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S. HRG. 111–640 

CHINA’S EXCHANGE RATE POLICY AND TRADE 

IMBALANCES 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

ECONOMIC POLICY 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE EFFECT THAT CHINA’S EXCHANGE RATE POLICY HAS 

ON TRADE FLOW, U.S. MANUFACTURERS, AND WORKERS 

APRIL 22, 2010 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 
COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

KAY BAILEY HUTCHISON, Texas 

JUDD GREGG, New Hampshire 

EDWARD SILVERMAN, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

DEVIN HARTLEY, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON ECONOMIC POLICY

SHERROD BROWN, Ohio, Chairman 

JIM DEMINT, South Carolina, Ranking Republican Member 

JON TESTER, Montana 

JEFF MERKLEY, Oregon 

CHRISTOPHER J. DODD, Connecticut 

CHRIS SLEVIN, Staff Director 

(II)
C O N T E N T S 

THURSDAY, APRIL 22, 2010 

Page 

Opening statement of Chairman Brown ................................................................ 1 

WITNESSES 

Lindsey Graham, Senator from the State of South Carolina ............................... 3 

Clyde Prestowitz, President, Economic Strategy Institute .................................. 6 

Prepared statement .......................................................................................... 30 

Nicholas Lardy, Anthony Solomon, Senior Fellow, Peterson Institute for International Economics .............................................................................................. 10 

Prepared statement .......................................................................................... 36 

Charles H. Blum, Executive Director, Fair Currency Coalition .......................... 11 

Prepared statement .......................................................................................... 46 

Daniel J. Ikenson, Associate Director, Center for Trade Policy Studies, Cato 

Institute ................................................................................................................ 13 

Prepared statement .......................................................................................... 52 

Responses to written questions of: 

Senator Vitter ............................................................................................ 77 

Jack W. Shilling, Retired Executive Vice President and Chief Technical Officer, Alleghany Technologies Incorporated, and Chairman, Specialty Steel 

Industry of North America .................................................................................. 21 

Prepared statement .......................................................................................... 60 

Mark A. Suwyn, Executive Chairman of the Board, NewPage Corporation, 

Miamisburg, Ohio ................................................................................................. 22 

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

Derek Scissors, Research Fellow, Asian Studies Center, The Heritage Foundation ........................................................................................................................ 24

Prepared statement .......................................................................................... 73 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Letter from Damon A. Silvers, Policy Director and Special Counsel, AFL– 

CIO ........................................................................................................................ 80 

Letter from Erik O. Autor, Vice President, International Trade Counsel .......... 83 

(III)

(1) 

CHINA’S EXCHANGE RATE POLICY AND 

TRADE IMBALANCES 

THURSDAY, APRIL 22, 2010 

U.S. SENATE, SUBCOMMITTEE ON ECONOMIC POLICY, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 10:11 a.m., in room SD–538, Dirksen 

Senate Office Building, Senator Sherrod Brown (Chairman of the 

Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN SHERROD BROWN 

Chairman BROWN. This hearing of the Economic Policy Subcommittee of the Banking Committee will come to order. I appreciate my friend Senator Lindsey Graham, who has been outspoken 

in support of manufacturing and on all of these issues that surround currency, and we will hear from Senator Graham in just a 

moment. 

The matter before the Subcommittee is an urgent one. We are 

holding this hearing in the hope that our witnesses can shed light 

on the effect that China’s exchange rate policy has on trade flow 

and U.S. manufacturers and our workers and on what remedies 

Congress should consider. Financial and trade analysts and news 

reports indicate we should anticipate China to begin gradually revaluating its currency, the RMB, in the coming weeks. What we 

hope to learn is what a meaningful appreciation of the RMB would 

be and what effects it will have on the U.S.–China trade relationship and on U.S. employment. We will consider remedies to address 

this imbalance that exists today and that we can expect to remain 

for some time in the future. 

While it is true the journey of a thousand miles begins with a 

single step, it is an awfully slow way—and I know it has tried Senator Graham’s patience, too—a slow way to reach our destination. 

But that is the path we are on today. 

When I came to Congress in 1993, the RMB was valued at about 

5.5 to the dollar. Then from 1995 to 2005, it was valued at about 

8.28 without change. In my mind, that is one of two things: one 

heck of a coincidence or blatant currency manipulation. 

From 2005 to the middle of 2008, we were heading in the right 

direction in part because of Senator Graham’s and Senator Schumer’s—in large part because of their efforts, but still too slowly. 

Beginning in 2005, the Government of the People’s Republic of 

China managed a slight currency appreciation which allowed for a 

few years of modest progress. But in the summer of 2008, China 
2 

abandoned this process and once again fixed the value of their currency against the dollar. So our journey of a thousand miles has 

involved more steps backward than forward during the last decade 

and a half. 

By keeping the value of their currency artificially low, China provides an incentive to foreign corporations to shift production there 

because it reduces the price of investing in China and makes China’s exports cheaper. This continued undervaluation, which most 

economists agree—and we will hear from several of them today— 

is in the range of 25 to 40 percent, has caused serious harm to our 

economy and has cost American jobs. 

Think about it. If a gas station is offering gas for $3 a gallon and 

another is selling it for $2 a gallon, how long can the first one stay 

in business? 

According to a recent Economic Policy Institute report, since 

China joined the WTO in 2001, 2.4 million jobs have been lost or 

displaced in the U.S. as a result of the U.S.–China trade deficit. 

Under the Omnibus Trade Act of 1988, the Treasury Department 

is required to formally identify countries that manipulate their currency for the purpose of gaining an unfair competitive trade advantage. In recent years, Treasury has found that certain countries’ 

currencies were, in fact, undervalued. 

However, based on its interpretation of the law’s legal standard 

for a finding of manipulation, Treasury refused and continued to 

refuse, through Presidents of both parties, to cite such countries as 

currency manipulators. Last month, Secretary Geithner announced 

the Department will delay the release of the statutorily required 

report to Congress. This Committee has oversight responsibility of 

this issue, and under Article I, Section 8 of our Constitution, it is 

Congress that is charged with the regulation of both foreign commerce and the value of our currency. 

The Subcommittee has invited a representative of Treasury to 

testify today, but the Department declined due to its ongoing diplomacy, both bilaterally with the Chinese and in multilateral settings 

like the G–20. I disagree with the Department’s decision. I care 

less about the exact timing of the report than I do about the Administration’s willingness to be open with Congress and the American people about what it is doing and why it is doing it. And while 

the cat has got their tongue when it comes to testifying before Congress, I note that not one but three Treasury representatives were 

scheduled to speak with a group of bankers and analysts at the 

JPMorgan investor conference at the Madison Hotel tomorrow 

morning. 

The American people have been patient as the Administration 

continues this strategy, but patience is waning as more U.S. businesses are undercut and more U.S. workers are losing their jobs. 

Just yesterday, Commerce said it will investigate whether Chinese 

aluminum products are getting unfair subsidies, but have delayed 

a decision as to whether currency valuation will be a factor in the 

case. 

These delays and the Administration punts on currency decisions 

involving China cannot last forever. The Chinese Government follows its economic interests. The U.S. Government should do the 

same. 
3 

I know I can speak for Secretary Dodd in stating that the Committee looks forward to Secretary Geithner’s appearance before the 

Committee in the coming weeks. 

Today we have three distinguished panels, led off by Senator 

Graham, to help the Subcommittee understand not just the fact 

that China’s currency is undervalued. That point is clear to all of 

us. What we hope to understand are the effects of that policy and 

what options are available for moving forward. 

I look forward to the hearing and the testimony of each of the 

witnesses, and we will start with Senator Graham—and Senator 

Schumer we invited today, too, the two chief sponsors of the currency manipulation issue. Senator Schumer could not join us. His 

staff is here, and I very much appreciate Senator Graham being 

here and Senator Graham’s work on this and many other issues. 

Lindsey. 

STATEMENT OF LINDSEY GRAHAM, SENATOR FROM THE 

STATE OF SOUTH CAROLINA 

Senator GRAHAM. Well, thank you, Mr. Chairman. People are 

dying for their Congress to work together in a bipartisan fashion 

to solve problems that affect their daily lives. Well, when it comes 

to China currency, your ship has come in. We have got new legislation with Senators Stabenow, Brown, Brownback, myself, and Senator Schumer, and, Mr. Chairman, having you on board has been 

great. No one has talked more about this in terms of how Chinese 

manipulation of their currency affects the ability of American manufacturing to survive. And American manufacturing is under siege 

for a lot of reasons, some of them of our own making back here. 

We need to do a better job of regulating, taxing, and litigation. But 

at the end of the day, it is the world economy, and Republicans and 

Democrats see the current behavior of the Chinese government of 

manipulating the value of the yuan against all other currencies as 

having a devastating effect in terms of the global economy. 

The reason I know they are manipulating is that the only time 

it gets any adjustment or revaluation is when we put a bill in. And 

the moment we look the other way, it stops. 

Now, this is a bipartisan team to fix the problem, but there is 

a bipartisan problem associated with Chinese currency. In the 

Bush administration, it was impossible for us to get the Bush administration to say China manipulated their currency, which everybody knows they do. The Obama administration ran—music to my 

ears. Now here we are having the same trouble with them. We cannot get them to do the things that would change this policy. And 

I think the reason is that when you get in the White House, you 

realize that we are borrowing so much of our money to run the 

Government and pay our bills from China, it just makes it very difficult to engage China. And that is an unhealthy relationship. 

I want a good partnership with China. I want it to be mutually 

beneficial. But this one issue of where the currency of China is 

kept artificially low has a devastating effect—and I am not an 

economist, but I am looking at it through the eyes of a manufacturer in Ohio and South Carolina. You are producing a product to 

be sold on the world market. One of your biggest competitors is 

China. If they can beat us because they do a better job, so be it. 
4 

That is just the way the world is and will always be. If the other 

person outworks you and has a better business model that is more 

efficient and they are smarter at what they are doing and they 

work harder and you lose, so be it. But our companies in Ohio and 

South Carolina are losing market share not because they are being 

outworked. They are being out manipulated. 

It is one thing to compete against cheap labor, and the Chinese 

communist capitalist model is unique. They are capitalist as long 

as the government allows you to be a capitalist. They literally recruit millions of workers, put them in high-rise apartment buildings and set their wages, in a way that could never happen here, 

and provide that labor to any company that would come over. The 

company has to agree to a Chinese partner at 51 percent, and if 

you do a business for a long time over there and you have got technology, there will be a Chinese company opened across the street 

from where you are doing business that is using your technology. 

That is just the way it is with China, and instead of complaining, 

we ought to do something about it. 

When it comes to their currency, based on economics, as I understand it, the more you export, if you become an export economy, 

well, the value of your money should change based on the way you 

are doing business. If you are making all of your money by selling 

goods to other countries, then the value of your money ought to 

change based on your export-import balances. 

Well, it never changes. And what does it mean if it never 

changes? What does it mean if they manipulate the currency? It 

means that the company in South Carolina and Ohio has got to 

compete against cheap labor, no EPA, a command-and-control communist economy. You also have to compete against artificially low 

money. If it is 25 to 40 percent below its true value, that means 

that a product produced in China, in addition to the other things 

I have said, direct subsidies, low wages, no environmental laws, on 

top of all that you are getting a reduction in the cost of producing 

goods in China because the money discount goes to the people making products in China at the expense of people in South Carolina 

and Ohio. 

If China were some island nation trying to get through and just 

pay their bills and manipulating their currency to kind of seize a 

market just to stay in business for a while, that would be OK with 

me. They are not. They are a huge economy. They are sucking up 

all the excess oil there is in the world. They are going around buying natural resources. They are growing at 11 percent with no end 

in sight. I am glad they are doing well, but not at our expense. I 

want them to do well. I want them to be a partner that can buy 

stuff from us. But they have to adopt recognized trading policies 

and economic principles to be a good partner. 

Our legislation is very simple. If you find that their currency is 

misaligned—and you do not go to intent. If it is misaligned, then 

we give the Treasury Department and the Commerce Department 

tools to address that misalignment. And it is not China specific. It 

is any country that has a certain economic weight that is engaging 

in this behavior. Our country can push back. We can now bring 

dumping cases based on misaligned currency. That would be a 

huge breakthrough. 
5 

The textile industry, which is constantly under siege from Chinese products being dumped throughout the world, would now be 

able to make a case that I am losing market share because the 

money is a form of dumping, the money manipulation. 

We would get 80 or 90 votes if we could ever get this sucker on 

the floor, and it is a shame, quite frankly, that we are having to 

do this legislation given all the efforts by the Bush administration 

and the Obama administration to find a better glide path. But in 

2008—the Chairman is absolutely right—their marginal efforts at 

currency adjustment stopped because the political pressure 

stopped. 

So this time around, we have got a chance to institute reforms 

that will be WTO compliant. And if it hurts our relationship with 

China, then that says a lot about the relationship. It is not healthy 

that you have to ignore someone’s cheating to keep them as a 

friend. I have nothing against the Chinese people. I do not like 

their form of government, but they do not like ours. We will just 

deal with that. I cannot sit by and watch people in my State, Ohio, 

or anywhere else lose their job because the Congress is allowing 

someone as big as China to cheat. 

Stop cheating is all we are asking. Allow the currency to float in 

a reasonable way. I understand you have an immature banking 

system. I am willing to be flexible and reasonable. You need to increase the basket of items that go into valuating the yuan. You 

need to change your banking system so it will accommodate a floating currency. I do not expect that it would happen overnight, but 

I expect a system to be in place to replace adjustments based on 

political pressure. 

I cannot live with small changes in the yuan directly related to 

how much time and attention the two of us spend on China currency. I need to go back to South Carolina and you need to go back 

to Ohio and tell folks change is coming. It is going to take a while 

for the Chinese economy to float their currency, but we now have 

them on a path where over time we will have a better trading relationship. The Chinese people save way too much. We save way too 

little. They need to open up their markets to financial services so 

their people can have a way to invest their money. We are good at 

that. And where they are better than us because of the way they 

do business fairly and we lose, so be it. But they are beating us 

not because they are better, but because they are manipulating 

their currency. And if we do not do something about that, then the 

public is going to be very disappointed in their Congress beyond 

what they are today. 

One last thought. We borrow most of our money from China to 

pay our bills, and one of the biggest bills we pay is buying oil from 

overseas. This is a lousy spot for America to find herself in 2010. 

And I am working with you, Mr. Chairman, to do something about 

both things. I am working with you to find a way to get a better 

trading relationship with China so that we will have an honest 

trading relationship. And I am working with you to find a way to 

reduce our dependency on foreign oil. If the next generation of 

Americans inherits a world economy where China continues to manipulate their currency given their growth, it is going to destroy 

American manufacturing. If we continue to never change our poli-
6 

cies here at home about finding oil that we own and consuming less 

and investing in technology to break our oil dependency, they are 

going to be more dependent on Mideast oil, and that is not what 

either one of us wants to do for the next generation of Americans. 

So I hope the Congress, the Democratic and Republican leadership, will get behind this bill because the time is long overdue to 

act. Thank you very much. 

Chairman BROWN. Thank you, Senator Graham. Thanks for joining us, and I appreciate your comments and especially your work 

on all of those issues, from climate change to the currency issue, 

so thank you again. 

I will call the first panel up, if they would join us. Thank you, 

all of you, for joining us. I will introduce each of you briefly. Then 

I am going to do something a little different. Mr. Prestowitz has 

a flight, because of a cancellation has to get out earlier. So after 

his testimony, I will ask him a couple questions. Then the rest of 

you can do your statements, and I will then focus on the three of 

you, if that is OK with people. 

Clyde Prestowitz has played key roles in achieving congressional 

passage of NAFTA and in shaping the final content of the Uruguay 

Rounds, as well as providing an intellectual basis for current U.S. 

trade policies, and was the lead negotiator, as most of you know, 

for the Commerce Department in the Reagan years in our Japan 

negotiations. I just finished over the weekend reading the galleys 

of his new book which is coming out, ‘‘The Betrayal of American 

Prosperity,’’ and his role in how America can address these issues. 

Nicholas Lardy, Senior Fellow for the Peterson Institute for 

International Economics, was a Senior Fellow at Brookings for 

about a decade and the Director of the Henry Jackson School of 

International Studies prior to that at the University of Washington. His writings I have been a fan of for many years and 

learned a great deal about trade and economic policy. 

Charles Blum is Executive Director of the Fair Currency Coalition, for 30 years focused on trade and manufacturing while serving in various capacities in the Government and the private sector, 

and he has been a very important advocate as part of the Domestic 

Manufacturing Group and part of the National Association of Manufacturers and all that he has done that way that has been so important to us. 

Daniel Ikenson is the Associate Director of Cato Institute’s Center for Trade Policy Studies. Cato, as you know, speaks articulately 

and forcefully on behalf of issues that are important in this country 

and I think has a perspective that is important for all of us to address also. So, Mr. Ikenson, welcome to you. 

I will start, if Mr. Prestowitz would do his testimony, and then 

as I said, I will ask him a couple questions and then move to the 

rest of the panel. Thank you. 

STATEMENT OF CLYDE PRESTOWITZ, PRESIDENT, ECONOMIC 

STRATEGY INSTITUTE 

Mr. PRESTOWITZ. Thank you very much, Mr. Chairman. I appreciate your courtesy. 

First, I think it is important to recognize that in the tensions between the U.S. and China—the trade deficit, the nature of the 
7 

trade between the U.S. and China, questions of employment and 

unemployment—the currency is only one factor. There are a number of other factors—savings and investment, consumption policies, 

economic growth, and so forth. So currency is only one factor, but 

it is an important factor. And as Senator Graham said, there is no 

doubt that China is managing its currency to maintain it an undervalued rate. The evidence of that is the daily intervention by China 

in currency markets and the huge accumulation of dollar reserves 

by China. 

You have my written testimony. I wanted to hit just four quick 

points. One of them is the argument that is often heard that the 

exchange rate does not matter, the argument being that even if 

China revalued, it would not make any difference in the U.S. trade 

deficit or U.S. employment; and, moreover, that the driver of these 

imbalances is not the exchange rate but it is consumption and investment and savings. Two points there: 

One is that the equation that calculates the impacts of these factors is a mathematical identity, and so by definition, in a mathematical identity, the action in the equation can be either way. So, 

of course, savings and investment has an impact, but so also do 

currency rates. And in this case, we know that the currency rates 

are being distorted. Again, not the only influence but a very important influence. 

The second point is when we say it does not matter, that is almost like saying prices do not matter. And if prices do not matter, 

then I am not sure economics matters. The point is that there are, 

of course, a number of factors that determine trade balances, but 

certainly the rate of currency is one of them. 

It is often said that between 2005 and 2008 China did allow its 

currency to float up about 20 percent, and yet the U.S. trade deficit 

increased, and this is cited as evidence that the currency rate does 

not have any effect. But one has to remember two things—three 

things. One is that this was a period of a bubble in the United 

States, enormous growth in U.S. demand. One has to ask the question: If they had not allowed the currency to float up, would the 

deficit have been bigger? 

And the final point, I think, is that while China’s currency appreciated nominally by 20 percent, in fact, because its rate of productivity growth was very high, the appreciation in real terms was actually less. In fact, it may even have depreciated in real terms over 

that period of time. So just to make the point that currency rates 

do matter and we should not ignore them. 

The second point is that while we talk about this issue in terms 

of deficits, imbalances, and particularly unemployment in the U.S., 

I think there is another very important element, perhaps more important, that we do not discuss very much, and that is, the distortion of trade. In other words, we could have a situation, as we do 

with Saudi Arabia, where we have a huge trade deficit with Saudi 

Arabia, but our trade with Saudi Arabia is not being distorted. 

What we make in the United States, what we sell in export is not 

being distorted by our trade deficit with Saudi Arabia. On the 

other hand, in our trade with countries that—and China is not the 

only one. Let us keep this in mind. But our trade with countries 

that do manage their currencies to be undervalued, it changes the 
8 

structure of our trade. And in a way, that is more important than 

the question of deficits and employment because while other factors 

impact deficits and employment, the structure of the trade is very 

much impacted by the currency rates. 

The third point I would like to make is that in this discussion, 

we are frequently warned that any effort by the U.S. to offset the 

impact of the currency distortions would be protectionist and would 

risk setting off a trade war. I think it is important for us to understand that when countries manage their exchange rates to be undervalued as a matter of policy, that is a protectionist policy. And 

so in this debate or in this confrontation, it is not the United States 

that is being protectionist. We are already in a situation in which 

others are being protectionist. 

The last point I would make is this: China has said, and understandably, that it manages its exchange rate in the interest of its 

economy. It has unemployment; it has huge structural problems. It 

is a country that needs to have rapid growth. We want it to have 

rapid growth. We want it to be successful, and China has said, 

look, you know, we are not doing this to hurt you guys; we are 

doing this because this is in the best interest of our economy. And 

I think we can understand that. 

I think that sometimes rather than pointing the finger at China, 

we should take a similar position, namely, that, OK, we understand you have unemployment, we understand you need to hit 

growth targets. We have unemployment, too; we have growth targets we need to hit as well; and, therefore, we need to manage our 

currency in the best interest of our economy. 

We can do that. We have countervailing duty laws. There are 

clauses in the WTO that suggest that currency manipulation is 

really illegal under WTO rules. We have balance-of-payments 

issues that could be adduced to justify measures by the U.S. to 

counter the impact of currency management. I think particularly 

our countervailing duty laws and the ability of the Secretary of 

Commerce to self-initiate countervailing duty cases is something 

that should be pursued more aggressively than it has been. But my 

point is that rather than constantly beating up on China, perhaps 

we should be looking to our own interests and thinking about what 

we can do to protect our interests. 

The final point I would make is that in the debate about competitiveness and the question of what is causing decline of U.S. competitiveness, certainly China’s currency policies are one factor that 

contributes to a decline in U.S. competitiveness. But we should not 

forget that there are man factors that we contribute ourselves. We 

are low savers. We do have a de facto industrial policy that makes 

no sense. And so as well as dealing with the currency issue, we 

should be dealing with that in the context of a broad strategy to 

revitalize the U.S. productive base. 

Thank you. 

Chairman BROWN. Thank you, Mr. Prestowitz, and I will ask a 

couple questions, then move on to Mr. Lardy. 

This week, Brazil and India joined the call for China to appreciate its currency. Since those are two countries that are part of the 

developing emerging economy BRIC group—Brazil, Russia, India, 

and China—what does this suggest to you that they have made 
9 

that call? And what opportunities does it present to us to work 

with them rather than trying to address this unilaterally? 

Mr. PRESTOWITZ. Well, I think it is very important that they 

made that call because what it tells us is that while we tend to 

think of this question in bilateral terms, in fact, China’s policies 

are having a negative impact on many countries. And that suggests 

that it should be possible to address this in a multilateral setting, 

in a multilateral framework, rather than just a U.S. beating up on 

China framework. And so I think that the Administration would be 

well advised to try to rally support from others who are being negatively impacted. 

Chairman BROWN. In your book, you mentioned—thank you for 

that. You talked about U.S. company—I mean, the framework of— 

I often heard in my time in the House working on trade issues that 

trade brings democracy and the wealthier a country gets, the more 

it interacts with Western democratic countries like ours, the more 

democratic it becomes and the more it shares our values. 

You point out in your book and other times I have heard you 

that, in fact, U.S. companies sometimes prefer manufacturing and 

development and location of plants, if you will, in countries that 

are less than democratic and countries that are authoritarian. If 

that, in fact, is true—and I think it is, too. But if that, in fact, is 

true, how do we change that direction a little bit so that it is not 

more of a pull to do business in China for an American company 

because of the authoritarian structure that might make their lives 

a little bit easier? 

Mr. PRESTOWITZ. Well, I think it is, as you have said, we are in 

a situation in which global companies are major political players in 

Washington, DC, and in other democratic capitals. In authoritarian 

capitals, they are supplicants, just like everybody else. And so the 

balance of influence is kind of asymmetric. 

But more than that, I think a major issue that needs to be discussed in tandem with the currency question is the question of investment incentives, because right now, if you look at the structure 

or the dynamics of a global economy, all of the incentives are really 

such as to move the production of tradable goods and the provision 

of tradable services out of the U.S. 

What are those dynamics or those incentives? One of them is currency. Currency is being undervalued in a number of countries, 

China lead among them but not the only one. 

The second one is financial investment incentives. Put your factory in my country and we will give you the land. We will give you 

the infrastructure. We will put in a capital grant. You won’t pay 

taxes for 30 years. So on a $5 or $6 billion investment, those incentives can amount to as much as half of the capital invested, and 

what they serve to do is to distort the actual market dynamics. 

So, for example, you can produce widgets more economically in 

the U.S., let us say, than in China on a normal operating cost 

basis. But if the capital is subsidized, then you move that production to China. And so the location of production is not being determined by market forces. It is being determined by capital investment incentives. 

This is something that the U.S. does at the State level, but the 

States don’t have many chips to play with in the U.S. We don’t do 
10 

it at the Federal level. I think we should. I think we should have 

a fund. My proposal is that we propose globally to negotiate an 

agreement like we have in the WTO on export subsidies. We proposed to negotiate disciplines on the use of investment incentives, 

but at the same time, while negotiating that, we create a fund that 

would match the incentives of others to offset that distortion of the 

market forces. 

Chairman BROWN. Thank you, Mr. Prestowitz. Thank you for 

joining us. 

Mr. Lardy, your testimony, please. Thanks. 

STATEMENT OF NICHOLAS LARDY, ANTHONY SOLOMON, SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL 

ECONOMICS 

Mr. LARDY. Thank you very much, Senator Brown, for inviting 

me to appear before the committee this morning. I did submit a 

statement for the record and I would just like to take my limited 

time to draw out some points from that. I am going to focus on four 

key points from the prepared statement. 

The first is that although China’s external surplus on a global 

basis has fallen extremely sharply, from 11 percent in 2007, 11 percent of GDP, to only 1 percent of GDP in the first quarter of this 

year, I think this decline was caused primarily by factors that have 

already been reversed or are likely to be transitory. But the sharp 

and unexpected reduction in China’s external surplus does suggest 

that there is a substantial uncertainty about the precise degree of 

undervaluation. 

In other words, this surplus has fallen much, much more rapidly 

than anybody expected. However, despite this, I do believe that 

China’s currency on a fundamental basis remains significantly undervalued and it is quite likely that the external surplus will rise 

in the second half of this year as compared to the second half of 

2008. 

The second point in my prepared statement is that the virtual 

disappearance of China’s external surplus means that within 

China, it will be politically difficult for the central government to 

resume a policy of appreciation vis-a-vis the dollar. It will be 

strongly resisted by provincial and other local political leaders 

along China’s coast, where upwards of 50 million people are employed in export-oriented manufacturing. They simply won’t understand why appreciation is called for in a period when China’s surplus has disappeared. If appreciation does resume, I expect it 

would be relatively modest, at least until the global recovery 

strengthens further and China’s external surplus widens significantly, for example, as a result of the resumption of growth in Europe. 

The third point in my prepared statement is that even if the 

undervaluation of the RMB remains very large, a rapid correction 

of this undervaluation is not optimal from either the U.S. or the 

global perspective. A rapid appreciation would likely lead to a deceleration of China’s economic growth and thus both impede global 

recovery and lead actually to a loss of jobs in the United States. 

This is very straightforward. If China’s growth decelerates, their 

imports will decelerate and will have negative implication for jobs 
11 

in the United States. So the optimal path is to rather eliminate the 

undervaluation over a period of years. This would add modestly to 

the growth of employment in the United States as our economic recovery continues. I think the problem is, as one reads estimates 

about the number of jobs that might be created as a result of China’s appreciation, it is frequently not qualified by any discussion 

about the timeframe over which that would be either likely to occur 

or optimally should occur. 

The fourth point is that, again, and Clyde mentioned this, I think 

U.S. policy should not focus exclusively on the Chinese exchange 

rate. Rather, policy should be set on a broader framework that recognizes that reducing China’s and keeping China’s external surplus 

small requires not only a more flexible exchange rate, but also 

structural reforms within China that would lead to more consumption-driven growth. 

This is the savings-investment imbalance. This is essentially, I 

think, the economic rebalancing agenda that has been taken up in 

the economic component of the strategic and economic dialog with 

China that is led by Treasury Secretary Geithner. It is also a very 

important part of the G–20 process that has emerged over the last 

year or so. In my judgment, it is this more comprehensive approach 

that is most likely to reduce global economic imbalances and thus 

contribute to a more sustainable global economic recovery. 

Thank you. 

Chairman BROWN. Thank you very much, Mr. Lardy. 

Mr. Blum. 

STATEMENT OF CHARLES H. BLUM, EXECUTIVE DIRECTOR, 

FAIR CURRENCY COALITION 

Mr. BLUM. Thank you, Mr. Chairman. The Fair Currency Coalition appreciates this opportunity to testify on what action can and 

should be taken to remedy currency undervaluation by China and 

others. 

Almost 6 years ago, we sought a solution through multilateral 

dispute settlement by filing a well researched and argued Section 

301 petition. It was summarily rejected by the last Administration. 

Only then did we turn to legislation, developing and refining what 

is now known as the Currency Reform for Fair Trade Act, introduced by Senators Stabenow and Bunning and by Representatives 

Tim Ryan and Tim Murphy. We intend to continue to work on this 

problem until it has been resolved on an effective and lasting basis. 

Had the government acted on the Section 301 complaint in 2004, 

or had any version of our legislation passed the Congress, the damage to American workers and industries would have been reduced. 

Had the IMF or the WTO been up to their task, the problem we 

face today would be less difficult to manage. Unfortunately, none 

of that has happened. 

Instead, China’s trade surplus with the United States and with 

the world, as well as its foreign exchange reserves, have mushroomed over these last 10 years while U.S. manufacturing employment has plummeted by one-third. A remedy delayed is a remedy 

denied. The longer it is denied, the greater the injustice. 

The logical approach, as Mr. Prestowitz already has mentioned, 

the logical approach is to deal with currency undervaluation as a 
12 

subsidy, using the WTO sanctioned remedies, countervailing duties, to offset the unfair advantage on an industry-by-industry 

basis. Undervalued currencies meet the three legal tests for a subsidy finding. 

The government established exchange rate, which is price fixing 

on a broad scale, forces banks to pay the seller of an internationally traded good or service extra units of the home currency compared to its fair market value. That is a government mandated financial contribution. The extra units of currency constitute the 

benefit to the exporter. That benefit creates an incentive to export. 

Currency undervaluation thus seems to be a classic example of an 

export subsidy, a practice that has been from the beginning prohibited under GATT rules. 

Passage of legislation, such as S. 1027, the Stabenow-Bunning 

bill, would distinguish actionable from nonactionable forms of currency undervaluation. That is an important point. Currency undervaluation is not a per se issue. It has to be defined. There need to 

be conditions and terms. The legislation does that. 

S. 1027 would also provide clarity regarding the method of calculating the subsidy, the source of data to be used in that calculation, 

and other procedural matters. Clear guidance from the Congress 

would facilitate the application of existing law to a new area of economic activity, reduce the scope for controversy, strengthen the 

hand of the government in the ensuing litigation and negotiations, 

and provide helpful guidance to trade practitioners, importers, exporters, and foreign governments about the rules that will govern 

their trade. 

A new bill, the Currency Exchange Rate Oversight Act of 2010, 

S. 3134, has 18 cosponsors today, including the Chairman and Senator Graham. It seeks to strengthen the Treasury’s negotiating leverage in its oversight of foreign government currency practices, in 

part by explicitly authorizing the use of trade law remedies in response to currency undervaluation. The FCC welcomes this legislation and is working with the chief cosponsors, Senators Schumer 

and Stabenow, to strengthen it as much as possible. 

In closing, let me invoke no less a free trader than Ronald 

Reagan, for whom I worked in the 1980s. In the wake of the 1985– 

1986 realignment of currencies following the Plaza Accord, he explained his trade policy in a radio address in three simple concepts. 

First, he said, trade must be reciprocal. Free and fair trade with 

free and fair traders is exactly what he said. He didn’t say free 

trade with the world. He didn’t say free trade with free traders. He 

said free and fair trade with free and fair traders. A strict reciprocity is the first principle. The second is that trade must be 

based on a mutual respect for the rules. And third, policy must 

produce results. 

Persistent currency undervaluation surely is a protectionist practice. Tolerating such protectionism undermines the global economy. 

Confronting it cannot be deemed as protectionism so long as that 

is done within agreed rules. 

Martin Wolf recently wrote in his column in the Financial Times, 

‘‘The U.S. was right to give talking a chance. But talk must lead 

to action.’’ A sound trade remedy is the best approach to action. It 

provides negotiating leverage without overkill. Once it has accom-
13 

plished its objective, each countervailing duty remedy can be adjusted according to the degree of revaluation, all the way down to 

zero. It is a carrot as well as a stick. 

In our view, legislation is the right thing to do. It is the only 

thing we can do. It is the one thing we must do. It is high time 

for the Congress to act by passing S. 1027 or equivalent legislation. 

Thank you very much. 

Chairman BROWN. Thank you, Mr. Blum. 

Mr. Ikenson, welcome. 

STATEMENT OF DANIEL J. IKENSON, ASSOCIATE DIRECTOR, 

CENTER FOR TRADE POLICY STUDIES, CATO INSTITUTE 

Mr. IKENSON. Thank you, Chairman Brown. I very much appreciate the opportunity to be here with you today. 

Many economists believe the Chinese currency is undervalued, 

and I have no reason to disagree with that. But the broad range 

of estimates of undervaluation, 10 percent to 40 percent, approximately, should remind us that the true value of the Renminbi can 

only be determined if the currency is allowed to float and the capital account is fully liberalized. The world would probably be much 

better off if China did that, as it would lead to more optimal resource allocations, although a stronger RMB presents its own set 

of challenges to U.S. producers and consumers. 

A stronger RMB, for example, would lead to increased demand 

in China for commodities and raw materials, which would bid up 

the prices, increasing the cost of production to U.S. producers, some 

of which would be passed on to U.S. consumers, exacerbating the 

stress on their own budgets already felt by the relative decline of 

their dollars against the RMB. 

For many in Washington, though, it seems the issue is not the 

Chinese currency per se but that the United States has a large bilateral trade deficit with China, which is often attributed to the undervalued RMB. A currency revaluation for many policymakers is 

just a proxy for reducing the trade deficit, which itself is seen as 

a proxy for creating jobs in the U.S. economy. 

But the relationship between currency values and trade is not as 

straightforward as might have been the case before globalization 

took hold. Because of the proliferation of transnational production 

sharing arrangements, the effects of currency value changes cut in 

many different ways. The last period of RMB appreciation is instructive. As you heard earlier, between July 2005 and 2008, the 

RMB appreciated by 21 percent against the dollar, from a value of 

12.08 cents to 14.64 cents, but during that period, contrary to what 

the textbooks predict, the U.S. trade deficit with China increased 

from $202 to $268 billion, or by 33 percent. 

U.S. exports to China increased, as predicted, and by $28 billion, 

or 69 percent. But there is a strong case to be made that Chinese 

currency appreciation wasn’t the most important determinant of 

that export growth, and I refer you to the chart in my submitted 

written testimony. 

During that same period, U.S. imports from China increased by $94 billion, or 39 percent. One reason for continued U.S. consumption of Chinese goods, despite the relative price increase, is that 

there may be a shortage of substitutes in the U.S. market for Chi-
14 

nese-made goods. If that is the case, RMB appreciation reduces 

Americans’ real incomes, and any trade sanctions imposed to approximate or compel that appreciation can be seen as a regressive 

tax. 

But the fact that a 21 percent increase in the value of the RMB 

was met with a 39 percent increase in import value means that the 

quantity of imports demanded after the price change increased by 

nearly 15 percent. Higher prices met with greater demand would 

seem to defy the law of demand, so something else must have happened. 

I think Chinese exporters must have lowered their RMB-denominated prices to keep their export prices steady. That would have 

been a completely rational response, enabled by the fact that RMB 

appreciation reduces the cost of production for Chinese exporters 

who rely on imported raw materials and components. According to 

a growing body of research, somewhere between one-third and onehalf of the value of U.S. imports from China is actually Chinese 

value added. The other half to two-thirds reflects the costs of materials, labor, and overhead from other countries, including the 

United States. China’s operations still tend to be low-value manufacturing and assembly operations. Thus, much or most of the 

value of Chinese exports was first imported into China. 

RMB appreciation not only bolsters the buying power of Chinese 

consumers, but it makes Chinese-based producers and assemblers 

even more competitive because the relative prices of their imported 

inputs fall. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the effect desired by many in Congress, which is to reduce 

U.S. imports from China. 

That process might very well explain what happened between 

2005 and 2008 and is probably a reasonable indication of what to 

expect going forward. Factors such as income, savings propensities, 

the availability of substitutes, and monetary and fiscal policies 

have greater influence than currency movements over trade flows, 

particularly when exporters are willing to absorb the costs of those 

currency changes. 

As to the claims that imports kill jobs, I would note that U.S. 

producers themselves account for a majority of import value year 

after year. The figure was 55 percent in 2008. Fifty-five percent of 

U.S. importer value was imports conducted by U.S. producers. Imports from China and elsewhere really, therefore, support countless 

jobs up the value chain in the United States. 

During the quarter-century between 1983 and 2008, as the value 

of U.S. trade increased more than fivefold in real terms, U.S. employers added 46 million jobs to payrolls and real GDP more than 

doubled to $14.5 trillion. That is 1.8 million net new jobs per year, 

even as U.S. import value increased by 8 percent per year over that 

period. 

Finally, yesterday, the U.S.–China Business Council released a 

compilation of State-by-State export data which revealed, among 

other findings, that in 2009, 19 U.S. States exported more than $1 

billion worth of goods to China, which is our third-largest export 

market; that U.S. exports to China were off by only 0.2 percent in 

2009, while exports to the rest of the world tanked by 19 percent; 
15 

that 47 States have experienced triple-digit export growth to China 

since 2000; and that exports to China from Ohio grew from $292 

million in 2000 to $1.9 billion in 2009. The undervalued RMB is 

apparently not an insurmountable barrier to exports, as some have 

suggested. 

Thank you for your time and attention. 

Chairman BROWN. Interesting. Thank you, Mr. Ikenson. 

Mr. Lardy, you in some sense agreed, in some sense contrasted 

your views with Mr. Prestowitz. One place where they were more 

or less coincident was that it should be part of whatever we do 

with adjusting currency. I think you wanted to move probably more 

slowly than he would on adjusting currency, but since he is not 

here to speak for himself, I won’t do that debate. 

But you both talked about making this part of a larger plan. He 

mentioned manufacturing policy and other things. You mentioned 

using the talks, the strategic talks to urge some kind of restructuring of China’s relationship with us, economic relationship with 

us. Would you talk that through a little more, about what those 

talks should be and what you would suggest we try to accomplish 

within China’s economy and, I assume, ours to deal with these disadvantages of currency and, I assume, to deal with the trade deficit 

overall and our economic relationship. 

Mr. LARDY. Yes. I think the talks through the strategic economic 

dialog deal with this broad rebalancing agenda, and I think for 

China, that means several areas where there is room for policy 

change beyond the currency. I am not minimizing the currency. 

Chairman BROWN. I understand. 

Mr. LARDY. The currency is a key part of it, but there are other 

things that need to be done. Price reforms, for example, are extremely important. China has tended to have undervalued prices 

for energy, still has significantly undervalued prices for electricity, 

for example. That provides a very substantial advantage to producers of tradable goods, that is, exports and import-competing 

goods. These are the firms that use most of the electricity in China. 

So appropriate pricing of electricity, water, a lot of other natural 

resource products. 

I think Senator Graham also mentioned the environmental protection. They need to introduce appropriate environmental charges 

and fees. Again, that would tend to raise the cost of producing exports. It would not impinge so much on the production of services. 

A very big part of this rebalancing is to get away from a totally 

manufacturing-driven growth process and have the service sector 

play a larger role in growth. 

Financial reform is another important part of this reform of the 

banking system, which I believe is very important. Primarily, the 

step that is needed is interest rate liberalization. There has been 

a massive tax on the household sector by very low deposit rates. 

That means households’ income growth has been inhibited compared to what it would have been on a more liberalized interest 

rate environment. 

The central government in China and the local governments, as 

well, need to continue to build out the social safety net. They have 

done a reasonably good job of accelerating that process over the 

last few years, but more, much more needs to be done. That would 
16 

tend to reduce the household savings rate and help to alleviate the 

saving-investment imbalance that Clyde spoke of. 

So there are some things in the pricing domain, the financial sector, particularly interest rate reform, and environmental charges 

and fees, and more of a social safety net, which would affect individual choices on consumption versus savings. All of those things 

would tend to reduce China’s very large—traditionally, over the 

last few years, very large external surplus. 

So, as I said, not just the currency. Other things need to be addressed, as well. But the currency certainly should be part of it. 

Chairman BROWN. What would you consider—and this is for both 

Mr. Lardy and Mr. Blum—what would you consider a meaningful 

step by the Chinese government? Forget our legislation in terms of 

enactment. Think of it in terms of a prodding, for instance, for now. 

What would you—and you have said—I don’t want to put words 

back in your mouth. What would each of the two of you, and then 

I will get to Mr. Ikenson, consider a meaningful step by the Chinese voluntarily on currency? At what rate of appreciation? What 

step over time, and what kind of timeframe? 

Mr. LARDY. Well, my answer to that would have to be conditional 

on some of the factors I alluded to earlier. That is whether or not 

the U.S. growth continues to gain traction, whether Europe joins 

in the recovery process sometime this year. 

I certainly agree with what the Central Bank Governor said a 

number of weeks ago, that repegging to the dollar in the summer 

of 2008 was a temporary measure undertaken with the stress of 

the financial crisis and that it would be the—the policy would be 

changed. I think there is enough evidence now that global recovery 

is reasonably strong. I think they should go back to allowing their 

currency to appreciate. 

When their external surplus, though, has almost disappeared, I 

would be very surprised if they would be willing to appreciate more 

than three or 4 percent. Let us say, over the balance of this year 

unless we get—if we got strong European recovery and their surplus started to go up again—then I would expect and hope that 

they would appreciate more than that, maybe 5 percent or 10 percent. But I do think it has to be somewhat—our expectations have 

to be somewhat conditioned on what happens to the global recovery, the pace, and also what happens to their own trade position, 

their global trade position. 

Chairman BROWN. Mr. Blum, same question to you with the addendum, do you agree with Mr. Prestowitz’s contention—I don’t believe he said it today, but he has other times—that increase in Chinese productivity basically canceled out the appreciation of the 

Yuan in that 2- or 3-year period. So address that, if you would. 

Mr. BLUM. Let me address that first. 

Chairman BROWN. Sure. 

Mr. BLUM. It is obviously true. The productivity of Chinese workers is escalating rapidly. People are being taken off the farm and 

being put in factories, and after a certain amount of training, they 

become highly productive compared to what they used to be. There 

is no question about that. 

But there is something else, and it gets me to a comment I wanted to make to Mr. Lardy’s earlier point. A big part of the problem, 
17 

which I don’t think, Nick, I heard you say, is that the government 

is lavishing—the Chinese government is lavishing cheap, even zero 

interest, effectively, zero interest money on favored enterprises. 

They are almost always state-owned enterprises. 

So one reason—another reason, let us say—why the appreciation 

during those 37 months didn’t add up is that the people who were 

investing for export were being given free money. That nullified a 

big part of the effect of the appreciation. 

And in that connection, I think it is important to recognize, Mr. 

Lardy has talked correctly about the thriftiness of Chinese households. I know many Chinese people, how careful they are with their 

money. They hate credit cards. They save and pool their money to 

buy things. This is all true. But in the last few years, the corporate 

savings have outpaced the household savings. It is now a bigger 

factor. The latest numbers I have, which are Chinese numbers, are 

that in 2007, corporate savings reached the level of 22.9 percent of 

Chinese GDP, while household savings, while still rising—well, actually while fairly stagnant over a 15-year period, were at 20 percent. 

So a big part of the consequence of the currency policy is to put 

a lot of money in the hands of and at the control of these statecontrolled enterprises. They are the guys who invest for export, 

sometimes nullifying the currency policy. 

To answer your question directly, I will tell you honestly what 

we have told the Treasury Department is, we don’t have a specific 

number of set of numbers, but we have told them that the initial 

revaluation needs to be higher than the last time, 2.1 percent. The 

pace at which appreciation proceeds needs to be faster than the 

last time, which produced—again, there are two ways to measure 

it. So we get 17.5 percent if you use the Renminbi to the dollar. 

You get a higher number if you use cents per Renminbi. 

Third, it has got to be sustained. I mean, last time, the Chinese 

stopped when they found it convenient to stop, before we had actually gotten any benefits. Part of the reason is it was not backed up 

by all of the rest of the policies, and we certainly endorse Treasury’s effort to have a full-scale understanding with the Chinese 

about what needs to be done on their side and on our side to rebalance the economy. 

So it is not an easy issue. It is not a magic number. It is not a 

stable number. Forty percent happens to be a recurring number, 

but a lot of things have changed. This will change with both economies. 

So what we need, I think, is a serious, sustained process that 

will actually bring us reliably to some kind of equilibrium. 

Chairman BROWN. Give me, if you would, a real short answer on 

a pretty simple question, the two of you, Mr. Blum and Mr. Lardy. 

Is Congressional pressure a necessary ingredient to begin to fix 

this? Mr. Blum. 

Mr. BLUM. Yes. 

Chairman BROWN. Mr. Lardy. 

Mr. LARDY. I used to be agnostic on this question, but in the current environment, I think pressure either from the Congress or 

from the executive branch is probably counterproductive. This has 

become politically a very contentious issue within China and I 
18 

think the more external pressure there is, the harder it is for them 

to change off the peg. 

Chairman BROWN. OK. I understand that. 

Mr. LARDY. I would—let me, just in response to your earlier 

question, I would say it is very important to recognize this productivity gain is very important, and this is one of the things that I 

don’t think is fully understood or adequately understood in China. 

That is, the appropriate exchange rate is a moving target. China 

has much higher productivity growth in the export sector than its 

trading partners. Even if they moved magically to an exchange rate 

that we would all agree on was the right number within a relatively short period of time, their competitiveness would have improved vis-a-vis their trading partners and they would be heading 

back into a surplus. So they need to have a steady pace of appreciation in order to offset that productivity gain and not have larger 

and larger imbalances. 

Chairman BROWN. Mr. Ikenson, listening to your comments and 

looking at your testimony, I was going to ask you if the size of the 

trade deficit with China, our bilateral trade deficit, was of concern 

to you, but I guess I want to frame it in a different way as I am 

listening to the comments of others. 

A lot of us are concerned that, you know, as we wean ourselves 

off foreign oil—and we all kind of think we should do that in various degrees and various paths—that we do not want to see us losing the opportunity to build a domestic clean energy manufacturing 

capability. It is a concern particularly of mine. I was critical of the 

Administration on the stimulus dollars—regardless of what you 

thought about the stimulus package, but the stimulus dollars going 

to build wind turbines abroad and used in the United States. And 

I was critical of the Administration, but I also was understanding 

in that we do not necessarily have the industrial capacity to succeed, at least in the short term, on doing that. 

One, is that a major concern of yours? And, second, if it is, what 

do we do to build this manufacturing capacity to lead the world in 

at least—not lead the world, if we do not lead the world, which we 

should do, but at least be a major player in solar panels, wind turbines, biomass, fuel cells, all of that? 

Mr. IKENSON. Well, let me just back up and address what I think 

is a myth that has been lingering for quite some time, and that is, 

this myth of manufacturing decline. There is this presumption that 

the Chinese have eaten our lunch, that we have de-industrialized, 

that we do not produce anything anymore. U.S. producers, U.S. 

manufacturers are still the world’s most prolific. We measure manufacturing output by value, not by volume. In fact, about 22 percent of the world’s manufacturing value-added comes out of the 

U.S. factories; about 13 or 14 percent comes out of Chinese factories. We are not producing the products that you see in retail 

stores anymore. We are not producing baseball bats and sporting 

goods and hand tools and clothes. We are producing pharmaceuticals and chemicals and airplanes and technical textiles. 

So we have moved up the value chain, and it seems to me that 

these industries that you speak of are in the U.S. manufacturing’s 

bailiwick. We are occupying the higher value-added portion of the 

value chain. China is still at the lower value-added stages. It wants 
19 

to get to where we are. It might get to where we are. We can stay 

where we are and stay at the top if we have the right policies, and 

I think those policies are policies that attract investment, that attract human capital, liberal immigration policies. And we need to 

recognize that—you know, we used to talk about comparative advantage in terms of one industry against another. Ricardo spoke of 

the Portuguese wine maker and he English cloth maker producing 

and exchanging surpluses. Today I think that applies to—comparative advantage applies to functions on the supply chain, and we 

need to maintain our position at the upper end. 

If you speak to people at the National Association of Manufacturers, they say their biggest problem is the dearth of skills. People 

do not have the skills to take some of the jobs that could lead these 

industries into the future. I think that we should come up with 

some sort of an idea where manufacturers subsidize or pay for 

workers to get these skills in exchange for a commitment from 

workers to stick with them for a number of years. I think manufacturers do not want to invest in these skills knowing that people 

might take off. 

So if there is some sort of an arrangement that can be worked 

out like that, I think we could create the skill set and the labor 

force necessary to excel in those industries. 

Chairman BROWN. Thank you. I would argue that Ricardo would 

be perhaps surprised that both wool and wine would have very possibly moved to Portugal, but that is a whole other issue. 

I hear your arguments, and I have heard those before, and I 

think there is great credence to major parts of it. It is clear that 

we are a much more productive manufacturing sector. It is clear 

that we produce more than we ever did, and our lost jobs surely 

are ascribed in part to efficiency. But I also represent a State—and 

I have looked at what has happened to my hometown and so many 

others. Much of this manufacturing for a lot of reasons has gone 

elsewhere. 

Also, most disturbingly to me that 30 years ago manufacturing 

was about a third of our GDP and finance was about half that, and 

today it is almost the reverse of that, and, you know, look where 

that got us. But that is, again, another issue. 

Let me ask a brief question. I hope you can give me a brief answer on this. A bit off the subject, but not. Senator Graham talked 

about the climate change legislation peripherally. Putting aside 

your position on climate change itself, on whether it exists, who is 

responsible if it does, and whether and how we should address it, 

should we do a border adjustment? Would you support some kind 

of border adjustment to apply to those countries that do not follow 

significant environmental rules that we would impose on our Government, on our industries and utilities and transportation and 

homes, if you will? Would you support some kind of a border adjustment which would be the shape of a tariff or a payment or 

something like that? Mr. Lardy. 

Mr. LARDY. Well, I—— 

Chairman BROWN. Fairly short if you can, but if you cannot, I 

understand. 

Mr. LARDY. I would support that if it was consistent with the 

WTO. 
20 

Chairman BROWN. OK. Mr. Blum. 

Mr. BLUM. Yes, well, I can say that the Fair Currency Coalition 

has no position on that, but if you will allow me a personal observation—and, again, I would hark back to Ronald Reagan’s reciprocity. If we play by one set of rules and our trading partners play 

by another, we are going to hurt ourselves. 

Chairman BROWN. OK. Mr. Ikenson. 

Mr. IKENSON. No. 

Chairman BROWN. OK. That was a pretty short answer. That 

was even shorter than ‘‘yes’’ by one letter. 

Mr. Ikenson, at the risk of making an assumption where you 

work and whom you might consider your personal and your thinktank heroes might be, do you come down on the same place as Mr. 

Blum in your interpretation of what Ronald Reagan would say 

about this? 

Mr. IKENSON. I think reciprocity is not necessary. I think we can 

improve our lot through unilateral measures. We do not need—if 

our trade partners want to engage in protectionism, if they want 

to subsidize their producers, we can still improve our lot and maximize our position by reducing our trade barriers or eliminating 

them. Ronald Reagan is thought to have been a free trader, but he 

engaged in a lot of protectionism as well. But I would say we do 

not need reciprocity; we do not need trade agreements. We can follow in the footsteps of the countries that are leading us in this continent—Mexico and Canada—by eliminating tariffs as a way to reduce costs for U.S. producers. The Canadians and the Mexicans 

have cut tariffs on a whole slew of products, industrial inputs. That 

is one way to reduce costs for U.S. producers. We can do that unilaterally. 

Chairman BROWN. Thank you. Great discussion, and all three of 

you defended your positions articulately and very well, with passion. Thank you to the three of you. Thanks. 

I will call up the next panel, please. Thank you. 

Jack Shilling is Executive Vice President of Corporate Development and Chief Technical Officer (retired) of Alleghany Technologies. He earned his Ph.D. in metallurgical engineering from the 

University of Pittsburgh and for more than 30 years oversaw the 

manufacture of high-technology specialty metals for aerospace and 

defense markets and energy generation markets. We need more 

people studying what you studied these days. Thank you for joining 

us. 

Mark Suwyn, Chairman of NewPage in Miamisburg, Ohio, his 

previous positions with NewPage included Chairman and Chief Executive Officer and Executive Chairman of the Board. He was 

Chairman and Chief Executive Officer of the Louisiana Pacific Corporation for 8 years, and as I said, NewPage is located in 

Miamisburg, Ohio. That is the largest coated paper manufacturer 

in North America with $3.1 billion in net sales. 

Derek Scissors is a Research Fellow of the Heritage Foundation. 

He focuses his studies on the economies of China and India as Research Fellow for Economics in Heritage’s Asian Studies Center, 

and he has written extensively in Foreign Affairs, the New York 

Times, and other publications. 

Dr. Shilling, if you would begin. Thank you. 
21 

STATEMENT OF JACK W. SHILLING, RETIRED EXECUTIVE VICE 

PRESIDENT AND CHIEF TECHNICAL OFFICER, ALLEGHANY 

TECHNOLOGIES INCORPORATED, AND CHAIRMAN, SPECIALTY STEEL INDUSTRY OF NORTH AMERICA 

Mr. SHILLING. Well, thanks so much for asking me to be here. 

My conviction, from all of my previous experience, some of which 

was in China, actually, is that it is vitally important for job creation, the overall economy, and national security—particularly important for national security—that the United States strengthen 

and extend its manufacturing base. An integral part of this effort 

must be an international system of exchange rates that reflect market fundamentals and that adjust as those fundamentals fluctuate. 

China’s enforced undervaluation of its currency by pegging the 

RMB to the dollar dates from 1994. Most estimates are that the 

RMB remains misaligned by about 40 percent relative to the U.S. 

dollar on a bilateral, real exchange rate basis, as large today as the 

RMB undervaluation was before the Chinese Government allowed 

the RMB to appreciate nominally by 17.5 percent between 2005 

and 2008. Other countries have similarly undervalued their currencies in an attempt to remain competitive with China. 

This sort of competitive currency depreciation is protectionist in 

nature, as others have said this morning, and a significant factor 

in the weakening of our U.S. manufacturing base and in the increasing loss of skilled jobs and investment in the United States. 

The RMB’s protracted undervaluation also facilitates exports from 

China into the U.S. and impedes exports from the U.S. to China. 

The U.S. trade deficits with China and China’s hoard of foreign reserves will continue to grow as long as the RMB remains undervalued. 

In my written statement, I have discussed how the RMB’s 40- 

percent undervaluation affects purchasing decisions and the prices 

of items traded between the U.S. and China. I have also described 

what likely would happen if the RMB were effectively revalued by 

40 percent on a bilateral, real exchange rate basis relative to the 

dollar. All other things being equal, price becomes the dominant 

issue where exchange rates have a direct and obvious impact. 

I believe there are at least two principal lessons to be drawn 

from this review. First, in my opinion, the primary benefit of a 

meaningful 40-percent revaluation of the RMB would be to have a 

positive impact on reducing imports into the U.S. of subsidized 

products from China. This shift in turn would mean that U.S. producers would have a greater ability to supply a wide range of segments in the U.S. domestic market with a broader range of products and in larger volumes than is presently the case. There would 

be, in other words, a very beneficial effect on the U.S. economy, 

U.S. jobs, investment, and, again, national security. 

Second, the effect of revaluation on exports from the U.S. to 

China likely would be somewhat helpful, but not as much so because it seems likely the Chinese Government would intervene in 

the future in some manner other than an undervalued RMB to prevent a significant disruption to the ability of Chinese producers and 

labor to supply their own market. 

I would emphasize that the 40-percent revaluation of the RMB 

must be on a real exchange rate basis in accordance with inflation- 
22 

adjusted, trade-weighted exchange rates. The RMB’s appreciation 

between 2005 and 2008 was a nominal 17.5-percent appreciation. 

And during that time, China’s economy and ability to supply the 

U.S. market grew rapidly and dramatically. 

It seems clear that China is very unlikely to revalue meaningfully on its own initiative, nor is the IMF in a position to impose 

and enforce a solution. In the meantime, if not countered, China’s 

protectionist currency policy will increasingly drain the United 

States of knowledge and expertise, contribute to the demise of U.S. 

manufacturing, and siphon off U.S. jobs, technology, and investment. That is not a winning formula for the U.S. economy and national security. 

It is critically important that we act now before the situation deteriorates further. Competitive currency depreciation on the unprecedented scale practiced by China is a very destabilizing mercantilist monetary measure with far-reaching and damaging effects 

on international trade. A first step that can be taken by Congress 

and the executive branch is legislatively confirming the legal right 

of U.S. industries to countervailing and antidumping duties as a 

means of offsetting injury caused by imports from any country with 

a fundamentally undervalued currency. This approach would be a 

reasonable implementation in U.S. domestic law of the WTO’s provisions, would timely help U.S. companies and workers, would act 

as a deterrent, and would underscore that protracted currency depreciation will not be tolerated. 

Thank you. 

Chairman BROWN. Thank you very much, Dr. Shilling. 

Mr. Suwyn, welcome. 

STATEMENT OF MARK A. SUWYN, EXECUTIVE CHAIRMAN OF 

THE BOARD, NEWPAGE CORPORATION, MIAMISBURG, OHIO 

Mr. SUWYN. Thank you, Mr. Chairman. I appreciate the opportunity to appear to discuss China’s exchange rate policy and imbalances. As you indicated, NewPage produces printing and writing 

papers, including coated and uncoated free sheet and groundwood 

papers. While headquartered in Miamisburg, we have production 

facilities in Kentucky, Maine, Maryland, Michigan, Minnesota, and 

Wisconsin, employing about 7,500 people. Production of these papers is a multibillion-dollar industry in the United States. 

China’s undervalued currency is a very significant problem for 

the United States paper producers. The U.S. has a significant competitive advantage over China in the production of paper and paperboard used domestically for printing and writing, a fact that has 

been confirmed regularly in various market research studies. Paper 

producers in this country have access to abundant, renewable, responsibly managed fiber sources, and we have a plentiful supply of 

water required for paper processing. We have a highly skilled 

workforce with generations of experience producing paper and 

state-of-the-art equipment. We have also the advantage of being 

close to the bulk of our customers in the U.S. market since paper 

is a low-margin, high—very heavy product that has very high, expensive shipping charges. 

Now, by contrast, the Chinese producers have to import the vast 

majority of the fiber that they use. Most of that comes from Latin 
23 

America. They also lack an adequate water supply. Wage rates are 

lower in China than they are in the U.S., but paper manufacturing 

is pretty much automated so that the wages are only about 10 percent of the total costs of producing the product. Therefore, they do 

not gain a real significant advantage from those lower wage rates. 

They have state-of-the-art production equipment, such as we do. 

But, finally, their producers are an entire ocean and half a continent away from our customers in the Midwest, and paper is very 

heavy and expensive to ship, and something has to cover that. 

Nonetheless, despite those disadvantages, Chinese paper producers have been able to lower prices, increase exports, and gain 

significant market share in the United States, all because of the 

large subsidies provided by the Chinese Government, their willingness to dump product in the U.S. market, and the biggest subsidy 

of all, the 40-percent undervaluation of the Chinese currency. 

In September of last year, NewPage, along with other members 

of the domestic industry and the United Steelworkers Union, filed 

antidumping and countervailing duty petitions covering certain 

types of coated paper from China and Indonesia. In the countervailing duty petition covering Chinese subsidies, we listed a host 

of subsidy programs that benefit Chinese paper producers, including allegations covering China’s undervalued currency. 

Now, as it has been pointed out earlier and in my written testimony, we provided currency information that demonstrated that 

there were legal requirements—all three legal requirements for 

finding the existence of a countervailable subsidy were met: the 

Chinese Government had provided a financial contribution, it resulted in a benefit, and which was specific to a particular industry 

in China. 

Much to our disappointment, the Commerce Department did not 

initiate an investigation into our allegation when we first made it 

in September of last year, claiming that we had failed to sufficiently allege that the receipt of the excess yuan is contingent on 

export or export performance—in other words, exactly how the subsidy was specific. But in January of this year, we submitted a revised allegation, shown here, that gave all kinds of details by a 

third-party economist, an independent economist, that demonstrated that, based on the Chinese Government’s own data, 70 

percent of China’s foreign exchange earnings were derived from the 

export of goods. Because Chinese exporters garner the overwhelming share of benefits from the undervaluation of the RMB, 

the subsidy benefit is de facto specific to the exporters as a group. 

As of today, the Department of Commerce has still not announced whether it will initiate an investigation into whether China’s undervaluation of its currency confers a countervailable subsidy. We believe, as do many Members of Congress, that Commerce 

has a legal obligation to investigate this practice. We hope an initiation occurs soon so that Commerce will have sufficient time to 

fully analyze this allegation. 

China’s undervalued currency, as well as the other subsidies 

from which Chinese coated paper producers benefit, has had a very 

significant impact on NewPage and other members of the coated 

paper industry. The consequences are documented in the preliminary unanimous injury determination by the International Trade 
24 

Commission, which was issued in November of last year. They cited 

a number of things, but I will just summarize that during this time 

period the increase in the U.S. market share of imports from 

China—and Indonesia—rose from 15 percent to 26 percent during 

the first half of 2009. This came by because of significant underselling by Chinese producers that led to price depression across the 

whole industry. These steps and these actions contributed to the 

closure by NewPage and other coated paper producers of several 

mills over the past several years, including two of our mills at Kimberly and Niagara, Wisconsin; a mill in Muskegon, Maine; and in 

Columbus, Mississippi, just a month or so ago. And we had also a 

converting facility in Chillicothe, Ohio. 

I estimate that about 2,500 direct jobs were lost, with another 

5,000 indirect jobs as suppliers, contractors, and shippers lost business. 

So what is the appropriate response to their undervalued currency? We believe the best outcome, of course, would be for China 

to allow its currency to float freely and reflect market forces. However, we cannot wait 4, 5, 6, 8, 10 years for that to occur. Whatever 

may be accomplished through long-term negotiation, we believe 

that the Department of Commerce needs to investigate China’s undervalued currency as a countervailable subsidy to the Chinese 

coated paper producers and to ultimately impose countervailing duties to offset the level of undervaluation. We believe this is required by the U.S. countervailing duty law and is critical to prevent material damage to the U.S. paper industry and the jobs and 

local communities that rely on our industry. 

Again, I appreciate the opportunity to appear before you today 

and would welcome any questions that you have. 

Chairman BROWN. Thank you very much, Mr. Suwyn. 

Dr. Scissors. 

STATEMENT OF DEREK SCISSORS, RESEARCH FELLOW, ASIAN 

STUDIES CENTER, THE HERITAGE FOUNDATION 

Mr. SCISSORS. Thank you, Mr. Chairman, for the opportunity to 

speak today. I am going to embrace two seemingly contradictory 

themes. One is that China is, in fact, a mercantilist trading state 

but, nonetheless, revaluation of the yuan will not benefit the U.S. 

The first step in reconciling those two themes is a reminder of 

something that we tend to forget, and I have not actually heard 

mentioned at this panel so far. The U.S. has a much bigger economy than China. I do not mean that as a reason for complacency. 

I mean that our policies and our behavior have necessarily far 

more influence on the U.S.–China economic relationship than China’s policies and behavior. We are the 800-pound gorilla here, not 

them. That is the main reason that there is no conventional relationship between the exchange rate, whether measured in real or 

nominal terms, and the bilateral trade gap—and, again, not just 

from 2005 to 2008, but from 1994 to 2009. 

When the U.S. economy expands, we pull in more Chinese goods, 

regardless of the exchange rate, and when the U.S. economy contracts, as it has in the financial crisis, we pull in fewer Chinese 

goods, regardless of the exchange rate. 
25 

Putting it in rough terms, all Chinese policy and behavior only 

explains about a fourth to a third of U.S.–China economic relations. 

The weight is concentrated on our side, not theirs. Our policies, I 

realize, are not the focus of this hearing, but they are vital, and 

I can summarize a way to reduce the trade gap, create jobs, and, 

as mentioned earlier, strengthen national security in four words: 

Cut the budget deficit. 

Back to the topical theme of Chinese mercantilism. There have 

been multiple pieces of legislation in Congress calling China a nonmarket economy. These are exactly correct. In fact, it almost seems 

as if some members have forgotten how right they are about China. 

Why does that matter? If you pick a policy to change from a nonmarket economy, it is not going to do any good. Even if the exchange rate is important in influencing Chinese trade, Beijing will 

just intervene in some other way to compensate, because that is 

what happens in nonmarket economies. 

As it happens, Beijing did not need new intervention the last 

time the yuan appreciated against the dollar, and it will not need 

it this time because the peg is really a minor factor in Chinese 

trade. Much more important is that China heavily subsidizes its 

state-owned enterprises. Mr. Blum in the last round mentioned one 

of these subsidies, and he and I completely disagree on the larger 

point, and we agree on this. China provides basically free money 

to most of its state-owned enterprises, and that is not the only subsidy. In the trading hubs, where one-third of China trade goes 

through Shanghai, Shenzhen, Xuzhou—three cities, one-third of 

the trade—land is very expensive for understandable reasons. But 

all land is owned by the state, so state firms can acquire land in 

the trading hubs freely and quickly whenever it is necessary. 

The biggest subsidy I want to point to, however, is regulatory. 

State firms are sheltered from competition at the national level for 

the big state firms and competition at the local level for small state 

firms. The central government has formally and explicitly reserved 

most of the economy for state economic leadership and is formally 

and explicitly working to consolidate major sectors, and by consolidate, they mean using government intervention to create a small 

number of very large firms, all of which are state owned. 

The result is that relatively few state firms are guaranteed the 

bulk of many major sectors in the economy. This creates economies 

of scale, which makes state enterprises more competitive in exports 

even though they are otherwise inefficient. But the real harm to 

open trade and to the U.S. in particular comes in imports. All imports from any country, all nonstate domestic production, whether 

by local firms or foreign firms based in China, are competing for 

a minority stake of many sectors. Imports of goods and services 

are, thus, capped regardless of the exchange rate. 

I want to stress that. Whatever the exchange rate is, you are still 

not capturing larger shares of the Chinese market because they are 

reserved for the state. 

The bottom line is, when you consider all the factors involved, 

there is little role left in U.S.–PRC trade for the value of the 

renminbi. China has a nonmarket economy, as Congress has noted, 

and the U.S. has more weight in the relationship and our policies 

matter more than theirs. The stories you hear, as my fellow panel-
26 

ists have told, about the RMB mattering works when you put the 

more important factors on the sidelines, in particular, when you act 

as if China will not adopt another policy to countervail a change 

in exchange rate when we know China will because it is a mercantilist trading state, as Congress has pointed out. 

So I am not here to say the U.S. should do nothing. I am here 

to say that real improvement in U.S.–China economic relationships 

will require more difficult work than a renminbi revaluation. We 

need to go after those subsidies. We are not going to get rid of them 

entirely, and it will not be as simple as saying, OK, let us have an 

exchange rate revaluation. But it will actually work. 

We have a couple of things in our favor. One thing was mentioned by the Chairman in the last round. The U.S.–China Strategic and Economic Dialogue should exist for just this purpose. It 

is not for conventional trade discussions. That is for the JCCT. It 

is so senior leadership can hash out major change, which is what 

we are talking about right now. 

Nick Lardy mentioned some changes on the Chinese side. I want 

to focus my suggestions on changes that will directly affect U.S.– 

China trade rather than fundamental reform within China itself. 

We should call for less harmful Chinese bank lending. Their 

bank lending subsidizes their state firms. It is a distortion of global 

economic trade and investment. There should be less of it. We have 

something to do on our side that has exactly the same effect. It is 

less of a U.S. budget deficit. Or we could just cut the budget deficit 

from our own reasons and support Chinese market reform. This 

was also mentioned in the last panel. 

The PRC has claimed for over a decade that it was going to liberalize capital controls. They have not. Their lack of progress is inconsistent with pledges to the U.S. And if they liberalize capital 

controls, it will be much harder for them to use bank loans to subsidize their firms. 

The best thing we could do in the S&ED would be invoke WTO 

principles concerning state dominance of all these sectors. First of 

all, the lack of transparency, China will not tell us exactly what 

state dominance means and what policies are to be used to encourage state dominance. They will not commit to anything. And the 

lack of transparency violates WTO principles. It hampers market 

access and it hampers our negotiations over market access. 

If the WTO is insufficient as a tool to get the Chinese to move 

on state dominance, we have the possibility of a bilateral investment treaty, which we should not extend to China unless we get 

progress on this issue, as well as the S&ED. 

In sum, RMB revaluation is not going to accomplish much of 

anything. When proponents are pressed, they understandably—and 

you have heard repeatedly—point to additional issues that need to 

be resolved, and they are right. But we would be much better off 

skipping over RMB revaluation and going to what really matters, 

which is state dominance of the economy in China and the budget 

deficit in the U.S. 

Thank you. 

Chairman BROWN. Thank you, Dr. Scissors. I appreciate that. 
27 

Dr. Shilling, my staff pointed out, I guess the humor writers behind me, that if Dr. Shilling were more in geology than metallurgy, 

we would have rock, paper, and scissors here, but—— 

[Laughter.] 

Chairman BROWN. I know you have always heard jokes about 

your name, Dr. Scissors, so this is the best we can do. Since you 

laughed, that was actually my line. It wasn’t theirs. 

[Laughter.] 

Chairman BROWN. Dr. Shilling, you had said the IMF is not in 

the position to, perhaps, to do anything here. Is there a case to be 

made for bringing this dispute—dispute in my words, Dr. Scissors 

might not call it that—but is there a case to be made for bringing 

this dispute to the WTO in your mind? 

Mr. SHILLING. Well, I don’t consider myself an expert in that particular area. We have lots of other folks here who are. I am a manufacturing guy and a technology guy. There is a case for doing anything and everything we can do to reverse the trend of lost U.S. 

manufacturing and technology. And if we thought we could win a 

WTO case on any basis that Dr. Scissors was talking about or 

Clyde talked about or anybody else, I am all for doing it. 

The country has got to get tough here because time is running 

out. Every year that goes by that we don’t do what we need to do 

to create a level playing field for U.S. manufacturers is a year lost. 

So whether there legally is a case that we would win, that could 

be presented and won at the WTO, I am not knowledgeable enough 

to answer it. 

Chairman BROWN. OK. 

Mr. SHILLING. I hope there is, and if there is, we should definitely pursue it. 

Chairman BROWN. What would you do if—well, I mentioned the 

wind turbines when I asked Mr. Ikenson earlier. The Administration will say, and I think rightly, although I didn’t exactly agree 

with their emphasis and their focus on this issue, they will say 

that we don’t have the industrial capacity to begin the scaling up 

of wind turbine production and some other clean energy, and some 

other industrial capacity generally. But your field is metals and 

you understand a lot of this. 

What should we be doing in terms of building the supply chain, 

converting from other things, perhaps, so that we really can benefit 

from this revolution, if you will, in clean energy? I mean, granted, 

there are other issues. There is nuclear and there are other things 

that we will likely pursue. But especially in these new energy alternatives, where do we go? How do we do this? 

Mr. SHILLING. Yes, that is a big question. Let me try to give— 

I have worked on this for so long and think about it so much, I will 

try to give you a real simple—because it is a relatively simple—answer. 

First of all, there are things we need to do besides address currency misalignment, as has been pointed out by others, to create 

a level playing field for investment in the United States. 

The next thing we should do is tax reform, because the U.S. has 

a noncompetitive tax structure from a corporation standpoint compared with the rest of the world, both in terms of income tax and 
28 

VAT tax, et cetera. We have got to look at that and make that competitive. 

We have got to look at our energy policies and how they affect 

the costs of manufacturing. Energy is a big factor in manufacturing 

costs and they have to be competitive, and we have to look at regulatory issues and make sure we are competitive there in a general 

sense. 

But if we were to create a level playing field for investment, I 

have always believed that the private sector can handle picking 

winners and losers, and gradually, over time, bring the manufacturing base back to this country. One of the things that is very 

frustrating to me is to read statements that ‘‘those jobs are lost forever,’’ that ‘‘those industries are lost forever,’’ and that ‘‘the U.S. 

can’t compete in that.’’ 

We have to be innovative manufacturers of wind turbines. I am 

all for alternative energy. I am all for doing everything we can in 

those areas. But we have 300 million-plus people here. We need to 

create employment opportunities across a large segment of manufacturing and we should set very high expectations in terms of 

what can be done. Labor costs are, as has been pointed out, a small 

percentage of costs of many U.S. manufacturers, particularly highly 

productive U.S. manufacturers. But we are disadvantaging our 

U.S. manufacturers, we are discouraging investment in U.S. manufacturing because the playing field isn’t level. 

So I don’t think the solution is to subsidize a particularly bright 

idea like wind turbine manufacturing. That will work temporarily, 

but it won’t solve the bigger picture of this tremendous loss of both 

manufacturing and technology. I will stop there. 

Chairman BROWN. That is helpful. 

Mr. Suwyn, why the resistance to petitions like yours from our 

Government? It is not a political partisan thing. The Bush administration was not particularly aggressive on these. The Obama administration on some narrow issues has been a little more aggressive, but generally has not been where a lot of us think they should 

be. What is the resistance? Do you understand this? 

Mr. SUWYN. I don’t, because we have been pushing on this now 

for several years, particularly in this most recent petition. I am not 

sure. I assume it is a political hot potato and people are worried 

about that. It is obviously caught up in the whole issue of our relationships with China, Senator. 

But to me, it is—and I am a simple person—it is very clear. They 

are subsidizing their operations significantly by both the things 

that Mr. Scissors indicated, and we are seeing all of that, and those 

things, we can go after. We are going after those subsidies. 

But one of the biggest ones, we can’t go after, which is the currency. And so we have asked, we have requested, we have submitted documents like this to articulate why it is, in fact, meets all 

the requirements. And what we have gotten so far is nothing. It 

is like it is a blank wall. So we are not even getting told why they 

won’t. We are simply getting no response at all on that. So I don’t 

have an answer as to why. 

Chairman BROWN. Well, I am as perplexed as you are. I mean, 

certainly the geopolitical issues of we need China’s help with Iran 

and North Korea, but it has puzzled me for a decade-and-a-half. 
29 

Mr. SUWYN. Yes. 

Chairman BROWN. Your outspokenness and aggressiveness as a 

major Ohio manufacturer is important to continue to weigh in. 

Dr. Scissors, a last question, and then we are kind of running out 

of time. Is the status quo on exchange rate acceptable to you? 

Mr. SCISSORS. Yes, and not because I am in love with the status 

quo on the exchange rate but it is because it doesn’t matter. It is 

just not to where I would put U.S. energy in negotiations with 

China. We just mentioned that there are these political issues. I 

am an economics person. I think economics is more important than 

politics. But even on economic issues, I just wouldn’t go with the 

exchange rate. 

If somebody said, we are not going to do anything else, then I 

would say, fine. Let us work on the exchange rate. If we are not 

going to do anything else, then an exchange rate change might be 

helpful. But it is not where I would put my first priority, my second priority, or my third priority. So if someone said, let us sit on 

the exchange rate and do other things, I would say I would rather 

do that. 

Chairman BROWN. I thank you. I think there is agreement from 

the three of you and the four on the previous panel that it is bigger 

than exchange rate, that there are many things to do. I mean, 

many of us agree with Mr. Suwyn that the exchange rate should 

be a central focus of this, though. 

Well, thank you all. The record will be open for an additional 7 

days. If you have other answers that you wish you had given or if 

you have another rock, scissors, and paper joke, you could expand 

on that, or if you have anything else that you want to submit to 

the Subcommittee, we would appreciate that. 

The testimony of all seven of you was very, very helpful today. 

So thank you, and the Subcommittee is adjourned. 

[Whereupon, at 11:47 a.m., the hearing was adjourned.] 

[Prepared statements, responses to written questions, and additional material supplied for the record follow:] 
30 

PREPARED STATEMENT OF CLYDE PRESTOWITZ 

PRESIDENT, ECONOMIC STRATEGY INSTITUTE

APRIL 22, 2010 

Chairman Dodd, Ranking Member Shelby, and Members of the Subcommittee on 

Economic Policy, thank you for the opportunity to speak to you this morning. My 

name is Clyde Prestowitz, President of the Economic Strategy Institute. 

The Subcommittee has asked for answers to specific questions with respect to China’s currency policy. I would like to address these questions in brief now, and then 

go into greater detail as to the scope of this issue and what we must do to address 

it. 

To What Extent Is China’s Currency Misaligned? 

Estimates of this misalignment range from 10 to 50 percent. The majority of analysts put the undervaluation of the Chinese RMB at 25–40 percent. 

What Is the Effect of This on the U.S. Trade Deficit and on U.S. Employment? 

The undervaluation of the RMB tends to increase both the U.S. trade deficit and 

U.S. unemployment. Nobel Prize winning economist Paul Krugman has estimated 

that proper RMB valuation could result in an increase of as many as 1.4 million 

U.S. jobs. That suggests a trade deficit reduction of over $100 billion using standard 

estimating parameters. 

But these are only representative figures because many factors other than exchange rates influence both the trade deficit and the level of employment. No one 

can say for sure at any particular moment exactly what amount of trade deficit or 

unemployment is due to currency undervaluation. But neither can anyone deny that 

such undervaluation distorts trade and ways that are negative both for the undervaluing country and its trading partners. 

Moreover, the impact is not only on trade. It is also on investment. If global companies anticipate that a major country’s currency will be chronically undervalued, 

they will tend to move investment and production to that country and away from 

other locations which might be better suited for the production in terms of their actual factor endowments. Thus the market distortion is not only of trade, but of the 

whole composition of production and structure of the economy. For instance, the fact 

that China undervalues the RMB is displacing production not only from the United 

States, but also from Mexico, Indonesia, the EU and other locations. The whole global economy is being distorted, in other words. 

What Sectors of the Economy Would Increase Employment in the Wake of 

an RMB Revaluation? 

Again, we must note that many factors in addition to exchange rates influence 

employment levels. But certainly an RMB revaluation would push in the direction 

of higher U.S. employment. This would be in a wide variety of sectors ranging from 

furniture production to textiles, semiconductors, machine tools, aircraft parts, tires, 

and many, many other sectors. Actually, it would be more or less across the board 

because a rise in one sector tends to stimulate a rise in others. 

What Happened When China Allowed RMB Appreciation in 2005–2007 and 

Why Did the Trade Deficit Not Decline Then? 

First, the appreciation was quite small in nominal terms being only about 20 percent over 2 to 3 years. Since China’ productivity was growing very rapidly and at 

a greater rate than the currency appreciation during that period, in real terms, the 

RMB was actually depreciating. So a much greater appreciation over a shorter period of time would have been necessary to have significant impact on trade deficits 

and surpluses. 

Second, many other things were occurring at this time in addition to the change 

in currency values. The U.S. economy was in the midst of its real estate bubble and 

China’s exports were being subsidized in a number of ways in addition to currency 

undervaluation. So these factors acted to compensate for the effect of the currency 

revaluation. 

What Is the Appropriate Appreciation for the RMB at This Point? 

The question is appropriate for whom. For China, a slow gradual appreciation of 

4–5 percent a year is advantageous. For the United States a revaluation of 15 percent annually over 2 to 3 years would be helpful. 
31 

What Are the Options? 

A negotiated deal between the G-20 countries for a wide reaching set of currency 

adjustments would be the most preferable solution. Indeed, ultimately, it is the necessary solution. Ideally, such a solution would not only adjust currencies but would 

also begin a process of creating a new global financial framework in which the role 

of the dollar would be reduced and that of other currencies increased and in which 

eventually there would evolve one global currency. To drive toward this goal, it 

might be necessary for the United States to invoke the clauses of the WTO and to 

take necessary measures to offset the damage being done to its economy. 

To more thoroughly address the question of whether or not China is manipulating 

its currency, the answer is, of course, that it is doing so by intervening constantly 

in currency markets to maintain the nominal value of the Renminbi (RMB) at a 

fixed rate to the dollar. Such action does not make China unique. A number of other 

countries (Saudi Arabia for example) also peg their currencies to the dollar and also 

intervene from time to time in currency markets to maintain those pegs, and their 

actions do not attract much attention. 

What makes the China case such an important issue is the same factor that made 

Japan’s currency policies so contentious in the 1980s. The currency manipulation is 

only one aspect of an economic development strategy that emphasizes export led 

growth. Countries that pursue this strategy attempt to achieve the economies of 

scale beyond those arising from supplying their domestic markets by expanding production capacity to supply foreign markets as well. The strategy typically entails 

strong incentives and even compulsory measures to assure high savings rates, high 

rates of investment in so-called ‘‘strategic, export industries’’ (typically steel, machinery, electronics, aerospace, chemicals, textiles, and autos), a variety of subsidies 

for exports, currencies that are kept undervalued in order to provide an indirect 

subsidy to exports, and various constraints on imports and foreign participation in 

domestic markets. The objective of these strategies is not only to achieve strong exports, but also to realize continuous current account surpluses and to accumulate 

large dollar reserve holdings. These policies typically result in huge global imbalances and are essentially ‘‘beggar thy neighbor’’ in their impact on other countries. 

It is important to understand that it is this latter element that leads to discontent, 

international friction, and demands for a response. Commentators often discuss the 

trade deficits and attribute trade frictions to the size and chronic nature of such 

trade deficits. But the truth is that we have trade deficits with countries (like the 

oil producers) with whom we have no trade frictions. It is not the deficits, per se, 

that are the problem. Rather it is market distortions and predatory displacement 

of industries that arise in strategic trade situations that give rise to dissatisfaction 

and complaints. And this would be true even if we had trade surpluses with China 

and other strategic trading countries. The issue is not imbalances. Rather, it is strategic trade or what some might call mercantilism. 

A large majority of analysts and commentators agree that China has long been 

pursuing strategic trade and globalization policies and that part of this has been 

and is an effort to keep the RMB undervalued as a subsidy to exports. It is further 

agreed that this currency undervaluation has proved economically beneficial to China’s export industries while also proving harmful to the economies of a number of 

other countries including that of the United States. Our trade balance, our international debt, the continuing erosion or our industrial output—these are all important economic issues that can be in some way at least partially linked to China’s 

currency manipulation and its broader strategic export and development strategies. 

Interestingly, the Japanese example indicates that these policies are eventually likely to be harmful to China as well. . China is still a developing country, and needs 

to cultivate domestic demand and promote sustainable growth. The continued policy 

of an artificially devalued yuan is not in China’s best interests. Greater exchange 

rate flexibility will help reinforce a shift in the composition of growth, and allow 

them to weather fluctuations in global supply and demand. 

The problem, however, is far bigger than China’s currency, and let’s be clear that 

China is not the only one in this game. Many of the East Asian countries are managing their currencies to facilitate their export competitiveness into the U.S. market. But currency is just the tip of the iceberg. We’ve all been engaging in a huge 

charade. We in the United States have been acting on the basis of the presumption 

that in a world of globalization, with a majority of countries being IMF and WTO 

members, that all countries are playing the same globalization game. And that it 

is a game of win-win free trade. This has never been true and is increasingly less 

true. In fact, the world is divided—some important countries (the U.S., the U.K., 

a few others) are more or less free traders, but many other countries are neo-mercantilists pursuing export-led growth strategies guided by elaborate industrial policies. We’ve seen this movie before. We’ve seen Japan pioneer the export-led growth 
32 

strategy, followed by the Asian Tigers, and now we’re seeing the last tiger, or perhaps the first dragon, perfecting the model. A model, it should be noted, that is not 

unique to Asia. Indeed, we see Germany pursuing accumulation of chronic trade 

current account surpluses and insisting that it can never buy more of the products 

of its partners in the EU. 

That this is being discussed now is due in large part to the semiannual Treasury 

report due this April 15th on the exchange rate policies of foreign countries. What 

complicates the issue is the fact that the report necessitates a presidential action 

fraught with considerations far beyond the narrow sphere of currency devaluation. 

Moreover, the report is structured such that it puts the United States in an accusatory position, labeling China as being unfair. Not surprisingly, the possibility of 

such an accusation by the United States leads Chinese leaders not to want to appear to be submitting to U.S. pressure, even if the U.S. position is on the issue is 

correct. 

On the other hand, a large majority of economists and informed observers agree 

that China is manipulating its currency, intervening in currency markets, accumulating huge reserve surpluses, and harmfully distorting markets, including its own. 

If the President doesn’t declare China to be doing what everyone knows it is doing, 

he will lose face and appear weak. It will look like he is being dishonest, and kowtowing to China. When we consider some scenarios that may emerge, the picture 

does not improve. For instance, there has been much talk of late that China will 

soon allow some small degree of revaluation. While that may appear to be a mutually beneficial outcome that would save faces all around, the truth is that a nominal 

revaluation is not a solution to the problem. Only a major revaluation over a relatively short period can have the necessary impact. If China were to make a token 

move—say, three or four percent—that is not a gesture we should view as significant. Though small enough to prevent the Chinese leadership from losing face at 

home, yet appear to us as though they are capitulating to our concerns, such a 

minor change will have no significant impact. It is not enough for the Chinese to 

make token gestures in order to appease us diplomatically—real change must be accomplished. We cannot fall into the trap of being satisfied with occasional nominal 

adjustments. 

Rather than making this a bilateral issue, it is clearly preferable that some multilaterally negotiated arrangement be achieved, perhaps in the G-20 or in the WTO 

or even in the IMF. Another option is negotiating with China in a multilateral context, such as the G-20 or the WTO. But if that can’t be achieved in some reasonable 

period of time, countries, including the United States, will be obliged to defend their 

interests in whatever way they deem appropriate, unilaterally or as a coalition of 

concerned countries. A difficulty is that the global institutions and many of their 

key underlying concepts such as most favored nation and national treatment are not 

cognizant of the present structural realities and not adequate to deal with the problems of a world that is half neo-mercantilist/strategic trade and half free trade. How 

laughable is it that countries put enormous effort into the WTO to lower tariffs 

while ignoring exchange rates which can easily move by a magnitude greater than 

the value of the tariffs the WTO system has reduced, or that the IMF can discuss 

currency values and exchange rates without reference to trade and investment? Yet 

they do. We should recognize and use this opportunity to begin establishing 21st 

century institutions for the 21st century. The first step is to recognize the realities. 

While the WTO has instituted rules about national treatment and most-favored 

nation status, application varies by country. Although we have created a trade regime that works in theory, we need to be addressing not just trade but the issues 

that are inextricably linked to it, including exchange rates. What we need is not the 

trade regime we’ve developed, but a globalization regime. Can we really have deep 

economic integration between authoritarian, strategically guided economies and 

democratic/laissez faire economies? This is one example of the dichotomy between 

mythology and reality. While China’s currency is part of the bigger problem and 

must be honestly dealt with, by itself it won’t solve the problems we face unless we 

deal with the other aspects of the issue as well. Investment incentives (capital 

grants, tax holidays), antitrust policies or lack thereof, industrial targeting policies, 

structures of distribution and so forth. We have a WTO, but what we really need 

is a world globalization organization. 

Negotiations similar to those of the Plaza Agreement of 1985 should be launched 

immediately to coordinate a substantial (40 to 50 percent) revaluation of a number 

of managed Asian currencies versus the dollar and the euro over the next 2 to 3 

years. This would also have to entail an agreement to halt strategic currency management activities. A second longer term objective of the deal would be a reversal 

of savings and consumption patterns in the United States and Asia. Once the current recession is behind us, Washington would promise to balance the Federal budg-
33 

et over the business cycle and to reform poorly targeted consumption incentives like 

the tax deductibility of interest on home equity loans, while key Asian and oil producing countries and Germany would undertake to increase domestic consumption. 

China could upgrade its social safety net, and a true liberalization of Japan’s housing and consumer credit markets might do wonders. The oil countries also need to 

improve social safety nets and greatly upgrade their infrastructure. 

After this initial deal, the IMF or a new body representing the major currencies 

(dollar, euro, yen, and yuan) must continue to coordinate policy and manage appropriate currency adjustment. Its mission must be to push the global system toward 

balance. To this end it should effect a transition to a more stable global currency 

system. One possible option would be a basket of currencies. Indeed, the IMF’s Special Drawing Rights (SDRs) already represent a currency basket and an exchange 

of dollars for SDRs (China has actually suggested something like this recently) 

might be used as a device to get away from excessive reliance on the dollar. Regardless of how it is done, the end result must be a system that makes neomercantilist 

currency management and U.S. abuse of the privilege of printing the dominant currency impossible. 

If starting such discussions proves difficult, the United States in concert with 

other affected countries could initiate unfair trade actions under their domestic laws 

and also under the antisubsidy and nullification and impairment provisions of the 

WTO. It could also formally call for official consultations by the IMF with certain 

of its members regarding their currency management practices. This, of course, 

would be strong medicine, but it would surely stimulate discussion, and it is all perfectly legal and in keeping with both the rules and spirit of open, rules based trade. 

Over the longer term, the currently prevailing half-free trade, half-mercantilist 

system of globalization must be replaced by the establishment of a one economy-one 

system regime. To do this the WTO will have to be completely revamped with new 

standards, rules, and authority. Most Favored Nation and National Treatment 

standards are no longer sufficient. There must be just one kind of WTO Treatment 

in all economies. Global rules must be created to break up and regulate cartels. Distribution and marketing channels must be equivalently open in all markets not only 

de jure but de facto. It must be possible to appeal on such issues not just to national 

courts but to objective international dispute settlement bodies. Sovereign investment 

funds and state controlled enterprises must be subject to international scrutiny and 

to transparency and rules that assure they are operating completely outside the political realm. Likewise, tax holidays, capital grants, and other financial incentives 

used to bribe global corporations with regard to location of plants, labs, and headquarters must be subject to common WTO and IMF discipline. Nor should the WTO 

and other international bodies wait for complaints to address these issues. Rather, 

they should maintain continuous monitoring of real market developments and apply 

discipline wherever and whenever necessary. 

Again, it may be difficult to obtain agreement on negotiating such rules. Therefore, the United States and other interested countries should not hesitate to file 

WTO and IMF complaints and take the actions allowed by international law against 

measures and policies that distort globalization. Financial investment incentives 

targeted to particular industries and companies can be attacked under the 

antisubsidy rules while toleration of cartels and favored positions for state related 

enterprises can be attacked under the nullification and impairment rules. Again, the 

U.S. authorities should not wait for complaints. Because of their greater sensitivity 

to authoritarian regimes than to democracies, global corporations will hesitate to 

bring complaints for fear of retaliation from authoritarian neo-mercantilist regimes. 

Therefore, U.S. and other affected officials should monitor conditions proactively and 

self-initiate appropriate actions. Again, these are sure to stimulate negotiations. 

Of course, if negotiations are not possible, then we will be forced to defend our 

own interests as best we can unilaterally. 
34 

Attachment 1 

TIME TO COOL CHINA, U.S. TEMPERS 

Business Times, Saturday, March 20, 2010 

A failure may result in another economic recession, and perhaps even a new cold 

war, from which no side would be able to decouple. 

By Leon Hadar, Washington Correspondent 

Members of a bipartisan coalition of U.S. lawmakers are accusing the Chinese of 

a plot to manipulate the value of its currency in order to boost its exports and make 

American imports harder to sell in China. 

And the lawmakers have introduced legislation that would force the U.S. Treasury to impose stiff penalties against China and other countries that are engaged in 

such unfair currency manipulation. 

In the House of Representatives 130 members of the House of Representatives 

signed a letter protesting China’s manipulation of its currency while in the Senate, 

a group of 14 Democrats and Republicans are pressing the Obama administration 

to act against the Chinese. 

The senators, led by liberal Democrat Charles Schumer from New York and conservative Republican Lindsey Graham from South Carolina, are arguing that past 

U.S. administrations, worried about the rising economic power of China, had refrained from identifying Beijing as a ‘currency manipulator’ which would then have 

required Washington to impose duties on Chinese imports. But with unemployment 

rate remaining high and as the U.S. trade deficit with China—its second largest 

trading partner—keeps growing, American lawmakers are responding to public 

anger by blaming China for using its currency to gain a trade advantage. 

The senators want to ensure that the U.S. Treasury’s semi-annual report on foreign exchange rate practices that is scheduled to be released next month will, indeed, label China as a ‘currency manipulator’ and force the Administration to come 

up with ‘remedial’ legislation that would supposedly compel China to revalue its 

currency. 

Their Bill—‘Currency Exchange Rate Oversight Act’—was introduced following a 

war of words between the U.S. and China in recent days over the allegedly misaligned Chinese currency, the yuan, as well as other policy issues, including the 

meeting between President Barack Obama and the Dalai Lama at the White House, 

the U.S. decision to sell arms to Taiwan as well as complaints from American companies about Chinese trade practices and Sino-American disagreements over climate 

change. 

And while the American economy has just started recovering from a painful recession and is showing some growth, the World Bank this week has upped its forecast 

for China’s 2010 GDP growth to 9.5 percent after it grew at 8.7 percent last year. 

American lawmakers say that some of this impressive export driven economic 

growth has been achieved in part through Chinese currency manipulation. 

The Chinese policies amount to ‘cheating’, according to Democratic Senator Debbie 

Stabenow which represents Michigan, a State whose manufacturing sector, including a struggling car industry, has been devastated by the Great Recession and 

where the official unemployment rate is around 15 percent (and among AfricanAmericans, close to 50 percent). 

She and her colleagues are complaining that the Chinese government is essentially subsidising its exports by keeping its currency value low and want Washington to stop talking and to finally walk the walk. The Obama administration 

needs to pull ‘the trigger on (currency) manipulation,’ explains Mr. Graham, whose 

own State of South Carolina has been experiencing an unemployment rate of more 

than 13 percent. 

He told reporters that ‘‘we’re all living in fear of what China might do’’ since ‘‘we 

borrow way too much money from them,’’ adding that ‘‘we need to break that fear 

and do what’s right.’’ 

China has approximately U.S.$2.4 trillion of accumulated foreign reserves which 

explains why many economists believe that the yuan is undervalued as a result of 

a calculated policy pursued by China’s financial authorities. They buy U.S. dollars 

and sell their own yuan, a policy that helps to keep the greenback’s exchange rate 

fixed to their own currency. The result is a distortion of trade flows—cheap Chinese 

exports to the U.S. continue while imports from the U.S. into China remain expensive. 

But since the Chinese do not allow their currency to float freely, the same economists also disagree over the degree to which the Chinese undervalue their currency. 
35 

Economists also differ in estimating the extent to which the appreciation of the Chinese currency will lead to the narrowing of the U.S. trade deficit with China. After 

all, reducing that deficit seems to be the main rationale for the proposed legislation 

on Capitol Hill. 

In fact, according to the Cato Institute’s trade analyst Dan Ikenson, from 2005 

to 2008, at a time when the yuan was appreciating against the U.S. dollar, the U.S. 

trade deficit with China actually increased from U.S.$202 billion to U.S.$268 billion. 

Thus, the think tank’s analyst suggests, the level of the U.S. deficit is determined 

by many factors other than just the value of the Chinese currency. 

For example, Mr. Ikenson points out that the yuan was growing stronger between 

2005 and 2008, U.S. imports from China increased by U.S.$94.3 billion, or 38.7 per 

cent. He suggests that one reason for continued U.S. consumption of Chinese goods 

despite the relative price increase may have been the shortage of or even the lack 

of substitutes for Chinese-made goods in the U.S. market. 

Moreover, only somewhere one-third and one-half of the value of U.S. imports 

from China is actually Chinese value-added, with the other half to two-thirds reflecting costs of material, labour and inputs from other countries. 

Hence, a stronger yuan actually makes imported inputs cheaper for Chinese producers, who may respond by reducing their prices for export, which means that the 

currency appreciation may lead to a rise—not a reduction—of American imports 

from China. 

Unfortunately, much of this economic common sense is probably not going to 

counter the political pressure from Congress on the Administration to ‘do something’ 

that is fuelled, in turn, by America’s economic distress and the ensuing populism 

that makes China such an easy target. 

A key Chinese official responded to this pressure from Congress by saying that 

his government has become a convenient scapegoat for America’s trade problems. 

But this official needs to recognise that that kind of behaviour is a mirror image 

of sort of the way that some members of the Chinese communist establishment have 

been exploiting anti-American nationalist sentiment as part of a strategy to mobilise 

public support for the regime in Beijing. 

In a way, scapegoating the ‘other’ seemed to have become the favourite political 

weapon by both Americans and the Chinese. 

The problem is that the back and forth sniping between Washington and Beijing 

over China’s currency policy is more than just a ‘normal’ economic dispute between 

two countries that has been exploited by politicians on both sides. 

Indeed, the global financial imbalances between the U.S. (consumption that created deficits) and China (savings that produce surpluses) helped create the conditions for the financial melt-down. 

And unless the two sides take steps to deal with these imbalances, the global financial system could experience more disasters in the future. 

From that perspective, China’s massive trade and foreign exchange surpluses— 

reflecting the huge surpluses of exports over imports and saving over investment— 

should be seen not so much as a challenge to American economic interests but as 

a threat to the entire global economy, and eventually to China itself. 

The Americans need to cut their consumption and borrowing. But that could only 

take place if the U.S. dollars in China’s government-controlled banks are being 

spent to buy American products as opposed to its debts. And if and when that happens, the appreciation of the Chinese currency would be inevitable. 

In the meantime, a Chinese refusal to revalue its currency is bound to bring about 

retaliatory action by Washington and ignite a destructive economic war between the 

two nations. 

And the situation is only going to be aggravated if China continues to respond 

in a somewhat frantic way to not-very-unusual actions by the Obama administration 

(meetings with the Dalai Lama or arms sales to Taiwan). 

If anything, China’s rising economic and diplomatic power require it to embrace 

a more nuanced, if not refined, diplomacy that one expects from a great power, especially when it is dealing with the more accommodating Administration in Washington. 

More important, there is no reason why China and the U.S. should not be able 

to settle their differences over currency in the same amicable way that the U.S. and 

Japan were able to during the 1980s. 

A failure to do that would be a recipe for another economic recession and perhaps 

even a new cold war from which no side would be able to decouple. 

Copyright 2010 Singapore Press Holdings Ltd. All rights reserved. 
36 

PREPARED STATEMENT OF NICHOLAS LARDY 

ANTHONY SOLOMON SENIOR FELLOW, PETERSON INSTITUTE FOR INTERNATIONAL

ECONOMICS

APRIL 22, 2010 

China and the United States each contributed massively to the large global economic imbalances that emerged in the middle of the last decade. China was far and 

away the largest global surplus country by the middle of the decade. Its current account surplus reached an astonishing 11.0 percent of GOP in 2007 and for the 4 

years from 2005 through 2008 China accounted for about a fifth of the total global 

surplus. China’s emergence as a large surplus country reflects the rise of domestic 

savings relative to investment over this period. 

The United States was far and away the world’s largest deficit country in recent 

years, hitting a peak of 6 percent of GOP in 2006. For the same 4-year period the 

United States accounted for almost 60 percent of the total global deficit. These very 

large U.S. deficits reflected our low national savings relative to our national investment. 

The imbalances in both countries contributed to the global financial crisis, though 

lax financial regulation in the United States was undoubtedly a more important underlying cause. 

But this situation has changed significantly over the past 2 to 3 years. The external imbalances of both the United States and China have declined dramatically. 

From its 2007 peak China’s current account fell by almost half to 6.1 percent of 

GOP in 2009 and in the first quarter of this year was running at an annual rate 

of only 1 percent of GDP. Similarly, the pace of official intervention, which prevents 

the value of the renminbi from appreciating, fell by three-fifths in the first quarter 

of this year compared to last year. The U.S. current account imbalance also has fallen sharply; the deficit fell to only 2.9 percent of GOP last year, about half the level 

of 2006. 

Given these developments it may appear that the renewed focus by the U.S. Congress on China’s currency and its external imbalance is misplaced. In China the 

Ministry of Commerce now argues that the collapse of China’s trade surplus shows 

that its currency is no longer undervalued and thus appreciation is not warranted. 

However, I believe that this conclusion is not well founded since the decline in China’s external surplus in large part was caused by three factors that are likely to 

be transitory or already have been reversed. 

First, China was the first globally significant economy to begin to recover from 

the global recession. China’s growth bottomed out in the fourth quarter of 2008 and 

then accelerated very strongly starting in the first quarter of 2009. Thus China’s 

recovery predates that of the United States, its largest trading partner, by half a 

year and predates European recovery by an even longer period. China’s early growth 

resurgence compared to the rest of the world boosted its imports relative to its exports, cutting the external surplus. But this factor will wane if the U.S. recovery 

gains traction and Europe begins to recover. 

Second, China’s terms of trade have deteriorated dramatically over the past year, 

reflecting a sharp rise in commodity prices. Since China is the world’s largest importer of a number of key commodities, sharply rising prices for these goods have 

added substantially to China’s import bill, thus reducing its external surplus. This 

is unlikely to continue to be such a major factor going forward. 

Third, the renminbi appreciated 15–20 percent in real effective terms from late 

2007 through the first quarter of 2009. This was a major factor contributing to the 

sharp reduction in China’s surplus in 2008 and 2009. But since the first quarter of 

2009 the renminbi has depreciated in real effective terms by about 5 percent. This 

factor is likely to contribute to a rise in China’s surplus, probably beginning in the 

second half of 2010. 

Thus I disagree with those who argue that China’s currency is no longer undervalued. It seems more likely that China’s external surplus will turn upward and 

that China’s contribution to global economic imbalances should continue to be a 

focus of U.S. policy. 

However, the extraordinarily sharp and unexpected reduction in China’s current 

account surplus over the past year surely suggests that there is substantial uncertainty surrounding most estimates of the degree of renminbi undervaluation. Moreover, we should recognize that the virtual disappearance of China’s trade surplus, 

even if only temporary, means that within China it will be politically difficult for 

the government to quickly resume a policy of appreciation vis-a-vis the U.S. dollar. 

It also means that if this policy is adopted we are likely to see a slow pace of appre-
37 

1Morris Goldstein and Nicholas R Lardy, ‘‘China’s Exchange Rate Policy: An Overview of 

Some Key Issues’’, in Morris Goldstein and Nicholas R. Lardy, editors, Debating China’s Exchange Rate Policy (Peterson Institute for International Economics, 2008), pp. 54–55. 2Michael Mussa, ‘‘Global Economic Prospects for 2010 and 2011: Global Recovery Continues’’, 

April 8, 2010. Available at http://www.petersoninstitute.org. 

ciation, at least until the global recovery strengthens and China’s external surplus 

widens significantly. 

Furthermore, even if the degree of undervaluation of the RMB is very large, a 

rapid appreciation of the renminbi is not optimal from the Chinese perspective and 

probably not from the U.S. perspective either. With about fifty million people employed in China’s export-oriented manufacturing, the Chinese government will eschew rapid appreciation since that would result in a sharp fall in the output of these 

industries and eliminate many of these jobs. Their optimal strategy will be a gradual appreciation that would eliminate the growth of China’s trade surplus and thus 

tend to stabilize the output and employment of these industries. In 2008, when my 

colleague Morris Goldstein and I believed the renminbi was very substantially undervalued, we argued the optimal time frame for eliminating currency undervaluation would be 4 to 6 years. 1 Our colleague, Michael Mussa, points out that a very 

rapid elimination of China’s currency undervaluation would not be desirable from 

the perspective of the United States since it would likely ‘‘disrupt China’s economic 

growth in ways and to an extent that could not plausibly be offset by other policy 

adjustments.’’ 2 A rapid deceleration in the growth of the world’s second largest 

economy is not likely to enhance global economic recovery, nor would it likely contribute to the recovery of employment in the United States. Indeed, the opposite is 

more likely. 

Ultimately reducing imbalances, whether in the United States or China, requires 

structural reforms that reduce the gap between national rates of savings and investment. The exchange rate is an important factor that can contribute to this process. 

But without supporting reform policies in both countries, the results of exchange 

rate adjustment alone are likely to be disappointing. 

In China, some progress has been made over the last couple of years to advance 

this broader rebalancing agenda. This progress is spelled out in greater detail in the 

attached Policy Brief, which was distributed by the Peterson Institute in March. The 

government has taken steps to reduce some of the factor market distortions that 

have artificially subsidized the production of export goods and goods that compete 

with imports and at the same time have inhibited the output of services, which are 

largely consumed at home. In 2009 the government raised the prices of some important inputs, notably fuels, which are predominantly consumed in the industrial sector. This reduced the bias of investment toward manufacturing, contributing to a 

larger increase in investment in services than in industry in 2009. This is a reversal 

from the pattern that had dominated Chinese investment for many years. Similarly 

the government continued to accelerate its build out of the social safety net by massively increasing expenditures on health, education, and pensions. This should contribute to a reduction in households’ precautionary demand for savings and thus a 

reduction in China’s large savings surplus. Finally, bank lending to consumers grew 

dramatically last year, facilitating a remarkable increase in household consumption 

expenditures. 

In addition to allowing its currency to appreciate, the Chinese government should 

adopt a number of other policy reforms to insure a sustained reduction in its global 

current account surplus and a successful transition to more consumption-driven 

growth. Low interest rates on bank loans continue to favor manufacturing (tradable 

goods) over services and thus contribute to China’s external surplus. To address this 

problem China’s central bank should end its policy of imposing a broad range of deposit and lending rates in favor of allowing supply and demand in the market to 

determine interest rates. Further price reforms would also contribute to sustaining 

the reduction in China’s global current account surplus. For example, while the government last year raised the prices of gasoline and diesel fuel, electric power remains underpriced, continuing to provide an advantage to China’s exports. And, 

after years of discussion, the government should introduce realistic environmental 

taxes and fees, which would help to level the playing field between industrial 

growth and exports versus services and consumption. 
38 
39 
40 
41 
42 
43 
44 
45 
46 

1See, Attachment 1 for the FCC’s list of members. 2 As of April 20, 2010, S. 1027 has eight cosponsors, and H.R. 2378 has 102 cosponsors. 

3 IMF, Article IV, Section (1). 

PREPARED STATEMENT OF CHARLES H. BLUM 

EXECUTIVE DIRECTOR, FAIR CURRENCY COALITION

APRIL 22, 2010 

On behalf of the members of the Fair Currency Coalition (FCC), 1 I thank the Subcommittee for this opportunity to testify on what action the United States can and 

should take to remedy the persistent problem of currency undervaluation by China 

and other countries. The FCC and its antecedents have worked on this problem continuously for 7 years. In 2003–4, we developed a well researched and argued petition filed under Section 301 of the Trade Act of 1974 that was summarily rejected 

by the last Administration. 

Only then did we turn to a legislative solution, developing and refining the legislation currently known as the Currency Reform for Fair Trade Act, introduced by 

Senators Stabenow and Bunning in the Senate (S. 1027) and by Reps. Tim Ryan 

and Tim Murphy in the House (H.R. 2378). 2 We will continue to work on this problem until it has been resolved on an effective and lasting basis. 

A Remedy Delayed Is a Remedy Denied 

Currency misalignment is not a new problem, nor is it limited to the Chinese 

renminbi (RMB). On the contrary, it is a perennial problem for reasons that we will 

address in this testimony and one that continues to grow in severity. 

Consider the data contained in Attachment 2. They show that over the 10 years 

since China’s accession to the World Trade Organization (WTO), the U.S. trade deficit with China has mushroomed, as have China’s global trade surplus and its stockpile of official foreign exchange reserves. At the same time, U.S. manufacturing employment has plummeted by one-third. 

We do not suggest that the undervalued RMB is the sole cause of the loss of 

American manufacturing jobs, though the two clearly are related. Our point is simply that the long delay in our response to this persistent problem has allowed it to 

grow to the detriment of American workers and industries. Moreover, what would 

have been a more easily managed problem—had we acted on the Section 301 complaint in 2004, the first version of our legislation in 2005, the improved version in 

2007, or even the latest version introduced last year—has become an enormous 

problem. 

A remedy delayed is a remedy denied. The longer it is denied, the greater the injustice. History suggests that the currency problem will become even larger and 

harder to manage in the future unless we act now. 

Let’s look at the options for near-term solutions. 

Multilateral Rules Provide No Solution to Currency Misalignment 

For understandable reasons, many would prefer to find a solution in the multilateral rules and institutions that are supposed to provide a framework for settling 

monetary disputes among nations. Indeed, repeated attempts have been made to address the problem through these channels. By now it should be clear that existing 

multilateral rules and institutions are woefully inadequate to deal with the problem 

of currency misalignment per se. The problem lies not in the degree of effort by our 

government but rather in the weakness and imprecision of the rules themselves and 

the excessive length of multilateral dispute resolution processes. 

Consider the following the sorry performance of the International Monetary Fund: 

• International Monetary Fund Article IV—the most relevant international law 

on exchange rate practices—obligates members to ‘‘avoid manipulating exchange rates or the international monetary system in order to prevent effective 

balance of payments adjustment or to gain an unfair competitive advantage 

over other members.’’ 3 The overriding aim of Article IV is ‘‘sound economic 

growth’’ and the correction of imbalances that threaten it. 

• As part of its exchange rate surveillance mandate, the IMF holds annual consultations with each of its members under Article IV. Repeatedly, the IMF has 

in careful, diplomatic language suggested that China should revalue the 

renminbi. Such moral suasion is the only tool the IMF has, and it has never 

been enough to persuade China to end its mercantilist currency policy. Indeed, 

China has taken the extraordinary step of blocking the release of the IMF’s reports for 2007, 2008 and 2009, presumably because it does not like the conclusions. 
47 

4General Agreement on Tariffs and Trade, Article XV, Section 4. 

• The weakness of its rules and the lack of any credible enforcement power makes 

the IMF useless for all practical purposes in addressing the problem of currency 

misalignment. 

Consider next the problem of addressing currency misalignment through the rules 

of the World Trade Organization: 

• Article XV provides that WTO members ‘‘shall not, by exchange action, frustrate the intent of the provisions of this Agreement nor, by trade action, the 

intent of the provisions of the Articles of Agreement of the International Monetary Fund.’’ 4

• Such broad language might conceivably form the basis for action under WTO 

rules. A legal argument clearly exists that undervalued misalignment of a currency constitutes an export subsidy, a practice prohibited on manufactured 

goods by GATT Article VI. In addition, it can be argued that undervaluation 

constitutes a de facto additional levy on imports, nullifying and impairing the 

tariff bindings under GATT Article II. Indeed, such allegations were among 

those made by the Coalition’s Section 301 complaint in 2004, and we continue 

to believe that they have legal and economic merit. 

• While there is little question that an undervalued currency has those deleterious effects on key elements of the basic trade contract among WTO members, 

it is far less clear what action the WTO might take in response to a complaint 

brought by the United States or a group of countries. 

• Novel issues pose substantial problems for the WTO’s ad hoc dispute settlement 

panels and the standing Appellate Body. Panelists are drawn from the trade 

policy establishment around the world. Their knowledge and experience vary, 

of course, but few of them have any grounding in monetary affairs. As a consequence, it is difficult to anticipate how they would analyze, much less resolve, 

disputes centering on IMF standards and concepts. 

• Most importantly, the WTO arguably lacks a clear mandate to deal with these 

issues on its own. Instead, GATT Article XV, paragraph 2 requires the WTO 

to ‘‘consult fully with the International Monetary Fund’’ in cases dealing with 

‘‘monetary reserves, balances of payments or foreign exchange arrangements.’’ 

Worse yet, the WTO is obligated by that same paragraph of Article XV to ‘‘accept the determination of the Fund as to whether action by a contracting party 

in exchange matters is in accordance with the Articles of Agreement of the 

International Monetary Fund.’’ 

• Thus, the WTO must rely on the impotent IMF to decide the issue, that same 

IMF that can’t even find a way to convince the Chinese to agree to the release 

of three annual consultation reports that have no legal or practical consequences. 

• In addition, the filing of a case by the U.S. government under the WTO has 

other potential pitfalls. First, as the plaintiff in the case, the burden of proof 

would be on the United States to prove that action on currency manipulation 

falls within the ambit of WTO rules. Thus, the United States would be forced 

to meet a higher evidentiary threshold than the defending country, likely 

China. Second, the adjudication and remedy implementation process of WTO 

appellate panels is painfully slow. Not only is the outcome difficult to predict, 

it will take years to render and implement any decision—time American producers facing subsidized import competition do not have. 

This brief analysis helps explain why chances of any timely solution arising from 

the existing rules on currency manipulation or misalignment are for all practical 

purposes zero. 

Multilateral Rules Cannot Be Upgraded in the Foreseeable Future 

Others have proposed that the solution lies in updating the existing multilateral 

rules to render them relevant to the realities of this century rather than the last. 

The most direct approach is that proposed by Arvind Subramanian of the Peterson 

Institute for International Economics and Aaditya Mattoo of the World Bank. They 

suggest that WTO rules be amended so as to prohibit currency undervaluation. They 

choose the WTO over the IMF because undervaluation has clear trade effects and 

because the IMF has no enforcement powers, especially when it comes to large creditor nations—just the ones who might benefit most from an undervalued currency. 
48 

5This opinion is shared by the 130 members of the House of Representatives who signed a 

letter to Commerce Secretary Gary Locke and Treasury Secretary Timothy Geithner dated 

March 15, 2010. Fifteen members of the Senate wrote to Secretary Locke on February 26, 2010, 

arguing that Commerce had sufficient authority under existing law to initiate a full investigation of alleged currency subsidies. Both document are available at http://www.faircurrency.org. 

Theoretically, this concept seems direct and sensible. As a practical matter, however, there is little chance whatsoever that the WTO could be amended this way 

and no chance at all that it could be done expeditiously. 

For the foreseeable future, we are stuck with the multilateral rules as they are 

in dealing with this urgent and still growing problem. 

Trade Remedies Are the Only Effective Tool for Addressing Currency Misalignment 

Thus, by a process of elimination, we come to national trade laws as the only 

basis for effective legal action to counter currency misalignment. The FCC has long 

believed that the most effective, readily available tool is the countervailing duty law, 

the means authorized by WTO rules for any member to neutralize injurious subsidies. 

Under U.S. law and the WTO rules, there are three requirements for a determination of subsidy: (1) a financial contribution by or at the direction of the foreign government that (2) confers a benefit upon the recipient and that (3) is not generally 

available. In the case of undervalued currencies, the government-established rate— 

price fixing on a broad scale—forces banks to pay to the seller of an internationally 

traded good or service extra units of the home currency compared to the fair market 

value of the currency. The extra units of currency constitute the benefit. That benefit creates an incentive to export. Currency undervaluation thus seems to be a classic example of an export subsidy. Under GATT rules, export subsidies have been 

prohibited since the 1940s because they are inherently distortive of trade flows. Implementing the multilateral rules through the U.S. countervailing duty law thus 

seems to be a reasonable reliance on established international law. 

In our opinion, the Department of Commerce already has the authority to investigate currency subsidies. 5 Determining it to be an export subsidy would seem to 

comport well with established Commerce practice and U.S. law. Until now, the Department has not agreed, although its position seems to have shifted at least once. 

That suggests that the Department would benefit from passage of legislation that 

clarified the status of currency subsidies under the countervailing duty law by distinguishing actionable from nonactionable forms. The Department would also benefit from clarity regarding the method of calculating the subsidy, the source of data 

to be used in that calculation, and other procedural matters. 

The clear expression of Congressional intent would facilitate the application of existing law to a new area of economic activity, reduce the scope for controversy, 

strengthen the hand of the government in the litigation that inevitably will follow, 

and provide helpful guidance to trade practitioners—importers, exporters and foreign governments—about the rules that will govern their trade. 

Recently, another significant legislative proposal emerged in the Senate, the Currency Exchange Rate Oversight Act of 2010 (S. 3134). The chairman of this subcommittee and Senator Graham are among the 18 cosponsors. The bill seeks to update the Treasury Department’s oversight of foreign government currency practices. 

An important part of the bill is the attempt to provide Treasury with credible negotiating leverage by authorizing the use of trade law remedies in response to currency undervaluation. The FCC welcomes this legislation. We have concerns about 

some of the current provisions, especially as they relate to countervailing duty remedies, and are working with the chief cosponsors, Senators Schumer and Stabenow, 

to strengthen them as much as possible. We do so in the firm belief that countervailing duties are the best available remedy to currency undervaluation. 

Responsible Use of Trade Remedies Is Not Protectionism But Supports 

Free Trade 

In closing, let me deal with the standard argument that any use of our trade laws 

is inherently protectionist. No less a free trader than Ronald Reagan explained his 

trade policy in a radio address to the Nation in the summer of 1986. Coincidentally, 

he did so shortly after the Plaza Accord led to a substantial realignment of major 

currencies. 

Reagan made three points: first, trade must be reciprocal—‘‘Free and far trade 

with free and fair traders’’ was his motto; second, trade must be based on a respect 

for the rules; and third, trade policy must produce results. 
49 

Reciprocity. Respect for rules. Results. Those are three touchstones that should 

continue to guide U.S. trade and currency policy. 

As Martin Wolf wrote recently in the Financial Times, ‘‘The U.S. was right to give 

talking a chance. But talk must lead to action.’’ Legislation is the right thing to do. 

It is the only thing we can do. It is the one thing we must do. It’s high time for 

the Congress to act by passing S. 1027. 
50 
51 
52 

1To float its currency and let markets determine the value, China would have to remove restrictions on its capital account, so that investment can flow in and out of the country freely. 

If China did this, it is not entirely clear that the value of the RMB would appreciate. It is possible that there would be more capital flight than inflow, as domestic savings are able to pursue 

investment options outside of China. This capital flight would have a depreciating effect on the 

value of the RMB. 2Of course, there are many other important determinants of the trade account besides relative currency values. 

PREPARED STATEMENT OF DANIEL J. IKENSON 

ASSOCIATE DIRECTOR, CENTER FOR TRADE POLICY STUDIES, CATO INSTITUTE

APRIL 22, 2010 

Chairman Brown, Ranking Member DeMint, and Members of the Subcommittee, 

I am Daniel Ikenson, associate director of the Center for Trade Policy Studies at 

the Cato Institute. I appreciate the invitation to share my thoughts about the Chinese currency, its relationship to the bilateral trade deficit, the impact on U.S. jobs, 

and what, if anything, Congress should consider doing. The views I express are my 

own and should not be construed as representing any official positions of the Cato 

Institute. 

Introduction 

Many economists believe that the Renminbi is undervalued, but there is disagreement about the magnitude. Disagreement is to be expected. After all, nobody can 

know the true value of the RMB unless, and until, it is allowed to float freely and 

restrictions on China’s capital account are removed. 1 Short of that, economists 

produce estimates of undervaluation—and those estimates vary widely. So that begs 

a practical question: How will we know when we are there? 

That question is important because Congress is once again considering legislation 

to compel the Chinese government to allow RMB appreciation under the threat of 

sanction. Regardless of whether sanctions take the form of an across-the-board surcharge or are the product of a countervailing duty investigation or are manifest in 

exchange rate conversions in antidumping calculations, a precise estimate of the 

market value of the Renminbi would have to serve as the benchmark. But respected 

economists from reputable institutions have produced a range of undervaluation of 

approximately 10 to 40 percent. So what should be the benchmark? 

Of course the sanctions approach is fraught with dangers. Not only would it 

amount to a tax on U.S. producers and consumers—felt particularly acutely by 

lower- and middle-income families—but it could spark retaliation from China and 

run afoul of U.S. World Trade Organization obligations at a time when the Obama 

administration is planning to hold our trade partners more accountable to their own 

WTO commitments, as part of its National Export Initiative. 

Many in Washington blame the undervalued Renminbi for the trade deficit with 

China, and blame the deficit for U.S. job losses. But those relationships are weak. 

Before doing something unnecessary or counterproductive, Congress should consider 

whether, and to what extent, RMB appreciation would even lead to more balanced 

bilateral trade. Recent evidence casts plenty of doubt. 

Laser-like Focus on the Trade Deficit 

For many in Washington, it seems the issue is not that the Chinese currency is 

undervalued per se, but that the United States has a large bilateral trade deficit 

with China, which is popularly attributed to the undervalued RMB. 2 Currency revaluation for many policymakers is just a proxy for reducing the trade deficit to 

zero—or better still, turning it into a surplus. There should be little doubt that 

many will take the position that the RMB is undervalued as long as U.S. imports 

from China exceed U.S. exports to China. 

Leaving aside the question of whether bilateral deficit reduction should even be 

an explicit objective of policymaking in the first place, there is reason to be skeptical 

that currency revaluation would have the ‘‘desired’’ effect. It is assumed that Americans will reduce their purchases of Chinese products and that the Chinese will increase their purchases of American products if the value of the RMB increases 

against the dollar. But whether those trends would work to reduce the U.S. deficit 

with China depends on the extent to which consumers in both countries are responsive to the relative price changes. 

What matters for the trade account is how much Americans reduce their purchases of Chinese goods and how much the Chinese increase their purchases of U.S. 

goods. Import value equals price times quantity, so if the percent increase in price 

(appreciation of the RMB) exceeds the percent reduction in quantity of imports con-
53 

3There is also an ‘‘income effect’’ from the change in currency values. When the dollar declines in value, U.S. consumers experience a decline in real income, which affects their consumption choices. Even though Chinese imports might be relatively more expensive than they were 

before the currency rise, they may still be less expensive than the alternatives. Accordingly, U.S. 

consumers with lower real incomes might be inclined to purchase more Chinese imports. 4Federal Reserve Board, Federal Reserve Statistical Release G5.A, Foreign Exchange Rates 

(Annual), release dates January 4, 2010 and January 2, 2009. Since July 2008, the value of the 

Yuan against the dollar has not changed measurably. 

sumed (in absolute value), then import value will increase. For example, if the RMB 

appreciates by 25 percent and U.S. consumers reduce consumption of Chinese imports by only 10 percent, then the value of U.S. imports from China will be greater 

than before (adding to the trade deficit). The same 25 percent increase in RMB 

value, however, should lead to an unequivocal increase in U.S. exports to China because the dollar price charged (the price used to measure U.S. exports) remains the 

same, while the quantity sold to China increases because Chinese consumers, by virtue of RMB appreciation, face lower relative prices, and demand more goods. Thus, 

RMB appreciation should unambiguously increase U.S. export value, reducing the 

trade deficit. But its effect on U.S. import value is ambiguous. 

Whether the aggregate change in U.S. import and export value results in a lower 

trade deficit depends on the relative responsiveness (price elasticity) of American 

and Chinese consumers to the price changes they face. If U.S. consumers are responsive (they reduce the quantity of their purchases by a percentage greater than 

the price increase), then the trade deficit will decline, regardless of the degree of 

Chinese responsiveness. If U.S. consumers are not responsive (they reduce the quantity of their purchases by a smaller percentage than the price increase), then import 

value will rise and Chinese consumers would have to increase their purchases of 

American goods by a large enough percentage to offset the increased U.S. import 

value, if the U.S. trade deficit is to be reduced. 3

Weak Link Between Currency Values and Trade Flows 

Recent evidence suggests that RMB appreciation will not reduce the U.S. trade 

deficit and undermines the common political argument for compelling China to revalue. Between July 2005 and July 2008, the RMB appreciated by 21 percent 

against the dollar—from a value of $.1208 to $.1464. 4 During that same period (between the full year 2005 and the full year 2008), the U.S. trade deficit with China 

increased from $202 to $268 billion. 

U.S. exports to China increased by $28.4 billion, or 69.3 percent. But how much 

of that increase had to do with RMB appreciation is very much debatable. The nearby chart shows that U.S. exports to China were already on an upward trajectory, 

increasing by $3 billion in 2001, $3 billion in 2002, $6.2 billion in 2003, and $6.1 

billion in 2004, when the exchange rate was consistently at 8.28 RMB per dollar. 

Natural sales growth from the confluence of market penetration and cultivation of 

Chinese demand was already evident. 
54 

5The dearth of substitutes is probably a function of retailers not wanting to incur the costs 

of having to reconfigure their supply chains. If the cost of reconfiguring and sourcing products 

from other countries is similar to the cost of maintaining Chinese suppliers with their exchangeinduced higher prices, then retailers may be more likely to stick with the status quo and pass 

on their higher costs to consumers. 

In 2005—the first year in which there was a slight RMB appreciation—the value 

of exports increased by $6.8 billion. Exports jumped another $12.5 billion in 2006, 

a year in which the RMB appreciated by 2.8 percent. But in 2007, despite an even 

stronger 4.7 percent RMB appreciation, the increase in exports was only $9.3 billion. 

And in 2008, the RMB appreciated by a substantial 9.5 percent, but the increase 

in exports fell to $6.8 billion. If currency value were a strong determinant, then export growth should have been much more robust than it was in 2007 and, especially, 

in 2008. Other factors, such as Chinese incomes and Chinese savings propensities, 

must have mitigated the lower relative price effects. 

On the import side, recent experience is even more troubling for those who seek 

deficit reduction through currency revaluation. The evidence that an appreciating 

RMB deters the U.S. consumption of Chinese goods is not very compelling. During 

the period of a strengthening RMB from 2005 to 2008, U.S. imports from China increased by $94.3 billion, or 38.7 percent. Not only did Americans demonstrate strong 

price inelasticity, but they actually increased their purchases of Chinese imports. 

One reason for continued U.S. consumption of Chinese goods despite the relative 

price increase is that there may be a shortage of substitutes in the U.S. market for 

Chinese-made goods. In some cases, there are no domestically produced alternatives. 5 Accordingly, U.S. consumers are faced with the choice of purchasing higher-priced items from China or foregoing consumption of the item altogether. 

It is doubtful that members of Congress, who support action to compel Chinese 

currency appreciation, would proudly announce to their constituents that they intentionally reduced their real incomes. But that is the effect of relative dollar depreciation. 

Globalization Mutes the Effect of Currency Changes 

Something else is evident about the relationship from those 2005 to 2008 data. 

The fact that a 21 percent increase in the value of the RMB was met with a 38.7 

percent increase in import value means that the quantity of Chinese imports de-
55 

6 Assume that the price of imports is $1 and the quantity demanded is one unit. The import value is then $1. If a 15.2 percent increase in price leads to a 38.7 percent increase in value, 

then quantity must increase by 20.4 percent because: (1.152 x price) x (1.204 x quantity) = 

138.7. 7 Robert Koopman, Zhi Wang, and Shang-Jin Wei, ‘‘How Much of Chinese Exports Is Really 

Made in China? Assessing Foreign and Domestic Value-Added in Gross Exports’’, U.S. International Trade Commission, Office of Economics, Working Paper no. 2008-03-B, March 2008. 8Daniel J. Ikenson, ‘‘Currency Controversy: Surplus of Controversy, Deficit of Leadership’’, 

Cato Free Trade Bulletin no. 21, May 31, 2006. 9 Cathy L. Jabara, ‘‘How Do Exchange Rates Affect Import Prices? Recent Economic Literature and Data Analysis’’, U.S. International Trade Commission, Office of Industries Working 

Paper no. ID-21 (revised), October 2009. 10 U.S. Department of Commerce, Bureau of the Census, Foreign Trade Statistics, http:// 

www.census.gov/foreign-trade/balance/c5700.html#2009. China was the fastest-growing market 

among America’s top 25 largest export markets between 2000 and 2008. In 2009, overall U.S. 

exports declined 12.9 percent, but exports to China held steady, declining by just 0.23 percent. 

manded after the price change increased by nearly 15 percent. 6 Higher prices being 

met with greater demand would seem to defy the law of demand. 

Chinese exporters must have lowered their RMB-denominated prices to keep their 

export prices steady. That would have been a completely rational response, enabled 

by the fact that RMB appreciation reduces the cost of production for Chinese exporters—particularly those who rely on imported raw materials and components. According to a growing body of research, somewhere between one-third and one-half 

of the value of U.S. imports from China is actually Chinese value-added. 7 The other 

half to two-thirds reflects costs of material, labor, and overhead from other countries. China’s value-added operations still tend to be low-value manufacturing and 

assembly operations, thus most of the final value of Chinese exports was first imported into China. 

RMB appreciation not only bolsters the buying power of Chinese consumers, but 

it makes China-based producers and assemblers even more competitive because the 

relative prices of their imported inputs fall, reducing their costs of production. That 

reduction in cost can be passed on to foreign consumers in the form of lower export 

prices, which could mitigate entirely the effect desired by Congress, which is to reduce U.S. imports from China. That process might very well explain what happened 

between 2005 and 2008, and is probably a reasonable indication of what to expect 

going forward. 

A 2006 Cato paper on the topic of exchange rates and trade flows found that despite considerable dollar depreciation between 2002 and 2005 against the Canadian 

dollar, the Euro, the Japanese yen, the Korean won, and the Brazilian real, the U.S. 

trade deficit expanded during that period with Canada, Europe, Japan, Korea, and 

Brazil. 8 Factors other than currency movements, such as income and the availability of substitutes, influence trade flows, particularly when exporters are willing 

to absorb the costs of those currency changes. 

In a recently published paper from the U.S. International Trade Commission, 

economist Cathy L. Jabara observes a weak relationship between exchange rates 

and U.S. import prices, particularly with respect to imports from Asia. Exchange 

rate pass-through is quite low because exporters often ‘‘price to market’’ to absorb 

costs and maintain market share. She notes that the economic literature supports 

her findings of low exchange rate pass-through, particularly for consumer goods. 

Ironically, she also notes that economist Paul Krugman, who is among the most outspoken advocates of U.S. intervention on the currency issue, was one of the first to 

explore and describe the potential for exchange-rate pass-through to mitigate the 

impacts on trade flows. 9

Economic Benefits 

Although it may be fashionable to think of China as the country to which the U.S. 

manufacturing sector was offshored in exchange for tainted products and a mountain of mortgage debt, the fact is that the bilateral relationship has produced enormous benefits for people in both countries, including most Americans. China is 

America’s third-largest export market, and has been our fastest-growing market for 

a decade, providing 20.2 percent annual sales growth for U.S. businesses between 

2000 and 2008, when overall annual export growth to all countries stood at just 6.8 

percent. 10

American businesses, portfolio investors, and 401(k) participants also have benefited handsomely from China’s high rate of sustained economic growth. Likewise, 

American consumers have benefited from their access to Chinese goods. Imports 

from China have helped keep prices in check, raising real incomes and easing the 

strain on family budgets. 
56 

11Production of Apple iPod’s is the quintessential example of the benefits of transnational 

production and supply chains. The degree of international collaboration embedded in the value 

of an iPod has been described in a few other Cato publications, including: Daniel Ikenson, ‘‘Made 

on Earth: How Global Economic Integration Renders Trade Policy Obsolete,’’ Cato Trade Policy 

Analysis no. 42, December 2, 2009. 12 James Fallows, ‘‘China Makes, the World Takes’’, Atlantic, July/August 2007, http:// 

www.theatlantic.com/doc/200707/shenzhen. 13 It is particularly ironic to hear this last accusation from spendthrift members of Congress 

who overlook the fact that their own profligacy is what brought China to the U.S. debt markets 

in the first place. 

What is perhaps less well known—because they are often portrayed as victims— 

is that large numbers of American producers and workers benefit from the bilateral 

relationship, as well. This is the case because the U.S. economy and the Chinese 

economy are highly complementary. U.S. factories and workers are more likely to 

be collaborating with Chinese factories and workers in production of the same goods 

than they are to be competing directly. The proliferation of vertical integration 

(whereby the production process is carved up and each function performed where 

it is most efficient to perform that function) and transnational supply chains has 

joined higher-value-added U.S. manufacturing, design, and R&D activities with 

lower-value manufacturing and assembly operations in China. The old factory floor 

has broken through its walls and now spans oceans and borders. 

Though the focus is typically on American workers who are displaced by competition from China, legions of American workers and their factories, offices, and laboratories would be idled without access to complementary Chinese workers in Chinese 

factories. Without access to lower-cost labor in places like Shenzhen, countless ideas 

hatched in U.S. laboratories—which became viable commercial products that support hundreds of thousands of jobs in engineering, design, marketing, logistics, retailing, finance, accounting, and manufacturing—might never have made it beyond 

conception because the costs of production would have been deemed prohibitive for 

mass consumption. Just imagine if all of the components in the Apple iPod had to 

be manufactured and assembled in the United States. Instead of $150 per unit, the 

cost of production might be multiple times that amount. 11

Consider how many fewer iPods Apple would have sold; how many fewer jobs iPod 

production, distribution, and sales would have supported; how much lower Apple’s 

profits (and those of the entities in its supply chains) would have been; how much 

lower Apple’s research and development expenditures would have been; how much 

smaller the markets for music and video downloads, car accessories, jogging accessories, and docking stations would be; how many fewer jobs those industries would 

support; and the lower profits those industries would generate. Now multiply that 

process by the hundreds of other similarly ubiquitous devices and gadgets: computers, Blu-Ray devices, and every other product that is designed in the United 

States and assembled in China from components made in the United States and 

elsewhere. 

The Atlantic’s James Fallows characterizes the complementarity of U.S. and Chinese production sharing as following the shape of a ‘‘Smiley Curve’’ plotted on a 

chart where the production process from start to finish is measured along the horizontal axis and the value of each stage of production is measured on the vertical 

axis. U.S. value-added comes at the early stages—in branding, product conception, 

engineering, and design. Chinese value-added operations occupy the middle stages— 

some engineering, some manufacturing and assembly, primarily. And more U.S. 

value-added occurs at the end stages in logistics, retailing, and after-market servicing. 12 Under this typical production arrangement, collaboration, not competition, 

is what links U.S. and Chinese workers. 

Economic Frictions 

Despite the enormous benefits of the bilateral relationship, Americans are more 

likely to be familiar with the sources of friction. Americans have heard that underhanded Chinese policies have had a deleterious impact on U.S. manufacturing. They 

have been told that China manipulates its currency to secure an unfair trade advantage; ‘‘illegally’’ dumps and sells government-subsidized products in U.S. markets; 

maintains policies that discriminate against imports and favor domestic industries; 

steals American intellectual property; treats its workers poorly; degrades the environment; sells us tainted products; and even caused the U.S. financial crisis by lending America too much money. 13

There is some truth in some of those claims. But there is also a good deal of exaggeration, misinformation, and hypocrisy in them. Some ring hollow because the U.S. 

government—usually at the behest of the same interests clamoring for action 

against China—commits the same sins. 
57 

14For more comprehensive treatments refuting the myth of manufacturing decline in the 

United States, see, Daniel Ikenson, ‘‘Thriving in a Global Economy: The Truth About Manufacturing and Trade’’, Cato Trade Policy Analysis no. 35, August 28, 2007; Daniel Ikenson and 

Scott Lincicome, ‘‘Audaciously Hopeful: How President Obama Can Help Restore the Pro-Trade 

Consensus’’, Cato Trade Policy Analysis no. 39, April 28, 2009, pp. 12–16; and Daniel Griswold, 

‘‘Trading Up: How Expanding Trade Has Delivered Better Jobs and Higher Living Standards 

for American Workers’’, Cato Trade Policy Analysis no. 36, October 25, 2007. 15 United Nations Industrial Development Organization, ‘‘National Accounts Main Aggregates 

Database, Value Added by Economic Activity’’, (2008 data are the most recent available), http:// 

unstats.un.org/unsd/snaama/resQuery.asp. 16 Yuan Jiang, Yaodong Liu, Robert H. McGuckin, III, Matthew Spiegelman, and Jianyi Xu, 

‘‘China’s Experience With Productivity and Jobs’’, Conference Board Report Number R-1352-04- 

RR, June 2004, http://www.conference-board.org/publications/describe.cfm?id=809. 17Lawrence J. Lau, et al., ‘‘Estimates of U.S.–China Trade Balances in Terms of Domestic 

Value-Added’’, working paper no. 295 (Palo Alto, CA: Stanford University, October 2006; updated November 2006). 

Manufacturing the Myth of Decline 14

Nefarious Chinese trade practices are often blamed for the decline of U.S. manufacturing. But the first problem with that presumption of causation is that U.S. 

manufacturing is simply not in decline. Until the onset of the recent recession (when 

virtually every sector in the economy contracted), U.S. manufacturing was setting 

new performance records year after year in all relevant statistical categories: profits, 

revenues, investment returns, output, value-added, exports, imports, and others. In 

absolute terms, the value of U.S. manufacturing has been growing continuously, 

with brief hiccups experienced during recessions over the past several decades. As 

a percentage of our total economy, the value of manufacturing peaked in 1953 and 

has been declining since, but that is the product of rapid growth in the services sectors and not—as evidenced by its absolute growth—an indication of manufacturing 

decline. 

The preponderance of Chinese and other imported goods on retail store shelves 

may give the impression that America does not make anything anymore. But the 

fact is that American factories make lots of things—in particular, high-value products that are less likely to be found in retail stores—like airplanes, advanced medical devices, sophisticated machinery, chemicals, pharmaceuticals, and biotechnology 

products. American factories are, in fact, the world’s most prolific, accounting for 

21.4 percent of global manufacturing value-added in 2008, while China accounted 

for 13.4 percent. 15 The main reason for continued American industrial preeminence 

is that the U.S. manufacturing sector has continued its transition away from laborintensive industries toward higher value-added production. 

Regardless of manufacturing’s operating performance, the metric that matters 

most politically is the number of jobs in the sector. That figure reached a zenith 

of 19.4 million jobs in 1979 and has been trending downward along roughly the 

same trajectory ever since. China’s entry into the WTO and the subsequent increase 

in bilateral trade did nothing to accelerate the decline. Manufacturing job loss has 

very little to do with trade and a lot to do with changes in technology that lead to 

productivity gains and changes in consumer tastes. China has also experienced a 

decline in manufacturing jobs. In fact, many more jobs have been lost in Chinese 

manufacturing and for the same reasons—productivity gains. According to a 2004 

study published by the Conference Board, China lost 15 million manufacturing jobs 

between 1995 and 2002, a period during which 2 million U.S. manufacturing jobs 

were lost. 16

Policymakers in Washington have been citing a figure from the Economic Policy 

Institute that attributes 2.4 million manufacturing job losses between 2001 and 

2008 to the bilateral trade deficit with China. But that figure approximates job 

gains from export value and job losses from import value, as though there were a 

straight line correlation between the figures. And it assumes that imports do not 

create or support U.S. jobs. But U.S. producers—purchasing raw materials, components and capital equipment—account for more than half of the value of U.S. imports annually, according to the U.S. Bureau of Economic Analysis. Those imports 

support U.S. jobs in a wide range of industries. 

Furthermore, according to the results from a growing field of research, only a fraction of the value of U.S. imports from China represents the cost of Chinese labor, 

materials and overhead. Most of the value of those imports comes from components 

and raw materials produced in other countries, including the U.S. 

In a 2006 paper, Stanford University economist Lawrence Lau found that Chinese 

value-added accounted for about 37 percent of the total value of U.S. imports from 

China. 17 In 2008, using a different methodology, U.S. International Trade Commis-
58 

18 Robert Koopman, Zhi Wang, and Shang-jin Wei, ‘‘How Much of Chinese Exports Is Really 

Made in China? Assessing Foreign and Domestic Value-Added in Gross Exports’’, U.S. International Trade Commission, Office of Economics, working paper no. 2008-03-B, March 2008. 19For a more comprehensive treatment of this topic, see, Daniel Ikenson, ‘‘Made on Earth: 

How Global Economic Integration Renders Trade Policy Obsolete’’, Cato Trade Policy Analysis 

no. 42, December 12, 2009. 20 Bureau of Economic Analysis, ‘‘Foreign Direct Investment in the United States: Selected 

Items by Detailed Industry of U.S. Affiliate’’, 2004–2008, http://www.bea.gov/international/ 

xls/LongIndustry.xls. 

sion economist Robert Koopman, along with economists Zhi Wang and Shang-jin 

Wei, found the figure to be closer to 50 percent. 18 In other words, despite all the 

hand-wringing about the value of imports from China, one-half to nearly two thirds 

of that value is not even Chinese. Instead, it reflects the efforts of workers and capital in other countries, including the U.S. In overstating Chinese value by 100–200 

percent, the official U.S. import statistics are a poor proxy for job loss. 

The fact that China surpassed Germany to become the world’s largest exporter 

last year—a milestone that prompted a string of ‘‘end-of-Western-civilization’’ newspaper commentaries—says less about Chinese economic might than it does about 

the extent of global economic integration. The global division of labor enabled by intricate transnational production and supply chains still assigns to China primarily 

lower-value production and assembly operations. 19 That alone speaks to the complementary nature of the U.S. and Chinese economies, underscores the meaninglessness of bilateral trade accounting, and magnifies the absurdity of predicating policy 

on the goal of reducing a bilateral trade deficit. 

Despite occasional fireworks, both governments have mutual interest in harmonious economic relations. Our economies are extremely interdependent. U.S. economic performance will continue to be a determinant of Chinese economic performance—and vice versa—and barring destructive policies, the pie should continue to 

grow larger. Much more can be done to cultivate our areas of agreement using carrots before seriously considering the use of sticks. 

Less Provocative Alternatives 

Another reason the Chinese government worries about RMB appreciation is that Chinese investors owns about $800 billion of U.S. debt. A 25 percent appreciation 

in the RMB would reduce the value of those holdings to approximately $640 billion. 

That’s a high price for China to pay, especially in light of the fact that U.S. inflation 

is expected to rise in the coming years, which will further deflate the value of those 

holdings (and ease the burden of repayment on U.S. taxpayers). Likewise, mass 

dumping of U.S. government debt by Chinese investors—the much ballyhooed ‘‘leverage’’ that China allegedly holds over U.S. policy—would precipitate a decline in 

the dollar as well, which also would depress the value of Chinese holdings. The assertion that China holds U.S. debt as a favor to America, and would withdraw that 

favor on a whim, is a bit far-fetched. 

China, it seems, is guilty of a failure to heed the first law of investment: it failed 

to diversity its portfolio adequately. The overwhelming investment focus on U.S. 

public debt has left China exposed to heavy losses from dollar inflation and RMB 

appreciation. The fact that the inflation rate is in the hands of U.S. policymakers 

makes China even more reluctant to allow large-scale or, at least, precipitous, RMB 

appreciation. 

As of the close of 2008, Chinese direct investment in the United States stood at 

just $1.2 billion—a mere rounding error at about 0.05 percent of the $2.3 trillion 

in total foreign direct investment in the United States. That figure comes nowhere 

close to the amount of U.S. direct investment held by foreigners in other big economies. U.S. direct investment in 2008 held in the United Kingdom was $454 billion; 

$260 billion in Japan; $259 billion in the Netherlands; $221 billion in Canada; $211 

billion in Germany; $64 billion in Australia; $16 billion in South Korea; and even 

$1.7 billion in Russia. 20

If it is desirable that China recycle some of its estimated $2.4 trillion in accumulated foreign reserves, U.S. policy (and the policy of other governments) should be 

more welcoming of Chinese investment in the private sector. Indeed, some of China’s past efforts to take equity positions or purchase U.S. companies or buy assets 

or land to build new production facilities have been viewed skeptically by U.S. policymakers—and scuttled—ostensibly over ill-defined security concerns. 

A large inflow of investment from China would have a similar impact as a large 

increase in U.S. exports to China on the value of both countries’ currencies, and on 

the level of China’s foreign reserves. In light of China’s large reserves and its need 

and desire to diversify, America’s need for investment in the real economy, and the 

objective of creating jobs and achieving sustained economic growth, U.S. policy 
59 

should be clarified so that the benchmarks and hurdles facing Chinese investors are 

better understood. Lowering those hurdles would encourage greater Chinese investment in the U.S. economy and a deepening of our mutual economic interests. 

To reduce bilateral tensions and foster greater cooperation from China with respect to market access, intellectual property theft, and other legitimate U.S. concerns, the United States should offer to reform its punitive trade remedies practices 

toward China. Ending the practice of treating China as a nonmarket economy in 

antidumping cases would probably do more to improve bilateral economic relations 

than just about any other possible reform. 

China has made no secret of its desire to be designated a market economy. In essence, China’s NME status is an asset to U.S. policymakers—but a rapidly depreciating one. In accordance with the terms of its WTO accession, China’s economy 

cannot be treated as an NME after 2016, so U.S. policy will have to change in 6 

years anyway. If U.S. policymakers want anything of value from China in exchange 

for designating it a market economy, that designation has to come soon. The longer 

this inevitable reform is delayed, the less valuable it becomes. 

Short of graduating China to market economy status, U.S. policymakers could reduce bilateral tensions by addressing another systemic, methodological problem that 

results in Chinese exporters being penalized twice for the same alleged infraction. 

Since the Commerce Department resumed applying the countervailing duty law to 

nonmarket economies in 2007 (after a 22-year moratorium), it has failed to account 

for the problem of ‘‘double-counting’’ in cases where imports are subject to both the 

antidumping and countervailing duty laws. 

Under NME methodology, a Chinese exporter’s U.S. prices are compared to a surrogate value based on costs in a third country, such as India. Any difference between the U.S. price and that surrogate accounts for both the dumping and subsidy 

margin because the surrogate represents a nondumped, nonsubsidized price. However, U.S. practice has been to treat that difference as reflecting only the margin 

of dumping, while calculating an additional margin to reflect the subsidy only. Both 

the dumping margin (which already reflects the amount of the subsidy) and the subsidy margin are applied as duties on Chinese imports, resulting in a double counting 

of the countervailing duty. 

Some Hypocrisy in U.S. Allegations 

Claims are numerous that China maintains discriminatory policies that impede 

imports and foreign companies. Indeed, some of those claims have been substantiated and remedied. Others have only been substantiated. And still many more 

have been merely alleged. 

The United States maintains formal and informal channels of communication 

with the Chinese government through the Strategic and Economic Dialogue, the 

Joint Commission on Commerce and Trade, and other venues, through which 

sources of economic and trade friction are discussed and often defused. On eight occasions, the United States decided that bilateral process alone was insufficient, and 

lodged official complaints with the WTO Dispute Settlement Body about various 

Chinese practices. Outcomes in two of the cases are still pending, but six of the 

eight cases produced satisfactory outcomes from the perspective of the U.S. government: either China agreed during consultations to change its rules or practices, or 

a dispute panel affirmed most of the U.S. complaints and issued opinions requesting 

that China bring its practices into conformity with the relevant WTO agreements. 

It is difficult to find merit in the suggestion that U.S. trade policy toward China 

should change tack and become more unilateralist or provocative, when the WTO 

dispute settlement system has worked well as a venue for resolving U.S. complaints. 

The United States has brought 19 cases against Europe in the WTO, but there is 

not much talk about adopting a more strident trade policy toward the EU. 

The fact is that China has made substantial progress since beginning its reforms 

to join the WTO. Nevertheless, some trade barriers and subsidy programs still exist 

or have emerged that, if challenged, likely would be found to violate China’s various 

WTO commitments. And China should be held accountable to its market liberalizing 

commitments. Still, it is up to the USTR, in conjunction with other stakeholders, 

to evaluate the evidence and weigh the costs and benefits before deciding whether 

and when to lodge official WTO complaints. 

One of the costs of bringing cases against Chinese market barriers or policies that 

favor domestic firms would be the exposure of U.S. hypocrisy. The U.S. government 

subsidizes chosen companies and industries, too. The past 18 months is littered with 

examples, such as General Motors and Chrysler. Though the U.S. business community is concerned about the emergence of technical market barriers in China favoring local companies, the U.S. government maintains opaque technical barriers in a 

variety of industries, which hampers and precludes access to the U.S. market for 
60 

21 United States Trade Representative, 2009 Report to Congress on China’s WTO Compliance, 

December 2009, p. 4. 1See, Fair Currency Coalition, ‘‘Fact of the Week—China’s Record Reserves’’, (Jan. 26, 2010), 

available at, www.faircurrency.org. 

foreign food products, in particular. Mexican trucks cannot even operate on U.S. 

highways. There is an element of the pot calling the kettle black in U.S. allegations. 

By and large, though, the Office of the U.S. Trade Representative, in its December 

2009 report to Congress about the implementation of China’s WTO commitments, 

strikes the right tone and reassures that the economics can and should be shielded 

from the vicissitudes of politics: 

China has taken many impressive steps over the last 8 years to reform its 

economy, while implementing a set of sweeping WTO accession commitments that required it to reduce tariff rates, to eliminate nontariff barriers, 

to provide national treatment and improved market access for goods and 

services imported from the United States and other WTO members, to protect intellectual property rights, and to improve transparency. Although it 

still does not appear to be complete in every respect, China’s implementation of its WTO commitments has led to increases in U.S. exports to China, 

while deepening China’s integrations into the international trading system 

and facilitating and strengthening the rule of law and the economic reforms 

that China began 30 years ago. 21

Conclusion 

The world would be better off if the value of China’s currency were truly marketdetermined, as it would lead to more optimal resource allocations. The impact on 

the bilateral trade account—meaningless as that statistic is in a globalized economy—would be impossible to predict. But compelling China to revalue under threat 

of sanction could produce adverse consequences—including reductions in Americans’ 

real incomes and damaged relations with China—leaving us all worse off without 

even achieving the underlying policy objectives. 

For now, it would be better to let the storm pass and allow China to appreciate 

its currency at its own pace. 

PREPARED STATEMENT OF JACK W. SHILLING 

RETIRED EXECUTIVE VICE PRESIDENT AND CHIEF TECHNICAL OFFICER, ALLEGHANY

TECHNOLOGIES INCORPORATED, AND

CHAIRMAN, SPECIALTY STEEL INDUSTRY OF NORTH AMERICA

APRIL 22, 2010 

I am grateful to participate in today’s hearing. My conviction, based upon my previous experience—most recently as Executive Vice President, Corporate Development and Chief Technical Officer of Allegheny Technologies Incorporated and as 

Chairman of the Specialty Steel Industry of North America—is that it is vitally important for job creation, the overall economy and national security that the United 

States strengthen and expand its manufacturing base. An integral part of this effort 

must be an international system of exchange rates that reflect market fundamentals 

and that adjust as those fundamentals fluctuate. 

I. To What Extent Is China’s Currency Misaligned? 

For the past 16 years, China has engaged in the protectionist policy of currency 

depreciation by effectively pegging the renminbi (RMB) to the U.S. dollar, and other 

countries have compounded this problem by undervaluing their currencies in an attempt to remain competitive with China. 

There is a broad consensus that the RMB is substantially undervalued. The Peterson Institute estimates that the renminbi remains misaligned by about 25 percent 

on an overall, real-effective-exchange-rate basis and by about 40 percent relative to 

the U.S. dollar on a bilateral, real-exchange-rate basis. This 40-percent undervaluation vis-a-vis the U.S. dollar is as large today as it was 6 years ago before a modest 

revaluation and nominal appreciation of the RMB by China between July 2005 and 

July 2008. China’s intervention in the exchange markets is now approximately $30– 

$40 billion per month, and China’s foreign reserves are estimated to be at least $2.4 

trillion and possibly as much as $3 trillion. 1 These numbers are staggering and contribute to a huge, artificial and competitive advantage for China in various ways. 
61 

II. What Effect Does the RMB’s Undervalued Misalignment Have on the 

Trade Deficit and U.S. Employment? 

A. Background 

The U.S. manufacturing base has been eroding for a long time, while manufacturing capability in China has been increasing dramatically over the same time period. This shift has been well documented by others. The large and growing trade 

imbalance with China is one confirmation of this situation. 

Loss of our domestic manufacturing base presents serious economic and national 

security problems as documented recently in the President’s Framework for Revitalizing American Manufacturing. These problems include a significant loss of more 

highly compensated employment opportunities for our citizens. There are many factors affecting the competitiveness of U.S. manufacturers that are far more important than labor rates, which are often cited incorrectly as the reason for this loss 

of competitiveness. 

One of the most important and most easily understood factors undermining U.S. 

competitiveness is the impact of exchange rates, and particularly the actions of the 

Chinese government to prevent the RMB from appreciating relative to the U.S. dollar. In order to understand the importance of exchange rates to competitiveness and, 

therefore, to the U.S. trade imbalance with China and loss of American jobs, it is 

helpful to understand how products are generally sold and then to apply that knowledge to both imports and exports in various market segments. Some examples are 

provided below. 

B. How Products Are Sold 

The following factors come into play when a decision is made by a supplier and 

a customer to enter into a purchasing agreement: (1) price and its impact on profit 

margin; (2) availability; (3) supply chain management issues; (4) quality; (5) product 

capability; (6) short-and long-term customer-supplier relationships; and (7) strategic 

considerations. All other things being equal, price becomes the dominant issue 

where exchange rates have a direct and obvious impact. However, in order to understand a specific purchasing decision, it is often necessary to consider some or all of 

the other factors just mentioned. 

C. Imports From China Into the United States 

A 40 percent undervalued RMB has a dramatic impact on imports. When a product made in China is sold in the United States, the invoice is paid in dollars and 

then converted to RMB in China to pay the Chinese producer. If the Chinese product is sold for $100 in the United States, approximately 683 RMB are provided to 

the supplier in China under the current exchange rate between the RMB and the 

U.S. dollar. If the costs of manufacturing are 500 RMB in China, the Chinese producer’s operating profit is 183 RMB. 

If, on the other hand, the RMB were allowed to appreciate to market rates, 40 

percent higher in value, only 409 RMB would be generated in China, resulting in 

an operating loss of 91 RMB. The net result would be an unwillingness by the Chinese producer to export that product to the United States at the original price of 

$100, and the Chinese producer’s export price would rise, making U.S.-origin products more competitive. 

Note that the Chinese producer’s export price to the United States would not necessarily rise by 40 percent. The specific price increase would depend upon the degree to which costs could be lowered in China and the minimum profit margin that 

would be acceptable to the Chinese producer. The Chinese producer’s price increase 

would also depend on some of the other factors mentioned above, such as product 

availability from U.S. domestic suppliers and strategic considerations, including the 

ability of the Chinese supplier to decrease prices over time through cost reductions, 

the Chinese producer’s ability to supply other products of interest to the U.S. purchaser, and the perceived long-term importance of the business to the Chinese supplier and U.S. customer. 

Importantly, a 40 percent revaluation of the RMB could have a significant favorable impact on a Chinese producer’s costs. A central consideration is the benefit the 

Chinese producer would realize when purchasing raw materials or energy in U.S. 

dollars with a more valuable RMB. For instance, over 50 percent of the value of 

stainless steel is in inputs such as nickel, chromium, molybdenum, and natural gas 

that are priced globally based on U.S. dollars. With reference to the previous illustration, if 50 percent or 250 RMB of the Chinese producer’s total costs of 500 RMB 

were in U.S. dollar commodities, with a 40 percent revaluation of the RMB the Chinese producer’s costs would decrease by 100 RMB to 400 RMB, and the loss of 91 

RMB after revaluation of the RMB that was postulated above would become a small 

operating profit of 9 RMB. Nevertheless, such a large revaluation would still have 
62 

2 If the unit price in China remained at 100 RMB for a U.S. producer’s product, for instance, 

the U.S. producer would receive only U.S.$14.64 at the current exchange rate of 6.83 RMB/ 

U.S.$1, but would receive U.S.$24.45 at the revalued exchange rate of 4.09RMB/U.S.$1, an increase of 67 percent. 

a substantial, unfavorable effect on profitability even after taking such purchasing 

benefits into consideration. 

To summarize, above all else a long-term, chronic undervaluation of the RMB has 

led and will always lead to the gradual loss of American manufacturing competitiveness, particularly when the undervaluation is so large. The larger the exchange-rate 

misalignment, and the longer in time that this misalignment is allowed to persist, 

the more price will become the determining factor and allow the Chinese producer 

time to resolve all other issues at least to parity with the U.S. domestic producer. 

In addition, the longer this misalignment is allowed to persist, the higher the probability is that U.S. competitors will cease to exist when the misalignment is corrected. 

D. Exports to China From the United States 

The same logic that applies to imports into the United States from China, as discussed above, also applies to exports by the United States to China. In this case, 

the important issue is how many U.S. dollars a U.S. producer will receive when the 

U.S. product is sold in China in RMB and the RMB are then converted back into 

U.S. dollars. If the price in RMB doesn’t change and the RMB–U.S.$ exchange rate 

is allowed to appreciate by 40 percent, a U.S. producer in the abstract should receive an effective price increase of over 60 percent in U.S. dollars. 2

Such a huge revenue increase would be expected to significantly improve U.S. 

competitiveness and result in U.S. producers quoting on business in China that otherwise would produce inadequate margins. However, it is unlikely that such success 

would be completely realized. One reason relates to cost reductions that would occur 

for Chinese producers associated with dollar-denominated purchases of input materials and energy, as discussed above. In addition, it is critically important to the 

Chinese government that China be able to maintain a large GDP growth rate. If 

it is assumed that current prices produce acceptable profit margins to Chinese producers, many of whom have significant ownership by the Chinese government, it 

seems very likely the Chinese government would intervene in the future in some 

manner other than an undervalued RMB to prevent a significant disruption to the 

ability of Chinese producers to supply their own market. In other words, price has 

not been, nor will it be, the only factor considered in purchasing decisions made in 

China. We can all speculate on how China would accomplish this, but it seems highly likely that following a significant currency realignment, e.g., by 40 percent, action 

can and would be taken by the Chinese government to protect China’s ability to continue to grow its own GDP and keep its citizens employed. 

Because of its impact on jobs and national security, it is my opinion that the impact of Chinese currency manipulation on imports into the United States from 

China and the resulting inability of U.S. domestic manufacturers to supply their 

own U.S. market is a much larger problem than a lost opportunity to export products from the United States to China, although both are important. 

E. Example 1: Specialty Metals 

1. Titanium Condenser Tubing—This is a high-tech product used for seawater 

cooling in conventional and nuclear power plants. The important issues to understand here are (a) this product is critical to the functioning of these systems and 

(b) China has not had the capability to supply their own market with acceptable 

quality product. In situations like this, China has been unable to export product and 

depends on imports. Pricing relative to Chinese competition has not been a factor, 

and therefore the exchange rate has not been an issue. Orders are frequently quoted 

in U.S. dollars, and the currency risk (although there is none if the exchange rate 

is pegged) is assumed by the purchaser. 

However, as China builds this ability over time (as it is attempting to do today), 

most likely using foreign technology, pricing will become a factor for both imports 

and exports of this product as discussed above, and exchange rates will become very 

important. So, as we look to the future, it is very important that we act now to help 

preserve the technology advantage that currently exists with high-tech products like 

titanium condenser tubing produced by U.S. manufacturers. 

2. Grain-Oriented Electrical Steel (GOES)—This steel also is a high-tech specialty 

metal product critical to the efficient distribution of electricity in any advanced or 

emerging economy. Electrical power is generated in power plants. In order to use 

this electricity, it must be distributed widely to all sectors of the economy. These 
63 

distribution systems employ many large transformers, and GOES is critical to their 

efficient operation. 

Ten years ago, the story of GOES in China was much the same as the titanium 

condenser tubing story. But over the intervening time period, China has added sufficient capacity using foreign technology for the most part so that Chinese producers 

can now supply their own market. The Chinese government recently implemented 

antidumping and countervailing duties claiming trade agreement violations by U.S. 

producers of GOES. The U.S. industry feels these decisions are unjustified and is 

considering its options. 

During the last 5 years or so, imports of this product into the United States from 

China have not been significant, because China did not have an adequate domestic 

supply. Exports from U.S. producers to China, however, have occurred because of 

inadequate supply in China. As China increased capacity over this time period, exchange rate issues became more of a factor. With large import duties now imposed 

due to China’s trade cases against the U.S. producers, exchange rate issues are of 

significant importance. If and when these duties are removed, exchange rates will 

remain important to future U.S. exports of GOES to China and will be critically important to the ability of U.S. producers of GOES to supply their own domestic market assuming increasing imports into the United States of Chinese product. 

3. Commodity Stainless Steel Sheet and Strip—This product is considered a commodity product, because world-wide competition uses very similar technology. Highly productive processes have been developed that make labor costs less important 

relative to other cost components such as energy and raw materials. In addition, 

China has built significant capacity over the last 10 years using foreign technology. 

Major suppliers in China are government-owned, and in that sense, return-on-investment issues are most likely of lesser importance than is true for a normal, freeenterprise company. 

Over the last decade, U.S. producers have been unable to sell significant quantities of this commodity product in China, whereas China has become one of the 

largest exporters of stainless steel sheet and strip to the United States. See, Attachment 1. If the Chinese currency were revalued by 40 percent, one would expect imports of this product into the United States to be significantly reduced. However, 

it is unlikely in my opinion that U.S. exports of commodity products to China would 

increase as much for the reasons discussed above. China would be expected to intervene in some manner to prevent this from happening. 

F. Example 2: Consumer Products 

Gas grilles are an instructive example of how the RMB’s enforced undervaluation 

affects trade between China and the United States in consumer products. Most gas 

grilles sold in big box stores were developed originally in the United States. But 

now, virtually all of these products are made in China and imported into the U.S. 

market. 

These gas grilles are sold strictly on the basis of price. Were the exchange rate 

allowed to appreciate by 40 percent, it is highly likely that imports from China 

would be reduced over time as U.S. manufacturers restored capacity allowing significant production to return to the United States. Not only would such a transition 

benefit the U.S. producers of gas grilles, but a significant benefit would accrue as 

well to the U.S. domestic manufacturers of gas grilles’ component parts and raw materials, such as commodity stainless steel. At the same time, it is unlikely that U.S. 

exports to China would increase to nearly the same extent for the reasons discussed 

above along with the fact that significant Chinese capacity now being used for the 

U.S. market would need to be diverted to the Chinese market. 

G. Economic Segments 

The charts and tables in Attachment 2 set forth data with respect to major segments of products traded between China and the United States from 2000 through 

2009. During those years China far and away exported more products to the United 

States in these segments than the United States exported to China. Further, China’s exports to the United States have covered a wide diversity of products in terms 

of technology and sophistication and met a broad spectrum of basic needs for the 

U.S. economy. In addition, China’s exports to the United States during this period 

generally expanded and grew over time, particularly in the segment of computer 

and electronic products. U.S. exports to China, in contrast, have been far less. These 

overall trends are underscored when specific products are analyzed. Considering the 

discussion above, it seems most likely that significant currency realignment would 

have the best chance of improving the trade balance between the U.S. and China 

by reducing imports over time in the following segments: Computer and Electronic 
64 

3Morgan Stanley has said that it expects China will permit the renminbi to appreciate to 6.54 

RMB/U.S.$1 by the end of 2010 and to 6.17 RMB/U.S.$1 by the end of 2011. Morgan Stanley, 

‘‘China Economics—Renminbi Exit from USD Peg: Whether, Why, When, How’’, at 1 (Apr. 5, 

2010). Yet that nominal appreciation from the current rate of 6.83 RMB/U.S.$1 would be only 

9.7 percent, about the same pace over the next 21 months as the pace China set between July 

2005 and July 2008. That pace of nominal appreciation will be no more effectual than the RMB’s 

nominal appreciation was between July 2005 and July 2008. 

Products; Apparel and Accessories; Electrical Equipment; Appliances and Components; Furniture and Fixtures; and Fabricated Metal Products. 

III. What Happened When China Allowed the RMB To Appreciate From 

2005–2008? Why Did the U.S. Trade Deficit Not Narrow During This 

Time? 

Between July 2005 and July 2008, the Chinese government allowed the RMB to 

appreciate nominally relative to the U.S. dollar by 17.6 percent, from 8.28 RMB/ 

U.S.$1 to the current rate of 6.82 RMB/U.S.$1. During those 3 years, China’s foreign reserves rose from $711 billion to $1.8 trillion, and the U.S. trade deficit and 

number of jobs lost likewise increased substantially. There are two basic reasons 

why China gained ground and the United States lost ground despite this appreciation of the RMB during those 3 years. 

First, the time between July 2005 and July 2008 was one in which China’s economy was growing rapidly, and China’s ability to supply the U.S. market was increasing dramatically, both in terms of manufacturing costs and product capability. 

Moreover, as seen in the examples above, as Chinese producers have become more 

self-sufficient there has been less reason for China to import from the United 

States. Each of these influences contributed to a more pronounced trade deficit by 

the United States with China. 

Attachment 3 gives a graphic picture of total trade between China and the United 

States from 2000 through 2009 and shows the extent of the increasing trade deficit 

by the United States with China over that time. As depicted in Attachment 3, the 

U.S. trade deficit worsened considerably during the period of 2005 through 2008, 

and the largest trade deficit incurred by the United States with China occurred in 

2008. 

Second, the RMB’s appreciation between July 2005 and July 2008 was in nominal 

terms, but then as now the RMB’s undervaluation relative to the U.S. dollar was 

around 40 percent on a bilateral, real-exchange-rate basis. What was needed then, 

in other words, was a meaningful revaluation of the RMB in that amount in accordance with inflation-adjusted, trade-weighted exchange rates. The same is true 

today. 3

IV. If China Were To Allow for a Currency Revaluation, What Is an Appropriate Appreciation? What Tools Should Congress Consider To Remedy 

This Imbalance? What Are the Multilateral Policy Options? 

What is needed is for China to revalue the RMB relative to the U.S. dollar by 

40 percent on a bilateral, real-exchange-rate basis. But what should we do if this 

does not happen in a timely manner? Unfortunately, while the International Monetary Fund for the last 5 or 6 years especially has been sounding the alarm about 

China’s undervaluation of the renminbi, the IMF’s authority is so limited under its 

Articles of Agreement that China has been able to block publication of the IMF’s 

2007, 2008, and 2009 reports on China’s currency policy. It is apparent that a 

strengthening of the multilateral rules on protracted currency depreciation is imperative. 

In the absence of unilateral action by China to appropriately revalue its currency, 

a first step that can be taken by Congress and the Executive Branch against this 

protectionist practice is to authorize the imposition of countervailing or antidumping 

duties against imports from any country with a fundamentally undervalued currency. This approach would be a reasonable implementation in U.S. domestic law 

of the World Trade Organization’s provisions, would assist materially injured U.S. 

industries and workers, would act as a deterrent, and would underscore that protracted currency depreciation will not be tolerated. 

V. Conclusions 

Currency manipulation by the Chinese government has significantly affected the 

bilateral trade deficit of the United States with China, primarily through its effect 

on the levels of imports into the United States from China. From 2002 to 2009, the 

United States ran a cumulative trade deficit of nearly $5.4 trillion for All Merchandise, including a deficit of almost $1.6 trillion with China. China’s share of the U.S. 
65 

4See, Fair Currency Coalition, ‘‘Fact of the Week—RMB Peg Fuels China Trade Surpluses, 

Undercuts U.S. Recovery’’, (Feb. 23, 2010), available at, www.faircurrency.org. 5 Robert E. Scott, ‘‘Unfair China Trade Costs Local Jobs’’, (Economic Policy Institute, Mar. 23, 

2010). 

trade deficit in All Merchandise rose from 22 percent in 2002 to 45.3 percent in 

2009. 4

This deficit has resulted in a significant loss in the United States of important 

manufacturing capability and its higher-paying jobs that would have been used to 

supply the U.S. market at realistic prices. Prices of Chinese imports are artificially 

low due to the effective subsidization associated with the undervalued Chinese currency vis-a-vis the U.S. dollar. As the Economic Policy Institute reported in a study 

last month, the RMB’s substantial undervaluation has been a major reason for the 

United States’ imbalanced trade with China, the loss of 1.6 million manufacturing 

jobs in the United States between 2001 and 2008, and depressed and lower wages 

for many more millions of U.S. workers. 5

As devastating to the United States as these trends are, the longer-term prognosis 

if China persists in its behavior is even more troubling. In addition to further trade 

deficits and lost jobs, the renminbi’s undervalued misalignment is an important factor in making investment in China more attractive and feasible than investment in 

the United States. It is not necessary or even desirable to stop investment overseas 

by multinational companies, but it is critical that the protectionist policy of China’s 

enforced undervaluation of the RMB should not be tolerated. If not countered, that 

policy will increasingly drain the United States of knowledge and expertise, continue to contribute to the demise of its basic manufacturing capability, as well as 

jobs and revenue, by weakening companies in areas such as the U.S. specialty metals industry, which are constantly developing new technology that has essential applications to the U.S. economy and national defense. 

The major benefit associated with China allowing the RMB to appreciate by 40 

percent to market levels, or otherwise mitigating this problem, will be to allow U.S. 

manufacturers to recapture the U.S. market that has been lost or will be lost to Chinese imports. Less benefit to exports of U.S. products into China is anticipated, because the Chinese government’s emphasis on large increases in GDP each year will 

almost certainly be reflected in other measures that favor Chinese domestic production and sales, thereby compensating in part for any meaningful revaluation of the 

RMB. 

Virtually all segments of the U.S. economy should benefit, but major sectors representing high levels of imports into the United States from China would be advantaged the most. As indicated by the charts and tables in Attachment 2, these segments include computer and electronic products, primary metal manufacturing, textile mill products, apparel and accessories, plastics and rubber products, electrical 

equipment, appliances, and components, furniture and fixtures, and other fabricated 

metal products. 

The importance of this issue, and its potential impact, is directly proportional, or 

perhaps even geometrically proportional, to the magnitude of the currency misalignment and its remediation. Current estimates of 40 percent misalignment are enormous in this context. Likewise, token efforts to reduce this misalignment will be 

generally ineffective. 

It is critically important that we act now. Pushing the problem ahead will only 

produce a bigger problem in the future as U.S. GDP weakens and U.S. manufacturing and technology capability is lost. In the absence of unilateral action by China 

to appropriately revalue its currency, a first step that can be taken by Congress and 

the Executive Branch is to authorize the imposition of countervailing or antidumping duties against imports from any country with a fundamentally undervalued currency. 
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PREPARED STATEMENT OF MARK A. SUWYN 

EXECUTIVE CHAIRMAN OF THE BOARD, NEWPAGE CORPORATION, MIAMISBURG, OHIO

APRIL 22, 2010 

Mr. Chairman, Mr. DeMint, and Members of the Subcommittee, I appreciate the 

opportunity to appear on this panel to discuss China’s exchange rate policy and 

trade imbalances. My name is Mark Suwyn and I am Chairman of NewPage Corporation. NewPage was founded in 2005, when the company purchased certain 

paper operations of MeadWestvaco. NewPage produces printing and writing papers, 

including coated and uncoated free sheet and groundwood papers and paperboard, 

newsprint, supercalendered paper, and specialty paper. NewPage is headquartered 

in Miamisburg, Ohio, and has production facilities in Kentucky, Maine, Maryland, 

Michigan, Minnesota, and Wisconsin. NewPage has about 7,500 employees, and is 

the largest producer of coated printing and writing papers and paperboard in North 

America. Production of these papers is a multibillion dollar industry in the United 

States. Today, I would like to speak about how the U.S. paper industry has been 

impacted by China’s exports of coated paper and paperboard, and in particular 

about the large and distortive subsidy that Chinese paper producers benefit from 

as a result of China’s undervalued currency. 

China’s undervalued currency is a very significant problem for U.S. paper producers, as it is for many other U.S. manufacturers that compete with imports from 

China. The United States has a significant competitive advantage over China in the 

production of paper and paperboard used domestically for printing and writing, a 

fact that has been confirmed regularly in market research studies. Paper producers 

in this country have access to abundant and renewable fiber sources, and we have 

a plentiful supply of water required for paper processing. We have a highly skilled 

workforce with generations of experience producing paper, and state-of-the-art paper 

equipment. And we have the advantage of being close to our customers in the U.S. 

market. By contrast, the Chinese producers have to import the vast majority of the 

virgin fiber they use to produce paper, much of it from Latin America. They also 

lack an adequate water supply. And although wage rates are lower in China than 

they are in the United States—paper manufacturing is not very labor intensive, accounting for only about 10 percent of the cost of producing paper—the Chinese do 

not gain any real advantage from having lower wage rates. The Chinese use comparable state-of-the-art production equipment that U.S. producers use. Finally, Chinese producers are an entire ocean and half a continent away from our customers 

in the Midwest. Nonetheless, Chinese paper producers have been able to lower 

prices, increase exports, and gain market share in the United States, all because 

of large subsidies provided by the Chinese government and their willingness to 

dump their product in the U.S. market. And the biggest subsidy of all is the 40 percent undervaluation of the Chinese currency. 

In September of last year, NewPage, along with other members of the domestic 

industry and the United Steelworkers Union, filed antidumping and countervailing 

duty petitions covering certain types of coated paper from China and Indonesia. In 

the countervailing duty petition covering Chinese subsidies, we listed a host of subsidy programs that benefit Chinese paper producers, including an allegation covering China’s undervalued currency. 

Our currency allegation provided information demonstrating that all three legal 

requirements for finding the existence of a countervailable subsidy were met: (1) 

that the Chinese government had provided a financial contribution, which (2) resulted in a benefit, and (3) which was specific to a particular industry or group of 

industries in China. With respect to the financial contribution, we explained that 

by requiring foreign exchange that is earned from export activities to be converted 

into Chinese yuan at a rate that is set by the Government, a rate which is universally recognized to be about 40 percent below its true value, Chinese exporters reap 

an enormous windfall. Specifically, Chinese exporters get 40 percent more yuan for 

every dollar that they exchange than they otherwise would absent Chinese government intervention in the foreign currency markets. This provides an enormous, continuing benefit to those exporters, and allows them to significantly under-price U.S. 

producers. We also alleged and documented that this subsidy was specific to exporters in China, because it is directly linked with exports and creates a powerful incentive for Chinese producers to export their products to the United States, rather than 

sell them at home. 

The Chinese currency is clearly undervalued. A January 2010 policy brief by Dr. 

Lardy’s colleagues at the Peterson Institute estimates that China’s currency is undervalued by 41 percent on a bilateral basis against the dollar. Other estimates are 

within this range. 
71 

Much to our disappointment, the Commerce Department did not initiate an investigation into our allegation when we first made it in September of last year, claiming that we had failed to sufficiently allege that the receipt of the excess yuan is 

contingent on export or export performance—in other words that we had not shown 

how the subsidy was specific. But in January of this year, we submitted a revised 

allegation, this time providing an expert report from an independent economist 

which demonstrates that based on the Chinese government’s own data, 70 percent 

of China’s foreign exchange earnings from Current Account transactions and from 

long-term Capital and Financial account transactions were derived from the export 

of goods. The study concluded that no other category of foreign exchange inflows 

comes close to matching the $1.4 trillion foreign exchange earnings of Chinese exporters. Because Chinese exporters garner the overwhelming share of benefits from 

the undervaluation of the RMB, the subsidy benefit is de facto specific to exporters 

as a group. 

As of the preparation of this written statement, the Department of Commerce has 

not announced whether it will initiate an investigation into whether China’s undervaluation of its currency confers a countervailable subsidy. We believe, as do many 

Members of Congress, that Commerce has a legal obligation to investigate this practice. We hope an initiation occurs soon, so that Commerce will have sufficient time 

to fully analyze this allegation. 

China’s undervalued currency, as well as the other subsidies from which Chinese 

coated paper producers benefit have had a significant negative impact on NewPage 

and other members of the U.S. coated paper industry. These consequences are documented in the preliminary unanimous injury determination by the International 

Trade Commission (ITC), which was issued in November of last year. Among other 

things the ITC noted: 

• The increase in the U.S. market share of imports from China (and Indonesia) 

which rose from 15.3 percent in 2006 to 25.7 percent in the first half of 2009. 

• The large increase in the supply of low-priced subject imports in the first half 

of 2009 was accompanied by a decline in prices for the domestic product in the 

first half of 2009. 

• The domestic industry faced increasing pressure to lower prices or lose market 

share, particularly in the first half of 2009 as a result of the pervasive underselling by subject imports. 

• Significant underselling by Chinese producers led to price depression during the 

first half of 2009. 

• Imports from China led to decreases in U.S. producer’s production, shipments, 

and employment in 2009. 

• NewPage and others in the domestic industry have had to close many mills and 

converting facilities over the past 4 years, including mills in Kimberly and Niagara, Wisconsin; Muskegon, Michigan; and Columbus, Mississippi, and a converting facility in Chillicothe, Ohio. 

• The U.S. industry’s financial condition deteriorated in the first half of 2009 as 

the U.S. industry was forced to reduce prices in order to compete with substantially increasing imports, with operating losses of $17.2 million in the first half 

of 2009 compared with operating profits of $44.3 million in the first half of 

2008. 

The impact of Chinese subsidies on the U.S. coated paper industry, including currency undervaluation, is well-document in the ITC determination. It is notable that 

the deterioration in our industry accelerated in the first half of 2009, which coincides with the time when China halted its gradual appreciation of the yuan in November of 2008. However, the impact goes beyond the borders of the United States. 

Despite the fact that we have had some success in the past year in increasing our 

exports to other markets, we have not been able to export paper products to China. 

The severe undervaluation of China’s currency effectively imposes a 40 percent tax 

on any potential exports from our U.S. mills. This affects not only exports to China, 

but also exports to other third markets where we compete with the Chinese. 

So what is the appropriate response to China’s undervalued currency? We believe 

that the best outcome would be for China to allow its currency to float freely and 

reflect market forces. This would be the most favorable outcome for all U.S. manufacturers. I would note, however, that past efforts to negotiate with China either bilaterally or multilaterally through the IMF, have thus far produced no result. Whatever may be accomplished through long term negotiation, we believe that the Department of Commerce needs to investigate China’s undervalued currency as a 

countervailable subsidy to Chinese coated paper producers, and to ultimately impose 
72 

countervailing duties to offset the level of undervaluation. We believe this is required by the U.S. countervailing duty law, and is critical to prevent material damage to the U.S. paper industry and the jobs and local communities that rely on our 

industry. 

Again, I appreciate the opportunity to appear before you today, and would welcome any questions you might have. 
73 

PREPARED STATEMENT OF DEREK SCISSORS 

RESEARCH FELLOW, ASIAN STUDIES CENTER, THE HERITAGE FOUNDATION

APRIL 22, 2010 
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RESPONSES TO WRITTEN QUESTIONS OF SENATOR VITTER 

FROM DANIEL J. IKENSON 

Q.1. Article IV, Section 1 of the Articles of Agreement of the International Monetary Fund (IMF) commits member countries to 

‘‘avoid manipulating exchange rates or the international monetary 

system in order to prevent effective balance-of-payment adjustment 

or to gain unfair competitive advantage over other member countries.’’ Moreover, the principles and procedures for implementing 

the Fund’s obligation (in Article IV, Section 3) ‘‘to exercise firm surveillance over the exchange rate policies of members’’ call for discussion with a country that practices ‘‘protracted large-scale intervention in one direction in exchange markets.’’ Would it be incorrect to state that China’s exchange rate policy violates most relevant international norms and standards? 

A.1. China’s exchange rate policy is no doubt frustrating to policymakers who believe—or who want their constituents to believe— 

that the undervalued Yuan is a major cause of the bilateral trade 

deficit, and that the bilateral trade deficit is a major cause of unemployment in the U.S. manufacturing sector. Although those 

causal connections are extremely weak, the Chinese currency is 

more than likely undervalued. That undervaluation has a positive 

effect on some Chinese and American interests, and a negative effect on other Chinese and American interests. Accordingly, it is 

crucial that policymakers consider the broader effects of Chinese 

currency appreciation—its impact on U.S. prices, global commodities prices, the costs of production for U.S. manufacturers that rely 

on imported raw materials and components, et cetera—before pulling the trigger on legislation designed to compel Chinese revaluation. 

Despite all of the media and political hype, it would be difficult 

to convince an objective jury that China’s exchange rate policy ‘‘violates most relevant international norms and standards.’’ Why? For 

starters, China is only one of 58 countries in the world that pegs 

the value of its currency to the value of another currency or to the 

value of a basket of other currencies. Nearly one-quarter of the 

world’s sovereign nation-states engages in overt currency manipulation. So, in that sense, China’s behavior is not extraordinary. 

The standard articulated in Article IV, Section I of the Articles 

of Agreement of the International Monetary Fund (IMF) to ‘‘avoid 

manipulating exchange rates or the international monetary system 

in order to prevent effective balance-of-payment adjustment or to 

gain unfair competitive advantage over other member countries’’ is 

a difficult one to meet. How does one prove that ‘‘prevent[ing] effective balance-of-payments adjustment’’ or ‘‘gain[ing] unfair competitive advantages over other member countries’’ is the motive for currency manipulation, as opposed to some other more benign motive? 

It is quite plausible that the Chinese government is worried about 

the effect of Yuan appreciation vis-a-vis the U.S. dollar because its 

investment portfolio includes nearly $1 trillion of U.S. government 

debt. A 25 percent depreciation of the dollar amounts to a loss of 

$200 billion of those debt holdings. Thus, protecting the value of 

those holdings may be an important motive for keeping the exchange rate stable. 
78 

At the end of the day, though, China stands out among the group 

of 58 countries that peg their currencies to the value of another. 

China is the largest economy among them and its enormous volume of trade and investment flows require a much higher level of 

intervention in currency markets, which has resulted in the accumulation of nearly $2.5 trillion in foreign currency reserves. China 

and the world would be better off if the value of the Yuan were 

market determined, and if those foreign reserves were reinvested 

around the world, where capital is most needed and can be deployed most productively and efficiently. 

But it would be a reflection of political expedience and economic 

mismanagement if sanctions were imposed to compel China to revalue or float its currency because such actions would likely generate even greater costs for the U.S. economy and have more serious consequences for the bilateral relationship. 

Q.2. Given that China refuses to use nominal appreciation to rebalance the Chinese and global economies, assuming currency manipulation and protectionism are not the root cause, what is the economic rationale for China’s insistence on a stable RMB? 

A.2. The desire for stability, as opposed to uncertainty, explains the 

Chinese government’s commitment to a currency peg. Investors like 

certainty; planners like predictability. Within that framework, I believe the Chinese government knows it is in China’s best interest, 

eventually, to allow supply and demand to determine the value of 

its currency. The government recognizes that the Chinese economy 

will have to become less reliant on exports and more reliant on domestic consumption to fuel its economy, which is a transition that 

is fostered by an appreciating currency. But at the same time, the 

government is worried about disrupting the double-digit annual 

economic growth it has experienced nearly without interruption for 

three decades. China’s reluctance on the currency issue is a reflection of the government’s aversion to tinkering with a model that 

has been hugely successful. 

Does China’s insistence on currency intervention harm U.S. interests? It carries adverse consequences for some interests and benefits for other, just as appreciation of the Yuan will carry benefits 

for some and costs for others. The undervalued currency probably 

suppresses, somewhat, the sales of U.S. exporters, which, incidentally, have been rising by 20 percent each year since China joined 

the World Trade Organization in 2001. But the effect of an undervalued Yuan on import-competing U.S. producers is less clear. The 

cheaper Yuan artificially inflates the costs of production in China, 

where one-half to two-thirds of the value of Chinese exports is first 

imported into China as raw materials and components. Yuan appreciation will reduce the cost of production by making those inputs cheaper, enabling Chinese producers to lower their prices for 

export to the United States. 

Finally, currency stability acts as a buffer that supports the 

value of China’s nearly $1 trillion holding of U.S. government debt. 

Yuan appreciation against the dollar will reduce the value of those 

holdings, which is already exposed to devaluation that would result 

from inflationary U.S. monetary policy. Since the rate of U.S. infla-
79 

tion is purely in the hands of U.S. monetary authorities, China is 

reluctant to relinquish its control of the exchange rate. 

If the U.S . Congress were more responsible with the taxpayers’ 

money, and did not insist on spending beyond its means, there 

would be no need to borrow from the Chinese or any other government. And the corresponding interest of those debt holders in a 

strong dollar would be mitigated. 
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ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

LETTER FROM DAMON A. SILVERS, POLICY DIRECTOR AND SPECIAL 

COUNSEL, AFL–CIO 
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LETTER FROM ERIK O. AUTOR, VICE PRESIDENT, INTERNATIONAL 

TRADE COUNSEL 
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