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21–296 PDF 2005

DOMESTIC SOURCE RESTRICTIONS THREATEN

FREE TRADE: WHAT IS THE FEDERAL GOVERNMENT DOING TO ENSURE A LEVEL PLAYING

FIELD IN THE GLOBAL ECONOMY?

HEARING

BEFORE THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

MAY 13, 2005

Serial No. 109–22

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpo.gov/congress/house

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

(III)

C O N T E N T S

Page

Hearing held on May 13, 2005 ............................................................................... 1

Statement of:

Holleyman, Robert, president and CEO, Business Software Alliance; John

Frisbie, president, U.S.-China Business Council; and Mark Bohannon,

Software Information Industry Association ................................................ 43

Bohannon, Mark ........................................................................................ 60

Frisbie, John .............................................................................................. 51

Holleyman, Robert ..................................................................................... 43

Wu, Benjamin H., Assistant Secretary for Technology and Acting Director

for National Technical Information Service, U.S. Department of Commerce; and Charles W. Freeman III, Office of the U.S. Trade Representative ..................................................................................................... 15

Freeman, Charles W., III .......................................................................... 24

Wu, Benjamin H. ....................................................................................... 15

Letters, statements, etc., submitted for the record by:

Bohannon, Mark, Software Information Industry Association:

Comments dated March 31, 2005 ............................................................ 61

Letter dated April 8, 2005 ........................................................................ 70

Prepared statement of ............................................................................... 75

Cummings, Hon. Elijah E., a Representative in Congress from the State

of Maryland, prepared statement of ............................................................ 11

Davis, Chairman Tom, a Representative in Congress from the State of

Virginia, prepared statement of ................................................................... 4

Freeman, Charles W., III, Office of the U.S. Trade Representative, prepared statement of ........................................................................................ 27

Frisbie, John, president, U.S.-China Business Council, prepared statement of ........................................................................................................... 54

Holleyman, Robert, president and CEO, Business Software Alliance, prepared statement of ........................................................................................ 46

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 7

Wu, Benjamin H., Assistant Secretary for Technology and Acting Director

for National Technical Information Service, U.S. Department of Commerce, prepared statement of ...................................................................... 18

(1)

DOMESTIC SOURCE RESTRICTIONS

THREATEN FREE TRADE: WHAT IS THE

FEDERAL GOVERNMENT DOING TO ENSURE

A LEVEL PLAYING FIELD IN THE GLOBAL

ECONOMY?

FRIDAY, MAY 13, 2005

HOUSE OF REPRESENTATIVES,

COMMITTEE ON GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m., in room 2154,

Rayburn House Office Building, Hon. Tom Davis (chairman of the

committee) presiding.

Present: Representatives Tom Davis, Duncan, Cummings and

Norton.

Staff present: Keith Ausbrook, chief counsel; Chas Phillips, policy

counsel; Rob White, press secretary; Drew Crockett, deputy director

of communications; Victoria Proctor, senior professional staff member; Edward Kidd and Jaime Hjort, professional staff members;

John Brosnan, GAO detailee; Teresa Austin, chief clerk; Sarah

D’Orsie, deputy clerk; Corinne Zaccagnini, chief information officer;

Andrew James, staff assistant; Nancy Scola, minority professional

staff member; Earley Green, minority chief clerk; and Jean Gosa,

minority assistant clerk.

Chairman TOM DAVIS. Good morning. The committee will come

to order. A quorum being present, I want to welcome everybody to

today’s hearing on foreign government efforts to institute unfair

procurement rules to gain an economic advantage over U.S. companies.

I am particularly concerned with the recent actions by the Chinese Government. China recently circulated draft rules on government software procurement. These rules make it virtually impossible for American software companies and other non-Chinese firms

to provide products and services to the Chinese Government, China’s largest purchaser of information and technology products.

The rules would require American companies striving to do business with the Chinese Government to manufacture all of their

products in China and to register the copyrights in China before

they register them anywhere else. In addition, at least 50 percent

of the product development must be done in China. These rules

make participation in the Chinese Government market nearly impossible for U.S. firms and I might add firms in other parts of the

world.

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The U.S. software industry already has lost billions of dollars in

export revenue due to rampant piracy and counterfeiting in China.

The committee has previously held hearings on intellectual property and was astounded to learn that 92 percent of Chinese software products are pirated. A ban against Chinese Government procurement of U.S. software would eliminate our industry’s best opportunity to expand its legitimate exports to China.

I am, of course, concerned about the direct impact of the proposed regulations on the U.S. software industry. But even more important is the impact on world trade and the discriminatory precedent this would set if China were to adopt such onerous rules. The

fact that the U.S. trade deficit with China has reached record levels only adds to my concern.

Additionally, China should beware of the law of unintended consequences. The proposed regulations would deny China’s government the ability to use the world’s best software and undermine

China’s efforts to encourage the active participation of U.S. software companies in developing a vibrant software economy in

China.

For the global economy to operate to the benefit of all nations,

each country must have procurement systems that are nondiscriminatory, transparent and merit based and technology neutral.

The primary purpose of today’s hearing is to get a better understanding of our government’s effort to ensure a level playing field

for U.S. companies abroad.

We have two distinguished panels of witnesses before us today.

On the first panel, we will hear from Benjamin Wu from the Department of Commerce Technology Administration and Charles

Freeman from the Office of the U.S. Trade Representative, who will

discuss their efforts to dissuade China from implementing this and

other discriminatory policies.

Our second panel features private sector representatives from

the Software Information Industry Association, the Business Software Alliance and the U.S.-China Business Council. These representatives will explain the implications of the Chinese law on

American competitors.

I have been a strong supporter of trade with China, supported

the resolutions before the House on that, and I am a strong supporter of free trade, and I have been a strong supporter of our government not limiting where we can buy our products.

When Accenture won the contract last year for the U.S.-VISIT

program, even though it was headquartered offshore, there were efforts on the House floor to strip them of this because they weren’t

an American company, I was the one who led the debate against

that, because, I believe in free and open trade and getting the best

products for the American people at the best price wherever they

come from, but we are not going to sit here and allow other countries to start building walls around them without us taking a look

at other forms of retaliation. We can’t let this happen, and free

trade can’t continue.

I am hopeful as the U.S. Department of Commerce and USTR

continue to talk to China that this is a two-way street. China has

a lot more to lose than we do by putting up barriers. They have

a huge trade surplus right now with the United States.

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We need to take a look at how much is the Chinese Government

buying from America and how much is America buying from the

Chinese Government. Let’s take a look at, for the Chinese products

we’re buying, how much it would cost us to get them somewhere

else. This committee is going to look at that data and take a look

economically are we really disadvantaged at this point if we point

up the barriers. This is of grave concern.

The other thing is, I think if China wants to develop its own software industry, do it the old fashioned way: Enter the market system. They have a lot of smart people over there. Their software industry is emerging and growing every day, but this is not the way

to do it. I have to say, I don’t think the U.S. Congress is going to

sit still if China were to proceed with this and implement this.

I want to welcome everybody to today’s hearing.

[The prepared statement of Chairman Tom Davis follows:]

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Chairman TOM DAVIS. I now recognize Mr. Cummings.

Mr. CUMMINGS. I want to thank you, Mr. Chairman; and I ask

unanimous consent that the statement of Mr. Waxman, our ranking member of the full committee, be a part of the record.

Chairman TOM DAVIS. Without objection.

Mr. CUMMINGS. Thank you very much.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Mr. CUMMINGS. Mr. Chairman, I agree with what you just said,

and I would add one other element to it before I get into my statement, and that is that we have heard complaints all over our country about jobs, people want jobs. With these kinds of policies, Mr.

Chairman, it’s very, very clear that, while Americans would have

greater opportunities if the doors were open and the trade deficit

was not as great as it is, the fact is that Americans want to work.

So I thank you for calling this hearing to discuss these issues that

threaten our Nation’s trading relationships with China.

The specific subject of our hearing is a draft law being considered

by the Chinese Government that would effectively prohibit American firms from selling software to Chinese Government entities.

Technically, the law requires the Chinese Government to buy software only from Chinese companies or from a list of preferred foreign companies. However, to be placed on a list of preferred foreign

companies, a company must meet requirements that are so onerous

it is likely that no foreign firm would even try to meet them.

While this individual law is troubling on its own, it is all the

more troubling because of the context in which it is being considered. Despite having joined the World Trade Organization, the Chinese Government has continued to support policies that are expressly discriminatory; and it has sanctioned the continuation of

practices that harm its trading partners.

For example, the Chinese Government continues to enforce discriminatory tax and tariff policies and has thus far failed to take

the steps necessary to protect intellectual property. Frequently, the

Chinese Government has allowed market access only after firms

seeking to do business in China have entered into the so-called offset agreements which have required firms to make available to

Chinese industries technical knowledge about a product or process

in exchange for increased market access. The law now under consideration would simply continue and expand these policies by requiring businesses wanting to sell software in China to subsidize

the research, subsidize the development and production in China

of that software.

As unacceptable as these restrictions on software are, particularly as China is now reported to be the second largest market for

personal computers in the world, American businesses are rightly

concerned that if this law is enacted it could be expanded to include other critical trade sectors such as agriculture, infrastructure

technology and other portions of the high-tech sector. Therefore, it

is imperative that we take the opportunity that this hearing presents us today to make it known yet again that we oppose the imposition of unfair trade restrictions on American businesses.

The stakes here are extremely high. Total trade, Mr. Chairman,

between the United States and China exceeded $230 billion in

2004. Unfortunately, that trade was not balanced. Our trade deficit

with China totaled $162 billion in 2004 and is now larger than our

deficit with any other country in the world. Not surprisingly, our

deficit with China has been more—one of our most rapidly growing

deficits in recent years. According to the Congressional Research

Service, in 2004, the deficit was more than 30 percent higher than

the deficit incurred in the previous year.

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I echo the comments of so many of my colleagues regarding trade

with China or with any nation. We must have fair trade. Unfortunately, the provisions being considered by China will continue what

is an inherently unfair trade relationship between the United

States and China. It may therefore be time for us to finally take

steps to show the Chinese Government that we simply will accept

nothing less than fair trade in our trade relations.

Mr. Chairman, I look forward to hearing from our witnesses

today; and I yield back.

[The prepared statement of Hon. Elijah E. Cummings follows:]

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Chairman TOM DAVIS. Thank you very much.

Mr. Duncan.

Mr. DUNCAN. Thank you very much, Mr. Chairman; and thank

you for calling this hearing on a very important topic which is becoming more important all the time. Thank you for your heartfelt

opening statement.

You know, if 10 years ago, or possibly even 5 years ago, I had

said in a speech or put in one of my newsletters or had spoken publicly and predicted that our trade deficit would be running at $55

or $60 billion a month now or we would have a $162 billion trade

deficit with China, people would have thought I was crazy. They

would have said that never would have happened. And there are

some people, even in spite of this shocking trade deficit that we

have now, who say, well, we don’t need to worry about that. That

means lower prices for Americans and so forth.

But, you know, our relatively low unemployment rate is masking

a tremendous problem in this country and that is our very great

underemployment. We have college graduates—in fact, sometimes

with advanced degrees—all over this country who are working as

waiters and waitresses in our finest restaurants. Every kid today

is going to graduate school or feel they have to. They can’t get the

good jobs they could have just a few years ago with just a bachelor’s degree and so they are going to graduate schools.

Half the kids are going to law school or thinking about it. The

universities see the law schools as moneymakers and so the professors tell them, we know there are too many lawyers. Don’t worry

about it. There is always room for another good one. They don’t tell

them that half the lawyers getting out of law school can make more

money managing a McDonald’s or driving a long haul truck.

We have the college graduates who are having to settle for lowpaying, service-sector-type jobs because the trade deficit shows us

that we are still sending millions of jobs to other countries; and we

have to do better. Many, many—in fact, almost every Member of

Congress is concerned about this.

A recent column by Paul Craig Roberts, who was Assistant Secretary of the Treasury under President Reagan and who is a nationally syndicated columnist, he wrote this: A country cannot be

a superpower without a high-tech economy, and America’s hightech economy is eroding. Corporate outsources presented the loss of

manufacturing capability as a positive development. Manufacturing, they said, was the old economy, whose loss ensured American’s

lower consumer prices and greater shareholder returns. The American future is in the new economy of high-tech-knowledge jobs. So

far in the 21st century, there is scant sign of the American new

economy. The promised knowledge-based jobs have not appeared.

To the contrary, the Bureau of Labor Statistics reports a net loss

of 221,000 jobs in six major engineering job classifications, a country that doesn’t need as many engineers; and much of the work

that remains is being outsourced or filled with cheaper foreigners.

His column goes on and on in that vein. But there’s great concern.

I represent a district in east Tennessee whose economy is better

than most districts in the country because of two things, because

so many people are moving there from the north to retire and beVerDate 11-MAY-2000 13:54 Jul 07, 2005 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 D:\DOCS\21296.TXT HGOVREF1 PsN: HGOVREF1
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cause of government spending. But we have watched the shutdown

of almost all of our manufacturing and furniture, textiles in many

other ways.

I have a friend who is one of the richest, most successful men

in Tennessee. He has a medical company that puts out the lightweight shoes for foot and ankle injuries and puts out the disposable

surgical trays. He has plants in Ireland, one in Estonia, two in

Mexico, two in Nicaragua. He told me recently—he has eight plants

in Tennessee. He said, I want to keep jobs in America, but I am

paying $2,850 for my employees in Nicaragua, and I’m one of the

highest paid employers there. He says, I pay $3,500 a year for my

American employees just for their health care, and I don’t know

how much longer I can keep jobs in this country because the Chinese are breathing down my neck.

That is happening in every industry; and if we don’t wake up,

we are going to slowly but surely turn this country into some type

of Third-World nation.

I am sorry I am going to have to leave in a few minutes to catch

a plane to Tennessee, but I wanted to come and make this statement and express my very great concern about this situation they

are in, particularly with the Chinese manipulating their currency,

and something has to be done.

Chairman TOM DAVIS. Thank you very much, Mr. Duncan.

What I heard at a graduation speech recently and that is that

graduates with a degree in science asks, why does it work; a graduate with a degree in engineering asks, how does it work; a graduate with a degree in accounting asks, how much does it cost; and

a graduate with a liberal arts degree asks, do you want fries with

that?

The world is changing. There are some educational components

to this equation that China can do very, very well in a free and

open market. I don’t know why they would want to run and hide

and look for the protections they are looking at in this case. But

I will tell you, they are not going to be using American dollars if

that’s what they think, buying their goods while putting up restrictions around them.

We have Mr. Benjamin Wu, who is no stranger to this committee. He’s the Assistant Secretary for Technology and Acting Director for National Technical Information Service, U.S. Department of

Commerce; and Mr. Charles Freeman III, the Office of the U.S.

Trade Representative.

Thank you very much for being here and my regards to Mr.

Portman, one of our former colleagues, who was just sworn in.

Would you rise with me and raise your right hands.

[Witnesses sworn.]

Chairman TOM DAVIS. Mr. Wu, I will start with you. I am sure

this has been carefully scripted when you get into the international

language. We are not as scripted up here. We are a little more free

flowing in terms of what we have to say, but thanks for being with

us.

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STATEMENTS OF BENJAMIN H. WU, ASSISTANT SECRETARY

FOR TECHNOLOGY AND ACTING DIRECTOR FOR NATIONAL

TECHNICAL INFORMATION SERVICE, U.S. DEPARTMENT OF

COMMERCE; AND CHARLES W. FREEMAN III, OFFICE OF THE

U.S. TRADE REPRESENTATIVE

STATEMENT OF BENJAMIN H. WU

Mr. WU. Thank you, Chairman Davis. Congressman Cummings,

Congressman Duncan and Congresswoman Norton, I appreciate

being invited to address the committee’s concerns on the use of domestic source restrictions by foreign governments.

There is a growing concern that some of our international trading partners are implementing standards and technical regulations

that effectively serve the trade barrier and limit the expansion of

American exports. This has prompted the administration to take

action over the past several years. U.S. businesses are pushing for

a fair and equitable playing field where standards could be judged

not only on the technical merits but also on the adherence of the

principals of transparency, fairness, due process and open participation. So in much of 2003 the Department of Commerce launched

a standards initiative to ensure that standards are fair and responsive to market and technology needs and that we partner with industry to combat standards as trade barriers to American goods

and services.

In May 2004, as a follow-up, the Department released a report

that called for greater collaboration across government and within

U.S. industry to prevent technical obstacles that impede U.S. exports. The report also emphasized best practices, provided critical

education and training and expanded our early warning tools. We

believe that, collectively, these actions will go a long way toward

an effective rapid response system when the use of standards are

identified as a trade barrier.

It’s clear in today’s face of intensifying global competition neither

industry nor government can be complacent about standards-related issues. Despite the healthy trade relationships, tensions can

arise when certain countries take restrictive action that could potentially exclude market access to U.S. businesses. Working in

close collaboration with industry, including the witnesses that you

will hear from on panel two, the Department is pursuing an active

multi-pronged strategy with respect to standards-related issues

around the globe, with particular attention on China, given American businesses’ desire to enter and help develop the Chinese marketplace. For China, this strategy includes continued engagement

at the policy and technical levels to deal with issues as they arise,

providing support where appropriate to the U.S.’ standards developing organizations to open offices in China, posting a standards

attache to the U.S. Embassy in Beijing and sponsoring an ongoing

series of both general and sector-specific workshops involving Chinese officials and relevant U.S. private and public sector interests,

among other initiatives.

Let me address the committee’s focus of the specific example

where China is causing great concern within U.S. industry, its

pending software procurement regulation which could limit the

ability of U.S. industry to sell software products and services to the

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Chinese Government. U.S. software companies, which are widely

recognized as industry leaders for their leading-edge innovation,

have invested billions of dollars in China to participate directly in

China’s growing information technology market. This is especially

necessary to combat and offset the perceived high rate of software

piracy in China.

The Chinese Government is a major source of legal software purchases and represents an open market for the U.S. software industry. China’s proposed procurement rules undermine the stated goal

of developing a domestic software industry which requires close collaboration of foreign software producers and foreign investment.

On a political level, also, the proposed domestic preference set

forth in China’s procurement policy runs counter to the spirit of

Premier Wen Jiabao’s commitment to reducing our trade deficit

with China by increasing U.S. exports.

The Department of Commerce, in close coordination with the Department of State and U.S. Trade Representative’s Office, has been

actively engaging the Chinese Government on this issue since September 2003 to ensure that the U.S.’ companies are not excluded

from the government’s software procurement market.

Our strategy has been a combination of bilateral dialog, industryto-government exchanges and multilateral coordination. These have

included the provision of technical assistance on government-procurement-related activities and topics to relevant Chinese policymakers, facilitation of industry exchanges with key officials at the

Ministry of Finance and Ministry of Information Industry and the

State Council Informatization Office, communication of our dialog

and our concerns directly through bilateral exchanges between the

United States and Chinese senior leadership, and also solicitation

of other key trading partners such as the European Union and also

Japan to engage China directly on this issue. We continue our

strong efforts on this issue.

In particular, I would emphasize we have taken every opportunity to address and raise this issue with our Chinese counterparts, especially at the very highest levels, ranging from Deputy

Division Director to Vice Premier. For example, Under Secretary

for Technology Phil Bond, Commerce Under Secretary, has raised

the issue with SCITO Vice Minister Yang Xueshan. I also raised

the issue with the Vice Minister as well as with MII Vice Minister

Xi Guohua during my August 2004, trip to Beijing where I led a

17-member government industry delegation to discuss related

issues.

In addition, former Commerce Secretary Evans has raised the

issues on several occasions since October 2003 with Vice Premier

Wu Yi, with Vice Premier Zeng Peiyan and also MII Minister

Wang, the most recent which occurred in January 2005 on his final

trip to China before he completed his tenure as Commerce Secretary. And it is expected that current Commerce Secretary Carlo

Gutierrez will also be raising this issue in his future discussions

with senior Chinese ministers as well.

We have also approached the European Union and Japan repeatedly to enlist their support in this effort since both have shared

goals regarding a fair and nonrestrictive procurement policy in

China. The European Union in particular is lobbying aggressively

17

for China to begin negotiations on the WTO agreement on government procurement, the GPA. And Japan’s Ministry of Economy,

Trade and Industry has raised the issue with China’s Ministry of

Commerce as well.

In our exchanges with the Chinese Government, our message is

clear and consistent. By moving to implement this policy, China

would be undermining its explicitly stated objective of encouraging

the development of a domestic software industry.

Developing software in a global context requires the formation of

partnerships between foreign and domestic companies to provide

users the best products at the lowest price possible and the lowest

total cost of ownership. Restricting the purchase of foreign software

discourages foreign software vendors from seeking cooperative associations with local companies, which can also isolate Chinese domestic companies from the international software community. Furthermore, firms generally invest in research facilities where there

is an active market for the results of their research and the strong

likelihood of recouping their investment costs. In the face of limited

market potential, many foreign firms are likely to reduce their research and development in China, and they will be required to implement procedures or eliminate it completely. China’s best hope

for development for its software industry lies in the creation of enforcement of intellectual property rights and also in fostering a climate of innovation, not in implementation of restricted measures.

The potential impact of China’s proposed software procurement

measures on the U.S. software industry is less certain but certainly

would not be positive. We are concerned that the overly restrictive

definition of domestic software contained in the draft regulations

has the potential to sharply restrict the sales of U.S. software to

the Chinese Government.

Mr. Chairman, the fact that you are holding this hearing underscores the importance of this issue to American software manufacturers and that the legislative bodies and the executive branch of

the U.S. Government shares the significant concerns about the implications of China’s pending regulation concerning the Chinese

Government’s acquisition of software. At Commerce, we will continue to work collaboratively with State, with the USTR’s Office to

ensure that the U.S. software companies continue to have access to

Chinese Government customers. We will continue to work vigorously to achieve this goal.

Thank you, Mr. Chairman; and I would be happy to respond to

any questions you and members of the committee will have.

Chairman TOM DAVIS. Thank you, Mr. Wu.

[The prepared statement of Mr. Wu follows:]

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Chairman TOM DAVIS. Mr. Freeman.

STATEMENT OF CHARLES W. FREEMAN III

Mr. FREEMAN. Thank you, Mr. Chairman and members of the

committee. It is a great honor for me to be here today.

Thank you for the greetings to Ambassador Portman. I come

from being in the middle of a request by Ambassador Portman to

initiate a top-to-bottom review of our trade policies with respect to

China, so I look forward to coming back to the committee and discussing those in greater depth.

I appreciate Congressman Duncan’s mention of the concerns that

we have as a result of the increasing competitiveness in this country of Chinese imports. I know we are here today to discuss market

concerns into China, so I will address my remarks to that. I have

submitted testimony for the record, which I would ask be included.

Chairman TOM DAVIS. Without objection, your entire written

statement is in the record.

Mr. FREEMAN. If I could summarize it fairly briefly, we have had

over the past few years, especially since China joined the WTO in

2001, a series of concerns with respect to their WTO commitments

and also concerns about the extent to which our companies and our

businesses, our farmers and workers have access to their market.

We have some fairly significant concerns that still remain, although we have made progress.

China has become our fifth largest export market. It has been

our fastest growing by far in the past few years. So we have grown

from a fairly low base a number of years ago to about $35 billion

in exports last year. That is the good news.

The greater concern I think is as a result of some of the market

access problems we have. Primary among those would obviously be

China’s protection of intellectual property rights. If we are talking

about the software market, we are looking at piracy rates of upwards of 90 percent. That is extraordinarily difficult for our companies to deal with and extraordinary difficult not just in the Chinese

marketplace but increasingly as a result of exports of counterfeit

and pirated materials from China to either third-country markets

or even into our own.

We have made progress but continue to have concerns with China’s treatment of our agricultural exports, particularly through the

use of sanitary standards that questionably have scientific bases.

We continue to be concerned about the treatment of our services

industries through the use of high capitalization costs or other requirements that put an excessive burden particularly on our smaller firms.

We have concerns about China’s implementation of its commitments on distribution rights, the ability of our firms not to just get

a product in the Chinese market but actually have it appear on

Chinese shelves and reach Chinese consumers.

And, finally, we have concerns with respect to China’s implementation of its commitments on transparency, in other words, the

ability of not just our firms but Chinese companies and others to

see the rulemaking and licensing decisions as they occur and to

have access to the processes which will ensure that these are not

operating beyond the veil of secrecy.

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We are here also to discuss the increasing use in China of industrial policies that have the effect of limiting the access of our exports and limiting the ability of our exports to achieve penetration

to the Chinese market. We have seen this in the use of standards,

as Under Secretary Wu discussed, where China produces Chinesespecific standards that make it very difficult for our firms to

produce on an economic basis for the Chinese market. We have

seen this through the use of discriminatory tax policies. Last year,

the United States filed the first and only case against China in the

WTO for its use of discriminatory tax policies in the semiconductor

area.

And increasingly now we are seeing it in the use of government

procurement regulations. To review the bidding in 2002, China promulgated the government procurement law which set in place in effect a ‘‘buy China’’ set of regulations that made it difficult or created the prospect that certain sectors would be reserved or at least

presented to Chinese companies more favorably than to foreigners.

This comes, as I think the chairman and others have suggested, at

a very bad time when we do have a $162 billion trade deficit,

where increasingly our products that do have a competitive advantage or should have a competitive advantage in the Chinese marketplace, including technology products and software products,

when these are increasingly beginning to have a market develop

particularly in the government’s market, which is, as most of you

know, the only legitimate market for software in China. This presents significant problems to us.

In November 2004, China targeted software as the first sector in

its government procurement law to produce these ‘‘buy China’’ policies; and they fleshed out the law further in March 2005. The policy itself attempts to put in place limitations on U.S. software and

other foreigners’ penetration of the marketplace by insisting upon

a narrow definition of domestic. If a United States or foreign company wants to qualify as domestic, it has to put in place significant

R&D in China, qualify for tax purposes, have a certain number of

Chinese employees and, in other words, raise the cost of doing business in China so that—as an exporter—so that, in effect, you are

supposed to relocate to China.

What has the United States done? What has the administration

done? In addition to some of the activities that Assistant Under

Secretary Wu described, the administration has targeted this policy

at the highest levels for discussion at the Joint Commission of

Commerce and Trade, which was in December 2003, elevated by

President Bush and Premier Wen to be the primary problem-solving dialog in the relationship to overcome trade frictions and, as

has been said and what was described by Premier Wen, as the

process to encourage U.S. exports, as opposed to discouraging Chinese imports to the United States. So we have targeted this policy

specifically for inclusion in resolution at that dialog.

In addition, we are working very hard to make sure that China

lives up to its 2001 commitment to join the government procurement agreement as soon as possible. If it were to join the government procurement agreement, this policy would be in violation, in

our view, of the agreement. So the shortest distance between these

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two points is for China to join the GPA. They said it is ready to

join as soon as possible.

We have been working very hard to make sure we are preparing

China to be technically ready to achieve the negotiations and accession to GPA. They are saying the key concern is whether it’s possible yet. We have been working with our fellow WTO members,

the Europeans, the Japanese, to encourage China toward a path

that gets them toward GPA accession. But we are trying to use the

power of logic and persuasion. That is, if the stated policy of the

Chinese is to encourage a domestic software industry, the way to

do it is not to eliminate competition. Silicon Valley was not created

in a vacuum but through the free exchange and flow of ideas. The

key is not to further reduce the ability of others to compete in that

marketplace. That will only stagnate the market, in our view, and

stagnate the development of China’s software development and

make it difficult for us to support open markets to Chinese products.

Mr. Chairman and members of the committee, I greatly appreciate the opportunity to be here today. I’m happy to discuss this

and other things the administration is doing to ensure a level playing field with respect to China and look forward to your questions.

Chairman TOM DAVIS. Thank you.

[The prepared statement of Mr. Freeman follows:]

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Chairman TOM DAVIS. Do either one of you have any idea how

much our government is buying in Chinese goods and services annually? Any ballpark?

Mr. FREEMAN. I don’t have a figure. As a result of China not participating in the GPA, they are not as active as they otherwise

might be.

Chairman TOM DAVIS. There was a controversy about buying

those green beret caps from China. But I’ve got to believe at least

on the good side that there are a number of items we are purchasing, and I’m wondering if you could try to see if you could put a

dollar figure on what we’re buying from China. Because I think

their program, although they cite buy America and some other provisions in our law which are very, very slight—which by the way,

for the record, I don’t like—but although they cite this, I think they

have a lot more to lose if we get into a trade war on this in terms

of the expanding markets.

The other thing we look at is the component of what we are buying from China, how much would it cost us if we had to go somewhere else, what’s the cost to taxpayers in value. I think we need

to be aware of those things as we enter into negotiations and add

up some dollars and cents.

I agree with you. There are a lot of minds in China. They’re putting a lot of emphasis on education. Their software industry is

going to do just fine over the long term. Our countries are

offshoring a lot of work to China right now. The last thing they

want to have, I think, is a trade war into these areas. They can

learn and grow and prosper and be very, very competitive. But if

they start putting up barriers, they are going to be finding out that

they’re going to be left with inferior software and they are not

going to be able to compete in global markets. What are the Europeans doing about this?

Mr. FREEMAN. The Europeans are primarily focused on getting

China to join the government procurement agreement. They have

less of a stake in China’s software market than we do. They have

their own problems in terms of developing a software market for

themselves. So their key is, I think, they are trying to get China

to join the GPA so that the next step, whatever that might be, if

it’s not software, it’s an area that Europe is even more competitive,

that they do not fall afoul.

Chairman TOM DAVIS. I think in IT we are running an $8 billion

trade surplus. It’s one of the few areas we’re running a surplus,

and now they want to put up a barrier to do that.

You know, I don’t think it serves their own purposes certainly,

but I don’t think we can sit there and be a punching bag. You have

to remember, the Accenture contract last year on U.S.-VISIT was

almost overturned in the House. The mood of Members will be very

angry if they are to implement these regulations. And although the

administration wouldn’t like it, it’s hard to figure there wouldn’t be

some congressional retaliation. All a Member has to do is take a

look on any appropriation bill and say no funds shall be expended

to a good company from China and it’s made in order. You can’t

protect this from leadership.

There are a lot of vulnerabilities that the Chinese need to understand. They better add up the dollars and cents before they try to

34

start getting into this. There has to be a better way to try to get

at their end results, I think, than just putting up a ‘‘buy China’’

for software.

Also, I don’t know—although American businesses have invested

a lot over there, given the intellectual piracy and other issues that

are raised, I don’t think it’s a smart move. And I think you are

doing everything to encourage them. I don’t think Congress will sit

idly by and watch this happen.

The Chinese Government has stated that its procurement framework is modeled in large part of those of other countries, including

our Buy America Act. That’s not really accurate, given the depth

and breadth of the proposed regulation, is it?

Mr. FREEMAN. In our view, it is not. The key again is, is it consistent with the government procurement agreement? If China has

committed, as they have, to join the government procurement

agreement as soon as possible, the fact they would be putting in

place policies in the interim that are not consistent with GPA neither makes sense nor is fair play.

Chairman TOM DAVIS. Would you agree that the domestic source

restrictions that we do have on our acquisition system, such as the

Buy America Act or the Berry amendment and various other restrictions that apply to defense procurements, that they make it

more difficult for us to argue against restrictions like the ones we

are discussing today? Do they throw that back at us?

Mr. FREEMAN. They do. I think there is a fairly open and transparent process by which we arrive at those regulations, and we feel

quite confident that those are consistent with GPA.

Mr. WU. Mr. Chairman, in relation to software, procurement by

the U.S. Government is done through service contracts. That

means the development, the maintenance and consulting. The Buy

America Act does not apply to service procurement.

Chairman TOM DAVIS. The Trade Agreements Act has a limited

role there? Trade Agreements Act would have a limited role where

Buy America doesn’t apply, or are you familiar with it?

Mr. FREEMAN. I’m not certain. I have to get back to you.

Chairman TOM DAVIS. In the written testimony, the U.S.-China

Business Council said some of their member companies considered

the Chinese pending software procurement rules indicative of the

country’s overall procurement practices. Do you think that’s accurate?

Mr. FREEMAN. I think it is. The reason we are spending so much

time on this issue is that it could very well be the tip of the iceberg. If this is clearly the first sector that they have targeted, there

are others that are out there; and if this is successful for whatever

reason, then we face significant problems down the road.

Chairman TOM DAVIS. As you know, China has a huge trade surplus with the United States. Mr. Duncan talked about it; Mr.

Cummings talked about it. China’s Premier has stated that China

will reduce surplus by importing more American products, but it

appears that the Chinese Government is about to throw up a new

barrier to market access for one of the competitive exports by requiring government ministries to purchase only Chinese software.

This is the one area where America leads the world, where you

would think, if they wanted to develop their own industry, they

35

could work with us, learn with us, team with us, contract with us,

instead of putting up a barrier. What is the administration doing

to China to hold the Chinese Premier to its word that they are

going to buy more American products?

Mr. FREEMAN. Well, the initial thing and the immediate thing is

to make sure that China does everything in its power to dismantle

this policy in the context of the Joint Commission on Commerce

and Trade, which we will hold in the middle of this summer,

chaired on the U.S. side by Secretary Gutierrez of Commerce and

now Ambassador Portman of USTR and Vice-Premier Wu on the

Chinese side.

The key is to make sure that China recognizes that in the context of bilateral trade discussions the injection of this kind of policy

is completely the wrong direction and not just in terms of its own

interest in developing software but particularly considering the

depth of the passions up here with respect to trade.

Chairman TOM DAVIS. We have the largest economy in the world.

China’s economy is growing, but starting a trade war with us is not

very smart. Both sides get hurt, of course, in trade wars, but China

has more to lose at this point, given the balance of payments. Do

you agree with that?

Mr. FREEMAN. Exports to the United States are about 10 percent

of China’s GDP. That is a lot to lose.

Mr. WU. Mr. Chairman, I would also add, it is not just loss in

sales and revenue. We believe and are trying to underscore this

point with the Chinese that they would also lose innovation capabilities as well, because the U.S.’ industry, if they are allowed to

engage in the marketplace, if they are allowed to make the investments that they know will be fair and equitable and able to recoup

back, then they are willing to provide the assistance, the support

necessary that will help develop the Chinese marketplace, and that

is so critical in this international marketplace and global market

that we have. So if the Chinese want to be engaged in the process,

they have to be part of the process and not to be closed and an isolationist.

Chairman TOM DAVIS. The procurement side really bothers me;

and, of course, that’s the jurisdiction of the committee. Everybody

has a different view on trade. I have been a very strong free trader.

I have looked at it that if we get a pretty good deal in our relationship with China in the sense that we are buying goods from them

at reduced costs which bring down inflation here and it’s good for

our consumers and what China is buying mostly from us is our

paper, that is not a bad tradeoff; and when we quit doing it from

each other, it could hurt us both.

We appreciate the administration’s efforts, but I am afraid that,

if we are unsuccessful, we have to understand they have to expect

some kind of congressional retaliation in terms of government procurement at a minimum; and I think they end up losing if that

happens. So let’s try to work this out. Everybody gets hurt in a

trade war.

Mr. Cummings.

Ms. Norton.

Ms. NORTON. I appreciate Mr. Cummings has allowed me to go

ahead of him. I have people waiting in my office.

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I wanted to come to this hearing to try to do what I have been

trying to do for a long time, to figure China out. We don’t seem to

be getting very far with China. I have a question of what we think

the real strategy is here. In many ways, this seems a counterproductive proposal, but is it? So the assumptions we make, it

seems to me, about what China is doing may be peculiarly western

assumptions about market and so forth. Let me ask you a question

based on how the Chinese might be looking at this.

Some of this, 50 percent of the market to be developed, some of

that is what developing countries have done all along. We are talking about pre-technology. It is not uncommon all over the world

today. We have all kinds of government policies that say, if you

want to do business here, if you want to have access to our resources, if you want access to our market, the quid pro quo is, and

we are used to that.

Now we are dealing in technology. Technology literally changes

moment to moment. And it looks like from what I can tell we

would not only be shut out, but their own development, such as it

would be, would be copyrighted. So here they want copyright protection, and to assure it they want the development on their soil.

Now we have had a kind of nervous quid pro quo: We sell, they

steal. They pirate, but we sell. Now they are going to continue to

pirate, but it’s going to be hard for us to sell to the government.

And this is China after all, who is the biggest purchaser.

I really wonder if this assumption that it’s so counterproductive

while they buildup their industry is correct. The Chinese are smart

people. This stuff is developing and out of date momentarily.

Pirating continues. They may believe they don’t need normal trade

in order to get access to what it takes to develop their industry.

They will do what they have been doing all along. More than 90

percent of our stuff gets pirated anyway, and we haven’t been able

to do anything about that.

I thought in traditional terms, too, how can they develop their

industry if in fact they don’t have access to ours? Hey, this is the

biggest market in the world. They know that everybody is trying

to get access to them. They want to develop that market for themselves. Everybody, hello. They may be under the assumption that

if they continue to pirate, close their market, this huge market that

everybody is salivating about really becomes only their market.

Yeah, they are a little behind the curve, but how much behind the

curve if they continue to pirate?

I would like a response to that, but my bottom line is I don’t see

China doing anything unless they feel they have something to lose;

and, thus far, I have not heard what they have to lose. I am very

impressed with the way in which China bargains with westerners:

Listen and ignore; listen, talk and ignore; keep doing what you

were doing all along. Until somebody really does something, and I

haven’t seen anything of that kind that has occurred, that makes

you have to move.

In the Korea talks, to get to another sector altogether, we’re

there. Whatever is their thinking, they are there. Not only has it

not done any good, it has gotten worse. Here, I don’t accept that

those poor things, they don’t know what they are doing. I don’t accept what the chairman said, it’s counterproductive. Don’t they see

37

they are going to be harmed? I don’t think that they’re stupid. I

think that they think that this is not going to hurt them, and I

have indicated some of the reasons why. And I would like your response to that.

Mr. FREEMAN. The Chinese are incredibly patient people, and

they do sit there, and they do tend to listen to us, and sometimes

it takes a long time for it to sink in.

You raise a very excellent point. Do they know what they are

doing? Do the people who have constructed this policy know what

they are doing? Of course. But the question is, who are they trying

to benefit? The notion that the stated policy is to develop a genuine

Chinese domestic software industry with the notion that China

doesn’t always want to be the sweatshop for the world, they want

to rise up the value chain and have their own brands, have their

own technology products, they want to do all of that stuff. So they

look out there and say, how do we deal with this? How can we possibly compete with the technology, superiority and the software

market from the United States and others?

And what they have decided to do is, while we are going to try

to find some shortcuts for our own software industry, but instead

of having an open policy which allows multiple Chinese software

industries to come to the table and operate, what they have tried

to do is essentially favor some select, very large state champions.

The problem is, and I think the chairman states it quite correctly, even if you develop these software champions and you have

producers for China’s market, the fact of the matter is that 90 percent of the software market is pirated. There is not a whole lot of

incentive to produce these world-class software industries if you

don’t protect IT, because the market ends up being very limited to

the government market; and it’s large but not a world-class market. It’s enough for companies to get a foothold, but really unless

and until——

Ms. NORTON. Maybe that is what they want, is to get a foothold.

They are protecting themselves now and, later on, they might be

willing when they get their own—when they themselves are angered to move forward.

My only concern here is that I think that if we want to interrupt

this—assuming that what they want to do is get drowned themselves before they have to open up, if we want to interrupt that

thinking, assuming that is the thinking, it seems to me they have

to understand they have something to lose. And the strategy of sitting there and talking to them and having them listen, be cordial

and they are listening seems to me favors their strategy, building

themselves, doing nothing while we give them nothing to lose.

WTO really doesn’t seem to have mattered a lot here. When it

comes to patience, Chinese patience may be legendary, but we ourselves are getting the trophy on patience with the Chinese.

Thank you very much, Mr. Chairman.

Mr. WU. Congresswoman, just to echo some of the points that

Charles had made with my own personal observations from the discussions that I have had with senior officials in delegation meetings which I have led here in Washington and in Beijing, it seems

clear that there is a significant voice within the Chinese Government to try to use the domestic requirements to try to elevate and

38

create their software industry. It’s for them a sense of nationalism.

They want to play as a world leader, that they have to have world

markets; and they are feeling, as has been conveyed to me, that if

they are going to be purchasing Chinese Government software then

they should give preference to the domestic markets so they can

build it up and then allow that industry and that company to be

able to play in the world stage to compete against some of the

international players.

The problem, though, is that in some of the proposed regulations,

they do it in such a heavy-handed way that excludes any opportunity for U.S. companies—or any international software company—to enter into that market. And there isn’t a process of openness, of fairness or due process or participation.

And what we are seeking is to allow us to be at least part that

have process. And that’s the effort that USTR’s office and Department of Commerce have been trying to push.

I think it’s also somewhat divided too, within the Chinese Government. It seems as if there are some people who understand the

notion of the importance of innovation—of reaching out and being

part of the world economy—especially in the software center. And

then there are those who retreat back—that if we are going to help

our domestic countries, we have to have domestic—strong domestic

country requirements.

There was an article from November of this past year entitled,

‘‘Beijing City Slammed over Microsoft Deal,’’ which, according to

Beijing Times, Microsoft won a $21.95 million yuan contract from

the Beijing municipal government. But then they had to rescind it

because it came under fire for damaging China’s nascent software

industry.

So I think you are seeing divisions also within China. And ultimately we like to, through the administration efforts, through the

USTR and Commerce make sure that those who support the innovation and the openness and the fairness of process, make sure

they win out. And that’s why we are so aggressive in trying to

make sure at the very highest levels of government, the Chinese

understand the strong support and the insistence that they open

their markets in a fair and free way.

Chairman TOM DAVIS. Thank you very much.

Mr. Cummings.

Mr. CUMMINGS. Thank you, Mr. Chairman.

I am seeing and I am listening to all of this. I listened to the

chairman’s questions, and then I read the testimony that will come

up shortly from Mr. Frisbie, and then I read the testimony of Mr.

Bohannon of the Software Information Industry Association, and

then I read the testimony of Robert Holleyman, who is going to testify, president and CEO of Business Software Alliance, and I have

listened to your testimony.

I have to ask you this question, are we impotent with regard to

doing anything? I mean, when I look at everything that I have read

and heard, it sounds like we have to walk a very—and this is

just—I am a trial lawyer, so I am used to listening to testimony.

But it sounds like we have to walk a very thin line because we

don’t want to insult anybody, and we are in the process of trying

to negotiate. Is that a fair statement?

39

In other words, let me tell you why I refer to Mr. Bohannon’s testimony. Because I said to myself, now, these are the people who are

really—they have something to really lose here. So I was looking

for—I wanted to see what he said with regard to what is needed.

And what he said here is at a minimum the Chinese must begin

negotiations to join the WTO agreement on government procurement consistent with the WTO commitments which were made

more than 4 years ago. To date, no such discussions have taken

place.

As for changes in regulations, nonChinese software companies

must be allowed to compete as domestic software companies if they

meet nondiscriminatory minimal requirements that all companies

must meet in order to operate in the Chinese market.

He goes on to say this includes removing the requirement that

in order to be ‘‘domestic,’’ copyright registration must be held by a

Chinese person. The two-scheme, where waivers before any agency

can procure foreign software is simply unworkable and unacceptable.

Before that though, he talked about—he was very, very complimentary of the work they have been doing to do with our folks,

with you all.

So I am trying to think—and I was looking for the—you know,

this is what we got to do, and this is the way we do it. But it

sounds like—and then I listened to your answers to Ms. Norton’s

question. It sounds like we—do we have a big stick back here to

kind of wave to get the Chinese to do what we want them to do,

or am I missing something? Do you understand the question?

Mr. FREEMAN. Yes, I understand the question. There are a couple

of things been, obviously if you talk about $162 billion in trade deficit, and congressional concern, yes, you have a fairly big stick.

Mr. CUMMINGS. Does holding this hearing send any kind of message so far, you think?

Mr. FREEMAN. I think it does. Let me back up for a second. I am

not a trial lawyer, but I know that one of the problems we face

with this policy is it is not yet implemented.

Mr. CUMMINGS. Yes.

Mr. FREEMAN. What we are trying to do is we are trying to prevent it from becoming implemented. So, in theory, it is not quite

right one of the problems we have when we go and scream at the

Chinese people.

Mr. CUMMINGS. You don’t scream. You don’t look like a screaming type of guy.

Mr. FREEMAN. At 2 a.m., I can raise my voice. But what happens,

you know, is you say this is a problem. This is a problem our companies face. And they say well we haven’t implemented it yet. And,

in fact, we just bought $400,000 from such and such company why

are you getting spun up about it?

We say, well, what this does is it has a chilling effect on the marketplace. This is the kind of a policy which, even if not implemented, sends the wrong signal. In fact, you have government entities, maybe not in this building in China or Beijing, or maybe down

in Yunnan Province, but know about this policy and implement it

even actually before it is implemented.

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And that’s the concern that we have. So we are trying to get this

off the table before it actually fully gets in place. If and when it

fully gets put in place, you may actually see me scream.

Mr. WU. We work very closely with USTR and Department of

Commerce. We serve as advocate for free and fair trade and for industry. USTR has done a very good job in implementing some of

the negotiations, in being part of the negotiations. What we need

to do is if China wants to be a world player, they have send it to

WTO—they have a number of other agreements that they have

agreed to. And we need to make sure they live up to their obligations.

Certainly moving the Chinese into being a partner, in the WTO

Government Procurement Agreement, is very important. Because

then once they send to that status of being a player in that agreement, then they will have obligations that they have to live with.

That may very well make issues like this moot.

So moving them forward, they have committed to moving as soon

as possible. But using our leverage, partnering with our key trading partners such as the EU and Japan to help achieve a goal and

to have demonstrable accountability for the Chinese in procurement issues, is critical. And so I think that’s something the USTR

does very well.

Mr. CUMMINGS. Is there anything that you all need from us, the

Members of Congress, that would help you? I mean, do you have—

what you have. I can’t imagine what you might need, but is there

something that you need from us?

Mr. FREEMAN. Don’t underestimate the power of your own voice

with China directly. We hear frequently concerns from the Hill at

USTR and at Commerce. But China needs to hear that from you

all too. So the fact that you are holding this hearing is, in my view,

a very positive thing and something that I think does send a strong

message. I encourage you to pick up the phone and call the Ambassador if you feel the need.

Mr. CUMMINGS. Mr. Chairman, I have two more questions.

Chairman TOM DAVIS. Sure.

Mr. CUMMINGS. Mr. Wu, IBM recently sold its personal computer

division to a computer company that is primarily owned by the

Chinese Government. This sale was approved by the Committee on

Foreign Investments, despite concerns expressed in the United

States over the extent of technology transfer that this sale would

represent.

Do you think that the approval of this deal or of other proposed

sales would still be warranted if China is continuing to impose unfair trade restrictions, particularly on information technology products?

Mr. WU. Congressman, you are referring to the CFIUS procedure

for IBM and Novo merger. That was decided on its merits and really didn’t have the externality of these issues as part of that process.

The question with the CFIUS process is whether or not there

would be concerns of intellectual property transfer that would raise

it to such a level that would warrant the government to step in and

block the merger.

41

If you like, we can provide you with more information about the

process, the decisions and deliberations.

I think in this particular issue those, at least for IBM and Novo

the issues that—the greater issues that you are discussing here

today were not a party of the discussion.

Mr. CUMMINGS. Finally, let me ask you this. You know, industry,

in order to maintain any business, you have to have some kind of

predictability. You have to be able to reasonably predict your future. And certainly when you are dealing with sales, that’s a big

deal.

I mean, it basically dictates, as you well know, how many people

you are going to employ, whether you are going to expand, whether

you are going to move, all of those kinds of decisions.

And I would imagine that people in this computer area feel the

same way. I mean, do they still have—they still have the same

kinds of problems. I mean if you all, just based upon what I have

seen so far, if I am a business person and I am sitting on a seat,

I am sitting right now in my office watching this on C–SPAN—and

I am wondering what my future looks like with regard to this

issue. I know you are not—you don’t have a magic ball, but what

do you—what is your vision at least of what you think is reasonable of what will happen in the next year or two. You got me?

Mr. FREEMAN. If you are asking do I think we will resolve this

question?

Mr. CUMMINGS. Yes.

Mr. FREEMAN. I can’t say. We are going to try awful hard. If I

am a business person looking at the Chinese market and seeing

this kind of policy being implemented and seeing the general lack

of transparency in government rulemaking and decisionmaking and

licensing and so forth, I recognize the enormous risks of doing business in China and recognize, really, that this market has a long

way to go before you can achieve the kind of predictability that you

would really like.

It is getting—it is making progress. Things have really come a

long, long way in the past 3 years. But it’s a long way from being

what you call a market of perfect information.

Mr. CUMMINGS. And that coming a long way, what was, if you

had to think of one thing, either one of you, that was the brightest

light in that, you said we have come a long way. Is there something

that happened that just made you say, OK, this looks like we are

getting somewhere here? The reason I am asking that question is

I am just wondering, you know, what got us to whatever that point

was is trying to perhaps duplicate whatever helped us get there so

we can get to the next point.

Mr. WU. One of the, I think, brightest lights, certainly, in terms

of our negotiations on technology matters with China was the

WAPI issue with encryption. And there we were able to work with

the Chinese, elevate the discussion with the highest levels with

Ambassador Zoellig, USTR; Secretary Powell over at State and Secretary Evans at Commerce to raise it to a level that clearly underscored the administration’s concern about this, that we were able

to have China work on living up to its WTO obligations.

And we are continuing to work on doing that in that case on the

encryption standard, while it’s the example of a successful resoluVerDate 11-MAY-2000 13:54 Jul 07, 2005 Jkt 000000 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 D:\DOCS\21296.TXT HGOVREF1 PsN: HGOVREF1
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tion, it was at least based on WTO obligations that helped facilitate

the process.

So we need to get China engaged, be party to a number of obligations and treaties, and make sure they continue to hold up to their

obligations, especially on intellectual property rights.

Mr. FREEMAN. Could I just add quickly to that. I think if—even

looking at this issue, and where do I see signs of encouragement.

Five years ago, you never would have seen them publish the proposed rules or comment. You never would have seen multiple

drafts be exposed to public eye. And the fact that you have suggests to me that we have made tremendous progress. Now, the key

is to take the next step to not only have them accept comments,

but actually do something with them.

Mr. CUMMINGS. So I guess in a way we are kind of commenting

here today, would you agree? Mr. Wu.

Mr. WU. Another successful example is the WTO inconsistent rebate on the VAT for semiconductors manufactured in China. And

once again, there we had the opportunity to have China be required to live up to its obligation with WTO.

Let me also add, Congressman, in addition to the good work of

the USTR in negotiations requiring China live up to its treaty obligations, we are also engaged in the Department of Commerce on

the softer side, dealing with the trade and trying to impress upon

the Chinese the importance of innovation, of enforcement for intellectual property rights, and especially if they want to be a global

player.

Two years ago, when China had ascended to WTO status, I immediately went over and led a delegation of government officials to

go to the Chinese science parks to talk to their entrepreneurs and

to talk to their innovators and to underscore the importance of ITR

if they want to grow, if they want to start their open business, and

if they want to be successful.

Because they need to have that intellectual property right. The

trademarks all protected around the globe. So Commerce is engaged in a number of those activities, as well as on standards to,

in relation to China. We have been working very closely with industry and status of open organizations to make sure there’s a

process in China. So when we see a standards or trade barrier, we

can react immediately.

We can then get, if necessary, all of the highest levels of government engaged. And that’s part of the secret, I guess, for WAPI, is

that we were able to respond so quickly to the issue and alert the

Chinese that this was going to be a major issue for the United

States. And they were able to move to concession and accommodation to our needs.

Mr. CUMMINGS. I just wanted to echo what Chairman Davis has

said. I think you will get pretty much consensus from both Democrats and Republicans, that when it comes to trade, we are going

to have trade, we want it to be fair trade and we want our people

to have an opportunity to have jobs. We don’t want that college

graduate that Mr. Davis talked about with the liberal arts degree—

and here we are at graduation time by the way—going out to work

to ask the question, ‘‘Do you want it with fries?’’ Our young people

are working too hard to be the best that they can be to be denied

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these kinds of opportunities. They are invaluable. And these kinds

of opportunities, by the way, will last them until they die. So we

don’t want them to be deprived of that.

Thank you.

Chairman TOM DAVIS. Thank you very much. I want to thank

our first panel. Let me just add, I am somebody with a liberal arts

degree with Amherst, and I was a head fries man on the day shift

at McDonald’s early on in my life.

And a voice said, if you can’t do anything else, you can always

run for office. You just have to be 25 and a citizen of the State.

But we appreciate very much what you brought to this. I hope

you will take back to the Chinese some of the concerns that we are

raising on a bipartisan here in Congress.

I am going to declare a 2-minute recess while we get our next

panel. Thank you very much.

[Recess.]

Chairman TOM DAVIS. Thanks very much, thanks for being patient. You see, the members have a lot of interest in this that the

administration is trying to finess.

We will recognize our second panel. We have Mr. Robert

Holleyman, the president and CEO of Business Software Alliance.

Mr. John Frisbie, U.S.-China Council, and Mr. Mark Bohannon,

Software Information Industry Association.

Thank you all for being here. Please rise and raise your right

hands.

[Witnesses sworn.]

Chairman TOM DAVIS. Mr. Holleyman, we will start with you.

STATEMENTS OF ROBERT HOLLEYMAN, PRESIDENT AND CEO,

BUSINESS SOFTWARE ALLIANCE; JOHN FRISBIE, PRESIDENT, U.S.-CHINA BUSINESS COUNCIL; AND MARK

BOHANNON, SOFTWARE INFORMATION INDUSTRY ASSOCIATION

STATEMENT OF ROBERT HOLLEYMAN

Mr. HOLLEYMAN. Good morning, Chairman Davis. It is a pleasure on behalf of the member companies of the Business Software

Alliance to have an opportunity to testify before your committee

this morning.

The U.S. software industry is a uniquely global industry. U.S.

software companies derive more than half of their revenues from

exports. Trade liberalization in China and elsewhere is absolutely

critical to our industry’s growth. And BSA members have consistently and actively supported WTO trade liberalization agenda. We

strongly advocated for China’s WTO accession in 2001, and we also

believe that China must move forward with accession to the WTO’s

Government Procurement Agreement as it pledged to do.

Our industry is confident that given a fair and level playing field,

we can compete in the Chinese market and in any other market

in the world.

Yet, we face an uphill struggle in China. China should represent

a huge opportunity for our industry. It’s the second largest market

for personal computers in the world. It has vast opportunity for PC

software. But due to rampant copyright piracy, it’s only the 25th

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largest market in the world for software sales, ranking behind

much smaller countries like Denmark.

One bright spot in recent years has been the efforts of the Chinese Government to insure that the government itself uses only

legal copies of software. The Chinese Government is by far the

largest single purchaser of software in China, and the procurement

market represents one of the most significant growth opportunities

for the U.S. software industry. And we are concerned that it’s

about to be closed to U.S. software products and services.

In 2002, as you have heard, China enacted a broad law requiring

that the government purchase only domestic goods and services.

Unfortunately, the software sector was selected as the first sector

in which to apply this new law. As proposed, China software procurement regulations would severely restrict the ability of American software companies to sell to the Chinese Government. The

draft proposals sets up a 2-tiered preference system, the first tier

for domestic software and the second for qualifying foreign software. Domestic software is to be heavily favored in that process.

Our assessment is that no American software company will qualify as Chinese domestic software under the proposed regulations.

And to qualify as eligible foreign software, the software provider

must meet and satisfy a number of performance requirements, including things like investments in China, R&D, outsourcing work

and taxpayer payments. It’s our understanding that government

agencies will still need to get a waiver for each procurement of eligible foreign software.

In a market where over 90 percent of the software is pirated and

in the Chinese market is by far the largest purchaser of legitimate

software, such a discriminatory procurement regime would effectively close the door to many, if not all, U.S. software companies.

The Chinese procurement preference will have an immediate and

significant harmful economic impact in the United States. These

are not theoretical concerns, Mr. Chairman. We are already beginning to see effects in the marketplace, as we have heard from Mrs.

Norton earlier this morning, even if the regulations aren’t fully in

place.

Local and provincial governments have been canceling orders

based on pressure and concerns that they would not comply with

new procurement regulations.

I have to emphasize, as you have also heard this morning, that

this regulation is only the beginning of a process of implementing

China’s government procurement law. Other sectors will follow,

particularly those where China considers it strategic to its economic development.

China’s premier has committed to addressing the $162 billion

trade imbalance between the United States and China by facilitating an increase of U.S. exports to China. This proposed regulation

fails to advance that policy. It also fails to advance China’s broader

goals of developing a vibrant software economy and efficient, effective-government services.

The single most important thing that could be done to promote

a domestic software industry in China would be to reduce the $3.8

billion-a-year piracy problem, and thus expand the market for both

domestic and foreign software alike. Whatever we can do in China

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to reduce piracy should be aimed at that result, demonstrable market growth.

BSA has joined with a host of IT and U.S. industry leaders, a

number of whom you will hear from this morning, urging a delay

in implementation of these regulations until a mutual agreement

can be reached. China’s procurement framework must be open, inclusive and nondiscriminatory. It must allow United States and

other foreign software makers to compete without restriction in

China’s government market.

We appreciate your holding this hearing, Mr. Chairman. We appreciate the efforts to work with the U.S. Government. Time is of

the essence as China may move ahead to implement final regulations at any time. Thank you again for inviting BSA to testify. I

will look forward to answering questions at the appropriate time.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Mr. Holleyman follows:]

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Chairman TOM DAVIS. Mr. Frisbie. Thanks for being with us.

STATEMENT OF JOHN FRISBIE

Mr. FRISBIE. Chairman Davis, thank you for giving me the opportunity to testify today. When China joined the World Trade Organization in 2001, it agreed to conduct its government procurement

transparently. China became an observer to the WTO agreement

on government procurement in 2002 and began the process of joining the GPA as soon as possible. Accordingly, our expectation has

been that China’s procurement rules in the interim would move it

closer to the principles was GPA.

In March of this year, China released draft regulations on the

procurement of software, to raise important questions about China’s commitment to the spirit of the GPA. As currently written, the

draft regulations are a key concern for many of the U.S.-China

business councils, approximately 250 member companies. It’s, of

course, a concern for our members who are software companies.

But it is also a concern to other companies who look at this as an

indication of China’s government practices more generally.

I do want to note that we applaud the Chinese Government for

its transparency and the release of the proposed rules for public

comment. This is a step forward, as you probably know. However,

we have significant concerns that the new rules are also a step

backward for their procurement regime.

Our specific issues are twofold. First the software rules would essentially block American companies from competing on equal basis

with Chinese firms for PRC government contracts for software

products and services. And second, the software rules could set a

precedent for future discriminatory procurement policies.

The full explanation of the regulations is in my written statement, but in short the implementing measures for the government

procurement of software lay out guidelines for the certification of

domestic software and services.

The measures also envision a list of preferred nondomestic software and service providers. Essentially, the implementing measures would require Chinese Government entities to purchase domestic software products in domestic software services unless they

receive a special waiver from the Ministry of Finance and the Finance Administration Ministry to buy a list of qualified companies.

As a result these rules, as they are drafted contain a number of

concerns.

On a technical level, the rules appear to contradict open procurement principles by effectively prohibiting access by international

software providers to the PRC government market. The definitions

of domestic software products and domestic software services are

restrictive to a point that even those international companies with

subsidiaries, manufacturing facilities and large levels of investment

in China might be unable to qualify their products as domestic, as

that term is defined in the proposed rules.

To be certified as domestic, the software product must meet three

requirements. It must be developed in China. A Chinese entity

must hold its copyright, and half the development costs of this software must be incurred in China. Software, of course, is typically

not created in any one country.

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In addition, today’s software is often based on older programs

written years ago, and therefore could not have been developed in

China. So as a result to meet the domestic criteria, software companies would likely have to create entirely new products using programming code written only in China.

Since the rules, in effect, would therefore grant an absolute preference to domestic products and services, this amounts to a prohibition on the procurement of products developed and distributed by

international suppliers.

Furthermore, the procedures and the regulation for a listing in

the catalog of preferred nondomestic suppliers appear to give international companies only the most minimal level of market access.

Chinese Government entities will only be allowed to purchase

software listed in this catalog if there is no domestic substitute and

if they obtain a waiver from those ministries I mentioned a moment ago.

Those are highly restrictive requirements. And the proposed

rules will effectively block international software companies from

competing in this market on an equal basis with Chinese suppliers.

Many countries, including the United States, grant domestic

firms some form of preference in government procurement contracts. These preferences, however, are almost always accompanied

by cost thresholds or other mechanisms that limit the use of such

preferences.

In contrast, China’s proposed software procurement rule set out

an absolute reference for domestic goods. There are no general circumstances described in the proposed rules, in which an international company would enjoy the same access to the government

software market bears of domestic supplier.

So when you combine this absolute preference with the highly restrictive definition of domestic software, the proposed rules essentially block companies from competing in the market.

As such, the proposed rules do not conform to the requirements

of the WTO, the Government Procurement Agreement, which

China has said it intends to sign.

So where does that lead us? Our recommendations are these.

First I want to point out, as mentioned earlier, that China Wen

Jiabao, during his last visit to the United States in December 2003,

called for the expansion of U.S. exports to China to help reduce the

U.S. trade deficit.

He also said at that time that the U.S.-China trade relationship

should be based on the principles of mutual benefit, and that each

side should consider the effects on the other. We support these

statements by Premier Wen. We, therefore, would be disappointed

to see China implement policies that would greatly limit American

access to its government procurement market for software at such

a critical time in the U.S.-China trade relationship.

We need more opportunities for U.S. companies to sell products

to China, not less. Access to the PRC government procurement

market for software is exactly the type of win/win outcome of significant mutual benefit that Premier Wen spoke of in September

2003.

In addition, we strongly support the PRC’s government stated intention to join the GPA at the earliest possible time, and in the

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meantime, to develop rules consistent with the GPA. We have

asked the Chinese Government to be consistent with these stated

intentions and suspend further action on these rules until they can

be discussed in full at the JCCT meetings to be held in Beijing in

the next month or two. It’s our understanding that these proposed

rules will be a key part of the U.S. agenda at that meeting.

We fully support this approach and encourage the USTR and the

Department of Commerce to first secure commitments from Beijing

to shelve these software procurement rules or to revise them to address the concerns of American businesses and conform to international best practices.

Second, to work to establish a timetable for China to sign the

GPA and reinvigorate their commitment to do so.

Third, seek China’s agreement to delay in the meantime other

procurement regulations that might be under contemplation, not in

conformity with the GPA.

Through formal and informal channels, we have been making

these points to the Chinese Government in pointing out the benefits of having access to the best possible software at the best value,

and that this requires open procurement.

China is rightly interested in encouraging technological development and innovation, but this can best be done through greater

competition and more openness to new technologies. American

business and government should impose measures that use discriminatory policies to achieve these goals.

Thank you, Mr. Chairman. I am happy to answer any questions

you may have.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Mr. Frisbie follows:]

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Chairman TOM DAVIS. Mr. Bohannon.

STATEMENT OF MARK BOHANNON

Mr. BOHANNON. Mr. Chairman, thank you for the opportunity to

appear here today on behalf of the members of the Software Information Industry Association. Our more than 600 members produce

world class products for a variety of markets. They range from

some of the smallest and newest in the field to some of the largest

and well-known brands.

In the context of China, we have members that have been active

in the China market for many years, as well as those who are just

at the beginning stages of getting into that market.

Through our leadership and the U.S. information technology office, which is the leading voice of the U.S. IT industry in Beijing,

we have followed the developments on the new government procurement law, the drafting of these regulations and China’s efforts

to support a domestic software industry.

Unfortunately, based on this, we feel that the developments here

are, at least, one step forward, two steps back. We have, as my colleague Mr. Holleyman indicated, provided detailed sets of concerns

and outstanding questions to the Chinese Government. I believe we

have made these available to the committee, and, if appropriate,

would ask that they be included in the record.

Chairman TOM DAVIS. Without objection.

[The information referred to follows:]

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Mr. BOHANNON. In the simplest of terms, our concerns are threefold. First, it does create a two-tiered system that does discriminate

between domestic and foreign vendors and will effectively prevent

any nonChinese company from participating. As my colleague indicated, we believe no international software company will be able to

get its products to be eligible.

And I would go so far as to say that even many domestic Chinese

companies will have that trouble as well, which raises the issue of

transparency and consistency of the possible application of the

rules. The second issue is that rules impose onerous requirements

to be able to get on a second tier list of preferred foreign vendors,

requirements that are not imposed on Chinese companies.

And the third, the rules discriminate against U.S. companies by

demanding a waiver from the ministry of finance if a local or national government agency wishes to purchase so-called foreign software, a hoop that no Chinese company has to go through.

It’s unfortunate that this is the result, because today, U.S. software vendors enjoy generally favorable market access to the Chinese Government, despite the many challenges of piracy, lack of

transparency and the inconsistent rule of law.

It is our view that this two-tiered system of domestic and foreign

treatment of the rules appears to be intentionally designed to subvert this current status quo and change the current situation.

As my colleagues suggested, the developments in China really

bear no relation to international norms or to the requirements of

the Government Procurement Agreement, which promotes nondiscriminatory, competitive, merit-based purchases of goods and

services.

I would even go further to say that based on our experience and

working in a variety of markets—and in my own background working on technology development in the U.S. government—that no

country has attempted to isolate its software industry and software

procurement market from the international marketplace to the degree set forth in the rules.

And as such, the proposed rules represent a large step backward

in the Chinese Government’s efforts to integrate its domestic industries into the global economy. As you pointed out in your opening

statement, Mr. Chairman, the implementation rules will severely

impair the ability of the Chinese Government to obtain the best

possible products at the best competitive price. Sadly in our view,

these rules as drafted instead appear to promote only the interests

of certain domestic software companies.

As I detail in my testimony, it didn’t have to turn out this way.

Over the years, both U.S. industry and the U.S. Government have

been meeting with experts at all levels of the Chinese Government

to better understand their goals and to share the lessons learned

by U.S. agencies in their move from government-specific requirements for IT purchases to greater reliance on commercial off-theshelf products and emphasis on the best value in government purchases. Our discussions have emphasized the benefits of open,

transparent and competitive procurement policies.

And we have appreciated very much the leadership of the Department of Commerce, Department of State and the U.S. Trade

Representatives office, as well as many Members of Congress, who

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have engaged Chinese officials on how best to achieve their goals

while not discriminating against U.S. companies and avoiding

trade distorting measures.

I think the key question is where do we go from here? It is incumbent on both U.S. industry and the U.S. Government to continue to press for changes and to continue to see a delay in the

rules until real changes are made. We must work to insure that the

government procurement law achieves what it set out to do originally, to bring China’s practices into the mainstream of international commerce.

This commitment is important, because these regulations are the

first of what is likely to be a series of regulations affecting other

industries and products. And to that point, Mr. Chairman, I would

like to introduce into the record a letter from 15 association presidents representing the entire IT industry, as well as the business

community generally on this point.

Chairman TOM DAVIS. Without objection, it will be entered into

the record.

[The information referred to follows:]

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Mr. BOHANNON. As Mr. Cummings stated more eloquently than

I read from my testimony, it is incumbent that the Chinese begin

negotiations to join the WTO Government Procurement Agreement.

And as for changes in the regulations, we must make sure that

nonChinese software companies must be allowed to compete—and

I emphasize the word ‘‘compete’’—as domestic software companies

as if they meet nondiscriminatory applicable requirements to all

companies who must operate in the Chinese market.

Mr. Chairman, my members are under no illusion of what it

takes to operate in the Chinese market these days. It is a complex

market. Unfortunately, the developments in the implementation of

the new government procurement law and the draft regulations we

have before us are really not a step, forward, but a step back in

terms of making that situation more transparent, more open and

more competitive.

Thank you, and I would be happy to take any questions you

have.

Chairman TOM DAVIS. Thank you very much.

[The prepared statement of Mr. Bohannon follows:]

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Chairman TOM DAVIS. I guess, if we implement the regulations

as drafted, is it fair to say that most of your members would not

be able to compete for the business?

Mr. BOHANNON. I think, certainly, they would have difficulty

making and showing the specific requirements there.

I think one of the developments and possibilities here is that

what is going to happen to the existing installed, and I think that’s

a question none of us can answer at this stage. But certainly in

terms of meeting the technical requirements of the regulations, I

think many would be hard pressed to insure they meet those.

Chairman TOM DAVIS. That is why they are drafting them. They

want the work done in China by Chinese-owned companies.

Mr. Frisbie, do you agree?

Mr. FRISBIE. My response would be the same; it would negatively

impact our companies. But also, if they were implemented as drafted, I think that would get the attention of our nonsoftware company membership too, who would then have concerns about what

might follow on in other sectors of the procurement market.

Chairman TOM DAVIS. All right.

Mr. HOLLEYMAN. Mr. Chairman, I think ultimately a huge concern, in addition to the initial threshold task, which is unduly burden is that even a company that managed to make a second-tier

list, which is a qualified foreign software, would always be subject

to a waiver requirement that would have to come out of the ministry of finance before any ministry could purchase it. So it is a

double burden, and it is, we believe, ultimately going to be arbitrary and harmful.

Chairman TOM DAVIS. What are software sales, American software sales to the Chinese Government today? Does anybody have

any idea?

Mr. HOLLEYMAN. The estimate—I don’t know for American software sales. I know the total acquisitions in China are estimated to

be in the $606 to $660 million a year. I don’t know what portion

of that is U.S. companies, but a significant portion would be.

Chairman TOM DAVIS. That’s it, and they are going to risk a

trade war over that. I mean, look, let me ask you this. If they were

to do this, if I were to put an amendment in on the floor, which

would pass, that we would not—that we would be prohibited from

buying goods from China. The government would not be able to buy

goods from China, easy amendment to put on a restrictive spending

amendment, it is not subject to point of order.

What do you think the Chinese reaction would be, and what

would be your reaction to that? It would certainly get their attention because we are buying everything from AK–47s to clothing to

a lot of other goods from them right now.

Mr. BOHANNON. I think certainly it would send a message at a

minimum. I think that, you know, the challenge here is keeping

the focus on making sure the rules don’t get implemented so that

we can avoid such a situation. And I think our focus really is to

make sure that they don’t get implemented as they are proposed

so we can avoid exactly that kind of confrontation.

Chairman TOM DAVIS. But that would certainly send a message

to the Chinese that we are not bluffing, wouldn’t it? Mr. Frisbie,

what do you think?

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Mr. FRISBIE. I think the first thing I would like to see is what

happens at the JCCT meetings, because I know that for the USTR

and Commerce, it is one of the issues at the top of their list. I also

know from conversations with the Chinese Government that they

are considering this as well. So, I want to see what the results of

that meeting are.

Chairman TOM DAVIS. But if the meeting is bad, if we have a

bad outcome, what are we left to do at that point? Continue to buy

their goods? Continue to go out and have open procurement with

China? I think we have to take a look at how much it will have

cost us if we knock them off of our list. That’s a fair question. But

after that, I think, we have nothing to lose and you have to let

countries know that they can’t—that this has to be a 2-way Street.

Mr. Holleyman.

Mr. HOLLEYMAN. Mr. Chairman, I certainly think this morning’s

hearing and your statement is getting a lot of attention. So I think

it’s a useful step. And we hold out, as Mr. Freeman testified on the

first panel, that a specific item of discussion at the JCCT needs to

be on this topic.

We think ultimately there are three things that are going to help

in this, making sure at the highest political levels within China

this issue gets attention. Second, that there is an immediate standstill of any effort to impose these new regulations for software; and,

three, that China move forward with its commitment to join the

Government Procurement Agreement.

Chairman TOM DAVIS. Well, if they join the Government Procurement Agreement, these regulations probably wouldn’t be in order,

would we agree with that?

Mr. HOLLEYMAN. That’s correct.

Chairman TOM DAVIS. I think that’s what we need to work at.

I will just tell you if the we implement these regulations, somebody

will offer the amendment on the floor. We see these every year for

much less onerous actions by other companies and the governments. They need to know it is coming.

Sometimes we defeat these, sometimes we don’t. But Chinese

just need to understand that is going to happen. I don’t know if it

is a good idea or a bad idea at this point. Actually, after the hearing, I am beginning to think it is not such a bad idea. If that is

all we have left—but we all prefer to work this thing out as adults

and recognize whatever the Chinese are trying to accomplish, help

them accomplish that.

But, you know, at the same time, we are opening our markets

to them, and we have a huge trade deficit, that their government

needs to take a leadership role. And this is one of the few protected

areas, right? In terms of software and integrity if the government

buys there.

Let me ask you this: Each of you has identified specific concern

with the proposed rule. We talk about how the U.S. industry would

adopt these requirements of how we are predicting it. The Chinese

regulations require that in order to be considered domestic 50 percent of a product’s cost should be incurred in China, and that the

product must have its final formulation in China.

Is that realistic in light of the international way in which software development occurs?

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Mr. HOLLEYMAN. Well, it’s certainly not realistic for any existing

provider who has a global business.

Chairman TOM DAVIS. Is there any company or, for that matter,

any known software development model that tracks its costs by

geographical input?

Mr. BOHANNON. No. I mean, we have gone back to our members

to make sure that we are fully up to speed on the latest. We are

not aware of any company that does that. It’s both impractical and

not the reality of the way software development occurs.

Chairman TOM DAVIS. Also, the Chinese Government stated its

procurement framework is modeled in large part on those of other

companies. And they quote our Buy American or Trade Agreement

Act. But is this really an accurate statement from the experience

of your member companies?

Mr. BOHANNON. I can say categorically, no. I personally sat for

5 hours with the Chinese experts and brought in some of the best

in both private and public sector procurement experts—and had

them walk through with the Chinese how our system really works,

that it is based on a series of system preferences, not prohibitions,

which is at the heart of the Chinese approach. And that the U.S.

system, for all its complexity, does not discriminate on the basis of

national treatment. And we have explained this ad infinitum. But

they continue to make the suggestion that is the case. And certainly our experience in the EU is also indicative that Chinese approach is not based on any known model that we are aware of.

Chairman TOM DAVIS. Isn’t the Chinese software industry growing? I mean, it is growing like hopsi, isn’t it?

Mr. HOLLEYMAN. It is growing, Mr. Chairman. I mean, a lot of

that industry is the industry that is based on the outsourcing

model.

Chairman TOM DAVIS. Offshoring a lot of it.

Mr. HOLLEYMAN. A lot of what India is doing. But they also have

domestic producers of software. I mean, we think that the inconsistency of this is that it will isolate the Chinese Government in

terms of the type of software it uses. It will deny the government

the efficiency it wants. And no domestic Chinese producer who satisfies that government test is going to ever be competitive in our

view in the global marketplace. So long term, it hurts the Chinese

software industry short-term; and long term, it hurts the government for its e-government efforts.

Chairman TOM DAVIS. Mr. Bohannon.

Mr. BOHANNON. I will just add to Mr. Holleyman, the SIIA office

believes that the revenues of the domestic Chinese companies have

been going up 20 to 30 percent over the last 2 or 3 years, mainly

because they have benefited just like U.S. companies from the positive policies to get government agencies to procure legitimate software, for example. So what we need is to make sure that the good

pieces of the Chinese Government policies proceed because they

benefit everyone, and not go back to this discrimination between

foreign and domestic.

Chairman TOM DAVIS. Also, I mean, once, as their software development grows in China—and we all agree and understand, it

can grow exponentially without doing this—they are going to have

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more demands from China to stop piracy and for IP legitimacy and

the right; correct?

Mr. BOHANNON. That’s exactly right.

Chairman TOM DAVIS. I don’t know why they have such a good

model right now. Everything I read about what’s going on, U.S.

companies are a major part of what is growing in the software industry over there. And I think this is just a major step backward

for them.

And I am not sure if this is part of a political agenda, but the

Chinese are getting a lot of work now on government work, American government work for our government—because, as you say,

our business models don’t call for software to be developed in one

single place, it’s developed in pieces all over.

What actions would you like to see our government take in response to your concerns? Are we doing enough at this point? Is

going to the table and talking enough, or do you think hearings

like this, congressional pressure helps your meetings with your

counterparts help? What do we need to do? This needs to be, I

think, a coordinated effort. Whoever wants to. I have asked all of

you.

Go ahead. Mr. Holleyman.

Mr. HOLLEYMAN. I will start. I think that this hearing is absolutely useful. I know that a number of Members of Congress have

contacted the Chinese Ambassador in Washington, have raised this

on their trips outside the United States, I think raised this at the

highest political levels, as we have had at the cabinet level is absolutely important. I think the JCCT, which is upcoming in the next

couple of months, is a golden opportunity to try to insure some specific commitments from China that they will not implement these

rules and that they will move forward with the GPA. And as Assistant Secretary Wu testified, there have also been consultations

with the EU and with Japan.

I know that the EU has become engaged on this. And I think

working with our foreign trade partners who just want to make

sure that this market is open for America or any software to compete fairly. And we believe there are a lot of allies in this effort.

Mr. FRISBIE. This is clearly an important market access issue.

Again, it is not just software, but they are looking ahead if this

goes forward, how it might impact other sectors as well. So definitely this hearing helps to bring attention to the issue, and I think

attention will be given to this hearing. As we have all said, the

JCCT meeting is actually the right next focus. I know that USTR

and Commerce have that focus. A consistent message here and in

Beijing is also extremely important. And to the extent other governments do that as well here and in China and send a consistent

message, I think that will make a big difference, too.

Mr. BOHANNON. I would second all the comments of my colleagues. The two suggestions that I would make, in addition, are

I think we not only need to talk about this as an issue that affects

the software industry, but, Mr. Chairman, given your background

on procurement reform and the need for open and competitive procurement issues, I think we need to approach it at that broad level

as well. I think we can, you know—even if we solved the software

regulation issue, we still have a fundamental problem with the govVerDate 11-MAY-2000 13:54 Jul 07, 2005 Jkt 000000 PO 00000 Frm 00092 Fmt 6633 Sfmt 6633 D:\DOCS\21296.TXT HGOVREF1 PsN: HGOVREF1
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ernment procurement law that China has put in place. And that

is ultimately where we will have to deal with this.

The second is that we now have new leadership at the State Department, Ambassador—Secretary Rice, we now have a new head

of USTR, a new Secretary of Commerce. I think it’s essential that

they continue the consistent messages that have come out of those

departments with regard to the need to address this before the

rules get implemented.

Chairman TOM DAVIS. I supported BNTR, I supported Fast

Track, NAFTA, CAFTA, you like it, I am a free trader. And this

committee doesn’t have jurisdiction on trade issues, that’s the

Ways and Means Committee. We do have jurisdiction on procurement. This is the committee that will take those decisions, and I

take it very seriously, I have always—again, I led the fight last

year when they tried to knock licensure out of the U.S. visit, when

they have tried to put domestic source restrictions. I strike Buy

America every year as they try to expand that on appropriation

bills. So my record is pretty clear.

But we are just not going to sit here and let China take shots

at us without some kind of retaliation. Somebody is going to do it,

and that’s under this committee’s jurisdiction. So I am hoping we

can work these things out around the conference table if we need

to give the leeway, but I just want to say if that doesn’t happen,

I just don’t see Congress sitting idly by. I hope the Chinese understand that as they sit down.

Trade war, everybody gets hurt. Consumers get hurt, efficiency

gets hurt. I just don’t see this helping anybody. But you can’t just

sit here and have it one sided on the procurement side.

I believe, when we add up everything, you are going to find that

China sells us a lot more than we buy from them, government to

government, and has a lot more to lose. I guess the question that

we would have to answer, before moving ahead is, you know, how

much would it cost us to take and buy these goods and services

somewhere else than China. We intend to get that information, just

to have that, should we have to proceed.

But let’s all work together. I think industry to industry, government to government, trying to get this resolved in an applicable

way that makes economic sense.

Mr. Holleyman, let me just ask this final question: You mentioned software piracy in your statement. I know it’s a concern of

all of you. How does piracy relate to the government procurement

issue?

Mr. HOLLEYMAN. It relates directly in that the best legal and

largest market in China for legitimate software is with the Chinese

Government. And, in fact, there have been significant efforts by the

Chinese Government in the last couple of years to try to insure

that its software usage is, in fact, legal. BSA is working with the

Chinese Government this year on a number of education seminars

for Chinese Government officials to insure that they are using only

legal software. So that’s been very positive.

We are very concerned about anything that would restrict access

to that growing legal market. And let me just add, in conclusion,

that our companies are ultimately very optimistic about our ability

to compete in China. But we have to address the piracy problem,

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and we have to make sure that we have fair access to the best legitimate market that exist here today.

Chairman TOM DAVIS. OK. Anything else anybody want to add?

Well, our pleasure. Thanks for this important issue, not just for

software developers, but you say this can extend straight down the

procurement system, and that would not be helpful to anybody at

this point.

So I appreciate everybody for sharing your testimony. We have

entered into the record the accompanying data. We will get some

more facts on this, and we will continue to keep an eye on this as

it moves forward.

Thank you very much. This hearing is adjourned.

[Whereupon, at 12 noon, the committee was adjourned.]

[Additional information submitted for the hearing record follows:]

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