U.S. GOVERNMENT PRINTING OFFICE

64–766CC WASHINGTON : 2000

PNTR: OPENING THE WORLD’S BIGGEST POTENTIAL MARKET TO AMERICAN FINANCIAL SERVICES COMPETITION

HEARING

BEFORE THE

SUBCOMMITTEE ON

FINANCE AND HAZARDOUS MATERIALS

OF THE

COMMITTEE ON COMMERCE

HOUSE OF REPRESENTATIVES

ONE HUNDRED SIXTH CONGRESS

SECOND SESSION

MAY 23, 2000

Serial No. 106–102

Printed for the use of the Committee on Commerce

(

2

COMMITTEE ON COMMERCE

TOM BLILEY, Virginia, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

MICHAEL G. OXLEY, Ohio

MICHAEL BILIRAKIS, Florida

JOE BARTON, Texas

FRED UPTON, Michigan

CLIFF STEARNS, Florida

PAUL E. GILLMOR, Ohio

Vice Chairman

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

NATHAN DEAL, Georgia

STEVE LARGENT, Oklahoma

RICHARD BURR, North Carolina

BRIAN P. BILBRAY, California

ED WHITFIELD, Kentucky

GREG GANSKE, Iowa

CHARLIE NORWOOD, Georgia

TOM A. COBURN, Oklahoma

RICK LAZIO, New York

BARBARA CUBIN, Wyoming

JAMES E. ROGAN, California

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

CHARLES W. ‘‘CHIP’’ PICKERING,

Mississippi

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ED BRYANT, Tennessee

ROBERT L. EHRLICH, Jr., Maryland

JOHN D. DINGELL, Michigan

HENRY A. WAXMAN, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

RICK BOUCHER, Virginia

EDOLPHUS TOWNS, New York

FRANK PALLONE, Jr., New Jersey

SHERROD BROWN, Ohio

BART GORDON, Tennessee

PETER DEUTSCH, Florida

BOBBY L. RUSH, Illinois

ANNA G. ESHOO, California

RON KLINK, Pennsylvania

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

TOM SAWYER, Ohio

ALBERT R. WYNN, Maryland

GENE GREEN, Texas

KAREN MCCARTHY, Missouri

TED STRICKLAND, Ohio

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

JAMES E. DERDERIAN, Chief of Staff

JAMES D. BARNETTE, General Counsel

REID P.F. STUNTZ, Minority Staff Director and Chief Counsel

SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS

MICHAEL G. OXLEY, Ohio, Chairman

W.J. ‘‘BILLY’’ TAUZIN, Louisiana

Vice Chairman

PAUL E. GILLMOR, Ohio

JAMES C. GREENWOOD, Pennsylvania

CHRISTOPHER COX, California

STEVE LARGENT, Oklahoma

BRIAN P. BILBRAY, California

GREG GANSKE, Iowa

RICK LAZIO, New York

JOHN SHIMKUS, Illinois

HEATHER WILSON, New Mexico

JOHN B. SHADEGG, Arizona

VITO FOSSELLA, New York

ROY BLUNT, Missouri

ROBERT L. EHRLICH, Jr., Maryland

TOM BLILEY, Virginia,

(Ex Officio)

EDOLPHUS TOWNS, New York

PETER DEUTSCH, Florida

BART STUPAK, Michigan

ELIOT L. ENGEL, New York

DIANA DEGETTE, Colorado

THOMAS M. BARRETT, Wisconsin

BILL LUTHER, Minnesota

LOIS CAPPS, California

EDWARD J. MARKEY, Massachusetts

RALPH M. HALL, Texas

FRANK PALLONE, Jr., New Jersey

BOBBY L. RUSH, Illinois

JOHN D. DINGELL, Michigan,

(Ex Officio)

(II)

3

C O N T E N T S

Page

Testimony of:

Mastel, Greg, Director, Global Economic Policy Project, New America

Foundation ..................................................................................................... 46

Newhouse, Stephan F., Managing Director, Member of the Management

Committee, Morgan Stanley Dean Witter .................................................. 4

Valko, Cynthia Y., Executive Vice President, New York Life International, Inc .................................................................................................. 34

Watkins, Jesse J., Managing Director, Herbert L. Jamison & Co., LLC,

on behalf of the Council of Insurance Agents and Brokers ....................... 37

Whittaker, James S., Director, International Public Policy, Hewlett-Packard Company ................................................................................................. 8

Yingling, Edward L., Deputy Executive Vice President, Executive Director of Government Relations, American Bankers Association .................. 41

(III)

(1)

PNTR: OPENING THE WORLD’S BIGGEST POTENTIAL MARKET TO AMERICAN FINANCIAL SERVICES COMPETITION

TUESDAY, MAY 23, 2000

HOUSE OF REPRESENTATIVES,

COMMITTEE ON COMMERCE,

SUBCOMMITTEE ON FINANCE AND HAZARDOUS MATERIALS,

Washington, DC.

The subcommittee met, pursuant to notice, at 2:40 p.m., in room

2123, Rayburn House Office Building, Hon. Michael G. Oxley

(chairman) presiding.

Members present: Representatives Oxley, Shimkus, Towns, Barrett, Luther, and Rush.

Staff present: Robert Gordon, majority counsel; Linda Dallas

Rich, majority counsel; Robert Simison, legislative clerk; Shannon

Vildostequi, professional staff; Brian McCullough, professional

staff; Consuela Washington, minority counsel; and Bruce Gwinn,

minority professional staff.

Mr. OXLEY. The subcommittee will come to order. This week we

will be called upon to vote on a pivotal issue. Many have called the

vote on granting permanent normal trade relations with China the

most significant vote before Congress in decades. In casting this

vote, we will be choosing whether economic integration or economic

isolation is most likely to foster democracy and capitalism in

China. There is much to be desired of China’s Democratic and economic record. The momentous legacy still permeates the country

through State controls and social and economic life. Nevertheless,

the last 20 years show a pattern of China moving toward a market

economy.

Progress has been slow, and at times, frustrating. But the fact

remains that China has become significantly more Democratic and

capitalistic than it was in 1978, thanks mostly to the reforms of

Deng Xiaoping. As a single remaining superpower, the United

States, in its support of China’s WTO accession, is critical to integrating China into our global free markets and rule of law.

While a negative vote for PNTR will not prevent China’s accession to the WTO, it will put the United States businesses and

workers at an overwhelmingly competitive disadvantage versus our

competitors in Asia, Latin America and Europe. A negative vote

means that only the United States will be denied the benefits, and

protections of China’s accession to the WTO will confer on all other

WTO member countries.

2

China’s accession to the WTO will facilitate the shift of economic

power from state-owned enterprises to private sector market participants. An economic prosperity increases pressure for greater democracy. As Federal Reserve Board chairman Alan Greenspan recently observed, history has demonstrated that implicit in any removal of power from central planners and broadening of market

mechanisms, as would occur under WTO, is a more general spread

of rights to individuals. In fact, we have just witnessed this unfolding of democracy in South Korea and Taiwan over the last two decades, as they have integrated with international free markets.

WTO accession will not only benefit China, essentially it will translate into greater global harmony.

Free trade is more likely to foster cooperation than hostility. As

China’s global interdependency grows, so will its compliance with

international protocols. This is precisely why Taiwan supports China’s accession into the WTO. For WTO members, including the

United States, China’s WTO accession means increase access to the

world’s largest potential market. That translates to new opportunities and new jobs for American businesses and workers. With an

aging population of 1.3 billion people, the potential opportunities

for American financial services and providers are quite dramatic.

It has been estimated that under the full benefits of China’s

WTO related market opening, our annual exports to that country

would grow between $8 and $10 billion by the year 2005. In fact,

the financial services agreement to which China agreed in the

WTO negotiations represents the largest single trade agreement in

history. It covers $60 trillion in banking, insurance and securities

transactions each year. Furthermore, this trade agreement represents unilateral gain by American workers and businesses. China

has offered major concessions in return for WTO membership,

while the United States has agreed only to preserve its existing

market access without any new concessions.

For example, China has unilaterally provided for greater U.S.

market access in telecommunications and financial services and

has agreed to phaseout numerous import quotas, licensing and

ownership requirements and geographic restrictions, and just last

week, the European Union reached agreement with China as WTO

negotiations gained further concessions. Those benefits will accrue

to all WTO members, including the United States, if and only if we

approve PNTR tomorrow.

In addition to the opportunities a successful PNTR vote offers

American companies and workers, a successful PNTR vote provides

our companies and workers with protection in the form of the WTO

dispute resolution system. The U.S. will be able to use that dispute

resolution system to protect its rights with the support and pressure from 114 other WTO member countries who have similar interests in forcing open China’s markets.

We must remember that China’s WTO accession does not hinge

upon this week’s PNTR vote. WTO members will reap the benefits

of China’s accession, regardless of the congressional vote on PNTR.

If the Congress votes for PNTR, we will share in those benefits; if

we vote against it, we will not. This is a chance we should not pass

up. Extending PNTR to China is not only good economic policy, it

is a good way to influence political reform. It will be much easier

3

to influence Chinese reform as a trading partner than as the only

WTO member that refuses to extend PNTR to China.

Today we will hear from representatives of the finance, insurance

and high-tech industries. They offer a vital perspective on how

PNTR will impact our Nation’s economy, our businesses, and our

workers. I thank them all for their testimony. I look forward to

hearing what each of you has to say.

That ends the opening statement by the chair. I am pleased now

to recognize the gentleman from New York, the ranking member,

Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman. The subcommittee will consider the facts regarding the PNTR for China.

This hearing is very important to the American public, particularly

as it relates to the future of millions of American jobs. Some say

it will improve our financial services industry, which is very important to my home State of New York, and I know that Ms. Cynthia

Valko will testify in support of this viewpoint later on behalf of

New York Life.

I would still say if we believe that the export of financial services

will be enhanced when we are still waiting for the government of

China to honor its agreements with New York Life, Chubb Insurance, and Metropolitan Life, which are all New York companies.

We also must question China’s unfair labor practices, disrespect for

fundamental human rights, and their tax and threats against Taiwan.

Mr. Chairman, I am concerned about who will enforce the agreement between our two countries. I am also concerned about which

enforcement method will be used to ensure that our agreement

hold when our companies are not treated fairly by China. The most

important question, though, I have, Mr. Chairman, is who will stop

our jobs from going overseas to China?

For all of the above reasons, Mr. Chairman, I am opposed to

PNTR for China. However, I will be pleased to hear the different

views of our witnesses this afternoon. Thank you very much for

holding the hearing.

Mr. OXLEY. I thank the gentleman. His time has expired.

[Additional statement submitted for the record follows:]

PREPARED STATEMENT OF HON. TOM BLILEY, CHAIRMAN, COMMITTEE ON COMMERCE

On the heels of the comprehensive market access agreement reached with China

last fall, Congress will be considering legislation this week to provide permanent

status to normal trade relations with China.

The agreement that the EU just reached with China last week makes China’s accession to the WTO a virtual certainty. The question before us now is not whether

China will join the WTO, but whether the United States will enjoy the benefits of

the agreement we reached with China last fall. And whether the U.S. will have the

same market access rights as our Japanese and European competitors.

The Chinese market agreements are sweeping in their scope, and present significant new opportunities for American businesses. That translates into more good jobs

for American workers. The financial services agreement alone covers sixty trillion

dollars in potential transactions each year. With a population of 1.2 billion people

and very little available in the way of financial services, the Chinese market for insurance, banking, and securities is vast. But right now, without PNTR, American

companies have virtually zero access to China’s market.

The concessions to which China agreed in the high tech sector are also significant

to U.S. companies—both high tech and financial companies. The convergence of finance and technology has changed the way our own financial markets work today.

As the functions of finance become increasingly immersed in e-commerce and digital

4

automation, the software and hardware that high-tech companies produce is becoming the backbone of the financial markets. These dramatic changes improve the lives

of Americans, as well as consumers abroad.

There is much work to be done to improve the rights, and the lives, of Chinese

citizens. I strongly believe that by opening markets between the United States and

China, we will be better able to achieve those goals. I look forward to the testimony

of our witnesses today.

Mr. OXLEY. Now we will turn to our distinguished panel. Let me

introduce them beginning with Mr. Newhouse on my right. Mr.

Stephan F. Newhouse managing director, member of the management committee, Morgan Stanley Dean Witter. Mr. James S. Whittaker, director of international public policy from Hewlett-Packard

Company. Did I see you on C-SPAN this morning?

Mr. WHITTAKER. You did.

Mr. OXLEY. Very good. This will be a lot friendlier. Ms. Cynthia

Y. Valko, executive vice president of New York Life. Mr. Jesse J.

Watkins, managing director, Herbert L. Jamison & Company LLC,

from West Orange, New Jersey, on behalf of the Council of Insurance Agents and Brokers. Mr. Edward L. Yingling, no stranger to

this subcommittee, deputy executive vice president, executive director of government relations with American Bankers Association,

and Mr. Greg Mastel, director, Global Economic Policy Project, New

America Foundation here in Washington.

Gentlemen and lady, thank you all for being with us, and we will

begin with Mr. Newhouse. Let me ask if you could all try to stay

to the 5-minute rule. We can facilitate this. I know Mr. Newhouse

has to return to New York. We would love to be able to get through

the testimony and then have an opportunity for members to ask

questions to all of you. With that, I recognize Mr. Newhouse.

STATEMENTS OF STEPHAN F. NEWHOUSE, MANAGING DIRECTOR, MEMBER OF THE MANAGEMENT COMMITTEE, MORGAN

STANLEY DEAN WITTER; JAMES S. WHITTAKER, DIRECTOR,

INTERNATIONAL PUBLIC POLICY, HEWLETT-PACKARD COMPANY; CYNTHIA Y. VALKO, EXECUTIVE VICE PRESIDENT,

NEW YORK LIFE INTERNATIONAL, INC.; JESSE J. WATKINS,

MANAGING DIRECTOR, HERBERT L. JAMISON & CO., LLC, ON

BEHALF OF THE COUNCIL OF INSURANCE AGENTS AND

BROKERS; EDWARD L. YINGLING, DEPUTY EXECUTIVE VICE

PRESIDENT, EXECUTIVE DIRECTOR OF GOVERNMENT RELATIONS, AMERICAN BANKERS ASSOCIATION; AND GREG

MASTEL, DIRECTOR, GLOBAL ECONOMIC POLICY PROJECT,

NEW AMERICA FOUNDATION

Mr. NEWHOUSE. Thank you, Mr. Chairman. Good afternoon.

Again, thank you, Mr. Chairman, and good afternoon to you and

members of the subcommittee. My name is Steve Newhouse. I am

managing director and vice chairman of the Institutional Securities

and Investment Banking Group at Morgan Stanley Dean Witter

and Company.

Morgan Stanley Dean Witter is one of the largest global financial

services firms and maintains leading market positions in each of its

three business segments, securities, asset management, and credit

services. The company provides its products and services to a large

and diversified group of clients and customers, including corporations, governments, financial institutions, and individuals.

5

We support with enthusiasm your decision to hold these hearings

to consider the implications for America’s financial services industry of granting permanent normal trading relations to China. We

are honored to have been invited to testify and to share with you

Morgan Stanley Dean Witter’s views on this timely and critical

public policy issue. Without a doubt, granting permanent normal

trading relations or PNTR to China is the single most important

international trade issue to be considered by the 106th Congress

and by this administration.

Morgan Stanley Dean Witter has over 560 offices operating in 25

countries through the world. We have been active in China for almost two decades. We have offices in Beijing, Shanghai and Hong

Kong. In 1995, Morgan Stanley Dean Witter became the first foreign investment bank to participate in a domestic joint venture investment bank in China. So we know firsthand that the continued

opening of the foreign markets to U.S. goods and services has been

and continues to be an essential driver of this country’s economic

growth and success.

China, the world’s fifth largest market and the U.S.’s fourth largest trading partner, stands ready to join the biggest block of trading nations in the world, the World Trade Organization. In order

to do so, it has agreed to open its markets wider than ever before,

making unprecedented unilateral concessions that will dramatically

increase U.S. exports of goods and services. Both President Jiang

Zemin, and more particularly the Premier Zhu Rongji, have put

their personal and political credibility on the line for WTO membership. They have done so in the belief that economic openness

and reform are the only answers to the economic challenges faced

by China over the next decade.

This commitment to gain WTO membership was underscored last

Friday by additional concessions made by the Chinese to reach

agreement with the European Union on the issue of China’s entrance into the WTO. Parenthetically, that historic agreement with

a group of trading partners, which is, in the aggregate, larger than

the United States, makes an optimal bilateral trade relationship

between China and that country even more imperative.

We believe the United States must not miss this historic opportunity to embrace the commitments China has made and to welcome it fully into the world trading system on a most favored nation basis. The historic agreement reached by U.S. and Chinese negotiators in November 1999 is, as you are aware, both deep and

broad-based, covering both the goods and services sectors. For the

securities industry, the commitments from China, including minority ownership in local securities firms and asset management

firms, creates a strong platform for continued development of China’s capital markets. The commitments also importantly include

grandfathering all of our existing activities and investments in that

market place.

The opportunities for financial services firms in China are enormous and will become even greater once China joins the WTO. For

example, over the next decade, the financial resources required to

be invested in improvements to China’s communications and transportation infrastructure and energy-related capital equipment are

estimated to be over $1 trillion. The intermediation of both the doVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00009 Fmt 6633 Sfmt 6602 E:\HEARINGS\64766 pfrm03 PsN: 64766
6

mestic and international capital flows required to fill these requirements is one of the major business objectives of the next decade for

U.S. financial services firms as well as for our competitors around

the globe.

Herein lies the challenge: For if Congress fails to grant PNTR to

China, when China enters the WTO, American firms will be deprived of the benefits of China’s commitments in all sectors, even

while other countries reap those benefits. With PNTR, U.S. firms,

including financial services firms, will be able to enter and expand

in China on the same terms as our international competitors.

At its core, bringing China into the WTO increases China’s ties

with the international community. And when U.S. companies establish operations in China, they bring with them the best practices that they have observed around the world. Our own experience as a partner in China’s first domestic joint venture investment

bank, China International Capital Corporation, provides us with a

unique perspective on China’s development and with a unique opportunity to assist in the development of China’s economy and its

capital markets. We are engaged in a number of dialogs in China

across a wide variety of businesses, energy, technology, telecommunications, and banking, to name a few. We have been profoundly impressed with the high level of progress China has made

and by its consistent commitment to reforming its economy.

We believe economic stability in China during the Asian financial

crisis significantly contributed to the turnaround in the regional

economies and contributed to the global economic recovery. We believe China is deeply committed to developing its capital markets

and to becoming an even greater participant in the global economy.

We believe that the trade agreement reached by the U.S. and Chinese negotiators in November is a demonstration of that commitment. Finally, we believe the agreement will play a significant role

in advancing the restructuring that is the linchpin of economic reform in China.

Let me close with a personal observation. In my 25 years in

international finance, I have spent a great deal of time working

with emerging economies and emerging democracies. I have become

convinced that the economic and financial reform and political and

social reform are inextricably tied together. They are two sides of

the same coin. Once a country accepts as an imperative the need

to join the global economy, it has to make an implicit decision

about a number of non-economic issues. It must embrace the rule

of law or its trading partners will decline to enter into long-term

commercial agreements with it. It must open its lines of communication and make transparent its disclosures about itself or capital

will not flow across its borders and it must educate its people with

the breadth and depth not needed in a closed economy, if they are

to compete in a global one.

We urge you to support permanent normal trade relationship

status with China because we believe it is in the best interest of

the United States, the global economies and the world trading system.

Thank you very much for this opportunity to testify.

[The prepared statement of Stephan F. Newhouse follows:]

7

PREPARED STATEMENT OF STEPHAN F. NEWHOUSE, MANAGING DIRECTOR & VICE

CHAIRMAN, MORGAN STANLEY DEAN WITTER & CO.

Mr. Chairman and Members of the Committee. Good afternoon. I am Stephan

Newhouse, Managing Director and Vice Chairman of Institutional Securities and Investment Banking Group of Morgan Stanley Dean Witter & Co.

Morgan Stanley Dean Witter & Co. (the ‘‘Company’’) is a global financial services

firm that maintains leading market positions in each of its three business segments—Securities, Asset Management and Credit Services. The Company provides

its products and services to a large and diversified group of clients and customers,

including corporations, governments, financial institutions and individuals.

We support with enthusiasm your decision to hold these hearings to consider the

implications for America’s financial services industry of granting Permanent Normal

Trading Relations to China. We are honored to have been invited to testify and to

share with you Morgan Stanley Dean Witter’s views on this timely and critical public policy issue. Without a doubt, granting Permanent Normal Trading Relations—

or PNTR—to China is the single most important international trade issue to be considered by the 106th Congress and by this Administration.

Morgan Stanley Dean Witter has over 560 offices operating in 25 countries. We

have been active in China for almost two decades. We have offices in Beijing, Shanghai and Hong Kong. In 1995, Morgan Stanley Dean Witter became the first investment bank firm to participate in a domestic joint venture investment bank in China.

We know that the continued opening of foreign markets to U.S. goods and services

has been and continues to be an essential driver of this country’s economic growth

and success.

China, the world’s fifth largest market and the U.S.’s fourth largest trading partner, stands ready to join the biggest block of trading nations in the world—the

World Trade Organization. In order to do so, it has agreed to open its markets wider

than ever before, making unprecedented unilateral concessions that will dramatically increase U.S. exports of goods and services. Both President Jiang Zemin and

more particularly the Premier Zhu Rongi, have both put their personal and political

credibility on the line for WTO membership. They have done so in the belief that

economic openness and reform are the only answers to the economic challenges

faced by China over the next decade. This commitment to gain WTO membership

was underscored last Friday, by additional concessions made by the Chinese to

reach agreement with the European Union on the issue of China’s entrance into the

WTO. Parenthetically, that historic agreement with a group of trading partners,

which is in the aggregate larger than the United States, makes an optimal bilateral

trade relationship between China and this country even more imperative. We believe the United States must not miss this historic opportunity to embrace the commitments China has made and to welcome it fully into the world trading system

on a most favored nation basis.

The historic agreement reached by U.S. and Chinese negotiators in November

1999 is, as you are aware, both deep and broad-based, covering both the goods and

the services sectors. For the securities industry the commitments from China—including minority ownership in local securities firms and asset management firms—

create a strong platform for continued development of China’s capital markets. The

commitments also, importantly, include grandfathering of existing activities and investments.

The opportunities for financial services firms in China are enormous and will become even greater once China joins the WTO. For example, over the next decade,

the financial resources required to be invested in improvements to China’s communications and transportation infrastructure and energy-related capital equipment

are estimated to be over $1 trillion. The intermediation of both the domestic and

international capital flows required to fill these requirements is one of the major

business objectives of the next decade for U.S. financial services firms as well for

our competitors around the globe.

Herein lies the challenge. For if Congress fails to grant PNTR to China, when

China enters the WTO, American firms will be deprived of the benefits of China’s

commitments in all sectors, even while other countries reap those benefits. With

PNTR, U.S. firms, including financial services firms, will be able to enter—and expand—in China on the same terms as our international competitors.

At its core, bringing China into the WTO increases China’s ties with the international community. And when U.S. companies establish operations in China they

bring with them the best practices that they observe around the world.

Our own experience as a partner in China’s first domestic joint venture investment bank, China International Capital Corporation Limited (CICC), provides us

with a unique perspective on China’s development and with a unique opportunity

8

to assist in the development of China’s economy and its capital markets. We are engaged in a number of dialogues in China across a wide variety of businesses—energy, technology, telecommunications and banking, to name a few. We have been

profoundly impressed with the high level of progress made by China and by its consistent commitment to reforming its economy.

We believe economic stability in China during the Asian financial crisis significantly contributed to the turnaround in the regional economies and contributed to

the global economic recovery. We believe China is deeply committed to developing

its capital markets and to becoming an even greater participant in the global economy. We believe the trade agreement reached by US and Chinese negotiators in November is a demonstration of that commitment. Finally we believe the agreement

will play a significant role in advancing the restructuring that is the linchpin of economic reform in China.

Let me close with a personal observation. In my 25 years in international finance,

I have spent a great deal of time working with emerging economies and emerging

democracies, I have become convinced that economic and financial reform and political and social reform are inextricably tied together. They are two-sides of the same

coin. Once a country accepts as an imperative the need to join the global economy

it has made an implicit decision about a number of noneconomic issues. It must embrace the rule of law or its trading partners will decline to enter into long term commercial agreements. It must open its lines of communication and make transparent

its disclosures about itself or capital will not flow across its borders. And, it must

educate its people with a breadth and depth not needed in a closed economy if they

are to compete in an open global one.

We urge you to support Permanent Normal Trade Relations Status for China because we believe it is in the best interests of the United States, the global economy

and the world trading system.

Thank you again for this opportunity to testify. I will be pleased to answer whatever questions you have or to provide additional information for the hearing record.

Mr. OXLEY. Thank you.

Mr. Whittaker?

STATEMENT OF JAMES S. WHITTAKER

Mr. WHITTAKER. Chairman Oxley, members of the subcommittee,

good afternoon. My name is Jim Whittaker and I am director of

international public policy with Hewlett Packard Company. I am

testifying before you today as chairman of the U.S. High-Tech Industry Coalition on China. The Coalition is comprised of 13 high

technology trade associations, which represents U.S. manufacturers

of semiconductors, computers, electronics software, telecommunications equipment as well as U.S. service providers and Internet

companies.

U.S. China bilateral WTO accession agreement that Ambassador

Barshefsky negotiated is a solid win for the U.S. high-tech industry. Under that agreement, China is committed to eliminate tariff

and non-tariff barriers to trade, remove regulatory hurdles and investment restrictions on foreign firms. As a result, U.S. high-tech

industries are poised to expand sales and exports to this rapidly

growing market to increase high wage American jobs, and to maintain our technological leadership and competitiveness in international markets.

However, in order for industry to reap these benefits, congressional approval of PNTR is necessary. For this reason, we believe

that establishing permanent normal trade relations with China is

the most important vote that Congress will make in support of

American high-tech industry this year.

A few quick words about our industry. The high-tech sector is a

strong and important contributor to the U.S. economy. It is the

largest manufacturing sector in the U.S. employing 5 million AmerVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00012 Fmt 6633 Sfmt 6602 E:\HEARINGS\64766 pfrm03 PsN: 64766
9

icans last year. It is our Nation’s top manufacturing exporter with

25 percent of total exports, and its employees earn 82 percent higher than the average private sector worker.

Over the next few years, China is expected to become one of the

largest high technology markets in the world. According to International Data Corporation figures, annual growth rates for many

segments of the high-tech sector will be 20 to 40 percent annually.

Indeed, China’s semiconductor and cell phone markets are projected to be the world’s second largest by 2003, with a PC market

projected to be number two in the world next year. More than 20

million Chinese will be on-line next year, and we expect that to go

as high as 35 million in the following year.

Given these opportunities and the strong terms of the bilateral

agreement, China’s WTO accession will provide significant opportunities and benefits to the high-tech industry, including increased

exports and related jobs.

I would like to just take a few minutes to highlight a few of the

changes that will help us the most. One, China has agreed to adopt

the information technology agreement, which eliminates tariffs altogether on an array of IT and telecom products by the year 2005.

Two, China will, for the first time, permit American and other

foreign companies to directly import and export products. It will

also, for the first time, agree to permit us to distribute directly our

products and provide after-sales service repair and maintenance.

Three, China will immediately become subject to the TRIPs

agreement on intellectual property protection. We believe that the

TRIPs agreement is the best vehicle available to us to combat piracy of intellectual property and to support improved IT by Chinese’s governmental authorities.

Four, China has agreed to implement the TRIMS agreement

upon accession. This means that it will not condition investment

approvals, import licenses, or any other import approval on performance requirements of any kind, including local content requirements, technology transfer, or requirements to conduct R&D in

China.

Five, China has agreed that it will ensure that state-owned and

state-invested enterprises will make purchases and sales based

solely on commercial considerations providing U.S. firms with the

opportunity to compete on nondiscriminatory terms and conditions.

Six, China agreed, for the first time, to open its telecom market

to foreign service providers. In the important area of value-added

services, including Internet services, China has agreed to allow up

to 50 percent foreign ownership 2 years after accession. In addition,

China agreed to sign on to the WTO BTA agreement and committed to a set of regulatory principals contained in the so-called

reference paper to the BTA.

And finally, in the area of antidumping, the bilateral agreement

enables the U.S. to maintain strong protections against dumping

for 15 years. Since China’s economy is not fully market-oriented

yet, it is critical that the United States maintain its ability to utilize its existing non-market economy and methodology in the application of antidumping laws.

In conclusion, the American high-tech industry has been the forefront of U.S. economic expansion and technological leadership. AmVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00013 Fmt 6633 Sfmt 6602 E:\HEARINGS\64766 pfrm03 PsN: 64766
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bassador Barshefsky was able to obtain an historic market opening

package. We would hate to see these advantages to our foreign

competition. Granting China PNTR coupled with significant market reforms in China embodied in its WTO commitments will ensure our industry is able to participate fully in this critical market.

Along with many of America’s leaders across the political spectrum, we believe that engagement, not isolation, will lead to improved economic and social conditions in China. The terms for China’s accession in the WTO will help China to continue on its path

of economic reform, which we believe will lead to positive changes

in many areas. Already, American high-tech businesses are having

a positive impact on China by bringing our best practices in the

areas of human resource, environmental and business management

to China.

For these reasons, we support the establishment of PNTR with

China and are urging Congress to pass H.R. 4444.

Thank you, Mr. Chairman.

[The prepared statement of James S. Whittaker follows:]

PREPARED STATEMENT OF JAMES S. WHITTAKER, DIRECTOR, IMTERNATIONAL PUBLIC

POLICY, HEWLETT-PACKARD COMPANY, ON BEHALF OF U.S. HIGH-TECH INDUSTRY

COALITION ON CHINA

Chairman Oxley, members of the Subcommittee, good afternoon. My name is Jim

Whittaker, and I am Director of International Public Policy with Hewlett-Packard

Company. I have the honor of testifying before you today as the Chairman of the

U.S. High-Tech Industry Coalition on China.

The High-Tech Coalition on China is comprised of thirteen high-technology trade

associations, which work together on our highest priority public policy issue this

year—China’s accession to the World Trade Organization (WTO). The coalition represents U.S. manufacturers of semiconductors and semiconductor equipment and

materials, computers, electronics, software, and telecommunications equipment, as

well as U.S. service providers and Internet companies. A list of coalition members

is attached.

The U.S.-China bilateral WTO accession agreement reached on November 15,

1999 is a solid win for U.S. high-technology industries. In that agreement, China

committed to comprehensive reform of its economy, and to eliminate tariff and nontariff barriers to trade, regulatory requirements and investment restrictions. As a

result of this historic step, U.S. high-tech industries are poised to expand exports

to this rapidly growing market, increase high-wage American jobs, and continue our

technological leadership and competitiveness in international markets.

For our industry to reap the benefits of these market opening concessions that

China has made, however, Congressional approval of permanent normal trade relations (PNTR) with China is necessary.

IMPACT OF U.S. HIGH-TECHNOLOGY INDUSTRY ON THE U.S. ECONOMY

The high-tech sector is a strong and important contributor to the U.S. economy.

According to the American Electronics Association data from Cyberstates 4.0, the

high-tech industry is the largest manufacturing sector in the United States, employing 5 million Americans in 1999. This was twice as many as in auto manufacturing

and services, and far exceeds the one million workers in the chemical manufacturing

industry. The high-tech industry added over 1.2 million jobs to the U.S. economy

between 1993 and 1999, a 32 percent increase.

In addition, the high-tech industry also provides its employees with salaries 82

percent higher than the average private sector wage. In 1998, the average high-tech

wage was nearly $58,000 a year, while the average private sector wage was almost

$32,000. While high-tech wages increased 29 percent, private sector wages grew

only 8 percent between 1993 and 1998.

Federal Reserve Chairman, Alan Greenspan, recently reported that the high-tech

sector has been responsible for nearly half of U.S. domestic GDP growth since 1994.

Please see the attached chart.

In 1998, American high technology companies lead all other industries in privatesector expenditures on research and development (R&D). High-tech companies perVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 E:\HEARINGS\64766 pfrm03 PsN: 64766
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formed $55 billion in R&D—a 63 percent more than in 1993. Total industrial R&D

amounted to $145 billion in 1998, a 53 percent increase since 1993.

The high-tech industry is our nation’s the top manufacturing exporter. In 1999,

the high-tech sector exported $181 billion. High-tech exports comprised 25 percent

of total U.S. exports in 1999. Based on U.S. Commerce Department data, China represented the 14th largest high-tech export market in 1999, with high-tech exports

exceeding $3.3 billion—a 121 percent increase since 1993.

OPPORTUNITIES IN THE CHINESE MARKET

In the next decade, China is expected to become one of the largest markets in the

world. According to International Data Corporation figures, annual growth rates for

many high-tech products are increasing 20 to 40 percent. The following provides an

overview of the Chinese market for some of the key high-tech sectors.

Semiconductors and Semiconductor Equipment and Materials

The current semiconductor market in China is estimated to be up to $8 billion

per year. Some analysts expect it to become the third largest semiconductor market

by 2001 (ahead of Germany, but behind Japan and the United States) and the second largest by 2010. The current semiconductor equipment and materials market

in China is estimated to be over $1 billion per year and is projected to reach almost

$4 billion in 2003.

Computers

The market in China for computers is expanding rapidly, averaging 37 percent

growth per year for the past three years. The Chinese market will continue to

grow—International Data Corporation predicts that by 2001, China will be the second largest PC market after the US and Japan. More than 120 million Chinese citizens plan on buying a computer in the next two years.

Software

China’s software market is growing at 28 percent a year. High growth rates will

continue as Internet use in China continues to climb and piracy rates decrease. The

Internet is projected to reach an estimated 20 million people in China by the end

of 2000.

Telecommunications

China’s market for cellular telecommunications is growing at a tremendous rate.

By the end of 1999, China boasted approximately 40 million cellular subscribers,

bringing it closer to its target of becoming the world’s second largest cellular market

with approximately 60 million subscribers. Only the cellular market of the United

States is projected to be larger than China’s by the end of this year. With the market potential for 3rd generation mobile communications also taken into consideration, China promises market opportunities for years to come.

Internet

More than 9 million Chinese are already on-line, and in the next few years China

is expected to become one of the largest Internet markets in the world. This growing

market offers tremendous commercial opportunities to U.S. firms. By participating

in this market, U.S. Internet service and content providers can make sure that vital

social services—such as education, communications and telemedicine—are delivered

across the Internet. We can also lay the groundwork for e-commerce and the economic growth, productivity and jobs it will generate.

BENEFITS OF CHINA’S WTO ACCESSION

As the China accession negotiations began in earnest, the High-Tech Industry Coalition on China set forth its objectives for our U.S. negotiators. The package that

they have come back with meets those objectives.

Under the terms of the November 1999 bilateral agreement, China’s WTO accession would provide significant opportunities and benefits to U.S. high-tech industries. A summary of some of these key benefits follows.

• Information Technology Agreement: China has agreed to adopt the Information

Technology Agreement (ITA), which eliminates tariffs on products such as computers, telecommunications equipment, semiconductors, semiconductor manufacturing equipment, computer equipment and other high technology products. China

has agreed to eliminate nearly all of its IT tariffs (which currently average 13%)

by 2003, and the remainder by 2005.

The benefits to U.S. high-tech industries are clear: duty-free entry of U.S. products should result in increased exports, sales and market share of U.S. products. In

12

addition, American high-tech companies producing in China will have access to

lower cost inputs. Finally, China’s adoption of the ITA will help to combat smuggling, since the incentive for the creation a black market to circumvent tariff barriers will be removed. • Trading and Distribution Rights: China will, for the first time, permit American

and other foreign companies to directly import and export products—so-called trading rights. China has also, for the first time, agreed to permit American and other

foreign companies to directly distribute their products, including wholesale and retail and after-sale service, repair, maintenance, and transport.

For American high-tech industries, the right to provide direct service is essential

to control quality and ensure the authenticity of the spare parts being delivered. Indeed, in other important overseas markets, American firms increasingly are using

quality service as a strategic weapon against foreign competitors to win customers

and grow market share. The inability to deal directly with end-users is a particular

problem in the semiconductor industry, where the design and development of application-specific chips requires extensive contact between semiconductor producers

and the ultimate end-users of the chips.

Since China has agreed that all restrictions on trading and distribution rights will

be eliminated three years after accession for most sectors, the benefit will be the

ability for our industries to quickly excel in China’s rapidly growing, competitive information technology market. • Investment Restrictions: China has agreed to implement the WTO Trade-Related Investment Measures (TRIMS) Agreement upon accession. This means China

will eliminate and cease enforcing trade and foreign exchange balancing requirements. China will also eliminate and cease enforcing local content requirements,

and refuse to enforce contracts imposing these requirements. China will guarantee

that laws or regulations to the transfer of technology or other know-how will be consistent with WTO obligations to protect intellectual property rights and trade-related investment measures.

China has also agreed that, upon accession, it will not condition investment approvals, import licenses, or any other import approval process on performance requirements of any kind, including: local content requirements, offsets, transfer of

technology, or requirements to conduct research and development in China.

These provisions will help protect American firms against efforts by some Chinese

officials to force the transfer of U.S. commercial technology to Chinese firms, which

has been a significant issue for U.S. high-tech companies seeking market access or

the right to invest in China. • State-Owned and State-Invested Enterprises: China has agreed that it will ensure that state-owned and state-invested enterprises will make purchases and sales

based solely on commercial considerations, providing U.S. firms with the opportunity to compete for sales and purchases on non-discriminatory terms and conditions. This is an important point for U.S. high-tech industries, since state-owned

and state-invested enterprises currently control a significant share of domestic and

international trade in commercial high-tech goods in China. • Telecommunications Services: Included in China’s concessions in the telecom

sector, China agreed to open its telecom market to foreign service providers according to the following schedule:

• Phase-in of foreign participation in paging/value-added services in two years, allowing up to 50 percent ownership by foreign investors; • Phase-in of foreign participation in mobile/cellular services over five years, allowing up to 49 percent ownership by foreign investors; • Phase-in of foreign participation in fixed line/international long distance services

over six years, allowing up to 49 percent ownership by foreign investors.

In addition, China agreed to sign onto the WTO Agreement on Basic Telecommunications Services (BTA). The BTA commits participating countries to open

their telecom services markets. China has committed to a set of regulatory principles contained in the so-called Reference Paper to the BTA, and has therefore

made specific commitments to open up its telecom services markets. These include

providing access to the public telecom networks of incumbent suppliers under nondiscriminatory terms and at cost-oriented rates. China also agreed to technologyneutral scheduling, meaning technology choices are made as commercial decisions,

rather than government mandate.

The Ministry of Information Industry (MII) is preparing China for competition

from foreign service providers after China’s accession to the WTO. To meet this goal,

China’s second telecom carrier, China Unicom, is slated to buildout an additional

national cellular network in 2000 based on Code Division Multiple Access (CDMA)

technology. This development is very positive for U.S. telecom equipment manufacturers, as they are the world’s leading suppliers of this technology. In addition,

13

China introduced a new service provider into the market in 1999, China Netcom

(CNC). This new company will focus on the provision of Internet Protocol (IP) telephony, allowing more efficient use of bandwidth on the Chinese networks. • Intellectual Property: By joining the WTO, China will become subject to the

Agreement on Trade Related Aspects of Intellectual Property (TRIPs). Moreover,

China has agreed to be subject to all TRIPs obligations upon accession, without any

transition period. The TRIPs agreement is the best vehicle available to high-tech industries to combat piracy of intellectual property and to create a healthy environment for the development of information technology in China.

Industry experts estimate that 95 percent of the business applications software

used in China was pirated in 1998 (the last year for which data is available), depriving the software industry of nearly $1.2 billion in licensing revenue. If China were

to bring its legal system into compliance with the standards in the TRIPs Agreement, the U.S. software industry should be much more able to enforce its rights in

Chinese courts and administrative tribunals. However, the United States will be unable to ensure Chinese compliance with the TRIPs Agreement absent the grant of

PNTR to China. • Antidumping: The bilateral agreement enables the United States to maintain

strong protections against dumping. Since China’s economy is not fully market-oriented, it is critical that the United States maintains its ability to utilize its existing

non-market economy methodology in the application of U.S. antidumping laws. The

United States and China have agreed that the United States may maintain this current methodology for 15 years after the date of China’s accession to the WTO.

PNTR IS NECESSARY FOR THE U.S. TO BENEFIT FROM CHINA’S WTO ACCESSION

The United States must approve permanent normal trade relations (PNTR) status

for China in order for U.S. firms to receive the benefits of China’s accession to the

World Trade Organization (WTO). If China accedes to the WTO and the U.S. Congress does not pass legislation granting China PNTR, it is expected that the Administration would invoke its right of ‘‘non-application’’ under Article XIII of the WTO

Agreement, as has been done with respect to other countries subject to the JacksonVanik Amendment. This would be done at the time China formally accedes to the

WTO. Even though China would become a WTO member, the United States would

not treat China as a WTO member. Moreover, China would not be required to treat

the United States as a WTO member.

Without PNTR, an historic opportunity would be jeopardized for U.S. companies

and their workers. The terms of the landmark U.S.-China bilateral agreement concluded in November and all other terms of China’s WTO accession package would

not apply to U.S.-China trade and investment, except to the extent that existing bilateral agreements make the WTO agreement terms binding between the two countries.

While the United States would receive some modest benefits, such as tariff cuts,

under the terms of the 1980 bilateral agreement between the United States and

China, many of the hard-fought concessions by the Chinese are not covered by this

agreement. For example, China’s agreement to eliminate forced technology transfer

and investment requirements would not be extended to the United States. Nothing

in the 1980 agreement requires the Chinese government to ensure that its stateowned and state-invested enterprises make their purchases solely on commercial

terms, while China agreed to this commitment in the WTO accession agreement.

Without PNTR, U.S. companies would not benefit from China’s agreements to allow

distribution rights for foreign companies and to allow investment in telecom and

Internet services. Additionally, the United States would not have access to the WTO

dispute settlement process to enforce intellectual property and other rights in the

case of any noncompliance by China.

ANNUAL NTR EXTENSION IS NOT SUFFICIENT

Article I of the General Agreement on Tariffs and Trade (GATT) requires that

WTO members provide ‘‘unconditional’’ MFN treatment to other WTO members.

This principle is a cornerstone of the WTO and an open global trading system.

Some have argued that the United States can meet this unconditional MFN obligation, and thus be entitled to China’s WTO concessions, as long as Congress renews NTR on a continual basis. But under the Jackson-Vanik Amendment to the

Trade Act of 1974, China’s MFN status is tied to annual Presidential findings or

waivers regarding freedom of emigration, which can be overridden by Congress

through a joint resolution of disapproval. Continued annual renewal of China’s NTR

status would violate WTO rules because it would be conditional (on freedom of emigration per the Jackson-Vanik Amendment) and discriminatory (requiring proceVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00017 Fmt 6633 Sfmt 6621 E:\HEARINGS\64766 pfrm03 PsN: 64766
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dures for China that are not applied to other WTO members). Approval for permanent NTR is necessary to meet the WTO’s unconditional MFN obligation.

CONCLUSION

The American high-tech industry has been at the forefront of U.S. economic expansion and technological leadership. Granting China PNTR, coupled with the significant market reforms in China embodied in its WTO commitments, will enable

our industry to expand its market presence and business opportunities in this critical market.

Moreover, access to American commercial information technology enables people

worldwide to improve business efficiency across all sectors, enhance educational and

social opportunities, and connect with one another. Improved market access for U.S.

commercial information technology in China will help to advance economic and social reform in China. A timely congressional vote granting PNTR to China is a critical and necessary step toward securing this goal.

U.S. HIGH-TECH INDUSTRY COALITION ON CHINA

American Electronics Association; Business Software Alliance; Computer Systems

Policy Project; Computing Technology Industry Association; Consumer Electronics

Association; Electronic Industries Alliance; Information Technology Industry Council; National Venture Capital Association; Semiconductor Industry Association;

Semiconductor Equipment & Materials International; Software & Information Industry Association; Telecommunications Industry Association; and United States Information Technology Office.

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Mr. OXLEY. Thank you.

Ms. Valko.

STATEMENT OF CYNTHIA Y. VALKO

Ms. VALKO. Thank you, Mr. Chairman. I am grateful for the opportunity to offer New York Life International’s perspective on the

implications of China’s impending membership into the WTO. As

chair of the International Life Insurance Committee of the American Council of Life Insurers, I work closely with the colleagues

throughout our industry to promote a China agreement that addresses our most pressing commercial priorities in that market. We

have much to be enthusiastic about in the agreement negotiated by

U.S. Trade Representative Barshefsky’s team.

At the outset, I would like to cite a few key examples of how the

WTO agreement really offers a whole new basis for our industry’s

access in the China market. The provisions I am about to summarize represent the results of the WTO agreement negotiated between the U.S. and China, which we have studied in detail. The

EU concluded its own agreement with China last week and while

details are still emerging, we are hearing that that agreement may

have achieved some additional enhancements for life insurance,

particularly in terms of phase-in periods for a number of Chinese

commitments.

Because China’s final WTO package will be based on the best offers on the table, the benefits to the U.S. can only get better as a

result of any enhancements achieved as part of the EU agreement.

Today, the ability of our company and many others to obtain a license to sell life insurance in China is governed by a process that

is unpredictable, non-transparent and frequently politicized. Under

the WTO agreement, China has committed to granting licenses

based on clear-cut factors without easily manipulated economic

needs, tests or quantitative limits on licenses. Today, American life

insurers face geographic restrictions determining which Chinese

cities are open for business to their activities.

Under the WTO agreement, these restrictions will be eliminated

fully within 3 years of China’s accession, and a specified list of cities will be fully opened even sooner. Today, foreign life insurance

firms operating in China are not allowed to offer the full range in

financial products. Under the WTO agreement, companies like ours

will be able to sell health products within 4 years of China’s accession and pension group and annuity products within 5 years.

Today, foreign insurers in China are limited in their form of ownership and restricted in their choice of joint venture partners.

Under the WTO agreement, we will be able to select a Chinese

partner of our choice immediately upon China’s WTO accession

with a provision for 50 percent share in equity.

In short, these commitments represent a clear statement of the

political will of China’s leaders to open China’s financial services

markets to greater competition. In essence, China’s political leaders

are giving the country’s regulators and bureaucrats some extremely

significant marching orders and that, in the final analysis, is what

really matters in this agreement. The significance of China’s commitments is particularly striking in light of the tremendous potential of the Chinese market for life insurance. Although China has

35

more than one fifth of the world’s population, it currently accounts

for less than .2 of a percent of the world’s life insurance market.

Clearly, there is an immense room to grow.

The agreement offers us the possibility to participate in that

growth. China’s market liberalization steps will accelerate a process of awareness about life insurance. As China’s huge population

ages, the sheer number of elderly is stretching the traditional system beyond the breaking point. Recognizing this, individual Chinese are increasingly moving to assure their long-term social security by investing in life insurance and pension products. The WTO

agreement will accelerate that trend.

So the terms of the agreement are clearly good for U.S. providers

of life insurance and related products, but the financial services dimensions of the agreement will also contribute to a process of positive societal change in China. We know from experience that competitive and transparently regulated financial services systems are

at the very core of the entrepreneurship and economic freedom.

New York Life very much looks forward to being a part of that

process.

Mr. Chairman, China’s participation in the World Trade Organization is truly a momentous development. By approving PNTR,

Congress can send a strong signal that it recognizes those benefits,

for the citizens of both China and the United States, of China’s decision to play by global trade rules. Thank you very much for your

attention and for inviting me here today.

[The prepared statement of Cynthia Y. Valko follows:]

PREPARED STATEMENT OF CYNTHIA Y. VALKO, EXECUTIVE VICE PRESIDENT, NEW

YORK LIFE INTERNATIONAL, INC. AND CHAIRPERSON, INTERNATIONAL LIFE INSUR- ANCE COMMITTEE, AMERICAN COUNCIL OF LIFE INSURERS

Mr. Chairman, members of the Committee, I’m grateful for the opportunity to

offer New York Life International’s perspective on China’s impending membership

in the WTO, and the implications for an American life insurance company like ours.

As Chair of the International Life Insurance Committee of the American Council of

Life Insurers (ACLI), I’ve worked closely with colleagues throughout our industry

to promote a China agreement that addresses our most pressing commercial priorities in that market. I’m glad to report that we have much to be enthusiastic about

in the far-reaching agreement negotiated by U.S. Trade Representative Charlene

Barshefsky’s team.

In the life insurance and pension products sector, the agreement truly shifts the

basis for foreign companies’ participation in the Chinese market. I’d like to cite a

few key examples of how the agreement negotiated by the United States will improve our prospects in China.

I should note that last week’s agreement between the European Union and China

appears to encompass a number of elements which improve upon the deal negotiated by the U.S. team, particularly with respect to accelerated phase-ins of Chinese market-opening commitments. Details on the EU-China deal are still trickling

out, so I will focus today on the provisions of the U.S. agreement, which we’ve had

a chance to study. But I want to stress that our deal can only get better because

of what the EU has negotiated. Because China’s final WTO package will be based

on the ‘‘best’’ offers on the table, American insurance companies will benefit from

any enhancements that the European Union has in fact achieved.

Today, the ability of our company and many others to obtain a license to sell life

insurance in China is governed by a regulatory process that is unpredictable, nontransparent, and frequently politicized. Under the WTO agreement, China has committed to granting licenses based on clear-cut qualification factors, and without easily-manipulated economic ‘‘needs tests’’ or quantitative limits on licenses.

Today, American life insurers face geographic restrictions determining which Chinese cities are ‘‘open for business’’ to their activities. Under the WTO agreement,

these access restrictions will be eliminated fully within three years of China’s accession, and a specified list of cities will be fully opened even before that period expires.

36

Today, foreign life insurance firms operating in China are not allowed to offer the

full range of financial products. Under the WTO agreement, companies like ours will

be able to sell health products within four years of China’s accession, and pension,

group, and annuities products within five years.

Today, foreign insurers in China are limited in their form of ownership and restricted in their choice of joint venture partner. Under the WTO agreement, we’ll be

able to select a Chinese partner of our choice immediately upon China’s WTO accession, with a provision for a 50 percent share in equity.

China’s commitments in the life insurance sector represent a clear statement of

the political will of China’s leaders to open China’s financial services market to

greater competition. In the process, these reforms will significantly enhance the

ability of China’s citizens to control their financial destinies. By sending this political signal, and by committing China to fundamental reforms through binding WTO

obligations, China’s leaders are giving the country’s regulators and bureaucrats

some extremely significant marching orders. And that, in the final analysis, is what

really matters in this agreement.

The significance of these commitments is particularly striking when one considers

the future of the Chinese market for life insurance, pension products and other personal financial services. Although China has more than one-fifth of the world’s population, it currently accounts for less than two-tenths of a percent of the world’s life

insurance market. Even though the Chinese have one of the highest individual savings rates in Asia, China spends less on all forms of insurance than 28 U.S. states.

This disparity between China’s size and its currently underdeveloped insurance

market can be summed up in a single word: potential. The market-opening commitments contained in China’s WTO agreement are likely to lead to volume increases

that exceed 300 percent—more than $4.8 billion.

China’s market liberalization steps will accelerate a process of awareness about

life insurance and other personal financial management tools that is already underway in China, by virtue of changing attitudes about personal finance. As we have

seen so clearly in the Eastern European region, doubts about the solvency of staterun pension systems are increasing the demand for privately-held pensions, annuities and life insurance.

In China, this dynamic is particularly relevant in connection with emerging

strains on the traditional rural system of old age support. As China’s huge population ages, the sheer number of elderly will stretch the traditional rural system beyond the breaking point. Recognizing this, individual Chinese are increasingly moving to assure their long-term social security by investing in life insurance, pension

products, and other personal financial instruments. The WTO agreement will accelerate that trend, and will allow U.S. companies to participate more fully in it.

So the terms of the agreement are clearly very good for U.S. providers of life insurance and related financial products. But I think it is important to stress that

the financial services dimensions of the agreement will also contribute to a process

of positive societal change in China.

As members of the Committee are well aware, one of the key debating points regarding PNTR centers around the degree to which China’s membership in the WTO,

and its associated economic and trade liberalization commitments, will advance the

development of a more stable and democratic China. We have to be careful in this

argument. I think it is unwise to portray WTO membership as a sort of ‘‘silver bullet’’ that will rapidly transform Chinese society in a way that addresses many U.S.

policy concerns. There are no quick fixes to these problems, and we should not pretend that the WTO will provide such a fix.

But I do believe that U.S. goals can be achieved most effectively and most quickly

by granting China PNTR status, bringing it into the WTO and integrating its economy more deeply with that of the rest of the world. Moreover, I’m convinced that

the financial services dimensions of China’s WTO package speak eloquently to the

power of WTO accession to foster positive economic and social change in China.

We have seen over and over in the ‘‘newly industrializing’’ countries that competitive, dynamic, and transparently-regulated financial services systems are at the

very core of entrepreneurship and economic freedom. A mature and competitive financial services market creates stable pools for investment in infrastructure, housing, and other critical needs. Such a market also provides people with a larger set

of options about managing their financial destinies and long-term well-being. I am

convinced that the Chinese negotiators knew exactly what they were doing in offering such far-reaching ‘‘concessions’’ in the financial services area, because those very

‘‘concessions’’ are in fact critical to the development of strong social safety nets and

individual prosperity in China.

The investments that millions of Chinese make in an expanding array of personal

financial instruments will be translated into a stronger financial foundation for the

37

country as a whole. And just as the insurance industry in the United States has

enabled some of this country’s most significant investments in infrastructure and

productive enterprises, the expansion of China’s financial services market will reinforce the entrepreneurial spirit that is already at work creating a ‘‘new China.’’ New

York Life very much looks forward to being part of that process.

The bottom line is that China’s participation in the World Trade Organization is

a truly momentous development in that country’s evolution towards greater economic reform and political freedoms. Congress, by approving PNTR, can send a

strong signal that it recognizes the benefits—for the citizens of both China and the

United States—of China’s decision to play by global trade rules.

Thank you for your attention, and for inviting me to appear today.

Mr. OXLEY. Thank you.

Mr. Watkins?

STATEMENT OF JESSE J. WATKINS

Mr. WATKINS. I am here as managing director of my company

which is in New York, now that is New York and New Jersey. I

am representing the Council of Insurance Agents and Brokers,

which represent the Nation’s largest commercial agents and brokers for property and casualty insurance. I am also a director of

the U.S. China Foundation, which seeks to foster greater economic

and cultural relationships with our neighbors in the east.

At the outset, I want to thank Chairman Oxley and Congressman Towns for the great support you have given to us in our quest

to open Chinese markets to foreign brokers. As you know, insurance brokerage dropped off of the table during early negotiations

with the United States. In the Oxley-Towns letter to the Chinese

Ambassador in Washington back in March, you strongly urged the

Chinese Government to include this sector in the final Chinese

agreement, which was reached with the European Union.

I was in Hamburg, Germany last week at a meeting of the International Insurance Brokers Association, and I am delighted to report that the Chinese did concede to allow insurance brokers into

their agreement. Now that the EU has obtained this new important

concession from the Chinese, all brokers, including Americans, will

be beneficiary. The leadership of this subcommittee has made an

important difference in achieving this victory and we appreciate it.

Even without this concession, though, our association strongly believes that China should be part of the WTO. In the past year, I

personally have had an opportunity to travel to China to discuss

the need for promoting access for international insurance

brokerages to their market.

Unlike some of the other firms, my work has not been focused

singly on building a presence of my firm in the Chinese marketplace. Instead, I have been working with the Chinese to bring professionals to the U.S. to train them here so that they can build an

effective industry in China.

Ultimately, we hope to build the same kind of cooperative environment with the Chinese that we have built with Europe. We

stand to benefit to the extent that the Chinese ultimately will have

needs for property casualty insurance products that need to be

serviced both here in the United States and those products which

our clients need to be serviced locally in China. I am pleased to join

the delegation from the U.S. China Foundation to begin this effort

to extend economic and cultural ties to China. The extent of my acVerDate 11-MAY-2000 10:38 Sep 13, 2000 Jkt 064766 PO 00000 Frm 00041 Fmt 6633 Sfmt 6602 E:\HEARINGS\64766 pfrm03 PsN: 64766
38

tivities have been largely educational, and I believe strongly we

must encourage trade with China.

It is a simple issue. The Chinese are isolated, they can’t be educated. Active engagement in China in the trade’s sphere is an essential link to bringing economic prosperity and economic freedom

to China. Along the way, the prospects are limitless for American

firms to engage in these exciting opportunities. It is difficult to

argue that China’s entry into the mainstream of the world trading

system would not result in many positive benefits for the Chinese

people. Distribution of the economic rewards throughout a society

lead to greater political stability and ultimately a more Democratic

process. History has shown that a country is more likely to move

toward democracy when it has its own self-interest.

Membership in the WTO is clearly in China’s interest today. We

are suggesting that China’s inclusion can lead to greater cooperation, and as a result, our ability to influence human rights and

other crucial issues will increase significantly. This I know from

personal contact.

We cannot ignore the benefits to American business. China is one

fifth of the world’s population, and an on-tap potential for U.S.

businesses, many of which have already established offices in

China. The financial service industry is the crest of the Chinese expansion. The three pillars of banking, insurance and securities are

essential if that expansion is to continue, but those sectors must

have access to the market and be able to operate in a competitive

environment with clear rules and regulations.

The proposed structure would provide this to U.S. businesses. We

are joining in the view of the World Federation of Insurance Intermediaries who are meeting today in Lisbon, in which the Council

is also participating. If your vote this week fails, our efforts to

change China in a positive way will cease. Again, Mr. Chairman,

thank you for your work in advance of the cause and we appreciate

the opportunity to testify today.

[The prepared statement of Jesse J. Watkins follows:]

PREPARED STATEMENT OF JESSE J. WATKINS, MANAGING DIRECTOR, HERBERT L.

JAMISON & CO. LLC

This statement is submitted on behalf of the members of The Council of Insurance

Agents & Brokers (‘‘The Council’’). The Council is a national trade association founded in 1913 as the National Association of Casualty and Surety Agents. Since 1913,

The Council of Insurance Agents & Brokers has provided industry leadership while

representing the largest, most productive and most profitable commercial insurance

agencies and brokerage firms in the U.S., and around the globe. Council members

operate in over 3,000 locations and place nearly 80%—well over $100 billion—of the

U.S. commercial property/casualty premiums. In addition, Council members specialize in a wide range of insurance products and risk management services for business, industry, government and the public. Council members, who operate nationally and internationally, also administer billions of dollars in employee benefits.

Good afternoon, Mr. Chairman and members of the committee. I am Jesse Watkins, managing director of Herbert L. Jamison & Co. LLC, headquartered in West

Orange, NJ, with offices in New York. I have been an insurance broker at Jamison

since 1968, and I have been engaged in all aspects of our firm’s business, which includes a full array of property/casualty products and employee benefits, with a focus

on professional liability. Like many other insurance agencies and brokerage firms,

our business is conducted on a national scale; additionally, we place business in

international markets, and likewise receive the business of many companies that

are headquartered offshore. I also serve as a member of the Board of Directors of

the Council of Insurance Agents and Brokers.

39

At the outset, the Council would like to thank Chairman Oxley and Congressman

Towns for the great support that they have given to us in our quest to open Chinese

markets to foreign brokers. In their March 28 letter to the Chinese Ambassador Li

Zhaoxing, Chairman Oxley and Congressman Towns expressed the importance of

intermediaries. ‘‘We believe it is critically important that intermediaries be included

along China’s commitments for entry to the World Trade Organization,’’ they said.

The letter went on to urge the Chinese government to include this sector in the final

EU/China agreement.

The Council is very appreciative of these efforts and has made access to the Chinese insurance markets one of its highest priorities. Indeed, in the past year, I personally have had an opportunity to travel to China on two occasions to discuss the

need for promoting access for international insurance brokerages to their markets.

Unlike some other firms, my work has not been focused singularly on building a

presence for my firm in the Chinese marketplace. Instead, I’m working to bring Chinese professionals to the U.S. and to help train them to work effectively in this industry. Ultimately, we hope to build the same kind of cooperative environment with

the Chinese that we have already built with European firms. We stand to benefit

to the extent that the Chinese ultimately will have needs for property/casualty insurance products that need to be serviced in the United States.

I’ve been pleased to join with delegations from the U.S.-China Foundation to

begin this effort to extend economic and cultural ties to China. To the extent that

my activities have been largely educational to date, I have strong views in support

of China’s entry into the World Trade Organization. It is a simple issue. If the Chinese are isolated, they can’t be educated. Active engagement of China in the trade

sphere is an essential link in bringing economic prosperity and economic freedom

to the Chinese. Along the way, the prospects are limitless for American firms to engage in these exciting opportunities.

Last week, I attended meetings of international insurance brokers in Europe, and

I’m very excited to bring the news that the European Union successfully has persuaded the Chinese to include insurance brokerage as a part of their negotiated

agreement on WTO entry. As you know, insurance brokerage ‘‘dropped off the table’’

during earlier negotiations with the United States. Now that the EU has obtained

this new and important concession from the Chinese, all brokers—including American-based firms—will be the beneficiaries.

As noted at the outset, the crucial assistance of Chairman Oxley and Congressman Towns helped to make this Chinese concession a reality. Both of these leaders

wrote to the Chinese ambassador in Washington, strongly urging the Chinese government to include intermediaries in the agreement with the EU. This pressure was

also brought to the attention of our European counterparts, and helped create the

environment in which insurance brokerage remained a priority of negotiators. We

are extremely grateful for this important assistance, which came at a perfect time

in the negotiations.

Even had this development not occurred, however, it is important to note that we

would have strongly supported China’s entry into the WTO. It has long been recognized that liberalization of trade is critical to economic growth and stability. When

markets are opened and allowed to operate freely, society benefits from the prosperity created by a vigorous economy. Businesses flourish, jobs are created and living standards rise.

It is difficult to argue that China’s entry into the mainstream of the world trading

system would not result in many of these positive benefits for the Chinese people.

Furthermore, distribution of the economic rewards throughout a society can lead to

greater political stability and ultimately a more democratic process. Most Americans, I think, agree that such stability can be most readily accomplished through

an open and competitive marketplace.

We are not suggesting that we should ignore China’s many problems—the most

visible of which are human rights issues. And we are not suggesting that by

mainstreaming China that it would transform itself into a thriving democratic society overnight. Rather, history has shown that a country is more likely to move towards democracy when it is in its interest to do so. And membership in the WTO

is clearly in China’s interest today. We are suggesting that China’s inclusion in the

WTO can lead to greater cooperation and as a result our ability to influence human

rights and other critical issues will increase significantly.

Nor can we ignore the economic benefits to American businesses. China has onefifth of the world’s population and the untapped potential of that market is vast.

U.S. businesses are expanding at a rapid pace and many are establishing offices in

China, offering services and products to the Chinese people and local businesses

that are beginning to flourish in many areas of the country.

40

The financial services industry is on the crest of the Chinese expansion. The three

pillars of a competitive market—banking, insurance and securities—are essential if

that expansion is to continue. But those sectors must have access to the market and

be able to operate in a competitive environment with clear rules and regulations

that are not subject to the arbitrary whims of the government. The WTO structure

provides stability for US businesses operating abroad.

With the financial sector, a liberalized insurance market can play a key role in

enhancing such growth. The lowering of trade barriers to enhance the operation of

foreign-based insurance agents and brokers is integral to this process.

When barriers to foreign professional insurance intermediaries are lowered, benefits flow to all parts of the economy. One of the primary beneficiaries is the insurance consumer. A healthy insurance distribution system provides consumers with a

greater array of choice in insurance products and services. This in turn, allows commerce to flourish and the economy to grow.

In the 1950s, the manufacturing and service industries of the Western industrialized economies began to globalize and their insurance service providers began to

globalize alongside their customers. Initially, the geographic expansion of insurance

carriers and intermediaries was undertaken to ensure that the new risks associated

with their clients’ geographic expansion were identified and managed effectively.

This first stage of globalization not only improved the lot of those engaged in crossborder endeavors, but it also provided the host countries with the economic benefits

of goods and services, now manufactured locally, along with opportunities for local

vendors to form partnerships with foreign-based concerns and the creation of new

jobs to staff a modernizing economy.

The second stage in this process, from which much of the world today is deriving

benefits, involves providing insurance and risk management services to indigenous

or local businesses, especially those enterprises poised for growth and expansion beyond the borders of their home countries.

The process in which international intermediaries cultivate the business of homegrown companies is a crucial one for the China market. If unimpeded, this process

transforms the relationship between developed and developing countries from one

of producer-to-market to the more egalitarian one of competing producers. As the

developing economies take shape, openness to foreign insurance intermediaries can

make the difference between a country being included or excluded from the world

economy. The benefits of global trading are not possible without liberalized trade

in both insurance underwriting and distribution.

The need for insurance is clear and becomes more so with the increasing complexity of modern life. Without protection against the risk of expanding into unfamiliar territory, there would be few risk-takers and correspondingly little economic

growth. Insurance earns its place in the business world by its ability to make certain risks worth taking, i.e. by transferring some of it to a third party formed expressly to assume a portion of a company’s overall risk burden.

The contribution of insurance intermediaries may be less widely recognized, but

is no less significant. The indispensable function of agents and brokers is to guide

companies in this search for the most cost-effective way of managing risk. Agents

and brokers help companies find as much protection as they need, at the lowest

price possible and the best terms available.

Their contribution includes not just transferring risk to insurers, but evaluating

and implementing other means of funding for potential losses (such as captive insurance companies and other forms of self-insurance), providing services aimed at preventing losses in the first place (safety and other loss control programs), and providing services to minimize the cost of losses that do occur.

International intermediaries do not simply procure products and services; linking

their insurance and financial expertise with their expertise in client industries, they

are true market innovators. Because of their close relationship with clients, they can

often identify the need for a new product and may even create a suitable product

before the underwriters themselves can do so.

The natural development from pure insurance intermediaries to partners with clients in ‘‘enterprise risk-management’’ has been evolving. The process in countries

with newly-privatized economies or newly-liberalized financial sectors is bound to be

much faster as lessons learned over the years can be applied as needed.

The foreign offices of international intermediaries are largely staffed and often

headed by local inhabitants, whose knowledge of the local legal and economic conditions, as well as social and cultural mores, is indispensable. If you look at the overall geographic spread of intermediary networks, along with the make-up of their

professional service teams, its clear that intermediation as a service, beyond simple

placement of insurance, has become a worldwide commodity—a staple of modern

economic development serving the interests of all involved.

41

What is of benefit to the client is the combination of local service and international access offered. Through an international network, intermediaries can get

the best possible deal for clients because of their ability to tap into the worldwide

insurance marketplace. The more markets intermediaries can access for risk capital,

the better it is for the buyer. Intermediaries can ‘‘shop around’’ to get clients the

most protection for the least cost.

Intermediaries also bring to bear considerable experience and expertise that helps

clients in selecting markets that are both financially strong and well capitalized.

Since the goal is not just growth, but safe growth for clients, the ability to draw

on information about markets around the globe is key. Partnerships between local

and foreign insurers, or local and foreign intermediaries, can instantly give the domestic insurance community critical international links.

When intermediary operations are sufficiently liberalized, those producing goods

and services can take advantage of the more competitive financial atmosphere, making the most of their risk management budgets. The effect of such a combination

is to further propel economic growth in all quarters.

Finally, liberalization of insurance intermediaries is a necessary complement to

similar action in the insurance and reinsurance arenas. We recognize the importance of the US-China agreement reached last November to American interests and

the financial services industry. It provides broad access to the Chinese market for

banks, insurers and reinsurers. The initial failure of the US-China agreement to include insurance intermediaries was disappointing, because an offer made by the

Chinese last April would have eliminated many of the geographic and other restrictions on foreign insurance intermediaries. Under current rules, intermediaries can

only obtain a general business license in China, which places stringent restrictions

on what they can do and where they can operate. Furthermore, they can be subjected to the whims of the government at any time. What is given can be taken

away. It is therefore important that intermediaries have the same rights and protections that others in the financial services sector will receive once China accedes to

the WTO. Had the Chinese not made the concession last week to allow intermediaries access to their markets, China would have denied insurance consumers

the full benefits of a liberalized insurance marketplace.

We are very pleased that the Chinese are now demonstrating their commitment

to full market liberalization by providing intermediaries with the same level of access granted to insurance companies. Insurance companies and intermediaries work

closely together and it is difficult to imagine a viable system that allows insurers

broad access to consumers, but denies their agents and brokers the ability to distribute those products.

We are joined in this view by the World Federation of Insurance Intermediaries,

an organization representing over 500,000 professional insurance agents and brokers around the world, which is meeting this week in Lisbon with representatives

from our organization. If the vote in the House of Representatives fails this week,

it will be a severe blow to all of the participants in this international organization.

We understand the economic interests at hand in this debate and the value of

bringing China into the fold of the trading fraternity. China’s market provides enormous economic opportunities for US businesses and opens China to the benefits of

goods and services that can only lead to a higher standard of living, greater internal

stability and cooperation. The Council is on record for supporting market liberalization of economies around the world and will continue to do so. Again, Chairman

Oxley, we appreciate your and Congressman Towns’ continued support.

We appreciate the opportunity to express our comments today.

Mr. OXLEY. Thank you.

Mr. Yingling.

STATEMENT OF EDWARD L. YINGLING

Mr. YINGLING. I want to thank you, Mr. Chairman, for holding

this very important hearing. Our economy and our financial institutions are the envy of the world, but to sustain our growth, we

must continue to look for opportunities to open markets to U.S.

firms. Providing China with PNTR status is just such an opportunity. It will help to assure that China will adhere to international economic rules, treat businesses operating in the country

fairly, and provide American businesses, particularly small and

42

medium-size firms, greater access to the world’s largest emerging

market.

I would like to emphasize three points. First, granting PNTR status to China will promote stronger economic growth. Chinese firms

already have open access to U.S. markets, but up until now, U.S.

firms have found it difficult to reach Chinese consumers. With 1.2

billion people in China and GDP growth exceeding 10 percent per

year over the last decade, the potential export market for U.S. companies is extraordinary. Reducing barriers to trade and opening

markets will increase U.S. exports, create new jobs to support this

increase, and help sustain our current economic expansion.

Mr. Chairman, your State of Ohio is a good example. As you

know, Ohio is already a significant exporter of goods and services

to China. According to one recent study, Ohio exports to China in

1998 exceeded $500 million. The possibility for further exports from

Ohio and all other States, particularly given the infrastructure

needs that China faces, are substantial.

A second point granting PNTR will create new opportunities for

banks and financial service providers. The financial services industry is one area in which the U.S. leads the world. U.S. banking, securities and insurance firms are the most innovative and strongest

in the world. Opening foreign markets to financial services enables

us to leverage these advantages leading to more U.S. jobs.

In addition, and this is an important point, a local presence in

China by U.S. financial firms will help other U.S. firms take advantage of new opportunities. PNTR will mean a major presence by

U.S. financial institutions on the ground in China and U.S. financial institutions, say, for a small business in Ohio, can help pave

the way. They can provide the advice on how you get into that new

market, how you get the financing, how you get through the export

controls and the import controls, and that type of thing. If we give

that up to financial institutions from other countries, their first priority is going to be to help small and medium-size firms in their

country, not U.S. firms.

So having U.S. financial firms on the ground in China is a big

advantage to all U.S. firms. A special word is in order about agriculture. The ABA has many members which are small community

banks in agricultural areas. We have studied, in depth, the challenges that small rural communities face. To ensure the survival

of these communities, we must solidify increased agricultural exports. We saw the other side of that coin a couple of years ago

when Asia had its economic problems and the agriculture sector

went right into the tank. Passage of PNTR for China will help

small rural communities and their community banks.

Our third and final point is granting PNTR will keep the U.S.

on a level competitive playing field with our European and Asian

competitors. Today, there are over 54 foreign banks with a presence in China. Delaying adoption of PNTR will harm U.S. banks

as European and Japanese banks seize the opportunity to gain

market share at U.S. banks’ expense. Such a situation will not only

hurt U.S. financial firms in China, it will give our financial services

competitors a stronger, broader base from which to compete

throughout the world.

43

It doesn’t just hurt us in China. It will hurt us throughout the

world. In other words, failure to pass PNTR for China will hurt our

competitive position, not just in China, but everywhere, because

our competitors will have a stronger worldwide base than we will.

Thank you for the opportunity to present the views of the ABA.

[The prepared statement of Edward L. Yingling follows:]

PREPARED STATEMENT OF EDWARD L. YINGLING ON BEHALF OF THE AMERICAN

BANKERS ASSOCIATION

Mr. Chairman, I am Edward Yingling, Deputy Executive Vice President and Executive Director of Government Relations for the American Bankers Association

(ABA). ABA brings together all elements of the banking community to best represent the interests of this rapidly changing industry. Its membership—which includes community, regional, and money center banks and holding companies, as well

as savings institutions, trust companies, and savings banks—makes ABA the largest

banking trade association in the country.

I want to thank you, Mr. Chairman, for holding this very important hearing. The

financial services industry in the United States has been central to the economic

expansion that we have enjoyed over the last decade. Our economy and our financial

institutions are the envy of the world. To sustain our preeminence, we must continue to look for opportunities to open markets to U.S. firms. Providing China with

permanent normal trade relation (PNTR) status is just such an opportunity. It will

help to assure that China will adhere to the international economic rules, will treat

businesses operating in the country fairly, and will provide American businesses—

particularly small- and medium-sized firms—greater access to the world’s largest

emerging market. Not only will it stimulate economic growth in the U.S., but it will

certainly boost economic growth in China and create a base for economic and social

reform.

In my statement today, I would like to emphasize three points:

• Granting PNTR will promote stronger economic growth in both countries;

• Granting PNTR will create new opportunities for banks and financial service providers; and

• Granting PNTR will keep the U.S. on a level competitive playing field with our

European and Asian competitors.

I would like to touch briefly on each of these points in my statement today.

GRANTING PNTR WILL PROMOTE STRONGER ECONOMIC GROWTH IN THE U.S. AND CHINA

Granting PNTR is in the best interests of both the U.S. and China. Chinese firms

already have open access to US markets, but up until now U.S. firms have found

it very difficult, in some cases impossible, to reach Chinese consumers. The historic

trade agreement reached in November of last year, which paved the way to China’s

entry in to the World Trade Organization (WTO), was an important step in opening

Chinese markets to U.S. goods and services.

The potential economic benefits are striking. With 1.2 billion people and GDP

growth exceeding 10 percent per year over the past decade, the potential export

market for U.S. companies is extraordinary (see Figure 1). In spite of current restrictions, China has become America’s fourth largest trading partner, with total

trade exceeding $95 billion in 1999 (see Figure 2). The Congressional Research Service projects that U.S. exports to China will grow as much as $13 billion annually

over the next 5 years, supporting as many as 200,000 jobs in the U.S.

The reduction in tariffs will help both large and small firms. For example, Chinese tariffs on industrial and agricultural goods will fall by 50 percent or more over

five years. This will substantially boost the potential market for U.S. exports. In

fact, the United States Department of Agriculture estimates that improved access

to China will increase agricultural exports by $2 billion per year by 2005 and will

account for over one-third of US agricultural exports over the next decade. Moreover, China has committed to eliminating agricultural export and domestic subsidies, which have displaced U.S. exports in other foreign markets.

44

1Fung, K.C. and Lau, Lawrence, ‘‘New Estimates of the United States-China Bilateral Trade

Balances,’’ March 1999, pg 9. It is estimated that over 40 percent of U.S. goods exported to Hong

Kong are then shipped to China.

The elimination of tariffs by 2005 on computers, semi-conductors and other hightech products will also significantly boost the potential exports for the U.S. hightech sector. There is no doubt that this sector has been a driving force behind the

economic performance in the U.S. over the last five years. Exports to China from

this sector have already grown rapidly over this period. The opening of new markets, under fair competitive rules, will help sustain this competitive advantage of

U.S. firms.

Mr. Chairman, your state of Ohio is already a significant exporter of goods and

services to China and can serve as an example of what is at stake. According to

the Massachusetts Institute of Social and Economic Research, Ohio exports to China

in 1998 exceeded $260 million. Including goods from the U.S. going through Hong

Kong to China, as well as exports from other states that pass to China through Ohio

ports, adds another $256 million to the Ohio export total, according to K.C. Fung

and Lawrence Lau.1 The possibilities for further exports from key Ohio industries

such as industrial machinery, computers, instruments, fabricated metal products,

electronic and electric equipment, and chemicals are substantial—particularly given

the new infrastructure requirements that will face China over the next decade.

Importantly, China is also reducing non-tariff barriers. For example, U.S. exporters will be able to reach Chinese consumers directly, and provide services in ways

that could not have been done before. By increasing competition and eliminating the

required use of middlemen, Chinese consumers will enjoy lower-priced and higherquality goods and services.

The net effect of reducing barriers to trade and opening markets is that exports

from the U.S. and elsewhere will increase substantially. China’s trade now accounts

for 3 percent of world trade. Given the potential size of the market, there is plenty

of opportunity for companies around the world to market and sell products to Chinese consumers. The result will be increased economic growth in China, as well as

economic growth and new jobs in the exporting countries.

GRANTING PNTR WILL CREATE NEW OPPORTUNITIES FOR BANKS AND FINANCIAL

SERVICE PROVIDERS

The financial services sector is a key component of U.S. economic growth and development (see Figure 3). The opening of China’s markets to financial firms presents

tremendous opportunities for U.S. banks and financial firms and will add to U.S.

economic growth.

In this context, it is important to stress that the arena of financial services is one

in which the United State clearly leads the world. In banking, securities, insurance,

and other aspects of financial services, U.S. firms are generally regarded as the

most innovative and the strongest. Opening foreign markets to our financial services

firms enables us to expand these advantages, which of course lead, to more jobs in

the U.S. In addition, to the degree U.S. financial institutions can set up local offices

and come to know local economies, other U.S. firms will benefit, as the financial

firms can provide advice on how to compete in those local economies. In other words,

as China opens up, competitive strength of U.S. financial service companies will

help promote not only financial service jobs in the U.S., but jobs in other sectors

as well.

45

Due to market restrictions, investment and lending in China has been limited.

For example, direct investment in China lags far behind other countries (see Figure

4). According to Goldman Sachs, China’s domestic banking market is $1.1 trillion

in deposits and $1 trillion in loans. As of June 1999, deposits and loans had grown

20 percent and 16 percent, respectively.

U.S. banks will have full market access by 2005 after China’s accession into the

WTO. This means that U.S. banks will be allowed to engage in all transactions that

Chinese banks conduct today, including engaging in local-currency transactions with

Chinese companies (within two years) and retail banking transactions with Chinese

consumers (within five years). Moreover, all limits on geographic expansion within

China will be lifted within five years. China will allow foreign institutions to establish direct branches or be allowed 100 percent ownership in subsidiaries without

any numerical or geographic limitations. This is on par with what OECD countries

have agreed to and is superior to commitments by most other developing countries.

Foreign financial firms will also be allowed to acquire equity stakes (with limitations) in Chinese fund management companies and underwrite domestic securities.

Products that U.S. banks would likely offer include foreign exchange, hedging,

local-currency-based project finance and interbank transactions, syndicated lending,

and cash management for large corporations. Chinese financial consumers will also

benefit as consumer credit markets become more efficient and more readily available. One of the largest financing needs will be for infrastructure and telecommunication improvements, estimated to be $1 trillion. China’s private and public sectors

cannot finance this alone; foreign sources of funding will be required.

Equally important is that the best practices of U.S. banking institutions will be

exported to China. This will lead to more effective risk management, transparency

of financial balance sheets and appropriate allocation and utilization of capital and

credit.

Changes will also occur in insurance and securities markets as others on this

panel will testify. Relative to the size of the economy, capital markets are small.

This fact does suggest substantial growth potential. However, major steps will be

required to complete a modern regulatory and legal framework.

Not only are there direct benefits from providing financial products and services

in China, but there are many indirect benefits from U.S. banks as well. For example, U.S. banks provide export credits, trade finance and foreign exchange products

to U.S. companies. They also lend to exporting companies such as the agricultural

sector. In fact, it has been estimated that 80 percent of all exports to those with

in China are produced by small to mid-sized firms. These companies, of course, rely

on local bank financing for production and inventory control.

A special word is in order about agriculture. The ABA has many members which

are small community banks in agricultural areas. We have studied in depth the

challenges small rural communities face. Many believe the most important thing

that could be done to ensure the survival of such communities is to solidify and increase agricultural exports. Clearly we saw the impact of the Asian economic crisis

a few years ago on these communities. China is obviously a huge market for U.S.

agriculture. As is the case with financial services, agriculture is an arena in which

U.S. producers shine. Passage of PNTR for China will help small rural communities

and their community banks.

There are of course many challenges ahead, and the difficulties they present

should not be underestimated. These include the promotion of private sector firms,

the need to clean up bad loans and enhance competition among banks, and the need

to develop well-functioning financial markets. As China’s economic wealth increases,

however, these changes should occur, as will the demand for more financial services.

46

GRANTING PNTR WILL KEEP THE U.S. ON A LEVEL COMPETITIVE PLAYING FIELD WITH

OUR EUROPEAN AND ASIAN COMPETITORS

It is important to keep in mind that China will receive the benefits of greater

trade regardless of whether the U.S. takes this important step. China’s accession

to the WTO is near certain. The critical question, therefore, is whether U.S. banking

and financial services firms (as well as firms in other sectors) will be allowed to benefit from the opening of China’s markets.

As indicated above, China will face major infrastructure, telecommunications and

energy needs requiring significant foreign capital and financing. Modernizing its

economy requires a significant capital investment. With the PNTR, U.S. banking institutions will be able to provide new products and services. But the competition for

these markets will be intense. Today there are over 50 foreign banks with a presence in China. Delaying adoption of PNTR will harm U.S. banks as European and

Japanese banks seize the opportunity to gain market share at U.S. banks expense.

Such a situation would not only hurt U.S. firms in China, it would give our competitors a stronger, broader base from which to compete throughout the world. U.S. financial services companies must be allowed to maintain our preeminent status by

opening markets for our products and services.

Mr. OXLEY. Thank you.

And our final witness, Mr. Mastel.

STATEMENT OF GREG MASTEL

Mr. MASTEL. Thank you, Mr. Chairman. My name is Greg

Mastel. I am the director of the Global Economic Policy Project of

the New America Foundation. I am happy to be here today before

the subcommittee. I want to testify today regarding the granting of

PNTR status to China and China’s membership in the World Trade

Organization. I plan to focus my remarks on the WTO accession

agreement with China and its record of keeping trade commitments and the ability of the WTO to cope with China.

On paper, many have mentioned the WTO accession agreement

negotiated between the United States and China has many positive

features. The recent bilateral WTO accession agreement between

the EU and China in which all WTO members will benefit appears

to further strengthen the ultimate WTO accession terms with

China. However, the key question remains: Will China make good

on its promises? Ultimately, the WTO is a trade agreement. It has

a detailed process for enforcing compliance, but as the ongoing conflict between the United States and Europe on several agricultural

issues demonstrates, that process has a number of flaws and implementation of promises and dispute settlement panel decisions is far

from automatic.

The best indicator of China’s willingness and ability to implement the promises it has made in the WTO context is its record

in implementing other trade agreements. In the last decade, the

United States and China have concluded a number of major trade

agreements covering topics from protection of intellectual property

to textile imports.

A detailed record of China’s compliance with these agreements is

included in a recent article I wrote for the Weekly Standard, which

I asked to be included in the record of the hearing. The conclusion

that can easily be drawn from the Chinese trade history is that

China has a poor record of keeping its trade promises that is has

made to the United States. Every major trade agreement the

United States and China have struck has been dogged by repeated

instances of Chinese noncompliance, and at times, open violation of

the terms of the agreement.

47

China’s supporters often point to several understandings struck

on intellectual property as evidence of China’s willingness to keep

its trade commitments. Without question, the United States has invested a much greater effort in enforcing agreements on this topic

than any other. In most areas, the United States has not seriously

challenged China’s agreement violations. With regard to intellectual property piracy, however, the United States has formally

threatened to impose trade sanctions on China on at least three occasions to force China to live up to its bilateral agreements on the

topic.

As a result of this pressure, there is evidence that China has

made an effort to curb piracy. As any informed observer would concede, however, piracy of intellectual property, often directly involving Chinese Government ministries, the People’s Liberation Army,

or the relatives of China’s leaders, remains a widespread problem

in China. In fact, industry estimates of the piracy problem in China

are that piracy rates are over 90 percent in most categories, and

that total losses are actually higher than they were in 1995 when

the Clinton administration began intense efforts to enforce the

agreement. Moreover, the progress that has been made is the direct

result of repeated threats of sanctions by the United States. Without these threats, China is likely to have made little progress in

fulfilling its negotiated promises.

Often observers seem to assume that the WTO will automatically

be able to improve China’s compliance with its trade agreements.

There is simply no basis for this assumption. The WTO has the potential strengths over bilateral understandings of obligating China

to meet a wider array of commitments and bringing some multilateral pressure to bear on China to reform its trade policies.

Unquestionably, these are positive features, but the WTO is not

well suited to policing China. The WTO is the ultimate rules-based,

market-oriented organization. The fundamental problem is that

China is neither a rules-based country nor a fully market-oriented

economy, the ultimate square peg in a round hole.

Given the arbitrary and non-transparent manner in which Chinese ministries often make trade policy, it is difficult to even determine exactly what Chinese trade policy is in some areas, let alone

actually win a WTO dispute settlement panel finding against

China. As a result, the WTO is likely to suffer from exactly the

same type of compliance problems in China that have plagued bilateral trade agreements, and the United States will have given up

its option to impose bilateral trade sanctions on China to enforce

the agreements. At some point China, should become a WTO member.

In a perfect world, it may be wise to keep China outside the

WTO for a few years to allow its legal system to mature and the

economic reform process to advance further. But policy is not made

in a perfect world. I am cautiously willing to support China’s

WTO’s membership, provided the United States invest time and effort to enforce the agreement. Congress could play an important

role in ensuring the necessary time and energy is devoted to enforcement.

In general, the Congress has taken more interest in enforcing

trade governments than various administrations. In the case of the

48

Clinton administration, much critical work is taking place in the

last days of the administration at a time when many administration officials seem eager, perhaps too eager to complete China’s

WTO accession and convince Congress to vote for PNTR.

PNTR is the Congress’ major point of leverage vis-a-vis the administration in China. It will be wise, in my opinion, for the Congress to withhold its final vote on PNTR until the WTO accession

process is complete. Failing that, Congress should at least insist

that the final WTO accession protocol pay particular attention to

enforcement issues and pass legislation to ensure regular U.S. efforts focused on enforcement.

Thank you, Mr. Chairman.

[The prepared statement of Greg Mastel follows:]

PREPARED STATEMENT OF GREG MASTEL, DIRECTOR, GLOBAL ECONOMIC POLICY

PROJECT, NEW AMERICA FOUNDATION

Mr. Chairman and Members of the Subcommittee, my name is Greg Mastel and

I am Director of the Global Economic Policy Project at the New America Foundation.

I appreciate the opportunity to testify today before the Committee regarding the

prospect of granting Permanent Normal Trade Relations status to China and China’s membership in the World Trade Organization (WTO).

I plan to focus my remarks on the WTO accession agreement with China, China’s

record of keeping trade commitments, and the ability of the WTO to cope with

China.

THE WTO ACCESSION AGREEMENT

On paper, the WTO accession agreement negotiated between the United States

and China has many positive features. The recent bilateral WTO accession agreement between the EU and China—from which all WTO members will benefit—appears to further strengthen the ultimate WTO accession agreement with China.

However, the key question will remain: ‘‘Will China make good on its promises?’’

Ultimately, the WTO is a trade agreement. It has a detailed process for enforcing

compliance, but as the ongoing conflict between the United States and Europe on

several agricultural issues demonstrates, that process has a number of flaws and

implementation of promises and dispute settlement panel findings is far from automatic.

The best indicator of China’s willingness and ability to implement the promises

it has made in the WTO context is its record in implementing other trade agreements.

In the last decade, the United States and China have concluded a number of

major trade agreements covering topics from protection of intellectual property to

textile imports. A detailed record of China’s compliance with these agreements is

included in a recent article I wrote for the Weekly Standard, which is attached.

The conclusion that can immediately be drawn from the record is that China has

a poor record of keeping the trade promises it has made to the United States. Every

major trade agreement the United States and China have struck has been dogged

by repeated instances of Chinese non-compliance and, at times, open violation of the

terms of the agreement.

China’s supporters often point to the several understandings struck on intellectual

property as evidence of China’s willingness to keep its trade commitments.

Without question, the United States has invested a much greater effort in enforcing agreements on this topic than any other. In most other areas, the United States

has not seriously challenged China’s agreement violations. With regard to intellectual property piracy, however, the United States has formally threatened to impose

trade sanctions on China on at least three occasions to force China to live up to bilateral agreements on the topic.

As a result of this pressure, there is evidence that China has made an effort to

curb piracy. As any informed observer would concede, however, piracy of intellectual

property—often directly involving Chinese government ministries, the People’s Liberation Army, or the relatives of China’s leaders—remains a widespread problem in

China.

In fact, industry estimates of the piracy problem in China are that piracy rates

continue at over 90 percent in most categories and that total losses are actually

49

higher than they were in 1995 when the Clinton administration began intense efforts to enforce the agreement.

Moreover, the progress that has been made is the direct result of repeated threats

of sanctions by the United States. Without these threats, China is likely to have

made little progress in fulfilling its negotiated promises.

THE WTO AND CHINA

Often, observers seem to assume that the WTO will automatically be able to improve China’s compliance with its trade agreements. There is no basis for this assumption.

The WTO has the potential strengths over bilateral understandings of obligating

China to meet a wider array of commitments and bringing some multilateral pressure on China to reform its trade policies.

Unquestionably, these are positive features, but the WTO is not well suited to policing China.

The WTO is the ultimate rules-based, market-oriented organization. The fundamental problem is that China is neither a rules-based country, nor a fully marketoriented economy.

Given the arbitrary and non-transparent manner in which Chinese ministries

often make trade policy, it may be difficult to even determine exactly what Chinese

trade policy is in some areas, let alone actually win a WTO dispute settlement panel

finding against China.

As a result, the WTO is likely to suffer from exactly the same type of compliance

problems in China that have plagued bilateral trade agreements with China. And

the United States will have given up its option to impose bilateral trade sanctions

on China to enforce the agreements.

CONGRESS’S ROLE

At some point, China should become a WTO member. In a perfect world, it may

be wise to keep China outside the WTO for a few years to allow its legal system

to mature and its economic reform process to advance further.

But policy is not made in a perfect world.

I am cautiously willing to support China’s WTO membership provided the United

States invests time and effort to enforce the agreement.

Congress could play an important role in assuring that necessary time and energy

is devoted to enforcement. In general, the Congress has taken more interest in enforcing trade agreements than various administrations.

In the case of the Clinton administration, much critical work is taking place in

the last days of the administration, at a time when many administration officials

seem eager—perhaps too eager—to complete China’s WTO accession and convince

Congress to vote for PNTR.

PNTR is the Congress’ major point of leverage vis-a`-vis the administration and

China. It would be wise for the Congress to withhold its final vote on PNTR until

the WTO accession process is complete.

Failing that, Congress should insist that the final WTO accession protocol pay

particular attention to the enforcement issue and pass legislation to ensure regular

U.S. efforts focused on enforcement.

Thank you, Mr. Chairman.

50

51

52

53

Mr. OXLEY. Thank you. Thanks to all of our panel. Let me begin

with my questions before yielding to my friend from New York. Let

me ask Mr. Newhouse, you mentioned that Morgan Stanley has

been in China for over two decades. Are there other comparable

American companies, securities firms that are broker dealers and

investment houses that are in China as well?

Mr. NEWHOUSE. I would have to say not comparable, in that

there has been only one license granted for a joint venture investment bank, and that was the Morgan Stanley and CICC. It is currently contemplated there will be a number of additional, and this

would have happened with or without a WTO quite frankly, a number of additional joint venture licenses granted within the next 12

to 18 months. Setting that aside, the opportunity exists currently

for virtually all international financial intermediaries to intermediate, create between China and in the global financial markets.

In other words, to operate as underwriters and distributors for external financings done by Chinese enterprises and by the government. So many of us compete in the global markets. Currently

there is only one joint venture investment bank that is domestic.

Mr. OXLEY. What about European firms or other firms from, say,

South Korea or Japan? Are they entrenched in China?

Mr. NEWHOUSE. Currently they are on the same status as the

U.S. firms, but it is clear, as I said, with the momentum to import,

if you will, transfer technology that with membership in WTO,

China will be asking other international financial firms to embark

in joint ventures for this technology transfer with Chinese firms.

Obviously, this country’s failure to grant normalized trade relationships would disqualify us from that. So I would say if this bill were

not passed, you would see joint ventures that occur over the next

12 to 18 months. As I said, there will be several involving partners

not from the United States, but solely from Europe and Japan.

Mr. OXLEY. Mr. Whittaker, you mentioned there are 20 million

Chinese on-line currently; is that correct?

Mr. WHITTAKER. That should be by the end of this year, yes.

Mr. OXLEY. By the end of this year. How would that compare to

the number of Americans on-line?

Mr. WHITTAKER. I don’t know for sure, 22 million now.

Mr. OXLEY. So they are pretty close to us right now.

Mr. WHITTAKER. Growing very, very rapidly.

Mr. OXLEY. Frankly, I was struck by the phone calls that you got

this morning. It pulled me away from Sportscenter. That is how

fascinating it was. It was interesting because I was struck by the

lack of information that most of the callers had, and frankly it was

real scary. I thought you did a good job of handling it, but it was

obvious that there were a lot of folks that didn’t have a whole lot

of information in that regard. They probably don’t have a really

firm grasp of what is really going on in China. Was that your impression?

Mr. WHITTAKER. That was my impression. It is obviously an emotional issue. There are any number of reasons why you might not

like China or have the wrong impression of what is going on or

have the wrong impression of this agreement, and that certainly

came out this morning.

54

Mr. OXLEY. A lot of the critics of the PNTR say, well why should

we reward China for, and then fill in the blank, whatever this particular transgression is, and the labor unions are talking about not

giving China a blank check, whatever that means. But when I look

at the agreement, all the concessions are on the side of the Chinese. We are not giving up anything, and they are basically making

muck at opening concession in virtually every area. They are going

from 100 percent on automobiles down to 25 percent immediately

on the farm products, opening up markets for financial services

that we are talking about today, and it boggles my mind to think

that somehow we are doing them a favor by passing PNTR. Yet

that is the kind of rhetoric we hear around these halls virtually

every day lately. It is mind boggling.

Anyone else have any comment on that?

Mr. NEWHOUSE. I do. I would make this observation. The Chinese are also very aware of that fact. From their perspective, there

is no economic reason why the United States would fail to pass this

status for them because, in fact, all the benefits are to the United

States.

Mr. OXLEY. Where is the largest opposition in China to this

agreement?

Mr. NEWHOUSE. Basically, in those who want to keep the markets close, for example, the telecommunications industry, who

wants to allow almost no investment. As you know, when Premier

Zhu Rongji went home after his first attempt to negotiate an agreement here, the conservative powers over there made life very difficult for him. From the Chinese perspective, if there is no economic reason for us to oppose this agreement, the only reason for

opposition must be some kind of basic hostility to China, and that

is their attitude toward what this vote means. If there is no reason

for us to do it for economics, we must be doing it for some other

reason.

Mr. OXLEY. Anybody else?

Mr. MASTEL. If I could take issue with the statement a little bit.

I support PNTR, as I said, in my testimony. But it simply is not

true that the U.S. gives up nothing in the agreement. There are

two major things the U.S. gives up. By making China a WTO member, we phaseout the textile restrictions faster than we otherwise

would. That means China gets more access to the U.S. textile market than it otherwise would if it remained outside. Most importantly, the reason that China began this whole effort to enter the

WTO was to get some assurance that it would be free from the

threat of U.S. Unilateral sanctions as we threaten every year to

withdraw them within, as we have threatened a number of times

to impose sanctions on them.

Those are pretty good reasons. Those are pretty compelling reasons on China’s behalf. I think it still makes sense to grant PNTR,

but it is not true we don’t give up anything in the debate.

Mr. OXLEY. Give me one example of how yearly votes on most favored nation has somehow changed attitudes or behavior on the

part of the Chinese.

Mr. MASTEL. I didn’t say it has changed attitudes or behavior on

the part of the Chinese. I think, in fact, the annual threat ran out

of credibility about 5 or 6 years ago, but the threat of sanctions has

55

made a difference. In fact, the sanctions on intellectual property,

as I explained in my testimony, is one of the important factors to

push China toward better enforcement. The threats have some impact on China. That is, as I said, the whole reason that China

began to go down the road for WTO membership was to get some

assurance it would not be threatened by unilateral sanctions. They

are not a bunch of rues. They have done a pretty good job of negotiating the agreement that achieves that goal for them. The U.S.

Achieves many things, as you pointed out, but China gets some

things, too.

Mr. OXLEY. It is obvious that China is going to join the WTO

whether we vote tomorrow on PNTR or not; is that correct?

Mr. MASTEL. I think it is very likely, yes.

Mr. OXLEY. As a matter of fact, this administration has made it

clear they would not oppose China entry into the WTO, and after

the European deal last week, it is pretty clear that they will join

the WTO. The real issue is whether we are going to take yes for

an answer in regard to all of these concessions. That is basically

the issue. I have run over time. Let me recognize my friend from

New York, Mr. Towns.

Mr. TOWNS. Thank you very much, Mr. Chairman. Let me begin

with you, Mr. Mastel. I am concerned about, it was your characterization of China in its failure to comply with commitments that it

has made in the past. I note that you say China has failed even

to make public its laws and regulations that pertain to foreign

trade. What does this say about what our expectations should be

that China will comply this time around, with its commitments

to—would they actually file the agreement? What makes us think

that this would happen? Is there any tiff here?

Mr. MASTEL. I think we should have some doubt. I was really

struck today in testimony. I have done a number of these panels

in the last couple of months that all the witnesses today cited the

benefits of China’s WTO accession. They seem not even to conflict

the possibility that China would not fulfill its commitments. The

reality is, every single agreement we struck with China in the last

10 years, I know intellectual property, on market access, on textiles, on prison labor, have all had serious compliance problems.

In fact, as we should expect, insurance would say we should suspect, if anything, China will not fulfill its commitments. WTO has

a different enforcement scheme than bilateral agreements do, and

it is a very well regulated process that relies upon the rule of law

and transparent processes. None of those things really exist in

China right now. There is no reliable rule of law. Many regulations

are kind of made sub-rosa through administrative guidance. It is

hard to know what the policy is in China.

I support, as I said, WTO membership for China, but let’s be

honest here. It is going to be a very long struggle to bring China

into compliance, and it is a very difficult one. WTO is not a magical

solution. It will take at least a decade, probably more, to really

bring China in compliance. That should be the fundamental challenge the U.S. is facing now. That should be the real issue, I think,

as opposed to talking about some of the side issues.

Mr. TOWNS. You agree with that, Mr. Watkins?

56

Mr. WATKINS. I would say there is no question that having gone

and met with many of the governmental officials in China and the

provinces that there will be compliance is not automatic. Compliance really, in most cases, is similar to our States here. It is difficult. The Providence runs their areas, and the central government

makes policy. I do know from institutions I have had that the central government has been continually making efforts to impose

compliance with a number of the policies that they have agreed to.

There is no question it will take time.

My own personal feeling is in dealing with this, there will be

more competition within China to gain investment in their local

area, that that is their concern, local area, and to do those things

that are necessary in the local area, to gain the investment. The

more we can do that, the more they will deal with that, and they

will, I know in dealing with local areas, they will do things to

achieve investment that they feel is necessary for compliance.

It will not be overnight. There is no question in my mind, but

there is a desire, one, for investment, and two, to do those things

necessary to gain investment. If that means complying in many

areas on a local basis, I think that can be achieved, but you have

to educate them and have to work with them.

Mr. TOWNS. Why wouldn’t the annual review get us there faster?

Going year by year?

Mr. WATKINS. I really can’t go into that totally, because it really

would be speculative on my part. You have to understand China

is 56 ethnic groups.

Mr. TOWNS. Sounds like my district.

Mr. WATKINS. Or Jersey City, right? I sell to those groups, too.

It is a tough sale. But in those areas, the control of the central government is enforceable up to certain levels, but there is a lot of

freedom on a local level in the provinces just to maintain that control. Now, I think it really is educational, and I do know from talking to local officials, there is more pressure for compliance from the

central government. Whether it is achievable in all cases, I couldn’t

answer that.

Mr. TOWNS. Yes, Ms. Valko.

Ms. VALKO. Congressman, I would just like to reiterate a little

bit of what Mr. Watkins said. I don’t think China getting accession

into WTO is going to be the silver bullet, as we say, to create compliance with everything all at once. If I can speak from the life insurance industry perspective from where New York Life comes

from, today, right now, getting a license in that country is extremely unpredictable, is extremely non-transparent, and what the

WTO agreement will do is start to give us some clear-cut factors

as to how they identify and how companies can get licenses. And

it will not be easily manipulated, politically done, as it has been

in the past, and I think that is one step in the right direction, particularly from the life insurance side.

Mr. TOWNS. Thank you, Ms. Valko. Yes?

Mr. NEWHOUSE. Congressman, I am always more comfortable depending on enlightened self-interest than altruism for compliance

with agreements. The facts are that China and China’s leadership

needs global openness for its economy if it is going to sustain the

kind of growth rates, 8 to 9 percent, that are required for China

57

to absorb its growing work force. So they are committed to the requirement to open their economic activity to globalization. That

will not happen without the rule of law. Governments may enter

into agreements where compliance is an issue, but businessmen

don’t.

So without the rule of law developing in China, the objectives

that this global openness of economy that have been set forth by

the government will not take place. Once this happens, I think you

can be confident that the rule of law, the clarity of the regulations,

will become a fact of life. Otherwise, the objectives won’t be met.

Mr. TOWNS. Mr. Whittaker?

Mr. WHITTAKER. If I might, Congressman Towns, our view really

is that the multilateral mechanism using 135 countries, with all its

imperfections and difficulties and challenges, is far preferable to a

unilateral sanction approach over the long run. I certainly agree

that we all need to be vigilant, and actually our industry is gearing

up programs to be able to work with Chinese Government officials,

U.S. Government officials, and in the WTO, to address these kinds

of issues which are a challenge, and we understand that and we

are not naive in that sense.

But I think, as Mr. Newhouse said, ultimately what is really

going to make things change is the commitment on the part of the

Chinese Government to transform their economy. It is in their own

best interest to make it work, their own economy, and it is also in

their best interest to make sure that they behave and act responsibly in the WTO scheme.

Mr. TOWNS. Thank you very much. Thank you, Mr. Chairman.

Mr. OXLEY. The gentleman’s time has expired. Let me just close

with a couple of questions, if I may, and we will release this panel

as I know the gentleman from New York has to go back. Let’s assume for a moment that we don’t do the right thing tomorrow and

we don’t pass PNTR. This is a very close vote, one of the closest

votes I have been involved in since I have been in Congress, and

it could literally could go either way. But let’s say we, for some reason, we don’t do that. Let me ask each one of you how you view

that in terms of where you stand with your current and potential

competitors in the Chinese market, where are they, who are they,

and what effect would you have?

Mr. NEWHOUSE. As I suggested before, the short run, the competitive impact will be that clearly the Chinese response would be

to grant concessions, and the joint venture licenses to non-U.S.

firms. But I think more importantly, from our perspective, you can

divide the world in a lot of different ways. Our firm chooses to divide it by latitude, if you will. Europe, the Americas, and Asia and

the Pacific rim. In Europe, with the end of the cold war and with

the reform of the Eastern European economies and the Soviet

Union, that is on track. In North America and Latin America,

Latin America particularly, with the progress Mexico is making

that is on track, if you will, from our perspective as a global investment bank.

In Asia, China is the question mark. If China goes one way, that

third leg, if you will, of our global investment banking and securities strategy, we will prosper. If it goes the other way, the opposite

could be true. I think that, in my view, this vote and this stance

58

taken by the United States will have a significant impact on the

development of relationships between China and the west or in the

U.S.

Mr. WHITTAKER. A couple of comments. One is I think rejection

of PNTR would certainly hurt the prospects of the reformers in

China, those entrepreneurs, those political groups that want to

transform the Chinese economy. I think it would be a statement

that the U.S. for some reason, is not part of this.

I do believe that we would, as an industry, face competition from

Europe, Korea, Japan, Taiwan, any number of locations, very tough

competition, and we would expect to be put at a disadvantage. Not

only because we wouldn’t get some of the advantages that would

come from our being part of the WTO agreement with China, but

also because I think our issues of reliability, questions that our

Chinese customers would have about, are we a reliable supplier

under these circumstances, and all of this would have a negative

impact on us, and it would impact our ability to get the benefits

to generate the exports and jobs here in the United States.

Ms. VALKO. We believe from the insurance industry, and certainly from New York Life, that without PNTR, and China remains

closed to American insurers, it is very clear that the Europeans

will end up getting licenses. In the past, what has happened is the

Europeans have gotten doled out one license, and an American

company has gotten one license in any given year. And it is very

clear that if we do not end up voting for PNTR, that we are going

to be at a clear disadvantage from the United States perspective

of getting licenses in that country.

Our Europeans, the Japanese the Canadians, are going to be the

ones that get the licenses granted, and quite frankly, we feel that

we would ultimately be locked out from that marketplace to do life

insurance.

Mr. WATKINS. European brokers service, European industry. Europe would have the edge on us, and so therefore, U.S. brokers

would not be players at all.

Mr. YINGLING. I think it is important, if you look at this panel,

to recognize you have high-tech and financial services here, and if

you were picking two industries where the U.S. has a competitive

leg up on the rest of the world, those would be the two high-tech

and financial services. I think they would be more generally recognized in the high-tech area, but it is really true in financial services. We are the best.

So we would be shooting ourselves in the foot. Clearly, U.S.

banks would be at a serious disadvantage, just as others have

talked about the advantage of the Europeans and the Japanese in

their sectors. That would be the case with banking. But it wouldn’t

be just in China again. It would hurt us throughout Asia. China

is going to clearly be the economic base of Asia over time, and it

would hurt us worldwide because if you are basically at a huge disadvantage and a huge country, it is going to hurt you worldwide

when you are trying to compete.

Again, I put in a plug for community banks here. We have done

a lot of work studying the future of rural communities, and the key

in the next few years is agriculture exports. We are really at a

crossroads in agriculture in this country, and if we don’t open up

59

those markets for our agricultural exports again in an area where

we have a competitive advantage, our rural communities are going

to suffer, and community banks in those rural communities are

going to suffer.

Mr. MASTEL. Again, not to be a contrarian today. I agree with

a lot of what was said. If we do imagine that the Congress turned

down PNTR, which I guess I think is unlikely, but if we do imagine

that, I think clearly reduction of—negative period of U.S.-China relations and the Chinese would try to find ways to have their ill

feelings toward the U.S. known, but remember also, the U.S. has

something like a $70 billion trade deficit with China. If the U.S.

administration were willing to aggressively use its bilateral leverage to make sure that China didn’t discriminate against U.S. companies, didn’t grant licenses to European companies, I think that

would be a powerful disincentive to China than embarking on a

course of trade retaliation. But again, unquestionably, there would

be a rough period in U.S.-China relations. I am not as certain as

some of the other panelists are that that would mean the U.S.

Would face direct retaliation. That is very difficult for the Chinese

to pull off, especially in the face of the U.S. Having considerable

resources on its own to counter those kind of threats.

Mr. OXLEY. Thank you. Mr. Rush, do you have any questions?

Well, that was good timing as we proceed to a floor vote. Thank

you all very much for your excellent testimony and the subcommittee stands adjourned.

[Whereupon, at 3:50 p.m., the subcommittee was adjourned.]