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U.S.-CHINA ECONOMIC RELATIONS REVISITED

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

MARCH 29, 2006

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

on Finance ............................................................................................................ 1

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

WITNESSES

Bhatia, Hon. Karan K., Deputy U.S. Trade Representative, Office of the

U.S. Trade Representative, Washington, DC .................................................... 5

Lavin, Hon. Franklin L., Under Secretary of Commerce for International

Trade, U.S. Department of Commerce, Washington, DC ................................. 8

Adams, Hon. Timothy D., Under Secretary of Treasury for International

Affairs, U.S. Department of the Treasury, Washington, DC ............................ 9

Papovich, Joe, senior vice president international, Recording Industry Association of America, Washington, DC ................................................................... 29

Hormats, Hon. D. Robert, vice chairman, Goldman Sachs (International),

Goldman Sachs & Co., New York, NY ................................................................ 31

Frisbie, John, president, U.S.-China Business Council, Washington, DC .......... 33

Joachim, Gary, vice president, American Soybean Association, Owatona,

MN ......................................................................................................................... 34

Bergsten, Dr. C. Fred, director, Institute of International Economics, Washington, DC ............................................................................................................. 36

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Adams, Hon. Timothy D.:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 43

Responses to questions from committee members ......................................... 49

Baucus, Hon. Max:

Opening statement ........................................................................................... 3

Bergsten, Dr. C. Fred:

Testimony .......................................................................................................... 36

Prepared statement .......................................................................................... 55

Responses to questions from committee members ......................................... 67

Bhatia, Hon. Karan K.:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 70

Responses to questions from committee members ......................................... 80

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 99

Frisbie, John:

Testimony .......................................................................................................... 33

Prepared statement .......................................................................................... 100

Responses to questions from committee members ......................................... 108

Grassley, Hon. Charles E.:

Opening statement ........................................................................................... 1

Hormats, Hon. D. Robert:

Testimony .......................................................................................................... 31

Prepared statement .......................................................................................... 111

Responses to questions from committee members ......................................... 125

Joachim, Gary:

Testimony .......................................................................................................... 34

Prepared statement .......................................................................................... 127

Page

IV

Lavin, Hon. Franklin L.:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 130

Responses to questions from committee members ......................................... 136

Papovich, Joe:

Testimony .......................................................................................................... 29

Prepared statement .......................................................................................... 145

Responses to questions from committee members ......................................... 154

Santorum, Hon. Rick:

Prepared statement .......................................................................................... 157

(1)

U.S.-CHINA ECONOMIC RELATIONS REVISITED

WEDNESDAY, MARCH 29, 2006

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:08 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Charles E.

Grassley (chairman of the committee) presiding.

Also present: Senators Hatch, Snowe, Thomas, Bunning, Baucus,

Bingaman, and Lincoln.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Last June, our committee held a hearing in

which we examined economic relations between the U.S. and

China. Today’s hearing provides an opportunity to follow up on

those developments.

Looking ahead, I intend to continue this committee’s focus on our

trade and economic relations with China. We are committed to vigorous oversight on that relationship and what it means to the overall economic health and prosperity of our country.

Because our relationship with China is very important—China is

already, as you know, our fourth-largest export market—our export

growth to China far outpaces U.S. growth to the rest of the world.

That is partly due to the fact that the United States and China

have been the engines of the global economy in recent years.

Other major economies clearly need to do more, but the point is,

we derive a great deal of benefit from our economic relationship

with China. China also benefits. That should not be forgotten in

this debate.

On the other hand, we also have some tensions with China. For

example, our bilateral trade has become increasingly imbalanced in

recent years. That is partly due to the fact that our trade deficit

with other Asian countries has migrated, to some extent, to China.

But still it is an area of concern, and at some point the growth

of our bilateral trade deficit will be neither politically nor economically sustainable. That raises the question of, what should our policy response be? As I said last June, we have to be thoughtful in

our actions, and hopefully get it right. We cannot afford to act irrationally and get it wrong.

An important basis of developing our policy response is the extent to which China fulfills the obligations it assumed as a member

of the WTO and as a major beneficiary of open trade.

2

We have currency exchange rate issues. Last July, China abandoned its currency pegged to the U.S. dollar. China announced that

its exchange rate would become adjustable based on market supply

and demand.

China also announced that its currency would be allowed to fluctuate by three-tenths of a percent on a daily basis against a basket

of currencies. It is clear that the latter commitment is not being

met. Since July, China’s currency appreciated by about 1 percent

relative to the U.S. dollar. Much of that movement came in the last

few weeks; recently, in other words.

In addition to our growing bilateral trade imbalance, China ran a global trade surplus of over $100 billion. These mounting trade

imbalances indicate that China’s currency should appreciate further, but something is impeding that adjustment.

So that is why Senator Baucus and I introduced, just yesterday,

a bill to improve how we respond to the material currency imbalances. Our bill enhances U.S. engagement on this subject and it

provides for meaningful consequences if countries fail to act. Cooperation is key if we’re going to eliminate impediments to normal

market adjustment exchange rates.

Moving on, another important issue is the enforcement of intellectual property rights. Last July, China committed to boosting its

enforcement efforts in a number of ways, such as by ensuring that

all levels of the Chinese government use legitimate software products.

This comes on top of China’s pledge, in April of 2004, to, in their

words, ‘‘significantly reduce infringement of intellectual property

rights.’’ Yet, estimated piracy in China is rampant, and continues

to be. In addition, China accounted for almost 70 percent of counterfeit goods seized by U.S. Customs in fiscal year 2005.

So, in addition to the more fruitful engagement with China, we

need to be prepared to assert our trade rights effectively. That is

not to say the measure of our success is the number of cases that

we might bring to the World Trade Organization. I focus, and I

think we all ought to focus, on outcomes. If we can avoid lengthy

litigation to settle disputes, that is so much the better.

The administration has achieved important successes taking that

approach, but we also need to be prepared to litigate, if need be.

That is why the bill that Senator Baucus and I introduced

strengthens the administration’s ability to enforce our rights under

trade agreements, enhancing Congressional oversight of such efforts at the same time.

This hearing also gives us an opportunity to review our objectives for the planned meeting of the U.S.-China Joint Commission

on Commerce and Trade and the planned visit to Washington, DC

of the Chinese president.

We have a number of important issues to address, in addition to

currency exchange rates and intellectual property. So, we are going

to hear from the administration, and I look forward to that.

Now I am ready for Senator Baucus. Thank you. I did not thank

Senator Baucus for his cooperation on the legislation. I did at the

news conference yesterday, but I want to repeat it for the record,

that this was something that was very easy to work on, and I

thank you for your help.

3

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. It is, frankly, not

difficult at all, working with you. I very much appreciate your

statesman-like sense in developing this bill, and I think it is a good

piece of legislation.

Again, thank you for convening this hearing, because this is an

important juncture in our relationship with China. I made my seventh trip to China this January. I met with Premier Wen Jiabao,

Commerce Minister Bo, and other members of the senior leadership. I learned a lot, and I am eager to learn more today.

The book of Deuteronomy counsels, ‘‘When you make a promise,

do not be slow to pay it. Be careful to do what you say you’re going

to do. Keep the promise you have made.’’

Promises are fundamental to human relationships. Just as much,

promises form the foundation of international trade. America promises our trading partners to open our vast market.

In return, our partners promise America to open their markets

to our exports. Promises are at the heart of U.S. trade policy. Members of Congress promise their constituents to defend their interests. The administration promises Congress to negotiate trade

agreements consistent with the parameters in the law.

The administration promises to enforce these agreements vigorously. The administration promises to implement the trade laws

that the Congress passes. The government promises all Americans

to strive to make sure that trade works for them.

These promises reinforce the international trade system. We

must make sure that promises made are promises kept. Is China

keeping the promises that it made as part of its accession to the

World Trade Organization? Is the administration keeping its promise to enforce China’s trade obligations in U.S. trade law? The

record on both accounts is mixed.

Let us start with China. When it joined the WTO, China made

an extensive set of promises. China promised to reduce tariffs, to

improve market access for services, to limit subsidies, and to protect and enforce intellectual property rights.

Many rush to criticize China, but many also overlook China’s

enormous efforts to keep these promises. China has implemented

many of its WTO commitments on time, and some promises, like

trading rights, China has implemented early. This deserves recognition.

In many key areas, however, China has not kept its promises.

China maintains an unjustified WTO-inconsistent ban on U.S. beef,

despite clear scientific evidence that our beef is safe. China has a

team in Washington this week to address this issue, and they need

to resolve it now.

China tolerates massive levels of piracy and counterfeiting of foreign products. China hides the subsidies that it provides to stateowned enterprises. China has not yet taken meaningful action to

join the WTO agreement on government procurement. All evidence

suggests that China continues to manipulate its exchange rate for

competitive gain.

The administration has also made promises regarding China.

They promised to enforce China’s trade commitments and have

4

promised to defend U.S. trade law with respect to China. In some

areas, the administration has kept its promises.

USTR has made progress working with China on standards affecting wireless communications devices, for example. The USTR

successfully convinced China to rescind a WTO-inconsistent antidumping order on Kraft linerboard, which means a lot, I might say,

to many hardworking people in that industry in my State of Montana.

Ambassador Portman’s top-to-bottom review is an important step

in focusing efforts on enforcing China’s trade commitments, and I

commend Ambassador Portman and the administration for that.

The administration, however, can do more. I hope that the bills

that I have introduced with Senator Grassley yesterday, and with

Senator Hatch last month, will help to focus the administration’s

enforcement efforts.

In other areas, the administration has failed to keep its promises. It has effectively nullified section 421 of the Trade Act. Congress purposely included that provision in the China PNTR bill.

Congress intended for the administration to use that provision to

limit harmful surges in Chinese imports to help our domestic industry adjust.

Four times, the International Trade Commission recommended

that the President apply section 421 to counter the market disruption caused by Chinese imports, but in all four cases the President

refused to act.

Those decisions are completely at odds with what Congress intended, and those decisions have led Americans to lose jobs. Companies have gone out of business as a consequence, American businesses, bankrupt. Broken promises by China and the administration have led us to a dangerous place in our trade relationship.

It is no wonder that Americans do not trust China on trade when

it does not keep key commitments, and it is no wonder that Americans do not trust the administration on trade policy when the administration refuses to use U.S. law to defend Americans.

We need to get this relationship back on track. That is why I

have worked so closely with Senator Grassley, Senator Hatch, and

other members of this committee on responsible WTO-consistent

legislation. That legislation will help make our trade policy work

better. That legislation will address concerns that Americans have

on currency and on trade enforcement.

So let us work to see that China keeps its promises, and let us

ensure that the administration keeps its promises. Let us, thus, ensure that international trade can live up to the promise that it

holds for better lives for all Americans.

The CHAIRMAN. Thank you, Senator Baucus.

Our first panel includes Ambassador Bhatia. He is Deputy U.S.

Trade Representative, responsible for U.S. trade relations with

East Asia, South Asia, Southeast Asia, and Africa.

The second panelist is Treasury Under Secretary Tim Adams,

who is principal advisor to Secretary Snow on international economic issues, and that includes currency issues as well.

Third, Commerce Under Secretary for International Trade, Ambassador Frank Lavin, who oversees the International Import AdVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
5

ministration. We are very grateful because we know you had to adjust your schedule to be with us, and we thank you for doing that.

Do you have an order among yourselves? [No response] All right.

Then I would suggest Bhatia, Lavin, and then Adams. Is that all

right? Go ahead.

STATEMENT OF HON. KARAN K. BHATIA, DEPUTY U.S. TRADE

REPRESENTATIVE, OFFICE OF THE U.S. TRADE REPRESENTATIVE, WASHINGTON, DC

Mr. BHATIA. Thank you very much, Mr. Chairman, Senator Baucus, and members of the Finance Committee. Thank you for giving

me the opportunity to testify today.

I have prepared a more detailed statement that, with your permission, I would ask be submitted for the record, and I will just

give you a synopsized version this morning orally.

[The prepared statement of Mr. Bhatia appears in the appendix.]

Mr. BHATIA. Today’s hearing, I believe, is very timely. Last

month, USTR issued the administration’s top-to-bottom review of

our trade relationship with China. This comprehensive review of

our trade relationship, prepared after consultation with stakeholders and with Congress, is the first such review to have been

undertaken since China’s accession to the WTO, and contains various recommendations which we are in the process of implementing.

At the same time, we have been engaging China actively as we

prepare for a meeting of the Joint Committee on Commerce and

Trade, the JCCT, on April 11, and for President Hu’s visit to the

United States shortly thereafter.

In fact, Under Secretary Lavin and I just returned from meetings

in Beijing at the end of last week where we were pressing China

for more substantial progress in a number of areas.

Our assessment of our bilateral trade relationship with China,

reflected in the top-to-bottom review, is that, while that relationship has benefitted both the United States and China and has witnessed a number of positive developments in recent years, it lacks

equity, durability, and balance in the opportunities that it provides.

It has been more than 4 years since China joined the WTO, and

we believe we are entering a new phase in the U.S.-China trade

relationship. This new phase marks the end of China’s transition

period as a new participant in the WTO, and the beginning of a

period in which China must act and be treated as a fully accountable participant in, and beneficiary of, the international trading

system, one that must bear responsibility in its multilateral, its regional, and its bilateral trade relationships that is commensurate

with its commercial heft and with the economic benefits that it has

gained from participation in the global trading system.

Now, after 4 years of WTO membership, China has a track

record, and in our view, it is decidedly mixed. The commitments

that were easiest to fulfill have largely been fulfilled; those outstanding will require a more serious level of attention and focus.

In USTR’s most recent report to Congress on China’s WTO compliance, we highlighted our principal areas of concern, many of

which we are pursuing with China as we approach the April 11

JCCT and the visit of President Hu.

6

First on our list of concerns is intellectual property protection

and enforcement. While China has made improvements to its IPR

laws and regulations, the lack of effective IPR enforcement remains

an enormous challenge.

China committed to significantly reduce counterfeiting and piracy at the 2004 JCCT. Nearly 2 years have gone by, and that commitment has not been met.

Now we have seen China, under the leadership of Vice Premier

Wu Yi, take a number of steps in an attempt to address this problem, and there is evidence that it remains focused on it.

For example, just over the past couple of days China announced

actions to close and discipline 14 plants that produced pirated

DVDs and CDs. We have been pushing China very hard in this

area and look forward to getting a full report from China in the

next few days on its recent actions.

This week, China also announced final regulations to transfer

IPR cases from administrative authorities to criminal authorities,

and draft regulations to transfer IPR cases from Customs authorities to criminal authorities, again, in response to vigorous U.S.

pressure.

However, while these steps and others that China has taken are

helpful, they have not resulted in significant reductions in piracy

and counterfeiting levels.

We have also seen China continue to use an array of industrial

policy tools to protect favored sectors and industries in the area of

services. Concerns in many sectors remain, largely due to arbitrary

and non-transparent policies, and China’s use of entry threshold requirements that exceed international norms.

Their exceedingly high capitalization requirement for telecommunications services, for example, is a good example, and one

which we think China should change as soon as possible.

Agriculture is a high priority of the administration’s trade relations with China. And while China is one our farm sector’s best

customers, the record demonstrates that China does not always

base its food safety decisions on science, as evidenced by its continued ban on U.S. beef. China needs to lift this ban.

And there are concerns in the area of transparency and rule of

law, for example, that cut across sectors. In short, while China has

a more open and competitive economy than 25 years ago and WTO

accession has led to the removal of many trade barriers, there are

still substantial barriers to trade that have yet to be dismantled,

and they need to be.

These actions not only harm U.S. businesses, farmers and workers, they are also inconsistent with China’s own best interests.

Now, the top-to-bottom review that we issued last month concludes that to effectively address these and other challenges going

forward, U.S. trade resources and priorities with respect to China

need to be readjusted.

First and foremost, the report calls for strengthening our current

focus on China’s WTO compliance and adherence to international

norms, as China has transitioned to being a mature trading partner in the international system.

To improve our enforcement efforts, China has recently established the position of Chief Counsel for China Enforcement, and a

7

China Enforcement Task Force with a broad and aggressive mandate. The task force has already met and begun its work, and we

expect to see it move forward quickly with a broad and aggressive

agenda.

It will approach enforcement comprehensively by using WTO

mechanisms short of dispute settlement, by seeking to ensure that

China lives up to its bilateral commitments like those it has made

in the JCCT, and by developing strategies for addressing trade

problems that have so far been difficult to address, such as the

Chinese government’s excessive subsidization of a range of Chinese

industries.

But it will also focus on issues where there is a need to enforce

China’s obligations through dispute settlement. We are already

pursuing potential WTO cases on a number of fronts, and we will

not hesitate to bring them if we believe that doing so is in the

United States’ best interests.

Indeed, in January of this year we were poised to bring a case

challenging China’s imposition of antidumping duties on our Kraft

linerboard exports, as Senator Baucus referenced, when at the eleventh hour China reversed course and rescinded its improper duties.

We have made clear to China that using the WTO dispute settlement mechanism should not be viewed as a failure in our relationship, rather it is a sign of the maturity of that relationship.

In addition to strengthened enforcement, the top-to-bottom review outlines the following actions that we are in the process of

taking to ensure meaningful progress on our priority objectives

with respect to China: 1) expanding USTR’s information assessment capabilities; 2) the creation of a senior advisory task force on

China under the auspices of our Advisory Committee on Trade Policy and Negotiations, which will be co-chaired by John Engler,

president of the National Association of Manufacturers, and Dr.

Fisk Johnson, chairman of S.C. Johnson & Company; 3) expanding

our trade negotiating capacity in Beijing; 4) increasing coordination

with other trading partners, such as the EU and Japan, on China

trade issues of common interest, such as enforcement of intellectual

property rights and tariffs on automobiles and auto parts; 5) deepening our trade relations with other Asian economies through such

mechanisms as bilateral FTAs with Malaysia and South Korea,

and within regional forums to maintain and enhance our commercial relationships in the region; 6) increasing the effectiveness of

high-level meetings with China’s leaders, including through holding

annual meetings of the JCCT; 7) strengthening the U.S.-China dialogue on important multilateral and bilateral issues that pose potential problems for the relationship, including China’s participation in global institutions, market access and standards issues, subsidies and structural issues; 8) strengthening U.S. Government

interagency coordination through more frequent and rigorous use of

the TPRG mechanism; and, finally, 9) strengthening executive Congressional partnership through regular briefings for Congressional

members and staff.

I would be happy to go into these in any greater detail that you

desire. Mr. Chairman and members of the committee, thank you

for providing me the opportunity to speak with you this morning.

8

The CHAIRMAN. Thank you.

Mr. Lavin?

STATEMENT OF HON. FRANKLIN L. LAVIN, UNDER SECRETARY

OF COMMERCE FOR INTERNATIONAL TRADE, U.S. DEPARTMENT OF COMMERCE, WASHINGTON, DC

Mr. LAVIN. Thank you, Mr. Chairman, Senator Baucus, members

of the committee. I am pleased to be with you today to share some

thoughts on our economic relationship with China.

As Ambassador Bhatia noted, we just returned from China a few

days ago. Secretary Gutierrez is there this week, all continuing discussions as a lead-up to this year’s meeting of the Joint Commission on Commerce and Trade.

The relationship between the United States and China could well

be the most important international economic relationship of our

era, because the complexity of the relationship encompasses almost

every major economic issue we face, such as competitiveness, trade

balance, investment policy, and a relationship between economies

of this size, as well as the fundamental differences of language, development levels, and political systems, which can present significant challenges, not the least of which are the trade barriers on

China’s side.

But as we wrestle with these challenges, we also need to keep

the positives in mind: U.S. exports to China increased by over 20

percent in 2005, and, indeed, since China joined the WTO in 2001,

U.S. exports to China have increased by some 118 percent, which

is the highest 5-year percentage increase among our top export

markets.

U.S. companies operating in China really report generally successful results, and we should also bear in mind that imports can

bring advantages to the U.S. economy, as well as challenges.

But I want to focus on these challenges for a moment. When we

look at the challenges in the U.S. market, the Department of Commerce, as the Chairman noted, takes the lead on trade remedy response.

We currently maintain 58 antidumping orders on imports from

China, including consumer goods, steel products, agricultural products, seafood, and chemicals. These orders represent 22 percent of

all current U.S. antidumping orders and affect some $5 billion-plus

in 2005 trade.

Regarding subsidies, we have stepped up our engagement of

China through the JCCT. We have a Structural Issues Working

Group, and we have launched a steel dialogue. Subsidies in China

cover a wide range of issues, including industrial policies, China’s

banking sector, the role of state-owned enterprises, and China’s

continued use of price controls.

In the China market itself, we believe U.S. firms face a range of

barriers and challenges. Intellectual property rights issues might

be chief among them, as they include issues from software and entertainment piracy to fake pharmaceuticals and illegal knock-offs of

famous brands’ consumer goods.

As Commerce hosts the Patent & Trademark Office, as well as

the International IPR Enforcement Coordinator, in addition to the

International Trade Administration, we think we are able to bring

9

a distinctive combination of technical trade expertise to these

issues.

If we move beyond the IPR issues, China has an array of nontariff barriers, including government regulations, technical standards, non-market mechanisms, lack of transparency, and weak enforcement laws.

In fact, a complete list of trade barriers in China would be quite

extensive and would include China’s ban on U.S. beef, U.S. firms’

inability to get 3–G service licenses, and Chinese barriers to U.S.

telecom firms.

Furthermore, China is considering regulations that would be

steps backward in areas such as direct marketing and express delivery. Also, as Senator Baucus noted, China has yet to honor its

commitment to join the WTO government procurement agreement.

While we are trying to tackle these issues through the JCCT, we

did finish a week of consultations. Some progress was made, but

in my view, most of the major issues remain unresolved.

Beyond those discussions, the Commerce Department has a

range of activity on the front lines every day in China to help U.S.

companies compete in that market. China represents our largest

single overseas presence. Our team there ranges from commercial

specialists to patent and trademark experts.

We have four programs underway in China: developing market

opportunities, business facilitation, problem-solving, and enforcement. Last year, we tallied in the thousands the number of U.S.

companies that were helped through the various activities of trade

promotion: IPR assistance, seminars, website call support, and so

forth. With your permission, Senator, I have a written testimony

that goes into detail on those points.

Ultimately, for the benefit of both our countries, open markets

are essential. The most important step China can take if it wants

to ensure continued access to the U.S. market would be to continue

to increase market access for U.S. firms.

American companies, workers, and farmers can compete with

anyone in the world, given a level playing field, and we will continue to work with our Chinese counterparts to achieve that goal.

Thank you, Mr. Chairman. I would be happy to take your questions.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Lavin appears in the appendix.]

The CHAIRMAN. Now, Mr. Adams?

STATEMENT OF HON. TIMOTHY D. ADAMS, UNDER SECRETARY

OF TREASURY FOR INTERNATIONAL AFFAIRS, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Mr. ADAMS. Thank you, Mr. Chairman, Senator Baucus, and

other distinguished members of the committee. I am pleased to be

with you here today to discuss the Department of Treasury’s economic engagement with China.

As my colleagues have noted, the U.S. economic relationship with

China may be the single most important economic relationship as

the 21st century opens.

More than 25 years have passed since China began its transition

to a market economy, and China has seen its standard of living

10

surge—in fact, it is almost unprecedented—with the transformation that this economy has experienced in such a short period of

time.

China is now the world’s fourth largest economy and the third

largest trading nation. The United States has benefitted from China’s growth. U.S. exports to China have grown at five times the

rate of our exports to the rest of the world since China joined the

WTO, and China has risen to our fourth largest export market.

Moreover, China and the U.S. together have accounted for almost

half of global growth since 2000.

China’s rapid growth and the character of that growth also poses

great challenges, not only for China, but for the rest of the world.

China’s overall current account surplus has risen sharply, from $17

billion in 2001, to $69 billion in 2004, and estimates for 2005 are

something around $150 billion, which would be close to 7 percent

of China’s GDP.

China’s current account surplus is now a major component of

global imbalances, and its continuation risks undermining support

for the open trade policies which have contributed so much to its

rapid development.

Secretary Snow and the entire Treasury team have been working

on this relationship now for many years. Last fall, on his most recent trip to China, Secretary Snow articulated the three pillars of

what China needs to do to support robust and sustainable economic

growth.

These are: adopt a more market-based, flexible exchange rate;

shift from investment- and export-oriented growth to a more consumption-based growth model; and reform and open up their financial sector, including their capital markets.

The Chinese have made some important achievements in these

three pillars, but they have much work to do. Encouraging China

to meet its responsibilities is a global task and has global implications. To that end, we have worked closely with our colleagues in

the G–7, APEC, the IMF, and other formal and informal institutions to help bring about this change. There is a broad-based consensus on what China needs to do.

With this strategy in place, it is useful for me now just to take

a couple of moments and maybe walk you through these three pillars.

The first one is exchange rate flexibility. Convincing China to

move more rapidly to a more market-based, flexible exchange rate

is our number-one priority. Exchange rate flexibility is, first and

foremost, in China’s interest.

Greater exchange rate flexibility will strengthen the ability of the

Chinese monetary policy to help assure sustained growth and avoid

the boom/bust cycles that we have seen certainly in the 1990s.

Greater ability to control domestic interest rates will also lead to

more efficient financial intermediation and help avoid credit-fueled

investment booms resulting in the build-up of non-performing

loans.

The Chinese leadership has publicly committed to greater exchange rate flexibility. Our engagement with China on exchange

rate policy is now not about whether, but about how quickly.

11

Premier Wen reaffirmed this commitment following the closing of

the National People’s Congress just a week or so ago, saying,

‘‘China will expand the foreign exchange market and will allow

more flexibility and fluctuation of the currency.’’

China has made some progress in making its currency more

flexible and market-determined, starting with the adoption of the

new exchange rate mechanism last July 21st. This authorized

inter-bank trading of currency. The trading bank is no longer the

counterpart for every transaction.

China has also introduced new financial products that hedge

against currency risks, which is important for their industry.

But to date, China’s progress has been far too cautious. Since

China began changing its exchange rate regime last July, its currency has appreciated by only 3.2 percent, and the day-to-day fluctuation has been severely constrained. In fact, it has failed to test

the limits of its narrow intra-day trading bands that were established last July.

The Chinese government must allow market forces to play a

much greater role in the determination of its currency’s value. The

obstacles are no longer technical. China could easily move more

rapidly towards greater flexibility. It should do so now.

The second pillar of our strategy is achieving more balanced

growth. The counterpart to China’s high investment in its current

account surplus is a savings rate of roughly 50 percent of GDP, the

highest in the world.

Chinese households save 25 percent of their income, on average,

mostly in the form of low-interest, low-earning bank deposits.

Household savings reflected a weak social safety net, and limited

access to financial instruments and insurance.

China’s leaders recognize that achieving more balanced growth is

central to current China policy. To spur consumption, China has

placed strong emphasis on rural development in its most recent 5-

year plan.

To boost disposable incomes of the rural poor, the government

has recently decided to cut agriculture taxes and eliminate fees for

rural primary education. It also plans to direct more capital and social spending to the rural sector.

Increasing the range of financial products available to households is also a critical component. Household savings could be reduced by insurance policies covering disability and catastrophic illness, and by the ability to finance education and other major expenses, and by making higher-return investment options available

to households, including investment options overseas.

This brings me to the third pillar of our strategy, financial sector

and capital market reform. Inefficient financial intermediation remains the Achilles heel of the Chinese economy. To help modernize

China’s financial system and capital markets, Treasury has identified a number of key priorities.

First, we believe it will be in China’s best interests to allow more

competition and market forces into the sector, in particular, by

eliminating ownership caps on foreign states and expanding the

scope of products that those institutions can offer. We are also

pressing China to make substantial new commitments in financial

services as an essential element of any Doha agreement.

12

Second, China’s regulators and firms need to improve capacity

for risk management. Third, China needs to improve opportunities

for private companies to obtain finance so that capital can be channeled to its most productive uses.

In the corporate bond market, we have encouraged authorities to

eliminate duplicative government approvals and to move to a more

disclosure-based system. On the equity markets, we are arguing for

an end to the moratorium on new listings and sales of domestic security companies to foreign investors. Finally, China needs to continue to privatize its state-owned enterprises.

Another important area of our engagement with China is protecting China’s financial system from abuse. China must strengthen its draft anti-money laundering law, as it falls short in many

key areas. We have been working very closely, bilaterally and multilaterally, with Chinese authorities on these issues.

Finally, let me address one of the stated concerns of some of the

members of this committee regarding China’s holdings of Treasury

securities, and I will do that by just putting it in perspective. China’s holdings are 3.2 percent of total public debt outstanding, and

6.6 percent of total debt outstanding held by non-U.S. Government

institutions.

China has purchased around $34 billion in Treasury securities in

2005. This is about 11 percent of what was issued or purchased.

This is in the context of the extraordinarily deep and liquid Treasury market, where daily trading is about $500 billion. China holds only about $470 billion, or 2 percent of the total of $23 trillion in U.S. credit/debt securities, so its holdings are quite

small relative to the stock.

In conclusion, China continues to undergo historic economic

transformation. Developing a constructive and mutually beneficial

economic relationship with China now is vitally important, since

the decisions we take in the next few years will guide the U.S.-

China economic relationship for a generation and the shape and

pace of global growth for many years to come.

As a significant member and beneficiary of the international

economy, China should make a greater contribution to sustaining

strong global growth by reducing its large current account surplus

and working to maintain global support for an open trade and investment system.

To put it simply, China must play by the rules of the system.

Failure to do so entails consequences both for China, for the U.S.,

and for the global economy. It is important that we manage our relations in a way that preserves global growth and maintains an

open trade and investment policy, which is a win-win proposition

for China and for us.

The U.S. Treasury is committed to promoting a path of mutual

prosperity and global leadership in our economic relations with

China.

Thank you for this opportunity to appear before your committee

today.

The CHAIRMAN. Thank you very much.

[The prepared statement of Mr. Adams appears in the appendix.]

The CHAIRMAN. After the Chairman and Ranking Member, we

have it in this order: Hatch, Bunning, Bingaman, Lincoln, and

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Thomas. And because we have a very distinguished second panel,

and also because there is a vote at, I believe, a quarter to 12, I

would ask members to stay within their 5 minutes, at least 5 minutes of asking your last question, so that we do not disregard our

second panel, some of whom have come a long way.

Mr. Bhatia, what are our expectations, as you see them, regarding the upcoming trade policy review of China by the World Trade

Organization, and specifically whether this process might spur

needed reform in China?

Mr. BHATIA. Thank you, Mr. Chairman. Yes. We do have a trade

policy review. The WTO actually has a trade policy review scheduled for China the end of the month of April.

This is an opportunity basically for member states, all of the

WTO member states, to pose questions to China that will elicit responses about both what it has actually done to fulfill its commitments, and what it intends to do.

I should tell you that we anticipate this being a pretty thoroughgoing exercise. We just went through one ourselves over in Geneva,

and I would note, emerged, I think, by consensus, with very strong

marks, the United States as a whole, with respect to its policy.

China is going to have some very tough questions to answer. We

have already posed more than 200 questions to the Chinese. Just

to give you a sense, I think the United States got 600 questions in

its TPR, and we always attract a fair number. So, it is going to be

a pretty rigorous event for them.

The hope, I think, is that the question and answer period forces

China both to focus on what it has accomplished, and what it has

not accomplished. In that process, we will elicit both a greater understanding of what it intends to do to fulfill its obligations, but

also perhaps some further commitments on their part to take some

steps that we see as being important.

From our perspective, the multilateral arena is a very important

one for China, to engage China in, as we seek to have them make

the sort of reforms and changes that we are pushing for, in addition to the bilateral forum that we have been using through the

JCCT.

The CHAIRMAN. All right.

Then, also for you, please provide us with some sort of summary

of what progress USTR is making to enhance the degree to which

U.S. trade policy is proactive and informed by comprehensive information on those economic trends and developments that we read

about every day going on in China.

Mr. BHATIA. Again, I appreciate the question, Mr. Chairman. You

are clearly referring to the part of our top-to-bottom review where

we identified this as one of our higher priorities—indeed, one of our

highest priorities.

Just by way of a sense of background, it was our sense that, as

we move into this new phase of our trade relationship with China,

it is critically important that we not be in a reactive mode, not reacting to issues that come up, the issue of today or yesterday, but

that we be looking forward a month, a year, several years forward

so that our trade policy is informed by such a longer-term view.

To that end, I would point out two things that we already have

under way. The first is the hiring of more analysts within our

14

China office. We have already hired two. There are more Chinafocused folks on the way. They funnel into and feed, by the way,

I should note, our Enforcement Working Group, so they will shape

both our enforcement strategy, as well as our negotiation strategy.

Second, we are very cognizant that we do not have all the answers at USTR or in the U.S. Government, and that we need to get

the benefit of the wisdom of many outside the government as well.

To that end, we have set up a task force within our Advisory Committee on Trade Policy and Negotiations, our most senior-level advisory committee.

I mentioned this in my opening remarks, that we have asked

John Engler and Dr. Johnson to co-chair that group. There will be

others who will join that. The first meeting of that group is scheduled for the beginning part of April. So, we will be using that

mechanism.

The CHAIRMAN. Thank you.

Secretary Adams, in my opening remarks I expressed my dissatisfaction with what I see: China failing to live up to its statements of last July on floating currency. I also feel sorry for them,

because I think such a move would be very beneficial to them as

well.

First, what are our expectations for meaningful currency reform

in China? Second, could you describe the various costs to China of

their delaying true currency reform?

Mr. ADAMS. Yes, Mr. Chairman. Thank you.

The CHAIRMAN. That is my last question.

Mr. ADAMS. Yes, Mr. Chairman. We continue to expect the Chinese to do what they said they are going to do. Senator Baucus

talked about promises. I wrote down his Biblical reference. It is one

I will pass along to my Chinese colleagues. We expect them to follow through on what they said they are going to do, and that

means greater exchange rate flexibility over time. I do not think

anyone expects a revolution to occur in a short period of time. I

think your colleagues, Senator Schumer and Senator Graham,

heard that firsthand; Senator Baucus, I am sure you heard it as

well.

But we do want to see steady progress every single day. In fact,

when I show up at the Treasury Department every morning, the

first thing I look at is, what is the exchange rate between the yuan

and the dollar. We watch it extremely closely.

But it is just one of three parts of our broader strategy, which

are not ends in and of themselves, but means to bring about a

more balanced relationship, to reduce risk to the global economy,

to maximize growth, and to bring about the important adjustments

that need to occur in the global economy.

Not undertaking greater exchange rate flexibility continues to

keep them in a box where they do not have appropriate monetary

policy instruments so that they can adequately deal with the boom/

bust investment cycles we have seen in the past.

There is a tremendous amount of inefficient investment occurring

in China. Investment, as a percentage of the GDP, is 40, 45 percent, one of the highest in the world. But they get very little for

it. In fact, you would think with the growth rates of 9 percent, with

the amount and quality of investments, they also should be growVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
15

ing much faster. So it gives them the appropriate tools to manage

their economy much better.

The CHAIRMAN. All right.

Now, Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

I would like to ask Ambassador Bhatia what the administration

is doing, successfully, to encourage China to lift its ban on beef. As

you well know, beef exports to China were growing at about 30 percent a year, until they were shut down a few years ago. The estimates are this is a several hundred million dollar industry in

China.

We have given them all of the information they need, and it

seems like they are just dragging their heels. I know, both from

Premier Wen, and I asked Mr. Bo a couple of months ago, I got signals—at least what I thought were signals—that they would take

care of that. So what needs to be done here?

Mr. BHATIA. Senator, as both Secretary Lavin and I mentioned,

we just came back from a trip to China. The issue of beef entered

prominently into our discussions there. It is a prominent issue in

the JCCT coming up.

As you also know by that background, on my way to China I

stopped in a number of other countries, including Japan.

Senator BAUCUS. Will this be lifted by the time of President Hu’s

visit?

Mr. BHATIA. All I can tell you is, we have made very, very clear

to the Chinese that if it is not lifted, it is going to be a major topic.

Senator BAUCUS. I am glad you did that. But by the time the

president is here, it will be a real problem. In fact, it would be in

China’s best interests, in my judgment, to lift that before his visit.

Mr. BHATIA. That point has been made quite clearly.

Senator BAUCUS. We did the same with the Korean president’s

visit here several years ago.

Mr. BHATIA. Yes.

Senator BAUCUS. Korea had very tough limitations on beef entering Korea. And I and others made it very clear when the Korean

president was about to come to the United States that it would be

a good idea to lift the ban, and they did.

Mr. BHATIA. Just so you know, there are technical discussions

that have been going on with the Chinese, but, as you say, this has

gone on far, far too long. There is no amount of technical information, beyond what we have already provided——

Senator BAUCUS. Thank you very much. That is very important.

I would like to turn now to section 421 safeguards, Ambassador

Bhatia. Frankly, I am a little concerned that the administration

has not followed up on recommendations by the International

Trade Commission, and that is an understatement.

I understand that the industry has filed six petitions for relief.

In how many cases has the ITC found market disruption and recommended relief?

Mr. BHATIA. In my understanding, sir, there were four decisions

that went to the President.

Senator BAUCUS. Four, that is correct. Ambassador Lavin, of

these four, in how many cases has the administration imposed relief recommended by the ITC?

16

Mr. LAVIN. The administration has not endorsed any of those

four.

Senator BAUCUS. The answer is zero. That is correct.

Ambassador Bhatia, what was the President’s rationale for refusing to grant relief in these instances, despite the ITC’s findings?

Mr. BHATIA. Senator Baucus, I think when you are talking about

the statute here, the 421 statute, in a nutshell, the statute, as you

will recall, requires balancing, effectively, whether the safeguards——

Senator BAUCUS. The President said it was not in the national

economic interest to do so.

Mr. BHATIA. Yes. When you measure the benefits and the costs

of doing so, the costs of doing so are probably going to be over five

times the benefits to be obtained.

Senator BAUCUS. Ambassador Lavin, what has happened to the

that wire hanger industry since the President decided not to impose import relief in 2003?

Mr. LAVIN. The 2003 decision, sir?

Senator BAUCUS. Yes. What has happened to that wire hanger

industry since the administration refused?

Mr. LAVIN. Sir, I do not have any data.

Senator BAUCUS. The answer is, all 15 U.S. plants producing

wire hangers have shut down and thousands of jobs have been lost.

Ambassador Lavin, in December of 2005, the President again refused to impose relief in the most recent 421 case involving steel

pipes. What has happened to that industry?

Mr. LAVIN. We have no information available.

Senator BAUCUS. That is revealing. I will tell you what happened. On March 24, the largest producer of this product announced that it would close its pipe-welding mill. This was due to

the administration’s failure to provide 421 relief.

Given the administration’s nullification of Congressional intent,

why would any industry in its right mind make use of any relief

provided for under U.S. law, that is, section 421? Who wants to

take a crack at that?

Mr. BHATIA. I am happy to start. First of all, Senator, I would

venture to say that the administration’s credentials in using trade

remedies are very strong. You mentioned the steel case, for instance. One only need look back at the global safeguards that were

put into place there.

The issue that we have here is the piece that’s put before us. And

I can speak personally with respect to the steel case because that

is the one that has happened since I have been at the USTR.

Again, let me point out a couple of other things.

Senator BAUCUS. I am sorry, Ambassador. My time is very tight

here.

Mr. BHATIA. All right. In a nutshell——

Senator BAUCUS. In a very small nutshell.

Mr. BHATIA. All right. It requires a balancing between the two,

the costs and the benefits. In this case, there was no question from

the evidence that was provided by the ITC that the costs would be

substantially greater to American consumers.

Second, the benefits, such as they were, would be diverted because you would have third-country providers, maybe 50 suppliers,

17

come in and fill up the back-fill. And lastly, I would point out that

during the period at issue here, U.S. producers were in fact not

only profitable, but in certain points in time hit record profitability.

So, these are all case-by-case issues. I guess what I can tell you,

sir, is that we stand committed to use 421 when the evidence before us demands it.

Senator BAUCUS. My time has expired. I will use about 10 seconds here. I hope that you develop good, solid, transparent metrics

with respect to IPR infringement. If you can tell the committee

also, what metrics are you using to determine the degree to which

China has made up its commitment to enforce IPR.

The CHAIRMAN. Senator Hatch?

Senator HATCH. To all three of you, I appreciate the hard work

that you are doing. I truly appreciate it.

The administration has information that intellectual property

rights violations are occurring. In your written testimony, you

make a distinction between so-called improvements in the Chinese

government’s piracy laws and their lack of enforcement. To me,

what matters is the bottom line.

How many more software programs and records are being legitimately sold, or illegitimately sold? Has there been a significant increase in the number of copyright piracy criminal prosecutions? To

me, these are statistics that matter. I have been over there. They

have always said they are going to do something about it, but they

never do.

I do not understand how you can say we are making progress,

when the government itself continues to steal—the government

itself continues to steal—American computer software.

Mr. BHATIA. Senator, all I can say is that we share, I think, a

common belief. The U.S. Government, the administration, and you

share a common belief that what matters here is the bottom line,

that you can pass the regulations, you can pass the laws, but unless you have effective enforcement and evidence to show effective

enforcement, it does not matter.

And indeed it would not matter not only simply from a trade perspective, but the Chinese themselves should care about this. It is

critically important to them advancing up the economic ladder to

more higher value-added products that they develop a vigorous IPR

enforcement system.

To that end, one of the things that we have been pushing them

on, just as recently as last Friday, is getting the data. Get us the

data that shows how many criminal cases, how many transfers of

cases from administrative to criminal.

Senator HATCH. Are they cooperating in that?

Mr. BHATIA. Yes. They have been providing some of the data, and

there is more that is allegedly coming.

Senator HATCH. And you think the data is reliable that they are

providing?

Mr. BHATIA. That always remains an issue. I think what we have

been trying to do is verify the data against what our experience is,

what we are hearing from industry, what we are hearing from others who are following that.

Senator HATCH. Even if the distinction can be made, isn’t Chinese criminal law not in compliance with the TRIPS agreement?

18

Mr. BHATIA. There are concerns as to whether there is compatibility. One of the areas that we have pointed the Chinese to, for

instance, is the issue of thresholds in their criminal law that effectively preclude, it is our concern, effective criminal enforcement.

Senator HATCH. Do you believe that the Chinese law finally has

reached the TRIPS threshold of criminalizing copyright piracy ‘‘on

a commercial scale’’ or does China continue to use the ambiguous

language ‘‘for the purpose of making a profit’’?

Mr. BHATIA. Our position is that we believe that those criminal

thresholds need to be changed, and we have made that quite clear

to the Chinese.

Senator HATCH. All right.

Secretary Adams, we have heard that President Wu told President Bush that China ‘‘would unswervingly press ahead with reform in its exchange rate mechanisms.’’ Obviously, despite a small

corrective action, this did not occur. In November of 2005, the

Treasury stated that the PRC was not living up to the commitments regarding the manipulation of their currency.

Does the administration sense a trend here? Is this not just like

the commitments that we have seen on intellectual property? First,

the Chinese make a commitment, and then fail to live up to it. If

China continues to have a lack of compliance on international

standards regarding intellectual property protection, how can we

trust them to adopt a market-based system?

Mr. ADAMS. Senator, that is a very good question. Indeed, they

continue to say all the right things. They continue to repeat and

repackage what we have been told, both publicly and privately.

When they do repackage it, they say it with greater emphasis.

That is great, but it is time to stop talking the talk and walk the

walk. We need to hold them accountable to what they said they

were going to do.

They have done some things to build the financial infrastructure

so that we can see greater exchange rate flexibility over time, so

I do not want to deny that they have done some things that are

important to bring about greater flexibility.

But we have not seen the kind of progress that we should be seeing and we want to see, and we are not going to rest until we do

see it.

Senator HATCH. Ambassador Lavin, I just have a few seconds.

But you just came back from a trip to China. As you know, in December of 2005, the Chinese completed their 15-month anti-piracy

campaign. Yet, informed sources cannot point to any meaningful

decrease of the widespread availability of pirated products. So what

was the Chinese government’s explanation for this?

Mr. LAVIN. I think your analysis is correct, Senator, that there

is very uneven performance within China, even when senior-level

government officials launched these types of initiatives.

It is worth noting that one IPR initiative which has been very

successful is that China has been able to stop any trademark violation of the Beijing Olympic logo. But that is quite clear evidence,

as far as we are concerned, that China does have the capability to

crack down on trademark and copyright infringement.

Senator HATCH. We know they have the capability. That is not

the problem.

19

Mr. LAVIN. Yes, sir. But they do not have the political will.

Senator HATCH. Well, we have to go after them and really let

them know, if they want to be in the world of nations, they have

to act responsibly.

Mr. LAVIN. Absolutely.

Senator HATCH. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Now we go to Senator Bunning.

Senator BUNNING. Yes, Mr. Chairman. I have an opening statement I would like to have included in the record.

The CHAIRMAN. Yes. It will be included in the record.

[The prepared statement of Senator Bunning appears in the appendix.]

Senator BUNNING. All right.

Just for the information of our panel, we made a trip to China,

six of the Senators did, in December; five members of the Trade

Subcommittee of this committee, the Finance Committee.

If you wonder why you have a problem with China, their Trade

Minister, and no one in their Trade Ministry, would meet with us.

So if you talk about a disconnect and a non-enforcement and a misunderstanding to occur—they do not even know how our democracy

works.

They think they can negotiate with you, the Trade Minister, the

administration, and get trade policy done. They do not realize it

has to come through this committee before it can become an agreement between China and the United States of America.

So you might start out with, in your conversations, since you are

more successful than five members of the Trade Subcommittee

were in December, of getting the Chinese’s attention on certain

trade issues. They sent number six or number seven in their line

of command to meet with us, and he did not know what trade was

all about.

First of all, I want to thank the USTR and the Commerce Department for their work that resulted in an agreement with China

to limit U.S. imports of Chinese textiles and clothing. As you know,

imports from China in these areas increased by 46 percent in just

the first 8 months of last year. Some categories have seen growth

in excess of 1,000 percent.

Could you please address what the impact of this agreement has

been on our Chinese imports in this area?

Mr. BHATIA. I will go first, Senator. The evidence we have thus

far—and again, this is the agreement, as you know, that was just

concluded at the end of last year—is that the reaction has been

quite positive, that effectively what the agreement did was, by removing the likelihood of safeguards coming in and going out, it created a more predictable environment, a more stable environment

for U.S. importers, for U.S. producers, and for Chinese producers.

So the result thus far that we have seen, we have encountered,

is that it is one of those occasions where working with the Chinese—and it was tough; I mean, it was seven negotiating sessions

with the Chinese——

Senator BUNNING. Since we are limited to 5 minutes, would you

please respond?

Mr. BHATIA. It has been positive.

20

Senator BUNNING. It has been positive?

Mr. BHATIA. Yes.

Senator BUNNING. That is all you can say? For both sides?

Mr. BHATIA. For both sides.

Senator BUNNING. All right.

What is the effect of this agreement on our domestic industry’s

ability to bring safeguard cases against the Chinese for textile and

clothing categories that were not covered by the agreement? Not

covered.

Mr. LAVIN. Senator, I do not think this decision prejudices subsequent cases. It was a broad agreement so it had broad coverage.

But if there were matters that were not covered, we have to go

back into that.

Senator BUNNING. In other words, if we find them violating other

textiles, other imports, we can go back?

Mr. LAVIN. Outside this current agreement.

Senator BUNNING. All right.

There is great potential for increased exports to China. In one of

Kentucky’s premier products, bourbon, we have seen growth in our

bourbon exports to China over the past couple of years. But a very

dark cloud has been hanging over the market in the form of a product standard that is simply not consistent with international standards or practice and not based on sound science.

I appreciate the great support that the USTR and China have

given this industry over the past 4 years as the industry has organized and participated in a series of scientific and technical

changes with China’s Ministry of Health and other agencies.

It is time to bring this all to a successful conclusion. Can you

please advise whether the USTR plans to raise this matter in the

coming meetings with the Chinese?

Mr. BHATIA. Senator, I am aware of the issue. It is the fusible

oil issue, I believe, with respect to whiskey exports.

Senator BUNNING. Yes.

Mr. BHATIA. We have raised it with the Chinese. We have been

dealing with them at the technical level. I can tell you that we will

continue to raise it with the Chinese.

Senator BUNNING. There is a problem. All of a sudden, Scotch

whiskey is the whiskey of choice in China.

Mr. BHATIA. Yes.

Senator BUNNING. If given an equal opportunity to compete, our

bourbon and all the things that we manufacture in Kentucky would

be, I think, very acceptable to the Chinese, without the technical

and scientific hurdles that have been put up.

Mr. BHATIA. Yes, Senator. I am aware of that. I am aware of the

fact that Scotch is apparently slightly different in terms of the fusible oil content. We have raised it, as I said, and we will continue

to raise it.

Senator BUNNING. We also have a problem with wood, with furniture, with a lot of other things, not only on currency. But we do

not seem to be getting results. We get a lot of talk. Mao Tse Tung

used to have ‘‘talk, talk, talk, fight, fight, fight.’’ That was his

motto.

21

Now, it is ‘‘talk, talk, talk, trade a little, give a little, trade a little.’’ We are still not getting through to the basic Chinese government how we have to do our trade relations with that country.

My time has expired.

The CHAIRMAN. Thank you very much.

Now, Senator Bingaman?

Senator BINGAMAN. Thank you very much, Mr. Chairman, for

having the hearing. Thank you all for being here.

On the currency issue, I appreciate the statement by Under Secretary Adams about the need for China to move more rapidly toward greater flexibility in its currency. There are some economists

who have argued that instead of us constantly pushing for more

flexibility, we really ought to just urge them to change the peg.

Why does that not make sense?

Mr. ADAMS. Thank you, Senator. It is a very good question. That

presupposes that we know what the new peg should be.

Senator BINGAMAN. Well, we know that the current peg substantially undervalues the yuan relative to the dollar, so any change

would be a very positive thing, from our perspective. Right?

Mr. ADAMS. Yes, Senator. Any forward movement would be welcome. When they did put in a new regime last July and eliminated

their 10-year former regime, we did applaud them for that move,

and we will continue to applaud them as they move in the future.

Senator BINGAMAN. That is what got them the 3.2 percent

change.

Mr. ADAMS. That is correct.

Senator BINGAMAN. Yes.

What options do we have? I have heard your statement, and I

do not question your motivation a bit where you say we will not

rest until they shape up.

What options do we have, what leverage do we have to bring

about any change in their policy with regard to currency? Is this

just something we jaw-bone about indefinitely?

I mean, one of the statements was ‘‘greater exchange rate flexibility over time.’’ I think our idea of ‘‘over time’’ is a few months.

Their idea of ‘‘over time’’ may be a few decades. How do you actually cause action to occur?

Mr. ADAMS. Well, we have been very active in multilateral circles. The idea is to bring about a global consensus. We think that

if we can move this discussion away from a bilateral conversation

to a multilateral conversation using the informal and formal institutions, that the sheer weight of global opinion should bring to bear

some change. If you listen to——

Senator BINGAMAN. How does that happen? It seems to me that

a multilateral conversation is useful, I guess. But how does the

weight of opinion affect the currency?

Mr. ADAMS. Well, it affects it in affecting the decision-makers’ decision about how quickly they allow change to occur. Now, I do

think if you had at this table my counterpart of the head of the

People’s Bank of China, Governor Zhou Xiaochuan, that he would

tell you he agrees with everything we said, that if he were in

charge or some of his colleagues were in charge, they would actually be moving more quickly. But it is a much more political deciVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
22

sion. I think my colleague hit it correctly. There does not seem to

be the political will to move more quickly.

Senator BINGAMAN. You indicated that the reserves, foreign currency reserves that the Chinese hold, are not significant compared

to the overall dollars that are being held. Their foreign currency reserves are about $853 billion now, expected to reach $1 trillion by

the end of 2006. That is not a concern to Treasury?

Mr. ADAMS. Senator, the numbers you cite are speculation about

the most recent numbers. We have a number slightly below that.

But there is no doubt which direction it is going.

Senator BINGAMAN. Slightly below the trillion?

Mr. ADAMS. It is slightly below the $854 billion number you

cited.

Senator BINGAMAN. Oh, I see.

Mr. ADAMS. Not much, but slightly. We have not seen a confirmation of their reported new numbers. It is quite likely they will

crest above $1 trillion later this year. It is an issue which we watch

closely.

Senator BINGAMAN. You say it is likely it will crest above $1 trillion?

Mr. ADAMS. If current trends continue, and one would be reasonable to expect that they would. We stay very engaged with them,

all parts of Treasury, in trying to understand how they manage

those reserves, their intention with managing those reserves. So

far, we are comfortable with the way they have been managing

them and the way they plan to manage them in the future.

Senator BINGAMAN. But is there any level of foreign currency reserves in dollars that would trigger a concern on our part? I mean,

if it got to $1.5 trillion or $2 trillion? I mean, is there any point

at which we actually take some action to impede or reduce the extent of the foreign currency reserves that they accumulate?

Mr. ADAMS. Well, the action we would like to see occur are the

actions we have been talking about here, this three-part strategy,

which they have embraced, to bring about greater balances so they

do not accumulate reserves at the kind of pace that they have in

the past.

But if there were a level, I would not want to offer that in an

open setting because it does have serious market ramifications.

Senator BINGAMAN. My time is up, Mr. Chairman.

The CHAIRMAN. Thank you. Senator Lincoln, then Senator

Snowe.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. Once again, we

very much appreciate you and Senator Baucus bringing us here together on such a critical issue for our Nation, workers, and our

economy.

I would like to say a big major ‘‘ditto’’ to Senator Baucus. I join

him in finding total frustration with the administration’s insistence

on not enforcing section 421, and I have spoken with you gentlemen on that on many occasions. We are grateful that you are here

today to discuss this, and many other issues, with us.

I have four mills in my State that make steel pipe, and two of

them have already had layoffs. As you know, as mentioned by Senator Baucus, last Friday on the 24th, one of the companies that has

23

a mill in my State shut down one of its pipe mills in Pennsylvania.

So we are definitely suffering repercussions from the inaction that

exists here.

Ambassador Bhatia, I know you mentioned, as Senator Baucus’s

time was closing, the same answer that we have gotten on several

occasions when we have raised this issue, the administration’s responses that we cannot reduce the pipe imports from China because 50 other countries export this product to the U.S., and yet

China alone accounted for more pipe imports in 2005 than 43 of

those countries put together.

So far, in 2006, China accounts for almost as many imports as

all of those countries put together. So in terms of saying that there

are other places that exist where all of this can also come from, I

do not think that is as plausible a response as the workers in these

facilities deserve.

The second reason for denying the relief that we continue to get

is the cost to the U.S. consumer would be too great. But the two

different ITC relief recommendations had estimated consumer costs

ranging from as low as $20 million to as high as $69 million, and

I think that works out somewhere between 7 cents to 23 cents per

American. The same ITC report shows a loss of 400 jobs and $20

million in wages to workers in this industry in 2005 alone.

I guess my question really is, how do you defend the decisions

to put thousands of workers out of work just so the cost of pipe is

slightly less? I mean, we have a good, solid industry there which

we are going to be losing, as we have seen the loss of many other

industries in this country.

I guess Secretary Adams is bringing up the political will. Where

is the political will to get behind our workers and to use the types

of redress that we have in our system to deal with what is occurring here?

Mr. BHATIA. Senator Lincoln, I appreciate the question. I tell you

honestly that I—we—deeply share the concern that American

workers in these industries have—any time an American worker

loses a job in this, or in any other industry. Just to be clear,

though, about some of the numbers that you mentioned.

First of all, our numbers indicate that there were on the order

of 300 to 350 employees in the industry as a whole that lost jobs

in this industry during the time period at issue. It fluctuated during that time, so at certain points it was higher than it had ever

been, at other points it was lower.

Senator LINCOLN. Well, as I mentioned, that came from the ITC

report.

Mr. BHATIA. Right.

Senator LINCOLN. I do not know why your numbers are different.

Mr. BHATIA. During that period of time, profits were—in fact,

from one point, from 2003 to 2004, they increased by about $100

million. They went from, I think it was, $130 million to $240 million, something along those lines. So you had a time when prices

were increasing and, in fact, profitability was going up. So there

were, clearly, things going on in this industry, I guess, is what I

am pointing out.

24

Senator LINCOLN. Well, I guess my point is, they are continuing

to go on in this industry. I mean, you dispute the number of jobs

that were lost in 2005. How many people lost their job last week?

Mr. BHATIA. I am not disputing that there are changes going on

in the industry. What I was trying to say is, what the 421 statute

says to us at the end of the day is, you have to balance. You have

to take the question of the negative impact of the safeguard, which

requires you to basically look at the impact on the economy as a

whole, which was measured at being on the order of—the numbers

that you have provided sound correct, up into the neighborhood of

$80 million—versus what the benefits would be to the industry.

Senator LINCOLN. But that was an extreme, $80 million.

Mr. BHATIA. Yes. Which would be on the order of $4 million

worth of benefit to $18 million.

Finally, let me just come back to the point that you talked about

before.

Senator LINCOLN. Do you still stand by those numbers?

Mr. BHATIA. Well, those are not my numbers. Those are ITC

numbers.

Senator LINCOLN. But, I mean, in seeing what has happened.

The ITC was not at $4 million. I think they were somewhere between $20 million as a low.

Mr. BHATIA. No. If I may, it depends on which remedy you want

to go with. But under one remedy, the potential benefit could increase U.S. producers’ income between $4 million and $8 million;

in the others, it was between $8 million and $17 million. So it was

a high of as much as $17 million. The cost to the economy as a

whole would range between $18 million at the low end up to $69

million at the high.

The CHAIRMAN. Senator?

Senator LINCOLN. My time has expired. I just have to say, if

these are not the places to use the safeguards that exist, I do not

know what is. I do not know what your impression or your intention is in this administration to implement those safeguards, or if

you think there is a reason to implement safeguards.

But in my opinion, and in the opinion of those workers, our trade

laws are the tools that we have and we should be using them, and

particularly when you get the kind of recommendations of four out

of six instances where the ITC recommends taking some action. I

do not know how you respond to those workers, but I think there

is more we could be doing.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman.

I thank you all for being here today. I think that obviously you

can sense a great deal of deep-seated frustration, because obviously

we are not talking about a minor actor in the global arena.

Obviously China, being a major force, has certainly created some

gargantuan distortions in the marketplace that are affecting so

many of our companies and workers here in America. I think our

patience is wearing thin.

Since their accession to the WTO back in December of 2001, we

should have made greater progress to this point on so many of the

25

issues we are discussing here today. And I know it is not for lack

of trying.

I think the question should be what we should be doing to ensure

that we certainly are going to make sure that China is living up

to its agreement and to the commitments that it made in its accession to the WTO.

Starting with the currency manipulation, Secretary Adams, one

of the questions I wanted to ask you, I understand the semi-annual

report will be issued in April. Is that correct?

Mr. ADAMS. Senator, it is due April 15. We are working toward

that deadline. I might add that President Hu Jintao’s visit, which

is now scheduled for April 20, could influence the outcome of that

report. So, therefore, it could be a few days late, taking into consideration that visit.

Senator SNOWE. Well, influencing in what respect? I think, particularly concerning the currency manipulation. Are you considering identifying China as a currency manipulator? I know the

Treasury report failed to do so in November. Frankly, that might

have been helpful to the whole process in expediting the situation,

because clearly it is significantly under-valued. Taking the snailpaced approach is not helping.

It has been 4 years, almost 5 years since they became a member

of the WTO. Here we are today, talking about major issues having

a profound impact on our workers and our companies.

Mr. ADAMS. Senator, we are currently evaluating China and a

number of other countries. We want to make sure that we are not

just focused on China, but any country that is in violation of both

the spirit and the letter of the law. We have not made that determination. We are in the process of making that determination, and

we look forward to bringing that determination to you once the report is finished.

Senator SNOWE. Well, in light of the president’s visit to the

United States in April, I hope we will not miss the opportunity to

designate them as such. I mean, that is my concern, that we are

going to miss another opportunity and forego a chance to highlight

and underscore a major issue that is having a significant impact

on our ability to be globally competitive, not to mention other countries as well. So, if we miss this opportunity, then when is it, next

November? That is the concern here.

I just want to send the message that, given the significant undervaluation of its currency, we really cannot afford to miss many opportunities because many people are losing their jobs. I think it is

abundantly clear, and it certainly does reflect in our position and

our posture with China, in the growing deficits and their growing

surpluses.

Getting back to the question on the schedule, do you expect the

report will come out before President Hu Jintao’s visit?

Mr. BHATIA. Senator, we have not made a determination about

the actual issuance date of the report. Again, we are working on

it. We always endeavor to get our reports out on time, but the

president’s visit could influence the outcome of that report and

therefore it may be a few days late.

26

Senator SNOWE. Ambassador Bhatia, I understand it may have

already been created, the top-to-bottom review of the U.S.-China

trade relations. Has that task force been created already?

Mr. BHATIA. The Enforcement Task Force has.

Senator SNOWE. It has been?

Mr. BHATIA. Yes.

Senator SNOWE. And when do you expect to have a report on the

status of China’s commitments as a member of the WTO?

Mr. BHATIA. The top-to-bottom review has come out. The Enforcement Task Force is sort of the group that will work on an ongoing basis. I think perhaps what you are referring to is the trade

policy review mechanism that is going on through the WTO. That

is scheduled to happen at the end of April of this year. That is

what Chairman Grassley referred to.

Senator SNOWE. Well, obviously one of the huge issues that is

certainly vexing in our relationship, certainly with companies and

industries that have worked with China, is the intellectual property rights, piracy, thievery, whatever you want to call it. I mean,

this is a major concern.

Frankly, we have not made any progress in this regard. In fact,

the U.S. Chamber of Commerce issued its 2005 report on the U.S.-

China Commercial Relationship, and I quote, ‘‘The IPR climate for

our companies in China has not materially improved in 2005, and

the infringers generally remain undeterred in the marketplace.’’ I

know, for example, one of my companies in the State of Maine has

had to spend over $1 million in legal fees, consulting, and so on

just to try to thwart the piracy question, the piracy of what they

make, having the Chinese appropriate that and obviously duplicate

it. They are spending over a million dollars. This is not a huge

company in our State. That is a problem.

That is obviously being replicated across America, and they are

doing this in all spheres. I have been to China. I have seen some

of the video stores. We have seen it all. That is the problem.

So what are we going to be doing to grapple with this problem

and to assert our rights and to assert their commitments under the

WTO? When can we expect any action on this question?

Mr. BHATIA. Senator, consistent with what we have laid out in

the top-to-bottom review and elsewhere, I think there is going to

have to be a multiple-pronged approach to this. Part of it is going

to be continuing to work with them bilaterally to the extent possible.

Part of it is going to be pushing them in other forums, regional

and multilateral. Part of it is going to have to be, where we believe

it is appropriate, litigation in the WTO. I can tell you right now,

IPR is one of the areas that we are working to prepare a case on.

Senator SNOWE. Thank you, Mr. Chairman. Thank you.

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. I have a couple. On the last, IPR, this is getting

to be a huge problem. I met with Madam Wu Yi a year ago or so

and addressed my concern and she blew me off, very disrespectfully. That sent a signal to me of how seriously they are taking

this. You know the problems. We are relying upon you, the administration, to solve this. That is your job. You are the USTR, you are

the executive branch. You enforce the laws, as it says in the conVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
27

stitution. We are dependent on you. We are asking a lot of tough

questions to back you up, basically.

I believe firmly that no country altruistically, out of the goodness

of its heart, ever lowers a trade barrier. They never do. The only

language any country understands is leverage. So you are going to

have to come up with leverage.

You are going to have to come up with some language that

China, any country that has an unfairly high trade barrier, understands. That is your job. You know what leverage works and what

does not work. You are going to have to find the leverage. Talk is

not going to do it, in my judgment.

Second, I might ask you, Secretary Adams, about the legislation

that Senator Grassley and I have introduced. The hope here, the

thought is, that by changing the term ‘‘currency manipulation’’ to

‘‘fundamental currency misalignment,’’ that might help you. That

is, the concern was that ‘‘manipulation’’ is a pejorative term, or

might be pejorative in the eyes of some, but not in others’. But

‘‘misalignment’’ is more of a neutral word. The thought is that applying this objective test to ‘‘fundamental currency misalignment’’

might help Treasury make a determination that, yes, there is fundamental misalignment.

Again, the second part of the test is, fundamental misalignment

adversely affects the economic interests of a country, the United

States. There can be misalignment that may not have an adverse

economic effect.

So could you tell us the degree to which this legislation might

help you address misalignment with currencies generally, and I

guess in some respects we are talking about China?

Mr. ADAMS. Yes, Senator. I have not seen the full scope of the

legislation, but particularly with reference to the point of ‘‘manipulation,’’ indeed, it is. It is an emotive term. We have not cited anyone since the early 1990s.

There was a period in which we cited countries frequently, some

13 times between 1988 and 1994, but we have not since 1994. So

because we have not employed it, the threshold becomes higher and

higher.

Senator BAUCUS. Will this help you? Will this legislation help

you?

Mr. ADAMS. Indeed it will, Senator. There is this view that somehow this term has taken on a life of its own, and whomever you

name as a manipulator has to wear around a scarlet ‘‘M’’ and will

be disgraced. We do not want to disgrace anyone, we want to solve

the problem. So I think it is a very innovative and novel approach

to helping.

Senator BAUCUS. I appreciate that.

What are your thoughts on the counter-argument that China

often uses, namely, we cannot revalue because that will cause internal problems within our country, that we just cannot do that, or

if we do we have to go ever-so slowly? What is the answer to that?

Mr. ADAMS. Senator, I think we do need to be somewhat sensitive to their own domestic political concerns. I do not want to sit

here and defend the Chinese, and I am not going to. But they really do have two economies. They have a very urban, coastal-based

economy which is beginning to become middle-class, and then they

28

have somewhere on the order of 700 or 800 million people who live

in the rural sector——

Senator BAUCUS. Well, I have been out there. They are working

at it, frankly. They are doing a lot.

Mr. ADAMS [continuing]. And some 200 million who live on less than $2 a day, and some 100 million that simply roam or are migrating from rural to urban areas.

I think their concerns about rural development, the increasing

inequity that exists between the urban and coastal areas and the

interior rural areas is real.

Senator BAUCUS. Well, do they not need a little nudge to get

them moving a lot more quickly, such as having a currency that is

misaligned? Would that not help them do what they know they

have to do?

Mr. ADAMS. I think they know what they need to do. I think for

them it is a balancing act of trying to move as quickly as they can

without creating political disruptions where the peasants are with

the pitchforks——

Senator BAUCUS. My time is about to expire.

What about, sometimes people say, well, gee, if the renminbi

were revalued, that would make Chinese products more expensive

to the United States. We would not be buying as many Chinese

products.

Would China therefore not have all the currency that it now gets

from U.S. purchases of Chinese products, and therefore China

would not be investing as much, say, in the Treasury markets in

the United States? That would force the United States to increase

interest rates. So, gee, if you ask for a currency revaluation, you

are going to get higher interest rates. That is the argument.

What do you say about that?

Mr. ADAMS. I do not make much of that relationship. I think the

interest rates are set in a global pool of savings and investment.

Obviously China plays a part in that equation, but it is a very

small part. I think we can see a greater flexibility and greater appreciation of currency without it having a deleterious impact on

U.S. industries.

Senator BAUCUS. I appreciate that.

I just believe that there is an opportunity for China here to step

up in the world arena. It is a real opportunity for China. It is an

opportunity for China to show that it is part of the world community, responsibly, by revaluing, for example, by undertaking other

actions that it knows it could and should take. It is going to be the

largest economic power in a couple, three decades from now. There

is an opportunity to be a very important, responsible political

power as well.

I just hope that China is thinking along those lines. It is a message that I gave to Premier Wen and to others that I met there,

and I know that they are thinking about it. But I just urge all of

us to keep looking at enhancing the positive side, the economic opportunity side of all this too, while we are also pointing out some

of the problems that exist. Thank you.

Thank you, Mr. Chairman, very much.

The CHAIRMAN. Thank you, panel. We appreciate it very much.

I am going to move quickly to the next panel.

29

We have Joe Papovich, senior vice president international at the

Recording Industry Association of America. Mr. Papovich will give

his testimony and then leave right away, because he has obligations elsewhere. We understood that before he came. But he will

respond to questions for the record.

We also have Ambassador Hormats, vice chairman at Goldman

Sachs (International). Then we will hear from John Frisbie, president of the U.S.-China Business Council. Following that, Gary

Joachim, vice president of the American Soybean Association. Then

Dr. C. Fred Bergsten, a frequent appearer before this committee,

director of the Institute of International Economics.

So we are going to start with you, Joe, because we know you

have to go.

STATEMENT OF JOE PAPOVICH, SENIOR VICE PRESIDENT

INTERNATIONAL, RECORDING INDUSTRY ASSOCIATION OF

AMERICA, WASHINGTON, DC

Mr. PAPOVICH. Thank you, Mr. Chairman and Senator Baucus,

for having this hearing today. I am Joe Papovich, senior vice president international of the Recording Industry Association of America.

Thank you for the opportunity to discuss the widespread piracy

in China of the recordings of America’s songwriters, performers,

and record companies.

Our members’ recordings are sold all over the world because

American music is sought by consumers everywhere. These sales

benefit our industry and add significantly to our Nation’s current

account balance.

Our Nation’s welfare is reduced and everyone in the music industry suffers when foreign governments tolerate widespread piracy of

our recordings. When it comes to pirating American sound recordings, China is one of the worst. This has been a point of conflict

between our countries for years.

There are three problems. First, China is awash in pirated recordings because the penalties imposed on pirates by the Chinese

government are simply not effective. Second, Internet piracy is

growing rapidly in China, already undermining our future there.

Third, my industry and other copyright industries face severe restrictions on our ability to do business in China.

It is difficult to significantly reduce piracy in China if the Chinese will not allow legitimate companies to expand their ability to

make available legitimate products to Chinese consumers. China

needs to abolish these restrictions.

Here are our recommendations. The Chinese government has

often acknowledged that piracy is a major problem. However, they

have consistently failed to take effective action.

Instead, they have relied on administrative actions, inspections,

seizures, modest fines, and the suspension of business licenses.

They do a fair amount of that. But these measures consistently fail

to provide deterrence. They are a slap on the wrist to the pirates.

China’s criminal enforcement authorities have been reluctant,

but must become actively involved, in the fight against piracy in

China, and they need to impose criminal deterrent remedies. Unless this occurs, we see little chance for improvement.

30

The U.S. Government, our executive branch, and Congress have

been increasing pressure on China toward this end, and we are

very grateful for this hearing to assist in this regard.

The U.S. Government and industry must continue to insist that

China fully implement the commitments it made in the WTO and

in the JCCT over the past 2 years, especially to significantly reduce

piracy by imposing deterrent penalties.

If this does not occur, our industry is working with USTR to prepare the necessary elements of a possible WTO legal complaint

against China. Of course, we hope that China will quickly take

steps to address the inadequacies of the current flawed system

such that litigation would be unnecessary.

However, we must be prepared to act if the Chinese continue to

resist taking the actions necessary to comply with their international commitments on enforcement.

There is one possible bright light. Ambassador Bhatia referred to

this in his testimony. In the last few days, we have received encouraging, but unconfirmed, reports that the Chinese government

has closed six plants that were producing pirated CDs and DVDs

and suspended production at an additional eight facilities.

We have been working closely with the U.S. Government over

the past few months to achieve exactly this. The Chinese government has also announced the referral of 18 Internet piracy cases

for criminal prosecution, and that is good news.

This hopefully signals a Chinese decision to begin more effectively and systematically dealing with the piracy problem. Such a

development would be a testimony to the efforts of the U.S. Government, led by Ambassador Portman and Secretary Gutierrez.

Nevertheless, even if this proves true, we are a long way from

the finish line—indeed, the finish line is a distant point in time—

but we are hopefully headed in a direction in which it will become

visible. We will need and count on your continued support.

We cannot force the Chinese government to act. All we can do

is be clear that we will not accept practices that fail to meet international standards.

I wish to say a word while I have the floor about Russia, which

is fast becoming the next China when it comes to blatant copyright

piracy. Copyright pirates in Russia are producing millions of pirated sound recordings, movies, and other infringing products and exporting them all over the world, ruining our markets inside and

outside of Russia.

We have a unique opportunity here as Russia hopes to join the

WTO. The U.S. Government should not agree to this until Russia

effectively addresses these problems, and I urge Congress to insist

on this.

The U.S. Government must press China—and Russia—harder to

strengthen their anti-piracy enforcement regimes. Unless the U.S.

uses every option available to it, we will continue to face the same

situation that we do today into the foreseeable future: overwhelmingly pirate markets and lost opportunities for U.S. companies and

workers.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

31

[The prepared statement of Mr. Papovich appears in the appendix.]

The CHAIRMAN. The vote has started, so we will just stand in recess.

[Whereupon, at 11:45 a.m. the meeting was recessed, reconvening at 11:55 a.m.]

The CHAIRMAN. Robert, why do you not proceed?

STATEMENT OF HON. D. ROBERT HORMATS, VICE CHAIRMAN,

GOLDMAN SACHS (INTERNATIONAL), GOLDMAN SACHS &

CO., NEW YORK, NY

Mr. HORMATS. Thank you very much, Mr. Chairman. First of all,

it is a pleasure to be back before this committee again. Second, let

me just start out by commending you and Senator Baucus on the

legislation which you have just introduced.

I think this is an enormously important step forward, for several

reasons, one of which is, it is great to see the Chairman of the committee and the Ranking Democrat working together on a bipartisan

basis with other members. I think bipartisanship has been the hallmark of U.S. trade policy, and for you to continue that trend is

really in a great tradition. It is the best kind of governance on

trade and other issues.

Second, I am very impressed that it is comprehensive. You have

been asked to deal on the Hill, this committee, with a lot of bilateral agreements and very specific kinds of trade issues, but only

dealing with part of the problem. This really is comprehensive, and

I think that is an enormously important step, having a good dialogue on trade policy in its length and breadth.

Third, it brings in other countries, because there are a lot of

other countries that have similar objectives to the United States,

and working with them, I think, is particularly important in getting results.

Fourth, you have remedies in there. You have actual remedies

for dealing with the kinds of issues that the bill focuses on, and

therefore I think that is also important. So, by and large, I think

this is an important step forward, and I commend you and your

colleagues on this.

Second, I would like to talk a little bit, since there is a limited

period of time, about a couple of issues where I think priority

should be given. I completely agree about the importance of the exchange rate issue.

I think that the dialogue that has been held with China on this

is extremely important. It is important in a bilateral sense, but it

is more important in one sense, that if China raises its currency

value, other Asian countries are likely to do so.

Since roughly 40 percent of our trade is with Asia, if you can get

the Chinese renminbi and other currencies rising together, it really

will have an impact. A lot of countries do not let their currency go

up because they do not want to lose competitiveness vis-a`-vis the

Chinese. If the Chinese go up, it will have a broad benefit for the

region.

The point, however, is that it is not likely the Chinese, who have

done things in their reform program in a very gradual way, are

going to do this as quickly or as dramatically as many might want.

32

That does not mean that there should not be a dialogue to encourage them to do this, because there are a lot of reasons for their

doing it, domestic and international, but that is to say there should

be, alongside that, other elements of our trade relationship.

There are several that I just want to touch on. One point is,

when we deal with the Chinese, it is good to have allies in China.

There are many people in China, many interest groups, who support the kind of things we are encouraging China to do, that are

in their interest to do. For instance, intellectual property. There

are a lot of Chinese companies that also support improving intellectual property protection. We ought to work with them as allies.

Telecom. Opening up of the telecom sector. That would be very

helpful to rural China to have more cell phones and other kinds of

phones; bringing new cell phone technology is in very important.

Improving the banking system is very important because it can

improve the efficient utilization of capital to go into small, privatesector enterprises. As you well know, Mr. Chairman, small enterprises are big job creators in this country, and they can be in

China. The problem is, they are not able to get capital as easily as

they should. That is one area.

The second is energy. I think, unless we can work with the Chinese effectively on energy and cooperate—and they need a lot of

things that we can provide, clean coal technology, for instance, biomass technology, a lot of things that can help them reduce dependence on imported oil, can be very helpful to our companies as well

because we have very good energy technology.

Also, if we can do this, we help to avoid the kind of confrontations that are likely to occur if, instead of working together with

the Chinese on energy, we are at odds with them on this. I think

one thing I have put in my written testimony is to have a Cabinetlevel committee on energy cooperation and to develop, as a result

of President Hu’s visit here, a U.S.-China energy partnership,

which could bring in other countries like Japan, which also, as you

know, has very positive technology.

These are the kinds of things that I think are extremely important in the overall relationship and I think could actually help considerably to build off the relationship that can help to deal with the

big imbalances that are occurring, because there is a mutual benefit in the relationship we have had with the Chinese, but it is

going to get more and more stressed, and there will be more and

more friction, and there will be more and more frustration on the

part of this committee, others on the Hill, and Americans, if this

large imbalance remains or gets bigger.

Therefore, I think it is in the Chinese’s interests to try to do

something about it, as it is in our interests to put these kinds of

items on the agenda, and a summit meeting of President Bush and

President Hu is an important opportunity. I would say it is in the

Chinese interest not to wait for that, but to do as much as they

can prior to that visit in order to set the stage for positive dialogue.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

[The prepared statement of Mr. Hormats appears in the appendix.]

The CHAIRMAN. Mr. Frisbie?

33

STATEMENT OF JOHN FRISBIE, PRESIDENT,

U.S.-CHINA BUSINESS COUNCIL, WASHINGTON, DC

Mr. FRISBIE. Thank you, Chairman Grassley. I appreciate the opportunity to testify today.

The U.S.-China Business Council, as you may know, represents

approximately 250 U.S. companies that are doing business in and

with China. We are now in our 33rd year of existence.

Throughout our existence, we have pursued a balanced approach

to our trade policy with China. This balanced approach recognizes

the significant benefits that trade and investment with China have

provided U.S. companies and the American economy. At the same

time, we pursue resolution to the problem areas in our trading relationship.

My written statement lays out our views on today’s topic in some

detail. In my oral statement, I would just like to touch upon three

items that I understand are of particular importance to the committee, and that is the USTR’s top-to-bottom review, the currency

issue, and the upcoming Joint Commission on Commerce and

Trade meeting.

In regards to the top-to-bottom review, we welcome the findings

and recommendations included in the USTR’s report. As you are

aware, the report proposed enhancing USTR’s enforcement capabilities, increasing staff both in China and in Washington, and improving coordination with our other trading partners on China

issues. All of these, in our view, would be helpful in addressing the

concerns of the U.S. business community.

Based upon my 20 years of doing business with China, resolution

of these problems is best pursued with the type of constructive engagement that USTR is proposing. We support the refocusing of

their resources described in the report and anticipate tangible results and a stepped-up engagement effort.

On China’s currency, this issue, more than any other, has certainly captured the attention of Congress and much of the public

debate about China trade. As we noted in our testimony submitted

last year, China should indeed adopt a more permanent exchange

rate.

Our focus, we think, should be on encouraging China to undertake the broader financial sector reforms that will enable it to remove capital controls at some appropriate point in the future and

allow those market forces to determine the value of the currency.

We understand Treasury is having this sort of dialogue in these

broad reforms now, and we support that dialogue. In the meantime, China should move more quickly to allow market influences

with trade flows to be reflected in the exchange rate.

This is a message that I delivered, by the way, in several meetings in Beijing in February when I was out there with Vice Minister Ran, including people back in China. Certainly last July’s

change is welcomed by all.

Movement since then to allow market influences a greater role

in setting exchange rates has been slow, although I think, as noted

earlier, the pace has picked up somewhat in the last month or so.

My meetings in Beijing, as well as the reading of Chinese language press when I was there in February, suggest that Chinese

34

economists and currency traders themselves anticipate gradual appreciation to continue over the balance of this year.

The third item I want to touch on is the JCCT meeting coming

up on April 11th. That, in turn, comes in advance of President Hu’s

visit to Washington later on in the month.

China has done moderately well in following through on the commitments it has made as part of the JCCT process, but some issues

remain unresolved. For us, two areas, we think, must be central in

this year’s meeting.

First and foremost is IPR enforcement, as has been talked about

a lot today. This is the top problem cited most by our membership.

Intellectual property piracy simply must not be tolerated. At the

same time, we have to recognize that this far-reaching problem is

not going to be solved overnight.

The key is, China needs to be able to show steady progress in

reducing piracy. I think the challenge for us, in turn, is to identify

specific measures for adoption in the JCCT process that, if implemented, will lead to such tangible progress. Last July’s JCCT IPRrelated measures were a good step in this direction, and I think we

need to continue that approach in April of this year.

The second issue that the U.S.-China Business Council believes

must be addressed in this year’s JCCT is subsidies. If we are to

seek a level playing field for U.S. companies operating in China, as

well as for American companies facing Chinese competition at

home and in other markets, we need to devote more effort and resources to better understand this aspect of China’s economy.

China’s WTO entry agreement required it to file a report on its

subsidies upon accession in 2001. That deadline, of course, was

missed. At the 2005 JCCT, China agreed to submit the report by

the end of last year. It has still not been submitted. This report

must be completed and submitted right away.

This report is not going to likely provide the details and complete

picture needed, but it is a necessary first step to getting at this important aspect of a level playing field.

Apart from these two broad issues, we certainly hope the JCCT

will successfully address other, more specific issues that USTR and

Commerce are well aware of in terms of input from the business

community, and we know they are discussing those actively with

their PRC counterparts.

Let me conclude there. Thank you very much.

The CHAIRMAN. Thank you.

[The prepared statement of Mr. Frisbie appears in the appendix.]

The CHAIRMAN. Mr. Joachim?

STATEMENT OF GARY JOACHIM, VICE PRESIDENT,

AMERICAN SOYBEAN ASSOCIATION, OWATONA, MN

Mr. JOACHIM. Good afternoon, Mr. Chairman. I am Gary

Joachim, a soybean and corn farmer from Owatona, MN. I currently serve as vice president of the American Soybean Association.

ASA represents 25,000 producer members on national issues important to U.S. soybean farmers. We appreciate your invitation to

testify today on the current state of U.S.-China economic relations.

It is impossible to overstate the importance of China as a market for U.S. soybeans. In 1996, the U.S. sold $414 million worth of soyVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
35

beans to China, a significant market at the time. Last year, the

value of our soybean exports reached $3 billion. This is more than

a seven-fold increase in a decade in which China emerged as the

largest foreign buyer of U.S. soybeans.

The 405 million bushels exported to China in 2005 represented

40 percent of total U.S. exports, and 13.5 percent of last year’s U.S.

soybean crop. Prospects for continued growth in Chinese soybean

imports are excellent.

China’s population of 1.3 billion is close to leveling off, but its

urban component has more than doubled since 1980. As per capita

income has risen to $1,300 a year, more Chinese consumers can afford a diet higher in protein and vegetable oil.

Annual consumption of protein meal is currently 30.9 pounds per

capita, just 27 percent of the level we consume in the U.S. China’s

per capita consumption of vegetable oil is 15.7 pounds, or 44 percent of the U.S. level.

As demand continues to grow, China’s inability to significantly

expand their domestic production of soybeans and other oil-seeds

and beans means that most of these requirements will come from

imports. ASA has worked closely with this, and previous administrations, to increase access to this growing Chinese market through

trade negotiations.

We have provided specific objectives to U.S. negotiators during

talks on China’s accession to the WTO, and strongly supported

Congressional approval of this agreement.

As negotiations under the current Doha Round proceed, additional reductions in China’s agricultural tariffs and expansion of its

tariff rate quotas will be critically important to achieving a successful final agreement.

I would like to comment more specifically on the importance of

improved access in China in the Doha negotiations. According to a

preliminary analysis by the American Farm Bureau Federation,

China will play a significant role in the final economic impact of

a WTO agreement on global agricultural trade.

The analysis assumes that China will be subject to whatever

market access commitments are required of developing countries,

or a 40-percent reduction. It does not, however, take into account

the possible exclusion of sensitive or special products from formula

tariff reductions.

Based on these assumptions, the Farm Bureau analysis indicates

China will account for between 35 and 40 percent of total agricultural trade gains from a new agreement.

This amount includes 85 to 90 percent of the increased global

trade in soybeans and soybean oil, and 40 to 45 percent of the increased trade in soybean meal. China will also account for a substantial amount of the increase in trade of other agricultural commodities.

Given the high dependence for increased exports of key U.S. agricultural products on improved market access in China, it is critically important that China accept the same tariff reductions required of other developing countries.

We must also prevent key U.S. agricultural product exports, including livestock products, from being excluded from full tariff reVerDate 11-MAY-2000 14:33 Mar 19, 2007 Jkt 095484 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 33886.000 SFIN1 PsN: SFIN1
36

ductions or tariff rate quota expansion through designation as ‘‘sensitive’’ or ‘‘special’’ products.

Unless China is a full participant, it is doubtful there could be

enough expansion in trade in a final agreement to justify the concessions the U.S. has offered to make on reducing trade-distorting

domestic support.

We are aware of concerns with China’s $200 billion-plus trade

surplus with the U.S. and proposals to impose a high punitive tariff on Chinese imports if China does not revalue its currency

against the dollar.

As ASA indicated in testimony to this committee last June, we

are concerned that higher tariffs on Chinese goods could trigger retaliation by China against U.S. imports. As an alternative for addressing the trade imbalance, we would encourage the committee

to ensure that China undertakes full market access commitments

in the Doha negotiations and that the number of agricultural commodities that can be designated as ‘‘sensitive’’ or ‘‘special’’ be extremely limited. If successful, this course of action would increase

U.S. agricultural exports to China rather than causing them to be

restricted.

As we also indicated in our June testimony, our industry’s trade

relations have not been without difficulties. These problems have

included uncertain and changing requirements on the imports of

biotech soybeans and various restrictions based on the reported

presence of diseases or fungicide residues.

While we have not experienced disruptions in the past 2 years,

the potential for unexpected actions in the future remains a serious

concern. However, we believe the relatively smooth course of our

trade relations with China in recent years is due, in part, to the

resolution of disputes through reinforcement of the mutual benefits

of free and balanced trade rather than through public confrontation.

In closing, Mr. Chairman, China is a vital and growing market

for U.S. agricultural sales. Including China as a full participant in

the current WTO market access negotiations is critical to achieving

a meaningful improvement in world trade and agricultural products. ASA urges the committee to focus on this priority as it addresses the current U.S.-China trade imbalance.

Thank you for the opportunity to appear today, and I will be

happy to answer any questions.

The CHAIRMAN. Thank you.

[The prepared statement of Mr. Joachim appears in the appendix.]

The CHAIRMAN. Dr. Bergsten?

STATEMENT OF DR. C. FRED BERGSTEN, DIRECTOR, INSTITUTE OF INTERNATIONAL ECONOMICS, WASHINGTON, DC

Dr. BERGSTEN. Mr. Chairman, thank you very much for the invitation to appear before the committee again. Let me start by congratulating you and Senator Baucus on the legislation that you introduced yesterday.

Your Trade Enhancement Act will be a major improvement in

U.S. law, particularly regarding the currency and foreign exchange

37

issues, and it ought to be adopted, even if there were no current

problem with China.

It will no doubt help deal with the current problem with China,

as I will indicate, but I applaud your initiative in any event. I hope

you will pursue it as expeditiously as possible.

I also appreciate the opportunity to give you a copy of a new book

on China that I have co-authored with colleagues at the Institute

for International Economics and the Center for Strategic and International Studies, who did the security part.

We immodestly subtitled the book, ‘‘What the World Needs to

Know Now About the Emerging Superpower.’’ It is a very serious

effort to do a factual analysis of what China means for the world

that avoids a lot of the rhetoric, politics, and emotion in the current

debate, and we hope it will be helpful to you and your colleagues

in the Congress, as well as the public more broadly.

Let me make three points, and then I will be happy to answer

any questions. I have given you a more elaborate analysis in my

written statement.

The first point is that a change in China’s currency policy, the

exchange rate issue that has been discussed so much this morning,

is by far the most important issue in U.S.-China economic relations. I do not mean to denigrate intellectual property rights or any

of the other topics that have been discussed here.

But getting China to revalue the renminbi by, say, 20 percent,

and getting the other Asian currencies to move up by a similar

amount, which would be likely, would reduce the U.S. global current account deficit by $60 billion to $80 billion per year. So the

payoff is huge.

Pursuing the issue is important to reduce our unsustainable

international imbalance. It is important to bring China’s huge surplus down, and it is clearly the number one issue.

Second, and really picking up on a point Senator Bingaman

made, China’s currency issue has to be regarded in two steps, over

two time periods. It is well and good, as Under Secretary Adams

says, that the Chinese should adopt a more flexible exchange

rate—over the long run, they should.

The Chinese say they want to do it, and I think they will do it,

but not until they reform their banking system sufficiently to avoid

the risk of capital flight and destabilization from that more flexible

exchange rate. Resolving their banking problem is going to take

some time.

In the short run, therefore, what’s needed is a one-step revaluation or series of revaluations of the currency or a managed upward float in which the Chinese push the renminbi up. But we

should forget about any notion that they are going to have a freely

floating exchange rate any time soon and that market forces will

then push the renminbi up.

That is just not going to happen in light of their banking system.

We need to focus instead in the short run, meaning several years,

on more discrete, hopefully sizeable, and managed increases in the

value of their currency.

They have demonstrated clearly they can manage an avoidance

of a stronger value for the renminbi. They have intervened to the

tune of $20 billion per month for the last 3 years to do it. That is

38

where their almost $1 trillion in foreign exchange reserves comes

from.

They can also clearly manage it up by either revaluation or an

upward float, if they wanted, and that should be the objective of

U.S. policy. We must keep in mind that they need to do it not only

quickly but also by a large amount.

Our calculation is that their currency, judged on a global basis,

is undervalued by 20 to 40 percent. They need a big revaluation.

They are obviously not going to do that overnight or in one step,

but something moving in that direction decisively and with a major

down payment soon is required.

The critical question, then, is how do we get them to do it? They

obviously do not want to do it. It is equally obvious that the administration’s quiet diplomacy has borne very little fruit, even when

the pressure has been stepped up a little bit over the last 6 months

or so.

We clearly need a new policy approach, and I would hook it, as

several members have today, to the upcoming visit of President Hu

Jintao in April.

One cardinal requirement, I would argue, is for the administration and Congress to adopt a unified, or at least consistent, position.

The administration has tended to be the ‘‘good cop,’’ with quiet

diplomacy, and the Congress has been the ‘‘bad cop,’’ particularly

your colleagues Senators Schumer and Graham, with their acrossthe-board tariff.

The Chinese have been able to exploit the difference between the

administration and Congress, essentially counting on the administration to save them from Congress, and that bet has paid off so

far. I think you have to get the two ends of Pennsylvania Avenue

together.

I propose a four-part strategy. First, the administration should

notify the Chinese right away that unless they make a significant

down payment appreciation of at least 10 percent of their currency

prior to the release of the U.S. Treasury’s next semi-annual report,

the Treasury will label China a currency manipulator under current law. It is absolutely clear that the manipulation has taken

place for years. Treasury will lose all credibility if, once again, it

fails to label China. But the administration should tell China right

now that Treasury is going to label it a manipulator a month from

now, or whenever the report comes out. This will give the Chinese

a chance to head it off by making a serious down payment. I think

there is a significant chance the Chinese would do that. They do

not want to be named and shamed. They do not want this to disrupt the Hu visit. The Treasury should tell the Chinese that right

now.

Second, Treasury should also tell its G–7 partners and the IMF

that it is about to label China a manipulator and thus escalate this

debate quite substantially. That will help bring the G–7 countries

and even the IMF, which has been pretty recalcitrant on all this,

into support for getting action on the issue.

We need to multilateralize the approach. But the IMF can say

that the Treasury itself has not ever labeled China a manipulator,

why are you asking us to do so at the IMF?

39

If the Treasury now indicates that it will label China a manipulator, then there is a good chance to galvanize the international

community and the multilateral institutions that should be out in

front on this. The United States cannot do it if it does not lead. But

if it does, it can galvanize support. This would be step two in my

strategy.

Third, the administration has to tell the Chinese that unless

they move by an acceptable amount and at an acceptable speed to

revalue the currency, the administration will no longer be able to

oppose responsible Congressional initiatives to address the issue,

particularly the bill that you, Mr. Chairman and Senator Baucus,

have just introduced.

The Grassley-Baucus legislation, as you well know, would provide explicit sanctions against China, or any countries whose currencies are in fundamental misalignment, including some things

the Chinese want: a larger quota at the IMF and revocation of

their status as a non-market economy.

In the discussion with Under Secretary Adams, a couple of people raised the question, do you have the tools? I used to be in that

job, Mr. Chairman. The administration does not have the tools.

Your legislation would give responsible tools to the administration, not like an across-the-board import surcharge, but responsible

tools that the Chinese would not want to see deployed against

them.

So this legislation is one that the administration, if it cannot

support it, certainly should not oppose. The administration should

let the Chinese know they are not going to save them from Grassley-Baucus.

Fourth and finally—I will not make the fifth point in my written

statement here—the Congress should proceed with all due speed to

pass Grassley-Baucus anyway. The currency sections of your new

legislation are vastly superior to the 1988 law. They ought to be

put into law as soon as possible, even if there were no current

China problem.

But the administration can let China know, and China will see

itself, that if it continues to fail to take adequate action on the currency front, passage of the bill will give the administration new

tools, and will indeed insist that the administration use those tools

to achieve the required currency correction.

So, if we can get the administration to itself recognize it has to

label China now, tell the Chinese now so it could put them on notice, mobilize the multilateral community, and have your legislation coming as quickly as possible to provide the back-up, we would

have a new strategy in this area that would bring some promise

at long last of resolving the most central issue of U.S.-China economic relations today. Thank you.

The CHAIRMAN. Thank you very much.

[The prepared statement of Dr. Bergsten appears in the appendix.]

The CHAIRMAN. I would like to get four or five questions in in

about 10 or 12 minutes, so if you could keep your answers short,

I would appreciate it. You could expand in writing, if you would,

if you need to go beyond that, because there are some meetings I

have to go to.

40

Bob, one of the arguments against currency reform is that China’s financial system is too shaky. Your view on that.

Mr. HORMATS. Thank you. I actually think that the financial system in China does really need reform. I think that one of the

things they are in the process of doing, and Tim Adams mentioned

this a little while ago, is trying to get their system better able to

cope with the kind of changes that would be required were they to

raise their currency. But I do not think that is a deterrent at this

point to some revaluation of the currency.

I think that the two really go hand in hand. In one sense, they

should be reforming their financial system. They should be doing

a number of things to cushion the domestic economy from the kinds

of changes that they regard as being difficult for them.

But it should not deter them from some adjustment right away.

They have been, in fact, reforming their system for quite some

time, so it is far better able to cope today than it would have been

a year or two ago. So, I can see part of that argument being valid,

but I do think there is an opportunity for them to raise the value

of their currency without major disruption.

Moreover, the key point is that it creates the right incentives for

doing what the Chinese want to do anyway, which is to shift a certain portion of their investment away from export-oriented products, more toward the domestic economy, and to shift a larger portion of their GDP away from an export focus to improving domestic

living standards.

And to the extent they raise the value of the currency, they create the kind of investment incentives and the kind of incentives for

shifting the economy away from too much dependence on exports

to a lot more emphasis on domestic demand improvement and consumption improvement, which they need to deal with some of the

instability that they have in central and western China, where people feel that their standard of living is not rising enough. Part of

the currency shift would help in achieving that goal, so that would

help stability.

The CHAIRMAN. Mr. Frisbie, China is using an industrial policy

for their domestic industries. How much of an input do foreign

companies like the ones you work with have as the government

shapes those industrial policies, and how would you recommend

that we approach this issue with China?

Mr. FRISBIE. I think it is a mixed record. On the positive side,

we can look at things. For example, a current issue, China’s antimonopoly law that is being developed. They have issued several

drafts of it publicly and they have allowed foreign companies to

comment on it, as well as other organizations, and there have been

changes in those drafts in response. So there are some positives to

point to.

But on the other hand, a key part of industrial policy is the setting of standards. I think that we feel that process is still too

opaque in China. Obviously it affects a broad variety of industries.

Which gets to another point I guess I would make, too. I mention

we serve our membership regularly on their issues, and that IPR

is the top one in our most recent survey.

But number three on that list is transparency. That has always

been in the top 10. It has usually been lower, perhaps because

41

other issues were deemed to be more important. But it has moved

up to be the third issue and it is consistently cited by companies

operating in China. That is one that I think needs to be gotten at

better.

This is also something that should be addressed, I think, certainly for the JCCT process and beyond, in terms of China doing

a better job, perhaps along a Federal Register type system, to have

drafts of laws, regulations, and so on be put out there for public

comment.

The CHAIRMAN. Thank you.

Mr. Joachim, as a fellow farmer, I know that you raise a legitimate question when you express concern about, if we put additional tariffs on imports from China, then we might be retaliated

against.

If that were the case, how credible is it that the Chinese would

retaliate against exports of our soybeans? Could supplies from

other countries compete with U.S. soybeans and take up the slack,

which obviously would hurt American farmers?

Mr. JOACHIM. Mr. Chairman, that is probably, indeed, what

would happen if the Chinese decided to retaliate against our agricultural exports. Obviously it would cause a disruption in trade,

and of course that would mean lower prices not only for our farmers, but actually for everybody who grows soybeans in the world.

There is a reason we sell so much of our crop to China: we have

transportation advantages that the South Americans do not have.

The CHAIRMAN. Dr. Bergsten, what policy should we pursue to

help foster domestic demand-based economic growth in China

versus export-led growth?

Dr. BERGSTEN. We address this topic at great length in our new

book, Mr. Chairman. There is a very natural set of policies. As

China has deregulated and privatized its state-owned enterprises,

a lot of the benefits previously provided to the citizenry by the

state-owned enterprises have disappeared: health care, free education, pensions, etc.

So now less than 20 percent of the Chinese population has any

health insurance or any pensions at all. In rural areas, until very

recently, the Chinese had to pay for primary education.

China, thus, has an enormous opportunity to respond to its social

problems, which have led to a lot of disruption in the countryside,

by increasing government programs for health care, pensions, and

education, all of which, in economic terms, mean spending on domestic demand, thus giving China a big, new jolt of growth, simultaneously meeting priority social needs and shifting growth from

the export side to the domestic demand side. In short, it is a winwin set of policy changes. The Chinese are aware of it. They are

moving, but very slowly, in that direction.

They need to consciously phase in those new domestic social

spending programs in parallel with phasing in the needed rise in

the value of their currency and therefore the reduction of their

trade surplus. Done properly, the two things will intersect and

mesh very nicely. They can keep 8, 9, 10 percent growth but alter

the composition in ways that are desirable both domestically and

internationally.

42

Mr. HORMATS. And I think they are in the process of doing it,

but it is slower, and the resource allocation required is probably

greater than they budgeted so far. But they know they need to do

it, because there are lots of social pressures in China.

There are lots of demonstrations, violent demonstrations, against

income inequality and against the number of the kinds of issues

that we are talking about: health insurance, education, taxation.

They have to do this, particularly in rural China. That will help.

They know they have to accelerate the process for their own good

reasons, but it helps us also.

Dr. BERGSTEN. Since Mr. Hormats has added a word to my answer, could I add a word to the question you asked him at the start

about the effect of greater exchange rate flexibility on their banking system, and vice versa?

The CHAIRMAN. Yes.

Dr. BERGSTEN. The distinction between the kinds of exchange

rate change is very important. A theoretically pure floating exchange rate, which also means getting rid of all capital controls,

would pose a big risk for the Chinese financial system because,

under that approach, a lot of capital flight could occur. People who

are worried about Chinese banks could move money out, and the

Chinese economy could be at risk. The Chinese know that, and

therefore they are not going to do it.

By contrast, one-step revaluations of the currency will permit

them to keep the fixed exchange rate within very narrow margins

and keep the capital controls. Doing so would have no discernibly

negative effect on their banking system at all.

That is a major reason, in addition to the need for a speedy,

large change in the currency relationship, to do it that way and

stop harping on greater flexibility, which I am afraid the U.S. Government, the world, and the IMF have done, thus giving the Chinese an easy out for the last 3 years. The debate needs to focus on

what could be done practically and in large amount in the short

run.

Mr. HORMATS. I agree with that. They are not going to let their

currency float freely for a very long time.

The CHAIRMAN. Thank you all very much. The hearing is completed. Thank you all for coming.

[Whereupon, at 12:30 p.m., the hearing was concluded.]

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Æ