante from 

our standpoint, and maybe to make it a little easier for China by 

not singling it, I think it would make sense to name the several 

of them. 

Mr. BOUSTANY. Would this help China solve or face its problems? I mean, because, you know, given the evolution of its manufacturing to sort of this middleman approach as opposed to what 

has gone before because of their input costs coming from these 

other Asian countries, would it stimulate some of these other countries to go to a free float? 

Mr. BERGSTEN. Well, it would. It highlights the fact that the 

Asian countries do have a problem in their exchange rate relationships with each other. And here I would bring in Japan. They talk 

about coordinating their exchange rate and their monetary policies. 

They haven’t been able to do it. They still view themselves as competitors more than cooperators. 

But they really do in fact need to work out an answer to that 

collective goods problem. Korea, for example, let its exchange rate 

go up sharply a couple of years ago and looked around and nobody 

else was there. They wound up on a limb, uncompetitive, and came 

back down. 

I have proposed an Asian Plaza Agreement, where the Asians get 

together and work out a common move in their own currencies so 

as to deal with the global rebalancing problem without beggaring 

each other in the way that otherwise could occur. 

Mr. BOUSTANY. Dr. Levy—— 

Chairman LEVIN. Okay. No, your time is up. Okay. So others 

can—Mr. Boustany. 

So let me just—let’s review where we are. We are not quite sure 

when the bells will ring. Mr. Neal, you are next under our rules, 

then Mr. Pascrell—— 

Mr. CAMP. I have not questioned yet. 

Chairman LEVIN. Oh, all right. That is true. I skipped my questions, but you don’t have to do that. All right. So Mr. Neal and 

then Mr. Camp, and then Mr. Pascrell, Mr. Crowley, Mr. Davis of 

Illinois, Mr. Etheridge, Ms. Sa ́nchez, and then Ms. Schwartz. Oh, 

yes, Mr. Tiberi is here. All right. 

Mr. TIBERI. Thank you. Thank you, Mr. Chairman. 

Chairman LEVIN. No, no. Wait, wait. You are not—Mr. Neal is 

next. I think, because there are many more Democrats, we are 

going to take two at a time and—let’s just go. It is going to work 

out. 


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So next is—where are we? Mr. Neal is next, and Mr. Pascrell. 

You are a duo. Okay? Mr. Neal. 

Mr. NEAL. Thank you, Mr. Chairman. 

Chairman LEVIN. Three minutes. 

Mr. NEAL. Thank you. Thank you, Mr. Chairman. 

I guess what I am curious about is I agree with Dr. Ferguson 

that we don’t want to ignite a currency war with the Chinese. But 

at the same time, how are the European Union members and Canada responding to China’s position? I mean, the headlines are 

dominated, even over the last few days, on an array of issues. But 

how are the European Union members and Canada reacting? 

Mr. FERGUSON. I can’t speak for Canada, but the European solution is an inadvertent one. When they had a conscious strategy 

of trying to engage China, when President Sarkozy took a hard 

line, it was a miserable failure. 

But they have solved the problem by having their own massive 

internal crisis. And the crisis of the Eurozone has the unintended 

consequence of weakening the Euro. This is part of the currency 

war story. 

You know, listen to those crocodile tears falling in Germany 

about the dreadful Greeks. In fact, German manufacturers are delighted that the Greeks are screwing up because it is finally weakening the Euro relative to the dollar and other currencies. So that 

is really the solution that they have inadvertently come up with. 

Mr. NEAL. And the pound? 

Mr. FERGUSON. The pound is going to be an even weaker currency than the Euro. I would expect you will be shopping in London with parity to the dollar any time—some time this year. 

Mr. NEAL. Let me just throw this out to the panel as well. How 

would the Chinese justify their current position? 

Mr. PRESTOWITZ. Well, they justify it on the basis that they 

are a developing country. They have to create I forget how many 

million—20 or 30 million—jobs a year just to absorb the population 

moving from the countryside to the cities. 

Mr. NEAL. To the urban areas? 

Mr. PRESTOWITZ. They have—you know, they are in catch-up 

mode. They also argue that they are only—they are the most dynamic economy. They are kind of contributing disproportionately to 

global growth, partly as a consequence of this policy. 

And, you know, they make the same arguments that we have 

heard here, that even if they revalued their currency, it wouldn’t 

make any difference. They point to our deficits, our low saving 

rates, our declining competitiveness, and basically they tell us to 

pull up our socks. 

And this is very similar to discussion we had in the 1980s with 

Japan. You know, we complained in the 1980s that the Japanese 

were not fulfilling all their obligations, undervaluing their currency, and so forth, and they turned around and said, no. The problem is not us. It is you. And so the Chinese do the same thing. 

Mr. BERGSTEN. But the Chinese have implicitly admitted that 

they have to change their strategy. For six years, President Hu 

Jintao and Premier Wen Jiabao have said repeatedly, we agree 

with the need to rebalance our economic growth strategy, put less 

weight on export expansion and trade surpluses, and put more 


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weight on increasing consumer demand and domestic services sectors. 

They have adopted it as policy. The move of the exchange rate 

for three years back in 2005 was part and parcel of that. Then they 

got cold feet in the face of the global crisis and put a halt to it. 

But they have essentially adopted a strategy, rhetorically at least, 

of changing the composition of their growth, part of which would 

essentially be a big change in the exchange rate. 

So I think they have accepted it implicitly. They have stopped it 

because of the crisis. The head of the central bank said recently 

that it was a temporary thing and they would go back to the exchange rate movement at some later point. So it is a matter of timing and how fast they go about it. 

One counsel to us would be to be patient and they will get to it. 

But the problem is a lot of crockery is broken in the meanwhile. 

But I think they have implicitly accepted, in the G20 and, in the 

IMF, a need to rebalance their growth strategy, which has to include an important currency dimension. 

Mr. NEAL. Thank you. Thank you, Mr. Chairman. 

Chairman LEVIN. Thank you. 

Mr. PASCRELL. Mr. Chairman, we need an Administration that 

for once will stand up to China. This is a very serious problem 

here, not only contributing to the trade deficit with currency manipulation, but this is an even bigger problem in terms of how our 

goods have become less competitive. 

And you tell this—you tell this to the computer industry, the 

electronic equipment industry in the United States, and parts industries that they will have to continue to wait and be destroyed 

as the textile industry was destroyed in this country, and we think 

we are going to solve all these problems diplomatically. 

I don’t think that works. 2.4 million American jobs have been 

lost or displaced since China joined the WTO in 2001. As a result 

of the growing trade deficit with China, and in the state of New 

Jersey, we have lost in that period of time 68,800 jobs. That is outlined very clearly in the EPI briefing case which was reported, 

which was referred to before. 

In my district, the 8th Congressional District alone, we lost 6,000 

jobs, lost or displaced. Those numbers are significant. And when I 

go back—it will be interesting. When I go back to the district, I intend to talk to some business people about this who are very concerned that they cannot get their product into China, and want to 

deal with the exports. 

I am going to tell them, well, look. We are going to deal with this 

diplomatically because we don’t want to perhaps cause a situation 

that occurred in the 1930s. And you know what happened then, 

wink wink. 

This is an absurdity. We also know that China exports five times 

as much to the United States as we export to China. We have leverage over China to ensure equity in our trade relations. 

And my question to you, Mr. Ferguson: What can the U.S. do, 

and what measures do you suggest, to protect the nation from any 

possible retribution from China? 

Mr. FERGUSON. Well, I think the first thing is to be very careful about assuming that all the lost jobs were lost because of ChiVerDate Nov 24 2008 00:01 Jun 10, 2011 Jkt 063077 PO 00000 Frm 00079 Fmt 6633 Sfmt 6602 I:\WAYS\OUT\63077.XXX GPO1 PsN: 63077

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nese competition. And it would be an even bigger mistake to assume that they would all magically come back if China’s currency 

were revalued. These would be very misleading assumptions. 

I think an important issue that has been raised in our discussion 

this morning is what the best channel to go through might be. And 

we have expressed skepticism about legislative action, retaliatory 

tariffs, for good reason. You may dismiss the parallel with the 

1930s as somehow irrelevant, but I can assure you any further 

blows to global demand dealt by errors of U.S. fiscal, monetary, or 

trade policy would harm your constituents even more severely than 

they have so far been harmed. 

If you had a choice between the IMF and the World Trade Organization—and this is really an important point that Dr. Bergsten 

has raised—the World Trade Organization is the better institution 

for two reasons. It is better at dealing with big guys, and it is better at dealing with surplus countries. 

Mr. PASCRELL. Let him finish the sentence. 

Chairman LEVIN. So we will follow the rules. Mr. Roskam is 

next. Mr. Tiberi, Mr. Roskam goes first under our procedures, and 

then all of the—— 

Mr. PASCRELL. Mr. Chairman. 

Chairman LEVIN. Yes. 

Mr. PASCRELL. Couldn’t we have at least allowed the gentleman to finish the sentence? 

Chairman LEVIN. I think he finished. 

Mr. FERGUSON. Just. 

Chairman LEVIN. Okay. Finish the sentence. I thought he had. 

Mr. FERGUSON. I did finish the sentence. Thank you, Mr. 

Chairman. 

Chairman LEVIN. Okay. So here we go. Mr. Roskam is next, and 

then under our rules Mr. Crowley, Mr. Davis of Illinois, Mr. 

Etheridge, Ms. Sa ́nchez, then Mr. Tiberi and Ms. Schwartz. Okay? 

We are taking the two of you who came in after we started. 

So let’s go. We may have 20 minutes. It is hard to tell. Mr. Crowley—no, Mr. Roskam. 

Mr. ROSKAM. Yes. 

Chairman LEVIN. I guess, Mr. Roskam, you will go next and 

then Mr. Crowley. Excuse me. 

Mr. ROSKAM. Thank you, Mr. Chairman. Mr. Chairman, thank 

you for this hearing. I have really found it insightful and helpful. 

Dr. Ferguson, maybe to finish your point from a minute ago, 

could you give your perspective on sort of the WTO, why it is that 

that—the subtlety there vis-a-vis the IMF? And could you comment, maybe, on Dr. Bergsten’s approach? Would you—Dr. 

Bergsten’s approach, if I understood it correctly, was designate 

China as a currency manipulator, and then do sort of a special 

envoy approach with the IMF and the WTO. Could you comment 

on that? 

Mr. FERGUSON. I don’t think there is any harm in going to the 

IMF, but I don’t think anything much will come of it. The IMF is 

only able to exert leverage over countries that are in deficit and in 

crisis, and they are usually smallish countries. And there are plenty of those it has to concern itself with right now. 


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The difference is that the WTO is a body quite differently constituted that is able to impose decisions on the biggest countries, 

including the United States when it has violated its WTO obligations. The WTO is the most powerful of all the international economic institutions, and that is why it is actually our best channel. 

China has gained hugely from WTO membership, as I think was 

pointed out by Congressman Pascrell. But that puts it in a position 

of vulnerability if we pursue the letter of the law in the WTO. And 

that seems to me to be the best course of action to take. Is 

there—— 

Mr. BERGSTEN. I agree with that and add one crucial point. 

Under the WTO rules, they ask the IMF for a judgment as to 

whether a currency is undervalued or overvalued. So technically, 

the WTO, given a case by the U.S., will ask the IMF for a finding. 

The managing director of the IMF has been going around the 

world saying the RMB is substantially undervalued. So I think the 

right advice would be provided. But that is the key reason why the 

IMF technically has to be involved in the process. 

Mr. FERGUSON. Very briefly, it is not just the currency issue 

that we should take to the WTO. There are many, many other 

issues where you could challenge China’s compliance. 

Mr. ROSKAM. Is it a conditioned precedent to move forward to 

name them as a manipulator in April? 

Mr. BERGSTEN. Neither technically nor legally. The U.S. has 

those rights in the WTO or IMF. My point is, and I have heard this 

from people all over the world for five years, that if the U.S. is not 

willing to call a spade a spade itself, why is it asking them to stand 

up and be counted in a coalition of the willing? 

Mr. ROSKAM. I understand. Dr. Levy. 

Mr. LEVY. Yes, Congressman. If I may, I would just argue—I 

would take some issue with Dr. Ferguson. There is a serious downside risk to taking a case to the WTO, which is: We do not have 

clear language at the WTO delineating exactly which conditions are 

acceptable and which are unacceptable. 

The U.S. could lose either way. If it loses the case, we will never 

hear the end of it from China about how their practices have been 

justified. If we win the case, we will have established the precedent 

of panel overreach, that we are counting on dispute settlement panels to essentially legislate and come up with rules. 

Mr. ROSKAM. Thank you. I yield back. 

Chairman LEVIN. Thank you. 

Mr. CROWLEY. Thank you, Mr. Chairman. 

I am interested in hearing from all of you, I guess—I don’t know 

if there is enough time for that—in terms of what your thoughts 

are if China—if you can carry through, if China would begin to or 

stop the purchasing of Treasury bills, what effect that would have 

in terms of our market share, what the reaction would be. I would 

like to hear, if you can give that. 

Before you answer that, let me just get the other two, both Drs. 

Ferguson and Bergsten. I believe you both have stated that you believe that the U.S. should declare China a currency manipulator. 

Is that correct? 

Mr. FERGUSON. [Nodded head up and down.] 


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Mr. CROWLEY. What do you believe is the worst case scenario 

if the United States does not do that, and if we take no further action? I don’t believe either one of you is suggesting we take further 

action in terms of congressionally. But at the minimum, you believe 

the U.S. should declare them manipulators. 

Many economists, and we have heard some reports already, have 

demonstrated the job loss that has taken place here because of— 

as a result of China’s currency manipulation. Do you believe that 

that has peaked? Has it leveled off, or do we still—or are we still 

poised to possibly lose millions more jobs? 

Mr. BERGSTEN. I think the situation will get worse if we did 

nothing about it. If China maintains the exchange rate where it is 

now, but if the IMF forecast is right, its surplus rises again, and 

in absolute terms gets to about double where it is now, that simply 

means a bigger deficit for us and more job loss for us. 

So the worst case, in my analysis, is if we do not label China. 

We still have no credibility in trying to line up a multilateral coalition to take the preferred measures. 

Mr. CROWLEY. Dr. Ferguson. 

Mr. FERGUSON. Well, I think if we don’t label China a currency 

manipulator, we will look like the wimps of the western world. So 

it is our credibility that will really be the biggest problem. And I 

think that is the most powerful argument. 

Your first question is a really important one. I was at a conference in London last week at which a leading Chinese economist 

said the following: ‘‘My recommendation is that China should buy 

no more U.S. Treasuries, but should not sell them all at once.’’ And 

when he said those words, there was a stunned silence in the room. 

That seems to me to indicate that there is a fundamental policy 

change underway, and it will put the pressure on the Federal Reserve to start buying Treasuries if China stops because otherwise 

there will be a significant runup, maybe of 200 basis points, in 10- 

year yields. And that would really be devastating for the U.S. economy at this time of depressed demand and very high levels of debt. 

Mr. BERGSTEN. I strongly disagree with that, with all due respect. First of all, if they stopped buying Treasuries, like the guy 

said, we could declare victory. That is what we want. We want 

them to let the exchange rate of the renminbi go up. The way they 

keep it from going up is to buy dollars, to buy Treasuries. 

Now, what would be the effect on our monetary policy and our 

macro economy? First of all, since our deficit would come down, we 

wouldn’t need to borrow as much foreign money. We would still 

have a budget deficit. Maybe it will put some healthy pressure on 

us to reduce our budget deficit. 

But in the meanwhile, other people would have to buy those 

Treasuries. The Fed itself would, at the end of the day, buy Treasuries, as it does now, under its zero interest rate and quantitative 

easing policies. 

Krugman has argued strongly that more of that could be done 

without much effect on interest rates. I don’t think it would go up 

200 basis points, but it would go up some. We have done analysis 

on it ourselves. We think maybe 50 basis points. There would be 

some effect on interest rates. There is no free lunch in getting 

these imbalances down, that is for sure. 


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Chairman LEVIN. Mr. Davis of Illinois. 

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman. 

You know, I was just thinking that in the community where I 

live, out on the streets there is a saying that if you see a sucker, 

bump his head. And I guess if you translate that, it would probably 

mean if you see opportunity, exploit it or make use of it. 

My question really is: How much or what kind of impact do we 

see revaluation of China’s currency helping to make up for the differential in labor and production costs which are enticing American 

companies and international corporations to flock to China in pursuit especially of consumer items? 

And how does the differential in consumption in China versus 

consumption of these goods in the United States impact our trade 

deficit? 

Mr. BERGSTEN. Well, it would help a lot on both counts. On the 

latter, remember, if they revalue the exchange rate, it makes imports a lot cheaper. Therefore, they will import more from us and 

everybody else. That is good for consumers in China. So if they 

really want to shift the economy more toward consumption, a big 

revaluation of the exchange rate is very helpful. 

In terms of relative labor costs, it also helps. It is not going to 

solve the whole problem; their labor costs will still be much lower 

than ours. But remember, their productivity is much lower than 

ours, too, and what counts is the relationship between the two. 

If the RMB were to go up by my full 40 percent, that is like reducing the gap between productivity differentials by about 40 percent. It wouldn’t solve the whole problem, but it would help a lot 

in terms of U.S. competitiveness both in the Chinese market and 

domestically against products coming from China. 

Mr. DAVIS OF ILLINOIS. Anyone else? 

Mr. PRESTOWITZ. Well, that is—I agree essentially with what 

Fred said. But I would add this point. That is that much of what 

we sell—much of the dynamic you are talking about, the movement 

of U.S. productive factories and investment abroad, is not so much 

in response—it is partly in response to the currency. But it is also 

very much, as I said earlier, in response to these very aggressive 

investment incentives. 

And I think that is another issue that has to be addressed in this 

context. And I think it is something that can be done in the WTO, 

as Mr. Ferguson suggested. 

Mr. FERGUSON. A very brief remark on this. We would have to 

keep pressing them because they keep making productivity gains. 

And we must realize it is a very important point. This isn’t a onetime quick fix. 

Even if there was a 40 percent revaluation, it wouldn’t be long 

before we would find ourselves once again under pressure because 

the real gains are coming in the unit labor costs, not from the currency manipulation. 

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman. 

Chairman LEVIN. Under our rules, Mr. Camp wants to inquire. 

Mr. CAMP. Thank you very much, Mr. Chairman. 

We hear a lot about China’s foreign currency reserves. And Dr. 

Levy, could you help the committee understand the ramifications 

of holding those reserves? And certainly, you know, the impact on 


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financial markets, for example, and some have argued they may 

have been the cause of the financial crisis, does this push down 

U.S. interest rates? 

Can they use them to subsidize manufacturing? And are there 

any other countries that, over time, have had either large foreign 

currency reserves or large trade surpluses, and what was the impact? 

So if you could just enlighten the committee in that area, I would 

appreciate it. 

Mr. LEVY. Yes. I would be happy to. There is a lot of material 

there. 

I would say I do not believe that China’s accumulation of foreign 

currency reserves were a principal cause of the financial crisis. 

It does have the effect of increasing the pool of savings in the 

world, and that does have the effect of driving down interest rates. 

But I think for the U.S. as a major borrowing nation, in general 

seeing lower interest rates is a good thing. If we misuse the funds, 

that is not really China’s fault. 

I think there are common misperceptions that the accumulation 

of reserves is some war chest for China to do whatever they please 

to, as you suggested, subsidize domestic manufacturers, is one common. In fact, it is a very limited pile of funds, and I would argue 

that it is in no sense a measure of Chinese success, that it is a 

growing problem for the Chinese. 

Were they to try to use these funds domestically, the first step 

would be that they would have to convert—whether it is dollars, 

Euros, yen—they would have to convert them into their currency, 

and that would bid up their currency. 

What they are faced with is as soon as that happens, they face 

a very serious capital loss. They can have a capital loss both because of the change in the currency and if interest rates were to 

rise. So it is actually a major point of vulnerability for China. 

Were there other points that missed? 

Mr. CAMP. No. I mean, that was generally it. I have a few seconds left. Is there anybody else who would care to comment? 

Mr. BERGSTEN. I think the Chinese fully understand that they 

are going to take big capital losses on their dollar holdings. They 

have viewed this all along as an export subsidy, which leads to a 

job subsidy. And they know that at some point, they are going to 

have to pay the price. 

It is actually ironic and almost humorous. The Chinese complain 

about the international value of the dollar and the international 

role of the dollar. But every day, as I testified, they are buying another $1 billion worth of dollars to keep their currency from rising. 

They are the ones who are propelling the dollar to an ever greater 

international role, all the while complaining about it. 

So I don’t have too much sympathy for them. I think the 

thoughtful people there know that they are going to take a loss. 

They don’t have to mark it to market, incidentally. It doesn’t go 

into their budget. It doesn’t go into any accounting. They will never 

have to pay any piper for it. But they know that as part of their 

development strategy, it is a price that they judge to be worth paying. 


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Mr. CAMP. All right. Thank you. I see my time is expired. Thank 

you, Mr. Chairman. 

Chairman LEVIN. Thank you, Mr. Camp. 

Mr. Etheridge and then Ms. Sa ́nchez. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. Thank you for this 

hearing. 

Let me follow that a bit because if you look at it internationally 

and look at some numbers—I am looking on this chart—if you go 

back to 2000 on the foreign currency exchange reserves that China 

has accumulated, and with the amount of trade deficits they have 

accumulated at the same time, it is about a fivefold increase, you 

know, progressively. It keeps going. 

My question is this, though: Because as you look at the loss of 

jobs in this country in that same period and you look at how the 

products we manufacture have gone, and it is also having an impact, starting to have an impact, on our agricultural exports that 

we now still have a balance of payments in, my big question to you, 

in a state like mine in North Carolina, where we produce pork and 

poultry and a host of manufacturing textiles and technologies, give 

me some understanding of where we are headed with all this stuff. 

We have talked about it in the broader sense. But through the 

international or the large corporate entities, you know, they are 

moving stuff at that level. I want to know what happens on Main 

Street for the guy and gal who is out there working every day who 

is trying to make a living and don’t understand all this stuff. 

Mr. BERGSTEN. Well, I did a quick calculation based on the 

data your staff aide gave me on North Carolina. And if I understand it right, your population is about 3 percent that of the country. 

Mr. ETHERIDGE. Correct. 

Mr. BERGSTEN. So if the averages pan out and my numbers are 

right, then eliminating the Chinese currency misalignment would 

create somewhere between 18,000 and 30,000 jobs in North Carolina. It actually might be a bit more than that because in agriculture and low-productivity industries like textiles, you actually 

get more jobs per billion. So you would probably be toward the 

upper end of that range. 

It would be significant in terms of job creation in a trade-oriented state like North Carolina. 

Mr. ETHERIDGE. Mr. Ferguson. 

Mr. FERGUSON. More jobs have been lost in the United States 

by the bursting of the real estate bubble and the loss of jobs in 

housing and construction than have been lost to competition with 

China in the last three years, far more. 

And we must beware of what would be a Pyrrhic victory, in Dr. 

Bergsten’s terms. If we got a currency revaluation at the price of 

higher interest rates, then it would be very bad news indeed for the 

people in the housing and construction sectors so badly affected 

and so very far from a sustainable recovery right now. 

Mr. ETHERIDGE. So it is not a very simple answer? 

Mr. PRESTOWITZ. But, listen. The course that we are on at the 

moment, if the Chinese don’t revalue and we stay on the track we 

are on, is unsustainable. And it results in continued erosion of U.S. 


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competitiveness and U.S. standard of living, and it is just not a 

sustainable course. 

Mr. ETHERIDGE. Thank you, Mr. Chairman. 

Chairman LEVIN. Ms. Sa ́nchez, you have the last crack, I think. 

Thank you for your patience. 

Ms. SA ́ NCHEZ. Thank you, Mr. Chairman. And I want to thank 

the witnesses for their patience. 

All of you seem to agree that China is artificially holding down 

the value of its currency in order to boost its exports and make imports more expensive there. And it is clear that the use of the favorable exchange rate policy hurts American farms and American 

workers. 

And estimates that are about 1.5 million jobs are lost due to the 

currency manipulation. And in fact, in the state of California, we 

have lost the greatest number of jobs due to unfair Chinese trade 

policies, and sadly, my district ranks No. 32 of all 435 congressional districts in job loss due to unfair Chinese trade. 

And so, Mr. Chairman, I would ask unanimous consent to be able 

to submit the EPI briefing paper, ‘‘Unfair China Trade Costs Local 

Jobs,’’ for the record, if I may. Mr. Chairman? 

Chairman LEVIN. Without objection. 

[This information follows:] 


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Ms. SA ́ NCHEZ. Thank you. And in my limited time, I want to 

ask Mr. Prestowitz: In your written testimony, you conclude that 

tax holidays, capital grants, and other incentives used to bribe 

global corporations with regard to the location of their plants, labs, 

and headquarters have to be subject to common WTO and IMF discipline. 

And I was wondering if you could elaborate a little bit more on 

that. 


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One set of countries is playing a game that I would call dirty free 

trade. The markets are pretty open. I mean, our market is pretty 

open. It is not fully open, but it is pretty open. And they are playing in terms of market outcomes being acceptable, legitimate outcomes. 

Another set of countries is playing the strategic, export-led catchup game. It is like having two teams. One is playing football and 

one is playing baseball. But the premise of this discussion is everybody is playing baseball. 

The truth is, everybody is not playing baseball. And we have an 

incompatibility between these two systems. It manifests itself in 

the currency. It manifests itself in the current account imbalances. 

And it is driven not just by—it is driven by a whole set of factors. 

It is driven by one set of countries has strong incentive to save. 

The other set of countries tends to be high consumption. One set 

of countries manages its currency, provides export subsidies, offers 

aggressive investment incentives in order to attract investment, to 

attract technology flows, manages limits, restricts/guides entrance 

into its own market. The other set of countries allows pretty free 

entry. 

And we are having a clash of those two systems. And part of that 

clash needs to be addressed, in my view, through the currency 

problem, as we have discussed today. But the currency issue won’t 

solve the whole clash. 

Intel, for example—if there is one product in which the United 

States has a classic competitive advantage, it has to be Intel’s 

microprocessors. They make 85 percent of the world’s computer 

microprocessors, and they make 80 percent of them in the United 

States. So we have a competitive advantage. 

Intel has just announced a major factory in China. Now, is the 

production cost of those microprocessors going to be less in China? 

Not really. It is not labor-intensive. It is capital-intensive. And 

Intel is getting a huge tax and capital package in order to induce 

a location of that factory. 

And that is not the only reason that Intel put the factory there, 

but it is an important one. And it is something that we have not 

been addressing. And yet if we do all the things that we think need 

to be done in terms of currency adjustment, that factor alone, that 

strong financial incentive, will continue to tend to draw competitive 

production facilities out of the U.S. into China and into other countries that pursue the same—— 

Ms. SA ́ NCHEZ. Resulting in job losses here in the United States. 

With respect to—and I love the phrase that you used, dirty free 

trade, because I think that says it all. Do you think that the same 

might also be true for labor and environmental laws, i.e. countries 

that have much more lax laws can lure global companies to locate 

there at the cost of those who actually have decent labor standards 

and environmental standards? 

Mr. PRESTOWITZ. Yes. Certainly. That is a serious concern, 

yes. 

Ms. SA ́ NCHEZ. And doesn’t that then pretty much create this 

race to the bottom of, you know, companies moving to the place 

with the least amount of—— 


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Mr. PRESTOWITZ. That is certainly a consideration in some of 

the shifts that are made in production locations, moreso in some 

industries than in other industries. 

Ms. SA ́ NCHEZ. So, I mean, in essence, if you follow that line of 

reasoning to its logical conclusion, it is not really workers that end 

up benefitting or end up, you know, doing better or having increased opportunities over the long run. You have people who have 

the ability to move capital and facilities that continue to profit off 

of—— 

And the difficulty is that in the relationship between us and 

China and a number of other developing countries, we are playing 

as if we have deep integration, but we don’t have the rules and the 

institutions to facilitate it. 

So if I could just pose one last question? An additional 15 seconds? It is a yes or no question, so it should be—— 

Mr. CAMP. She has been given double the time any other member has gotten. 

Ms. SA ́ NCHEZ. All right. I will submit in writing, and I will 

yield back. 

Chairman LEVIN. All right. Well, she was last and the most patient, so I thought she might have a few extra moments. 

Mr. CAMP. And she did receive them. 

Chairman LEVIN. So thank you very, very much. This has been 

especially illuminating, really. I think you have been able to outline what the challenges are, and to outline some alternatives, and 

to help us evaluate them. 

So I think, Mr. Camp, you join in thanking this particular—if 

you want to say a few words? 

Mr. CAMP. Yes. I just want to thank the panel for their testimony. It was a very good hearing. And I want to thank the chairman for holding it. 

Chairman LEVIN. We stand adjourned. We beat the bell. Thank 

you. 

[Whereupon, at 12:13 p.m., the committee was adjourned.] 

[Submissions for the Record follow:] 


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anorris on DSK5R6SHH1PROD with HEARING63077A.146
190 

Æ 


anorris on DSK5R6SHH1PROD with HEARING63077A.147