U.S. GOVERNMENT PRINTING OFFICE

52–839 CC WASHINGTON : 1999

THE FUTURE OF UNITED STATES-CHINA TRADE

RELATIONS AND THE POSSIBLE ACCESSION OF

CHINA TO THE WORLD TRADE ORGANIZATION

HEARING

BEFORE THE

SUBCOMMITTEE ON TRADE

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

NOVEMBER 4, 1997

Serial 105–72

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON TRADE

PHILIP M. CRANE, Illinois, Chairman

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

AMO HOUGHTON, New York

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

WALLY HERGER, California

JIM NUSSLE, Iowa

ROBERT T. MATSUI, California

CHARLES B. RANGEL, New York

RICHARD E. NEAL, Massachusetts

JIM MCDERMOTT, Washington

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

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

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

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

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

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

is further refined.
iii

C O N T E N T S

Page

Advisory of October 22, 1997, announcing the hearing ........................................ 2

WITNESSES

Office of the U.S. Trade Representative, Susan G. Esserman, General

Counsel .................................................................................................................. 31

U.S. Department of State, Howard H. Lange, Acting Deputy Assistant

Secretary of State for East Asian and Pacific Affairs ....................................... 39

American Electronics Association, James F. Whittaker ....................................... 61

Aronson, Robert R., Ross Manufacturing Corp., and Revpower Limited ............ 102

Bereuter, Hon. Doug, a Representative in Congress from the State of

Nebraska ............................................................................................................... 14

China WTO High-Tech Coalition, James F. Whittaker ........................................ 61

Cohen, Calman, J., Emergency Committee for American Trade ......................... 82

Cox, Hon. Christopher, a Representative in Congress from the State of

California .............................................................................................................. 18

Emergency Committee for American Trade, Calman J. Cohen ........................... 82

Ewing, Hon. Thomas W., a Representative in Congress from the State of

Illinois ................................................................................................................... 19

Giordano, Nicholas, D., National Pork Producers Council ................................... 98

Hewlett-Packard Co., James F. Whittaker ............................................................ 61

Hills & Co., Julius Katz .......................................................................................... 51

ITT Industries, Wingate Lloyd ............................................................................... 56

Katz, Julius, L., Hills & Co. .................................................................................... 51

Levin, Hon. Sander M., a Representative in Congress from the State of

Michigan ............................................................................................................... 12

Lieberman, Hon. Joseph I., a U.S. Senator in Congress from the State of

Connecticut ........................................................................................................... 7

Lloyd, Wingate, U.S. Chamber of Commerce, and ITT Industries ...................... 56

National Pork Producers Council, Nicholas D. Giordano ..................................... 98

Ross Manufacturing Corp., Robert R. Aronson ..................................................... 102

Semiconductor Industry Association, George Scalise ........................................... 75

Stewart, Terence P., Stewart and Stewart ............................................................ 89

Sunkist Growers, Michael Wootton ........................................................................ 108

U.S. Chamber of Commerce, Wingate Lloyd ......................................................... 56

Whittaker, James, F., Hewlett-Packard Co., American Electronics Association,

and China WTO High-Tech Coalition ................................................................ 61

Wootton, Michael, Sunkist Growers ....................................................................... 108

SUBMISSIONS FOR THE RECORD

American Beekeeping Federation, Inc., American Honey Producers Association, Inc., and Fresh Garlic Producers Association, joint statement and

attachments .......................................................................................................... 114

American Honey Producers Association, Inc., joint statement and attachments

(See listing under American Beekeeping Federation, Inc.) .............................. 114

Andersen Worldwide, Charles P. Heeter, Jr., statement and attachment .......... 122

Cast Iron Soil Pipe Institute, statement and attachment .................................... 127

Committee on Pipe and Tube Imports, and Weirton Steel Corp., joint statement ...................................................................................................................... 129

DeLaney, Paul H., Jr., Law Office of Paul H. DeLaney, Jr., statement and

attachments .......................................................................................................... 131

Frenzel, Bill, Brookings Institution, statement .................................................... 50

Fresh Garlic Producers Association, joint statement and attachments (See

listing under American Beekeeping Federation, Inc.) ....................................... 114
Page

iv

NACCO Materials Handling Group, Inc., statement and attachment ................ 139

National Juice Products Association, statement and attachment ....................... 141

U.S. Integrated Carbon Steel Producers, statement ............................................. 143

United States Council for International Business, Abraham Katz, letter and

attachments .......................................................................................................... 147

Weirton Steel Corp., joint statement (See listing under Committee on Pipe

and Tube Imports) ................................................................................................ 129
(1)

THE FUTURE OF UNITED STATES-CHINA

TRADE RELATIONS AND THE POSSIBLE

ACCESSION OF CHINA TO THE WORLD

TRADE ORGANIZATION

TUESDAY, NOVEMBER 4, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON TRADE,

Washington, DC.

The Subcommittee met, pursuant to notice, at 10:03 a.m., in

room 1100, Longworth House Office Building, Hon. Philip M. Crane

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
2

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON TRADE

FOR IMMEDIATE RELEASE CONTACT: (202) 225–1721

October 22, 1997

No. TR–18

Crane Announces Oversight Hearing on

the Future of United States-China Trade

Relations and the Possible Accession of

China to the World Trade Organization

Congressman Philip M. Crane (R–IL), Chairman, Subcommittee on Trade of the

Committee on Ways and Means, today announced that the Subcommittee will hold

a hearing on the future of United States-China trade relations and the possible accession of China to the World Trade Organization (WTO). The hearing will take

place on Tuesday, November 4, 1997, in the main Committee hearing room, 1100

Longworth House Office Building, beginning at 10:00 a.m.

Invited witnesses include United States Trade Representative, Charlene

Barshefsky, and Under Secretary of State for Economic, Business and Agricultural

Affairs, Stuart Eizenstat. Testimony will also be received from private sector witnesses. Congressmen Doug Bereuter (R–NE) and Tom Ewing (R–IL) have been invited to testify on H.R. 1712, the ‘‘China Market Access and Export Opportunity Act

of 1997.’’ In addition, any individual or organization not scheduled for an oral appearance may submit a written statement for consideration by the Committee or for

inclusion in the printed record of the hearing.

BACKGROUND:

Article XII of the Agreement Establishing the World Trade Organization states

that any State or separate customs territory may accede to the WTO ‘‘on terms to

be agreed between it and the WTO.’’ In practice China, Taiwan, and other applicants must negotiate terms for membership in the WTO in the form of a Protocol

of Accession. Through the operation of a Working Party, the United States, and

other WTO members have an opportunity to review the trade regimes of applicants

to ensure that they are capable of implementing WTO obligations. In parallel with

the Working Party’s efforts, the United States and other interested member governments conduct separate negotiations with the applicant. These bilateral negotiations

are aimed at achieving specific concessions and commitments on tariff levels, agricultural market access, and trade in services, of particular interest to the member

country involved.

China applied for accession to the General Agreement on Tariffs and Trade in

July 1986, and work has proceeded sporadically in the China Working Party since

that time to negotiate the conditions upon which China will enter the WTO.

In negotiating the terms of its accession to the WTO, China takes the position

that the United States should grant China unconditional, most-favored-nation

(MFN) trade status, a change requiring legislation. Sections 402 (a) and (b) of the

Trade Act of 1974 set forth criteria which must be met, or waived by the President,

in order for the President to grant MFN status to non-market economies such as

China. Conditional, non-discriminatory MFN trade status was first granted to the
3

People’s Republic of China, pursuant to Title IV, on February 1, 1980, and has been

extended annually since that time. Extensions are granted based upon a Presidential determination that such an extension will substantially promote the freedom

of emigration objectives in Title IV of the Trade Act of 1974, the so-called JacksonVanik amendment.

The annual Presidential waiver authority under Title IV expires on July 3 of each

year. The renewal procedure requires the President to submit to Congress a recommendation for a 12-month extension by no later than 30 days prior to the waiver’s expiration (i.e., by not later than June 3). The waiver authority continues in

effect unless disapproved by Congress. Disapproval, should it occur, would take the

form of a joint resolution disapproving the President’s determination to waive the

Jackson-Vanik freedom of emigration requirements for China.

H.R. 1712, the ‘‘China Market Access and Export Opportunity Act of 1997,’’ introduced by Congressmen Doug Bereuter (R–NE) and Tom Ewing (R–IL), would encourage the People’s Republic of China to join the WTO by removing China from

Title IV of the Trade Act of 1974, and authorizing the President to raise tariffs on

Chinese imports, if China fails to take adequate steps to become a WTO member.

In announcing the hearing, Chairman Crane said: ‘‘It is indeed frustrating for

those of us who support normalizing U.S. trade relations with China to observe that

China’s WTO negotiations—in progress for over a decade—are still far from concluding. When measured against the obligations and commitments observed by other

WTO members, China’s proposals for liberalizing its trade regime remain seriously

inadequate. I continue to hope that China will come forward with meaningful offers

to breathe life into trade talks which are, for now, largely stalled.’’

FOCUS OF THE HEARING:

The focus of the hearing will be to examine the future of United States-China

trade relations and the problems and opportunities associated with the entry of

China into the WTO. Testimony will be received on objectives for the negotiations

with China, as well as on the anticipated impact of its WTO membership on U.S.

workers, industries, and other affected parties. Members of the Subcommittee would

also welcome testimony on: (1) how progress in China’s WTO negotiations are affecting the pending application of Taiwan to join the WTO, (2) whether the terminology

‘‘most-favored-nation treatment’’ should be changed in order to reflect more accurately the nature of the trade relationship with China, and (3) views on H.R. 1712.

DETAILS FOR SUBMISSIONS OF REQUESTS TO BE HEARD:

Requests to be heard at the hearing must be made by telephone to Traci Altman

or Bradley Schreiber at (202) 225–1721 no later than the close of business, Tuesday,

October 28, 1997. The telephone request should be followed by a formal written request to A.L. Singleton, Chief of Staff, Committee on Ways and Means, U.S. House

of Representatives, 1102 Longworth House Office Building, Washington, D.C. 20515.

The staff of the Subcommittee on Trade will notify by telephone those scheduled to

appear as soon as possible after the filing deadline. Any questions concerning a

scheduled appearance should be directed to the Subcommittee on Trade staff at

(202) 225–6649.

In view of the limited time available to hear witnesses, the Subcommittee may

not be able to accommodate all requests to be heard. Those persons and organizations not scheduled for an oral appearance are encouraged to submit written statements for the record of the hearing. All persons requesting to be heard, whether

they are scheduled for oral testimony or not, will be notified as soon as possible

after the filing deadline.

Witnesses scheduled to present oral testimony are required to summarize briefly

their written statements in no more than five minutes. THE FIVE–MINUTE RULE

WILL BE STRICTLY ENFORCED. The full written statement of each witness will

be included in the printed record, in accordance with House Rules.

In order to assure the most productive use of the limited amount of time available

to question witnesses, all witnesses scheduled to appear before the Subcommittee
4

are required to submit 200 copies of their prepared statement and an IBM compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1 format, for review by

Members prior to the hearing. Testimony should arrive at the Subcommittee on

Trade office, room 1104 Longworth House Office Building, no later than Friday, October 31, 1997. Failure to do so may result in the witness being denied the opportunity to testify in person.

WRITTEN STATEMENTS IN LIEU OF PERSONAL APPEARANCE:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) single-space legal-size copies of

their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text

or WordPerfect 5.1 format only, with their name, address, and hearing date noted

on a label, by the close of business, Tuesday, November 18, 1997, to A.L. Singleton,

Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102

Longworth House Office Building, Washington, D.C. 20515. If those filing written

statements wish to have their statements distributed to the press and interested

public at the hearing, they may deliver 200 additional copies for this purpose to the

Subcommittee on Trade office, room 1104 Longworth House Office Building, at least

one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not

in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on an IBM compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect

5.1 format. Witnesses are advised that the Committee will rely on electronic submissions for

printing the official hearing record.

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

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

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

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

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

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

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

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

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

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

5

Chairman CRANE. The Subcommittee will come to order. Will everyone please be seated. Good morning. This is a meeting of the

Ways and Means Trade Subcommittee, to consider the critical issue

of United States-China trade relations, and to assess the progress

in the negotiations for China to join the WTO, World Trade Organization.

It is indeed frustrating to those of us who support normalizing

United States trade relations with China to observe that the negotiations between that country and the WTO, in progress for over

a decade, are still far from a conclusion. When measured against

the obligations and commitments observed by other WTO members,

China’s proposals for liberalizing its trade regime remain seriously

inadequate. If China joins the WTO, the terms on which it accedes

will have a huge impact on the opportunities available to United

States firms and workers in the 21st century. However, I know I

speak for many of my colleagues when I say that the United States

should not engage in these talks indefinitely. Either China offers

to make the necessary reforms of its closed system in the near future, or I would support deploying United States negotiators to another assignment until such time as China is willing to work out

a commercially acceptable agreement.

Today we will hear from two administration witnesses who will

discuss the results of the summit meeting last week between President Clinton and President Jiang Zemin. I am interested in hearing their thoughts on the summit, and specifically whether it succeeded in injecting any momentum into the lackluster WTO negotiations. I note that the focus of the summit was on areas other

than trade, and I’m interested in what the USTR, U.S. Trade Representative, sees ahead for the United States-China economic relationship in light of these factors.

Finally, I welcome the testimony of my colleagues, Doug Bereuter

and Tom Ewing, who will discuss legislation they have drafted,

H.R. 1712, which is designed to spur progress in China’s WTO negotiations.

Now I would like to yield to my distinguished colleague from

California, Mr. Matsui, for an opening statement.

Mr. MATSUI. Thank you, Mr. Chairman, for these hearings today

on the future of United States-China trade relations and the possible accession of China to the World Trade Organization. I would

also like to welcome Mr. Lieberman, Mr. Bereuter, Mr. Levin, Mr.

Ewing, and certainly Mr. Cox from California.

At last week’s summit here in Washington, it was agreed by the

United States and China that China’s full participation in the multilateral trading system is in their mutual interest. It was further

agreed by both sides to intensify negotiations on market access and

on implementation of the WTO principles so that China can accede

to the WTO on a commercially meaningful basis at the earliest possible time. In light of this renewed commitment by both sides on

China’s accession to the WTO, this hearing is indeed timely.

Our traditional relationship with China has become one of the

most important and complex of all trade relationships. Consequently, I would submit that the negotiations on the terms and
6

conditions for China’s entry into the WTO will be the most important trade negotiations in which the United States is involved in

the coming years. Clearly, the economic stakes with China are

high. China is now the world’s 10th largest trading country. Given

the impressive growth of the Chinese economy and its population

of 1.2 billion people, 22 percent of the world population, China’s

presence as a world trade partner will only increase.

Unfortunately, as the commercial importance of China has

grown, so has our bilateral trade deficit. Last year, our bilateral

trade deficit grew to nearly $40 billion. This year the deficit will

be in the range of $46 billion. This is clearly unacceptable. One

way to reduce this deficit is through greater access to the Chinese

market and continuing reform of the Chinese economic system.

This can be accomplished in part by China’s accession to the WTO

on sound commercial terms.

Let me reiterate for the record my longstanding position on this

issue. The United States should support Chinese accession to the

WTO provided it is done on a commercially sound basis and with

full acceptance by China of the basic obligations of the WTO system. Moreover, our trade negotiators in the administration should

take whatever time is necessary to pursue negotiating options that

ensure these negotiations are done properly and not hastily.

A key issue is whether the United States should grant China unconditional MFN, most-favored-nation status, upon China’s completion of the terms of accession to the WTO. Granting China unconditional MFN will require an act of Congress, so Congress must continue to be an active partner with the administration in formulating the United States negotiating position. Moreover, there continues to be lively debate in Congress on how the Congress should go

about extending unconditional MFN to China and under what circumstances. Several bills have been introduced, and will undoubtedly be the subject of discussions at today’s hearing.

In conclusion, Mr. Chairman, let me state that prior to last

week’s summit, it appeared China was unable or unwilling to come

forward with a set of offers on WTO accession that would provide

and move the process forward. Last week’s summit may have

breathed new life into these negotiations. Only time, however, will

tell. Given the importance of these negotiations, it is absolutely essential that we in Congress continue to work closely with the administration to both promote and safeguard United States commercial interests, and to ensure that the deal reached lays a significant

solid foundation for congressional action on unconditional MFN for

China.

I welcome today’s witnesses and look forward to their testimony.

Again, thank you, Mr. Chairman.

Chairman CRANE. I want to thank the witnesses in advance for

their prepared testimony. I would ask that you please try and keep

your oral remarks to under 5 minutes. Please submit your written

text for the printed record. It will be made a permanent part of it.

The first witness today is our distinguished colleague from Connecticut, Senator Lieberman, who has introduced in the Senate legislation similar to the Bereuter-Ewing bill. We’ll then proceed with

Sandy Levin from Michigan, Doug Bereuter from Nebraska, Chris
7

Cox from California, and Tom Ewing from my home State of Illinois. Please proceed in that order.

[The opening statement of Hon. Jim Ramstad follows:]

Statement of Hon. Jim Ramstad, a Representative in Congress from the

State of Minnesota

Mr. Chairman, thank you for calling today’s hearing to discuss US-China trade

relations and the possible accession of China to the WTO.

Earlier this year during the MFN hearings and debates, we discussed in depth

our relationship to China. It continues to be an important issue we must review

often since the U.S.-Sino trade relationship is very important to U.S. businesses and

jobs.

China is one of the fastest-growing markets in the world and is home to over 1.2

billion people—20% of the world’s population. US-China bilateral trade has grown

from $2 billion in 1978 to nearly $60 billion in 1996—a 3000% increase! And my own home state of Minnesota exports about $120 million annually of

manufactured goods and agricultural products to China, excluding Hong Kong. Almost 200 Minnesota companies do business with China, making it our eighth largest trading partner—and growing. Some 60 Minnesota companies have joint ventures, factories or branch sales offices in China.

I know the Minnesota business community is excited about future opportunities

with China. The recent US-China talks, in which President Clinton pledged to allow

American companies to begin bidding on $60 billion in Chinese energy contracts and

the President of China promised to reduce tariffs on $1.2 billion of US computers

and telecommunications equipment will directly impact Minnesota companies like

Honeywell and 3M, as well as many others.

But, according to Sung Won Sohn, Chief Economist of Norwest Corporation, many

nontariff barriers remain as major factors impeding economic progress between our

countries. We must take steps to remove these impediments. Through our policy of

engagement, I believe we can, after much hard work, achieve progress on economic

and political issues in China that are important

Knowing how crucial a normal, engaged relationship between the US and China

is for improving the lives of people in both countries—as well as those of Hong

Kong, Taiwan and other Pacific Rim nations—I want to thank you again, Mr. Chairman, for calling this hearing. I look forward to hearing from today’s witnesses about

the importance and implications of US-China Trade relations and China WTO accession.

STATEMENT OF HON. JOSEPH I. LIEBERMAN, A U.S. SENATOR

FROM THE STATE OF CONNECTICUT

f

Senator LIEBERMAN. Thank you, Mr. Chairman. Good morning,

Mr. Chairman, Mr. Matsui, Members of the Subcommittee. Thank

you for giving me this opportunity to say a few words about our

relations with China, particularly our trade relations, and then to

talk about H.R. 1712.

Mr. Chairman, we are at a critical juncture in our relations with

the PRC, People’s Republic of China. How we choose to manage

China’s emergence as a major global power will profoundly affect

the shape, not only of the global order, but the future prosperity

of our workers and industries. I believe we have got to work to establish an acceptable framework for peacefully integrating China

into the evolving economic, security, and political systems of international order. The core question that we in this Congress must

face is whether to continue our current path of cooperation and integration or choose the path of containment and isolation.

Mr. Chairman, the administration has made its choice. I think

it is the correct one, which is for cooperation and integration. We

in Congress are sending mixed and often negative signals. During

this session there has been much debate about what direction we
8

should take in our relations with China. Much of the legislation

that has been introduced has assumed the worst, centered on containment, and favored economic sanctions to remedy just about

every Chinese transgression. This policy is ultimately premised, I

believe, on a view that China will inevitably be our next great

enemy. But it seems to me that treating China as our inevitable

enemy is the surest way to guarantee that result.

What we need here is not just sticks, but carrots as well. I say

that because on balance, China’s economic and political reforms are

becoming more, not less consistent with America’s core values. The

transformation of a socialist command economy into a controlled

market system has allowed for the emergence of a new class of entrepreneurs, and has promoted individual freedom to decide what

to consume, where to live, what to do for a livelihood, and with

much more freedom what to say and think, what to say to each

other.

The state sector of the economy—and I think this is a very important result of trade and economic growth—the state sector of

the economy has steadily declined and increasing numbers of Chinese now work for employers that do not answer directly to the

Central Government or the Communist Party. That means the

Communist Party’s ability to control and monitor the social, political, and economic lives of individual Chinese citizens has diminished substantially.

So the movement in China, thanks in good measure to trade and

economic growth, is in our direction. On the other hand, there’s an

awful lot that still falls short of our ideals and principles. Here,

particularly in the subject of this hearing, we have a large and

growing trade deficit with China that is unacceptable. A prosperous

and stable relationship will only continue for as long as we have

fair access to China’s markets. Therefore, bringing China into the

World Trade Organization will only help in establishing a level

playingfield for us to compete with China.

To encourage China’s current path of reform and development,

and to help ensure that China’s inevitable transformation into a

global and strategic superpower occurs in a way not adverse to

American interests and values, I believe we must have a policy

that aims at integration instead of isolation, and really relies on

carrots, saving the sticks for when they are most needed. In that

sense, it is time for Congress to end our mixed messages and ambivalence, the noise that makes us feel good but doesn’t lead to

much, and to work together across party lines to build a bipartisan

consensus for a new China policy.

Toward that end, 2 weeks ago I was privileged to introduce the

U.S.-China Relations Act of 1997 in the Senate, along with a bipartisan group of colleagues: Senators Chuck Hagel, Bob Kerrey, and

Frank Murkowski. In that legislation, which deals with our strategic relationship with human rights concerns, environmental concerns, and so forth, we embraced in total H.R. 1712, the measure

introduced by Congressmen Bereuter and Ewing, because we think

it is a perfect combination of carrots and sticks, holding out the

hopes, setting a path for accession of China to WTO and thereby

getting us over the annual spasms related to the consideration of
9

MFN status, but containing within it the stick of a snapback tariff

to create greater incentive for movement forward.

I am going to leave the discussion of the details of the bill to its

originators. Let me just say that I believe it holds hope of creating

a win-win situation. A win for the United States in terms of access

to Chinese markets, a win for China and particularly for its people,

as we help them walk the road not only to a better life, but to a

freer life.

Mr. Chairman, I would like to ask your permission to include the

rest of my statement in the record as if read. Thank you for your

courtesy in allowing me to come over and say a few words this

morning.

Chairman CRANE. Without objection so ordered.

[The prepared statement follows:]

Statement of Hon. Joseph I. Lieberman, a U.S. Senator from the State of

Connecticut

Mr. Chairman, distinguished Members of the Committee, I appreciate this opportunity to discuss my views on the future of U.S.-China trade relations.

We are at a critical juncture in our relations with the People’s Republic of China.

How we choose to manage China’s emergence as a major global power will profoundly impact the shape of the global order and the future prosperity of our workers and industries. This is not dissimilar to the late 19th century when Japan and

Germany emerged to challenge Britain for world leadership.

British diplomacy failed although its task was not an easy one. Two terrible wars

have stained the history of this century. We must try to do better. We must work

to establish an acceptable framework for peacefully integrating China into the evolving international economic, security, and political systems. And the core question is

whether to continue on our current path of cooperation and integration or choose

the path of containment and isolation.

During this session there has been much debate about which direction we should

take in our relations with China. Most of the legislation that has been introduced

regarding China has assumed the worst, centered on containment, and favored economic sanctions to remedy a host of Chinese transgressions. This policy of containment is ultimately premised on a view that China will be our next great enemy.

Some of my colleagues ask us to pass laws that use punishment as the primary

tool in our bilateral relationship. These proposals overlook a number of realities: the

ineffectiveness and unproductiveness of punitive legislation in changing China; the

importance of maintaining and fostering trust and confidence in such an important

bilateral relationship; the real potential for retaliation by China; and the potential

upsides of a constructive relationship with China. Ultimately, those bills proposing

containment of China will neither achieve their stated aims of changing China’s behavior nor promote America’s more general national and international interests.

The rest of the world will not join us in our effort to isolate China. That makes

containment unworkable. Our best policy option is to work to integrate China. Just

this past week, the U.S.-China summit realized the first steps towards a more integrated and cooperative relationship with China. We should be encouraged and press

forward for more contact with China.

But before rushing to any conclusions about China’s intentions, it is helpful to

take a closer look at its development over the past 20 years. China has been engaged in a slow but steady effort to integrate itself into existing international systems. It has made efforts to be active in the United Nations, it has participated in

a number of multilateral organizations, and has adapted some domestic institutions

and policies to the demands of the international community.

I visited China last March with my friend and distinguished colleague, Senator

Connie Mack of Florida, and was struck by the revolutionary changes occurring

there. This time the revolution is being driven not by Mao’s little red book, but by

the mass quest for cellular telephones and personal computers, and incidentally, all

the personal freedom of communication that goes with them.

The central government in China is still not tolerant of opposition. Political and

religious dissidents are in jail. I was disappointed that President Jiang did not use

the summit as an opportunity to release Wei Jing Sheng. On the other hand, average Chinese seem to have lost their fear of open and spirited conversations with
10

Westerners. And Senator Mack found the Catholic Churches during that Holy week

before Easter packed with worshipers.

On balance, China’s economic and political reforms are becoming more, not less,

consistent with American core values. The transformation of a socialist command

economy into a controlled market system has allowed for the emergence of a new

class of entrepreneurs and has promoted individuals’ freedom to decide what to consume, where to live, what to do as a livelihood. The State sector of the economy has

steadily declined, and increasing numbers of Chinese now work for employers that

do not answer directly to the central goveist Party. This means that the Communist

Party’s ability to control and monitor individual’s social, political, and economic lives

has diminished substantially. Explicit political reforms have been fewer, but today

there are more local elections being held in China than at any other time in its modern history. The legal system has been reinvented over the past two decades, and

has seen in recent years substantial (though still inadequate) improvements in

criminal procedure and judicial review of administrative abuses. It can be said in

summary that, the reforms of the past two decades have led to increased personal

liberty, a strengthened legal system, and the beginnings of a civil society, although

there is still a very long way to go.

The Chinese government has undertaken a slow but steady deregulation of the

economy since it allowed for free enterprise in the countryside in 1982. Deregulation

and the marketization of the Chinese economy has led to unprecedented improvements in the living standards—and purchasing power—of ordinary Chinese. In the

past 15 years, China’s per capita GDP has more than tripled, from $889 to $2,923,

and is forecast to be $4,190 in 2000. Not uncoincidentally, China’s demand for US

exports has increased in similarly substantial leaps. US goods and services exports

destined for China have increased from $3.7 million in 1980 to $11.1 billion in 1995.

China is now America’s fifth largest trading partner. Similarly, US Foreign Direct

Investment in China has increased significantly.

On the other hand, we have a large and growing trade deficit with China that

is unacceptable. A prosperous and stable relationship will only continue for as long

as we have fair access to China’s markets; and bringing China into the World Trade

Organization will only help in establishing a level playing field for us to compete

with China.

The United States, along with its trading partners, have spent nearly half a century writing the rules for disciplined but fair international economic relations. From

the Kennedy Round to the establishment of the World Trade Organization in 1994,

the United States has been instrumental in establishing the new international trade

order. We should continue to lead by bringing China into the WTO on terms that

not only will expand global economic opportunities for all member economies but

also will preserve our domestic economic interests.

The time has come for China to be full member of the new global economic system

and to share in the maintenance and growth of that system. The sooner China is

a part of the WTO the better for everyone.

This is why Senators Hagel, Kerrey, Murkowski and I decided to include Representative Beureuter and Ewing’s proposal for giving China permanent MFN into

our U.S.-China Relations Act of 1997. It is important to get China into the WTO,

but also to hold them to high standards. We should not allow for a transition period

for the PRC in fulfilling fundamental obligations of the WTO, including national

treatment, transparency, and judicial review. There must be real market access for

agricultural products and services (this includes the right to establish services in

the areas of insurance, value added telecommunications, financial services, distribution, and business services such as after-sales services). The PRC should agree to

eliminating nontariff barriers in not more than 5 years from the time of accession.

The PRC should agree to lifting trade-related investment barriers within 2 years of

accession. And most importantly, we must develop a multilateral review mechanism

to ensure the China is meeting the obligations of the WTO and create appropriate

enforcement mechanisms, in the Office of the USTR, to monitor the PRC’s implementation of the WTO.

To encourage China’s current path of reform and development and to help ensure

that China’s inevitable transformation into a global economic and strategic power

occurs in a way not adverse to U.S. interests or values, the U.S. must have an active

China policy that aims at integration instead of isolation, and relies on carrots rather than sticks. It is time for Congress to end the ambivalence and build a consensus

for a new China policy. Towards that end, along with my distinguished colleagues

Senators Hagel, Kerrey, and Murkowski, I introduced the U.S.-China Relations Act

of 1997.

This legislation assumes that China will emerge as a superpower in the coming

decades and become a nation with which the United States can and must have coop-
11

erative relationships—and that our relationships will be more cooperative if our economic, strategic, human rights, and environmental relations are viewed as distinct

components of a larger, mutually-beneficial whole. It is based on a conclusion that

China today is different from the China of the Cultural Revolution two decades ago

and the China of Tiananmen Square a decade ago.

In addition to calling for the granting of permanent MFN upon China’s accession

to the WTO, the ‘‘U.S.-China Relations Act of 1997’’ requires the President to provide an annual accounting of our economic relationship with China. The President

would be required to submit an annual Economic Balance of Benefits Study to the

Congress. The report would analyze the impact of existing bilateral trade agreements with China on U.S. employment, balance of trade, and U.S. international

competitiveness.

To further promote China’s integration, the Act encourages China’s future participation in the OECD and G097 meetings by requiring the President to develop criteria for support of China’s participation in the Organization for Economic Cooperation and Development and G097 meetings, two groups that China is far from being

accepted into, but in which it aspires to membership.

It is also important not to lose sight of the fact that our trade relationship is one

part of a larger relationship. To support our economic relations we must also maintain cooperative strategic and political relations. The Act requires greater information on energy and national security issues. The President should establish a bilateral U.S.-China committee on energy security and one for food security. These committees would help develop a bilateral policy for securing a stable supply of energy

from politically volatile regions and securing food for China’s large population. The

bill also includes a Sense of the Senate Resolution that the President and Congress

continue to expand contact and exchanges between U.S. and Chinese national security personnel.

Human rights are fundamental and cherished American values, as well as a key

concern that drives U.S. foreign policy. This heritage of idealism and support for individual rights dates back to the founding of our country and is a profound asset

to U.S. leadership in the world.

The United States must do what it can to work with China to promote human

rights through changes in their institutional, legal, and political structures. Moreover, international interaction and economic growth have and will, over time, help

inculcate the rule of law in China. It is incumbent of the United States to encourage

this dramatic transformation of China’s legal regime. The ‘‘U.S.-China Relations Act

of 1997’’ encourages change in China by promoting dialogue between professional

groups, by creating incentives for China to establish the rule of law and a civil society, but retaining the Presidential option of imposing sanctions in the event of an

absence of progress over time.

There is, however, one provision more than any other that characterizes the tone

and thrust of this Act. It calls for the formation of a commission to prepare a profile

of China province by province. This profile then would serve as a basis for consideration of transactions with China by the Export-Import Bank and the Overseas Private Investment Corporation in those identified provinces.

This provision is particularly helpful in improving and strengthening our relations

with China. By opening up OPIC programs to regions that have acceptable human

rights, labor, and environmental standards, we are increasing investment into

China at the same time we are advancing our values. It is a provision that encourages China to improve its human rights record without punitive economic sanctions.

It uses a carrot instead of a stick.

America’s economic and strategic interests, as well as our fundamental values, are

best served by encouraging China on its path of economic and political reform.

China’s geopolitical and economic rise are inevitable developments. How we react

to China’s transformation and manage the bilateral relationship, however, is within

our discretion. U.S.-China relations are at a critical turning point, and the real challenge before us now is how to peacefully integrate China into the world community,

and work with China to ensure world prosperity and stability in the 21st century.

Mr. Chairman and distinguished members of the Committee thank you for this

opportunity. I ask that my complete statement be included in the record.

Mr. Levin.

Chairman CRANE. Thank you for giving us your time, Senator.

f
12

STATEMENT OF HON. SANDER M. LEVIN, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF MICHIGAN

Mr. LEVIN. Thank you, Mr. Chairman. First, if I might, let me

sincerely congratulate you and the Subcommittee for holding this

hearing. There has been too little attention to the issue of Chinese

WTO accession and our economic relationship in this Congress. It

took a back seat during the recent visit of President Jiang Zemin

and probably appropriately so; human rights issues were more center stage. But it’s critical that we increasingly turn to the issue of

our economic relationships.

The visit here was a mixture of communication and kind of

peaceful confrontation on human rights issues. I think we need to

have the same kind of approach on economic issues. There’s a huge

distance between containment on the one hand and acquiescence

on the other. I am opposed to either one.

China’s economy is now the second largest in the world and is

predicted to become the first in the next several decades. It’s not

only going to become perhaps the largest, but it’s a very different

economy than that of the United States, Japan, or Western Europe.

The role of the State is dramatically different, both in terms of

ownership and management of the economy.

We are going to become increasingly competitive or there will be

increasing competition from China. It’s not just a matter of toys

and footwear. If you look at the data, even today they show the five

largest exports of China, after toys and footwear are data processing equipment, electrical machinery, and telecommunications

equipment.

There have been several approaches suggested as to our economic relationships with China. One is to negotiate, to essentially

bring them into the WTO and then negotiate the tough issues. I

think that would be a serious mistake; I think it would be doomed

to failure. A second approach, which the United States has been

taking, is to negotiate first, but to focus on market access issues,

to bring China in on commercially acceptable terms, but with the

market access focus being primary.

But I want today to emphasize that there are issues beyond market access: export controls that China now imposes, subsidies, and

there’s a protocol that has been suggested through WTO that I

think is totally unsatisfactory. Local content issues, technology

transfer requirements, labor market standard issues, environmental standard issues are today being discussed through fast

track.

There was an article in the Washington Post on October 25 that

had this headline: ‘‘China Plays Rough: Invest in Transfer Technology or No Market Access.’’ It discusses the experience of GM,

General Motors. When I was in China, I discussed that: In order

for China to give its acceptance to GM’s plant, there was a requirement of technology transfer. It requires that GM set up five training institutes for automotive engineers, and includes an understanding that after 5 years, China will enforce its local content requirements. So while much of the content in the Buick Regal that

comes off the assembly line today is made in the United States,

after a few years that’s not going to happen.
13

So let me just conclude by urging that you very much continue

this debate. I would also urge, Mr. Chairman and the Members

who have come here today for this important subject, that we

should not give up our leverage here in the Congress. There are

some who argue that we should approve any Chinese accession to

WTO. However you come out on that, I don’t think we want to give

up our only other leverage, our only existing leverage: that relates

to permanent MFN status for China.

This is going to be a tough, difficult series of negotiations. There

is a lot at stake for the United States, for its businesses and workers. We should be patient. It’s important that it be done in the

right way. Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. Sander M. Levin, a Representative in Congress from the

State of Michigan

Thank you, Mr. Chairman, for giving me this opportunity to testify on a truly

vital trade issue.

Just look at the numbers. China’s real GDP more than quadrupled in the fifteen

years after its historic re-opening in 1979. By some measures, China now has the

world’s second largest economy. It also holds the second largest bilateral trade deficit with the United States, behind Japan.

Let’s face it: the impact of China on the world trading system and the U.S. economy over the next decade will be powerful.

So we better get it right. And that means taking the time to get it right.

In the long run, the best hope for stabilizing trade relations lies in China’s accession to the World Trade Organization on commercial, as opposed to political, terms.

This would bind China to the open market principles that undergird the global trading system. China is both a developing country and one of the largest economies in

the world. Any terms of accession must recognize this duality: China must commit

to abide by free market norms, yet implementation can take place over a specified

period of years.

But it’s going to be a lot harder than it sounds.

We all agree that China should accede on ‘‘commercially acceptable’’ terms. But

that begs the question: what does ‘‘commercially acceptable’’ mean when applied to

a non-market economy, over 40 percent of which is made up of state-owned enterprises, and much of which is subject to central- and regional-government control, all

on a scale that dwarfs every other economy but our own?

The answer is that the term ‘‘commercially acceptable’’ has no objective meaning

in relation to China, which has an economy that is far from ‘‘commercial’’ in any

familiarly capitalistic way and which is far from ‘‘acceptable’’ in any economic, let

alone political, parlance. Instead, the term ‘‘commercially acceptable’’ means what

we and the rest of the WTO community and China say it means.

So the debate is not really about what is ‘‘commercially acceptable,’’ but rather

what is best for the economic, political and military security of all nations and, in

particular, what is best for the WTO and the market economies that belong to it

today?

Already we hear some say that it would be better to get China into the WTO

quickly and then sort out our disagreements. And we hear others say that China

should be let in as soon as it offers more meaningful market access.

In my judgment, both of these schools of thought head us in the wrong direction.

First, our main leverage with China lies in negotiating the terms of accession.

Once China is in, many countries will not have the temerity to challenge China even

when it bends or breaks WTO rules. China will then be able shape the WTO in its

image, rather than the WTO shaping China. The time to sort out our differences

and to chart a clear path to China’s compliance with free market norms, as embodied in the WTO rules, is before accession, not after. Cutting corners in admitting

China to the WTO would not only perpetuate our bilateral trade deficit but would

undermine the entire global trading system. Most immediately, China’s accession

will set an important precedent for future accessions by similar non-market economies like Russia, Saudia Arabia, Eastern Europe, and Vietnam. But other dangers

abound: with the recent financial turmoil in Asia, some of China’s neighbors may

be actively looking for an alternative to the Western economic model.
14

Second, agreeing to core WTO principles like national treatment, most favored nation treatment, and transparency, and agreeing to tariff reductions and market access should be the beginning, not the end of the negotiations. Then we’ve got to ask

‘‘market access to what?’’ To the small fraction of China’s economy that’s subject to

market forces? NO! We’ve got to address the unique problems presented by stateowned enterprises, state-directed comglomerates, and export targeting. We’ve also

got to ensure that there’s an independent judiciary and the rule of law to enforce

contract and other rights. And we ought to insist on minimally free markets for

labor, as well as minimum environmental standards. The extensive intertwining of

government and private sectors in China and in other non-market economies demands special attention and may require new rules to deal with government subsidization. And we ought to consider the transitional mechanisms used to integrate

the nonmarket economies of Hungary, Poland and Romania into the WTO’s predecessor, the GATT, in the 1960s. These mechanisms essentially prescribed that, during the transition period, imports into the nonmarket economy rise by a fixed percentage each year while free market economies retain the right to unilaterally limit

nonmarket exports to their markets to prevent market disruption.

Finally, let me say a word about those who would downplay China’s significance

by saying that imports from China are mainly toys and footwear. The problem is

that the toymaker of today is the automaker of tomorrow.

While it’s widely recognized that China exports a lot of toys to the U.S., it’s also

true that three of China’s other top-five exports are data processing equipment, electrical machinery, and telecommunications equipment. And a recent news article describes China’s plans to produce Buick Regals that will be made initially with mostly U.S. parts but eventually—because of China’s domestic content requirements—

will be made exclusively of Chinese parts and exported abroad. As former Commerce

Undersecretary of International Trade Jeffrey Garten wrote in last week’s Financial

Times, China ‘‘is fast moving upmarket, selling more sophisticated manufactured

products.’’

In the end, I believe that patience in negotiating the terms of China’s accession

to the WTO is vital because progress on economic relations will have an enormous

impact on the human rights and national security dimensions of our relationship

with China and the rest of the world.

As we patiently negotiate the terms of China’s accession, we must not hesitate

to aggressively take unilateral action under Section 301 of U.S. trade laws to combat China’s unfair trade practices wherever possible.

Also, to provide our negotiators with additional leverage in the accession talks

and to ensure that U.S. interests are fully promoted, I believe that it is preferable

that Congress should vote on the final accession agreement as it does with all major

trade pacts. While this would be the first time Congress has voted on an accession

agreement, in my view it would be appropriate because of the sheer size of China’s

economy. But Congress will play a vital role in any event. China’s accession to the

WTO will be linked to granting MFN on a permanent basis, and Congress would

need to act on that proposition after seeing the actual terms of accession.

So I congratulate the Subcommittee for holding this hearing. We need to be engaged on this critical set of issues. They are not easy ones, and reasonable people

can differ. But it is essential to face the issue head on, and the sooner the better.

Next, Mr. Bereuter.

Chairman CRANE. Thank you, Sandy.

f

STATEMENT OF HON. DOUG BEREUTER, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF NEBRASKA

Mr. BEREUTER. Thank you, Mr. Chairman and Mr. Matsui, Members of the Subcommittee. First let me thank you for holding these

very timely hearings. I know it’s extremely busy for all of us so I

will be concise as you request.

As we all know, last week President Clinton hosted Jiang Zemin

for the first Sino-American summit on United States soil since

1985. One year after that last official State visit in 1985, the People’s Republic of China formally applied to become a signatory to

GATT, the General Agreement on Tariffs and Trade. Since then,
15

there have been more than 20 working party meetings in Geneva,

and many more bilateral meetings between our trade negotiators

to bring China into what we now call the World Trade Organization.

Despite these multiple efforts, there has been very little real

progress in getting China to formally bind itself to international

trade rules. Nearly every news commentator on last week’s summit, from the New York Times to the Associated Press, has stated

that one big failure of the summit was a noticeable lack of progress

in these decade-old negotiations. Earlier this year conventional wisdom was that this summit would showcase an agreed framework

for China’s WTO accession. Yet as recently as last week, the Journal of Commerce called Beijing’s effort to get into the WTO a ruse.

Examining the PRC’s offer in many areas—from financial services to agriculture to rules on investment—leads one to conclude

that the Journal of Commerce is correct. Meanwhile, China’s trade

surplus with the United States is growing significantly and the

growth rate for United States exports are stagnant. Therefore, in

both political and economic terms, the huge and growing trade deficit is unsustainable in this country. We must have change.

It is really not too surprising that China’s offer to become a

member of the WTO is woefully inadequate and that the decadeold negotiations have stalled. As a recent New York Times editorial

pointed out, Beijing’s hesitation is unsurprising. It already reaps

without making concessions the benefit of the same tariff status we

grant to member countries of the WTO without being a member of

that organization. This guarantees that Chinese exports to the

United States are taxed no more than exports from any WTO member. Incidentally, the European Union countries have not automatically granted China a similar free ride.

Recognizing that China gets this free ride to United States markets without giving United States exporters similar treatment,

Representative Tom Ewing and I have introduced legislation that

gives American trade negotiators the tools to pry open China’s market. The China Market Access and Export Opportunities Act, H.R.

1712, requires that China make either an acceptable offer to join

the WTO or face snap-back tariffs, generally tariffs in the 4- to 7-

percent range as contrasted to the Smoot-Hawley level tariffs of

about 44 percent. Now that’s a reasonable approach to negotiations

that are going nowhere and a U.S. trade deficit that is rapidly

growing and unsustainable.

The Bereuter-Ewing legislation would help induce China’s leaders to comply with world trade rules by eliminating our annual

most-favored-nation review when China accedes to the WTO. Most

people think that just happens; it doesn’t. This would eliminate

Beijing’s contention that China could make all of the major structural and trade liberalization changes necessary to join the WTO,

only to have the U.S. Congress continue its annual MFN reviews.

Alternatively, if the President determines that China is not making

significant progress toward WTO membership or if Beijing denies

United States exporters adequate interim market access, the China

Market Access and Export Opportunities Act would require the

President to impose pre-Uruguay round tariffs, tariffs which were

in effect on December 31, 1994, on one or more categories of im-
16

ports from China. As I said, those are in the range of 4 to 7 percent, in contrast to the Smoot-Hawley 44 percent average. Those

are mandated, of course, if MFN is revoked. Their imposition would

be a realistic enforceable response to China’s closed markets. Beijing would be compelled to take notice.

Currently, China’s leaders ignore Congress’ annual threat to revoke MFN because they know we will not impose such draconian

tariffs on United States imports. Six months after the law’s enactment, the President would be required to announce the tariff increases that he deems appropriate. Six months later, he would impose the tariffs selected if China still does not meet the bill’s criteria. This process would give the administration an entire year for

serious WTO accession negotiations with the additional leverage of

modest, if realistic, tariff increases.

Moreover, in opposing tariffs, the President would be given wide

discretion to select items for tariffs, to set tariff rates differentially

but within statutory limits, and to modify tariff rates depending

upon Beijing’s response.

Our scalpel-like tariff raising mechanism, rather than the meat

ax Smoot-Hawley level tariffs of the annual MFN process, would

greatly increase the U.S. Trade Representative’s ability to negotiate a commercially acceptable protocol for China’s accession to the

WTO.

Seeing the red light, I’ll respect that. I do have a couple more

paragraphs, but you have the full statement before you. Thank you,

Mr. Chairman.

[The prepared statement follows:]

Statement of Hon. Doug Bereuter, a Representative in Congress from the

State of Nebraska

As we all know, last week President Clinton hosted Jiang Zemin for the first SinoAmerican Summit on U.S. soil since 1985. One year after that last official state visit

in 1985, the People’s Republic of China formally applied to become a signatory to

the General Agreement on Tariffs and Trade. Since then, there have been more

than 20 working party meetings in Geneva and many more bilateral meetings between our trade negotiators to bring China into what we now call the World Trade

Organization. Despite these multiple efforts, there has been very little real progress

in getting China to formally bind itself to international trade rules. Nearly every

news commentary on last week’s Summit—from the New York Times to the Associate Press—has stated that one of the big failures of the Summit was a noticeable

lack of progress in these decade-old negotiations.

Earlier this year, conventional wisdom was that this Summit would showcase an

agreed framework for China’s WTO accession. Yet, as recently as last week the

Journal of Commerce called Beijing’s efforts to get into the WTO a ‘‘ruse.’’ Examining the PRC’s offers in many areas from financial services to agriculture to rules

on investment leads one to conclude that the Journal of Commerce is correct. Meanwhile, China’s trade surplus with the United States is growing significantly and

growth rates for U.S. exports are stagnant. Therefore, in both political and economic

terms, the huge and growing trade deficit is unsustainable in this country. We must

have change.

It is not surprising that China’s offers to become a member of the WTO are woefully inadequate and that the decade-old negotiations have stalled. As a recent New

York Times editorial pointed out, ‘‘Beijing’s hesitation is unsurprising. It already

reaps, without making concessions, the benefit of [the same tariff status we grant

to member countries of the WTO without being a member of that organization.’’

This guarantees that Chinese exports to the U.S. are taxed no more than exports

from any other WTO counties. Incidentally, the European Union countries have not

automatically granted China such a ‘‘free ride.’’

Recognizing that China gets this ‘‘free ride’’ to U.S. markets without giving U.S.

exporters similar treatment, Representative Tom Ewing (R–IL) and I have introduced legislation that gives American trade negotiators the tools to pry open China’s
17

markets. The China Market Access and Export Opportunities Act (H.R. 1712) requires that China make either an acceptable offer to join the World Trade Organization or face ‘‘snap-back’’ tariffs. That’s a reasonable approach to negotiations that

are going nowhere and a U.S.-China trade deficit that is rapidly growing and

unsustainable.

The Bereuter-Ewing legislation would help induce China’s leaders to comply with

world trade rules by eliminating our annual most-favored-nation (MFN) review

when China accedes to the WTO. This would eliminate Beijing’s contention that

China could make all the major structural and trade liberalization changes necessary to join the WTO only to have the U.S. Congress continue its annual MFN

reviews.

Alternatively, if the President determines that China is not making significant

progress toward WTO membership, or if Beijing denies U.S. exporters adequate

market access in the interim, the China Market Access and Export Opportunities

Act would require the President to impose pre-Uruguay Round tariffs (tariffs in effect on December 31, 1994) on one or more categories of imports from China. Because these tariffs average from 4%–7%, rather than the Smoot-Hawley (44% average) tariffs mandated if MFN is revoked, their imposition would be a realistic, enforceable response to China’s closed markets and Beijing would be compelled to take

notice. Currently, China’s leaders ignore Congress’ annual threat to revoke MFN because they know we will not impose such draconian tariffs on U.S. imports.

Six months after the law’s enactment, the President would be required to announce the tariff increases that he deems appropriate. Six months later, he would

impose the tariffs if China still did not meet the bill’s criteria. This process would

give the Administration an entire year for serious WTO accession negotiations, with

the additional leverage of modest, but realistic, tariff increases. Moreover, in imposing the tariffs, the President would be given wide discretion to select items for tariffs, to set tariff rates differentially but within the statutorily imposed limit, and to

modify tariff rates depending on Beijing’s response. Our scalpel-like tariff raising

mechanism—rather than the ‘‘meat axe’’ Smoot-Hawley tariffs of the annual MFN

process—would greatly increase the United States Trade Representative’s ability to

negotiate a commercially acceptable protocol for China’s accession to the WTO.

China’s desire to join the World Trade Organization represents an historic opportunity for the United States to level the playing field for U.S. companies and workers to sell their products in China. However, this opportunity will be lost if the U.S.

Congress and the Administration do not agree on a strategy to coax China into that

organization. The China Market Access and Export Opportunities Act is a tough but

reasonable way to pressure Beijing to eliminate those trade barriers which currently

stand between China and its membership in the WTO. The economic and trade liberalization reforms in China, which this legislation promotes, will reduce our enormous bilateral trade deficit and benefit U.S. workers and consumers while stimulating the most positive forces of political and social change in China.

In conclusion, Mr. Chairman, I urge this committee to ask the Administration

whether it will devise a new strategy for China’s WTO accession after a decade of

failed negotiations. If they don’t have such a strategy, they should either get on

board with this approach or get out of the way. From my perspective, the status

quo of these negotiations with China is no longer acceptable. China’s new WTO accession strategy is to close deals with Japan and the European Union while blaming

the United States for blocking its membership. Congressman Ewing and I want to

eliminate the PRC’s excuse for not putting forward a commercially acceptable protocol. We are very open to discuss and negotiate changes to our legislation. We acknowledge it is not perfect; for example, we have endorsed the excellent suggestion

by Representative Chip Pickering to tie the snap-back trigger in our legislation to

the date of the expiration of our bilateral trade agreement with China (February

1, 1998). But we strongly believe that something like our legislation is necessary

to coax China into the WTO.

Mr. Cox.

Chairman CRANE. Thank you, Doug.

f
18

STATEMENT OF HON. CHRISTOPHER COX, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. COX. Thank you very much, Mr. Chairman. Thank you also

to the Ranking Member, whose statement at the outset I agree

with completely. The question is not whether the People’s Republic

of China should be admitted to the WTO, but when, and on what

terms.

The terms should be commercially reasonable. They should be

sound. That must be the focus of our negotiations. The object of our

policy should be to increase two-way trade with China so that more

American products and services are sold in China and so that the

standard of living on both sides of the Pacific will rise. The best

way to increase American access to the PRC market is first, to

eliminate trade barriers, both tariff and nontariff; second, to encourage the transition from a Communist, state-controlled economy

to a competitive market economy; and third, to encourage the transition from the political rule of commerce to an authentic rule of

law.

In each of these three areas, the status quo in the People’s Republic of China renders it unready and unfit for accession to WTO

membership.

Communist China’s transition to a market economy is proceeding. That is encouraging, but it is unfair at present to say that the

economy of the People’s Republic of China is based on competition

between commercial firms independent of state control and significant State subsidy, a requisite for WTO membership. Instead, we

find today that two-thirds of the urban work force continue to be

employed in state-owned industries, pursuing state industrial policy, with massive state subsidies.

While we must continue to encourage the People’s Republic of

China to reduce its tariffs to permit global trade on fair terms, the

PRC maintains very high tariffs on foreign imports, including products such as automobiles, where the tariffs are as high as 150 percent.

The rule of law covers dispute resolution, contracts, banking,

commercial law, and many other areas. In each of these areas, serious problems exist in the PRC by virtue of its Communist rule.

Disputes are governed by at least five overlapping and inconsistent

authorities. Chinese courts regularly refuse to honor international

arbitration awards, despite the PRC’s accession 10 years ago to the

New York Convention on Foreign Arbitral Awards.

According to a recent Clinton administration report, a large number of regulations affecting imports remain unpublished, despite

Communist China’s commitment 5 years ago to publish all laws

and regulations affecting imports.

So, the question is, will we best succeed in each of these three

areas by quickly admitting the People’s Republic of China into the

WTO, or by negotiating their accession on these terms?

The People’s Republic of China, in its application to the WTO,

has complicated this equation by applying as a developing rather

than as a developed nation. Accession on such terms would relieve

it of the obligations to reduce its tariffs and eliminate its subsidies

for government-controlled industries. The People’s Republic of

China should not be granted entry into the WTO with a leisurely
19

schedule for removing barriers to trade, whether they be tariffs,

unpublished regulations acting as nontariff barriers, or the myriad

subsidies and requirements on foreign investors that violate free

market norms.

Let me close with one final point. Charlene Barshefsky wrote me

a letter on February 13 of this year in response to questions I

posed to her in a Commerce Committee meeting. She wrote as follows: ‘‘Regarding WTO accession for Taiwan and the PRC, administration policy is that each accession will be judged on its own merits. Further, in our view, all WTO accessions, including those of the

PRC and Taiwan, must and will be based on commercial, not political, criteria.’’

As you all know, Taiwan’s application for admission to the WTO

is presently being held hostage by the People’s Republic of China,

not as a commercial matter but as a political matter. Taiwan’s merits for admission to the WTO do not even compare with those of

the PRC; they are far more advanced. It has a free market economy

that’s existed for more than three decades. It has a GNP that is

the world’s 20th largest. I should point out that the per capita

GNP, gross national product, of the People’s Republic of China

ranks it below the Congo. Taiwan’s foreign exchange reserves are

the third largest in the world. Taiwan has become the seventh largest foreign investor in the world, and its purchases from the United

States are more than 60 percent greater than purchases by the

People’s Republic of China.

Taiwan is the only nation among America’s 10 largest export

markets that is not a member of the WTO. Most important, Taiwan

has already agreed to reduce the tariff level of many of its products

and to eliminate nontariff barriers as a condition of its admission

to the WTO.

In short, the People’s Republic of China is not ready for and does

not meet the criteria for admission to the WTO—certainly not as

a developing nation, and not yet as a developed nation—while Taiwan can easily exceed all of the requirements for admission to the

WTO.

I hope that the administration continues to adhere to the policy

outlined in Charlene Barshefsky’s letter to me in February of this

year. I hope that the Congress will do so as well. Our objective

should be to see to it that both Taiwan and the People’s Republic

of China are ultimately admitted to the WTO, as Mr. Matsui said,

on commercially fair and reasonable terms.

I thank the Chairman.

Chairman CRANE. Thank you, Chris.

Mr. Ewing.

STATEMENT OF HON. THOMAS W. EWING, A REPRESENTATIVE

IN CONGRESS FROM THE STATE OF ILLINOIS

Mr. EWING. I would like to thank my good friend, the Chairman

of the Subcommittee, for holding this hearing. Mr. Chairman, Mr.

Matsui, Members of the Subcommittee, I congratulate you on the

leadership which you have given on trade issues. I hope that that

leadership will pay off this week with one more victory for fast

track before we leave to go home.
20

Mr. Chairman, I would like to begin by providing the Subcommittee with a little insight into the process that gave way to

the introduction of the Bereuter-Ewing bill, H.R. 1712. It is a combination of H.R. 35 introduced by Congressman Bereuter, and H.R.

941 introduced by myself. At the time I drafted H.R. 941, negotiations over China’s entry into the World Trade Organization had

momentum. An agreement was predicted by the time the People’s

Congress met in September. With this timetable in mind, I designed H.R. 941 to show that Congress was willing to discuss permanent most-favored-nation status and to fulfill our obligation

under article I of the GATT with respect to the People’s Republic

of China.

I wanted to provide the U.S. Trade Representative with a carrot,

in the hopes that it would entice the Chinese into meeting their

stated timetable. However, in the months the followed, negotiations

with the Chinese seemed to run out of steam, and the possibility

of getting a deal done at the time this year was called into question. This changed the way I looked at the negotiations. While I

still recognize the importance of granting China most-favorednation status on a permanent basis upon entering the WTO, I

began to see that our Trade Representative would also need a stick

to go along with the carrot. Congressman Bereuter and I realized

that by combining our two bills, we would effectively arm the Trade

Representative with the power needed.

Negotiations with China over entry into the WTO have dragged

on for nearly 10 years. I was sorry to see that virtually no progress

was made during the summit. Every magazine and newspaper article that I have read on these negotiations has a quote from the

Chinese official regarding their desire for permanent MFN. Why

don’t we have permanent MFN? Well, there could be two reasons.

One reason could be that the Chinese are really bluffing when they

talk about getting into the World Trade Organization. The second

might be that they don’t think the United States is serious and

that our negotiator really doesn’t have the power to grant them

most-favored-nation status which, of course, is the truth without

congressional action.

If the Chinese are negotiating in good faith, then we should move

on. Either way, this bill clears the way for an agreement by removing the issue of permanent MFN from the table and eliminates the

ability for the Chinese to use that as an excuse for not making a

commercially acceptable offer.

The WTO membership for China is not, as it has been characterized, a gift to China. I am constantly amazed by the argument because it is so obviously in the U.S. interest to have a multilateral

forum to settle trade disputes.

In my full remarks, I have listed several examples of how that

has worked to our benefit. The American economy—be it manufacturing, agriculture, or the need for more and better jobs for American workers—would benefit from a stable and reliable Chinese

market and from WTO membership for China. That would go a

long way toward providing what we need in our relationship with

China.

I thank you, Mr. Chairman, for the opportunity to testify on our

bill, and for the opportunity for this Subcommittee to consider the
21

legislation which Congressman Bereuter and I have introduced. I

would also ask permission that the full text of my remarks be entered in the record. Thank you.

[The prepared statement follows:]

Statement of Hon. Thomas W. Ewing, a Representative in Congress from

the State of Illinois

I would like to thank my friend from Illinois, the Chairman of this Subcommittee,

for holding this hearing. Mr. Chairman and Members of the Subcommittee, your

leadership on trade issues has been an integral part of the success we have had on

trade votes. Lets hope we can get one more victory this year by passing Fast Track

later this week.

Mr. Chairman I would like to begin by providing the Subcommittee with some insight into the process that gave way to the introduction of the Bereuter-Ewing bill.

H.R. 1712 is a combination of H.R. 35 introduced by Rep. Doug Bereuter and H.R.

941 introduced by myself. At the time I crafted H.R. 941, negotiations over China’s

entry into the WTO had momentum and an agreement was predicted by the time

the Peoples’ Congress met in September. With this timetable in mind, I designed

H.R. 941 to show that Congress was willing to discuss permanent MFN and to fulfill

our obligations under Article 1 of the GATT with respect to the People’s Republic

of China. I wanted to provide USTR with a carrot in the hopes that it would entice

the Chinese into meeting their stated timetable. However, in the months that followed negotiations with the Chinese seemed to run out of steam and the possibility

of getting a deal done at all this year was called into question. This changed the

way I looked at the negotiations. While I still recognized the importance of granting

China permanent MFN upon entering the WTO, I began to see that USTR would

also need a stick to go along with the carrot. Doug and I realized that by combining

our two bills we would effectively arm USTR negotiators with the necessary leverage to complete this process.

Negotiations with the Chinese over their entry into the WTO have dragged on for

nearly 10 years and I am sorry to see that virtually no progress was made during

the summit. Every magazine or newspaper article that I have read on these negotiations has a quote from a Chinese official regarding their desire for permanent MFN.

There are two possible reasons that the permanent MFN issue is brought up so

often by the Chinese. One reason could be that they are bluffing and they are simply using this as an excuse not to make the necessary reforms and concessions for

a commercially viable agreement. The second reason could be that the Chinese are

negotiating in good faith but see little reason to make serious reforms and concessions when U.S. negotiators do not have the statutory authority to provide China

with permanent MFN thus forcing them to negotiate once with the Administration

and once with Congress. I believe that the real reason may be combination of both.

Regardless of which reason you tend to believe, the Bereuter-Ewing bill is the solution. If the Chinese are indeed bluffing this bill calls that bluff and forces the PRC

to get serious or face a credible, but moderate, tariff increase. If the Chinese are

negotiating in good faith, then this bill clears the way for an agreement by removing

the issue of permanent MFN from the table. Either way, this bill eliminates the

ability for the Chinese to use permanent MFN as an excuse not to make a commercially acceptable offer.

WTO membership for China is not, as it has been characterized, a gift to China.

I am constantly amazed by that argument because it is so obviously in the U.S. interest to have a multilateral forum to settle trade disputes. In order for China to

get into the WTO, they will have to reduce and in many cases eliminate tariffs and

non-tariff barriers that currently impede market access for U.S. exports. In addition,

WTO membership will lock-in these reforms and prevent backsliding. This is extremely important for agriculture. For years the U.S. negotiated with the European

Union, on a bilateral basis, over an EU ban on hormone treated beef. The science

that the EU hid behind was laughable but these bilateral negotiations produced no

results. Then the WTO came into existence and the U.S. sought relief from the WTO

dispute resolution panel. Low and behold, the WTO ruled that the EU ban was not

for public health but an unfair trade barrier. As American wheat growers know,

there is a similar situation ongoing with China. Currently, China refuses to allow

U.S. wheat grown in northwestern United States into their market because of what

they claim is a dangerous fungus present on this wheat. This fungus, known as TCK

smut, is completely harmless and is consumed here in the U.S. without incident.

Once in the WTO, this ban would likely be exposed as an unfair trade barrier and

would clear the way for U.S. wheat to gain access to the Chinese market. Backsliding is also a serious concern for agriculture. While corn, soybeans and other oil-
22

seeds have enjoyed good access to the Chinese market, a recent decision by China

to arbitrarily raise tariffs on American soyoil shows how easily this trend can be

reversed without WTO protections. American agriculture needs the stable and reliable Chinese market and WTO membership will go along way towards providing

that reliability and stability.

Thank you Mr. Chairman for the opportunity to testify and I would be glad to

answer any questions that the Subcommittee might have.

I would like to address a couple of questions to Tom and Doug.

Chairman CRANE. Yes, indeed. Thank you, Tom.

f

First, many observers have stated that permanent MFN status is

a carrot to use as negotiating leverage to get China into the WTO.

Your legislation grants China permanent MFN upon its accession

to the WTO. If we were to grant China the benefit of permanent

MFN through legislation, before talks are concluded, how would

this impact Ambassador Barshefsky’s negotiations with the Chinese?

Doug, do you want to go first and then Tom?

Mr. BEREUTER. If I understand it correctly, if we would grant

them MFN before they come into the WTO, it completely disarms

our negotiator. There really would be no leverage then to have the

Chinese make changes to give us adequate market access. I think

it would be a substantial mistake, a very serious mistake, if we

granted it before WTO negotiations have been completed.

Mr. EWING. The legislation which we have introduced would not

give them permanent most-favored-nation status until they were a

member of the WTO. That’s the carrot. I agree with Congressman

Bereuter, it would be a mistake to give that to China until they

had made their necessary changes to get into World Trade Organization.

Mr. LEVIN. Mr. Chairman, might I just quickly comment?

Chairman CRANE. Sure thing, Sandy.

Mr. LEVIN. Very quickly, I would think we would want to retain

that in terms of our ambassador’s negotiating position. But I think

we should also understand that if Congress acts now and relates

it to when accession occurs, we are essentially giving up Congress’

role. I think this is such a serious issue; we need to be an active

participant.

Chairman CRANE. Yes. Doug.

Mr. BEREUTER. I would like to make just a brief followup comment on that. Of course, MFN—whether or not we grant it, whether we approve the President’s decision to extend it—should really

be based upon China’s performance in the trade area. There are a

whole range of actions that we can and do take on things that are

outside trade. So it seems to me entirely appropriate: If they solve

the problems that we in the international community believe are

in China and make the kind of changes necessary in their economy

and structure to come into the WTO, then there is no legitimate

reason for the annual MFN extension debate. Because that is

meant to be a trade-related action. It has brought in a whole variety of discussions, a laundry list of concerns we have with the Chinese, but we have means of more directly approaching those issues,

and MFN should be maintained as a trade-related item.
23

Mr. EWING. Mr. Chairman, if I may. I think Mr. Levin’s comment

and our response really gets to the crux of the issue we’re laying

before your Subcommittee. It’s kind of a chicken-or-egg issue: Do

we put that out there so China knows they can have most-favorednation status when they move or do we hold it back saying, You

move and then we’ll give it to you.

I think for 10 years we have been in the position of saying, You

move and we’ll give it to you. Now we want to put it out there and

say, It’s there; Congress has acted. You move and you get it.

Chairman CRANE. In your bill, what does adequate market access

mean as a standard that the President must use as a basis to impose snapback tariffs?

Mr. BEREUTER. Mr. Chairman, adequate market access is a

standard currently existing in United States law in several places.

Most recently, it is a standard the President is supposed to apply

to all countries that are not members of the WTO to determine

whether he should utilize existing snapback tariff raising authority.

Adequate market access is also a lower standard than the reciprocal standard in section 405 of the Trade Act of 1974; the President must apply every 3 years when he is required to review the

1979 bilateral trade agreement between the United States and

China, which expires once again next February.

So we took language that is in existing law and inserted it in

this legislation for that purpose.

Chairman CRANE. Do you want to add anything to that, Tom?

Mr. EWING. No. I think he has covered it.

Chairman CRANE. Would specific industry sectors, such as toy

manufacturers, be particularly harmed if the snapback mechanism

in your bill were imposed by the President?

Mr. BEREUTER. Mr. Chairman, it depends entirely on what exports the President would choose to apply the new 4- to 7-percent

tariff rate average on. He can, of course, bring them up to the preUruguay round level of December 31, 1994. He can do it on some

products; he can do it on all products. He can do it differentially.

When he sees progress, he can lower or increase them differentially

all under the cap, of course.

Now, toy manufacturers specifically, I would say this: Some categories of products like toy imports receive greater tariff reductions

during the Uruguay round than other categories of products.

Therefore, they are potentially exposed to greater tariff snapbacks

imposed by the President. But, of course, he wouldn’t have to take

it up to the limit of where they were in December 31, 1994.

So it is really giving the USTR and the President the kind of leverage they need to make the best case for the Chinese to pay attention to us. These are the kind of reasonable increases in tariffs

that can be differentially imposed on exports and really be imposed. They are not a hollow threat, like going back to SmootHawley level tariffs at 44 percent on average.

Mr. LEVIN. Mr. Chairman, can I just comment briefly on the leverage?

Chairman CRANE. Sure thing.

Mr. LEVIN. Very briefly, I think it’s interesting to have this kind

of a proposal, especially when 10 years ago, we fought over the use
24

of such approaches vis-a-vis Japan. But I think it’s a mistake to

think that the basic missing piece of the equation, vis-a-vis China

today, is lack of leverage. Our administration has a lot of leverage,

for example, the use of 301. We have the leverage of the largest

market for Chinese goods. More than the lack of leverage, there is

the issue of what our battle plan is, I think. What is our bottom

line, and how do we get there?

I think the significance of this hearing, Mr. Chairman and Mr.

Matsui and my colleagues who have joined in with you, is that this

is a rather unique occasion. We need to do more of this, to talk

through where we are going, to handle these vital and difficult

issues on trade with the fastest growing and second largest economy—and a very differently structured economy.

Mr. BEREUTER. Mr. Chairman.

Chairman CRANE. Yes, Doug.

Mr. BEREUTER. The leverage that we have today relates to our

bilateral trade relationship with China. It is not leverage that really is aimed at pushing them to make the changes necessary to

come under the WTO. What we should be wanting to do is subject

them to international trade rules. That will serve our purpose. It

is beneficial to the United States. Beyond that, frankly, it benefits

every other country in the world once we move them into the international trade arrangements.

The leverage on 301 is strictly the leverage that we can apply on

our bilateral trade relationship. It’s important, but our objective

must be to get them into the WTO—and not under any conditions,

but under the right conditions where they have really made the

structural changes and the changes in tariffs and nontariff barriers

that cause them to deserve to have WTO membership. We cannot

reward them prematurely; it would be inappropriate.

Chairman CRANE. Mr. Matsui.

Mr. MATSUI. I would like to thank all four gentlemen, and, of

course, Mr. Lieberman as well. Actually I don’t have a question. I

just appreciate the point of view of all four of you and Mr.

Lieberman.

I think Mr. Bereuter, Mr. Levin, and others have pretty much

stated the issue. This hearing obviously serves a purpose in helping

us define our priorities in terms of what we want to do when we

do negotiate with the Chinese. One of the frustrations I think all

of us have had—the four of you and all of us on this Subcommittee—is the fact that when we were discussing MFN, we had five

or six other Members before us. Their main thrust was the release

of the dissidents, certainly having the International Red Cross visit

the dissidents, the whole issue of human rights, forced abortions,

sale of organ parts and things of that nature. Somehow, we have

to come to grips with what our priorities are in our negotiations

with the Chinese.

I think, at least the thrust from what I am hearing here, that

the deficit and obviously market access are important issues. But

we can’t expect to take the entire relationship we have with the

Chinese, and every issue every one of the 435 of us are concerned

about, and then dump it on the middle of negotiations. I think it

is our responsibility, as well as the administration’s, to try to come

up with a set of priorities, define those priorities, and then move
25

forward. I think that, hopefully, will be what comes out of this and

any other hearings as we move along.

Chairman CRANE. Thank you.

Mr. Thomas.

Mr. THOMAS of California. Thank you very much, Mr. Chairman.

I join my colleague from California: It’s nice to have a Trade Subcommittee hearing on China which is focused on economic issues.

We have had so many that have been focused on aspects other than

economic.

I am also absolutely convinced that all of us believe that China’s

accession to the WTO is, as it always has been, primarily in the

hands of China. Our goal—and that’s why I do want to applaud my

colleagues Mr. Bereuter and Mr. Ewing—is to create a clear understanding in the Chinese of the path it takes to get there. That’s

why I’m not opposed to taking something like most favored nation

and having it available to the trade ambassador and the President

as a tool or a carrot to move China in the direction she may need

to go. But I do think of paramount importance is getting China to

understand that a set of behavioral parameters are necessary to be

met by them before they receive accession.

I believe your product is better than anything I have seen. Combining the two bills is an absolute positive. There may be problems

with some of the timelines in the bill but, overall, it is absolutely

the best thing that I have seen.

I want to agree briefly with my colleague from California, Mr.

Cox. I just find it ironic that once again, China wants to dictate

terms, notwithstanding what its current ‘‘market economy’’ looks

like in the area of antidumping and tariff laws in the United

States, that China wants to be considered a market economy.

When we dealt with Poland, Romania, and Hungary under the

former regime on GATT, they were nonmarket economies in dealing with dumping and the rest. I think it is absolutely correct to

view that position with China as well. I am concerned about the

size of the tariffs on a number of agricultural products.

To a certain extent, we have to place a degree of trust in the

hands of those individuals who negotiate on behalf of the United

States. I am pleased to say that over the years I have been on this

Subcommittee with different administrations, almost without exception, the U.S. Trade Representatives have been people that we

could trust. I have sometimes been concerned about the resources

available to them vis-a-vis other areas of the Federal Government—their ability to do what has been placed before them as

timely or as well as they would like. We will be very mindful of

that and make sure that they have as many resources as possible.

But until and unless we find additional areas that we can add

to this legislation, Mr. Chairman, I am very pleased with the work

product of our colleagues on other Committees concerned about

this. I see this as a major step forward in communicating to China,

This is what you do if this is what you want. If you want it, you

do this. If you don’t want it, then it’s up to you. I am very pleased

with my colleagues’ presentation, and would invite any comments.

Mr. BEREUTER. Mr. Chairman, may I just respond briefly?

Thank you very much, Mr. Thomas, for your comments. I certainly am in agreement with them, and thank you for the com-
26

pliments that you have extended to us. I would say this: Of course

any legislative product almost always can be improved. We welcome suggestions in that respect. We hope that you can move this

legislation, or your own product, based upon the concepts within

our bill.

In my full written statement, you will see a reference made to

Congressman Chip Pickering of Mississippi. He has been very interested and helpful to us. For example, he came up with an idea

which I think has merit: that the trigger date for the President’s

decision within this bill should really be at the end of our current

bilateral trade agreement with China, which is February 1998. The

President routinely extends that, but as he suggests, that is probably the appropriate time for the trigger date.

Mr. THOMAS of California. Thank you very much, Mr. Chairman.

Thank you all.

Chairman CRANE. Thank you.

Mr. Houghton.

Mr. HOUGHTON. Thank you, Mr. Chairman. Gentlemen, it’s good

to be with you and thank you for your comments. It seems to me

that there are two issues here. First is two-way trade; second is

abiding by the rules of international trade. I think we have been

talking about the latter more than the former. I think your bill,

H.R. 1712, makes a lot of sense, that it is moving in the right direction.

But the thing I really question underneath is, Are we really serious as a Congress? Mr. Levin and I have talked about this many

times before vis-a-vis Japan, about making sure that trade is fair.

If it’s fair, it’s both ways. We have not exercised any of the prerogatives which we have, through a variety of laws, to make sure that’s

happened. We still have this tremendous imbalance of trade with

Japan. We are going to have a tremendous imbalance of trade with

China. The thing that I worry about is that we’ll have the legal

documents and they will abide by the basic constructs of the WTO,

and yet we still will have this tremendous imbalance in trade. I

want to know if anybody would like to make a comment on that.

Mr. BEREUTER. Mr. Houghton, I think we have the structure now

in the WTO. The United States needs to bring cases there, including on nontariff barriers, where that is an acceptable procedure.

We have to push them toward completion.

As you know, the United States has brought more cases before

the WTO than anyone else. I think that’s entirely appropriate. As

you also know, it’s the nontariff barriers and the kind of cultural

impediments that are thrown in the way of adequate access to Japanese markets by the bureaucracy. So it is that area, not in the formal tariffs or quotas, which we have successfully knocked down.

But it is through WTO that we now have the mechanism to bring

down those existing inequities. We have to have the courage and

the tenacity to really insist that there is a followthrough. We have

a real test now with the European Union. Now that we have had

a favorable ruling toward us on a particular issue that you are familiar with, we have to see if, in fact, it is implemented. It’s a real

test.

Mr. LEVIN. Let me just say, in response to your salient question,

that the bilateral trade relationship is important in addition to the
27

rules of WTO. Today I wanted to emphasize the difficulty of integrating China into the WTO system, to plead with all of us on this

Subcommittee and other Committees to pay attention to it. It far

overshadows some other trade issues because of the size of China

and the difficulty of its structures. It is so far away from being a

free market economy. We have to face up to how this is integrated

into the WTO system.

We have some very tough issues, and I don’t think we have adequately faced them in a number of instances. I mentioned subsidies, but there are others.

Mr. Houghton, I think your question asks whether there are

issues that can’t be resolved solely through the WTO and China’s

accession to it. I think the answer to that is clearly, yes. We have

learned from our relationships with Japan, Korea, and other countries that the WTO regimen today is inadequate in terms of nontariff barriers. I don’t see how anybody can say that there are adequate safeguards. If there were, we wouldn’t be negotiating for improvements in the WTO regimen. I think that’s true of a whole variety of trade issues. I view trade issues not in a narrow sense, but

in a broader, I think realistic, sense.

So I think your question is absolutely on point: WTO accession

for China has some very tough issues. But if we resolve those, as

difficult as they are, do not think that there would be no need to

pay attention to issues in our bilateral relationship. They cannot be

resolved through the WTO alone.

Mr. EWING. Amo, I think you really get to the very bottom line,

that’s fair trade between China and the United States that doesn’t

have a tremendous imbalance. I wouldn’t want to speak for my colleague Mr. Bereuter, but I don’t think our bill addresses all those

problems. I think you take it a step at a time. I think we’re moving

in that direction by considering legislation such as we have introduced. It won’t bring about a total solution. But we didn’t get here

in 1 or 2 years. It will take some years to do that, but it ought to

be our goal.

Mr. COX. I would just add to what has been said that the

handover of Hong Kong on July 1 offers an opportunity for the People’s Republic of China to gain even more familiarity with the

terms of trade that the rest of the world finds commercially reasonable. Hong Kong is a separate member of the WTO already. It retained its separate membership in the WTO after July 1. Because

our own policy of one China is consistent with the PRC’s policy of

one China, accepting America’s seventh largest trading partner and

largest non-WTO market, namely Taiwan, into the WTO right now

would actually provide an enhanced opportunity for the People’s

Republic of China to again gain access to the norms of commercial

dealing which actually stand to benefit, as we here in this room all

understand, the People’s Republic of China. Political insistence on

doing something else is actually self-abnegation from a trade standpoint for the PRC. It does not benefit them. It does not increase

their standard of living. So that is why, when we are looking for

carrots, I suggest that we take very literally the words of Charlene

Barshefsky in her letter to me: That we assess the separate merits

of the applications of Taiwan and the People’s Republic of China

for admission to the WTO.
28

As you know, under Article XXXIII of the General Agreement on

Tariffs and Trade, a working group was appointed that’s now looking at Taiwan’s WTO accession. I think it makes a great deal of

sense because some of these things are not strictly lawyers’ points.

That’s the point you made. Some of it’s cultural; some of it’s the

norms of trading and dealing. To the extent that there are more

Chinese involved in the WTO, we’re better off.

Mr. HOUGHTON. Can I just make one further comment, Mr.

Chairman?

Chairman CRANE. If it’s brief.

Mr. HOUGHTON. I’m not sure I can make it brief; I’ll do the best

I can. I really believe that if we are going to reach out to the rest

of the world, we must reach out meaningfully to China. We must

take them as they are, as they are moving toward rather than as

we would like to see them at the moment. Yet, at the same time,

I think that we have got to put the flow of trade in perspective,

which I don’t think we do. This is not just a Chinese issue, it’s an

overall issue so we don’t end up as a warehouse for goods we can’t

afford to buy. Thank you.

Chairman CRANE. Mr. Ramstad.

Mr. RAMSTAD. Thank you, Mr. Chairman, for calling this hearing. I want to commend our colleagues on this panel for the bipartisan, enlightened, and pragmatic approach they bring to this crucial

trade relationship. I represent almost 200 Minnesota companies

which do business with China, making it our eighth largest trading

partner—and growing. Almost 60 Minnesota companies have joint

ventures, factories, or branch sales offices in China.

The question I get asked by representatives of those companies

each year is, Why do you engage in the annual ritual of selfflagellation, also known as the China MFN renewal debate. So I

commend you and your legislation as alternatives to this annual

ritual.

I would like to ask any of the panelists—perhaps Mr. Levin has

the best pipeline downtown—whether you have gotten any comments from the administration on your legislation?

Mr. LEVIN. It’s not mine.

Mr. RAMSTAD. On this legislation. I realize you’re not a sponsor,

Mr. Levin, but——

Mr. LEVIN. No. I think we need to engage China; we need to engage ourselves on where these negotiations are going. We really

haven’t done that. As you hear the testimony this morning, Mr.

Ramstad—and I have had a chance to glance over some of it. I

think that what leaps out—there are differences of opinion—but

what leaps out is that what the terms of the rules of competition

with China turn out to be and how they are shaped, in terms of

their accession to WTO and otherwise, are going to be critically important to businesses and workers in this country.

What the testimony says to me is, We want more trade. But we

have to be concerned about under what conditions. That is not a

direct answer to your question because I don’t know precisely what

the administration’s position is. I think, though, we need to rely

less on what we do legislatively at the moment and more on engaging the administration in an honest, direct way on our direction on

this issue.
29

Mr. RAMSTAD. So the administration hasn’t expressed a position

on this legislation to your knowledge?

Mr. LEVIN. Not that I know.

Mr. RAMSTAD. Or the knowledge of the authors?

Mr. LEVIN. Not that I know of.

Mr. BEREUTER. Mr. Ramstad, at the working level we have found

very supportive comments from various agencies; I won’t be more

specific, but more than one. We have a problem, as you know, in

that sometimes people forget that there can be good ideas on both

ends of Pennsylvania Avenue. The track record suggests that it’s

time for the legislative branch, consulting of course with the executive branch, to break the impasse and give the trade negotiator

some of the tools that she needs.

I don’t expect her at this point to come forward and say positively. It needs to be elevated to the highest level in the administration. They need to look realistically at what the opportunities

and the prospects are for real progress. I hope they will do that.

Mr. RAMSTAD. I understand our differences, Mr. Levin, and your

differences with the authors on this. I was just trying to find out

whether the administration has provided any input on this at all.

I probably directed the question to the wrong person.

Let me ask you a little more substantive question: Have snapback tariff approaches been used before? If so, have they been effective, to your knowledge?

Mr. EWING. I can’t answer whether they have been used before,

though I am assuming they have.

What I think is effective is for the administration to have the

power of some comeback, some penalty, some retort for unfair trade

activities that may be imposed on us. I think history would show

that generally there’s a standoff and then an agreement; it’s

worked out and we move on. That to me is the real purpose of having the snapback: It gives the President, whoever he might be, real

power in negotiating any trade disputes.

Mr. LEVIN. Mr. Ramstad, about 10 years ago, a form of this was

proposed relating to market access. We had a donnybrook of a debate over this type of approach.

I am not conceptually opposed to it under any circumstances. I

just think we need to ask whether the problem is that there aren’t

enough tools in the hands of our negotiators, or is it to figure out

where we are really going.

My judgment is that it is less a question of our power than it

is a challenge of figuring out where we’re really going on these very

thorny issues. But in answer to your question—it’s a good one—

they have been proposed.

Mr. RAMSTAD. Thank you, Mr. Chairman.

Chairman CRANE. Ms. Dunn.

Ms. DUNN. Thank you very much, Mr. Chairman. Welcome, gentlemen. It’s been an interesting debate. I especially appreciate the

Chairman’s effort to disconnect trade from some of the areas that

we all appreciate are terribly important for us to look into.

I will tell you, being from a trade State like Washington, where

we have Boeing Aircraft, Microsoft, and all sorts of other export

materials, I still am intrigued by the point that Mr. Cox makes. I

would like to ask each of you to answer this question. Is the obvi-
30

ous disconnect that exists between Charlene Barshefsky’s letter

and the actual policy that we’re following—which is, in my mind,

very, very political—what do you think about the true status of our

approach to the WTO, which, I think everybody admits, says Taiwan waits until China gets in?

What do you think about that? What is the reality of it? What

do you think would happen with mainland China if Taiwan were

allowed accession to the WTO? Start with Mr. Bereuter.

Mr. BEREUTER. I believe Taiwan ought to have WTO membership

as soon as they qualify for it. If that’s before the PRC, which is

quite likely, then so be it. They have some things to change too.

They are not quite ready to have WTO membership, but they could

do it in a flash. They could make those changes in a flash and be

brought in.

I think certainly the reaction of mainland China is not going to

be positive, but it provides one more incentive for the Chinese to

make the changes. Tell me a single incentive at work in United

States-China trade that would cause the PRC to make the necessary changes. I don’t think there are any at all. It’s not a matter

of deciding where we are going or giving the trade negotiator the

adequate tools. It’s both. But there is no reason why Taiwan cannot

be brought in to the WTO as soon as they meet the qualifications,

in my judgment.

Mr. LEVIN. I think it’s a really good question. I don’t think there

ought to be any sequential linkage that’s automatically done. I do

think, though, that you have to look at the issue in relationship to

our overall relations with China. I just don’t think you can totally

separate the trade issues from broader diplomatic ones, because

they rebound into trade issues.

I do think we ought to look at China’s WTO accession basically

as a trade issue. This set of questions about WTO accession illustrates that trade needs to be looked at in a broad rather than narrow way. Market access, as I said before, is too narrow a concept.

We’re talking about a whole host of issues, embedded in the Chinese structure, that are going to impact competition between the

United States and China.

I think we ought to look at the economic issues in their own

right. But I don’t think I could say that if I were negotiating or advising people who were negotiating with China and Taiwan that I

would think the issue of sequence irrelevant. Because for China, it

clearly isn’t.

Mr. EWING. I think the question is a very good one. I personally

would hope that economies like Taiwan, wherever they exist

around the world, should be brought into WTO as quickly as possible. I see the WTO as an opportunity for our country to have the

most level playingfield with those with whom we do the most business. I think that helps industry. I think it helps agriculture. I

think it helps American workers for that to come about.

The sequence—whenever a party is ready, we certainly ought to

be encouraging them to be full and complete partners of the WTO.

Ms. DUNN. Thank you, Mr. Chairman.

Chairman CRANE. Thank you all very much for your testimony

today regarding China and its possible accession to the WTO.
31

We’ll now turn to Ms. Esserman, General Counsel for the U.S.

Trade Representative’s Office, and Howard Lange, Acting Deputy

Assistant Secretary of State for East Asia and Pacific Affairs. We

look forward to your comments about where China is in the process

to join the WTO and whether the summit last week will add any

momentum to the discussions. Please proceed in the order I introduced you.

STATEMENT OF SUSAN G. ESSERMAN, GENERAL COUNSEL,

OFFICE OF THE U.S. TRADE REPRESENTATIVE

Ms. ESSERMAN. Good morning, Mr. Chairman and Members of

the Subcommittee. It is a pleasure to be here today to discuss

United States-China trade relations and China’s efforts to join the

WTO. Mr. Chairman, as you know, the United States-China relationship is complex and multifaceted, encompassing a wide range

of issues that go far beyond trade. At the summit last week, Presidents Jiang and Clinton had a frank and indepth exchange on the

wide array of issues affecting our bilateral relations, ranging from

human rights to nonproliferation to environmental protection.

Trade was also the subject of the summit. We made progress on

specific bilateral issues and China’s accession to the WTO, which

I will review in a moment.

Trade is an increasingly important part of our relationship.

China is the fastest growing economy in the world, and early in the

next century it may have the world’s largest economy. Today China

is the 10th largest trading nation and the United States’ 4th largest trading partner. Over the past decade, United States exports to

China have nearly quadrupled.

The administration has two principal goals in its trade policy

with China. First and foremost, we continue to pursue actively

market-opening initiatives on a broad scale for U.S. goods, services,

and agricultural products. United States businesses should have

access and necessary protections for their properties in China’s

market equivalent to that which China receives in the United

States. Especially in light of our trade deficit, we must see a greater balance in our trade relationship with high growth for our exports to China in areas where United States companies maintain

a comparative advantage.

Second, a fundamental principle of our policy has been working

to ensure that China accepts the rule of law. That is, ensuring that

China’s trade and economic policies are consistent with international trade practices and norms. Indeed, this adherence to international norms is fundamental to advancing the entire range of

issues between our countries. We have pursued these goals both

through WTO accession negotiations and bilateral initiatives.

While our bilateral trade agreements cover specific sectors of

United States trade, negotiations on China’s accession to the WTO

provide an opportunity to address trade issues for all sectors of the

economy in a comprehensive and systematic fashion.

Turning to the WTO, China has now adopted a more serious attitude about the accession negotiations. Earlier this year, negotiators

reached agreement on a series of issues relating to WTO rules,

with China making new commitments related to national treat-
32

ment, transparency, TRIPs, Trade Related Aspects of Intellectual

Property Rights Agreement, and agriculture export subsidies.

At last week’s summit meeting, President Jiang recognized that

China’s accession to the WTO must be based on commercially

meaningful commitments. The Presidents agreed to intensify negotiations on market access including tariffs, nontariff measures,

services standards, agriculture, and on implementation of WTO

principles so China can accede to the WTO on a commercially

meaningful basis at the earliest possible date.

During the summit, China made two announcements of importance in the WTO market access negotiations. First, China expressed its intention to join the Information Technology Agreement

as soon as possible. The ITA, as it’s called, calls for elimination of

tariffs on all information technology products by the year 2000,

with staging permitted for a limited number of products. This will

lead to the elimination of tariffs on a wide range of products important to the United States such as semiconductors, computers, telecommunications equipment, and software, and therefore constitutes

a major reduction in tariffs on a number of important sectors. It

also constitutes an important gain because this is an area where

China’s market is growing rapidly. China’s announcement on ITA

is also significant as it is the first time that China has decided to

participate in a zero-for-zero initiative.

China’s second announcement at the summit indicated a willingness to make further substantial cuts in its tariffs that would lower

its overall average tariff rate. China’s applied rate has been 23 percent. On October 1, China announced reductions in its tariffs resulting in an overall average tariff rate of 17 percent. Offering further tariff reductions that result in substantially lower average tariff rates is a positive step.

The assessment of tariff concessions, however, depends not only

on the average tariff rate but also on whether China meets United

States requests on priority products. China also gave us a new

written services offer, an indication that China is now taking the

negotiations on services more seriously. While some improvements

in the offer were made, U.S. requests in important areas like distribution, telecommunications, financial and professional services

were not sufficiently addressed. We will continue to seek substantial improvements in the services offer.

While the summit will form the basis for intensive negotiations

on market access over the months ahead, much remains to be done.

Like every accession negotiation, the details are enormously important.

Over the past year, we have also made some progress on the

rules and general principles that are the foundation of the WTO;

I would just like to review a couple of these advances. First, on

trading rights, or the right to import and export directly: In March,

China agreed to increase progressively the right to import and export products so that at the end of 3 years, all foreign individuals

and companies and all companies in China will have the right to

import and export all products throughout China. This commitment

represents a major change in China’s trading system since only a

few companies in China now have the right to import goods di-
33

rectly from the United States. This is an important step in providing national treatment to U.S. exports.

China has agreed to eliminate other practices that discriminate

against imported goods and foreign producers of goods in China.

For example, China will eliminate its system of dual pricing for

products and services related to production, distribution, marketing, and sales of goods in China. Under the old system foreigners

were charged much more for air or rail freight, or preferential access to these services was granted to a domestic producer. China

has already begun to dismantle its system of dual pricing, thus

putting United States invested companies on a more equal footing.

China has also made important commitments in the transparency area, such as making information available to other governments and to people engaged in trade on all of the issues covered in the WTO. Translations of laws and regulations will be

available, and WTO members will have the opportunity to comment on proposed laws and regulations before they become effective. China has also agreed that it will enforce only those laws and

regulations that they publish.

China has agreed to establish independent tribunals to review

administrative actions relating to the implementation of WTO

agreements, and also to grant the right to seek this judicial review.

Both steps will help address corruption and encourage the development of the rule of law in China.

China has also committed to implementing the TRIPs agreement

immediately upon accession, thus foregoing any transition period.

On agriculture rules, China has agreed not to use export subsidies

for agriculture products.

While much work remains on important protocol and rules

issues, China has agreed to several significant reforms of its trade

regime this year.

I would like to briefly turn to bilateral issues, where we also

made progress at the summit. The administration reached an

agreement that secures important market access for foreign financial information companies operating in China such as Dow Jones

and Reuters, and ensures that Chinese companies and financial institutions will continue to have access to United States information

services.

Second, China will now license a second United States company

to provide insurance in China. Many highly qualified United States

companies are seeking to enter China’s growing market for insurance. We will continue to press China to expand access to other

United States insurance companies, enabling them to provide the

full range of insurance services.

Finally, last week the United States and China signed an agreement with respect to space launches that will provide effective

price disciplines in some of the most rapidly growing areas of commercial space launch activity.

Bilateral initiatives and agreements have been and continue to

be an important mechanism to address specific sectoral problems

requiring immediate action. Monitoring and enforcing current

agreements are also an important part of our work with China. For

example, in the area of intellectual property, significant progress in

dampening piracy has been achieved since 1996. Intellectual prop-
34

erty rights, IPR, enforcement is now part of China’s nationwide

anticrime campaign. China has shut down 41 factories with 58 CD

production lines. Nevertheless, problems remain, particularly in

end-use piracy of business software and the market access area.

In the agricultural area, we continue to press for the removal of

sanitary and phytosanitary barriers to our agricultural exports.

While we have made progress on products such as apples, cherries,

and grapes, we still face barriers to U.S. exports of citrus, PacificNorthwest wheat, stone fruit, and beef, pork, and poultry products.

In all these areas, we continue work to further open China’s markets for United States products. As the Subcommittee is aware,

this administration has demonstrated a willingness to threaten or

impose sanctions to achieve its objectives, as has been the case in

both the intellectual property area and textiles.

In sum, while China has made progress in its WTO accession negotiations, these negotiations are complex and will require extensive further work. China’s accession to the WTO is in the interests

of the United States, but only on the basis of a commercially meaningful agreement. We are prepared to move quickly, but the pace

is up to China.

We look forward to working with the Congress, this Subcommittee, and the private sector as we continue to pursue this important

objective. Thank you.

[The prepared statement follows:]

Statement of Susan G. Esserman, General Counsel, Office of the U.S. Trade

Representative

Mr. Chairman and members of the Committee, it is a pleasure to appear before

you today to discuss U.S.-China trade relations and the People’s Republic of China’s

efforts to join the World Trade Organization (WTO). After describing the general

trade relationship with China, I will discuss the status of our negotiations for China’s accession to the WTO, including progress made at last week’s summit, and then

turn to some of our bilateral initiatives.

President Clinton and President Jiang Zemin met last week and held an important and constructive summit meeting. The two Presidents had an in-depth and

frank exchange of views on an array of issues affecting the entire relationship ranging from human rights to non-proliferation and environmental protection. They

agreed to sustained high-level dialogue through regular summits and communication.

On the trade front, we made progress on specific bilateral issues and China’s accession to the WTO. Such progress is important, since China is one of the fastest

growing economies in the world, with growth rates averaging around 10 percent in

recent years. Already possessing the world’s largest population, by early in the next

century, China may have the world’s largest economy.

Today, China is the world’s tenth largest trading nation and the United States’

fourth largest trading partner. U.S. exports to China have nearly quadrupled over

the past decade. The United States is China’s largest export market. U.S. imports

from China were nearly $51.5 billion in 1996 (or more than 20 percent of China’s

exports to the world). By contrast, U.S. exports of goods to China last year stood

at $12 billion. This year, we estimate that the United States’ largest trade deficit

in goods and services will be with China, surpassing the deficit with Japan.

While the large trade deficit with China is the result of many factors, an important factor is China’s failure to provide increased market access as demonstrated

by a 2 percent growth in U.S. exports to China in 1996 and 5 percent growth in

U.S. exports this year. This is in contrast with a 28 percent growth in China’s exports to the United States this year. We must see greater balance in our trade relationship—with high growth in our exports to China particularly in sectors where

U.S. companies are most competitive.

Despite China’s movement away from a centrally planned economy toward a

quasi-market economy in recent years, China’s markets still remain relatively

closed. China is pursuing an export-led growth strategy while protecting its domestic markets through high tariffs, quotas, restrictive standards and activities of state
35

trading enterprises. In addition, China’s failure to meet fundamental international

norms—such as national treatment, transparency, or the right to import or export

freely—deprives U.S. exports of a level playing field on which to compete.

The Administration trade policy with China is clear. First, we will continue to

pursue market opening initiatives on a broad scale for U.S. goods, services and agricultural products through the WTO accession process and bilateral initiatives and

agreements. U.S. businesses should have access—and the necessary protection for

their properties—in China’s market, equivalent to that which China enjoys in the

U.S. market.

The second fundamental principle of our trade policy is to ensure that China accepts the rule of law. We seek to encourage China to develop trade and economic

policies that are consistent with international trade practices and norms. The rule

of law is an important part of ensuring that China provides meaningful market access and underpins our bilateral and multilateral agreements.

WTO ACCESSION

Both China and the United States agree that China’s accession to the WTO must

be on a commercially meaningful basis. While our bilateral trade agreements cover

specific segments of U.S. trade, negotiations on China’s accession to the WTO provide an opportunity to address trade issues in a comprehensive and systematic fashion for all sectors of the U.S. economy. The process of negotiating the terms of China’s accession to the WTO is a major focus of our efforts to expand market access

for U.S. exports, and to bring China into the international rules-based trading system.

China’s WTO accession negotiations encompass a number of elements that we can

broadly divide into two categories. The first concerns the rules and general principles, such as national treatment, transparency, elimination of non-tariff measures

and compliance with WTO agreements such as the Agreement on Application of

Sanitary and Phytosanitary Measures. This category would also include any agreed

transition periods and other specific provisions to address particular aspects of China’s trade regime, e.g., antidumping rules and safeguards. The second broad category concerns the details of market access for industrial and agricultural goods and

services. China’s tariff and services schedules are an integral part of the protocol.

All elements of this package: market access for goods, agriculture and services, acceptance of rules, safeguards and timing, must come together for China’s accession

to move forward.

China has now adopted a more serious attitude about the accession negotiations.

Early this year, negotiators reached agreement on a series of issues related to WTO

rules making new commitments related to national treatment (trading rights and

non-discrimination), transparency, the TRIPs Agreement, and agriculture export

subsidies. On the market access front, China’s announcement at last week’s summit

that it intended to participate in the Information Technology Agreement as soon as

possible and that it would agree to further cuts in its tariffs, marked important

progress in the negotiations. Let me now briefly review the progress that has been

achieved on rules issues and the Summit announcements.

Trading rights (the right to import and export)

In March, China agreed to increase progressively the availability of the right to

import and export products so that at the end of three years all foreign individuals

and companies and all companies in China will have the right to import and export

all products throughout China. This commitment represents a major change in China’s trading system since only a comparatively few companies in China now have

the right to import goods directly from U.S. companies. This is an important step

in providing national treatment to U.S. exports.

Non-Discrimination

China has agreed to eliminate other practices that discriminate against imported

goods and foreign producers of goods in China. For example, China will eliminate

its system of dual pricing for products and services related to production, distribution, marketing and sale of goods in China. Under the old system, foreigners would

be charged much more for air or rail freight or preferential access to these services

would be granted to a domestic producer. China has already begun to dismantle its

system of dual pricing, thus putting U.S. invested companies on a more equal footing.
36

Transparency

China has committed to making information available to other governments and

to people engaged in trade on all of the issues covered in the WTO. Translations

of laws and regulations will be available and WTO members will have the opportunity to comment on proposed laws and regulations before they become effective.

Furthermore, China has agreed that it will enforce only those laws and regulations

that they publish.

Judicial Review of Administrative Decisions:

China will have independent tribunals for the review of administrative actions relating to implementation of the WTO Agreements and grant the right to seek judicial review of these administrative actions. Both steps will help address corruption

and encourage development of the rule of law in China.

Intellectual Property Rights

China has committed to implement the Agreement on Trade Related Aspects of

Intellectual Property Rights (TRIPs) upon accession.

Agriculture

China has agreed not to use export subsidies for agriculture products.

Agreement on these points represents progress in the negotiations. A great deal

of work, however, still remains to be done on market access, implementation of

WTO rules and our safeguards.

Although China has made some progress, China has not yet presented an acceptable offer on market access issues. China’s proposal on tariffs needs improvement

on timing of cuts and the number and level of tariff peaks and we need to reach

agreement on the cuts on U.S. priority products. We have yet to reach agreement

on acceptable phase-out periods for China’s remaining quotas, licensing and tendering requirements. Other issues, such as China’s application of mandatory standards for imports, customs valuation and licensing affect our exports access to China’s market and must be addressed.

On agriculture, for example, we are now engaged in intensive discussions on market access for key U.S. export products. These discussions encompass tariff levels,

administration of the tariff rate quotas that China wants to put in place, the activities of state trading enterprises and the details of China’s implementation of the

WTO Agreement on Agriculture. We and other WTO members are also urging China

to implement the Agreement on Sanitary and Phytosanitary Measures fairly and effectively.

Services is an area of particular concern to the United States and other WTO

members. For example, China’s commitment on trading rights is only the first step

in ensuring that U.S. exports reach customers in China. The ability to engage in

all elements of distribution, including after sales maintenance and repair, is key to

establishing long term relationships in the market and thus real market access for

goods. We are seeking significant commitments from China in a number of other

service sectors including telecommunications, financial services, including insurance,

professional services and others. We need to see substantial and comprehensive improvements in China’s market access offer on services.

SUMMIT RESULTS

At last week’s summit meeting, President Jiang recognized that China must accede to the WTO on a commercially meaningful basis. The Presidents agreed ‘‘to intensify negotiations on market access, including tariffs, non-tariff measures, services, standards and agriculture and on implementation of WTO principles so China

can accede to WTO on a commercially meaningful basis at the earliest possible

date.’’ We are prepared to move quickly, but the pace is up to China. Congress has

an important role in these negotiations as the Administration will continue to consult closely with members as negotiations proceed.

During the summit, China made two announcements relevant to the WTO. First,

China expressed its intention to join the Information Technology Agreement (ITA)

as soon as possible. The ITA calls for elimination of tariffs on all information technology products by the year 2000, although extended staging may be allowed for a

limited number of products, but no longer than to the year 2005. China must negotiate and all ITA participants must agree to any staging beyond the year 2000. The

ITA permits countries and separate customs territories in the process of acceding

to the WTO to participate in the Agreement, China may participate in the Agreement prior to completing the WTO accession process. China’s participation in the
37

ITA means that countries accounting for approximately 95 percent of trade in these

products are participants in the Agreement.

Elimination of tariffs on a wide range of products on which the United States is

highly competitive is an important benefit for the United States. This constitutes

a major reduction in tariffs in a number of important sectors. China’s market for

ITA products is growing rapidly. One estimate places China’s total imports of ITA

products at $14.5 billion in 1996 and other estimates are higher. According to industry estimates, China imports about 10 percent of its information technology products

from the United States. China’s announcement on the ITA is also significant as it

is the first time that China has decided to participate in a zero-for-zero initiative.

China’s second announcement at the summit indicated a willingness to make further substantial cuts in its tariffs that would lower its overall average tariff rate.

Previously, China’s applied tariff rate averaged 23 percent. On October 1, China announced reductions in its tariffs that result in an overall average tariff rate of 17

percent. Offering further tariff reductions that result in a substantially lower average tariff rate is a positive step. Ultimately, our assessment of the tariff reductions

will depend on whether China meets U.S. requests on priority products and satisfies

other key criteria.

China also gave us a new written services offer, an indication that China is taking

the negotiations on services more seriously. While some improvements in the offer

were made, U.S. requests in important areas like distribution, telecommunications,

financial and professional services were not sufficiently addressed. For example,

China’s offer covers a number of services sectors generally, but provides for liberalization only in a very limited or ‘‘experimental’’ basis. That liberalization is frequently restricted to certain geographic regions. In the telecommunications sector,

for example, the offer would permit establishment of two telecom joint ventures with

a twenty five percent equity cap in two cities in all of China. We will continue to

seek substantial improvements in the offer.

The summit resulted in progress that will form the basis for intensive negotiations over the months ahead. Our negotiators will meet again over the next few

weeks to discuss China’s market access offers. The APEC Ministerial meetings in

Vancouver in November will serve as another important opportunity for discussion.

In addition, the next round of formal Working Party meetings is scheduled for December.

BILATERAL INITIATIVES AND AGREEMENTS

Bilateral initiatives and agreements have been and continue to be an important

mechanism to address specific sectoral problems that require immediate action.

Monitoring and enforcement of current agreements are also an important part of

our work with China. In these contexts, the Administration has demonstrated its

willingness to impose sanctions to achieve its objectives. Another important result

of our bilateral initiatives is that they often compliment and reinforce the multilateral aspects of U.S. trade policy towards China. Our bilateral agreements on intellectual property rights, for example, provided the foundation for China’s commitment to implement the TRIPs agreement immediately upon accession to the WTO.

Similarly, effective implementation of agreements and rule of law is a principle that

underlies both our bilateral and multilateral agreements.

RECENT DEVELOPMENTS

The Administration has reached an agreement with China that provides an interim solution to a longstanding problem regarding regulation of U.S. companies

providing financial information to China’s market. The interim solution secures important market access for foreign financial information companies such as Dow

Jones and Reuters operating in China and ensures that Chinese companies and financial institutions will continue to have access to U.S. information services. While

the agreement provides an interim solution, we continue to seek commitments from

China to provide expanded market access and national treatment for financial information services in China’s WTO accession negotiations.

A second recent development involves the insurance services sector. While the

United States is requesting China to make significant improvements in its GATS

schedule on insurance services, in the interim, we are pleased that China has announced that a second U.S. company, will be licensed to provide insurance in China.

Many highly qualified U.S. companies are seeking to enter China’s growing market

for insurance products and we will continue to press China to expand access to other

U.S. insurance companies and to enable them to provide the full range of insurance

services.
38

Finally, last week the United States and China signed an agreement with respect

to space launches that will provide effective price disciplines in some of the most

rapidly growing areas of commercial space launch activity. The agreement puts new

provisions into effect as part of the 1995 U.S.-China space launch accord which clarify conditions included in the pricing of launch services. More information and greater certainty will be provided to industries interested in participating in this market.

ONGOING MONITORING AND ENFORCEMENT ACTIONS

As a result of our bilateral agreements, U.S. access to China’s market is far greater now than it was. Nevertheless, our access falls far short of what it should be.

Monitoring implementation and enforcement of these agreements is one way to expand U.S. access and build a foundation for future agreements. Let me briefly review our efforts on some of our significant bilateral agreements.

BILATERAL AGREEMENTS ON INTELLECTUAL PROPERTY RIGHTS

In 1995, the United States reached an agreement with China on intellectual property rights enforcement, particularly copyrights and trademarks, and improved market access for U.S. firms in the computer software, motion picture, publishing and

sound recording industries. In the 1995 Agreement, China committed to put a basic

structure in place for enforcement of IPRs at the central and provincial level and

in major cities. China also undertook improved Customs enforcement of IPRs at the

border and strengthened protection for well-known trademarks.

Over the next year, we carefully monitored China’s implementation of the 1995

Agreement. While China created enforcement task forces and embarked on some enforcement efforts, overall piracy rates remained extremely high and U.S. companies

were frustrated in their efforts to achieve market access. That is why, in May 1996,

the Clinton Administration threatened to take action against China for its failure

to implement satisfactorily commitments from the 1995 Agreement.

In June 1996, after substantial verification activities by the U.S. government and

U.S. industry, we decided that the Chinese had taken a critical mass of enforcement

actions in connection with the 1995 Agreement. Since June 1996, we have seen continued progress and continuing problems. IPR enforcement is now part of China’s

nationwide anti-crime campaign. China has put in place a functioning enforcement

system, based on the 1995 and 1996 agreements, to protect intellectual property.

Chinese authorities have shut down 41 factories with 58 CD/CD09ROM production

lines, radically cutting back on pirated sound recording production in South China.

China’s judicial system has become involved in combating IPR piracy and the number of decisions and the severity of penalties have increased.

Despite China’s increased efforts, problems remain, particularly in the area of

end-use piracy of business software. Piracy rates of entertainment software (game

CD’s) are also high.

Besides enforcement activities, our copyright industries have made some limited

headway on market access. For example, access for foreign sound recordings, stagnant at 120 titles three years ago, reached approximately 1000 titles in 1996. The

elimination of quotas should pave the way for Chinese record companies to sign licensing arrangements that capitalize on the companies’ entire catalogues. Given

that our copyright industries are among the most competitive in the world, we will

continue to push for further market access openings in this important area. Moreover, our bilateral IPR dialogue with China is active and we expect progress on fully

implementing our IPR agreements and addressing specific concerns that develop.

TEXTILES

Our February bilateral textiles agreement builds on and improves the 1994 Textiles Agreement with China. For the first time, our bilateral agreement provides

market access for U.S. textiles and apparel into China’s market. China also agreed

to ensure that non-tariff barriers do not impede the achievement of real and effective market access for U.S. textile and apparel exports.

Under this bilateral agreement, China will lower tariff rates over the next 4

years. For certain high priority products, China agreed to accelerate tariff reductions so that they are completed within two years. The first cuts became effective

on October 1 of this year.

The issue of illegal transshipments of textiles from China has been a significant

concern in the past. In the February 1997 Agreement, we reduced China’s quotas

in fourteen apparel and fabric product categories where China agreed that violations

of the 1994 Agreement, through transshipment or over shipment, had occurred.
39

Moreover, a special textiles import safeguard mechanism will remain in effect until

four years after the WTO Agreement on Textiles and Clothing has terminated.

MARKET ACCESS AGREEMENT

Obtaining effective implementation of the October 1992 market access agreement

is another example of the Administration’s continuing pursuit of market openings.

In that Agreement, China committed to make significant changes in its import regime, i.e., to eliminate import substitution policies, publish its trade laws in an official journal, apply the same testing and standards requirements to domestic products and imports, decrease tariffs on certain products, apply sanitary and

phytosanitary measures only based on scientific principles and eliminate licensing

and quota requirements on more than 1,200 products.

China has taken some significant steps in implementing the 1992 Agreement.

China’s trade regime is now more transparent; China has lowered tariffs on many

products and has eliminated well over a thousand non-tariff barriers. While China

has removed a substantial number of these barriers, we are concerned with China’s

tendency to substitute other barriers for the ones removed. On some products in the

medical equipment sector, for example, China has replaced a quota with a tendering

and registration requirement, which still impedes market access.

A number of other market access problems remain, in particular for U.S. agricultural products. In the 1992 Agreement, China committed to eliminate unscientific

sanitary and phytosanitary restrictions used as barriers to market access. China’s

implementation of this commitment remains incomplete. Over the last four years,

we have reached agreement on measures that permit the importation of live horses;

delicious variety apples and cherries from Washington State, apples from Oregon

and Idaho; cattle, swine, and bovine embryos. This month U.S. growers exported

their first shipments of grapes to China. This new market for grapes could reach

more than $45 million in the next two to three years.

We still face unjustified sanitary and phytosanitary (SPS) restrictions on U.S. exports of citrus, Pacific-Northwest wheat, stone fruit, beef, poultry and pork products.

While China has granted some access for beef, poultry and pork products through

certification and grant of import quotas to individual processing plants, China needs

to provide a system wide certification of U.S. plants and eliminate quotas.

For other agriculture products, we seek protocols that will permit access into China’s market in the immediate future. We are particularly disappointed with the lack

of progress during talks last month on completing a protocol for exports of U.S. citrus to China. Although considerable amounts of U.S. citrus enter China through

Hong Kong, Chinese plant quarantine officials have been unwilling to establish formal channels for U.S. exports of oranges, grapefruit and other citrus products.

Other countries in Asia accept U.S. citrus. U.S. experts have spent considerable

time and effort addressing China’s SPS concerns and we believe that a protocol permitting exports from all major citrus producing states should be completed.

CONCLUSION

While China has made progress in its WTO accession negotiations, those negotiations are complex and will require extensive further work. The Administration is determined to see China accede to the WTO, but only on the basis of a commercially

meaningful agreement. As we proceed along this difficult course, we are committed

to working with Congress to ensure that our mutual objective is achieved.

Mr. Lange.

Chairman CRANE. Thank you, Ms. Esserman.

f

STATEMENT OF HOWARD H. LANGE, ACTING DEPUTY ASSISTANT SECRETARY FOR EAST ASIAN AND PACIFIC AFFAIRS,

U.S. DEPARTMENT OF STATE

Mr. LANGE. Thank you, Mr. Chairman, for the opportunity to appear before the Subcommittee. I would like to offer a very brief

statement which I hope provides a context for discussion of the

WTO accession process and broader economic relations with China.
40

The administration believes that United States interests are best

served by a secure, stable, and open China. The manner in which

we engage China will help determine whether it becomes integrated into international norms and institutions, or whether it becomes isolated, hostile, and unpredictable. We believe the strategy

of comprehensive engagement is the best approach to encourage

the development of a China which is a constructive player in international systems.

Let me mention a few areas in which we have a strong interest

in engaging China. China is a nuclear weapons state and a producer of sophisticated technology. If we are to have a world in

which weapons of mass destruction are effectively controlled, it will

require China’s cooperation and adherence to international proliferation norms. Combating alien smuggling, narcotics trafficking,

and terrorism also requires a China which participates constructively with a network of international institutions that attack such

problems. China’s participation in international efforts to address

global warming is critical. China has played a very helpful role in

recent years in support of our efforts to keep peace and stability

on the Korean peninsula.

In no area is China’s adherence to international norms more important than human rights. Exposure to the outside world and the

exchange of goods, ideas, and people has brought increased openness, social mobility, and personal liberty to China. Nevertheless,

China continues to deny or curtail basic freedoms including the

freedom of speech, association, and press and the freedom to practice religion. China must do much more to bring its human rights

practices into accord with international norms.

Trade, which is the principal focus of this hearing, of course, is

an area where China’s integration into international institutions,

especially the WTO, can reinforce the positive evolution of China

and its institutions. Ms. Esserman has covered this issue, including

our bilateral trade relationship, in detail.

I would note, however, that the value of a commercially viable

WTO accession package to Americans goes well beyond dollars and

cents. Increasing China’s awareness of international trade norms

includes recognition of fundamental concepts of the rule of law

such as transparency, contract sanctity, and the need for an independent judiciary. These concepts will have an impact across the

board. Our trade agenda actively and directly supports the broader

agenda of our engagement policy.

Against the backdrop of our overall strategy, let me sketch some

summit results. First, the two Presidents had a good exchange of

views on the international situation, on United States-China relations, and the important opportunities and challenges facing the

two countries. They also had a very frank exchange of views, both

in private and in public, on the areas where we differ, notably

human rights. We achieved a number of concrete outcomes. I will

cite some of those outside the area of trade, which Ms. Esserman

has covered in her testimony.

As a result of the summit, we are bringing China’s nuclear nonproliferation policies and practices into line with international

norms. We are enhancing cooperation in addressing the intertwined issues of energy and the environment. We will be holding
41

regular summits and other meetings at senior levels. We are enhancing cooperation in law enforcement and in promoting the rule

of law in China. We are also taking steps to develop military-tomilitary relations.

Even in the area of human rights, where we have such obvious

differences, China has recently taken some positive actions. China

is inviting a group of American religious leaders to visit. China has

also agreed to begin preparatory talks on establishing a forum for

United States and China NGOs, nongovernmental organizations, to

discuss human rights. She is signing the International Covenant on

Economic, Social and Cultural Rights, and is studying the Covenant on Civil and Political Rights. We will continue our strong efforts to advance our interests in this area, which is critical to maintaining a healthy and positive relationship with China.

In conclusion, Mr. Chairman, a commitment to advance United

States interests by promoting China’s adherence to international

norms will remain a central theme of our efforts in all areas of our

relationship including, certainly, the area of trade. Thank you, Mr.

Chairman.

[The prepared statement follows:]

Statement of Howard H. Lange, Acting Deputy Assistant Secretary for East

Asian and Pacific Affairs, U.S. Department of State

Thank you for the opportunity to appear before the Subcommittee. I’d like to offer

a brief statement which I hope provides a context for the discussion today of the

WTO accession process and broader economic relations with China.

COMPREHENSIVE ENGAGEMEMENT

The Administration believes that US interests are best served by a secure, stable

and open China. The manner in which we engage China will help determine whether it becomes integrated into international norms and institutions or whether it becomes isolated, hostile, and unpredictable. We believe the strategy of comprehensive

engagement is the best approach to encourage the development of a China which

is a constructive player in international systems.

Administration policy is to encourage China’s integration into global institutions

and its adherence to international norms, and to maintain a constructive and productive relationship with China. Attainment of these objectives is important to the

security and well-being of Americans. China is a nuclear weapons state and producer of sophisticated technology. If we are to have a world in which weapons of

mass destruction are effectively controlled it will require China’s cooperation and

adherence to international proliferation norms. Combatting alien smuggling, narcotics trafficking, and terrorism, also require a China which participates constructively

in the network of international institutions that attack such problems. As the second largest emitter of greenhouse gasses, China’s participation in international efforts to address global warming is critical. In recent years China has played a very

helpful role in support of our efforts to keep peace and stability on the Korean peninsula. Yet we hope for more progress on security issues, with, for example, increasing transparency in China’s own military establishment.

In no area is China’s adherence to international norms more important than

human rights. Exposure to the outside world and the exchange of goods, ideas, and

people has brought increased openness, social mobility and personal liberties to

China. While these developments are positive, they are not sufficient. China continues to deny or curtail basic freedoms, including freedom of speech, association,

press, and freedom to practice religion. China must do much more to bring its

human rights practices into accord with international norms.

The recent history of Asia shows that over time, economic development leads to

growth of an educated and aware middle class and of a civil society. This in turn

leads to democracy, and this is the path we want to encourage China to travel.

Trade, the principal focus of this hearing, is an important area where China’s integration into international institutions, especially the WTO, and adherence to

international norms can reinforce a positive evolution of China and its institutions.

Your USTR witness will cover this issue, including our bilateral trade relationship,
42

in detail, and I will defer to her for that discussion. I would emphasize, however,

that the value to Americans from a commercially viable WTO accession package

goes beyond dollars and cents. China’s increasing recognition of international trade

norms entails the recognition of fundamental concepts of rule of law, such as transparency, contract sanctity, and the need for an independent judiciary. These concepts will have an impact across the board as we work with China to address all

the issues I have cited above, including weapons proliferation, human rights, and

the environment. In this sense our trade agenda actively and directly supports the

broader agenda of our engagement policy. Far from being in conflict with our overall

goals, our trade objectives support what we are trying to accomplish.

SUMMIT RESULTS

Against this backdrop of our overall strategy, let me sketch some summit results,

which we believe have furthered the goals I have described.

First, I’d note that the two Presidents had a good exchange of views on the international situation, US-China relations, and the important opportunities and challenges facing the two countries. They also had a very frank exchange of views, in

public and private, on the areas where we differ, especially human rights. Direct

communication between the top levels of our governments is essential to addressing

differences, deepening mutual understanding, and avoiding misconceptions. In addition, we achieved a number of concrete outcomes, including: • bringing China’s nuclear non-proliferation policies and practices into line with

international norms; • enhancing cooperation in addressing the intertwined issues of energy and the

environment; • holding regular summits and other meetings at senior levels, which will help

us expand cooperation and narrow differences with China; • enhancing cooperation in law enforcement, including stationing of DEA officers

at our Embassy in Beijing, and in promoting the rule of law in China; • taking steps to develop military-to-military relations in ways that minimize the

chance of miscalculation, advance transparency, and strengthen communication.

In the area of human rights, China has recently taken some positive actions,

which include inviting a group of American religious leaders to visit China to observe Chinese religious practices; agreeing to begin preparatory talks on establishing a forum for US and China NGOs and officials to discuss human rights; and signing the International Covenant on Economic, Social, and Cultural Rights. Human

rights is perhaps the most difficult area of our relationship and the one in which

progress is slowest and most difficult to measure. We will continue our strong efforts to advance our interests in this area, which is critical to maintaining a healthy

and positive relationship with China.

A commitment to advance US interests by promoting China’s adherence to international norms will remain a central theme of our efforts in all areas of our relationship with China, including nonproliferation, human rights, and law enforcement, as well as trade.

Thank you.

Ms. Esserman, I have long supported negotiating a free trade

Chairman CRANE. Thank you, Mr. Lange.

f

agreement with Taiwan. However, China has insisted that it be

granted membership in WTO ahead of Taiwan. The question in my

mind is, with that reversion of Hong Kong back to the mainland,

doesn’t mainland China have membership in the WTO? I mean,

Hong Kong has got it; it’s a part of China. It’s probably the biggest

means of goods and services flowing in and out of China. How do

you make the distinction?

Ms. ESSERMAN. Hong Kong is treated as a separate entity under

the WTO.

Chairman CRANE. It may be treated as a separate entity, but it

isn’t. I mean, it’s a Province of China.

Ms. ESSERMAN. Well, first and foremost, as we have all discussed

today, in order to become a member of the WTO, the entering coun-
43

try must accept the full range of responsibilities and obligations required of a WTO member. China has not done that yet. It would

not be appropriate at this time, simply because Hong Kong is a

member, for China to be a member of the WTO.

Chairman CRANE. If California were a member of the WTO, that

wouldn’t necessarily qualify the United States as a member?

Ms. ESSERMAN. No, it would not.

Chairman CRANE. It seems to me that that argument could have

been raised with President Jiang while he was here, that we’re

going forward now with WTO accession for Taiwan, another Province of China, and maybe in another century they will be reunited

with the mainland.

But at any rate, let me get onto a couple of other items. The joint

United States-China statement issued after the summit used the

phrase ‘‘commercially meaningful’’ instead of ‘‘commercially viable’’

when describing an adequate WTO Agreement on China. Does this

reflect any change in United States policy, and how does ‘‘commercially meaningful’’ differ from ‘‘commercially viable?’’

Ms. ESSERMAN. Mr. Chairman, ‘‘commercially meaningful’’ has

the same meaning to us as ‘‘commercially viable.’’ It means genuine

access in the area of goods, services, agriculture, and compliance

with WTO rules upon accession.

Chairman CRANE. OK. I just wanted to make sure there was no

difference in the meaning of the terminology.

Do you expect, Mr. Lange, the recent stock market prices in Asia

to affect China’s ability to make economic reforms or its willingness

to modernize its banking and financial system to keep pace with

WTO accession negotiations?

Mr. LANGE. So far, Mr. Chairman, China has not been notably

affected by the financial volatility in the rest of Asia, but of course

it is becoming increasingly involved and integrated into the Asian

economy. So over time, it will become more affected by such volatility, but at this time—certainly as far as I know—nothing we

have heard from the leadership of China suggests that they are

slowing down in their intention to continue with economic reforms

in China.

Chairman CRANE. At last week’s summit, President Clinton indicated that he will certify China as being in compliance with the

1985 agreement on United States-China nuclear cooperation. What

opportunities do you see this providing for small businesses and investors here in the United States vis-a-vis China?

Mr. LANGE. Well, once the 1985 agreement is in fact implemented, United States companies will of course have the opportunity to bid in a very large market for developing nuclear power

facilities in China.

I don’t know about the structure of the nuclear power industry

in the United States in detail, but I presume that the large contractors are served by a large network of small businesses and

small contractors as well.

Chairman CRANE. Thank you.

Mr. Thomas.

Mr. THOMAS of California. Thank you very much, Mr. Chairman.

I thank both of you for your comments.
44

Ms. Esserman, the USTR today sounded a little more like State

than usual. I don’t have my State Department translating dictionary. Frank and indepth discussions made progress ‘‘commercially

meaningful,’’ which the Chairman commented on; apparently it

means the same as viable. Could I ask you to engage, if you are

willing, in something that most of us would understand? That is,

on a scale of 1 to 10, where was China at the beginning of the year

and where are they now?

Ms. ESSERMAN. Well, Mr. Thomas, I hadn’t intended to use State

Department parlance, but as to your question——

Mr. THOMAS of California. It worries me because you were so

good at it.

Ms. ESSERMAN. Let me just say that we think the summit did

provide momentum on the WTO accession issue for a number of

reasons. First of all, China made two important announcements:

The announcement of their intention to join the ITA is an important advance, as is committing to further substantial tariff cuts.

Also, President Jiang has recognized that China must join the

WTO on a commercially meaningful basis, and the two Presidents

agreed to intensify our efforts to deal with the full range of issues

necessary to join the WTO.

Mr. THOMAS of California. I understand that; that was in your

testimony and that was your response to the Chairman. I don’t

want to put you on the spot. But does it appear, if 5 is halfway between 1 and 10, that we are on the other side of 5? Are we still

on the short side of 5? Did we cross 5 based upon this summit? Is

there any way to give us some progress report in a way that most

people would understand? I mean, I am only familiar with the

terms you are using in my area of involvement, education in terms

of pass-fail courses. Can we assign some kind of a grade, if you

don’t like using 1 to 10? Where are we?

Ms. ESSERMAN. Mr. Thomas, I really don’t—I am not able to assign a grade or a number, but I do think it’s genuine momentum,

that we really ought to work hard to take advantage of. In other

words, it provides us a basis for moving more positively. These are

two very important steps to provide genuine access. I think it’s

hard to provide a grade or a number to the situation.

Mr. THOMAS of California. I understand. I appreciate it. I’ll see

euphemisms under State Department and we’ll come up with that.

Another question, back to what the Chairman said: I’m concerned about this because Hong Kong is a member of the WTO and

it has reverted back to being a Province of China, mainland China.

Are we monitoring the criteria that were essential in allowing

Hong Kong to be a member of the WTO? Where is the Government’s position on any backsliding that may occur if, in fact, it does

occur on those criteria which enabled Hong Kong to be a member

of the WTO initially? Do we have any ongoing monitoring of Hong

Kong and its structure vis-a-vis where it was prior to its incorporation back into mainland China today or tomorrow or the day after?

Mr. LANGE. May I answer that, Mr. Thomas? Under the Hong

Kong Policy Act, we are required to monitor Hong Kong and its autonomy as a trading entity. This involves many aspects of Hong

Kong’s behavior. But we are very conscious of this requirement; we

follow it very closely. I am sure that our trade representatives in
45

Geneva as well as here in Washington also follow this very carefully and monitor it. We will be very vigilant for signs that they

are not acting independently.

Mr. THOMAS of California. And the intent of the Hong Kong Act

is that if, in fact, there has been major backsliding, it could include

denial of continued membership in WTO, or at least our active opposition to continued membership? I am taking an extreme position, but I am just wondering what leverage you have. I have often

found when you go to the extreme position, you have a better understanding of what leverage you have.

Mr. LANGE. I confess that I don’t recall the precise requirements

of the Hong Kong Policy Act, and whether it specifies that step.

Mr. THOMAS of California. My concern is that we could monitor

and then we could fall back into a series of euphemisms like ‘‘a

view with concern,’’ you know; there’s a whole series of words we

could use which would not indicate any clear punishment in the

area of backsliding, which I am very concerned about.

To conclude, it seems to me that the criteria we used on Hong

Kong ought to be used on Taiwan. And that if, in fact, substantive

behavioral criteria are met, there should be no interest in timing

of admission to WTO. What is the administration’s policy on that?

Ms. ESSERMAN. Mr. Thomas, if I could just address the question

about the WTO directly, there is a mechanism in the WTO for review of a country’s practices. I would be happy to provide further

information to you. I don’t know the precise date of the review for

Hong Kong.

The context of that review provides us another mechanism for

determining whether there is backsliding. Ultimately, the United

States does have authority to not apply the WTO rules to Hong

Kong.

Mr. THOMAS of California. Thank you very much. The Taiwan

question remains open, but it just seems to me that if they were

to meet the test, there should be no linkage in terms of timing. I

think that would be the best possible message we could send mainland China. Fit this behavioral parameter and you will be accepted,

just as Hong Kong was accepted and just as Taiwan would be accepted. The goal, of course, would be to get China to understand

that before Taiwan reaches a level of acceptance. But I believe we

are going to reach that point, that is, Taiwan meeting the criteria.

If we were to then withhold admission to Taiwan, I believe that

would have severe ramifications.

Ms. ESSERMAN. As Ambassador Barshefsky has said, we do look

at each of these situations based on the merits. Based on the merits, Taiwan is not yet ready to join. There are still a number of important outstanding issues in the area of agriculture, where imports of agriculture products are blocked. There are some important issues relating to financial services and tariff staging. So at

this point, Taiwan is not yet in a position to join.

Mr. THOMAS of California. Obviously, I am as interested as anyone and probably pushed a number of those agricultural issues.

I have a series of questions, Mr. Chairman, that I would like to

submit for the record to have the USTR answer. It has to do with

to a certain extent agricultural products with the Republic of China

and the issue that was mentioned earlier, the phytosanitary re-
46

strictions, and a number of other issues. I thank you very much for

your vigilance. My goal and your goal, I hope, is to make sure Taiwan understands that as it joins the democratic community of nations and pursues WTO membership if, in fact, they do measure

up, they would not be unnecessarily delayed by political considerations. Thank you, Mr. Chairman.

Mr. LANGE. If I may comment?

Chairman CRANE. Mr. Lange.

Mr. LANGE. If I could just comment briefly on the Taiwan angle:

I believe, as a matter of principle, it is treated as a customs territory similar to Hong Kong, the difference being that Hong Kong is

already in the WTO and has met the requirements. So, as Ms.

Esserman suggests, the question is really on meeting the requirements for entry, it’s not one of principal.

Mr. THOMAS of California. Mr. Chairman, our goal is to make

sure that that is, in fact, presented to you as a dilemma as soon

as possible.

Chairman CRANE. Mr. Jefferson.

Mr. JEFFERSON. Thank you, Mr. Chairman.

Ms. Esserman, I guess I am asking you this question: How does

the administration plan to approach the issue of whether China enters the WTO as a developed or developing country? And what are

the areas of the WTO where this status makes a difference in respect to the kind of commitment we can expect from China in the

WTO?

Ms. ESSERMAN. The U.S. Government has determined that it is

best to scrap the terms ‘‘developed’’ and ‘‘developing’’ nations, as

applied to China’s WTO accession. In fact, we think it best to take

a practical approach and address each issue based on the merits

in a way that would secure genuine market access and compliance

to WTO rules, in light of the particular situation presented by

China.

Mr. JEFFERSON. The question comes up because, unless this is

wrong, the United States accepts 30 percent of China’s exports,

while China only buys 2 percent of United States exports. Is that

figure right as far as you know? Does that sound about right?

Ms. ESSERMAN. Mr. Jefferson, I’m sorry. I couldn’t hear you.

Mr. JEFFERSON. I was saying that the United States accepts 30

percent of China’s exports, while China only accepts 2 percent of

United States exports. I was asking whether you agreed with that.

Is that figure right, do you know?

Ms. ESSERMAN. I don’t know whether that precise figure is true.

There is unquestionably a deficit problem with China. We are concerned about it. We think the most important——

Mr. JEFFERSON. I guess my question really is, even if you can’t

agree with those numbers, there is a huge disparity. To what do

you attribute it?

Ms. ESSERMAN. There is a serious disparity that causes us concern. It’s due to a variety of factors. One factor really is the fact

that our exports are not given full access to the Chinese market.

We think the most important way to address those issues is to

push ahead in a systematic way, to break down barriers, particularly through the WTO accession negotiations and through strong

bilateral initiatives.
47

Mr. JEFFERSON. In response to Mr. Thomas’s question, I believe

you made reference to the Information Technology Agreement.

Ms. ESSERMAN. Yes.

Mr. JEFFERSON. As an important accomplishment of the summit,

China said that it would seek to become a part of that, to join the

agreement. What is the expected timetable for China to join and

does it have any connection with WTO accession?

Ms. ESSERMAN. We would expect the timetable to be between approximately 2 and 6 months. That’s the time it has taken other

countries to join. There are a number of technical issues that need

to be reviewed with all of the countries that have joined the WTO.

Further, to answer your question, a country does not need to be a

member of the WTO to join the Information Technology Agreement.

Other countries have joined—I believe Estonia is an example—

when they are not yet members of the WTO.

Mr. JEFFERSON. But in the case of China specifically, there is no

connection being made between these two issues, WTO accession

and joining the ITA?

Ms. ESSERMAN. What I meant is they could join before they actually accede to the WTO, which is very good and important. It is a

part of their overall accession package because it reflects a significant lowering of tariffs on very important products to the United

States.

Mr. JEFFERSON. We have had various agreements with China

here recently: one on intellectual property, one on prison labor exports, and various market access agreements. Where are we now

with the status of those various agreements? Is China complying

with these agreements or not? How well is it complying with them

or not?

Ms. ESSERMAN. In the intellectual property area, I think that

there has been a lot of action taken to comply with the Intellectual

Property Agreement. You may recall the agreement was I believe

negotiated 2 years ago. A year later the U.S. Government felt that

China had not taken strong action and they threatened sanctions—

stiff sanctions. China undertook, and has continued to undertake,

significant measures to crack down on piracy, closing a number of

production lines—I believe 58 production lines, instituting a real

infrastructure to deal with piracy; instituting raids and a number

of initiatives to deal with the piracy issue overall.

So in the copyright area, there have been important gains, although certainly problems remain. This is why it is very important

for us not only to negotiate the agreement, but to continue monitoring the agreement diligently at every step. We’re continuing to do

that. We are concerned about China’s record in regard to business

and game software. We are also concerned about market access in

this area as well. So we’re continuing to monitor. A team recently

went to China to take further steps. We’ll be following up on that

trip.

Mr. JEFFERSON. Is the prison labor agreement being lived up to,

antiprison labor agreement?

Mr. LANGE. We find that there are some shortcomings in Chinese

compliance with the Prison Labor Agreement. They do not always

respond to our requests for inspections of facilities. Recently we

have experienced some improvement in Chinese performance, but
48

it is an area that we are continuing to emphasize and try to get

better compliance on China’s part.

Mr. JEFFERSON. This has been a very difficult area, the prison

labor area, hasn’t it?

Mr. LANGE. Yes, it has.

Mr. JEFFERSON. One last thing, Mr. Chairman, if I might. On

Bereuter-Ewing H.R. 1712, this so-called carrot-and-stick approach:

We have a permanent MFN and some opportunities to go to snapback, to pre-Uruguay round tariffs if compliance isn’t met. How

does the administration view this bill? Is there support for the Bereuter approach?

Ms. ESSERMAN. First and foremost, we very much appreciate the

spirit in which this legislation is offered. We appreciate the objective of Congressman Bereuter to try to facilitate rapid progress on

China WTO accession. However, we think that progress has been

made over the last year and particularly recently with the summit.

So we think it is premature to take a position on the bill.

Questions Received from Hon. Bill Thomas and Subsequent Responses from

Ms. Esserman

Question. The PRC has used phytosantiary restrictions lacking scientific justification to prevent imports of U.S. citrus and other produce. In some cases, such as China’s assertion that the U.S. has medfly infestations, the restrictions appear unjustified since other countries such as Japan, Korea and Australia accept our methods

of quarantine, isolation and eradication of this pest. How does your office intend to

get China to follow the WTO requirement for a scientific basis for sanitary and

phytosanitary restrictions as a condition of accession to the WTO?

Answer. Compliance by the Chinese Government with its commitments under the

1992 Market Access MOU has been a top priority for USTR. China has thus far

opened up its market to U.S. live cattle; bovine embryos; cherries from Washington;

delicious variety apples from Washington; and most recently grapes from California.

However, China still does not allow imports of our citrus, other varieties of apples,

tobacco, wheat and stonefruit.

At recent technical meetings in San Francisco, China offered to accept a protocol

and work plan for importing citrus from Texas and Arizona, but maintained its position that the recent incidence of medfly in California and Florida prevented them

from agreeing to a similar arrangement for those states. We were very disappointed.

The issue has been raised at the highest levels, including by the President, USTR

Barshefsky and Ambassador Peter Scher. We are now reviewing our options in close

consultation with U.S. citrus exporters.

We are working hard to reduce China’s tariffs and VAT rates, as well as any unscientific phytosanitary barriers in the context of China’s accession. China’s adherence to the Agreement on the Application of Sanitary and Phytosanitary Measures

is certainly a condition of its accession to the WTO. We will also continue to raise

our concerns bilaterally at the highest policy levels in China.

Question. The PRC tariffs and taxes are extremely high on some U.S. products. For

example, the tariff on fresh garlic is 22 percent and there is a 13 percent VAT on

top of that. What is your office doing to reduce China’s import tariffs on garlic and

agricultural products?

Answer. In our WTO accession negotiations with China we have been pressing the

Chinese to lower their tariffs, eliminate non-tariff trade barriers and abide by the

rules and general principles of the WTO. China has taken some actions to reduce

barriers. As of October 1, China’s applied tariff rate for garlic was reduced to 13

percent. In our ongoing WTO market access talks, we will continue to seek lower

rates and reductions in the VAT for garlic. The Administration is making it clear

to the Chinese that significant market access for U.S. agricultural exports is a condition for China’s accession to the WTO.

Question. In the past, the U.S. has treated nations such as Poland, Romania and

Hungary as non-market economies in dumping cases once they agreed to join the

World Trade Organization’s predecessor organization, the General Agreement on Tariffs and Trade. I understand that the People’s Republic of China has so far asked

that it be treated as a market economy in dumping cases. That would be inappropri-
49

ate. What, given China’s restrictive market access, is your office doing to ensure that

China is treated as a non-market economy for the purposes of our unfair trade laws?

Answer. We agree that we must ensure that the United States is able to continue

to apply its non-market economy (NME) methodology in antidumping investigations

of imports from China. While this issue is as yet unresolved, U.S. negotiators have

made it clear to China that its accession protocol must include language that permits continued use of NME methodology. Other WTO members that have used antidumping laws on China’s exports in the past support the U.S. position on this matmony. I now want to notify everyone that the Subcommittee will

ter.

Chairman CRANE. Well, we thank you very much for your testif

stand in recess until 1:15.

[Recess.]

Chairman CRANE. The Subcommittee will now reconvene. Our

next witness is Julius Katz, president of Hills & Co. Please proceed, Mr. Katz.

Mr. KATZ. Thank you, Mr. Chairman. Let me say that Bill Frenzel, who was to be here with me, couldn’t return this afternoon and

asked me to give his regrets. He also wished to be associated with

my statement. He has his own statement for the record.

Chairman CRANE. His statement will be included as well. Thank

you.

[The prepared statement of Mr. Frenzel follows:]
50
51

Mr. K

STATEMENT OF JULIUS L. KATZ, PRESIDENT, HILLS & CO.

ATZ. Thank you, Mr. Chairman. Thank you for inviting me

f

to appear before the Subcommittee to discuss H.R. 1712, a bill to

encourage China to join the World Trade Organization, to remove

China from the provisions of the Jackson-Vanik Act, and to provide

a more effective remedy to the problem of inadequate market access in China.

There is much in this bill to commend. First, by encouraging the

entry of China into the World Trade Organization, it recognizes the
52

growing importance of China as a major trading nation. As such,

it should be a full member of the WTO, as soon as it is able to commit itself to the obligations required of WTO members.

Second, the bill recognizes the importance of assuring China that

as a WTO member, it will be accorded permanent most-favorednation treatment. This would relieve United States negotiators of

the inconsistent position they find themselves in: Insisting that

China commit itself to the obligations of the WTO—the first principle of which is nondiscrimination, as embodied in article I of the

GATT—while at the same time insisting that under current United

States law, the United States could not commit itself to apply these

same WTO obligations to China. By removing the MFN issue from

the accession negotiations with China, the credibility of the United

States is significantly enhanced and its bargaining position improved.

Another important advantage of extending permanent MFN

treatment is that it will end the annual spring threat to deny such

treatment to China. Some view this annual event as a charade,

since the threat has so far turned out to be empty. Empty threats

are poor policy tools. But we should not assume that the exercise

is without cost. It puts U.S. firms at a competitive disadvantage

and casts the United States as a less than dependable trading partner; as such, it acts as an obstacle to U.S. exports.

The third major feature of the bill, the snapback provision, seeks

to provide a more credible instrument than the nuclear-like MFN

weapon to assure the ability of United States firms to compete on

an equitable basis in the Chinese market. Unlike the threat to

deny MFN treatment, which is usually aimed at a number of

nontrade issues with China, the snapback provision is directly related to our trade interests. Sensibly, this provision can be activated only if China is not a member of the WTO. As a member of

the WTO, China would be subject to the dispute settlement mechanism, which has proven to be a highly effective instrument for enforcing obligations of member countries.

In short, Mr. Chairman, I believe that the basic thrust of the bill

is desirable and worthy of support. I would, however, call attention

to several provisions which warrant particular consideration. These

relate to the time restraints and certain operative provisions of the

bill.

Under section III of the bill, the President is required to determine within 180 days of its enactment whether China is taking

adequate steps or making significant proposals to become a WTO

member and, if not, whether it is according adequate trade benefits

to the United States. Failing an affirmative determination, the

President is required to proclaim an increase in the duty rate on

one or more products imported from China up to the rate that applied on December 31, 1994, that is, the date on which reductions

of duty resulting from the Uruguay round began to take effect.

As I noted at the beginning of my statement, China should be

in the WTO. There would be important advantages to having China

in the WTO, subject to the rules and disciplines of the world trading system. It would benefit our relations with China in general

and our trade interests in particular to be able to bring any trade

disputes to the multilateral forum of the WTO.
53

Negotiations to bring China into the WTO have been underway

for several years now, and while considerable progress has been

achieved in persuading China to bring down its tariffs dramatically—to 10 percent according to a very recent report—a number

of very important unresolved issues remain. These include such

subjects as nontariff barriers, services, and the critical issue of ‘‘national treatment,’’ which would assure that United States firms are

treated the same in the Chinese market as Chinese firms.

The failure to resolve these issues thus far is not, in my view,

the result of a lack of effort or of unreasonableness on the part of

either China or the United States and other WTO members. Neither is the problem altogether ideological. The problem, I believe,

is the complexity of trying to make the Chinese economic system—

now dominated by bloated, inefficient state-owned enterprises—

compatible with the requirements of the WTO.

To put a time constraint on the negotiations could have the unfortunate result of putting as much pressure to achieve agreement

on the United States negotiators as on the Chinese. It is more important, I believe, to get the agreement right than to compromise

important principles in order to conclude an agreement by a date

certain.

Another provision that needs careful examination is the requirement that the President determine whether ‘‘China is according

adequate trade benefits to the United States, including equal competitive opportunities.’’ I am concerned that, on the one hand, if

taken literally, the threshold is so high as to be incapable of being

met. If, on the other hand, the phrase ‘‘equal competitive opportunities’’ is interpreted somewhat loosely, it may have little effective

meaning.

In conclusion, Mr. Chairman, let me say that the sponsors of the

bill have put forward a thoughtful and constructive approach to the

issue of trade with China. Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Julius L. Katz, President, Hills & Co.

Mr. Chairman: Thank you for inviting me to appear before the Committee to discuss H.R. 1712, a bill to encourage China to join the World Trade Organization, to

remove China from the provisions of the Jackson-Vanik Act, and to provide a more

effective remedy to address the problem of inadequate market access in China.

There is much in this bill to commend. First, by seeking to encourage the entry

of China into the World Trade Organization, it recognizes the growing importance

of China as a major trading nation. As such, it should be a full member of the WTO,

as soon as it is able to commit itself to the obligations required of members of the

organization.

Second, the bill recognizes the importance of assuring that as a WTO member,

China should expect that it will be accorded permanent most-favored-nation treatment. This would relieve U.S. negotiators of the inconsistent position they find

themselves in of insisting that China commit itself to the obligations of the WTO,

the first principle of which is non-discrimination, embodied in Article I of the GATT,

while at the same time insisting that under current U.S. law, the United States

could not commit itself to apply these same WTO obligations to China. By removing

the MFN issue from the accession negotiations with China, the credibility of the

United States is significantly enhanced and its bargaining position improved.

Another important advantage of extending permanent MFN treatment is that it

will end the annual Spring rite of the threat to deny such treatment to China. Some

view this annual event as a charade, since the threat has, so far, always turned out

to be empty. Empty threats are poor policy tools. But, we should not assume that

the exercise is without cost. It puts U.S. firms at a competitive disadvantage and
54

casts the United States as a less-than-dependable trading partner. As such, it acts

as an obstacle to U.S. exports.

The third major feature of the bill, the snap-back provision, seeks to provide a

more credible instrument than the nuclear-like MFN weapon to assure the ability

of U.S. firms to compete on an equitable basis in the Chinese market. Unlike the

threat to deny MFN treatment, which is usually aimed at a number of non-trade

issues with China, the snap-back provision is directly related to our trade interests.

Sensibly, this provision can be activated only if China is not a member of the WTO.

As a member of the WTO, China would be subject to the dispute settlement mechanism, which has proven to be a highly effective instrument for the enforcement of

member-country obligations.

In short, Mr. Chairman, I believe that the basic thrust of the bill is desirable and

worthy of support. I would, however, call attention to several provisions which warrant particular consideration. These relate to the time restraints and certain operative provisions of the bill.

Under section 3 of the bill, the President is required to determine, within 180

days of its enactment whether China is taking adequate steps or making significant

proposals to become a WTO member, and, if not, whether it is according adequate

trade benefits to the United States. Failing an affirmative determination, the President is required to proclaim an increase in the rate of duty on one or more products

imported from China, up to the rate that applied on December 31, 1994, that is,

the date on which reductions of duty resulting from the Uruguay Round began to

take effect.

As I noted at the beginning of my statement, China should be in the WTO. There

would be important advantages to having China in the WTO, where it would be subject to the rules and disciplines of the world trading system. There would be benefits

to our relations with China generally and our trade interests in particular to be able

to bring any trade disputes to the multilateral forum of the WTO.

Negotiations to bring China into the WTO have been underway for several years

now, and while considerable progress has been achieved in persuading China to

bring down its tariffs dramatically, to 10 percent according to a very recent report,

there remain a number of very important unresolved issues. These issues include

such subjects as non-tariff barriers, services, and the critical issue of ‘‘national treatment,’’ which would assure that U.S. firms are treated the same in the Chinese

market as Chinese firms.

The failure to resolve these issues thus far is not, in my view, the result of lack

of effort or of unreasonableness on the part of either China or of the United States

and other WTO members. Neither is the problem altogether ideological. The problem, I believe, is the complexity for political, social, and economic reasons of trying

to make the Chinese economic system, dominated by bloated, inefficient state-owned

enterprises, compatible with the requirements of the WTO.

To put a time constraint on the negotiations could have the unfortunate result

of putting as much pressure on the U.S. negotiators as on the Chinese to compromise important principles to achieve agreement. It is more important, I believe,

to get the agreement T3right than to conclude an agreement by a date certain.

Another provision that needs careful examination is the requirement that the

President determine whether ‘‘China is according adequate trade benefits to the

United States, including equal competitive opportunities.’’ I am concerned that, on

the one hand, the threshold, if taken literally, is so high as to be incapable of being

met. If, on the other hand, the phrase ‘‘equal competitive opportunities’’ is interpreted somewhat loosely, it may have little effective meaning.

In conclusion, Mr. Chairman, let me say that the sponsors of the bill have put

forward a thoughtful and constructive approach to the issue of trade with China.

Mr. Katz, would membership in the WTO provide China with

Chairman CRANE. Thank you, Mr. Katz.

f

gains and incentives sufficient to justify incurring the costs of domestic restructuring that would be required if it removed its trade

barriers?

Mr. KATZ. Well, I think it would, although it is an arguable question in China apparently. I think there are some comrades who

take the opposite position that it’s not worth doing. But overall, I

think it would be important to those in China who want to reform
55

the economy. It would provide an anchor to those reforms. It would

also give them an assurance of benefits in the United States and

other markets of the world. So I think the advantages certainly

outweigh the disadvantages for China.

Chairman CRANE. This is a repetitive question, but since the

Province of Hong Kong has a free trade relationship with the rest

of mainland China now, and since Hong Kong is a member of

WTO, isn’t China, effectively speaking, a member of the WTO?

Mr. KATZ. I don’t think so. Hong Kong has a special customs status. It is a special customs territory and is a member of the WTO

in that capacity. It has been since the beginning of the GATT.

Countries may have free trade arrangements with other countries,

but that doesn’t give the partner country any rights. So I don’t

think that having Hong Kong be a member solves China’s problem.

Chairman CRANE. Well, except to the extent that as I said, in effect they have a free trade relationship with all the other Provinces. Can’t they simply route goods back and forth through Hong

Kong?

Mr. KATZ. Well, they have a free trade relationship, but they

don’t have a common market. There is no common market between

Hong Kong and China. It’s a somewhat special situation.

Chairman CRANE. Why is it in the best interest of the United

States to have China in the WTO in your estimation?

Mr. KATZ. I’m sorry?

Chairman CRANE. Why is it in the best interest of the United

States to have China become a member of the WTO?

Mr. KATZ. Well, as I said in my statement, because it would subject China to the norms, the rules, the obligations of the world

trading system. I think it would be desirable for that reason. China

is a very large trading country and should be subject to the disciplines of the WTO. For somewhat similar reasons to the answer

I gave a moment ago as to what China’s interests would be. It

would also be in our interest to have whatever reforms have taken

place in China anchored in an international agreement, particularly a multilateral instrument.

Chairman CRANE. Why is it in China’s interest to join the WTO?

Mr. KATZ. Well, again, because I think they get the assurances

of consistent and permanent treatment in the markets of the member countries, the United States included. For internal political reasons, I think it is a way of reinforcing the pressure to reform their

economy, which I think ultimately they are going to have to do.

Chairman CRANE. But would you not agree that there could be

some staggering restructuring costs within China?

Mr. KATZ. Absolutely. That is the greatest obstacle I see at the

moment. The Chinese economy is still dominated by these very

large, inefficient state-owned enterprises into which the social safety net of the country is embedded. They are being supported by a

banking system which is also inefficient and probably largely insolvent. I mean the firms are insolvent and they are being bailed out

by a banking system which, under normal circumstances, would be

insolvent. I think the Chinese leadership understands and is determined to reform that system but how to do it, and over what period

of time, is the question.
56

Chairman CRANE. That time question is a valid one because I’m

sure that restructuring costs would have to be absorbed by the National Government over there. It would be for their long-term benefit, after going through that initial transition, but there would be

some political consequences of that. In your estimation, do you

think the people in power in China right now are prepared to make

that kind of a painful transition?

Mr. KATZ. I think in principle they are. I think as a matter of

policy they have pretty much made that decision. But precisely how

to carry it out, what the transition should be, and how they deal

with the interim problems that would arise in terms of surplus

labor, employment, housing, medical care, education, Social Security—all of those elements are embedded in these huge enterprises.

How to unwind that system is a formidable task, but I think they

are committed to doing it.

Chairman CRANE. Do you have any views on the possible consequences of permitting Taiwan WTO accession before the mainland if the mainland continues to drag its feet?

Mr. KATZ. Well, I think—obviously, the mainland Chinese would

be very upset about that. But what they would do as a practical

matter I don’t know. I assume it’s something they would get over

after a while. I don’t see them as the problem so much as I think

other WTO members would probably be reluctant to take on that

risk. I mean, I think the People’s Republic would get over it after

a while. I think the People’s Republic of China is moving inexorably to do what they have to do to become a member of the WTO,

but I wouldn’t care to put that in a timeframe of months. So I

think both of these entities should be and will ultimately be in the

WTO.

Chairman CRANE. I want to express appreciation to you and

apologize to you, Mr. Katz, for our interruption. But we had a bill

over on the floor; our Subcommittee brought up on CBI, the Caribbean Basin Initiative, parity and that’s why we had to break. I am

sorry we missed Bill Frenzel’s testimony, but it will be a part of

the record, as will yours. Thank you so much for coming today.

Mr. KATZ. Thank you, Mr. Chairman.

Chairman CRANE. We will now move onto the next panel which

will begin with Wingate Lloyd, director of international relations

for ITT Industries, here on behalf of the U.S. Chamber of Commerce. Then James Whittaker, manager of international public policy for Hewlett-Packard on behalf of the American Electronics Association; George Scalise, president of the Semiconductor Industry

Association; and Cal Cohen, president of the Emergency Committee

for American Trade.

If you will please now proceed in the order that I called you.

STATEMENT OF WINGATE LLOYD, DIRECTOR, INTERNATIONAL

RELATIONS, ITT INDUSTRIES; ON BEHALF OF U.S. CHAMBER

OF COMMERCE

Mr. LLOYD. Thank you, Mr. Chairman, for allowing me to testify

before your Subcommittee today. I am Wingate Lloyd, director of

International Relations for ITT Industries, a global diversified technology and manufacturing company.
57

Today I am appearing on behalf of the U.S. Chamber of Commerce. I am an active member of the Chamber’s International Policy Committee and also serve as the chairman of the WTO Working

Group. The Chamber is the world’s largest business federation,

with an underlying membership of more than 3 million businesses

and organizations. I appreciate this opportunity to present the

Chamber’s views on trade relations with China and on China’s accession to the WTO.

The U.S. Chamber of Commerce is committed to building support

for full normalization of the United States-China commercial relationship. The U.S. Chamber supports permanent and unconditional

extension of MFN trading status for China, China’s entry into the

WTO under commercially viable terms, and the removal of unilateral economic sanctions. It is the U.S. Chamber’s policy to build a

solid commercial foundation for our relationship with China which

will encourage cooperation in the full range of issues impacting our

bilateral relationship, from security and nonproliferation to human

rights.

Healthy United States-China trade relations are highly important to our national interest. Looking ahead, the World Bank estimates that China will have $750 billion in infrastructure needs

over the next decade. United States companies are very competitive

in this area of high priority for China.

The U.S. Chamber believes a good World Trade Organization accession deal with China is critical. What are the components of a

good deal? China must show commitment to WTO principles and

offer measures that will ensure United States access to China’s

growing market in agriculture, goods, and services. Only after

China takes these steps should the United States support China’s

accession to the WTO.

China’s bid to join the WTO represents an important opportunity. The commitments made by China in the accession negotiations will demonstrate China’s willingness to integrate itself into

the world trading system.

Mr. Chairman, China is a source of great potential for many

United States firms, including my own. All three elements of ITT

Industries operate in China: Our Fluid Technology Co. produces

pumps. Our defense and electronics unit makes connectors for mobile telephones and other purposes. Our automotive joint ventures

in the Shanghai area produce brake systems, wiper systems, and

other devices. We and our joint venture partners have invested

over $100 million in China in the last 5 years, and expect to expand our presence.

Last June, the Chamber of Commerce released the results of a

nationwide survey of small business trade and investment with

China. The survey showed that small business has a major stake

in United States-China trade, and that United States companies of

all sizes struggle with inconsistent rules and regulations; a lack of

transparency; unclear division of authority between National, Provincial, and local officials; and difficulties in enforcing contracts.

Both small and large business would benefit from a commercially

viable WTO Agreement.

However, China must make commitments. China’s market

should be open to foreign goods and services. Currently, foreign
58

companies that have not invested in China are not allowed to import, export, distribute, or sell directly into the Chinese market.

Beyond providing basic trading rights, China should continue to

make progress on tariff reduction and intellectual property protection.

There are critically important commitments that China must undertake before the U.S. Chamber can support its accession to the

WTO. China should bring its trading regime into conformance with

WTO Agreements and disciplines. China should extend national

treatment to foreign companies that invest in China. It should extend MFN trade status to all WTO signatories who extend such

treatment to China.

The ongoing China WTO negotiations have quickened over the

past year. But as can be clearly seen, more needs to be done. In

conclusion, we believe that China will require some latitude from

making the transition to a market economy, but USTR must insist

that China adhere to basic WTO obligations. We should recognize

that expanding our commercial ties with China is vital to America’s

future and that the terms of China’s WTO accession must expand

market access for United States companies, strengthen China’s

commitment to the rule of law, and require China to play by the

rules of international trade and investment. Accepting less would

mean lost opportunities for United States firms for decades to

come. Thank you.

[The prepared statement follows:]

Statement of Wingate Lloyd, Director, International Relations, ITT

Industries; on Behalf of U.S. Chamber of Commerce

Thank you, Mr. Chairman, for allowing me to testify before this Subcommittee on

Trade. I am Wingate Lloyd, Director of International Relations for ITT Industries,

a global diversified technology and manufacturing company. We employ about

60,000 people worldwide, with sales of $8.4 billion. Today I am appearing on behalf

of the U.S. Chamber of Commerce. I am an active member of the U.S. Chamber’s

International Policy Committee and its Asia Task Force, and also serve as Chairman of its WTO Working Group. The U.S. Chamber is the world’s largest business

federation with an underlying membership of more than three million businesses

and organizations of every size, sector, and region. I appreciate this opportunity to

present the U.S. Chamber’s views on trade relations with China and on the issue

of China’s accession to the World Trade Organization (WTO).

The U.S. Chamber of Commerce is committed to building support for full normalization of the U.S.-China commercial relationship. The U.S. Chamber supports permanent and unconditional extension of Most Favored Nation (MFN) trading status

for China, China’s entry into the World Trade Organization under commercially viable terms, and the removal of unilateral economic sanctions on China. It is the U.S.

Chamber’s policy to build a solid commercial foundation for our relationship with

China, which will encourage cooperation on the full range of issues impacting our

bilateral relationship, from security and nonproliferation to human rights.

Healthy U.S.-China trade relations are highly important to our national interest.

China has the world’s third largest economy. In 1996, the United States exported

approximately $12 billion in goods and services to China. These exports support

tens of thousands of high-wage American jobs. China is the sixth largest market for

American agricultural products. Looking ahead, the World Bank estimates that

China will have $750 billion in infrastructure needs over the next decade. U.S. companies are very competitive in this area of high priority to China. China will increase in importance for those members of the U.S. Chamber that export high technology equipment, such as aerospace, telecommunications, and petroleum technology, as well as agricultural products and consumer goods.
59

WTO ACCESSION FOR CHINA: MUST BE A GOOD DEAL

If we are to capitalize fully on China’s enormous market opportunities, the U.S.

Chamber believes a good World Trade Organization accession deal with China is

critical. What are the components of a good deal? China must show a commitment

to core WTO principles, including national treatment, non-discrimination, reciprocal

market access, transparency, protection of intellectual property rights, binding dispute settlement, trading rights, judicial review, and adherence to state-trading and

subsidy disciplines. China must also offer measures that will ensure U.S. access to

China’s growing market in agriculture, goods, and services. Only after China takes

these steps should the U.S. support China’s accession to the WTO.

Just last week, Chinese President Jiang Zemin visited the United States for the

first summit with a U.S. President in more than a decade. It was a historic opportunity to move our bilateral relationship forward. Strengthening commercial ties

was highlighted. Both Chinese and U.S. leaders recognize that China’s entry into

the WTO will be critical to improving our trade relations. Achieving that end, however, requires action by China.

China’s bid to join the WTO represents an important opportunity to apply internationally accepted multilateral disciplines to one of the world’s fastest growing

economies. The commitments made by China in the WTO accession negotiations will

demonstrate China’s willingness to integrate itself into the world’s trading system,

and to open its markets to foreign goods and services.

Mr. Chairman, China is a source of great potential for many U.S. firms, including

my own. All three elements of ITT Industries, one of the companies created by the

division of the old ITT Corporation in 1995, operate in China. Our Fluid Technology

company produces pumps both in Shenyang and in Luhe near Nanjing. Our Defense

and Electronics unit makes connectors for mobile telephones and other purposes in

Zhenjiang near Nanjing. Two of our Automotive joint ventures in the Shanghai area

produce brake systems, wiper systems, electrical switches, small motors and other

devices for automobiles manufactured in China. We and our joint venture partners

have invested over $100 million in China in the last five years, and expect to expand our presence. We look forward to working with our Chinese partners, customers, suppliers, and employees in joint efforts towards growth and prosperity in

the years ahead.

It is not only large U.S. companies like ITT Industries that will benefit from a

more open approach by China to international trade and investment. When the U.S.

Chamber testified before this subcommittee in June, we released the results of a nationwide survey of small business trade and investment with China. That survey

showed that small business has a major stake in U.S.-China trade, and that trade

with China is not the exclusive province of large multinational companies. Currently, U.S. companies of all sizes struggle in China with inconsistent rules and regulations, a lack of transparency, unclear divisions of authority among national, provincial, and local officials, and difficulties in enforcing contracts. High tariffs and

various import restrictions and licensing requirements are also significant barriers

for businesses. Clearly both small and larger businesses would benefit from a commercially viable WTO agreement.

American companies must be given the chance to compete and win in China. We

cannot afford to miss out on the great potential represented by the enormous China

market. That is why the U.S. Chamber fully supports China’s accession to the WTO,

but only in a manner consistent with its status as a major trading power and with

full adherence to the market principles assumed of all WTO signatories.

A GOOD CHINA WTO DEAL WOULD HELP ADDRESS THE U.S.-CHINA TRADE DEFICIT

China’s trade surplus with the U.S. is second only to that of Japan and is growing

at a faster rate. There are a number of reasons for the trade imbalance. First, many

of the products we used to import from Southeast Asian countries now come instead

from China, as manufacturing facilities have moved into southern China to take advantage of lower costs. Second, a strong U.S. economy is drawing in more imports

of Chinese goods. Third, certain U.S. government policies have prevented U.S. firms

from competing effectively in the Chinese market. The Overseas Private Investment

Corporation and the U.S. Trade and Development Agency, for example, cannot do

business in China. Other policies prohibit U.S. firms from exporting certain high

technology products to China, including civilian nuclear reactors. At last week’s

summit, President Clinton said he planned to certify that China has met the congressional conditions set in the 1985 agreement on U.S.-China nuclear cooperation.

That could pave the way for U.S. firms to gain access to China’s vast power market.
60

COMMITMENTS CHINA MUST MAKE

Yet while there are steps the U.S. can take, there are also actions that China can

and should take to address the trade imbalance. China’s markets should be open

to foreign goods and services. Currently, foreign companies that have not invested

in China are not allowed to import, export, distribute, or sell directly into the Chinese market. They must trade through authorized trading companies. Beyond providing basic trading rights, China should continue to make progress on tariff reduction and intellectual property protection. In addition to these measures, there are

a number of critically important commitments China must make before the U.S.

Chamber can support China’s accession into the WTO. These include China’s commitment to:

• bring its trading regime into conformance with WTO Agreements and Disciplines;

• extend national treatment on all goods and services to foreign companies that

want to invest in China;

• extend MFN trade status to all WTO signatories who extend such treatment to

China;

• sign the WTO Government Procurement Code;

• provide market access for textiles and agricultural products, putting aside

standards and certification requirements as barriers to trade;

• reduce export subsidies;

• liberalize access to its foreign exchange system for foreign exporters and investors; and

• apply the provisions of the WTO uniformly throughout China.

The ongoing China WTO negotiations have quickened over the last year. China’s

leadership has indicated a willingness to take steps to open its markets. Effective

October 1, China cut import tariffs from 23 percent to an average of 17 percent on

nearly three-quarters of the goods on which tariffs are imposed. China has also offered to shorten the period for phasing out quotas and licensing arrangements for

some industrial products. However, more concrete steps are necessary to build confidence that a WTO deal is within reach.

China will require some latitude in making the transition to a market economy,

but USTR must insist that China adhere to basic WTO obligations. We are concerned that China has shown a reluctance to engage in serious negotiations on fundamental issues such as transparency and uniform application of trade rules. Trade

and industrial policies, certification, registration, and licensing procedures should be

published so U.S. firms can make informed business decisions. We strongly believe

that China must make these commitments prior to receiving membership in the

WTO.

The integrity of the WTO system is at stake. Final WTO accession terms for

China will doubtless be used as a benchmark for accession negotiations for Russia,

Vietnam and other economies that are still in difficult transitions from centrally

planned to market economies. Each of these countries, including China, will be

tempted to reverse market reforms in the face of political or economic uncertainties

that are virtually certain to occur in the process of market transition. As a consequence, we believe that the terms of WTO accession should be defined carefully

to ensure that reforms in international trade policies are secure from threats to the

reform process.

CONCLUSION

In conclusion, Mr. Chairman, we should recognize that expansion of our commercial ties with China is vital to America’s future. The terms of China’s WTO accession must expand market access for U.S. companies, strengthen China’s commitment to the rule of law, and require China to play by the rules of international

trade and investment. Accepting less would mean lost opportunities for U.S. firms

your written statements will all be made a part of the permanent

for decades to come. Mr. Chairman, I would be pleased to respond to any questions.

Chairman CRANE. Thank you, Mr. Lloyd. Let me remind you that

f

record.

With that, our next witness is Mr. Whittaker.
61

STATEMENT OF JAMES F. WHITTAKER, MANAGER, INTERNATIONAL PUBLIC POLICY, HEWLETT-PACKARD CO.; ON

BEHALF OF AMERICAN ELECTRONICS ASSOCIATION AND

CHINA WTO HIGH-TECH COALITION

Mr. WHITTAKER. Thank you, Mr. Chairman. I am pleased to be

here on behalf of the American Electronics Association, and the

China WTO High-Tech Coalition to present our views on China’s

accession to the World Trade Organization. The AEA, American

Electronics Association, represents more than 3,000 member companies across the spectrum of electronics and information companies, from semiconductors and software to computers and telecommunications systems. In addition to the AEA, the High-Tech

Coalition includes the Business Software Alliance, the Electronic

Industries Association, the Information Technology Industry Council, the Semiconductor Industry Association, Software Publishers

Association, Telecommunications Industry Association, and the

United States Information Technology Office.

Before I turn to the WTO negotiations, allow me to put the

American high technology industry in perspective. The United

States high-tech industry is the single largest manufacturing industry in the United States, with 1.9 million workers. When computer and communication services are included, the industry employs 4.2 million workers. These are high skill, high-wage jobs with

average wages 73 percent higher than the average private sector

wage. The industry represents 6.2 percent of the U.S. GDP, gross

domestic product, with $150 billion in exports.

Now allow me to quickly frame the Chinese market and its enormous growth potential. While today it’s only one-tenth the size of

the U.S. market, in the future the picture will change dramatically.

The IT, information technology, sector’s estimated growth rate will

range from 20 to 40 percent annually over the next 15 years. The

computer market is currently estimated at nearly $7 billion, growing to $22.5 billion by the year 2000. The telecommunications market is estimated to be $7.5 billion with the Ministry of Post and

Telecommunications to invest $42 billion between now and the year

2000. Obviously China’s electronics market provides United States

producers with significant opportunities.

There are several fundamental principles which guide AEA’s

trade policy toward China. We believe that a strong United StatesChina relationship is vital to the future of the global trading system. We believe that China’s accession to the WTO is critical, but

it must be done on viable commercial terms, which I will discuss

in a moment. Finally, United States economic leadership and job

creation will depend on continued expansion of our trade with Asia

in general, and with China in particular since China plays an increasingly important role in the Asian-Pacific region.

Let me now turn to what AEA and the coalition mean by commercially viable terms. The terms referred to are a package of market access commitments and WTO core obligations that China

must undertake to ensure meaningful integration into the global

trading system I would like to review several of the key issues.

During President Jiang’s visit last week, he announced that

China would join the ITA, Information Technology Agreement. In

our view, this represents a significant move on the part of China,
62

and indicates that China is serious about negotiations to enter the

WTO. Further, it represents China’s own recognition of the value

to its own economy from participating in the ITA. Currently, China’s average tariff rate is roughly 23 percent. In the IT sector, tariffs range between 6 and 35 percent. Clearly, eliminating the tariffs

will increase United States exports and prompt further competitive

development of China’s IT and electronics market. We would urge

China to adopt a rapid schedule to phase out its duties as close to

the year 2000 as possible.

China’s decision to join the ITA, while a significant and welcomed step, is just one part of a package of needed market access

commitments. A key element to this package is adoption of the

WTO core obligations, including national treatment, transparency,

and consistent uniform enforcement. These obligations are fundamental to membership in the WTO, and it is essential that

China adopt them not only in letter, but in spirit. As basic elements of WTO membership, AEA and the coalition believe these

obligations should take effect immediately upon accession.

Regarding distribution rights, these provide companies with the

ability to distribute their imports freely throughout China. These

rights are essential but different from trading rights, which allow

firms the right to import and export. China has agreed to grant

trading rights to foreign firms, but has not yet agreed to grant distribution rights. Consequently, trading rights must be linked to distribution rights to achieve meaningful market access.

Regarding tariffs, there are other high-tech goods not currently

covered by the ITA agreement that require dramatic reduction or

elimination of duties. For example, tariff rates on medical electronics and scientific equipment are as high as 28 percent. We

would encourage China to join the WTO Agreement on zero-for-zero

tariffs on medical equipment.

Regarding industrial policies and technology transfer, the Chinese Government has targeted the electronics industry as a socalled pillar industry, which means that it views the development

of this industry is key to its national economic development. One

way that China can pursue this objective is to insist that foreign

firms invest in China and share that technology through joint ventures. The implied message is that such transfers are required to

gain market access to China’s rapidly growing markets.

While such technology transfers are not spelled out in Chinese

law, the Government’s practice is to persuade foreign firms to

transfer technology for market share. The approval authorities generally look for some technology transfer in training commitments

before approving a company’s request. The USTR is aware of this

important issue; we encourage them to continue to pursue all available options in the WTO to discourage the practices.

On telecommunications and information infrastructure, China

currently restricts full participation in competition and basic telecommunications services. In this era of global communications, it

is essential that China adopt a competitive model in telecommunications by adopting the terms and procompetitive regulatory principles of the General Agreement on Basic Telecommunications

within the WTO.
63

On intellectual property protection, China should adhere to and

enforce all WTO intellectual property rules. While progress has

been made under the United States-China bilateral IPR, intellectual property rights, agreements and China has moved to adopt the

TRIPs, trade related intellectual property agreement, China must

continue to enforce its rules and those of the WTO.

With respect to state-owned enterprises, we point out that they

currently represent almost 40 percent of China’s GDP. Consequently, they control a significant share of domestic and international trade in electronics goods in China.

The Government has made the difficult but essential decision to

allow nonprofitable firms to either be purchased by profitmaking

ones or to go out of business. Importantly, China has targeted 39

electronic state-owned enterprises as the best companies and key

partners for foreign investors. It is necessary that the WTO negotiations include affirmative obligations to ensure that China’s

state-owned enterprises make purchases and sales on the basis of

commercial considerations and under competitive processes.

Mr. Chairman, the high-tech industry is working closely with the

U.S. Trade Representative, who we believe will do an excellent job

in a tough, complex, and critical set of negotiations to ensure that

China’s membership is obtained with the necessary reforms and obligations. We look forward to continuing our work with the USTR

and with this Subcommittee to ensure this outcome. Thank you,

Mr. Chairman.

[The prepared statement and attachments follow:]

Statement of James F. Whittaker, Manager, International Public Policy,

Hewlett-Packard Co.; on Behalf of American Electronics Association and

the China WTO High-Tech Coalition

Thank you, Mr. Chairman. I am pleased to be here on behalf of the American

Electronics Association and the China WTO High-Tech Coalition to present our

views on China’s Accession to the World Trade Organization.

The American Electronics Association represents more than 3,000 member companies across the spectrum of electronics and information companies—from semiconductors and software to computers and telecommunication systems. As the largest high-tech trade association in the U.S., AEA represents American high-tech companies nationally through 17 council offices and globally through our offices in

Tokyo, Brussels and Beijing.

In addition to AEA, the High-tech Coalition includes the:

• Business Software Alliance (BSA);

• Electronics Industries Association (EIA);

• Information Technology Industry Council (ITI);

• Semiconductor Industry Association (SIA);

• Software Publishers Association (SPA);

• Telecommunications Industry Association (TIA); and,

• United States Information Technology Office (USITO), the Beijing representative office of AEA, SIA, SPA and TIA.

Before I turn to the WTO negotiations, allow me to put the American high tech

industry in perspective. The U.S. high-tech industry is the single largest manufacturing industry in the U.S., with 1.9 million workers. When computer and communications services are included, the industry employs 4.2 million workers. These are

high-skill, high-wage jobs, wigh-tech wage of $49,586, which is 73% higher than the

average private sector wage of $28,582. This industry represents 6.2 percent of the

U.S. GDP, with total sales of $866 billion and $150 billion in exports, making hightech the single largest merchandise export industry.

Now allow me to frame the Chinese electronics market enormous growth potential. While today it is only one-tenth the size of the U.S. electronics market, this

picture will change dramatically over the next 15 years. The Information Technology

(IT) sectors’ estimated growth rates range from 20% to 40% annually over the next

15 years. The computer market is currently estimated to be $6.8 billion, growing
64

to $22.5 billion by the year 2000. The telecommunications market is estimated to

be $7.5 billion, with the Ministry of Posts and Telecommunications (MPT) investing

$42 billion between now and the year 2000. As the data indicate, China’s electronics

market provides U.S. producers with significant opportunity.

There are several fundamental principles which guide AEA’s trade policy toward

China. We believe that: • A strong U.S.-China relationship is vital to the future of the global trading system; • China’s accession to the World Trade Organization is critical, but it must be

done on viable commercial terms, which I will discuss in just a moment; and finally, • U.S. economic leadership and job creation will depend on continued expansion

of trade with Asia in general and with China, in particular, since China plays an

increasingly important role in the Asia-Pacific regional economy.

Let me now turn to what AEA and the Coalition mean by commercially viable

terms. The terms referred to are simply a package of market access commitments

and core obligations that China must undertake to ensure meaningful integration

into the global trading system. I will review eight of the key issues.

THE INFORMATION TECHNOLOGY AGREEMENT

During President Jiang’s visit last week he announced that China would join the

Informationement (ITA). The ITA is a WTO agreement among 42 countries to eliminate all duties on information technology equipment. In our view this represents a

significant commitment on the part of China and indicates that China is serious

about negotiations to enter the WTO. Further, it represents China’s recognition of

the value to its own economy when participating in international agreements. Currently, China’s average tariff rate is roughly 23 percent. In the IT sector, tariffs

range between 6 to 35 percent. Clearly, the elimination of these tariffs will increase

U.S. exports and prompt further competitive development of China’s IT and electronics market. We now urge China to adopt a rapid schedule to phase out its duties

as close to the year 2000 as possible. This will ensure the greatest economic benefit

from the agreement. China’s decision to join the ITA, while a significant and welcome step, is just one part of a package of needed market access commitments.

CORE OBLIGATIONS

The first component of the WTO accession talks are the core obligations. These

obligations include national treatment, transparency and consistent uniform enforcement. These are fundamental to membership in the WTO and it is essential

that China adopt them not only in letter but spirit. As fundamental elements of

WTO membership, AEA and the Coalition believe these obligations should have limited, if any, transition periods.

DISTRIBUTION RIGHTS

Distribution rights provide companies with the ability to distribute their imports

freely throughout China. These rights are essential but different from trading rights

which allow firms the right to import and export. China has agreed to grant trading

rights to foreign firms, but has not yet agreed to grant distribution rights. Consequently, trading rights must be linked to distribution rights to achieve meaningful

market access. The U.S. high-tech industry views this as a key element of market

access measures to be undertaken by the Chinese.

TARIFF REDUCTIONS

In addition to adopting the ITA and phasing out tariffs on these products, there

are other high-tech goods not currently covered by the ITA that require dramatic

reduction or elimination of duties. For example, tariff rates on medical electronics

and scientific equipment are as high as 28 percent. In fact, we would encourage

China to join the WTO agreement on zero-for-zero tariffs on medical equipment

agreed to during the Uruguay Round. These and other rates should also be dramatically reduced or eliminated in order to increase U.S. exports and enhance the competitive growth of China’s market.

DEVELOPMENT OF INDUSTRIAL POLICIES AND FORCED TECHNOLOGY TRANSFER

The Chinese government has targeted the electronics industry as a so-called Pillar

industry, which means that it views the development of this industry as key to its

national economic development. One way that China can do this is to insist that

foreign firms invest in China and share their technology through joint ventures. The
65

implied message is that such transfers are required to gain increased access to China’s rapidly growing markets. Many AEA companies have expressed concern about

what is commonly referred to as, ‘‘market share for technology transfer.’’ While such

technology transfer requirements are not spelled out in Chinese law, the government’s practice is to persuade foreign firm to transfer technology for market share.

The approval authorities—government agencies that must approve foreign investment, including joint ventures and partnership—generally look for some technology

transfer and training commitments before approving a company’s request. The

USTR is aware of this important issue and we encourage them to continue to pursue all available options in the WTO include the Trade-Related Investment Measures (TRIMs) and other investment related negotiations in order to discourage these

practices.

TELECOMMUNICATIONS AND INFORMATION INFRASTRUCTURE

As Henry Schacht, CEO, Lucent Technologies, said last week to China’s President

Jiang, ‘‘weed communication can go a long way toward improving the lives of people

throughout the world.’’ China currently restricts full participation and competition

in basic telecommunications services. Further, China maintains severe limits on

content and transmission of data over the Internet. In this era of global communications, it is essential that China adopt a competitive model in telecommunications

by adopting the terms and pro-competitive regulatory principles of the General

Agreement on Basic Telecommunications within the WTO. Competition in the communications sector will serve many mutual goals of both the U.S. and China.

INTELLECTUAL PROPERTY PROTECTION (IPR)

China should adhere to and enforce all WTO intellectual property rules. As China’s own industries develop and the market becomes more competitive, it will be increasingly important to them to protect their intellectual property rights. While

progress has been made under the 1995 U.S.-China IPR agreement, China must

continue to enforce its rules and those of the WTO. Further, a strong intellectual

property regime is essential to encourage foreign trade and investment.

STATE-OWNED ENTERPRISE

State-owned enterprises currently represent almost 40 percent of China’s GDP.

Consequently, these enterprises control a significant share of domestic and international trade in electronics goods in China. China is in the process of reforming

this sector by privatizing these firms. The government has made a difficult but, in

its view, essential decision to allow non-profitable firms to either be purchased by

profit-making firms or to go out of business. Importantly, China has targeted 39

electronics state-owned enterprises as the best companies and key partners for foreign investors. It is necessary that the WTO negotiations include affirmative obligations to ensure that China’s state-owned enterprises (including partially state-owned

and recently privatized enterprises) make purchases and sales on the basis of commercial considerations ative processes.

Mr. Chairman, the high-tech industry is working closely with the United States

Trade Representative. USTR is doing an excellent job in what will be a tough, complex and critical set of negotiations as they work to ensure that China’s membership

is obtained following the necessary reforms and obligations. We look forward to continuing our work with USTR and this committee to ensure this outcome.

Attached for the record is China market information from the soon-to-be-released

AEA publication CyberNation, the position paper of the China WTO High-Tech Coalition and a list of the 39 state-owned enterprises China has targeted for the HighTech industry.

Thank you.

f
66

f
67
68
69
70
71
72
73

f
74

f
75

Chairman CRANE. Thank you, Mr. Whittaker.

Mr. Scalise.

STATEMENT OF GEORGE SCALISE, PRESIDENT,

SEMICONDUCTOR INDUSTRY ASSOCIATION

Mr. SCALISE. Thank you, Mr. Chairman. I want to thank you for

the opportunity to present the SIA’s, Semiconductor Industry Association, views on China’s accession to the WTO. We do support China’s accession to the organization but, as has been said so many

times, only on a commercial basis. I would like to set out the conditions that we think would be appropriate to satisfy that requirement.

First, let me talk just a little bit about the semiconductor industry. It employs about 260,000 Americans. It is the underlying enabling technology for the $400 billion electronics industry. As Mr.

Whittaker said, that industry employs about 4.2 million Americans.

Roughly half of our sales are exported. Worldwide, it’s a $139 billion industry today. By the year 2000, it will be about a $230 billion industry, growing at 17 percent compounded. Fortunately, the

U.S. segment of that industry has about a 50 percent market share

today. We want to maintain that. Therefore, open markets are critical to maintaining that 50 percent market share.

The Chinese semiconductor market today is estimated to be about $8 million. About 20 percent of that demand is being satisfied from domestic Chinese production. The rest of the market is

being met by imports from companies from around the world, in

particular, the United States. We believe that the Chinese market

could be the second largest segment of the world market by the

year 2010. Therefore, it is important that we become a major player in that market as time goes on.

Last week China announced that it would join the Information

Technology Agreement. That was a major step forward as far as we

are concerned; we are pleased to see that. Chinese tariffs on semiconductors are currently in the 6- to 12-percent range. On the

equipment that is used to make semiconductors, tariffs are about

35 percent. Elimination of these duties will certainly increase

United States exports and promote the development of a competitive electronics market in China, and will obviously enhance consumer opportunities in China as well. So a critical next step is to

reach an agreement on the phaseout schedule of these tariffs that

remain. The quicker the phaseout, the better.

Beyond tariffs, there are five key issues that must be resolved in

order for China to join the WTO on a commercially sound basis.

First, foreign firms must be granted distribution rights, as Mr.

Whittaker talked about just a few minutes ago, and on the conditions that he has outlined.

Second, Chinese state-invested enterprises must be obligated to

purchase solely on commercial terms. While China is in the process

of reforming its state sector by privatizing many of its firms, it’s

also building up a select group of national champions in the electronics sector. These state firms include both semiconductor producers and users. To ensure that the other market access commitments made by China are not undermined, the Chinese Government should commit not to pressure its state-owned enterprises or
76

its state-invested enterprises to favor Chinese-made goods over foreign goods.

Third, with respect to forced technology transfer, the Chinese

Government is seeking to develop its domestic chip industry by

persuading foreign firms to invest in China and share their technology with Chinese firms through joint ventures and other partnership arrangements. In return, it is suggested that increased

market access will be available to those firms willing to provide

this technology transfer. Discouraging such practices must be a primary objective of our negotiators. The reality is that China will obtain more advanced technology, and its industry will develop more

quickly, if foreign firms are allowed to transfer technology through

the development of regular business relationships rather than as a

result of Government pressure.

Fourth, with regard to intellectual property protection, it is essential that China not only agree to all WTO intellectual property

rules, but that it actively enforce these rules. Again, the point that

should be made is that it is in China’s interest to ensure full and

effective protection of intellectual property rights, as this will encourage the high-tech foreign investment it seeks to develop its

economy.

Finally, with respect to trade remedies, the SIA, Semiconductor

Industry Association, believes it is important that China’s accession

to the WTO in no way undermine the ability of the United States

to enforce its antidumping law against Chinese goods. China’s protocol of accession should reaffirm the ability of the U.S. Government to apply nonmarket economy rules in antidumping cases involving China.

Mr. Chairman, USTR is working very hard to ensure that China

obtain membership in the WTO, but only after making these essential reforms. We support continuing that approach. Thank you.

[The prepared statement follows:]

Statement of George Scalise, President, Semiconductor Industry

Association

I appreciate the opportunity to appear before the Subcommittee on Trade of the

Committee on Ways and Means to present the views of the Semiconductor Industry

Association (SIA) on the future of U.S.-China relations and the accession of China

to the World Trade Organization (WTO).

Before discussing the SIA’s position on these important issues, I would like to

take a minute to give some background on the U.S. semiconductor industry.

THE U.S. SEMICONDUCTOR INDUSTRY

Semiconductors are an increasingly pervasive aspect of everyday life, enabling the

creation of the information superhighway and the functioning of everything from

automobiles to modern defense systems.

U.S. semiconductor makers employ 260,000 people nationwide. The presence of

the industry is widespread—17 states have 1,000 or more chip workers within their

borders. Semiconductor products are the enabling technology behind the nearly $400

billion U.S. electronics industry, which provides employment for 2.5 million Americans.

The U.S. semiconductor industry is currently the world market share leader, with

1996 world sales reaching $60 billion, representing almost 46 percent of the $132

billion world market. Moreover, the world semiconductor market is expected to increase by over 75 percent in the next three years, with projected sales totaling over

$232 billion by the year 2000.

U.S. semiconductor producers are highly committed to maintaining their lead in

both semiconductor manufacturing and technology. The U.S. semiconductor industry
77

devotes on average 20 percent of its revenues to capital spending and another 11

percent to research and development—among the highest of any U.S. industry.

While investing heavily in the industry’s future competitiveness and technological

capabilities, SIA members also have always actively sought to secure foreign market

access for U.S. products. Because the semiconductor industry is so global in nature—roughly half of the U.S. industry’s revenues are derived from overseas sales—

the SIA has been dedicated since its inception to promoting free trade and opening

world markets.

For example, the U.S. industry has been in the forefront of efforts to eliminate

tariffs on semiconductors and related products worldwide. At SIA’s urging, the

United States, Japan and Canada eliminated their semiconductor tariffs in the mid1980s. Earlier this year, another 39 countries agreed to eliminate their semiconductor tariffs through the proposed Information Technology Agreement (ITA), and just

last week, at the Clinton-Jiang summit, China agreed to also join the ITA.

Given China’s potential to become the largest single market for semiconductors

in the world within a few decades, the SIA believes it is essential that the United

States ensure that China accede to the WTO on a commercially sound basis.

SEMICONDUCTORS IN CHINA

U.S. semiconductor firms are making substantial commitments to expand their

market presence in the People’s Republic of China. At the same time, China is seeking to foster its own electronics industry, with a particular emphasis on microelectronics, and is rapidly moving to integrate its economy more fully into the world

trading system. As part of this process, the Chinese Government and its electronics

industry are inviting closer contacts with the U.S. semiconductor industry, and significant opportunities and challenges have already become evident. In response to

these developments, the SIA determined several years ago that an examination was

needed of the issues confronting the U.S. semiconductor industry as a result of its

growing presence in China and China’s emergence as a major trading power with

a rapidly emerging electronics sector.

The result was an SIA study on China released in February 1995 entitled ‘‘Semiconductors in China: Defining American Interests.’’ SIA intended the study to be a

contribution to the information base necessary to support a constructive dialogue on

issues of mutual interest and concern as commercial and technological ties grow between the U.S. and Chinese industries. SIA has updated this information through

a series of annual trips, which have allowed the industry both to foster a better understanding of the Chinese market and to explain to Chinese officials U.S. semiconductor concerns regarding China’s trade and economic regime. The following information is based on our most recent visit to China in September 1997.

While statistical data on Chinese semiconductor demand and output are limited,

the market currently is estimated to be over $8 billion and it is growing at a rapid

rate. Since 1985, the average growth rate in semiconductor demand in China has

been about 24 percent per year. A number of observers believe that in light of China’s growing domestic demand for electronics products, China will become the

world’s second largest semiconductor market by 2010.

Presently local production can only supply about 20 percent of China’s semiconductor needs, and these represent primarily low-end devices used in consumer

electronics products like refrigerators, washing machines, radios, and televisions.

Virtually all sophisticated semiconductors needed by Chinese electronics firms must

be imported, a pattern that will not change significantly over the short run. This

continuing shortfall creates a major commercial opportunity for U.S. producers.

At the same time, the Chinese Government, through its Ministry of Electronics

Industry, is undertaking a significant effort to develop a competitive domestic Chinese semiconductor industry. While most semiconductor technology in China is currently at the 1–2 micron level, the Chinese Government is undertaking a number

of projects designed to obtain cutting edge manufacturing technology at the 0.35–

0.50 micron level, which would allow the Chinese industry to compete with the U.S.

industry and other key world semiconductor producers.

The focus of this Chinese Government plan to develop its own industry is an effort

to persuade foreign firms to invest in China and share their technology with Chinese firms through joint ventures and other partnership arrangements. In return,

suggestions are made that increased market access may be made available to those

firms willing to transfer technology. Reform of such practices must be at the heart

of any agreement to admit China to the WTO.
78

THE INFORMATION TECHNOLOGY AGREEMENT

SIA commends the announcement last week by China that it would join the ITA

as soon as possible and thereby eliminate its tariffs on semiconductors, semiconductor manufacturing equipment and related information technology products. This announcement is a critical step forward toward China’s accession to the WTO on commercially viable terms.

China currently imposes tariffs of 6–12 percent on semiconductors. Chinese tariffs

tend to be higher on low-end semiconductors which China can make domestically,

and lower on complex devices which must be imported. Elimination of these tariffs

will spur development of a competitive microelectronics industry in China, as it has

in other nations. It will allow U.S. producers to sell advanced semiconductors to

their Chinese customers at the lowest possible price, thereby both increasing U.S.

exports and strengthening the developing Chinese electronics industry.

A related benefit of China signing onto the ITA will be the elimination of the very

high tariffs—up to 35 percent—recently reimposed by China on semiconductor manufacturing equipment and other capital equipment imported into China. At the end

of December 1995, China’s State Council announced that as part of a series of major

reforms in its import tax regime it would eliminate previously existing tariff and

value added tax (VAT) exemptions for imports of capital equipment for foreign enterprises, effective April 1, 1996. Until this change, foreign-owned companies in

China and Sino-foreign joint ventures did not have to pay a VAT or duty on capital

equipment imports. Currently these companies must pay an import duty plus a VAT

of 17 percent assessed on the value of the equipment plus the customs duty. Given

that tariffs on capital equipment continue to be relatively high, this combination

had significantly raised the cost of capital imports into China.

POLICY ISSUES RELATING TO CHINA’S ACCESSION TO THE WTO

The SIA supports China’s bid to join the WTO, but only if that accession is accomplished on a commercially sound basis. In this regard, the SIA has a number of concerns with regard to trade and investment in China, including: (1) China’s trade regime, especially its limitations on trading and distribution rights; (2) purchasing

practices of China’s state-invested enterprises; (3) investment restrictions in China,

including those related to government pressure to transfer technology; (4) intellectual property protection; (5) Chinese targeting of particular sectors, including microelectronics in general and the semiconductor industry in particular; and (6) the U.S.

ability to apply the non-market economy provisions of U.S. antidumping law to

China. These particular concerns are described in detail below.

1. China’s trade regime needs restructuring and does not currently conform to WTO

requirements.

China’s foreign trade regime is a complex system with many anomalies which restrict the operations of U.S. firms in China: • Trading rights. ‘‘Trading rights’’ (e.g., the ability to import and export from

China), are limited to certain designated enterprises, including certain foreigninvested firms, which can trade products they manufacture in China. U.S. firms

doing business in China that lack such rights must conduct their business through

firms that hold such privileges. Moreover, a foreign company generally cannot directly sell or service end products, spare parts or components not made in China.

These limitations are significant impediments to U.S. semiconductor firms’ ability

to access the Chinese market, and, if not eliminated, may undermine the benefit of

other trade liberalization measures agreed to by China. SIA is encouraged by reports that China has committed in the WTO accession negotiations to provide trading rights to all Chinese firms within 3 years of its accession to the WTO, and urges

that it move as quickly as possible to provide such trading rights to all firms, without discrimination on the basis of nationality. • Distribution rights. Equally important as the right to import is the right to distribute goods within China. The current system forces U.S. producers to sell through

Chinese distributors, adding at least an additional 10 percent in costs and adversely

affecting service, inventory, and delivery. This critical issue remains to be negotiated in the context of China’s commitments to provide market access and national

treatment for foreign service providers.T • Transparency. China’s trade regime continues to lack transparency. Rules and

procedures are not consistently published, and are subject to varying ‘‘interpretations’’ by individual officials. China should commit to publishing fully all relevant

laws, regulations and decisions relating to trade and investment. SIA also believes

that China should move to a system of advance notice and publication for comment

of all laws and regulations affecting trade and investment, as well as to establish
79

a system to obtain official interpretations of legislation once it is published (through

judicial decisions that are published and authoritative administrative statements).

2. China’s accession to the WTO must include a guarantee that state-invested enterprises will make purchases based on commercial considerations.

Enterprises wholly or partially owned by the Chinese central, provincial or local

governments (state-invested enterprises) continue to make up a significant portion

of the Chinese economy. However, many of these enterprises are inefficient and burdened with costly social responsibilities unrelated to their core businesses. As a result, the state-sector of the Chinese economy is under increasing pressure. Half of

China’s state industrial enterprises incurred net losses last year, and profits of

state-sector companies have fallen from 6 percent of GDP in the early 1980s to less

than 1 percent in 1996.

Reform of the state sector is therefore at the top of the agenda for China’s leaders.

President Jiang Zemin has put forward a plan to ‘‘manage the large and let go the

small,’’ pursuant to which the state would retain shareholdings only in the largest

1,000 state-invested industrial firms, allowing approximately 117,000 smaller remaining firms to be merged, taken over by private investors, or dissolved.

This proposed reform plan has significant implications for the electronics sector,

given its designation as one of four ‘‘pillar industries’’—industries the Chinese Government has targeted as essential to the nation’s economic future. State-invested enterprises already control a significant share of the trade in electronics goods into

and out of China. For example, the Ministry of Electronics Industry (MEI) controls

the China Electronics Corporation (CEC), which in turn owns or controls a significant share of China’s electronics industry, including major consumers of semiconductors for consumer electronics and computer production. In addition, MEI last

spring announced the formation of Project 909, a joint venture between Shanghai

Hua Hong Microelectronics and Japan’s NEC to produce state-of-the-art semiconductors in the Pudong New Area outside Shanghai. Hua Hong is a MEI-owned

company, and its chairman is Hu Qili, the Minister of MEI.

As a result of the continuing active government role in the electronics sector,

there is a significant risk that as Chinese semiconductor production increases both

in volume and quality, other state-invested enterprises will be encouraged by Chinese officials to purchase from domestic suppliers. Such discrimination could significantly burden or restrict U.S. semiconductor sales in China in the future.

These risks have been increased by recent reports that, as the Chinese Government moves out of many sectors, it will actually focus more attention on building

up a select group of national champions in the electronics industry. Given the development of a potentially strong state-invested electronics sector in China, containing

both semiconductor producers and consumers, it is essential that Chinese stateinvested enterprises make purchases and sales only on the basis of commercial considerations. Unfortunately, current WTO rules do not effectively cover the purchasing decisions of state-invested commercial enterprises. For example, such enterprises are not covered by the GATT Government Procurement Code because the

purchases of the enterprises are for the purpose of manufacturing commercial goods,

not for government use.

Given the inadequacy of current WTO rules on this subject and the potential longterm significance of state-invested enterprises in the Chinese electronics sector, the

SIA urges that China’s protocol of accession to the WTO include affirmative obligations on the part of the Chinese Government to:

(1) ensure that its state-invested enterprises (including partially state-invested

and recently privatized enterprises that were formerly state-invested) make purchases on the basis of commercial considerations; and

(2) afford the enterprises of other WTO Members adequate opportunity, in accordance with customary business practices in market economies, to compete for sales

to state-invested enterprises.

SIA also believes that the protocol should require the Chinese Government to refrain from taking any measure, including administrative guidance, to influence or

direct state-invested enterprises as to the quantity, value, or country of origin of

goods purchased or sold, or otherwise impair the purchase or sale of goods. In addition, the WTO should review on a regular basis whether China’s state-invested enterprises are in fact making purchases on the basis of commercial considerations.

Where a WTO member country believes that the Chinese state-invested enterprises

in a particular sector are acting in a manner inconsistent with the aboverecommended obligations, it should be able to initiate consultations through the

Working Party with China. This special Working Party should remain in place until

the Working Party has determined that state-invested enterprises no longer control

a significant portion of the Chinese economy or any significant sector.
80

3. Investment restrictions in China limit U.S. market opportunities and may force

U.S. firms to transfer technology to Chinese firms.

While Chinese officials, especially at the local and provincial level, are quite interested in promoting foreign direct investment in China, a number of complex requirements exist for foreign-owned ventures. These rules place a number of restrictions

on foreign investment:

• Ownership restrictions. 100 percent foreign ownership of manufacturing facilities is permitted in China, but it appears that, under an unpublished policy applicable to the electronics industry, 100 percent of such a facility’s output must normally

be exported. A 70/30 foreign majority-owned joint venture is generally required

under the same policy to export 70 percent of its production, but there are no uniform rules; each arrangement is negotiated on a project-specific basis. For instance,

in one case Chinese authorities reportedly removed the export requirement from a

contract, provided the U.S. firm agreed instead to reinvest all profits earned from

domestic sales.

• Export targets. Despite the absence of any explicit legal obligations to meet specific export percentages (except for purposes of obtaining preferential tax treatment

or qualifying to establish a wholly foreign-owned enterprise) many U.S. companies

have been pressed by the Chinese approval authorities to agree to export targets.

While such rules are not always enforced, a company can legally be held accountable

for non-compliance at a future date.

• Local content requirements. There are localization requirements for parts and

materials for products made in China which are not technically legal requirements,

yet firms must file localization plans with their foreign investment application. The

Chinese Government also audits foreign firms to determine local content. What constitutes local content can be subject to many definitions. For example, importation

via a Chinese distributor can qualify a part as ‘‘local.’’ Chinese sectoral industrial

policies also contain local content requirements.

• Pressure to transfer technology. Ownership restrictions, export targets and local

content requirements may be imposed not only as strict legal obligations, but also

as quid-pro-quos for decisions by government officials at both the national and subnational level. Regardless of their form, these measures are often used as levers to

obtain transfer of technology from foreign firms.

Existing WTO rules on Trade-Related Investment Measures (TRIMs) do not adequately discipline these measures. Yet these measures can have a real and significant competitive impact on U.S. electronics firms, as advanced technology is often

the key to competitive success. To the extent that China can maintain such measures, U.S. exports in the electronics sector, such as semiconductors, may be restricted. Moreover, such investment restrictions have a negative effect on China, as

they discourage the investment necessary to develop a local Chinese electronics industry on a commercially sound basis.

China’s protocol of accession to the WTO should therefore include an explicit provision requiring China to refrain from taking any measure which requires a foreign

enterprise to invest, enter into any form of joint venture arrangement with a domestic entity or to transfer any technology or intellectual property to a domestic entity,

except in accordance with WTO rules. Such a provision must prohibit any measures

that force technology transfer—including any which are mandatory or enforceable

under domestic law or under administrative rulings, or compliance with which is

necessary to obtain any approval or advantage.

4. Intellectual property protection is inadequate.

China has enacted patent, copyright, and trademark laws, but their credibility requires strengthened enforcement. While there has been no piracy of semiconductor

intellectual property to date, China’s level of technological development does not yet

permit it to manufacture advanced U.S. products or misappropriate U.S. chip designs. However, China’s capabilities in the semiconductor sector are rapidly advancing. Therefore, the SIA remains very interested in issues relating to intellectual

property protection in China and strongly supports the U.S. Trade Representative’s

efforts over the last few years to negotiate agreements with China to ensure increased enforcement of Chinese patent, copyright and trademark laws.

Of particular concern is the fact that compulsory licensing remains authorized

under Chinese patent law whenever ‘‘necessitated by the public interest.’’ The WTO

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) prohibits the compulsory licensing of semiconductor technology except in certain limited

circumstances. China should revise this law to bring it into conformity with the

TRIPs Agreement as part of its WTO accession.
81

Accession to the WTO would also require China to enact specific legislation extending intellectual property protection to semiconductor layout designs

(maskworks). During last year’s SIA China trip, the SIA was told that a draft semiconductor layout design protection law had been prepared by the Ministry of Electronics Industry and was under review by the Chinese Patent Office. This is a positive development and every effort should be made to encourage the Chinese Government to continue to move forward on this front as expeditiously as possible. The SIA

would like the opportunity to review and comment on the draft legislation prior to

its enactment and would be willing to assist the U.S. and Chinese Governments in

a cooperative effort designed to ensure that this legislation is fully consistent with

all TRIPs obligations.

The SIA believes that China’s protocol of accession to the WTO should commit

China to abide by the obligations of the TRIPs Agreement as a developed country,

without any transition period before the obligations are enforceable. This is in China’s interest, as it will encourage the high technology foreign investment it seeks

to promote the development of its economy.

Earlier this year, China reportedly did agree in the WTO accession negotiations

to observe all obligations of the TRIPs Agreement upon its accession to the WTO.

This is a welcome development for which the Chinese Government deserves credit.

However, it is equally important that China begin taking concrete steps to bring its

laws into full conformity with these TRIPs obligations and to ensure full and effective enforcement of these laws throughout China.

5. Targeting of the electronics sector may restrict U.S. market opportunities.

The Chinese Government has designated four ‘‘pillar’’ industries for targeting as

essential to the nation’s economic future: automobiles, electronics, machinery and

petroleum/petrochemicals. Within electronics, emphasis has been put on microelectronics.

There have been repeated reports that China’s Ministry of Electronics Industry

and its State Planning Commission have drafted an electronics industrial policy to

promote development of its domestic industry. However, this policy plan has not

been issued publicly. Obtaining information on the current status of the proposed

electronics industrial policy remains an SIA priority objective.

While no details are currently available, earlier reports indicated that the electronics industrial policy could proscribe foreign majority ownership of semiconductor

firms, establish export performance requirements for Sino-foreign joint ventures,

and provide the basis for eventual displacement of foreign semiconductors in China

by domestically-made devices. The recent establishment of Project 909, in which a

foreign company (NEC of Japan) has been granted a 28.6 percent share in a Sinoforeign joint venture in return for supplying the advanced technology for the venture suggests a continuing Chinese Government focus on development of a domestic

semiconductor production capability. MEI has said that this joint venture is just the

first step for Project 909, which ultimately envisages the establishment of four or

five advanced semiconductor producers in China, with a dozen specialized plants

around the country and around 20 design, development and research institutes. The

production bases now appearing in China are centered in Beijing, Shanghai,

Shenzhen and Wuxi.

Of particular concern to the U.S. semiconductor industry are policies to pressure

foreign firms to transfer advanced technology. If such policies were adopted, either

explicitly or as a matter of practice in connection with government approval of specific foreign investment projects, the SIA believes that they would restrict market

opportunities for U.S. semiconductor firms. They would also prove counterproductive

over the long run to China’s interests because they would discourage the foreign investment necessary to promote China’s technological, economic and market development.

The 1992 U.S.-China Memorandum of Understanding (MOU) on Market Access

provides that China will eliminate the use of import substitution policies and measures. A number of the elements outlined above are arguably inconsistent with this

commitment. WTO rules also limit China’s ability to establish local content requirements. The SIA believes that any future policies governing China’s economic development should adhere to the provisions of the 1992 MOU and WTO rules.

In this regard and consistent with the transparency obligations of the WTO,

China should also commit to publish any internal policies or administrative guidance relating to its officially published industrial policies. The negotiation of China’s

accession to the WTO provides the appropriate forum for obtaining commitments by

China to make the necessary reforms with respect to its electronics industry policy.
82

6. The United States must maintain the ability to apply the non-market economy provisions of U.S. antidumping law to Chinese exports.

Chinese trade officials have cited the use of the U.S. antidumping law against

Chinese exports as a ‘‘trade barrier’’ they wish to see removed in the WTO accession

negotiations. In particular, Chinese officials are seeking to eliminate application of

the non-market economy (NME) provisions of the U.S. antidumping law to Chinese

exports, on the grounds that China is now a market economy.

U.S. antidumping law currently provides that, in the case of exports to the United

States from a non-market economy such as China, the Department of Commerce is

to determine the ‘‘normal value’’ of the product under investigation by valuing the

non-market economy producer’s factors of production in a surrogate market economy

country which is a significant producer of comparable merchandise and which is at

a level of economic development comparable to the non-market economy. These

NME provisions are critical to ensuring a fair comparison of the normal value of

goods produced in China with the export price of those goods in the United States.

Without such provisions, the Department of Commerce would have to rely on the

price charged for the goods in question in China, which, due to the substantial state

control in many Chinese electronics firms, may bear little relationship to true market prices or the actual cost of production of semiconductors and other electronics

components in China. Without the NME provisions of the antidumping law in effect,

Chinese state-invested enterprises could in the future make significant below-cost

sales of semiconductors in international trade, adversely affecting both the foreign

trade and the domestic economy of the United States.

A provision therefore should be included in China’s WTO protocol of accession to

permit the United States to continue to apply the NME provisions of the antidumping law to China. The current draft protocol includes proposed text to this effect,

but it has not yet been agreed upon.

CONCLUSION

China’s semiconductor market represents a major opportunity for the U.S. industry, but there are significant risks and hurdles to be addressed as well, especially

with regard to the rapidly growing Chinese market.

In microelectronics, China could become one of the world’s leading producers, and,

as such, it warrants continued monitoring to ensure that China’s trade and investment regime does not discriminate against foreign producers. Ongoing bilateral and

multilateral negotiations with China over the terms of its full integration into the

world trading system can be utilized to address those aspects of the Chinese system

which are problematic from the perspective of the U.S. semiconductor industry.

The U.S. Government is actively pursuing resolution of U.S. industry concerns in

negotiations over China’s accession to the WTO. SIA strongly supports the efforts

of USTR and other U.S. Government agencies in this regard. Meanwhile, in meetings with SIA, officials of the Chinese Government and its electronics industry have

demonstrated receptivity to many of the U.S. industry issues of concern outlined

above. The SIA believes that the potential exits for a productive joint effort to address these issues in the context of China’s accession to the WTO.

Mr. Cohen.

Chairman CRANE. Thank you, Mr. Scalise.

f

STATEMENT OF CALMAN J. COHEN, PRESIDENT, EMERGENCY

COMMITTEE FOR AMERICAN TRADE

Mr. COHEN. Thank you, Mr. Chairman. I am Calman Cohen,

president of the Emergency Committee for American Trade, ECAT.

ECAT represents the heads of U.S. international business enterprises consisting of all principal sectors of the U.S. economy. Annual sales of ECAT member companies total over $1 trillion, and

our companies employ approximately 4 million persons.

ECAT member companies believe that achieving a strong and

stable bilateral relationship with China must remain a priority of

United States trade policy into the 21st century. Securing China’s
83

entry on the basis of a commercially acceptable protocol is an essential part of strengthening our bilateral relationship. In the 21st

century, China may well become the largest economy in the world.

The tremendous size of the economy will have a major impact not

only on the global economy, but also on individual economies such

as that of the United States.

Due to the vast size and influence of China’s economy alone, it

is in our interest to have China become integrated into the world

trading system and subject to its rules. It is particularly in our interest to have China become subject to the rules of the system that

we in the United States help shape. China’s markets will not generally be open to United States goods and services until first it is

subject to World Trade Organization rules requiring the provision

of national treatment and nondiscriminatory tariff treatment. Second, any lack of enforcement of these obligations can be challenged

under the WTO dispute settlement procedures.

In particular, ECAT believes that a commercially acceptable protocol should include commitments by China in the following seven

areas. First, a substantial reduction in binding of tariffs on 2,300

priority items. Second, a commitment should be obtained to phase

out substitution and local content requirements and eliminate discriminatory taxes and restrictions on trading rights that violate the

national treatment provisions of GATT article III and GATS, General Agreement on Trade and Services, article III. With regard to

trading rights, the United States should refuse to accept an extended phaseout period.

Third, the full implementation of the United States-China bilateral intellectual property rights agreements of 1992 and 1995.

Fourth, the elimination of restrictions investment. Fifth, the provision of nondiscriminatory market access to United States service

providers. Sixth, the modification of industrial policies which are

inconsistent with the WTO. Seventh, the elimination of barriers to

United States agricultural exports.

While outstanding bilateral issues remain unresolved after the

summit, it did provide a first positive step toward a further

strengthening trade and security ties. The lifting of the unilateral

United States embargo on the sales of nuclear power equipment to

China in exchange for China’s commitment to end its nuclear cooperation and missile sales to Iran is a significant achievement and

important evidence that the United States policy of engagement is

producing concrete results.

The Chinese also made two other commitments during the summit which will serve as meaningful downpayments toward eventual

admission to the WTO. The reported Chinese commitment to lower

its average tariffs to 10 percent by the year 2005 appears to be a

significant response to the United States request for a major tariff

reduction. Of course, we all need to review the specifics of their

offer. China also agreed, as we have just heard, to join the ITA,

which will require eliminating its tariffs on computer and telecommunications equipment.

In moving forward with China’s WTO negotiations, the administration should continue to consult with Congress and the private

sector on the progress and substance of the negotiations. ECAT believes that any legislation requiring specific congressional approval
84

for China’s WTO accession could prove however to be counterproductive. Such a requirement could further entangle trade and

nontrade related issues concerning China. It would effectively tie

the President’s hands with respect to accession, as well as set an

inappropriate precedent requiring congressional approval of the accession of 27 other countries, including Russia, Vietnam, and Saudi

Arabia, that have applied for WTO membership.

At a time when the United States and China have just agreed

to work toward a constructive strategic partnership, it is more important than ever that United States policy toward China integrate

trade, security, and major bilateral concerns. Handling major

issues such as human rights, religious persecution, nuclear proliferation, and Taiwan in a piecemeal fashion will only undermine

the chances for further progress in these areas under this new relationship. We would urge Members of Congress to resist such an approach.

We note the efforts of Congressmen Bereuter and Ewing to work

with the administration and this Subcommittee toward China’s admission to the WTO on the basis of a commercially reasonable protocol of accession, and to look to the terms upon which the United

States could extend permanent MFN treatment to China. Such

positive efforts will improve the chances for securing China’s admission and will promote a constructive strategic partnership between the United States and China. Indeed, ECAT believes that

upon China’s accession to the WTO, the United States should provide permanent MFN trading status to China.

We also commend you, Mr. Chairman, and your colleagues who

continue to seek constructive ways to strengthen our bilateral relationship with China by changing the term ‘‘most-favored-nation

tariff treatment’’ to ‘‘normal trade status.’’ There is no question

that the term has been misinterpreted as indicating that the

United States is giving China special treatment. This is totally unwarranted, as the term ‘‘MFN’’ simply means, as we here all well

know, that an important country will not discriminate against another country’s goods in favor of a third.

In conclusion, I want to say thank you for this opportunity to testify. I would be happy to answer any questions.

[The prepared statement follows:]

Statement of Calman J. Cohen, President, Emergency Committee for

American Trade

I. INTRODUCTION

I am Calman J.Cohen, President of the Emergency Committee for American Trade

(ECAT) and am pleased to appear before the Trade Subcommittee to present

ECAT’s testimony on the possible accession of China to the World Trade Organization(WTO). ECAT represents the heads of major U.S. international business enterprises consisting of all principal sectors of the U.S. economy. The annual sales of

ECAT member companies total over $1 trillion, and the companies employ approximately 4 million persons.

ECAT member companies believe that achieving a strong and stable bilateral relationship with China must remain a priority of U.S. trade policy into the twentyfirst century. Securing China’s entry into the WTO on the basis of a commercially

acceptable protocol of accession is an essential part of strengthening our bilateral

relationship.

In the twenty-first century China will become the largest economy in the world.

The tremendous size of China’s economy will have a major impact not only on the

global economy but also on the individual economies of the United States and other
85

major developed nations. Therefore, due to the vast size and influence of China’s

economy alone it is in our interest to have China become integrated into the world

trading system and subject to its rules.

It is particularly in our interest to have China become subject to the rules of the

multilateral trading system that we helped shape. China’s markets will not be genuinely open to U.S. goods and services until first, it is subject to WTO rules requiring

the provision of national treatment and non-discriminatory tariff treatment and second, any lack of enforcement of these obligations can be challenged under WTO dispute settlement procedures. I would like to comment briefly on those areas in which

ECAT believes that China should make significant commitments in negotiating a

protocol of accession, noting the prospects for progress in the WTO following the recent summit, and discuss the need for an integrated China policy.

II. WTO ACCESSION

China’s accession to the WTO offers a unique opportunity to restructure U.S.-

China trade in a direction that leads to a more stable and prosperous commercial

relationship. It offers a means for the United States to move from having to enforce

a series of bilateral agreements to a comprehensive approach to U.S. market access

objectives for goods, services and investment. WTO rules and dispute settlement

procedures would also provide a more effective means to enforce China’s market access commitments and adherence to WTO obligations. China’s accession to the WTO

must be based, however, on a commercially acceptable protocol that improves U.S.

market access and implements WTO rules and obligations.

ECAT supports U.S. efforts to negotiate a strong protocol of accession. In particular, ECAT believes that a commercially acceptable protocol of accession should include commitments to provide the following:

• A substantial reduction and binding of tariffs on 2,300 priority items identified

by the United States and a commitment to phase out residual quotas and import

licensing restrictions.

• National treatment with respect to the treatment of foreign goods, services, and

investment. In this regard, a commitment should be obtained to phase out substitution and local content requirements and eliminate discriminatory taxes and restrictions on trading rights that violate the national treatment provisions of GATT

Article III and GATS Article III. With regard to trading rights, the United States

should refuse to accept an extended phase-out period.

• The full implementation of the U.S.-China bilateral intellectual property rights

agreements of 1992 and 1995.

• The elimination of restrictions on investment such as the imposition of requirements regarding export performance, import substitution, foreign exchange balancing, and technology transfer.

• The provision of non-discriminatory market access and the liberalization of existing geographic and licensing limitations to U.S. service providers, including financial services and telecommunications.

• The modification of industrial policies which are inconsistent with the WTO.

• The elimination of barriers to U.S. agricultural exports which are inconsistent

with the WTO, including sanitary and phytosanitary measures, that operate as disguised restrictions on trade.

Of these elements, ECAT member companies have been particularly concerned

with gaining significant commitments on market access, trading rights, services,

and investment.

To date, there has been some progress in accession negotiations, including China’s

commitment to provide a standstill against introducing new trade barriers. The Chinese have begun to discuss further reforms in their economic regime, including

greater privatization of state-owned enterprises.

While outstanding bilateral issues remain unresolved after the summit meetings

between President Clinton and Chinese President Jiang Zemin, it did provide the

first step toward strengthening trade and security ties. The lifting of the unilateral

U.S. embargo on the sales of nuclear power equipment to China in exchange for China’s commitment to end its nuclear cooperation and missile sales to Iran is a significant achievement and important evidence that the U.S. policy of engagement is producing concrete results.

The Chinese also made two other commitments during the summit meetings

which should serve as meaningful ‘‘downpayments’’ toward eventual admission to

the WTO. The reported Chinese commitment to lower its average tariffs to 10 percent by 2005 appears to be a significant response to the U.S. request for a major

tariff reduction as part of China’s WTO market access commitments. Of course, we

all need to review the specifics of their offer. China also agreed to join the Informa-
86

tion Technology Agreement which will require it to eliminate its tariffs on computer

and telecommunications equipment.

These new Chinese commitments in terms of tariff reductions will result in major

benefits to U.S. exporters. They also suggest what the benefits to the U.S. would

be if similar ‘‘downpayments’’ were made in other key areas such as trading rights,

barriers to investment, market access for services, and removal of agricultural market access barriers.

In moving forward with China’s WTO negotiations, the Administration should

continue to consult with Congress on the progress and substance of the negotiations.

ECAT believes, however, that any legislation requiring specific congressional approval for China’s WTO accession could prove to be counter-productive. Such a requirement could further entangle trade and non-trade related issues concerning

China. It would effectively tie the President’s hands, with respect to securing China’s accession, as well as set an inappropriate precedent for requiring congressional

approval of the accession of 27 other countries, including Russia, Vietnam, and

Saudi Arabia, that have applied for WTO membership.

III. NEED FOR AN INTEGRATED CHINA POLICY

At a time when the United States and China have just agreed to a ‘‘constructive

strategic partnership’’ it is more important than ever that U.S. policy toward China

integrate trade, security, and other major bilateral concerns. Handling major issues

such as human rights, religious persecution, nuclear proliferation and Taiwan in a

piecemeal fashion will only undermine the chances for further progress in these

areas under this new relationship, and we would urge members of Congress to resist

such an approach.

We note the efforts of Congressmen Bereuter and Ewing to work with the Administration toward China’s admission to the WTO on the basis of a commercially reasonable protocol of accession and to look to the terms upon which the United States

could extend permanent MFN treatment to China. Such positive efforts will improve

the chances for securing China’s admission to the WTO and will promote a constructive strategic partnership between the United States and China.

We also commend the efforts of Chairman Crane and others in the Congress who

continue to seek constructive ways to strengthen our bilateral relationship with

China by changing the term most-favored-nation tariff treatment to ‘‘normal trade

status.’’ There is no question that the term MFN, despite its well-established meaning, has been interpreted by some as indicating that the United States is giving

China special treatment. This is totally unwarranted as the term MFN simply

means that an importing country will not discriminate against another country’s

goods in favor of a third.

The MFN principle has long been embodied in international commercial law

under treaties of friendship, commerce, and navigation and is a core principle of the

original GATT rules. The United States grants MFN treatment to virtually all of

its trading partners, with the exception of a few countries such as Afghanistan,

Laos, Korea, and Vietnam. Therefore in extending MFN treatment to China, we are

only extending what is normal trading status for the majority of U.S. trading partners. Furthermore, we are not conferring normal trading status for free. In order

to receive it, China must give us MFN treatment.

Finally, in terms of an integrated China policy we believe that the one-China policy must be maintained as part of the commitments that the U.S. has made to

China. Consistent with this policy, Taiwan in our view should not be admitted to

the WTO prior to China. Taiwan’s accession should immediately follow China’s.

I appreciate the opportunity to appear before the Trade Subcommittee and would

be happy to answer any questions.

I have a question for all of you in the dias. What United States

Chairman CRANE. Thank you, Mr. Cohen. I thank all of you.

f

industries do you believe would most negatively be affected if

China enters the WTO as a developing instead of a developed country with stricter obligations?

Mr. LLOYD. It would seem to me that virtually every United

States firm interested in dealing with China would be adversely

impacted through the longer transition period that would be allow-
87

able to China, and it would simply postpone the day when China

must play by the rules.

Mr. COHEN. I would agree and add that, in particular, I would

site industries in the manufacturing sector as well as in the services sector. The reason why is that typically developing countries

have tried to have a very long phase-in period for obligations under

the WTO in the manufacturing sector. One area where China in

particular is woefully inadequate in offering market access is in the

services sector, which they may try to postpone.

Mr. SCALISE. Speaking briefly on behalf of the semiconductor industry, there’s no question in our view that with the rate of change

that takes place in technology and the ability for technology to flow

across borders, it is important that China come in as a developed

country as opposed to a developing country. Otherwise, the advantage that accrues to China is well beyond what would be reasonable.

Mr. WHITTAKER. I would concur with Mr. Scalise. I think it probably reflects the view of all of the high technology manufacturing

industries.

Chairman CRANE. Could you provide the Subcommittee with examples of how the presence of United States companies in China

helps to promote fundamental human rights for rank-and-file Chinese? In general, are United States business practices superior to

those of other foreign investors in China?

Mr. COHEN. I would simply say on that particular issue that it

has never been a choice between trade and human rights or, I

should say, trade or human rights. It has always been, in my view,

a question of trade and human rights going hand in hand.

Some examples of what I mean are best given by the type of involvement of American companies in China today. When it comes

to our facilities in China, we are demonstrating an open way of

doing business. Our activities in China are ones in which we do not

discriminate; we have open employment. We demonstrate to the

Chinese our democratic way of life. When it comes to offering them

exposure to new ideas, giving them the opportunity of new employment, we feel very strongly that we are increasing the choices of

individual Chinese. That indeed is what human rights is all about.

Mr. LLOYD. I think, speaking from my own company, ITT Industries, we adhere to the same environmental rules in China that we

do in the United States. Effluent standards are the same. Water

purification plants are put in in China just as they would be here.

I think that we also see, to some degree, the task of the American

firm abroad as one of demonstrating American values.

Mr. SCALISE. For the semiconductor industry, we have three

basic pillars that we focus on. One is technology. One is trade. The

other is environmental health and safety. The environmental

health and safety group makes certain that the principles that we

adhere to here in the United States are also the ones used throughout the world. In fact, the semiconductor environmental conference

that is held in a different city around the world each year—next

year it’s in Korea—draws about 500 folks from all over the world

including China, Japan, and all the other countries you can think

of. So I think that we are doing all of the things necessary to not
88

only be good producers, but also be good citizens in the broadest

sense of that word.

Mr. WHITTAKER. Mr. Chairman, I can only speak on behalf of

Hewlett-Packard Co., my one experience. But I do know that with

Hewlett-Packard, our Chinese employees benefit from the exact

same personnel policies, management styles, training, education,

and so on, as do our employees in Palo Alto, CA. That also applies

to our environmental, health, and safety programs as well.

It is interesting going to China and visiting a Hewlett-Packard

facility. You almost instantly bond with the employees there who

share the same experiences as you do: a lot of the same training

courses, the same philosophies about entrepreneurship, ownership

of a business project, and so on.

Chairman CRANE. I have the corporate headquarters of Motorola

in my district. They told me when they opened up a big plant over

there that they had to maintain clean working conditions, pay for

overtime, and provide health care for their employees. I asked if

they brought all that from over here and they said, No, that was

Chinese law, but that it apparently only applies to foreign companies coming in, not to domestics.

I thought about that a long time. And I thought, Gee, an American presence or any foreign presence over there under those guidelines has got to be setting a very powerful good example. If, at the

end of a long day’s labor—say I work for Motorola and you work

for some grungy Chinese factory, and we’re having our Tsing Taos

together at the end of the day—you are moaning to me about your

working conditions, wouldn’t it be logical for me to say, Hey, come

look at Motorola; why don’t you work for Motorola? As I have mentioned many times, Ben Franklin said a good example is the best

sermon. The presence of American companies over there is the best

sermon.

To the best of your knowledge, are other foreign countries that

are doing business over in China operating under those same

guidelines? Does that apply to all of them?

Mr. COHEN. I think there is a wide disparity among countries.

Certainly, companies that are based in the industrial democracies

have the best and, I would say, exemplary records, such as the

ones you have described. But there are instances of investments by

companies from other countries that are not at that high standard.

Chairman CRANE. Mr. Lloyd, you indicated in your testimony elements that you believe should be core components of an acceptable

WTO accession, including reciprocal market access, trading rights,

and adherence to state trading and subsidy disciplines. Where

would you say China’s offer is most deficient at the moment?

Mr. LLOYD. Where China’s offer is?

Chairman CRANE. Where is its offer most deficient at the moment?

Mr. LLOYD. Well, I think certainly it is in the state trading area,

although we learned for the first time this morning that it’s China’s intention to remedy the problem in 3 years. The requirement

that exporters move goods through state trading enterprises and

that investments be made through state trading enterprises has

been an onerous burden for foreign industry coming into China.
89

Chairman CRANE. Mr. Whittaker and Mr. Scalise, please discuss

the problem of state-owned enterprises in China and how their unfair trade practices can best be addressed by WTO accession.

Mr. WHITTAKER. I think to the extent that the WTO obligations

will obligate the Chinese Government to follow WTO rules and so

on, it will go some ways toward addressing that problem. For example, if, in the telecommunications area, the global telecommunications agreement were adhered to and some of its policies and

terms were adhered to, this would also address a number of the

issues.

Mr. SCALISE. The process of privatization is going to drive that

solution almost automatically because you move from what is

largely a bureaucratic driven set of enterprises that are government invested—not necessarily totally government-owned—to ones

that are driven and run by entrepreneurs. Entrepreneurs have a

very different set of objectives. Their objectives are to grow the

business, to make money, to compete, to be successful. By the very

nature of that process, it is likely that they will function on a commercial basis because that’s what is in their best interest.

Chairman CRANE. Finally, Mr. Cohen, what can we do to get

China to purchase more products from United States companies?

Mr. COHEN. I think one of the most successful ways of accomplishing that would be to have China a member of the World Trade

Organization. So many of the problems that we have in the relationship have to do with barriers, whether it’s in the manufacturing, services, or other sectors. If we try to negotiate each one of

them on a bilateral basis seriatim, the time that it would take is

immense. But if, in one fell swoop so to speak, all barriers are negotiated with the Chinese in order for China to be admitted to the

WTO, the net result would be increased market access for the

United States.

I would just indicate, as I mentioned a moment ago, one of the

areas in which the Chinese offers have been woefully inadequate

is in the service sector. Typically, when a services company enters

China, the company is restricted to a specific city or area, and it’s

not on a basis of access to the total China market. That is something that indeed does need to be addressed.

Chairman CRANE. I thank you all for your insightful testimony.

We’ll now move to our final panel of witnesses for the day. We’ll

begin with Terry Stewart, managing partner of Stewart and Stewart; and then proceed with Nicholas Giordano, assistant vice president of international trade for the National Pork Producers Council. Then Michael Wootton, director of Federal Government affairs

for Sunkist Growers; and we’ll conclude with Robert Aronson,

chairman of Ross Manufacturing.

If you will please proceed in the order in which I introduced you.

STATEMENT OF TERENCE P. STEWART, MANAGING PARTNER,

STEWART AND STEWART

Mr. STEWART. Good afternoon, Mr. Chairman. My name is Terry

Stewart. I am managing partner of Stewart and Stewart. I agree

with many of the comments made by the prior panel with regard

to the importance of WTO accession. I would note that, in response

to one of your questions, the concept of a developing or developed
90

country in an international organization like the World Trade Organization is a self-selecting issue. And to some extent, we have a

red herring in the discussion as to what China needs to do.

The United States remedy really is to insist on short transition

periods or no transition periods; but at the end of the day, our trading partners basically insist on the right to decide for themselves

whether they constitute a developed or developing country.

In my prepared statement, Mr. Chairman, I make basically five

points. The first point is that WTO accession is important for

China and for the trading system, but can and should be done on

commercial terms. What ‘‘commercial terms’’ are—I understand

that has been an issue of some discussion today, and I will not try

to go back through all of that. But clearly, areas such as State

trading, market access, service commitments, reduction of a whole

host of nontariff barriers need to be addressed. The only way that

can be done is by being willing to take the time to make it happen.

The United States to date has been willing to take the time and,

because of that, we are making progress and moving closer and

closer to something that would be deemed to be a commercial deal.

Second, to the extent that China needs time to adopt all WTO

obligations, existing WTO members should maintain transitional

rights which will, in fact, permit a maintenance of balance of rights

and obligations. That is not true in the draft protocol. What that

basically does is put pressure on the United States, European

Union, and other members to require immediate compliance with

WTO obligations upon accession. The tradeoff that has always existed is if China needs more time to fully adopt the obligations of

the WTO, its trading partners need supplemental rights that do

not otherwise exist. Those have basically been neutered in terms

of the draft text.

Third, the United States should not make China’s MFN status

permanent unless and until reasonable market access is established. In that regard, I would say, Mr. Chairman, that you need

more than WTO accession to have a balanced trade relationship

with China. Some of the issues that are needed beyond WTO accession, in my view, include an examination of China’s currency valuation. At the present time, China’s prices to the United States typically undersell all other producers in the world by roughly 40 percent. That suggests that you have a systemic problem in terms of

currency undervaluation.

Similarly, if you take a look at the World Bank statistics in

terms of purchasing power parity, China’s purchasing power parity

on a per capita basis runs four to five times its per capita to GNP,

also suggestive of a serious currency undervaluation. If you do not

address the currency imbalance under the existing statutory authority that the Secretary of the Treasury has, you will always

have a trade imbalance and a trading relationship imbalance.

Second, in that regard, investment measures will not be addressed under the WTO, at least not for the foreseeable future.

While there is something called a TRIMs Agreement, TradeRelated Investment Measures, which deals with trade related investment measures, one of the big problems U.S. companies have

is the restriction of investment on terms that we would consider to

be normal in particular areas, such as automotive and electronics.
91

That will not be addressed, and should be addressed bilaterally, before we provide permanent MFN treatment to China.

Third, there are important plurilateral agreements that are critical to certain strategic U.S. sectors, such as civil aircraft and those

parts of our economy that service government procurement, that

will not be addressed under the WTO because those plurilateral

agreements are voluntary and not mandatory. There should be

some means for the United States to engage in bilateral discussions

to get movement in those areas.

Finally, accession creates obligations, but the United States and

our trading partners need to provide technical assistance as we

have done in the intellectual property area if we expect China to

be able to fulfill its obligations in the near term.

Thank you very much, Mr. Chairman.

[The prepared statement follows:]

Statement of Terence P. Stewart, Managing Partner, Stewart and Stewart

Mr. Chairman and members of the Subcommittee: My name is Terence Stewart.

I am the managing partner of Stewart and Stewart, a law firm here in Washington

which focuses on international trade issues. Over the years, I have monitored developments on China’s efforts to accede to the World Trade Organization. I also have

written extensively on WTO issues and provide technical assistance to the Government of Ukraine in its efforts to accede to the WTO. My comments today reflect my

personal views and do not necessarily reflect the views of either my firm’s clients

or of my colleagues at the firm.

I am pleased to appear this morning to provide comments on U.S.-China trade

relations and on the prospects for China’s accession to the WTO. Certainly, China’s

size, economic growth in the last decade and potential has long captured the imagination of U.S. business. Statistics provided in the press as to level of foreign investment in recent years (second only to that in the U.S.), size of development projects

and projected demand in the future for energy and other products should create important opportunities for U.S. companies and U.S. workers. China has proven capable of expanding its export trade rapidly and appears to have the capacity to expand

its imports dramatically as well.

At the same time, the major differences in economic systems that continue to

exist, the large trade deficit the U.S. has with China which is rapidly expanding,

the continued lack of transparency of much of the Chinese system, the high tariffs,

major non-tariff barriers, continued lack of trading rights for many, extent of state

trading, the relatively poor record of implementation of existing bilateral agreements with the United States, continued heavy subsidization of many industries, to

say nothing of the problems that were addressed by many members of the Congress

and by the Administration in last week’s meetings with President Jiang on political

and religious liberties and human rights pose major challenges to the bilateral relationship.

I will limit my remarks to the trade and economic issues today, the area of my

background and expertise. I would urge the Trade Subcommittee and the Administration as we move forward with our bilateral trade relationship with China to focus

on certain fundamentals:

(l) WTO accession is important for China and for the trading system but can and

should be done on commercial terms.

(2) Should China need time for adopting all WTO obligations, existing WTO members should maintain transitional rights which will in fact permit a maintenance of

balance of rights and obligations.

(3) The U.S. should not make China’s MFN-status permanent unless and until

reasonable market access (i.e., accession on commercial terms) is established.

(4) WTO accession, even on commercial terms, will address only some of the existing impediments to U.S. trade flows:

(a) China’s currency valuation is suspect and should be addressed bilaterally

under existing statutory authority.

(b) Investment restrictions and China’s strategic industry initiatives seriously impede U.S. trade and investment flows; most such problems will not be resolved by

WTO accession.

(c) Plurilateral agreements in the WTO (Government Procurement and Civil Aircraft) are not mandatory for WTO members. China to date has been unwilling to
92

1 U.S. average tariffs are below 5%; the WTO Trade Policy Review of the United States in

1996 identified the ‘‘simple average of duties’’ in the U.S. as being 6.4% (page 44 of WT/TPR/

S/16).

join these agreements. Both are important for U.S. industries. Bilateral approaches

are needed in the absence of Chinese movement to accede to these agreements.

(d) Accession creates obligations but does not necessarily provide the tools for

complying with obligations undertaken. Infrastructure building for complying with

WTO obligations (notifications; administrative and judicial review rights; etc.) has

been a problem for many existing WTO members. Indeed, at the first Ministerial

last December in Singapore, roughly one half of WTO members had not provided

notifications in the vast majority of the areas of WTO obligations. The U.S. has provided significant assistance in areas such as Customs and intellectual property

rights enforcement. The U.S., Canada, EU and other WTO members need to significantly expand technical assistance to China to permit adequate institution building

(this assumes that China will accept the assistance).

(5) Even in areas where WTO accession will create rights and obligations, existing

U.S. trade problems suggest the need for additional bilateral efforts, whether

through the creation of bilateral Commissions or otherwise, to facilitate rapid resolution. The myriad sanitary and phytosanitary problems faced by U.S. agricultural

exporters and the substantial part of agricultural trade controlled by state trading

enterprises in China would be two examples.

Let me take up a few of the issues reviewed above in turn.

I. BURGEONING TRADE DEFICIT WITH CHINA

The press has duly noted the ballooning trade deficit with China. In recent

months, the deficit with China has been larger than the deficit with Japan. Of

greater concern is the fact that the deficit as a percent of total trade between the

U.S. and China is far greater than with any other major trading nation including

Japan. In 1996, the figure was roughly $4 of imports from China for every $1 of

exports to China. In 1997, the ratio is even worse, roughly 5-to-1. Japan, by contrast, has been running a little under 2-to-1 with the U.S. for many years. In 1996,

the U.S. trade deficit with China was $39.520 billion on total trade (imports and

exports) of $63.505 billion. In contrast, the U.S. trade deficit with Japan was

$47.580 billion on total trade of $182.793 billion.

While it is a truism that a country need not be concerned about running a trade

deficit with any one country, it is equally true that the deficit with China does not

reflect underlying competitiveness of the two countries. High tariffs and high nontariff barriers in China, a seriously undervalued currency in China, investment restrictions and other issues identified above contribute to the trade imbalance. Let

me just discuss a few of these problems.

China has substantially higher tariffs on most products than the U.S. Indeed,

many of China’s current tariffs are prohibitive of trade. In the 1997 National Trade

Estimate report (‘‘NTE’’) from USTR (page 44), China’s average tariffs in 1996 were

identified as being 23% with MFN rates as high as 120%. This average tariff is

roughly five times as high as the U.S. weighted average tariff.1

A host of non-tariff barriers have been identified by China as part of its accession

negotiations and continue to significantly restrict trade. Qutoas, licenses, import

tendering are just three identified as applying to many products. Proposed phase

outs of such barriers remain quite extended for some products of significant interest

to the U.S., such as 15 years for autos and trucks. See also 1997 NTE at 46.

Substantial amounts of trade into and out of China are controlled by state owned

enterprises which may not act on commercial considerations. For example, China

continues to insist that it will maintain state trading on a wide range of items of

potential interest to the U.S. including grain, vegetable oil, sugar, tobacco, chemical

fertilizers and cotton.

There are also significant investment restrictions in important sectors which adversely affects trade flows from U.S. parent organizations. Similarly, technology

transfer requirements reduce investment and trade.

At the same time, many industries in China are heavily subsidized which keeps

inefficient Chinese businesses in operation and reduce import flows from the U.S.

Finally, while improvements have been made in Chinese enforcement of intellectual property rights, China’s performance in the past has cost U.S. companies tremendous amounts. China remains subject to monitoring under Section 306 of the

Tariff Act of 1974 (See USTR Press Release 97–37, April 30, 1997, ‘‘USTR Announces Results of Special 301 Annual Review at 4.’’
93

2See Statement of Ambassador Barshefsky on ‘‘The future of U.S.-Japan Trade Relations’’ at

2 presented at Georgetown University Law Center Symposium on U.S. Trade Policy in Transition, January 21, 1994. 3See Work Report of the Trade Statistics Subgroup of the Trade and Investment Working

Group of the Sino-U.S. Joint Commission on Commerce and Trade reprinted in article appearing

in Beijing Xinhua, 21 March 1997 (translated in FBIS/CHI–97–056). ‘‘First, the U.S. import statistics has ignored entrepot trade and value added from entrepot trade to over-estimate its imports from China.’’ Second, ‘‘the U.S. statistics of its exports to China have been underestimated

by neglecting reexports.’’

Using the rule of thumb that every $1 billion in U.S. export trade is equal to

20,000 jobs,2 the $40 billion trade deficit with China, if it could be eliminated

through expanded exports would mean an additional 800,000 U.S. jobs.

I should note that China has been arguing for some time that trade imbalance

figures overstate two way trade, although even under China’s calculus the trade imbalance shows exports substantially more than 2-to-1, meaning that the problem

and direction of the problem remain but the magnitude may be smaller.3

Estimated Exports, Imports, and Balance of Goods—China, Japan, and Total, All Countries, 1993–1997

[In millions of U.S. dollars]

Exports 1993 1994 1995 1996 1997 (estimated)

Exports

Total, all countries 465,091.0 512,626.5 584,742.0 625,075.0 687,720.0

Change from

prior year ... 4% 10% 14% 7% 10%

China ..................... 8,762.8 9,281.8 11,753.6 11,992.6 12,574.5

Change from

prior year ... 18% 6% 27% 2% 5%

Japan .................... 47,891.5 53,487.7 64,342.6 67,606.8 65,845.2

Change from

prior year ... 0% 12% 20% 5% ¥3%

China—percentage

of Total, all

countries ............ 2% 2% 2% 2% 2%

Imports

Total, all countries 580,659.4 663,255.7 743,445.0 795,289.3 869,300.8

Change from

prior year ... 9% 14% 12% 7% 9%

China ..................... 31,539.9 38,786.7 45,543.2 51,512.6 63,141.0

Change from

prior year ... 23% 23% 17% 13% 23%

Japan .................... 107,246.4 119,155.7 123,479.1 115,187.0 121,081.0

Change from

prior year ... 10% 11% 4% ¥7% 5%

China—percentage

of Total, all

countries ............ 5% 6% 6% 6% 7%

Balance

Total, all countries ¥115,568.4 ¥150,629.2 ¥158,703.0 ¥170,214.3 ¥181,393.6

Change from

prior year ... 37% 30% 5% 7% 7%

China ..................... ¥22,777.1 ¥29,504.9 ¥33,789.6 ¥39,520.0 ¥50,590.2

Change from

prior year ... 24% 30% 15% 17% 28%

Japan .................... ¥59,354.9 ¥65,668.0 ¥59,138.5 ¥47,580.2 ¥55,552.4

Change from

prior year ... 20% 11% ¥10% ¥20% 17%

China—percentage

of Total, all

countries ............ 20% 20% 21% 23% 28%

AImports on Customs Value basis; Exports on f.a.s. basis; and Total, all countries on Census basis.

ASource: Bureau of Census foreign trade data.
94

II. WTO ACCESSION IS IMPORTANT FOR CHINA AND FOR THE TRADING SYSTEM BUT

CAN AND SHOULD BE DONE ON COMMERCIAL TERMS

The position of this and prior Administrations has been that the U.S. wants

China in the GATT and now WTO but on commercial terms. A fews weeks ago, the

U.S. identified the average tariff levels it was seeking from China as being 8%. Both

the U.S. and the EU have been encouraging China to join the Information Technology Agreement. President Jiang’s acceptance of that obligation during last week’s

summit here in Washington was obviously an important step forward on the market

access commitments, as it will reduce duties on computers, semiconductors and telecommunications equipment to zero within an as yet undisclosed period of time. Indeed, press reports indicate that the market access offer made by China last week

while not addressing certain important tariff peaks (e.g., autos), would reduce tariffs

on 4000 tariff items to an average of 10–12%.

While China is anxious to join the WTO and to have the U.S. make ‘‘MFN’’ treatment permanent, the U.S. should continue its approach of working hard to help

China gain access but only on commercially viable terms. The remaining tariff and

non-tariff barriers in China are serious impediments to a balanced trade relationship with China. While some of the economic reforms and political decisions needed

within China are obviously difficult and time consuming, premature accession would

only lock in a trade imbalance that would be difficult to address in the future. It

is in both countries’ interest to be sure that WTO accession will be sustainable for

both countries. As a number of U.S. Administrations have indicated to the Chinese

government, accession to the WTO is first and foremost in the hands of the Chinese

government. We will have a better ongoing economic relationship if we have confidence that the trading relationship is balanced from the beginning. This does not

require parity of rights and obligations, but it does require addressing the major

barriers which continue to exist in China.

Steps to intensify the bilateral negotiations between the U.S. and China on China’s accession announced during the summit last week are welcome and will hopefully permit the accession process to successfully conclude in the not too distant future. Major issues continue to exist, however, in terms of market access for our service industries, tariff and non-tariff barriers for our goods, standards including sanitary and phytosanitary measures, and agriculture. There also continue to be a handful of important protocol issues that have not been resolved. It is critical that this

Subcommittee support the U.S. insisting on commercially viable solutions to all

areas before the accession process concludes. The Administration was correct in not

setting a date for concluding negotiations. Let us hope that the pace of progress will

continue and increase in the weeks and months ahead.

III. SHOULD CHINA NEED TIME FOR ADOPTING ALL WTO OBLIGATIONS, EXISTING

WTO MEMBERS SHOULD MAINTAIN TRANSITIONAL RIGHTS WHICH WILL IN FACT

PERMIT A MAINTENANCE OF BALANCE OF RIGHTS AND OBLIGATIONS

Because of the tremendous changes in the economic system of China that accession to the WTO entails, it is not surprising that China has continued to seek transition periods to bring itself into compliance. One of the obvious trade offs for Members of the WTO in terms of examining China’s accession is speed of entry versus

balance of rights and obligations. From the beginning, one option to speed the accession process was the possibility of creating a transitional period in which China assumed less than full obligations and, as a result, obtained less than full rights visa-vis existing Members. While such an approach has significant intellectual appeal

and could have been a basis for an expedited accession, China has been reluctant

to accept significantly different rights regardless of the transition periods needed to

bring itself into compliance with WTO obligations. While early drafts of the Protocol

of Accession would have given significant rights to existing WTO members to address trade problems during the transition period before China accepted full obligations, such an approach has been unacceptable to China. The current draft protocol

has largely made the transitional rules unworkable for existing members as any action by an existing Member will require compensation to China. While this development may please the Chinese government, it places greater importance for the U.S.

and other members to be sure that the obligations undertaken by China are commensurate with its position as a trading nation at the present time and that transition periods are minimized.

This Subcommittee should encourage the Administration to revisit the transitional rules in the draft protocol to safeguard U.S. rights if transition periods to the

assumption of WTO obligations are significant for China.
95

IV. THE U.S. SHOULD NOT MAKE CHINA’S MFN-STATUS PERMANENT UNLESS AND

UNTIL REASONABLE MARKET ACCESS IS ESTABLISHED

Much of the U.S. business community is very anxious to have greater certainty

in their business dealings with China. The annual MFN renewal is both time consuming for business and creates significant commercial uncertainty as to the nature

of the relationship that will exist month to month. From a strictly commercial perspective, the establishment of permanent MFN status obviously makes the lives of

U.S. companies who export or invest in China much easier. Of course, the provisional MFN status flows from Title IV of the Trade Act of 1974 which was added

both to permit improved trade relations with Communist controlled countries and

to qualify such improvement upon improved freedom of emigration and other noncommercial issues.

Without speaking to the propriety/desirability/problem of non-trade considerations

controlling whether MFN status is provided to countries which continue to be subject to Title IV, from a purely commercial perspective, it would appear appropriate

to pass legislation that promises unconditional MFN upon accession of China to the

WTO as long as the Administration certifies that the accession is on commercial

terms and that the major impediments to a balanced trade relationship (WTO and

non-WTO related) have been addressed.

H.R. 1712 would address part of this commercial concern, although it is limited

to the WTO-related issues. The snap-back to December 31, 1994 MFN rates (i.e.,

before the WTO came into existence) raises some practical questions because of the

generally low level of U.S. tariffs that were in effect at the end of 1994 and hence

the potential loss of leverage with China to get forward movement. Nonetheless, the

bill addresses the underlying commercial issue and could form the basis for forward

movement if Congress were to determine that commercial concerns should control

or that non-commercial concerns can be better addressed through other means.

V. WTO ACCESSION, EVEN ON COMMERCIAL TERMS, WILL ADDRESS ONLY SOME OF

THE EXISTING IMPEDIMENTS TO U.S. TRADE FLOWS

The Subcommittee should keep in mind that addressing the WTO accession issue

is very important but is not the only issue critical to a balanced and rational trade

relationship with China. I review below just a few of the other issues that must be

addressed.

(a) China’s currency valuation is suspect and should be addressed bilaterally under

existing statutory authority

The Chinese currency is believed to be seriously undervalued which both encourages exportation at very low prices typically causing significant market disruption

and also retards imports into China by understating purchasing power.

In the last ten years, Chinese exporters have probably found themselves subject

to more antidumping actions than any other country in the world. The reason for

this is simple: across a huge array of products, prices from China are far, far below

any other country in the world. As I mentioned to private sector visitors from China

a few weeks ago, in light of the explosive export drive from China at prices which

are often 40–70% below any other supplier in the world, it is not surprising that

there have been trade cases. What is surprising is that there have not been far

more.

Let me review some U.S. import statistics for 1996 to give a sense of the magnitude of the underpricing phenomenon. In 1996, there were a total of 8,281 10-digit

harmonized tariff schedule categories for which there was import data for products

from China. Customs value on all imports from China for the year were $51.512 billion. We calculated average price per unit or average price per weight for imports

from China and for imports from all other countries. What we found was that for

the vast majority of categories, import prices from China were lower than import

prices from all other countries, with thousands of categories being 30%–70% below.

For all products, the average extent of underselling would appear to be slightly

above 40%. Such figures strongly suggest that the Chinese currency is seriously undervalued.

Similarly, the World Bank publishes annually information on per capita GNP (expressed in U.S. dollars) and something called the purchasing power parity on a per

capita basis (in ‘‘international’’ dollars). In the World Bank Atlas for 1997, China’s

purchasing power parity per capita was nearly five (5) times its per capita GNP,

again supporting a finding that the currency is seriously undervalued.
96

Comparison of Per Capita GNP and Purchasing Power Parity

GNP per capita, 1995

US $

PPP,

international

$

Ratio of

PPP to

US $

China ........................................................................................................ 620 2,920 4.71

United States ........................................................................................... 26,980 26,980 1.00

Japan ....................................................................................................... 39,640 22,110 0.56

Italy .......................................................................................................... 19,020 19,870 1.04

France ...................................................................................................... 24,990 21,030 0.84

Germany .................................................................................................. 27,510 20,070 0.73

Canada ..................................................................................................... 19,380 21,130 1.09

Thailand ................................................................................................... 2,740 7,540 2.75

India ......................................................................................................... 340 1,400 4.12

Mexico ...................................................................................................... 3,320 6,400 1.93

Brazil ........................................................................................................ 3,640 5,400 1.48

Indonesia ................................................................................................. 980 3,800 3.88

Poland ...................................................................................................... 2,790 5,400 1.94

ASource: World Bank Atlas 1997. The World Bank at 36–37. ANote: GNP per capita in international dollars is converted at purchasing power party (PPP) rates. PPP is

defined as the number of units of a country’s currency required to buy the same amount of goods and services

in the domestic market as US$1 would buy in the United States. See Id at 45.

As the Subcommittee is aware, U.S. law already permits the Secretary of the

Treasury to address correction of exchange rates where certain conditions are satisfied. See 22 U.S.C. 5304(b) Because China has a material global current account

surplus and a significant bilateral trade surplus with the United States, Treasury

has the authority to initiate negotiations with China to get a correction to the exchange rate of the Chinese currency.

China’s Current Account and Trade Surplus

[In millions of U.S. dollars]

1990 1991 1992 1993 1994 1995 1996

Current account ... 11,997 13,272 6,401 ¥11,609 6,908 1,618 7,243

Trade balance ...... 9,165 8,743 5,183 ¥10,654 7,290 18,050 19,535

Balance on goods

and services ...... 10,668 11,601 4,998 ¥11,497 7,611 11,958 17,551

ASource: IMF, International Financial Statistics, October 1997 at 196.

While Secretary Rubin raised the issue of currency value with the Chinese on his

recent visit to China, the Administration has not used its statutory authority to request bilateral consultations on exchange rates with China. Congress should be encouraging the Administration to resolve the exchange rate problem with China as

quickly as possible.

(b) Investment restrictions and China’s strategic industry initiatives seriously impede

U.S. trade and investment flows; most such problems will not be resolved by WTO

accession

Studies by the OECD and the World Bank indicate that multinational companies

handle one third of world trade between their own operations. Stated differently, investments abroad usually lead to significant exports from the country whose company has done the foreign investment. This trade may be equipment, raw materials,

services or other elements of the product being produced in the foreign country.

The restrictions placed on foreign investment by China both involve aspects that

are addressable under the WTO (e.g., local content, trade balancing and other traderelated investment measures) and aspects that are not (e.g., sectors that are off limits or where investment will be controlled). While WTO membership will obviously

permit some investment restrictions to be addressed, many of the fundamental concerns of U.S. investors, including concerns over strategic industry investment restrictions (autos, electronics, etc.) and technology transfer requirements will not be

addressable within the WTO. See October 25, 1997 Washington Post, page C1 and

C2, ‘‘China Plays Rough: ‘Invest and Transfer Technology, or No Market Access’.’’

As the Subcommittee is aware, efforts by the United States to build into the World
97

4See Exchange of Notes Constituting an Agreement Relating to Investment Guarantees. Beijing, 30 October 1980. 32 UST 4010; TIAS 9924; 1267 UNTS 315.

Trade Organization a broader investment regime during the Uruguay Round were

not successful. While the U.S. and others have been pursuing a Multilateral Agreement on Investments within the OECD and while a Working Party has been established within the WTO to examine the topic of trade and investment, there is no

short or medium-term prospect for a multilateral vehicle that will include China.

While the U.S. and China have a bilateral agreement on investment guarantees,

the agreement falls far short of the type of agreement needed to provide open access

to the Chinese market.4 The Subcommittee should encourage the Administration to

make a bilateral agreement on investment with China a priority and an important

consideration in determining whether to provide unconditional MFN treatment.

(c) Plurilateral agreements in the WTO (Government Procurement and Civil Aircraft)

are not mandatory for WTO members. China to date has been unwilling to join these

agreements. Both are important for U.S. industries. Bilateral approaches are needed

in the absence of Chinese movement to accede to these agreements.

Some of the leading export sectors of the U.S. economy involve companies that

sell civil aircraft or components thereof or who are involved in bidding on government procurement contracts around the world. The $3 billion order for Boeing

planes announced by the Chinese during President Jiang’s visit last week underlines the importance of certain sectors to our overall national export performance.

Unfortunately, two agreements within the WTO that could be of great importance

to many U.S. companies are not mandatory—the Civil Aircraft Agreement and the

Government Procurement Agreement. Despite efforts by the U.S. and the EU to

gain agreement by China to join these important agreements as part of the WTO

accession, China to date has not moved in this direction. While the U.S. was successful as part of the Singapore Ministerial in getting agreement to establish a

Working Party to review transparency issues in government procurement and to

seek agreement on transparency needs, such efforts are still in the early stages of

development and will only partially address the underlying concerns.

The Subcommittee should encourage the Administration to pursue: (1) bilateral

agreements on both issues apart from WTO accession, (2) duty free status for civil

aircraft and parts as part of the WTO accession process and (3) a reasonable commitment to a time line for China’s accession to the plurilateral agreements. Such

agreements should be part of any package needed for permanent MFN status.

(d) Accession creates obligations but does not necessarily provide the tools for complying with obligations undertaken. The U.S., Canada, EU and other WTO members

need to significantly expand technical assistance to China to permit adequate institution building.

As I reviewed for the Subcommittee in your February 1997 hearing on the Singapore Ministerial, many developing and least developed countries have had serious

problems complying with various obligations undertaken as part of the World Trade

Organization. Indeed, on many agreements, during the first two years fewer than

half of the Member nations provided notifications of laws, regulations or practices

as required by the Agreement.

In looking at the history of enforcement of U.S.-China bilateral agreements, implementation of rights and obligations has often been more difficult than reaching

the agreement in the first place. In the area of intellectual property, the United

States found that it needed a very broad based program of technical assistance and

collaboration if it were to find efforts by the Chinese government to approximate obligations undertaken.

The WTO’s general experience and our country’s specific experience with bilateral

agreements with China suggest that if we want a balanced trade relationship in fact

and reasonable compliance with obligations undertaken as part of the WTO or as

part of bilateral agreements, it will be important to assist in the institution building

that will be central to China’s compliance. This does not diminish the need for the

Chinese government to bring the political will and to devote the resources necessary

to implement international obligations. It does, however, recognize the reality that

it is in the U.S.’s interest to help see that the institution building is expedited. Congress and the Administration must see that agreements don’t stop at the signing

ceremony or aren’t left simply for the dispute resolution process. Technical assistance can make implementation a win/win for China and the rest of the trading system.
98

VI. EVEN IN AREAS WHERE WTO ACCESSION WILL CREATE RIGHTS AND OBLIGATIONS, EXISTING U.S. TRADE PROBLEMS SUGGEST THE NEED FOR ADDITIONAL BILATERAL EFFORTS TO FACILITATE RAPID RESOLUTION

Within the Administration’s list of priority areas to address as part of China’s accession effort are non-tariff barriers, standards and agriculture. The host of sanitary

and phytosanitary measures in place that restrict U.S. exports to China have been

well documented in various USTR documents. As reviewed in the 1997 National

Trade Estimate:

China committed in the 1992 Market Access MOU to base its agricultural import

standards on ‘‘sound science.’’ Since 1992, China has made some progress on agricultural sanitary and phytosanitary issues, signing bilateral protocols for several agricultural items, including live horses (September 1994); apples from Washington, Oregon and Idaho (April 1995); ostriches, bovine embryos, swine and cattle (June

1995); and cherries (March 1996). However, China’s sanitary and phytosanitary

measures still prohibit imports of U.S. citrus, plums, grapes, tobacco, and Pacific

Northwest wheat. In 1996, China’s sanitary requirements for poultry and poultry

meat became a major issue. Imports from the U.S. were abruptly stopped on several

occasions for reasons inconsistent with international standards.

Many of the statements filed with USTR as part of the effort earlier this year to

obtain public input on China’s WTO accession process identified problems with SPS

issues, as well as state trading, high tariffs and various other non-tariff barriers,

as restricting exports to China. See, e.g., letter of 2/28/97 from Indian River Citrus

League, letter of 1/14/97 from 16 members of the Senate Committee on Agriculture,

Nutrition and Forestry, letter of 3/14/97 from American Farm Bureau Federation

and associations representing soybeans, wheat, beef, corn, cotton, pork and rice.

While the federal government, the states and individual industry groups have

been working hard to overcome problems that have arisen, the trade effect of many

of these issues and the lack of clarity of WTO obligations on others (e.g., state trading) suggest that the establishment of high level, permanent commissions, stepped

up exchange of technical experts, and other actions may be appropriate to reduce

the level of misunderstanding, expand the areas of common agreement and find solutions that can be implemented quickly.

Again, the Congress may wish to link permanent MFN status to the achievement

of working mechanisms on these and the prior issues that may go beyond the WTO

itself.

I appreciate the opportunity to testify and would be pleased to answer any questions.

Our next witness, Nicholas Giordano.

Chairman CRANE. Thank you.

f

STATEMENT OF NICHOLAS D. GIORDANO, ASSISTANT VICE

PRESIDENT FOR TRADE, NATIONAL PORK PRODUCERS

COUNCIL

Mr. GIORDANO. Mr. Chairman, on behalf of America’s pork producers, I very much appreciate this opportunity to appear before

you today. U.S. agricultural exports remain a bright spot in our

Nation’s trade picture. Last year, the U.S. agricultural trade surplus was $27.4 billion, making agriculture the largest contributor

to a positive balance of trade.

Mr. Chairman, while our agricultural export performance has

been quite good to date, many barriers prevent us from realizing

our potential in international markets. The failure of China to

agree to a meaningful WTO accession protocol that will provide increased access for United States agricultural exports is a major

problem not only for the pork industry, but perhaps for all United

States agriculture. The pork industry, possibly more than any

other sector of United States agriculture, is disadvantaged because
99

China, the largest pork-consuming market in the world, has a de

facto ban on pork imports.

For the past 10 years, the United States has been negotiating

with China regarding that country’s accession to the WTO. While

some progress has been made, the two sides remain far apart on

many matters, including agricultural market access. Pork producers believe that enactment of the China Market Access and Export

Opportunities Act, H.R. 1712, would help pave the way for China’s

accession to the WTO. H.R. 1712 provides the incentives for China

to develop a meaningful accession package by pledging to eliminate

the annual MFN review under Jackson-Vanik. The legislation effectively addresses China’s concern that it could make all the necessary concessions to gain entry to the WTO, only to have the Congress balk at granting permanent MFN or other complications.

However, the legislation provides not only a carrot, but also offers a stick to induce China to develop a meaningful accession protocol. The legislation provides that within 6 months from date of

enactment, the President must make a one-time determination as

to whether China is ‘‘either denying adequate trade benefits to the

United States or not taking steps to become a full member of the

World Trade Organization.’’

If the President determines that China is not satisfying either of

the foregoing criteria, the legislation directs the President to raise

the duties on imports of one or more products from China to levels

no higher than the pre-Uruguay round levels.

Pork producers believe that this is a much more sensible approach than that offered by Jackson-Vanik which, if triggered,

would virtually lock out all Chinese exports to the United States.

The recent stock market swings have underscored the interconnectedness of the economies of Asia and the rest of the world. If

Jackson-Vanik were invoked against China, we believe the worldwide economic consequences would be dire.

H.R. 1712 gives the President a reasonable and appropriate tool

to use if China is not providing adequate market access or is not

making significant progress in its WTO bid. To date, trade with

China largely has been a one-way street, as evidenced by the massive trade deficit. Increasing tariffs on Chinese products to preUruguay round levels—levels which I understand are 4 to 7 percent higher than current tariff rates—would be a realistic and fair

response to Chinese practices. United States pork producers, along

with virtually all of United States agriculture, believe that China

must be engaged. The United States cannot, must not turn its back

on the most populous nation in the world, a nation which in our

lifetimes will likely have the largest economy in the world.

At the same time, the United States must not rush China into

the WTO. China is so far from compliance with WTO requirements

now that the effectiveness of the WTO would be severely compromised if China were admitted to the WTO at the present time.

Clearly, Russia and Ukraine would demand the same lenient treatment extended to China. Moreover, if the United States prematurely supports China’s WTO accession, the ramification for

United States exporters will be serious. Exporters will be forced to

wage a long and arduous campaign to open that market, similar to

the ongoing struggle with Japan.
100

Mr. Chairman, that concludes my comments. Thank you.

[The prepared statement follows:]

Statement of Nicholas D. Giordano, Assistant Vice President for Trade,

National Pork Producers Council

Mr. Chairman and members of the subcommittee: I am Nicholas Giordano, Assistant Vice President for Trade with the National Pork Producers Council. I appreciate

the opportunity to appear on behalf of U.S. pork producers to express our views on

the possible accession of China to the World Trade Organization.

The National Pork Producers Council is a national association representing 44 affiliated states who annually generate approximately $11 billion in farm gate sales.

According to a recent Iowa State study conducted by Otto and Lawrence, the U.S.

pork industry supports an estimated 600,000 domestic jobs and generates more than

$64 billion annually in total economic activity.

With 10,988,850 litters being fed out annually, 1.065 billion bushels of corn valued

at $2.558 billion are consumed by U.S. pork producers. Feed supplements and additives represent another $2.522 billion of purchased inputs from U.S. suppliers which

help support U.S. soybean prices, the U.S. soybean processing industry, local elevators and transportation services based in rural areas.

Pork is the world’s meat of choice. Pork represents 44 percent of daily meat protein intake in the world. Even though there’s been a huge global market for pork

and pork products, efficient U.S. producers were precluded from exporting significant volumes of pork in the pre-Uruguay Round Agreement, pre-NAFTA era. A combination of foreign market trade barriers and highly subsidized competitors kept a

lid on U.S. pork exports. U.S. pork producers were ardent proponents of the Uruguay Round Agreement and NAFTA. The industry strongly supports further trade

liberalization measures and, consequently one of the organizations leading the

charge for the renewal of fast track trade negotiating authority. These trade agreements permit U.S. pork producers to exploit their comparative advantage in international markets.

Since 1995, when the Uruguay Round Agreement went into effect, U.S. pork exports to the world have increased by approximately 45 percent in volume terms and

75 percent in value terms from 1994 levels. Indeed, the U.S. pork industry exported

over one billion dollars of pork for the first time in 1996. Explosive export growth

will continue in 1997 and 1998.

U.S. AGRICULTURE IS EXPORT DEPENDENT

U.S. agricultural exports continue to be a bright spot in our nation’s trade picture.

Last year, the U.S. agricultural trade surplus was $27.4 billion, making agriculture

the largest positive contributor to the U.S. balance of trade. We are the world’s leading exporter of agricultural products with a 21 percent share of world trade. The

agricultural sector is twice as reliant on international trade as the total U.S. economy with exports accounting for an estimated 30 percent of gross cash receipts.

While our agricultural export performance has been good, foreign trade barriers

and other factors continue to prevent us from realizing our potential in international

markets. The failure of China to agree to a meaningful World Trade Organization

(WTO) accession protocol that will provide increased access for U.S. agricultural exports is major problem for U.S. agriculture. The U.S. pork industry, perhaps more

than any other sector of U.S. agriculture, is disadvantaged because China, the largest pork consuming country in the world, has a de facto ban on pork imports.

CHINA HAS A DE FACTO BAN ON PORK IMPORTS

High tariff rates and a discriminatory value added tax put imported pork at a

sharp competitive disadvantage to domestic pork. Moreover, complicated and nontransparent restrictions on imported pork, administered by China’s quarantine administration (CAPQ), make it virtually port pork. While CAPQ officials acknowledge

the existence of the restrictions, they have been unwilling to date to supply copies

of the restrictions to U.S. trade negotiators stating that the laws are confidential.

CAPQ contends that Chinese restaurants and hotels can obtain licenses to import

pork. Unlike beef, for which licenses are available through regional CAPQ offices,

CAPQ says that it disseminates pork import licenses solely through CAPQ headquarters. In reality, very few licenses have been granted by CAPQ.

Recently China lowered tariffs on imported pork from 45 percent to 23 percent.

This development is not significant because the 23 percent duty is in addition to

the 17 percent value added tax which is discriminately applied against imports.
101

Thus, even if the many non-tariff barriers applied against imported pork were rectified, high tariffs would continue to block pork imports.

Earlier this year, CAPQ provided quotas to 11 establishments in Australia, Canada, and the United States as eligible to export meat and poultry to China for general consumption under a one year trial program. While in one sense this is a positive development because, as a matter of law, these imports are not limited to the

hotel and restaurant sector, as a matter of fact, high tariffs and other restrictive

measures will militate against any significant level of imports. The identified establishments include a pork facility in Australia that received a quota of 2,000 MT,

three pork facilities in Canada that received a total quota of 68,000 MT, and one

pork facility in the U.S. that received a quota of 5,500 MT. The Australian and U.S.

exports must be imported exclusively by Nanjing Five-Star Hotel Corporation Ltd.

and the Canadian product must be imported exclusively by Chaoying Foodstuff Ltd.

While pork is not on the formal list of state traded products in China, the appointment of these exclusive importers is troubling. Indeed, we understand that CAPQ

officials are involved with the ownership/manag these importers. Canadian pork

quotas are much higher than U.S. quota levels but must be imported pursuant to

the recently executed Canada-China pork protocol. We understand from Canadian

industry officials that they are extremely upset with this protocol because onerous

and non-scientific restrictions will preclude the shipment of any significant amount

of pork from Canada to China.

Moderate quantities of pork are flowing indirectly to China through Hong Kong

importers. The pork, almost all variety meats (e.g. hearts, stomachs, intestines), is

distributed to the general population mostly through local wholesale markets with

a small amount distributed through supermarkets. Technically the importation and

distribution of this product is illegal, a fact which is generally acknowledged by the

Hong Kong importers and Chinese distributors.

The U.S. pork industry urges the following changes in China:

(1) the abolition of the de facto ban on pork importation;

(2) the establishment of transparent import regulations and licensing requirements;

(3) repeal of the discriminatory value-added tax which is applied to meat imports;

(4) reduction of import duties to minimal levels with no TRQs;

(5) unrestricted entry and participation of non-government import entities;

(6) a protocol governing sanitary issues, which, among other things, recognizes the

U.S. safety and inspection system as equivalent and permits the export of pork from

any FSIS approved facility;

(7) the termination of subsidies to the Chinese pork industry.

The United States is uniquely positioned to reap the benefits of a liberalized Chinese pork sector. The U.S. exported over $1 billion in pork in 1996 and exports continue to sky-rocket. While the U.S. currently is the world’s second largest exporter

of pork behind Denmark, the oltural Policy Research Institute (FAPRI) report

states: ‘‘The U.S. becomes the number one pork exporter because it is able to expand

production without placing strong pressure on domestic prices.’’ Danish producers

currently have higher costs than U.S. producers and the gap is increasing. There

is virtually no room for the expansion of the Danish pork industry. FAPRI projects

that Chinese pork consumption will increase by over 23 percent, approximately 8

million metric tons, in the next ten years. To put this number in perspective, during

1996, U.S. pork exports were less than 500,000 metric tons.

Recent statistics reveal that China is surpassing Japan as the single largest

source of the U.S. trade deficit. If China liberalized its pork market, the U.S. would

be exporting huge volumes of pork to that country. The U.S. pork industry alone

could make a significant dent in the U.S.-China trade imbalance.

While the U.S. pork industry arguably stands to benefit more than any other segment of U.S. agriculture from a meaningful WTO accession protocol for China, virtually every other segment of U.S. agriculture will also benefit.

NPPC SUPPORTS THE CHINA MARKET ACCESS AND EXPORT OPPORTUNITIES ACT

For the past ten years the U.S. has been negotiating with China regarding that

country’s accession to the WTO. While some progress has been made, the two sides

remain far apart on many matters, including agricultural market access. NPPC believes that enactment of The China Market Access and Export Opportunities Act

(H.R. 1712) would help pave the way for China’s accession to the WTO.

President Clinton’s former chief economic advisor, Laura D’Andrea Tyson, wrote

in the New York Times during last year’s annual most-favored-nation (MFN) debate

that the U.S. should give China more incentive to undertake the steps necessary

for a meaningful accession protocol. She stated that:
102

Instead of threatening to terminate China’s MFN status, the U.S. should be signaling that we will facilitate China’s WTO membership provided Bejing meets the

necessary conditions. We should specifically pledge to grant China permanent MFN

status in return for such commitments.

(NY Times, May 28, 1997, at A18) H.R. 1712 provides the incentive to China to

develop a meaningful accession package by pledging to eliminate the annual MFN

review under Jackson-Vanik. The legislation effectively addresses China’s concern

that it could make all the necessary concessions to gain entry to the WTO only to

have the U.S. Congress balk at granting permanent MFN.

However, the legislation not only provides a carrot but, it also offers a stick to

induce China to develop a meaningful accession protocol. The legislation provides

that within six months from the date of enactment, the President must make a one

time determination as to whether: China is ‘‘either denying adequate trade benefits

to the United States or not taking steps to become a full member of the World Trade

Organization.’’ If the President determines that China is not satisfying either of the

foregoing criteria, the legislation directs the President to raise the duties on imports

of one or more products from China to levels no higher than the pre-Uruguay Round

levels.

This is a much more sensible approach than that offered by the Jackson-Vanik

provision which, if triggered, would virtually lock out all Chinese exports to the

United States. The recent stock market swings have underscored the interconnectedness of the economies of Asia and the rest of the world. If Jackson-Vanik were

invoked against China, the worldwide economic consequences would be dire.

H.R. 1712 gives the President a reasonable and appropriate tool to use if China

is not providing adequate market access or is not making significant progress in its

WTO bid. To date, trade with China largely has been a one way street as evidenced

by the massive trade deficit. Increasing tariffs on Chinese products to pre-Uruguay

Round levels—levels which I understand are 4 to 7 percen realistic and fair response to Chinese practices.

Should China’s position change after pre-Uruguay Round level duties are invoked,

the legislation provides the President with the flexibility to modify the duties upon

notification to the appropriate congressional committees.

U.S. pork producers, along with virtually all of U.S. agriculture, believe that

China must be engaged. The United States must not turn its back on the most populous nation in the world, a nation which likely will have the largest economy in

the world not long into the next century. At the same time, the U.S. must not rush

China into the WTO. If China were admitted to the WTO at the present time, the

effectiveness of the WTO would be severely compromised given that China is so far

from compliance with WTO requirements. Clearly, Russia and Ukraine would demand the same lenient treatment extended to China.

Moreover, if the U.S. prematurely supports China’s WTO accession, the ramifications for U.S. exporters will be serious. We will be forced to wage a long and arduous campaign to open that market similar to the ongoing struggle with Japan.

If enacted, the China Market Access and Export Opportunities Act improves the

prospects for China’s entry into the WTO on commercially acceptable terms.

Our next witness is Mr. Aronson.

Chairman CRANE. Thank you.

f

STATEMENT OF ROBERT R. ARONSON, CHAIRMAN, ROSS MANUFACTURING CORP., FORT LAUDERDALE, FLORIDA; AND

REVPOWER LIMITED, HONG KONG, CHINA

Mr. ARONSON. Thank you very much, Mr. Chairman. Thanks for

the opportunity of being here and testifying on this most timely

topic.

My name is Robert Aronson. I am chairman of the Ross Manufacturing Corp. of Fort Lauderdale, Florida, and Revpower Limited,

an American-owned company in Hong Kong. I have entered my

written testimony, so I will just add a few more remarks.

You may have seen this Business Week article. The date of publication was October 6, 1997, and the article is entitled ‘‘Cheated in
103

China.’’ It talks about four companies that have been cheated in

China: Kimberly Clark, Borg Warner, Asimco, and my company,

Revpower. I could add a number of other names to that list—

McDonnell Douglas, Occidental Petroleum, Chrysler, Microsoft,

Revmaster, and quite a few others—but why are American companies being cheated in China?

The basis for all commercial relations in China is the agreement.

There has to be a Chinese company and there has to be an American company, and there has to be an agreement between the two.

What we found out is that Chinese can breach agreements with impunity because there is really no rule of law in China, no protection

for American investments in Chinese courts. The Chinese courts

will not enforce arbitration awards in favor of American companies.

What do we do when we are cheated? What do all the 10,000

American companies with agreements do—agreements with arbitration clauses? Well, an example of what happens follows.

Senitron Co., an Arizona electronics company, lost an arbitration

award in Stockholm—over $1 million—and the Chinese stateowned entity was able to collect through American courts. On the other hand, Revpower, my company, has a $9 million arbitration award now. Another company in New Jersey, Petro

Chemical Co., has a $5 million arbitration award. It’s totally impossible to collect; the Chinese courts just won’t enforce. Our case is

over 4 years old, and we have had just one stall after another. In

fact, the latest thing—which we just learned today at lunchtime—

is that SFAIC, Shanghai Far East Aero-Technology Import and Export Co., the Chinese state-owned entity which is a subsidiary of

Shanghai Aviation Industries—the company that does the McDonnell Douglas aircraft—and which owes $9 million to Revpower has

now declared bankruptcy. We learned right after we received the

award in Stockholm in 1993 that the company had been conducting

an espionage operation at the McDonnell Douglas headquarters in

Long Beach.

They had a liaison office at McDonnell Douglas in connection

with their agreement with us, so we were really a cover for an espionage operation which went bad. The FBI arrested five of them.

One of them confessed everything and renounced his Chinese citizenship and he’s now under protective custody; the others were

sent back home. So this company, SFAIC, used us as a cover; they

never intended to engage in the business that we were in, which

was the battery business. After having confiscated our battery

plant and lost an arbitration case in Stockholm, now SFAIC has

simply declared bankruptcy. This is a State-owned entity, so something really needs to be done about those things.

American companies are running scared in China. Why? Because

everyone knows—the seasoned negotiators know—that the Chinese

can breach agreements with impunity, any time they want, and get

away with it. So we’re scared to death of what might happen.

We have another company in China, operating in Xiamen, that

makes fiberglass products. This project started 4 or 5 years ago,

and it’s been running along fine, increasing in volume each year.

But we are really afraid that, at any moment, there could be a

major breach in this agreement. And what would we do? We have

the standard Swedish arbitration clause in our agreement, but
104

should we go to Stockholm and spend $500,000 over 2 years to arbitrate and receive an award which would then be totally

uncollectible?

Another friend of ours has a company called Revmaster Aviation.

Revmaster deals with the same company that we deal with in

Xiamen, which is a large Chinese state-owned entity. Revmaster

began producing crankshafts in Harbin in north China in 1985. Its

partner, a Chinese state-owned company, produced the crankshafts

and shipped them to California. They were sold all over the country

by Revmaster.

Two years ago, all of a sudden Revmaster learned that its sales

had drastically declined, to almost nothing. Upon investigation,

Revmaster discovered that its partner—the state-owned company

which is also our partner in Xiamen—has begun selling those

crankshafts directly to Revmaster’s customers and competitors

through an intermediary company in Australia. Now what can

Revmaster do about that? What could we do about it if that particular Chinese state-owned entity does the same thing to us?

Arbitration doesn’t seem to be the answer. Yet these 10,000

agreements that exist in China all contain arbitration clauses.

They are like time bombs ready to go off. When the Chinese are

ready to breach an agreement or to confiscate a property or whatever they want to do, when they are ready to do it, they do it. They

know they can get away with it.

I think the solution is to enact the bill that was introduced by

Congressmen Bill McCollum, Clay Shaw, and Floyd Spence. H.R.

2141 would enable companies like ours to collect against Chinese

state-owned assets located in the United States in the event we’re

not able to collect in China. So I would urge the Subcommittee to

do whatever is necessary to get this bill through Committee and to

the floor for a vote because it’s something that every American

company operating in China really needs: a way to really collect

and to foreclose all the Chinese tricks that they have been playing

on us.

This is a simple amendment to a bill that already exists which

is called the Foreign Sovereign Immunities Act. Under this act, arbitration awards can even today be collected in the United States

through the Federal district court, but only against the offending

debtors. If those offending debtors have no assets in the United

States, why, then it would be impossible to collect.

This amendment would broaden the base for collection against

any State-owned, foreign State-owned assets in the United States.

So I would really hope that the Subcommittee and others give this

consideration.

Under the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards, China is required to do just that:

recognize and enforce; they do not. China does not recognize and

enforce arbitral awards under that treaty. So if China is not willing

to abide by its international obligations under the New York Convention, then how could we expect China to abide by any promises

that would come out of its accession to the World Trade Organization?

So I would say we have got to deal with first things first. That

concludes my comments. Thank you.
105

[The prepared statement follows:]

Statement of Robert R. Aronson, Chairman, Ross Manufacturing Corp.,

Fort Lauderdale, Florida; and Revpower Limited, Hong Kong, China

Mr. Chairman and members of the Subcommittee, my name is Robert R. Aronson.

I am Chairman of Ross Manufacturing Corporation (formerly Ross Engineering Corporation) of Fort Lauderdale, Florida, and President of Revpower Limited

(‘‘Revpower’’), an American-owned Hong Kong manufacturing company. I appreciate

the Subcommittee’s courtesy in inviting me to appear before you and applaud your

initiative in holding this timely hearing on China Trade Relations and the possible

accession of China to the World Trade Organization.

Also, I want to express my thanks to you, Mr. Chairman, and to Congressman

E. Clay Shaw, Jr. for the help you have given me over the years in our attempt

to collect an arbitration award made to Revpower by the Arbitration institute of the

Stockholm Chamber of Commerce (‘‘Swedish Arbitration Institute’’) on July 13,

1993. That award now stands at $9 million, including accumulated interest. (Exhibit

1)

On May 23, 1995, 1 testified before this same committee on the Revpower case

and at that time covered the history of the Revpower dispute with a Chinese stateowned entity, Shanghai Far East Aero-Technology Import & Export Corporation

(‘‘SFAIC’’) which led to arbitration, and subsequent efforts to collect on the award

through the Shanghai Intermediate People’s Court (the ‘‘Shanghai Court’’). Since

that Statement and all those details are already in the record, I will not repeat that

information here but simply refer you to the record.

Over four years have passed since we won that arbitration award. We expected

to receive payment in 1993. SFAIC had ample assets with which to pay and was

part of the powerful Chinese Military-Industrial Complex. (Exhibit 2) According to

a Dun & Bradstreet report (‘‘D & B Report’’) on SFAIC, they had a paid-in capital

of 500,000,000 Yuan. They owned the 4th floor of a large office building in downtown Shanghai. They were in the process of building a factory in Pudong, across

the river from Shanghai, for a joint venture with a Fortune-500 company to manufacture an electronic check-out apparatus that is found at all check-out counters in

large U.S. markets. They had property in California and Nevada and operations in

Hong Kong and other parts of the world. In Shanghai, they had a staff of 50 persons.

According to the D & B Report, SFAIC is a State-owned enterprise which is defined as follows in that report: ‘‘State-owned Enterprises refers to Corporations, Enterprises, other economic entities registered in China either financially supported or

ultimately controlled by the State, Provinces, Municipalities, Autonomous Regions

or Chinese Enterprises.’’

SFAIC is a wholly owned subsidiary of Shanghai Aviation Industrial Corporation

(‘‘SAIC’’), the company which assembles MD–80 aircraft for McDonnell Douglas. Our

original oral agreement was with SAIC, made in June of 1985 at the headquarters

of McDonnell Douglas in Long Beach, California. SFAlC did not exist at that time.

It was formed by SAIC initially to do business with us in February, 1986. The relationship between SFAIC and SAIC can be seen in a letter from Shanghai Aircraft

Manufacturing Factory, a division of SAIC, dated July 15, 1994 (Exhibit 3) and addressed to Mr. Du Jianping, General Manager of a company which manufactures

Sheltered Bus Stop Equipment. In that letter, the director of Shanghai Aircraft is

attempting to explain to Mr. Du that SAIC cannot sign documents with foreign companies and that such documents must be signed by SFAIC (the company which owes

us the award). The letter states:

...I have explained to you in the past that Shanghai Aviation Industry

Corporation (SAIC) has authorized Shanghai Far-East Aero-Technology Import & Export Corporation (SFAIC) as its representative to sign for it all

contractual documents directly with foreign parties. SFAIC signs all such

documents on behalf of the head office.

Thus, SFAIC is the alter-ego of SAIC.

COLLECTION

Since Revpower’s original understanding was with SAIC which later created

SFAIC to do business with us, I felt quite secure about receiving payment when receiving the arbitration award. Both SAIC and SFAIC had ample assets. Moreover,

SAIC was a subsidiary of the Ministry of Aeronautics and Astronautics (now called

Aviation Industries of China or ‘‘AVIC’’), a part of the Military-Industrial Complex

of China, backed by billions of dollars of Chinese foreign exchange reserves.
106

Instead of receiving payment in 1993 as I had expected, I was in for a very rude

awakening.

First shock

SFAIC refused to pay the award saying that ‘‘it was unfair.’’

Second shock

When we filed the award with the Shanghai Court, the court refused to give us

a receipt for the award, or a case number, and for the next two years refused to

even acknowledge that the award existed.

Third shock

Soon after receiving the award, late in 1993, we learned that SFAlC was transferring its business and assets to its parent, SAIC, and to its grandparent, AVIC.

Fourth shock

We began learning that China has a policy of Non-enforcement of arbitral awards

in favor of foreigners.

Matthew D. Bersani, an attorney with Paul, Weiss, Refkind, Wharton & Garrison,

with offices in New York and Beijing, talked of ‘‘the virtual impossibility of enforcing

arbitration awards in China’’ in his article entitled, ENFORCEMENT OF ARBITRATION AWARDS IN CHINA, published in The China Business Review, May–

June 1992. And the April, 1996 article entitled ALL CHANGE IN CHINA published

in International Commercial Litigation April 1996 stated, ‘‘Foreign companies know

that the rule of law carries less weight. For a start, lawyers say, the local courts

show hostility to foreigners. ‘Frankly, going there is ill-advised’ says one. The system is renowned to be slewed against strangers. ‘You are going to run into a wall

know as local protectionism. It is present in all cases, to an extreme degree, and

it is the decisive factor’.’’

One example of local protectionism is the Petro-Chemical Case Petro-Chemical

U.S.A. Company Incorporated of Fort Lee, New Jersey has been unable to collect

a $5 million award granted in 1995 by the Swedish Arbitration Institute. A copy

of a letter on this matter from attorney Magnus Andren of Lagerlof & Leman, New

York City, is attached. (Exhibit 4)

Fifth shock

Shortly after receiving the award in 1993, I learned that SFAlC had been conducting an espionage operation at its Liaison Office at the McDonnell Douglas headquarters in Long Beach, California. This office was set up just after SFAlC/

Revpower Letters of Intent were signed in February, 1986 (the month that SFAlC

was formed by SAIC). The FBI arrested the SFAIC officials in June, 1993. One of

them defected and confessed what had been going on. The others were deported

back to Shanghai. This confirmed what I had thought all along. SFAIC did not really want to be in the battery business. Their liaison office, set up ostensibly to monitor business with Revpower and others, was really a cover for espionage activities.

Officials at McDonnell Douglas worked with the FBI to uncover these activities.

Present status

The Shanghai Court has been sitting on the award for four years and has made

no effort to enforce collection from SFAIC. SFAIC has gone out of business. It is

obvious that China has no intention of paying this award.

Assistance by U.S. Government agencies

We have had a great deal of support from the U.S. Departments of Commerce,

State, Treasury, Office of U.S. Trade Representative, U. S. Embassy in Beijing and

American Consulate General in Shanghai whose officials have brought up the matter with their counterparts in Washington, D. C. and in China on many occasions,

but to no avail. The Chinese ignore the matter. We have an office in Shanghai and

our staff members report that the Chinese laugh at the 1958 New York Convention

on Recognition and Enforcement of Arbitral Awards. The comment we hear most

often is, ‘‘The New York Convention has no teeth.’’

EFFECT ON U.S. COMPANIES OPERATING IN CHINA

Many of these companies are very apprehensive in their dealings with their joint

venture partners or others with whom they have signed agreements. They know

that the Chinese can breach these agreements with impunity at any time and that
107

there is really no recourse. We all have come to learn that there is no legal protection for American investments in China. I can give you dozens of examples of major

breach of contract and outright confiscation, as in our case.

HOW TO LEVEL THE PLAYING FIELD

Most agreements between American companies and the Chinese are with Chinese

State-owned entities such as SFAIC. If these entities knew that they could not get

away with major breaches of contract and confiscation, the whole relationship between American and Chinese business would change for the better and would be

beneficial to both sides. This year, American investment in China is off by 50%, the

first time ever. Partly responsible for this decline is the growing awareness that

there is no legal protection for American investment in China.

From the American business point of view, one of the best ways to reverse this

one-sided situation would be to have enacted the International Arbitration Enforcement Act of 1997, H.R. 2141, a Bill introduced by Congressman Bill McCollum and

co-sponsored by Congressmen E. Clay Shaw, Jr. and Floyd Spence. It is my opinion,

shared by many other business men with operations in China, that H.R. 2141 is,

by far, the most important business related Bill pending in Congress and would do

more good for more American companies in China than any other pending Bill in

Congress.

H.R. 2141 is basically an amendment to the Foreign Sovereign Immunities Act

(‘‘Act’’). The Act protects foreign states from U.S.A. lawsuits, but with an exception.

The exception is that U.S. persons can collect international arbitration awards

against foreign states (or foreign State-owned entities) through the Federal District

Court.

The amendment would rectify this situation in that U.S. persons with international arbitration awards could collect against any non-diplomatic assets of the

foreign state located in the U.S.A. China has a great many State-owned companies

operating in the U.S.A. and most of them have assets in the form of property, inventories, cash in banks, etc. It would be difficult for all of them to dispose of their

assets.

Passage of H.R. 2141 would be a breath of fresh air for all American companies

with business in China. It would stop the Chinese from playing games with us and

our investments in China. It would put US-China business relations on a solid footing which would be good for both sides. It would stop major U.S. companies from

backing out of China or freezing present China projects. And it would encourage

newcomers to test the waters in China, with foreknowledge that their investments

would be legally protected.

My recommendation to the Subcommittee, therefore, is that everyone get behind

H.R. 2141 and do whatever is necessary to get this Bill enacted as quickly as possible for the sake of all of us.

CHINA’S POSSIBLE ACCESSION TO THE WORLD TRADE ORGANIZATION

I frankly can not see how China can be allowed into this organization when China

does not honor its obligations under the 1958 New York Convention on Recognition

and Enforcement of Arbitral Awards. China’s shameful behavior of allowing one of

its State-owned entities to transfer its business and assets to its parent and grandparent in order to avoid the award, and the shameful behavior of the Shanghai

Court in ignoring the award for 2 years and making no attempt to enforce the

award over a 4-year period is inexcusable.

And China’s disgraceful behavior in using the Revpower agreement as a cover for

an espionage liaison office at the McDonnell Douglas headquarters in Long Beach,

California is not the behavior of a county mature enough to join the World Community of Nations.

Therefore, at this point in time, I could not recommend that China be allowed to

become part of the World Trade Organization for the above reasons.

Mr. Chairman, that concludes my remarks. I look forward to working with you

and the Subcommittee to assist in getting H.R. 2141, perhaps coupled with several

other China related Bills, to the floor for a vote. I would be pleased to answer any

questions you may have and pleased to submit for the record any documents or correspondence the Subcommittee requests.

[Exhibits are being retained in the Committee files.]
f

108

Chairman CRANE. Thank you, Mr. Aronson.

Mr. Wootton.

STATEMENT OF MICHAEL WOOTTON, DIRECTOR, FEDERAL

GOVERNMENT AFFAIRS, SUNKIST GROWERS

Mr. WOOTTON. Mr. Chairman, Mr. Shaw, I am Mike Wootton, director of Federal Government affairs for Sunkist Growers. We are

headquartered in Sherman Oaks, CA. We are one of the oldest agricultural cooperatives in the United States—104 years old—and

represent 6,500 citrus farmers in California and Arizona in bringing their products to market.

Export markets have become a more and more significant source

of revenue for Sunkist and other citrus entities in California, Arizona, Florida, and Texas. Today, 45 percent of our growers, fresh

fruit sales annually are derived from export sales.

Since the late seventies, Sunkist has been working deliberately

to develop relationships and build a foundation for market development in the People’s Republic of China through trade in our processed citrus products. But since World War II, we have been denied

the opportunity to sell fresh fruit in China, as have all of the other

citrus producing States in the United States.

In 1992, the United States and the PRC entered into a market

access memorandum of understanding in which the Chinese Government committed itself to open its markets to American agricultural products, including fresh citrus fruit. Since that time, officials

at the Department of Agriculture and the Office of the U.S. Trade

Representative have been meeting with their counterparts in the

Chinese Government to address all outstanding technical issues.

Bilateral agricultural trade meetings have been held several times

this year—both in China and in the United States, as recently as

a week before last in San Francisco—to negotiate the terms and

conditions of agricultural trade compatible with obligations of country membership in the WTO.

Unfortunately, these efforts have yet to produce a satisfactory

resolution. The Chinese Government persists in its resistance to

protocols that would open its markets to American agricultural

products, including fresh United States origin citrus fruit. China

has yet to demonstrate full acceptance and implementation of WTO

Agreements on the application of sanitary and phytosanitary measures, on technical barriers to trade, and on import licensing measures.

In our case, China has maintained a quarantine against our

fresh fruit under the auspices of concern about exotic pests such as

Mediterranean fruit fly, which are not indigenous to the United

States, which find no permanent habitation here, and which periodically are brought into this country from abroad. China’s prohibition against fresh American citrus fruit continues, despite proven

successful isolation and eradication of the pest in the United States

following each detection incident.

As I noted, these periodic outbreaks—this year in the heavy tourist area of central Florida and more recently in the urbanized area
109

of South-Central Los Angeles—are usually caused by illegal importation of infested contraband fruit brought in by casual international travelers at major ports of entry, and also by illegal entrants from countries of Central and South America carrying fruit

from locations where Med fly and other exotic pests have become

established.

Our other major trading partners, notably Japan, Korea, Australia, and New Zealand—all citrus producing countries themselves—recognize and subscribe to the success of our quarantine

isolation and eradication program for Med fly. They readily accept

U.S. Government certification of pest free, fresh California and Arizona citrus fruit into their markets from pest-free zones in the

United States. The standards adhered to by WTO and other international organizations demand sound science as a foundation for

sanitary and phytosanitary policies, including quarantines. Regrettably, China has yet to demonstrate acceptance of this international standard.

China is a very significant prospective market for fresh American

citrus fruit. If the Chinese Government would finally allow our

fruit to pass over the Great Wall and into the Chinese marketplace,

we anticipate citrus fruit sales from California alone of $300 million annually during the early startup years. Building upon that

volume, we could do our part to help reduce the $50 billion trade

deficit that we currently suffer in commercial transactions with

China.

However, despite the best efforts of our Government, notably the

Department of Agriculture and the Office of the U.S. Trade Representative, America’s fresh citrus fruit continues to be excluded

from the marketplace in the People’s Republic of China. We therefore urge Congress to resist granting permanent MFN status to

China at this time, and to oppose also China’s accession to the

WTO at this time until China opens its markets to American products, including citrus fruit, lives up to its commitments expressed

in bilateral agreements, and fully demonstrates adherence to the

obligations inherent in WTO membership.

Thank you, Mr. Chairman.

[The prepared statement follows:]

Statement of Michael Wootton, Director, Federal Government Affairs,

Sunkist Growers

Chairman Crane, Members of the Subcommittee, I am Michael Wootton, Director

of Federal Government Affairs for Sunkist Growers, which is headquartered in

Sherman Oaks, California. As you may know, Sunkist Growers is a non-profit,

grower-owned marketing cooperative serving 6,500 citrus farmers in Arizona and

California. For 104 years, Sunkist Growers has successfully marketed high quality

citrus fruit produced by its grower-members. Today, Sunkist Growers produce approximately 65 percent of the oranges, lemons and grapefruit grown in Arizona and

California. Our cooperative enjoys a long history of dedicated effort to create and

expand markets around the world for our American citrus fruit. Sunkist exports

today account for about 45 percent of our growers’ annual fresh fruit sales.

Since the late 1970s, Sunkist Growers has been working to establish relationships

and build a foundation for market development through trade in processed citrus

products in the People’s Republic of China.

In 1992, the United States and the PRC entered into a Market Access Memorandum of Understanding in which the Chinese government committed itself to open

its markets to American agricultural products, including fresh citrus fruit. Since

that time, officials of the U.S. Department of Agriculture and the Office of the U.S.

Trade Representative have been meeting with their counterparts in the Chinese
110

government to address all outstanding technical issues. Bilateral agricultural trade

meetings have been held several times this year both in China and in the U.S. to

negotiate the terms and conditions of agricultural trade compatible with obligations

of country membership in the World Trade Organization. Unfortunately, these efforts have yet to produce a satisfactory resolution. The Chinese government persists

in its resistance to protocols that would open its markets to American agricultural

products, including fresh U.S.-origin citrus fruit.

China has yet to demonstrate full acceptance and implementation of WTO agreements on the Application of Sanitary and Phytosanitary Measures on Technical Barriers to Trade and on Import Licensing Measures.

In the case of our industry, the PRC has maintained a quarantine against the importation of fresh citrus fruit from the U.S. under the auspices of concern about the

Mediterranean fruit fly, an exotic pest which is not indigenous to the U.S. and

which finds no permanent habitation here, but which is periodically brought into

this country from abroad. China’s prohibition against fresh American citrus fruit

continues despite the proven successful isolation and eradication of the pest in the

U.S. following each detection incident. As I noted, these periodic outbreaks—this

year in the heavy tourist visitation area of central Florida and most recently in an

urbanized area of South-Central Los Angeles—are usually caused by the illegal importation of infested contraband fruit brought into the U.S. by casual international

travelers at major ports of entry and by illegal entrants into the U.S. from countries

of Central and South America carrying fruit from locations where Med fly and other

exotic pests have become established.

Our other major trading partners—notably Japan, Korea, Australia, New Zealand—all citrus producing countries themselves—recognize and subscribe to the success of our quarantine, isolation and eradication program for the Med fly. They

readily accept U.S. government certification of pest-free, fresh California and Arizona citrus fruit into their markets from pest-free zones in the United States. The

standards adhered to by the WTO and other international organizations demand

sound science as the foundation for sanitary and phytosanitary policies, including

quarantines. Regrettably, China has yet to demonstrate acceptance of this international standard.

Prospectively, China is a very significant market for fresh American citrus fruit.

If the Chinese government would finally allow our fruit to pass over the Great Wall

and into the Chinese marketplace, we anticipate annual citrus fruit sales for California alone of $300 million during the early startup years of market development.

Building upon that volume, we could do our part to help reduce the now $50 billion

annual trade deficit suffered by the U.S. in commercial trade with China.

However, despite the best efforts of our government—notably the U.S. Department of Agriculture and the Office of the U.S. Trade Representative—America’s

fresh citrus fruit continues to be excluded from the marketplace in the People’s Republic of China. We, therefore, urge the Congress to resist granting permanent MFN

status to China and to oppose, at this time, China’s accession to the WTO until

China opens its markets to American products, including American citrus fruit, lives

up to its commitments expressed in bilateral agreements earlier referred to and

does China need to take to demonstrate its intention to accept and

fully demonstrates adherence to obligations inherent in WTO Membership.

Chairman CRANE. Thank you. Mr. Wootton, what further steps

f

implement the WTO Agreements on the application of sanitary and

phytosanitary measures and also on import licensing measures?

Mr. WOOTTON. Well, in the case of sanitary and phytosanitary

measures, what we have simply asked them to do is do what other

trading partners, such as Japan are doing. That is, to accept the

type of phytosanitary protocols and work plans and standards that

we are able to devise, along with the expertise of the Animal Plant

Health Inspection Service at USDA, in identifying those areas

where we perhaps have a Med fly outbreak—as we did recently in

Tampa, Florida area—and quickly isolate and eradicate the pest,

quarantine the fruit coming out of that area, and exclude it from

the export market.
111

Our other trading partners—and certainly Japan is a good example of that—are readily willing to accept our protocols and our assurance that the fruit that they are getting from us is pest-free. We

ask China to simply do the same type of thing that seems to be

the international standard in this area.

At this point, you know, we have discussed technically with the

Chinese ad nauseam all of these points. We have had our scientific

experts in from Gainesville, Florida, California, and the other citrus producing States. The industry has insisted that China not be

given the opportunity to nickel-and-dime us to the point where

they’ll let in certain counties but not others, certain States but not

other States. We have insisted on their adherence to the WTO

standards and not be allowed to selectively choose a particular

county or State.

Chairman CRANE. Mr. Giordano, are other WTO partners who

produce pork, such as Canada and Australia, in agreement with

our general approach to Chinese accession to the WTO?

Mr. GIORDANO. Yes, they would be, Mr. Chairman. In fact, this

weekend I met in Mexico with representatives from both the Canadian and Mexican industries. This was on the agenda; we’re all in

agreement. I believe that they have made their concerns known to

their governments. Certainly, the European producers, who we also

frequently meet with—just this month, in fact, in Europe—would

also agree with that.

Australia—we don’t have much of a relationship with them yet.

Unfortunately, they also have a ban on our product, which is very

much a bogus sanitary restriction. But they are not much of a significant exporter. I would assume that their position also would be

that China should open the market, but I don’t know how much oxygen the issue has gotten in Australia.

Chairman CRANE. Mr. Stewart, you say in your testimony that

investment restrictions in China’s strategic industry initiatives seriously impede United States trade and investment flows with

China, and that these barriers can’t be resolved by WTO accession.

Could you elaborate on that concern?

Mr. STEWART. Yes, Mr. Chairman. The reality is that China has

a strategic industry program: The automobile sector, the electronics

sector—as I believe a speaker on the prior panel revealed—and one

or two others have been identified. Basically, in those sectors, foreign investment is either not allowed or is tightly controlled.

The result is that in sectors where the United States is highly

competitive, our companies are not able to exploit that advantage,

both from an export point of view and from an investment-incountry point of view. The highest tariffs that exist on an MFN

basis in China at the moment are reserved for the auto sector,

where I believe the tariffs are 120 percent. Obviously, those are

prohibitive tariffs in any country. They are coupled by a restriction

as to the amount of investment that can go in and the number of

companies that can go in. That has obviously presented problems

for the Big Three here in the United States, and certainly for many

of the auto parts suppliers.

Chairman CRANE. Mr. Aronson, do you believe the United States

is making reasonable demands for China’s accession to the WTO?

Mr. ARONSON. Could you repeat that?
112

Chairman CRANE. Do you believe that the United States is making reasonable demands for China’s accession to the WTO?

Mr. ARONSON. Oh, yes. I certainly think so. I think that the

United States position is that China should be considered a developed country rather than a developing country, and should have to

adhere to the standards of a developed country. But again, I think

that until China adheres to its obligations under other international agreements, such as the New York Convention on Recognition and Enforcement of Arbitral Awards, that no consideration

should even be given to China for accession to WTO.

If China does not adhere to one particular treaty, why should it

adhere to another? I think we need to go back to the basics, you

know, and review all the other international treaties to which

China is a signatory and make sure that China has lived up to its

commitments on all of those treaties before we even think about

WTO.

Chairman CRANE. Mr. Shaw.

Mr. SHAW. Thank you, Mr. Chairman. Mr. Aronson and I talked

about the problems that he’s had over in China over the years. I

would like to pose a couple of questions. First, how can Congress

protect American investment in China if they refuse to equally

apply their own laws to foreigners, as the situation is in your case?

Mr. ARONSON. Under the situation we have today, American investment in China is really not protected at all. There’s no protection for our investment there. Why? Because the Chinese can confiscate property. They can materially breach contracts and completely get away with it because should such actions result in disputes that end in arbitration awards in favor of Americans, those

awards are neither recognized nor enforced by Chinese courts. So

there’s really no protection.

The only way, in my opinion, that American investment can be

protected is to take it away from the Chinese court and bring it to

American courts, to the Federal District Court. The bill proposed

by you and Congressmen Bill McCollum and Floyd Spence, H.R.

2141, would do that. It would enable companies with international

arbitration awards to collect against Chinese state-owned assets in

the United States. That would level the playingfield. It would cause

the Chinese to stop playing around with our companies and with

our assets over there.

Mr. SHAW. I understand that that might be made an order as an

amendment on the floor this week, which I think would be very

helpful. That would give a cause of action in our own—would that

help you in your situation?

Mr. ARONSON. Pardon me?

Mr. SHAW. Would that help you in your situation?

Mr. ARONSON. Yes, that would help us. Especially if action could

be taken quickly on it.

We just learned today—at noon today, while we were having

lunch—that the company that owes us the $9 million in China, the

state-owned company, has filed bankruptcy. Amazing. Here’s a

state-owned company that has engaged in espionage activities

using our contract as a cover, and then, after having lost an arbitration award, has filed for bankruptcy. I think H.R. 2141 could

solve that problem.
113

Mr. SHAW. Is Chinese bankruptcy something like ours?

Mr. ARONSON. Yes, it is. It is. It’s very much like ours.

Mr. SHAW. So without this, you would be reduced to just being

one of the claimants?

Mr. ARONSON. Yes.

Mr. SHAW. But you haven’t established the enforceability from

the subsidiary that you did business with, isn’t that correct? Under

Chinese law, they just sort of ignored it.

Mr. ARONSON. Yes. The subsidiary, Shanghai Far East, actually

has been acting for its parent, Shanghai Aviation Industries. We

have hard evidence that one is the alter ego of the other. We really

have been dealing with Shanghai Aviation Industries, which produces the McDonnell Douglas MD–80s, all the while.

The subsidiary was a cover that was set up for espionage purposes. They—the officials—were all arrested by the FBI in California. Of course, one of them defected and confessed everything. The

others were sent back to China. Now the subsidiary has gone into

bankruptcy. But the subsidiary was always an alter ego, part and

parcel of its parent, and acting for and on behalf of the parent. So

we believe that under H.R. 2141, we could hold the parent responsible. The parent does have assets in the United States. However,

H.R. 2141 would enable us to collect against any State-owned assets in the United States since we’re dealing with State-owned

companies that owe us money in China.

Mr. SHAW. Thank you. Thank you very much. I am pleased that

I was able to be here during most of your testimony.

Mr. ARONSON. I hope that happens tomorrow.

Mr. SHAW. I welcome you to the Subcommittee as a constituent

of mine.

Mr. Wootton, going a little bit beyond the Sunkist situation, we

are presently going through a situation with Mexico regarding the

sanitation issue and citrus. How does what you refer to with the

Chinese differ from the problems that we are presently experiencing—and about which I have been advised by several people that

we have not been successful in exporting one single orange to Mexico. They are now claiming the sanitation problem with the fruit

fly.

Mr. WOOTTON. Well, certainly the use of phytosanitary arguments has become a new methodology in creating trade barriers.

We have experienced that as well with Mexico. Only recently did

Mexico agree to open up its market to Arizona-produced citrus

fruit, arguing all along that they were concerned about a Mediterranean fruit fly—which, historically, not one Mediterranean

fruit fly has ever shown up in Arizona.

So in the end, I think when the United States worked out their

concerns about Mexican avocado imports into the United States, all

of a sudden that phytosanitary concern about Arizona disappeared.

Some months after they agreed to open up the market for Arizona,

we are still without any of the specific work plans and protocols

that they have agreed to in place. So, you are right; they do use

phytosanitary arguments on occasion to create barriers to trade.

In the case of China, they have taken it to the extreme of excluding all United States citrus fruit, including that from Florida. I

might add that we are working in concert with the citrus industry
114

in Florida, Texas, Arizona, and California to jointly demand full access for all United States citrus producing States, not just one or

two.

Mr. SHAW. Is China a producer of citrus?

Mr. WOOTTON. They are a producer of citrus.

Mr. SHAW. How large are they?

Mr. WOOTTON. They are a very large producer in terms of acreage. But in terms of production volume, quality, and so on they are

not competitive with the United States. They are OK for small

fruit, some juice, some specialized items like mandarin oranges,

and that type of thing. But, for example, in the case of grapefruit,

Florida would certainly be the dominant producer and provider in

the China market for that.

It all started with China. Then Marco Polo took it to the Mediterranean, and from there back to South America, and up the coast

to the United States. So we just want to complete the circle.

Mr. SHAW. Thank you. Thank you all for your testimony.

Chairman CRANE. Thank you all for your testimony. This concludes the Subcommittee hearing on United States-China relations

and possible accession of China to the World Trade Organization.

The record will remain open until November 18. The Subcommittee stands adjourned.

[Whereupon, at 2:53 p.m., the hearing was adjourned, subject to

the call of the Chair.]

[Submissions for the record follow:]

Joint Statement of American Beekeeping Federation, Inc., American Honey

Producers Association, Inc., and Fresh Garlic Producers Association

Pursuant to the October 22, 1997 announcement by the Subcommittee on Trade

of the Committee on Ways and Means, the American Beekeeping Federation, Inc.

(‘‘ABF’’), the American Honey Producers Association, Inc. (‘‘AHPA’’), and the Fresh

Garlic Producers Association (‘‘FGPA’’) submit the following statement for consideration by the Committee and for inclusion in the printed record of the November 4,

1997 hearing held by the Subcommittee regarding the future of United States-China

trade relations and the possible accession of China to the World Trade Organization

(WTO).

In particular, ABF, AHPA and FGPA submit this statement concerning two issues

that deserve attention and priority commensurate with the United States’ other toppriority negotiating positions. First, this statement addresses the anticipated impact

China’s WTO membership would have on certain U.S. industries that are vulnerable

to Chinese imports. China’s accession may pose considerable danger to the U.S.

Commerce Department’s continued ability to treat China as a non-market economy

(‘‘NME’’) country under U.S. trade law. Second, ABF, AHPA and FGPA recommend

that China’s membership to the WTO also be conditioned on China granting significant concessions as to its tariff barriers restricting imports of U.S. merchandise.

With 1.2 billion citizens, China is the world’s largest market for virtually all merchandise. Nevertheless, China’s tariff barriers to trade effectively close that market

to potential U.S. exporters.

I. THE TERMS OF CHINA’S ACCESSION TO THE WTO SHOULD ENSURE THE CONTINUED

TREATMENT OF CHINA AS A NON-MARKET ECONOMY COUNTRY UNDER U.S. TRADE

LAW

Briefly summarized, China’s accession to the WTO will likely affect certain aspects of U.S. antidumping law. Specifically, China’s admittance to the WTO could

threaten the continued treatment of China as an NME country in future U.S. antidumping investigations and administrative reviews, unless China expressly consents

to special treatment in its WTO Protocol of Accession. The likely outcome of future

trade cases against China, absent NME treatment, could be either very small, or

zero percent, dumping margins found in most, if not all, cases. Therefore, AHPA,

ABF and FGPA urge the United States to negotiate for the insertion of specific language in China’s draft Protocol of Accession that would allow WTO Members to con-
115

1 Under a suspension agreement in an antidumping duty investigation, Commerce promises

to suspend the dumping investigation and not to impose dumping duties of any kind. The foreign industry (or, in the case of China, the Chinese Government) promises to take steps that

in essence will eliminate the injurious effects of the foreign imports on the U.S. industry. Commerce reserves the right to terminate the suspension agreement and immediately resume the

investigation if it determines that the foreign parties have not fulfilled their commitments under

the agreement. 2The FGPA is an ad hoc trade association that represents the country’s major producers of

fresh garlic. Almost all fresh garlic produced in the United States is produced in California by

the 13 members of the FGPA. For the 1996–97 crop year, the FGPA members are growing approximately 130 million pounds of fresh garlic, representing about $100 million in potential

sales.

tinue to make allowances for the special difficulties involved in making price comparisons in Chinese trade cases. Inclusion of such language may be essential to the

continued prosperity of AHPA, ABF and FGPA, and many other important U.S. domestic industries.

A. Certain U.S. Industries Are Extremely Vulnerable to Imports From China

If China’s accession to the WTO is not made conditional upon the ability of the

United States and other WTO members to treat China as a non-market economy

country when enforcing their trade laws, many U.S. industries that are vulnerable

to Chinese imports could be threatened. The potential adverse impact that such a

result could have on the U.S. honey and fresh garlic industries is described below.

1. Vulnerability of the U.S. Honey Industry

In the early 1990s, China exported only a few million pounds of honey each year

to the United States. During the three-year period 1992–94, Chinese annual imports

rose to an average of about 70 million pounds, which were sold here at about half

the price U.S. producers needed to recover their costs of production. In contrast to

China, U.S. producers supplied less than 60 million pounds to the U.S. market during 1992–94. The explosion in Chinese honey imports into the United States created

a massive oversupply situation, which caused U.S. producers’ prices to fall well

below their costs of production.

In October 1994, the ABF and AHPA formally asked the U.S. Government to conduct an antidumping investigation of honey imports from China. In November 1994,

the U.S. International Trade Commission preliminarily determined that the facts it

had gathered thus far in its investigation demonstrated a reasonable indication that

the U.S. honey industry was materially injured, or threatened with material injury,

by reason of Chinese honey imports.

In March 1995, the U.S. Commerce Department issued its affirmative preliminary

determination that all of the Chinese honey exporters were dumping honey into the

United States at rates at or over 127 percent ad valorem, and imposed provisional

dumping duties based on its findings.

In August 1995, Commerce and the Government of China signed the first and

only suspension agreement with China which essentially ‘‘suspended’’ the dumping

investigation 1 in return for China’s commitment to limit its exports to the United

States over a five-year period to 44 million pounds. China also agreed to limit the

sales price of Chinese honey into the United States to 92 percent of the weighted

average price of honey imports into the United States from all third countries. This

suspension agreement, supplemented by the five months of provisional dumping duties on Chinese honey imports at or above a 127 percent ad valorem rate, saved the

U.S. honey industry from destruction.

2. Vulnerability of the U.S. Fresh Garlic Industry

The FGPA,2 representing the U.S. fresh garlic industry, recently faced a similar

threat from Chinese imports. Several years ago, the U.S. fresh garlic industry was

nearly destroyed by a tidal wave of dumped fresh garlic imports from China. Chinese imports rose from 3.5 million pounds in 1992, to 9.4 million pounds in 1993,

and then to a staggering 63.5 million pounds in 1994. That year, Chinese imports

were available in the United States in huge quantities for a few pennies per pound

delivered. Only the imposition of significant antidumping duties saved the domestic

industry from certain collapse.

In January 1994, the FGPA asked the U.S. Commerce Department to impose

dumping duties against fresh garlic imports from China in hopes of neutralizing

their damaging effect. Commerce ruled that, for purposes for fresh garlic production,

China was an NME country. Commerce has made the same ruling in more than a

dozen other dumping cases it has conducted against Chinese imports. This NME

designation meant that, in determining the amount of dumping attributable to the
116

3 In the NME factors of production analysis, Commerce determines the actual factors, or elements, that go into making the relevant product in the NME country under investigation. Commerce then determines the value for each factor based on prices in a market economy country

that is at the same level of development as the relevant NME country. The values are then

summed on a weighted basis, and the resulting sum is used as normal value in the dumping

margin calculation. For dumping cases against Chinese exports, Commerce has typically used

factor values from India or Indonesia. 4While the dumping order has reduced official Chinese fresh garlic imports to a mere 200,000

pounds in 1996, many million pounds of Chinese imports continue to be illegally smuggled into

the United States each year without the payment of any antidumping duties by importers. See

attached February 24, 1997 press release from the U.S. Attorney’s Office in Los Angeles on the

criminal fraud guilty pleas of two dishonest importers regarding their avoidance of over $9 million in dumping duties on their smuggled imports of fresh garlic from China. 5Pursuant to Interpretative Note 2 to Article VI, paragraph 1 of the GATT, ‘‘contracting parties may find it necessary to take into account the possibility that a strict comparison with domestic prices . . . may not always be appropriate.’’ This exception applies in cases involving imports from countries whose governments have ‘‘a complete or substantially complete monopoly

of [their] trade and where all domestic prices are fixed by the state.’’ 1994 General Agreement

of Tariffs and Trade, Interpretative Note 2, art. VI, para. 1. This note was made part of the

General Agreement in 1955.

Chinese industry, the Commerce Department did not compare China’s home market

prices to the prices of Chinese exports to the United States.

Using its NME factors of production analysis instead,3 Commerce found in July

1994 that Chinese exporters were selling fresh garlic in the U.S. market for as little

as $.06/lb.—or 376 percent below the cost of production for fresh garlic in China.

The U.S. International Trade Commission also found that the Chinese imports were

a cause of material injury to the domestic industry. As a result, Commerce issued

a final dumping order in November 1994 that confirmed the 376 percent dumping

duty on fresh garlic from China found by Commerce in July 1994.4

Today, due largely to the dumping order, the FGPA members collectively have

over 1,700 employees dedicated to fresh garlic production. In addition, the FGPA

members each year contract with more than 100 independent farmers in California

to supervise the growth of fresh garlic in relatively small plots throughout that

state.

Accordingly, the FGPA—on behalf of domestic garlic producers—and the ABF and

AHPA—on behalf of the U.S. honey industry—urge the United States not to concede

to China on the issue of continued NME treatment under the WTO/GATT regime.

As discussed further below, these industries firmly believe that their hard-fought

victories against dumped Chinese exports could be undermined swiftly if Commerce

were required to treat China as a market economy country. Indeed, such a result

could lead to their rapid demise.

B. China’s Status as an NME Country Can Be Preserved by the Inclusion of Appropriate Language in China’s Protocol of Accession to the WTO

The U.S. honey and fresh garlic industries’ cases against imports from China

wholly depended on Commerce treating China as a NME, as Commerce has done

in every other of the two dozen dumping cases it has conducted against China over

the past ten years. Were China to be admitted to the WTO under terms that endangered Commerce’s ability to treat China as an NME, these and other U.S. industries

would be destroyed by Chinese imports within a few years.

Under the General Agreement on Tariffs and Trade (‘‘GATT’’), Article VI is the

provision that governs dumping investigations initiated among WTO Members. In

particular, when a Member conducts a dumping investigation, paragraph 1 of Article VI provides the relevant administering authority (such as the U.S. Commerce

Department) with instructions as to the method for calculating dumping margins.

Pursuant to Article VI, the administering authority must compare home market

prices in the country under investigation (i.e., normal value) to the prices of the

product as exported by that country to the investigating country.

There is one exception to this requirement. An interpretive note to paragraph 1

of Article VI authorizes the relevant administering authority to make an exception

in dumping cases against WTO Members that are non-market economy countries.5

In those cases, normal value may be determined by using a method different from

the method required to determine normal value in cases against market economy

WTO Members.

Since the GATT entered into force, three countries with state or centrally controlled economies have become GATT Members, and are now WTO Members: Poland

(1967), Romania (1971), and Hungary (1973). For each country, the U.S. Government successfully negotiated language in their Protocols of Accession whereby the

countries effectively recognized that they fit into the exception of Interpretative
117

Note 2 to GATT Article VI, paragraph 1. None of these countries has challenged the

United States’ designation of the country as an NME country in antidumping investigations.

Thus, in light of the current international antidumping regime, China must be

persuaded to come to an agreement with the WTO Members that would enable the

Members to treat China as within the terms of Interpretative Note 2 to GATT Article VI, paragraph 1. Thereby, any WTO Member that initiates an antidumping case

against Chinese exports would be able to take into account the ‘‘special difficulties’’

involved in determining price comparability between the price of Chinese exports

and Chinese home market prices.

With this in mind, the United States in December 1994 proposed specific language

to be inserted in China’s Protocol of Accession that would make clear that WTO

Members would retain the ability to treat China as an NME country after China’s

accession to the WTO. Thus, the most recent version of China’s draft Protocol contains the following section on ‘‘Price Comparability in Determining Subsidies and

Dumping’’ proposed by the United States:

[It is recognized that, in the case of imports of Chinese origin into a WTO Member, special difficulties may exist in determining price comparability in the context

of antidumping and countervailing duty investigations. In such cases, the importing

contracting parties may find it necessary to take into account the possibility that

a strict comparison with domestic prices in such a country may not always be appropriate.]

The brackets around this language indicate that the text has been proposed for

purposes of negotiation, but that it has not yet been officially adopted as a final

term of accession. In fact, from the time the United States proposed this provision,

China apparently has refused to make any concessions on this point.

As a result, more pressure must be brought to bear upon China on this issue. Indeed, the consequences of giving in to the Chinese on this issue could be profound.

The omission of this language from China’s final Protocol of Accession might create

doubts about whether a WTO Member like the United States could continue to treat

China as within the exception of Interpretative Note 2 to GATT Article VI, paragraph 1. These doubts may encourage China to challenge at the WTO any decision

by the United States to continue to treat China as a NME country under the U.S.

antidumping law. There is a risk that, in such an appeal, a WTO dispute resolution

panel would rule in China’s favor if China’s final Protocol of Accession is silent on

this issue.

Therefore, a clear provision explicitly authorizing the continued use of NME treatment should be included in China’s Protocol of Accession. At minimum, the United

States must ensure that the provision on ‘‘Price Comparability in Determining Subsidies and Dumping’’ remains an important part of China’s final Protocol of Accession. In addition, ABF, AHPA and FGPA strongly urge that the current bracketed

language in the draft Protocol would be significantly improved if it ended with this

sentence: ‘‘In such cases, the relevant WTO Member may use an alternative method

for calculating normal value as long as that method is appropriate and not unreasonable.’’

For the foregoing reasons, AHPA, ABF and FGPA do not support the accession

of China to the WTO unless China simultaneously agrees to allow other WTO Members to take into account for purposes of Article VI of the GATT the ‘‘special difficulties’’ involved in determining price comparability in the Chinese home market. Chinese accession without a negotiated agreement in this area would undoubtedly have

a severe, adverse impact upon the U.S. honey and fresh garlic industries, as well

as all other U.S. industries vulnerable to massive dumped imports from China.

II. THE TERMS OF CHINA’S ACCESSION TO THE WTO SHOULD REQUIRE THAT CHINA

UNDERTAKE TRADE LIBERALIZATION COMMITMENTS THAT ARE COMMENSURATE

WITH THOSE OF OTHER WTO MEMBERS

In light of their strong interests in improving access to the Chinese market, ABF,

AHPA and FGPA set forth below the U.S. honey and the fresh garlic industries’ concerns about the tariff rates currently in place in China that effectively impede access to the Chinese market for U.S. merchandise.

A. China’s Huge Tariff and VAT Rates on Honey Imports Have Entirely Closed

China’s Massive Market to Honey Imports from WTO Members

The ABF and AHPA are associations representing domestic producers of honey.

Their membership accounts for approximately 75 percent of honey production in this

country. ABF is comprised of about 1,500 members located in 48 states, most of
118

6The U.S. tariff on honey imports is $.021/kg., or $.01/lb. The total volume of all honey imports (not for retail sale) from all foreign countries was 147.12 million pounds, so theoretically,

$1.47 million was collected in regular U.S. import tariffs. The value of U.S. honey imports from

all countries in 1996 was $105.4 million. Thus, the theoretical U.S. ad valorem tariff on honey

imports is 1.4 percent.

whom manage apiaries for the purpose of honey production. A majority of commercial beekeepers are ABF members.

Likewise, the AHPA represents over 500 honey producers in 48 states and Puerto

Rico, who account for over 50 percent of the commercially produced honey in the

United States. Both ABF and AHPA are recognized in the U.S. beekeeping industry

as representatives of the interests of commercial honey producers.

Although China represents the world’s largest producer and exporter of honey, its

potential as a consumer and importer of honey has been beyond the reach of U.S.

honey producers. China is able to both exclusively serve its home market and export

hundreds of millions of pounds of honey by maintaining an extremely high MFN

tariff rate—55 percent ad valorem—on honey imports. This tariff is supplemented

by China’s value added tax (‘‘VAT’’) of 13 percent ad valorem on honey imports,

which is assessed against the declared value of the import plus the import tariff

charged. See Exhibit 1. Thus, China’s effective tariff rate on honey imports is a staggering 75.15 percent.

Indeed, China’s current published tariff and VAT on this product is many times

higher than the U.S. MFN tariff rate on honey imports, which converts to an estimated ad valorem rate of 1.4 percent, or only two percent of China’s combined tariff

and VAT on honey imports.6 (The United States maintains no VAT on these imports.)

As a result, no U.S. honey is exported to China, despite the fact that the U.S.

honey industry exports a significant portion of its production to foreign countries

other than China. Further, other significant WTO producers of honey are similarly

locked out of the huge Chinese market by its insurmountable tariff and VAT rates.

Were China’s tariff as low as the U.S. tariff on honey imports, and were China

to eliminate its VAT rate on this import, major honey producers such as Taiwan,

Korea, Russia, Mexico, Argentina, Vietnam, and the countries of the European

Union, would be able to direct more of their exports to China, and reduce their exports to the Western Hemisphere and Europe. This would create significant export

opportunities for the U.S. honey industry.

For this reason, ABF and AHPA strongly urge that China’s access to the WTO

be conditioned upon it meeting the trade liberalization commitments that other developed nations have undertaken. Until such time when China removes, or reduces,

these tariff barriers, any potential market that exists in China cannot be developed

by the U.S. honey industry.

B. China’s Import Tariffs and VAT Taxes on Fresh Garlic Effectively Close China’s

Market to Fresh Garlic Imports from the United States

Almost all fresh garlic produced in the United States is produced in California by

the 12 FGPA members. See enclosed membership list at Exhibit 2. For the 1996–

97 crop year, the FGPA members are growing about 130 million pounds of fresh garlic, which represents about $100 million in potential sales.

Fresh garlic production is an extremely complex, capital-intensive business. The

FGPA members collectively have invested over $120 million in their fresh garlic operations, all of which are dedicated to fresh garlic production. The FGPA members

collectively have over 1,700 employees dedicated to fresh garlic production. In addition, the FGPA members each year contract with more than one hundred independent farmers to supervise the growth of fresh garlic in relatively small plots throughout California.

The U.S. fresh garlic industry has struggled to remain viable, notwithstanding

that China represents the world’s largest producer and exporter of fresh garlic products (principally fresh whole bulbs and fresh peeled cloves). Moreover, in light of

China’s ongoing WTO accession negotiations, China now shows significant potential

as a consumer and importer of fresh garlic. However, until now, this potential has

been unrealized by U.S. fresh garlic producers, because China is able to both exclusively serve its home market and export hundreds of millions of pounds of garlic

by maintaining an extremely high MFN tariff rate.

China’s current published tariff and VAT on this product is 22 percent ad valorem. Moreover, this tariff is supplemented by China’s standard value added tax

(‘‘VAT’’) of 13 percent ad valorem on fresh garlic imports. See Exhibit 3. Thus, China’s combined MFN tariff and VAT on fresh garlic imports is approximately 38 percent.
119

7The U.S. tariff on fresh garlic imports is $.0128/kg., or $.005/lb. See Exhibit 2. In 1996, 48.4

million pounds were imported from all countries into the United States, so that a theoretical

total of $242,000 in regular import duties was collected. Since the total declared customs value

of these imports was $27.1 million, the effective U.S. ad valorem tariff rate is .28 percent, which

is .7 percent of China’s combined tariff and VAT of 38 percent.

This effective tariff rate on fresh garlic imports is many times higher than the

U.S. MFN tariff rate (the United States maintains no VAT on these imports), and

far exceeds the corresponding rates charged for this product by the other major

WTO fresh garlic producers. Indeed, the effective U.S. ad valorem rate is less than

100 times lower than China’s combined tariff and VAT on fresh garlic imports.7

As a result, no U.S. garlic is exported to China, despite the fact that the U.S. industry exports a significant portion of its production to foreign countries other than

China. Further, other significant WTO producers of fresh garlic are similarly locked

out of the huge Chinese market by its insurmountable tariff and VAT rates.

If China’s tariff were as low as the U.S. tariff on fresh garlic imports, and it were

to eliminate its VAT rate on this import, major garlic producers such as Taiwan,

Korea and Russia, which are more closely situated to China than the U.S. fresh garlic producers, would be able to direct more of their exports to China, and reduce

their exports to the Western Hemisphere and Europe, thereby creating significant

export opportunities for the U.S. industry.

Accordingly, FGPA strongly encourages the United States to demand in negotiations with China that its accession to the WTO be conditioned upon it meeting the

trade liberalization commitments that other developed nations have undertaken.

Until such time when China removes, or reduces, these tariff barriers, any potential

market that exists in China cannot be developed by the U.S. fresh garlic industry.

C. Conclusion

China’s combined import tariffs and VAT duties on the goods and products discussed in this statement are huge, and effectively close the massive Chinese market

to imports from many WTO countries (including the United States). In comparison,

the corresponding tariff rates for these products of other WTO countries (again including the United States) are tiny. Unless China agrees to lower its tariff rates to

the very small levels maintained by the United States, and to eliminate its VAT,

China will continue to be able to keep its market closed to U.S. exports.

Accordingly, the United States should accept a tariff binding offer from the Chinese only if it includes a commitment to match the U.S. tariff rates on the products

named here, and to eliminate China’s significant VAT on those imports.

We appreciate the opportunity to submit this statement on behalf of AHPA, ABF

and FGPA.

f
120

f
121

f
122

Statement of Charles P. Heeter, Jr., Partner, Office of Government Affairs,

Andersen Worldwide

f

INTRODUCTION

Mr. Chairman and distinguished members of the Subcommittee: My name is

Charles Heeter. I am a Partner with Andersen Worldwide and am responsible for

addressing international trade and related public policy issues that affect my firm’s

global operations. I appreciate the opportunity to submit this statement concerning

China’s possible accession to the World Trade Organization (WTO), and I wish to

commend you for taking a close and thoughtful look at this critical issue.

ANDERSEN WORLDWIDE

Andersen Worldwide is the world’s largest professional services organization, operating through two business units—Arthur Andersen and Andersen Consulting—

with member firms in 80 countries and correspondent relationships in 39 more. The

Arthur Andersen business unit has a multidisciplinary practice in accounting, tax,

legal, business advisory and specialty consulting services. The Andersen Consulting

business unit provides global management and technology consulting services. Our

global revenues exceeded $11 billion in the fiscal year ending August 31, 1997, and

we employ more than 100,000 people worldwide. We presently have offices in three

Chinese cities—Beijing, Shanghai and Shenzhen—and employ more than 500 people

there.
123

ANDERSEN WORLDWIDE’S SUPPORT FOR THE WTO

Our organization has more than doubled in size over the past five years. This

record growth is in large part attributable to our increasing involvement in markets

overseas. We have benefited tremendously from the worldwide trend toward trade

and investment liberalization. Such liberalization helps economies grow and helps

our clients grow. When our clients grow, we grow. We view continuing liberalization

as vitally important to our continued success.

More specifically, our success in servicing clients around the globe depends upon

our ability to gain access to national markets and to supply our professional services

through the establishment of member firms and through cross-border transactions.

For this reason, we attach a great deal of importance to a healthy, rules-based international trading system, and we strongly support the WTO and, especially, the General Agreement on Trade in Services (GATS), which embodies the basic rules of

international trade and investment for service providers.

SUPPORT FOR CHINA’S ACCESSION TO THE WTO

It goes without saying that China is the largest and most dynamic of the emerging economies, and it looms large in any company’s plans for growth in the AsiaPacific region. For this reason alone, it is important to bring China into the WTO

at the earliest possible date, and we at Andersen Worldwide fully support that objective. China’s membership in the WTO will be good for the countries and companies that do business with her, and equally important, it will be good for China,

helping to protect her interests and reinforcing the profound market-oriented

changes in her economy.

Having said this, however, I must quickly add that the terms of China’s accession

are vitally important. The regulatory environment in China imposes significant constraints on the operations of international professional services firms, especially in

the area of regulated services, such as auditing. The negotiations on China’s accession to the WTO provide an opportunity to address some of these regulatory constraints by making sure that China’s governmental policies conform to the disciplines of the GATS.

FOCUS ON THE TERMS OF ACCESSION

The critical issue is that China make concrete and substantial commitments on

market access and national treatment in its GATS schedule. Many of the GATS disciplines (in addition to market access and national treatment) only take effect for

the sectors in which a signatory makes scheduled commitments. Examples include

Article VI on domestic regulation and Article XI on payments and transfers. So, the

quality of China’s GATS schedule is especially important to service providers.

With respect to our particular businesses, we believe that China should schedule

commitments on accounting, auditing and bookkeeping, tax services, legal services,

management consulting, and computer-related services. Furthermore, we believe

these commitments should be structured in such a way as to ensure that China:

• Permits international firms to establish or affiliate with local member firms of

their choosing on contractual terms substantially equivalent to those used elsewhere

in the world;

• Allows joint venture firms and member firms to open branches in multiple locations with full rights to provide statutory services;

• Assures that any individual who meets the educational, experience and examination requirements to become a Chinese Certified Public Accountant (CPA) is allowed to be certified and registered;

• Removes the citizenship requirement for becoming a CPA and provides assurance that onerous residency and employment requirements will not be instituted;

• Removes the ban on advertising by accounting firms;

• Changes the basis for mandatory fees paid to the Chinese Institute of CPAs

from an assessment on gross income to a membership fee per individual professional;

• Adopts and promotes the use of international accounting and auditing standards for all publicly held companies in China, whether or not they are permitted

to have foreign shareholders, including the use of international standards of auditor

independence;

• Improves the transparency of regulation by adopting administrative procedures

that permit comment on proposed regulations and provide for an appeal of regulatory decisions, and by publishing all laws, regulations and administrative decisions in a timely fashion; and
124

• Eases controls on exit visas so that greater numbers of Chinese staff can be

placed in offices in Hong Kong and abroad for training and experience purposes.

Accepting these obligations would give substance to China’s market opening initiatives, would pave the way for a more rapid modernization of the accounting profession and the broader financial services sector, and would assure China’s transition into the global marketplace.

CONCLUSION

As I said earlier, Mr. Chairman, we at Andersen Worldwide strongly support China’s membership in the WTO at the earliest possible date. But we also believe that

the terms of membership should be structured in such a way as to reinforce and

strengthen the still fragile services trade regime.

I have taken the liberty of attaching to this statement a ‘‘white paper’’ that we

have developed to further explain the regulatory challenges in China and our ideas

about how China can make a more rapid and successful transition to international

norms. Thank you very much.

Accounting Modernization and the Chinese Regulatory Environment:

Making a Successful Transition to International Norms

f

INTRODUCTION

This document presents a constructive assessment of the regulatory environment

in which international accounting firms operate in China—the progress made and

some of the remaining tasks as China continues its opening to the outside world

and integration into the global trading system. Substantial progress has been made

over the past 15 years, and it is evident from their public statements that the Chinese authorities and leaders of the profession are committed to addressing the remaining issues. The observations herein, based on experience, are intended to encourage a dialogue among all parties interested in completing the reform process

and achieving China’s goal of a modern accounting profession at the earliest possible

date.

THE VALUE OF A MODERN ACCOUNTING PROFESSION

A thriving accounting profession employing modern accounting practices is an essential element of the financial infrastructure required by emerging economies. Accounting is the universal language of business. Modern practices help enterprise

management evaluate and control operations. They ensure that investors receive essential information and facilitate the development and efficiency of capital markets.

They help integrate national economies into an increasingly global marketplace.

And they assist government in performing its role of oversight and regulation to

protect public interests. Indeed, the success of accounting reform in economies opening to the outside world is an important factor in determining the overall pace and

success of economic modernization.

International accounting firms are the most dynamic agents of accounting modernization—helping nations move from the bookkeeping traditions of command

economies to the modern practices and standards necessary to the functioning of

market-based economies. These firms transfer technology, deliver state-of-the-art

training, provide career paths to local professionals (leading to management and

ownership), and, most important, make modern professional services available to

local companies and foreign investors to help them succeed in the marketplace.

It follows that international firms need a regulatory environment that permits innovation and expansion at acceptable levels of risk if they are to deliver these benefits to the degree and at the pace necessary to meet the demands of a rapidly expanding economy. Put another way, inappropriate regulation of the accounting profession and accounting firms can impede or, at least add significant inefficiencies

to, the modernization process.

THE OPENING OF THE CHINESE ACCOUNTING MARKET AND THE ROLE OF

INTERNATIONAL FIRMS

China reportedly has some 53,000 certified accountants in over 6,000 firms, the

vast majority of which are affiliated with, or sponsored by, governmental ministries

and agencies at the national, provincial or local levels. The Ministry of Finance
125

(MOF) in Beijing exercises close supervision of the Chinese Institute of Certified

Public Accountants (CICPA) and must give prior approval of many of the Institute’s

decisions. The indigenous profession and firms are not the private, independent,

professional entities common in most nations around the globe. In addition, practice

standards, while improving, are well below international norms.

China has recognized since at least the early 1980s the need for accounting modernization and has sought to achieve it by developing linkages to the worldwide profession and by opening its market to participation by international firms. Steady

progress has been made and relationships have deepened. This is most recently evident in the announcement that the CICPA will join the International Federation of

Accountants and the International Accounting Standards Committee.

Nonetheless, the regulatory situation and operating environment in China impose

certain constraints on the role of international firms—constraints that ultimately

limit the full contribution that they can make to integrating China into the global

marketplace, moving the accounting profession to international standards of performance, and providing higher levels of protection to Chinese investors.

Bifurcated Market

There is a significant disparity between the standards of performance, the level

of fees charged and the market’s expectations of local firms and the performance,

fees and expectations of the international firms. This is best seen in the development of a bifurcated market for audits of Chinese enterprises whose shares are publicly traded. The China Securities Regulatory Commission determines which Chinese companies qualify for public listing and, indirectly, the firms that can audit

those companies. International firms are permitted to audit ‘‘B’’ share listings, or

those companies in which foreign investment is allowed. Very few, if any, international firms perform audits for ‘‘A’’ share listings, which are solely for Chinese

investors.

In effect, international firms have not been able to access the major share of the

audit market and their penetration is limited largely to cases in which China wishes

to provide assurances to international investors. One important reason for this is

the disparity between the fees charged by international firms and those charged by

local firms, but these fee levels also reflect the quality of the work and the expectations of the market. Another significant reason is that newly listed companies often

use auditors who are linked to the same government entities from which the listed

companies come, thereby bringing into question the auditors’ independence. A unified market for audit services, with high expectations and standards of performance

at internationally-acceptable levels, would provide significant assurance to Chinese

and international investors alike and would significantly strengthen China’s capital

markets.

Business Structures

China permits international accounting firms to operate in three forms:

• As representative offices, which may provide consulting services to local and foreign enterprises, but may not employ Chinese CPAs or provide audit and attest

services;

• As joint ventures subject to a 50 percent foreign equity limit and certain management conditions, as well as a requirement that they be converted to member

firms within five years; and

• As member firms with a 30 percent foreign equity limitation and a requirement

to phase out foreign ownership in the future.

All international firms are committed to localization of management and ownership. They operate this way throughout the world. But the foundation for localization in China is still being laid. In an economy without the traditions and experience of modern accounting practices, considerable time is required to develop local

member firms and professionals to a sufficient level of expertise to meet the international firms’ global standards—typically 15, 20 or more years. Even in countries

with ‘‘mature’’ accounting professions, it normally requires ten or more years for a

newly-hired college graduate to gain the training and experience needed to be eligible for partnership, that is, to become an owner of the firm. And many do not survive the competition to achieve partnership.

The typical local member firm of an international accounting firm, moreover, is

subject to contractual relationships with its affiliated member firms in other countries. These contractual relationships ensure that all member firms perform to a

common standard and otherwise uphold the values and practices represented by the

international firm’s name and inherent in its reputation. They also provide the basis

for transferring technology and sharing global resources. Uncertainty about whether

these normal contractual arrangements will be permitted increases the commercial
126

and legal risk to the international firm. A legal environment preserving the right

to execute these contractual relationships will be essential to the successful creation

of local member firms.

In an environment such as China’s, international firms need time and flexibility

to develop local member firms to expected levels of performance, and they require

contractual assurances that standards will be observed. Regulatory requirements

that impose unprepared local partners on them, force them to accelerate the development process unreasonably, deny their normal contractual relationships and increase their risk exposure only serve to reduce the international firms’ ability to

commit the types of investment needed to develop China’s accounting profession.

Operating Restrictions and Impediments

The Chinese authorities impose a number of other restrictions on the operations

of international accounting firms, which interfere with the delivery of services and

the development of the profession. • International firms are limited to one joint venture, and that entity is limited

to one office, although with a license to practice throughout China. Despite the fact

that the law permits the establishment of branches, the CICPA takes the position

that the joint venture cannot exercise adequate control over branches in distant locations. This imposes a significant constraint on the delivery of services and on

growth. (Although international firms may affiliate with more than one Chinese

member firm in different locations, this is a sub-optimal solution because the two

Chinese entities are not affiliated themselves and have no experience in working together.) • Only the joint venture or member firm may employ Chinese CPAs. Although

other operations, such as a consulting firm or representative office, may employ accounting majors these employees may not be certified and registered as CPAs in these

other locations. Thus, these restrictions serve as a constraint on career development

and opportunities for Chinese citizens, and work to the detriment of the local profession as a whole. • There have been indications that the Ministry of Finance has questioned the

number of expatriates assigned to foreign-affiliated operations in China. While all

international firms are committed to localization, expatriates play an essential role

in managing a practice and delivering services. They are critical to delivering training—the medium by which technology is transferred—as well as to filling gaps in

technical and management skills until these can be developed locally. • Foreign accountants, since 1994, have been permitted to take the professional

examination, which is part of the professional qualification process in China, but

they still must be Chinese citizens to practice. The CICPA announced this year its

intention to remove the citizenship requirement, but it is likely to retain or impose

other significant restrictions related to residency and employment To date, no action

has been taken to eliminate the citizenship requirement, or to impose alternative

conditions.

• Accounting firms are prohibited from advertising their services. This is a constraint on the ability of all firms to get necessary information to consumers and to

compete in the marketplace. Reasonable guidelines regarding honesty and decency

in advertising ought to be sufficient to meet any public interest need.

• International firms are subject to an assessment by the CICPA equal to two percent of gross income, which means that the vast majority of the Institute’s funding

comes from international firms without a tangible relationship to benefits received.

Moreover, the CICPA assessment is frequently the subject of dispute over who collects it and the precise definition of the revenue base from which it is calculated.

Professional membership fees should be assessed on the individual members of the

professional body.

• Restrictions on exit visas, especially to Hong Kong, have proven to be a significant constraint on training opportunities. The inability to secure visas prevents

international firms from assigning Chinese staff to other offices, in Hong Kong and

outside China, where they could acquire on-the-job experience and exposure to the

international business environment. This would reduce training costs by improving

off-season utilization of manpower.

Regulatory Transparency and Consistency

While Chinese laws affecting the accounting profession are published and available, they establish a skeletal framework which must be fleshed out through regulation and administrative decision-making. The regulatory decision-making environment in China is highly opaque—international firms rarely have a voice in the process; there is no established administrative procedure; decisions are frequently not

published; new rules are applied retroactively; and there is no appeals process. In
127

1 International firms have multidisciplinary practices involving all these services. As a practical matter, client engagements frequently commingle services, individual professionals cross

practice lines, and the skills and intellectual capital underlying the various service lines reinforce each other.

addition, there is a concern that enforcement is somewhat arbitrary and may even

discriminate against international firms. This naturally creates uncertainty in the

operating environment and often places those outside the system at a disadvantage.

TRANSITIONING TO INTERNATIONAL NORMS THROUGH WTO ACCESSION

The negotiations leading to Chinese membership in the World Trade Organization

(WTO) provide an opportunity to assist China’s market opening and transition to

international norms by establishing a predictable regulatory environment conducive

to the rapid growth and development of China’s accounting profession. As part of

the terms of accession, China will become a signatory to the General Agreement on

Trade in Services (GATS). Because many of the GATS rules only apply to service

sectors for which the signatory country has scheduled specific commitments, it is

crucial that China include accounting, auditing and bookkeeping services in its

schedule. In addition, China should schedule commitments on tax services, management consulting and computer-related services.1

An important feature of the GATS is that it goes beyond traditional trade measures at the border to address internal regulatory requirements and conditions that

de facto impede the ability to take advantage of market openings. In this light, China’s schedule of commitments under the GATS should: • Permit international firms to establish or affiliate with local member firms of

their choosing on contractual terms substantially equivalent to those used elsewhere

in the world; • Allow joint venture firms and member firms to open branch offices in multiple

locations with full rights to provide statutory services; • Assure that any individual who meets the educational, experience and examination requirements to become a Chinese CPA is allowed to be certified and registered; • Remove the citizenship requirement for becoming a CPA and provide assurance

that onerous residency and employment requirements will not be instituted; • Remove the ban on advertising by accounting firms;

• Change the basis for CICPA fees from an assessment on gross income to a

membership fee per individual professional;

• Adopt and promote the use of international accounting and auditing standards

for both ‘‘A’’ and ‘‘B’’ listings on China’s stock exchanges, including the use of international standards of auditor independence;

• Improve the transparency of regulation by adopting administrative procedures

that permit comment on proposed regulations and provide for an appeal of regulatory decisions and by publishing all laws, regulations and administrative decisions

in a timely fashion; and

• Ease controls on exit visas so that greater numbers of Chinese staff can be

placed in offices in Hong Kong and abroad for training and experience purposes.

Accepting these obligations would give further substance to China’s market opening initiatives in the field of accounting, would pave the way for a more rapid modernization of the accounting profession, and would assure China’s transition into the

global marketplace. On the basis of these and other commitments, China should be

welcomed into full WTO membership.

of the Committee on Ways and Means, the Cast Iron Soil Pipe Institute (‘‘CISPI’’)

Pursuant to the October 22, 1997 announcement by the Subcommittee on Trade

Statement of Cast Iron Soil Pipe Institute

f

submits the following statement for consideration by the Committee and for inclusion in the printed record of the November 4, 1997 hearing held by the Subcommittee regarding the future of United States-China trade relations and the possible accession of China to the World Trade Organization (WTO).

Briefly summarized, CISPI submits this statement recommending that China’s

membership to the WTO be conditioned on China granting significant concessions

as to its tariff and non-tariff barriers restricting imports of U.S. merchandise. With

1.2 billion citizens, China is the world’s largest market for virtually all merchandise.

Nevertheless, China’s tariff and non-tariff barriers to trade effectively close that

market to potential U.S. exporters.
128

1 Cast iron soil pipe comprises the major input product of the plumbing industry. It is characterized by superior performance in terms of durability, resistance to corrosion from fluids and

gases, resistance to infiltration and exfiltration, and the ability to withstand extremes in temperature as well as pressure. Consequently, cast iron pipe is used primarily in building construction for sanitary and storm drain, waste, and vent piping applications. The product is installed

in residential construction, hospitals, schools, and commercial and industrial structures. As a

result, the pattern of cast iron soil pipe shipments and sales is directly related to the pattern

of building activity. 2The member foundries of CISPI are Charlotte Pipe & Foundry Company, Charlotte, NC; the

American Brass & Iron Foundry, Oakland, CA; and Tyler Pipe Industries, Tyler, TX.

Accordingly, CISPI has strong interests in improving access to the Chinese market. In particular, the comments set forth below address CISPI’s concerns about the

tariff rates currently in place in China that effectively impede the industry’s access

to the Chinese market.

I. CISPI: CHINA’S TARIFF AND NON-TARIFF BARRIERS RELATING TO CAST IRON SOIL

PIPE AND FITTING IMPORTS DENY FAIR ACCESS TO CHINA’S MARKET

CISPI, first organized in 1949 by the leading American manufacturers of cast iron

soil pipe, is a national trade association dedicated to advancing the interests of its

member foundries in the manufacture, use, and distribution of cast iron soil pipe

and fittings.1 Currently, CISPI’s membership is comprised of the three leading

foundries manufacturing cast iron soil pipe and fittings in the United States, with

significant production and levels of employment in North Carolina, California, and

Texas.2 Through cooperative efforts with its members, CISPI conducts research and

other programs in order to improve the industry’s products, achieve standardization

of cast iron soil pipe, and provide continuous programs for product testing, evaluation, and development.

The U.S. cast iron soil pipe industry is competitive worldwide and, more and

more, the business strategy of CISPI’s membership has been export-oriented. CISPI

members currently export U.S. cast iron soil pipe and pipe fittings to buyers in Canada, Mexico, Korea, and Malaysia. More recently, CISPI members are looking for

additional markets in the Pacific Rim region. With respect to China, CISPI believes

there may be significant potential for its members to expand their sales into the

Chinese market as well. However, the Chinese market currently offers more in the

way of potential than it does immediate rewards. As a result, it is very important

to CISPI that China remove, or significantly reduce, its barriers to entry of cast iron

soil pipe and fittings before it is admitted as a member of the WTO.

Under China’s current two-tiered customs regime, however, the cast iron soil pipe

and fittings expected to be exported to China in the future are subject to excessive

tariffs, with effective rates as high as 38 percent ad valorem. See Exhibit 1. By contrast to the U.S. tariff rates for cast iron soil pipe and pipe fittings, which are respectively 3.9 percent and 4.8 percent, the Chinese rates are exceptionally high. Indeed, these rates significantly reduce access to the Chinese market for U.S. producers of cast iron soil pipe and pipe fittings.

Given these barriers, China successfully shields its domestic producers of cast iron

soil pipe from competition by imports. In response, the United States ought to insist

during the course of the accession negotiations that China either remove these tariff

barriers, or at least reduce their effective rates to levels commensurate with those

of the United States.

Finally, U.S. cast iron soil pipe and pipe fittings have been adversely affected by

China’s non-compliance in the area of intellectual property rights. CISPI is aware

that U.S. product designs and patterns, and those of its members, have been copied

and used by competitors in China without risk of punishment and even less hope

for effective redress for the U.S. producers and trademark holders. Thus, like tariff

barriers, these obstacles to fair access also demand attention from the United States

during its negotiations with China.

For the foregoing reasons, CISPI strongly urges that China’s accession to the

WTO be conditioned upon it meeting the trade liberalization commitments that

apply to other developed nations. Until China removes its excessive tariffs and complies with international norms for open and fair trade, the potential market that

exists in China cannot be developed by the U.S. cast iron soil pipe and pipe fitting

industry.

II. CONCLUSION

China’s combined import tariffs and VAT duties on the goods and products discussed in this statement are huge, and effectively close the massive Chinese market
129

to imports from many WTO countries (including the United States). In comparison,

the corresponding tariff rates for these products of other WTO countries (again including the United States) are tiny. Unless China agrees to lower its tariff rates to

the very small levels maintained by the United States, and to eliminate its VAT,

China will continue to be able to keep its market closed to U.S. exports.

Accordingly, the United States should accept a tariff binding offer from the Chinese only if it includes a commitment to match the U.S. tariff rates on the products

named here, and to eliminate China’s significant VAT on those imports.

Exhibit 1.—Articles of Interest to CISPI by U.S. Harmonized Tariff Schedule Number and by Chinese Import/

We appreciate the opportunity to submit this statement on behalf of CISPI.

Export Tariff Classification Number

fUnited States

Classification No. Product General

rate

HTSUS 7303 ................................................ Tubes, pipes and hollow profiles, of cast

iron.

-

HTSUS 7303.0010 ....................................... Tubes and pipes of circular cross- .............

section, of the internal diameter of 500

mm or more.

2.6

HTSUS 7303.0090 ....................................... Other ............................................................ 2.6

HTSUS 7307 ................................................ Tube or pipe fittings (for example, couplings, elbows, sleeves), or iron or steel.-

HTSUS 7307.1100 ....................................... Cast fittings; of non-malleable cast iron ... 4.8

HTSUS 7307.1900 ....................................... Cast fittings; other ...................................... 5.8

China

Classification No. Product Rate VAT

7303 ...................................................... Tubes, pipes and hollow profiles, of

cast iron.

-

7303.0010 ............................................. Tubes and pipes of circular cross-section, of the internal diameter of

500 mm or more.

13/40 1 17

7303.0090 ............................................. Other .................................................... 18/40 1 17

7307 ...................................................... Tube or pipe fittings (for example,

couplings, elbows, sleeves), or iron

or steel.

-

7307.1100 ............................................. Cast fittings; of non-malleable cast

iron.

10/20 1 17

7307.1900 ............................................. Cast fittings; other .............................. 10/20 1 17

Joint Statement Committee on Pipe and Tube Imports; and Weirton Steel

1Most favored nation duty rate/general duty rate.

f

Corp.

These written comments are submitted to the Trade Subcommittee of the House

Committee on Ways and Means on November 18, 1997 in response to the November

4, 1997 hearing on U.S.-China Relations and Possible Accession to the World Trade

Organization (WTO) on behalf of the Committee on Pipe and Tube Imports (CPTI)

and Weirton Steel Corporation (‘‘Weirton’’). The CPTI is a not-for-profit trade association consisting of 27 United States producers of steel pipe and tube products.

Weirton of Weirton, West Virginia, is a manufacturer of flat-rolled steel products

with 5,300 employees.

As a whole, the CPTI and Weirton have supported global trade policies which promote free and fair trade. During the recent Uruguay Round the CPTI was engaged

in the debate over strengthening the U.S. unfair trade laws to ensure there was a

level playing field in steel trade. Weirton Steel also participated in this dialogue and
130

1Whereas ‘‘developing’’ country members are given a Subsidy Code phase I period of eight

years, a ‘‘least developed’’ country may be excused from compliance in a manner consistent with

their individual development, financial and trade needs, or their administrative and institutional capabilities.

supported measures to ensure that U.S. trade laws would not be weakened in the

final Uruguay Round Agreement. Since the completion of the Round, the U.S. pipe

and tube industry and steel manufacturers throughout the country have carefully

monitored activities that would involve the admission of new WTO members. These

comments reflect the views of U.S. pipe and tube producers and Weirton and address the primary issue of China’s accession to the WTO and the impact China’s

membership will have on the global steel market.

CHINESE STEEL INDUSTRY—OVERVIEW

Since China’s economy opened in the early 1980s, steel consumption and production have grown at a tremendous rate. In fact, China is now the largest steel consumer and producer in the world. Crude steel production has doubled from 1986 to

1995. In 1996, China produced over 100 million metric tons of steel and consumed

over 110 million metric tons. China has informed the OECD that by 2000, an additional 20 million metric tons of capacity and production are likely. China’s steel exports are now greater than U.S. steel exports and its steel import levels have fallen

to less than half the levels of U.S. imports. Continuation of these trends could result

in China taking the lead as a significant global leader in steel exports. The Chinese

steel industry is still almost completely state owned and controlled. Furthermore,

there are numerous major producers and an even greater number of smaller and

less efficient companies in the market. In an effort to be admitted into the WTO,

China reduced its average tariff on steel products from approximately 13% to 9%.

Tariffs for other steel products like stainless steel, tin-plate, and pipe and tube, remain above 20%.

APPLICATION OF THE NON-MARKET ECONOMY PROVISIONS OF U.S. LAW

China is asking that its WTO accession agreement provide for the treatment of

China as a market economy under the Dumping Code. The current Dumping Code

does not address the criteria for treating a country as a market or non-market economy. Under U.S. law the application of criteria for non-market economy status is

not determined by WTO membership, but rather by a set of economic factors delineated by the U.S. Congress and determined by the Secretary of Commerce. It is inappropriate for this issue to be addressed in the WTO accession negotiations. For

myriad reasons affecting both import competition and export opportunities, CPTI

and Weirton both look forward to a time when China is in fact a market economy.

However, this must occur through the Chinese government taking actions to remove

import licensing, liberalize credit and financial markets, remove domestic price controls of key commodities, and end massive subsidization of state-owned enterprises.

However, while China should eventually be rewarded when it achieves market economy status, this goal should be achieved through economic reforms not through political pressures for WTO accession.

CHINA SHOULD BE SUBJECT TO SUBSIDY CODE DISCIPLINE AFTER A PHASE-IN PERIOD

OF NOT MORE THAN THREE YEARS

China is requesting admission to the WTO as a ‘‘least developed country,’’ which

if allowed by the WTO would provide for a lengthy phase-in period for subsidy code

commitments.1 The Subsidy Code would also allow China, as a non-market economy

undergoing a transformation to a market economy, to apply programs and measures

necessary for such a transformation during the phase in period. If China is permitted to join the WTO under these terms, China could continue to provide massive

subsidies to its state owned steel industry and avoid both Subsidy Code violations

and penalties and national countervailing duty laws while it continues to modernize

its steel production facilities and adopt new export strategies.

It is disturbing to think that China views itself as a ‘‘least developed’’ country.

Their request for this status should not be granted. Its economy is no longer in infancy. Given that China will soon have the largest economy in the world, it is difficult to believe that it would qualify as a ‘‘least developed’’ country by definition.

The entire premise for offering ‘‘developed’’ country status is to enable poorer countries with temporary protection to build a manufacturing base. The past decade and

a half proves that China no longer needs to build its manufacturing base and sup-
131

port this expansion through government subsidies. This request for special treatment is no longer valid.

CPTI and Weirton are certainly concerned about the massive subsidies previously

granted to and currently being granted to the Chinese steel industry by the Chinese

government. All major Chinese steel producers remain state-owned enterprises. It

has been widely reported in the press that most of these steel producers suffer from

large losses. Therefore, the Chinese government is making regular direct equity infusions into these money losing enterprises. In addition, most of these enterprises

are believed to borrow from Chinese government owned banks, with little hope that

these government owned banks will ever be repaid these loans. Finally, the Chinese

Ministry of Metallurgical Industry admitted in a Salomon Brothers investment report issued in mid 1997 that the Chinese government supports the steel industry

by providing raw material inputs, such as iron ore, coal, and energy from stateowned enterprises to steel producers at prices that are only half the market value

of these inputs. These types of massive subsidy practices must be stopped within

a very short period of time after China’s accession to the WTO. This is particularly

appropriate given the injury from these subsidies that can be suffered by the U.S.

steel industry both in the U.S. market and in export markets. China was the second

largest exporter of plate to the United States in 1996 and the first quarter of 1997

and was the second largest exporter of standard pipe to the U.S. in the third quarter of 1997. In general, U.S. steel imports from China have risen rapidly in 1996

and 1997 from previous levels.

The U.S. steel industry has fought long and hard to ensure that global trading

partners adhere to the rules of the world trading system. We have supported strong

laws which provide for a level playing field. Allowing China to enter on its requested

and preferred terms would undermine the objectives of the WTO and allow China

to continue to subsidize industry and distort trade. These practices can not and

should not be permitted by the U.S. or by WTO members. The current WTO provisions on Subsidies should be enforced as to China. If they are enforced, China will

be forced to undertake the necessary reforms to steer their economy toward becoming a true market-based system.

CONCLUSION

In sum, the members of the CPTI and Weirton cannot support China’s accession

to the WTO absent strong conditions that they will adhere to the WTO Subsidy

Code. The U.S. government should carefully look at Chinese business practices to

evaluate the terms of their accession into the WTO. Entrance into this global trading body is a privilege and not a right. WTO membership should be an opportunity

to curb unfair trade practices and to remove tariff and non-tariff barriers to foreign

trade with China. Absent conditions which would ensure that China would be held

accountable to the Subsidy Code, Congress should urge the U.S. Government to

deny China’s entry into the WTO. Non-market economy dumping issues should not

be addressed in the WTO, but rather continue to be addressed under U.S. law.

As an industry which employs thousands of American workers, we ask Members

of the Ways and Means Committee and the Congress to carefully review this important trade policy consideration. We believe it is important that all global trading

partners adhere to the same rules and fulfill their obligations. If China is unwilling

to comply with these guidelines, then its request to enter into the WTO should be

denied.

Statement of Paul H. DeLaney, Jr.

HISTORY AND

f

BACKGROUND

The People’s Republic of China was shunned by the United States government

until the Nixon-Kissinger breakthroughs of the early 1970’s. In 1980, the House

Ways and Means Committee was urged by the President of the United States to go

to China to determine whether it might be willing to vote for Most Favored Nation

(‘‘MFN’’) trading Status for China. Based on this visit, the Committee recommended

a normal trading relationship between the United States and China, and MFN status was granted soon thereafter.

China has been seeking World Trade Organization (‘‘WTO’’) admission for more

than ten years. To date, the United States has not been willing to support China’s

membership, unless it is sure that China is ready, in terms of economic organization

and international deportment, to accept the full obligations of WTO participation.
132

In recent months, it has been suggested again that the United States should decide what it expects of China and lay out its expectations to China for the purposes

at hand.

The Chinese government has undertaken a slow but steady deregulation of the

economy since it allowed for free enterprise in the countryside in 1982.

Marketization of the Chinese economy has led to unprecedented improvements in

the living standards and purchasing power of ordinary Chinese. In the past 15

years, China’s per capita GDP has more than tripled, from $889 to $2,923, and it

is forecast to be $4,190 in 2000.

The United States trade deficit with China has been growing at an unacceptable

rate, and a prosperous and stable relationship with the United States can only continue as long as the United States has fair access to China’s markets (See Attachment A). Bringing China into the WTO should help to establish a level playing field

for Americans to compete with China.

Many believe that the time has come for China to be a full member of the new

global economic system and to share in the maintenance and growth of that system

and that the sooner China is a part of the WTO the better for everyone.

In considering United States-China trade relations and China’s efforts to join the

WTO, it is useful to review the general trade relationship with China and the status

of negotations for China’s accession to the WTO, including possible signs of progress

at last month’s United States-China summit.

It appears that President Clinton and President Jiang Zemin held an important

and constructive summit meeting and that the two Presidents had in-depth and

frank exchange of views on an array of issues affecting the entire relationship ranging from human rights, to non-proliferation, environmental protection and various

economic issues.

China is now the world’s tenth largest trading nation and the United States’

fourth largest trading partner. The United States is China’s largest export market.

United States imports from China were over $51 billion in 1996 (or more than 20

percent of China’s exports to the world). By contrast, United States exports of goods

to China last year stood at $12 billion. China is rapidly approaching Japan as the

single largest bilateral trade problem for the United States. It is important that

China recognize that the United States must see greater balance in this trade relationship.

Despite China’s movement away from a centrally planned economy toward a

quasi-market economy, China’s markets remain relatively closed. China is still protecting its domestic markets through high tariffs, quotas, restrictive standards and

activities of state trading enterprises. China’s failure to meet fundamental international norms, such as national treatment, transparency, or the right to import or

export freely, deprives United Sates exports of a level playing field.

The United States should continue to pursue market opening initiatives on a

broad scale for American goods, services and agricultural products through the WTO

accession process and through bilalteral initiatives and agreements. American firms

should have access, and necessary protection for their properties, in China’s market,

equivalent to that which China enjoys in the United States market.

The United States should also ensure that China accepts the rule of law and encourage China to develop trade and economic policies that are consistent with international trade practices and norms. The rule of law is important in assuring that

China provides meaningful market access and meets its obligations under bilateral

and multilaternal agreements. It now appears that China may have adopted a more

serious attitude about the accession negotiations, and the United States should take

advantage of this opportunity by pressing China further on the need for China to

move more aggressively on these issues.

China has committed to make information available to other governments and to

people engaged in trade on all of the issues covered in the WTO. Translations of

laws and regulations will be available and WTO members will have the opportunity

to comment on proposed laws and regulations before they become effective. Further,

China has agreed that it will enforce only those laws and regulations that are published.

China has agreed to have independent tribunals for the review of administrative

actions relating to implementation of the WTO Agreements and grant the right to

seek judicial review of these administrative actions. This should help address corruption and encourage development of the rule of law in China. China has committed to implement the Agreement on Trade Related Aspects of Intellectual Property

Rights upon accession.

China has agreed not to use export subsidies for agriculture products. Although

agreement on these points represents progress in the negotiations, a great deal still

remains to be done on market access, implementation of WTO rules and safeguards.
133

On agriculture, the United States is now engaged in negotiations on market access for key United States export products. These discussions encompass tariff levels, administration of tariff rate quotas, the activities of state trading enterprises

and the details of China’s implementation of the WTO Agreement on Agriculture.

The United States and other WTO members are also urging China to implement

the Agreement on Sanitary and Phytosanitary Measures. China now has the world’s

third largest economy, and China is the sixth largest market for American agricultural products.

Many United States businesses are committed to building support for full normalization of the United States-China commercial relationship. This includes support

for permanent and unconditional extension of MFN trading status for China, China’s entry into the WTO under commercially viable terms, and the removal of unilateral economic sanctions against China. Such a policy would strengthen the commercial foundation between the United States and China and would encourage cooperation on the full range of issues impacting the bilateral relationship from security and nonproliferation to human rights.

TERMS AND CONDITIONS FOR CHINA’S WTO ACCESSION

If the United States is to capitalize fully on China’s enormous market opportunities, a sound WTO accession deal with China is critical. For this reason, China must

show a commitment to core WTO principles, including national treatment, nondiscrimination, reciporcal market access, transparency, protection of intellectual

property rights, binding dispute settlement, trading rights, judicial review, and adherence to state-trading and subsidy disciplines. China must also offer measures

that will ensure United States access to China’s growing market in agriculture,

goods, and services. Only after China has demonstrated that it is taking these steps

should the United States support China’s accession to the WTO.

During Chinese President Jiang Zemin’s recent state visit to the United States,

it was clear that there is now an opportunity to move the bilateral relationship forward by strengthening commercial ties. Both Chinese and United States leaders recognize that China’s entry into the WTO will be important for improving trade relations, but achieving that end will require action by China.

China’s efforts to join the WTO represents a significant opportunity to apply internationally accepted multilateral disciples to one of the world’s fastest growing economies. Commitments made by China in the WTO accession negotiations should demonstrate China’s willingness to integrate itself into the world’s trading system and

to open its markets to foreign goods and services.

American companies must be given the chance to compete fairly in China. The

United States cannot afford to miss out on the great potential represented by the

enormous China market. Therefore, many American firms fully support China’s

accesion to the WTO, but only in a manner consistent with its status as a major

trading power and with full adherence to the market principles assumed by all other

WTO signatories.

UNITED STATES-CHINA TRADE DEFICIT

China’s trade surplus with the United States is second only to that of Japan and

is growing at a faster rate (See Attachment B).

There are steps the United States and China should take to address this trade

imbalance. China’s markets should be open to foreign goods and services. Currently,

foreign companies that have not invested in China are now allowed to import, export, distribute, or sell directly into the Chinese market.They must trade through

authorized trading companies. Beyond providing basic trading rights, China should

continue to make progress on tariff reduction and intellectual property protection.

In addition to these measures, there are a number of other important commitments

that China must make before the United States should should support China’s accession into the WTO.

Although China may require some latitude in making the transition to a market

economy, the United States must insist that China adhere to basic WTO obligations.

In this regard, China has shown a reluctance to engage in serious negotiations on

fundamental issues such as transparency and uniform application of trade rules.

Trade and industrial polcies, certification, registration, and licensing procedures

should be published so United States firms can make informed business decisions.

It is also important to understand that WTO accession terms for China will possibly serve as a precedent for accession negotiations for Russia, Vietnam and other

economies that are still in transition to market economies. This only reinforces the

need to make certain that the terms of WTO accession for China should be defined

for the purposes at hand.
134

Based on these considerations, it is clear that expansion of United States commercial ties with China is vital to America’s future and that the terms of China’s WTO

accession must expand market access for American companies, strengthen China’s

commitment to the rule of law, and require China to play by the normal rules of

international trade and investment.

UNITED STATES-CHINA SUMMIT

At the invitation of President William Clinton of the United States of America,

President Jiang Zemin of the People’s Republic of China visited the United States

from October 26 to November 3, 1997. This was the first state visit by a President

of China in twelve years.

During the Summit, the two Presidents related that while the United States and

China have areas of agreement and disagreement, they have a significant common

interests. Although the United States and China have major differences on human

rights, it was noted that there is great potential for cooperation in maintaining global and regional peace and stability and promoting world economic growth.

China stressed that the Taiwan question is still the most important and sensitive

issue in China-United States relations. The United States indicated that it contines

to adhere to a ‘‘One China’’ policy and the principles set forth in United StatesChina joint communiques.

The two Presidents indicated that they are prepared to take positive and effective

measures to expand United States-China trade and economic ties. China expressed

its intention to participate as soon as possible in the Information Technology Agreement, and in the context of WTO negotiations, China confirmed that it would continue to make further substantial tariff reductions.

The United States and China recognize that China’s full participation in the

multilaterial trading system is in their mutual interest. It was agreed to intensify

negotations on market access, including tariffs, non-tariff measures, services, standards and agriculture with a view toward implementation of WTO principles so that

China could accede to the WTO on a commercially meaningful basis at the earliest

possible date.

The United States and China intend to establish a joint liaison group to pursue

cooperative legal activities, which would include exchanges of legal experts, training

of judges and lawyers, strengthening legal information systems and the exchange

of legal materials, sharing ideas about legal assistance, consulting on administrative

procedures, and strengthening commercial law and arbitration.

PROTECTION OF TRADEMARKS AND BRAND NAMES AND REVERSION OF HONG KONG TO

CHINA

In recent years, a number of American firms have made substantial financial and

people commitments to China, and several have been quite successful doing branded

products business in China. To reinforce American trends and lifestyle appeal, such

firms have undertaken a range of marketing activities. In addition to advertising

and promotion (sometimes in conjunction with local licensees), these American firms

have sponsored public service efforts.

American firms which sell different products in different parts of the world make

substantial efforts to comply with the rules of law of each country in which they

do business. For example, certain products may be considered more appropriate for

Hong Kong than Mainland China.

American firms realize the importance of the broader relationship with China and

therefore they have often made considerable efforts to respect cultural differences

and to be in full compliance with Chinese rules of law, regulations and procedures.

In this regard, China clearly stated its support for the principle of ‘‘One China

and Two Systems’’ as this relates to Hong Kong’s reversion to China this past summer. Senior officials of the Chinese government have confirmed that they intend to

respect the economic and political differences between the two systems.

In their efforts to be good citizens in Mainland China and Hong Kong, American

firms have provided scholarships and technical training for Chinese nationals. Such

initiatives help to support general rule of law considerations and the protection of

intellectual property (including trademarks and brand names) by involving Chinese

nationals more directly in this process.

PRIVATE SECTOR VIEWS

In the Twenty First Century, it is expected that China will become the largest

economy in the world. This will have a major impact not only on the global economy,

but also on the individual economies of the United States and other major developed
135

nations. Therefore, due to the vast size and influence of China’s economy, it is in

the United States interest to have China become integrated into the world trading

system.

China’s accession to the WTO offers an unusual opportunity to restructure United

States-China trade in a direction that leads to a more stable and prosperous commercial relationship. WTO rules and dispute settlement procedures would provide

a more effective means to enforce China’s market access commitments and adherence to WTO obligations. China’s accession to the WTO must be based on a commercially acceptable protocol that improves United States market access and implements WTO rules and obligations.

China should provide substantial reduction and binding of tariffs and commit to

phase out residual quotas and import licensing restrictions. China should provide

national treatment with respect to the treatment of foreign goods, services, and investment. China should fully implement the United States-China bilateral intellectual property rights agreements of 1992 and 1995.

China should eliminate barriers to United States agricultural exports which are

inconsistent with the WTO, including sanitary and phytosanitary measures that operate as disguised restrictions on trade.

In recent weeks, considerable attention has been directed to the efforts of Congressmen Bereuter and Ewing to work with the Administration to bring about China’s admission to the WTO on the basis of a commercially reasonable protocol of

accession and to look to the terms upon which the United States could extend permanent MFN treatment to China. Such positive initiatives should improve the

chances for securing China’s admission to the WTO and could promote a constructive strategic partnership between the United States and China.

In terms of an integrated China policy, it should be clear that the maintenance

of the One China policy must be maintained as part of the commitments that the

United States has made to China.

IMPORTANCE OF UNITED STATES AGRICULTURE EXPORTS AND VIEWS OF AMERICAN

AGRICULTURE

United Sates agricultural exports continue to be a bright spot in America’s trade

picture. Last year, the United States agricultural trade surplus was $27.4 billion,

making agriculture the largest positive contributor to the United States balance of

trade (See Attachment C). The United States is the world’s leading exporter of agricultural products with a 21 percent share of world trade. The agricultural sector is

twice as reliant on international trade as the total United States economy, with exports accounting for an estimated 30 percent of gross cash receipts.

While American agricultural export performance has been good, foreign trade barriers and other factors continue to prevent American farmers and ranchers from realizing their potential in international markets. The failure of China to agree to a

meaningful WTO accession protocol that will provide increased access for United

States agricultural exports is a major problem for American agriculture.

For the past ten years the United States has been negotiating with China regarding its accession to the WTO. While some progress has been made, the two sides

remain far apart on many matters involving agricultural market access.

If the United States prematurely supports China’s WTO accession, the ramifications for American agricultural exporters would be serious. This could result a long

and arduous campaign to open China’s markets with many adverse consequences

in the years ahead.

Despite these problems, many American firms have been working to establish relationships and build a foundation for market development through trade in the

People’s Republic of China.

In 1992, the United States and China entered into a Market Access Memorandum

of Understanding in which the Chinese government committed itself to open its

markets to American agricultural products. Since that time, officials of the United

States Department of Agriculture and the Office of the United States Trade Representatives have been meeting with their counterparts in the Chinese government

to address outstanding technical issues. Bilateral agricultural trade meetings have

been held several times both in China and in the United States to negotiate the

terms and conditions of agricultural trade compatible with obligations of country

membership in the WTO. To date, these efforts have yet to produce a satisfactory

resolution. The Chinese government persists in its resistance to protocols that would

open its markets to American agricultural products.

China has yet to domonstrate full acceptance and implementation of WTO agreements on the Application of Sanitary and Phytosanitary Measures on Technical Barriers to Trade and on Import Measures.
136

China is clearly a significant market for American agriculture. If the Chinese government would finally allow more American agricultural products into the Chinese

marketplace, this would help to reduce an annual bilateral trade deficit with China

now approaching $50 billion (See Attachment A).

Therefore, various American agricultural groups have urged Congress to resist

granting permanent MFN status to China and to oppose China’s accession to the

WTO until China further opens its markets to American agricultural products, lives

up to its existing commitments in bilateral agreements, and fully demonstrates adherence to obligations inherent in WTO Membership.

f

f
137

f
138

Source: See United States Foreign Trade Annual 1974–1980, United States Department of Commerce, Bureau of the Census; and FT 990, Highlights of United

States Export and Import Trade, United States Department of Commerce, Bureau of

the Census.

f
139

Statement of NACCO Materials Handling Group, Inc.

Pursuant to the October 22, 1997 announcement by the Subcommittee on Trade

of the Committee on Ways and Means, the NACCO Materials Handling Group, Inc.

(‘‘NACCO’’) submits the following statement for consideration by the Committee and

for inclusion in the printed record of the November 4, 1997 hearing held by the Subcommittee regarding the future of United States-China trade relations and the possible accession of China to the World Trade Organization (WTO).

Briefly summarized, NACCO submits this statement recommending that China’s

membership to the WTO be conditioned on China granting significant concessions

as to its tariff and non-tariff barriers restricting imports of U.S. merchandise. With

1.2 billion citizens, China is the world’s largest market for virtually all merchandise.

Nevertheless, China’s tariff and non-tariff barriers to trade effectively close that

market to potential U.S. exporters.

Accordingly, NACCO has strong interests in improving access to the Chinese market. The comments set forth below address NACCO’s concerns about the tariff rates

currently in place in China that effectively impede the industry’s access to the Chinese market.

I. NACCO: CHINA’S TARIFF AND NON-TARIFF BARRIERS RELATING TO IMPORTED FORK

LIFT TRUCKS AND TRUCK PARTS DENY FAIR ACCESS TO CHINA’S MARKET

NACCO is one of the leading worldwide designers, manufacturers, and marketers

of forklift trucks and truck parts, which comprise the largest segment of the materials handling equipment industry. In terms of unit sales, NACCO leads all other

producers of forklift trucks in the United States. NACCO has facilities in Alabama,

Kentucky, Illinois, North Carolina, and Oregon, employing thousands of Americans.

In addition, NACCO has a network of dealers in more than 200 locations across

North America.

NACCO markets two full lines of a wide variety of forklift trucks and related

service parts. The principal categories include electric rider, electric narrow-aisle,

and electric motorized hand forklift trucks primarily for indoor use, and internal

combustion engine forklift trucks for indoor and outdoor use. NACCO also derives

significant revenues from the sale of service parts for its products, as well as replacement parts for most competing brands.

NACCO is also highly competitive worldwide, with facilities in Europe, South

America, and Australia. Based on the number of lift-trucks sold, NACCO is the

leading manufacturer of forklift trucks in the world. NACCO’s business strategy is

export-oriented and, in particular, NACCO believes that the Chinese market offers

an opportunity for growth.

Currently, China imports approximately 4,000 industrial trucks annually, compared to domestic sales by Chinese producers numbering over 20,000 units per year.

And although the Chinese market may be relatively small, it is growing at a rate

of about 10 percent each year. Even so, the Chinese market currently offers more

in the way of potential than it does immediate rewards. As a result, it is very important to NACCO that China remove its barriers to entry of industrial lift-trucks and

truck parts as a condition to its accession to the WTO.

However, under China’s current two-tiered customs regime, the majority of industrial lift-trucks and parts that are anticipated to be exported to China would be subject to excessive tariffs, with effective rates as high as 38 percent ad valorem, which

significantly reduces access to this important market for U.S. producers. See Exhibit

1.

By contrast to the U.S. tariff rate for forklift trucks and truck parts—which is

zero—the Chinese rates are exceptionally high, even by Chinese standards. Moreover, there is an apparent inconsistency between China’s tariff schedules and its application of customs duties, at least with respect to forklift trucks. NACCO’s experience in China indicates that, in fact, a tariff rate of 25 percent has been applied

to forklift trucks upon their entry into China, making the effective rate 46 percent

ad valorem. Thus, in addition to excessive rates, there exists an even more troubling

lack of transparency in the enforcement of China’s law.

In addition, China’s value added tax in practice unfairly discriminates against importers who re-export industrial trucks and truck parts. For example, re-exporters

receive a credit for the VAT paid, but only up to 9 percent of the article’s value.

Moreover, it may take as long as one year after they pay the VAT for the credit

to be paid. By contrast, domestic producers that export the same products often receive credit for their VAT payments more quickly than foreign importers and for

amounts over 9 percent, up to the full 17 percent VAT. In light of these kind of barriers, China successfully shields its domestic producers of forklift trucks and truck

parts from competition by imports.
140

With respect to non-tariff barriers, NACCO’s experience in the Chinese market

has exposed it to measures that further inhibit access to U.S. industrial trucks and

their parts. Although China’s tariff schedule does not mention the existence of any

licensing requirements for these imports, NACCO understands such licenses are required. These are often difficult and, therefore, expensive to obtain. Of even more

concern to NACCO is the somewhat arbitrary availability of so-called ‘‘low duty’’ import licenses from state trading companies. These licenses offer benefits to those importers able to obtain them in the form of reduced tariff and tax rates on imports.

Often, the amount of savings depends on the terms of the arrangement the importer

manages to strike with the state trading company. The result is that, without such

a license, an importer simply cannot compete, either with other importers or with

Chinese producers.

NACCO has also been competitively disadvantaged and deterred by general complexities and bureaucratic nuances involved in doing business in China. For example, if a company has helpful connections, or is willing to offer financial ‘‘inducements’’ to state trading companies, it may receive preferential low duties when importing or VAT tax breaks when selling in the domestic Chinese market. However,

none of these ‘‘programs’’ are either transparent or uniform in their application.

Finally, industrial forklift trucks and truck parts have not been immune from

China’s well-documented non-compliance in the area of intellectual property rights.

Foreign technology and product designs are frequently copied and used by competitors in China without risk of punishment and even less hope for effective redress

for the foreign importers. Thus, like tariff and non-tariff barriers, these obstacles

to fair access also demand attention from the United States during its negotiations

with China.

For the foregoing reasons, NACCO strongly urges that China’s accession be made

conditional upon it meeting the trade liberalization commitments that apply to other

developed nations.

II. CONCLUSION

China’s combined import tariffs and VAT duties on the goods and products discussed in this statement are huge, and effectively close the massive Chinese market

to imports from many WTO countries (including the United States). In comparison,

the corresponding tariff rates for these products in the United States are zero. Unless China agrees to lower its tariff rates, and to eliminate its VAT, China will continue to be able to keep its market closed to U.S. exports.

Accordingly, the United States should accept a tariff binding offer from the Chinese only if it includes a commitment to match the U.S. tariff rates on the products

named here, and to eliminate China’s significant VAT on those imports.

We appreciate the opportunity to submit this statement on behalf of NACCO.

f
141

Exhibit 1.—Articles of Interest to NACCO by U.S. Harmonized Tariff Schedule

Number and by Chinese Import/Export Tariff Classification Number

United States

Classification No. Product General

rate

HTSUS 8427 ................. Fork-lift trucks; other works trucks .........................................

fitted with lifting or handling equipment ................................

-

HTSUS 8427.1000 ........ Self-propelled trucks powered by ..............................................

an electric motor, other self-propelled trucks ..........................

Free

HTSUS 8427.2010 ........ Fork-lift trucks for containers .................................................. Free

HTSUS 8427.2090 ........ Other ........................................................................................... Free

HTSUS 8427.9000 ........ Other trucks ............................................................................... Free

HTSUS 8431 ................. Parts suitable for use solely or .................................................

principally with the machinery of headings Nos. 84.25 to

84.20.

-

HTSUS 8431.2000 ........ Of machinery of heading No. 84.27 .......................................... Free

China

Classification No. Product Rate VAT

84.27 .......................... Fork-lift trucks; other works trucks ..............................

fitted with lifting or handling equipment .....................

-

8427.1000 .................. Self-propelled trucks powered by an .............................

electric motor, other self-propelled trucks ....................

18/30 1 17

8427.2010 .................. Fork-lift trucks for containers ....................................... 18/30 1 17

8427.2090 .................. Other ................................................................................ 18/30 1 17

8427.9000 .................. Other trucks .................................................................... 18/30 1 17

84.31 .......................... Parts suitable for use solely or ......................................

principally with the machinery of headings Nos.

84.25 to 84.20.

-

8431.2000 .................. Of machinery of heading No. 84.27 ............................... 10/30 1 17

of the Committee on Ways and Means, the National Juice Products Association

1

Pursuant to the October 22, 1997 announcement by the Subcommittee on Trade

Most favored nation duty rate/general duty rate.

Statement of National Juice Products Association

f

(‘‘NJPA’’) submits the following statement for consideration by the Committee and

for inclusion in the printed record of the November 4, 1997 hearing held by the Subcommittee regarding the future of United States-China trade relations and the possible accession of China to the World Trade Organization (WTO).

Briefly summarized, NJPA submits this statement recommending that China’s

membership to the WTO be conditioned on China granting significant concessions

as to its tariff barriers restricting imports of U.S. merchandise. With 1.2 billion citizens, China is the world’s largest market for virtually all merchandise. Nevertheless, China’s tariff barriers to trade effectively close that market to potential U.S.

exporters.

Accordingly, NJPA respectfully requests that the United States not accede to China’s membership in the WTO without a significant improvement in China’s treatment of imported fruit juices. The comments set forth below address NJPA’s concerns about the tariff rates currently in place in China that effectively impede the

industry’s access to the Chinese market.

I. NJPA: CHINA’S TARIFF BARRIERS RELATING TO FRUIT JUICE IMPORTS DENY FAIR

ACCESS TO CHINA’S MARKET

NJPA is a national trade association comprised of over 70 juice growers and processors located throughout the United States. See enclosed membership list. NJPA

understands that the United States, along with other members of the WTO, is negotiating with China for entry into the WTO. It is very important to NJPA that China

remove its barriers to entry of U.S. fruit juices before it is admitted into the WTO.
142

China imposes excessive tariffs on fruit juice, significantly reducing access to this

important market for U.S. juice producers. China currently imposes a 55 percent

tariff on fruit juice imported from most favored nations such as the United States.

In addition, China imposes a value added tax (‘‘VAT’’) of 17 percent on fruit juice,

which, because it is imposed on the tariff-inclusive price of the juice, raises the effective import tariff rate to 81 percent.

Indeed, China’s current published tariff and VAT rates on juice products are dramatically higher than the U.S. MFN tariff rates on fruit juice, which range from

no duty to a duty of 8.58/liter. See 1997 Harmonized Tariff Schedule of the United

States, Heading 2009 (Fruit juices (including grape must) and vegetable juices, not

fortified with vitamins or minerals, unfermented and not containing added sugar or

other sweetening matter).

NJPA, therefore, strongly urges that China not be admitted to membership in the

WTO unless it meets the trade liberalization commitments that apply to other developed nations. NJPA members represent 90 percent of U.S. juice production and

employ thousands of Americans. The Chinese market represents a significant opportunity for U.S. juice producers to expand their exports, thereby creating jobs in Florida, California, and throughout the United States. This potential market cannot be

developed, however, until China removes its excessive tariffs and complies with

international norms for open and transparent trade.

II. CONCLUSION

China’s combined import tariffs and VAT duties on the goods and products discussed in this statement are huge, and effectively close the massive Chinese market

to imports from many WTO countries (including the United States). In comparison,

the corresponding tariff rates for these products the United States are tiny. Unless

China agrees to lower its tariff rates to the very small levels maintained by the

United States, and to eliminate its VAT, China will continue to be able to keep its

market closed to U.S. exports.

Accordingly, the United States should accept a tariff binding offer from the Chinese only if it includes a commitment to match the U.S. tariff rates on the products

named here, and to eliminate China’s significant VAT on those imports.

We appreciate the opportunity to submit this statement on behalf of NJPA.

f
143

This statement sets out the views of five major integrated U.S. producers of carStatement of U.S. Integrated Carbon Steel Producers

f

bon steel products—Bethlehem Steel Corp., U.S. Steel Group a Unit of USX Corp.,

LTV Steel Co., Inland Steel Industries, Inc., and National Steel Corp.—on U.S.-

China trade relations and, in particular, China’s possible accession to the World

Trade Organization (WTO). We commend the Subcommittee for holding this hearing

and appreciate the opportunity to express our views.

China’s bid to join the WTO raises issues of great commercial as well as political

importance. China has become a major player in the international economy, as reflected in the steel sector where China is now the world’s largest producer. (See

Chart 1.) To cite just one example of the shifts that are underway, Chinese exports
144

of cut-to-length carbon steel plate to the U.S. market grew from zero in 1993 to

300,000 tons in 1996.

While China’s rapidly growing economy offers a huge potential market for U.S.

exports, U.S.-China bilateral trade continues to be significantly out of balance. (See

Chart 2.) The U.S. trade deficit with China, nearly $40 billion last year, continues

to grow. Among the many causes of this deficit are Chinese policies that promote

export-led growth in certain sectors while restricting imports through a discriminatory and nontransparent trade and investment regime. Many of these policies are

inconsistent with both the letter and spirit of the WTO agreements.
145

The two pillars of the WTO are free and fair trade—elimination of barriers coupled with clear and enforceable rules against unfair trade. In the steel sector and

many others, China today does not trade fairly. China’s WTO accession must be

handled carefully in order to address these concerns and ensure fair global competition.

With an appropriate protocol of accession, U.S. steel producers are prepared to

support China’s accession to the WTO. The existing draft protocol, however, does not

adequately address several key issues. Of these, three are of particular importance

to the steel industry: antidumping rules, purchasing by state-owned enterprises, and

subsidies. These issues must be addressed, and addressed successfully, well before

the conclusion of the accession negotiations.
146

NON-MARKET ECONOMY ANTIDUMPING RULES

Current U.S. law provides that, in the case of imports from a nonmarket economy

(‘‘NME’’), the Commerce Department is to determine the ‘‘normal value’’ of a product

under investigation by valuing the NME producer’s factors of production (plus

amounts for general expenses and profit) in a surrogate country that is similarly

developed but market-oriented. This methodology is critical to ensuring a fair comparison of the normal value of goods produced in China, and other NMEs, with the

export price of those goods to purchasers in the United States. Other GATT signatories (now WTO members) have long applied similar rules.

The basis in the GATT for this methodology has been a note to GATT Art. VI,

which recognizes that, ‘‘in the case of imports from a country which has a complete

or substantially complete monopoly of its trade and where all domestic prices are

fixed by the State, . . . importing contracting parties may find . . . that a strict comparison with domestic prices in such a country may not always be appropriate.’’

Citing recent reforms that have occurred in China, Chinese trade officials argue

that China is no longer a non-market economy and therefore should not be subject

to NME antidumping rules in the United States, the EU and other jurisdictions.

Nevertheless, a substantial percentage of Chinese manufacturers continue to be

state-owned and controlled, and state control over input prices persists. This is especially true in the steel industry. In fact, in recent cases both inside and outside the

steel sector, the Commerce Department has reaffirmed that China continues to be

a non-market economy. The Department’s consistent findings in this regard should

not be negotiated away to smoothen WTO accession.

Were the Commerce Department to begin relying on state-controlled prices, the

Chinese Government could easily manipulate these prices in such a way as to mask

the true level of dumping taking place. For this reason, application of a ‘‘market

economy’’ antidumping analysis is inappropriate and will produce inequitable results so long as prices and enterprises remain under state control in China. For this

very reason, in the accessions of other non-market countries such as Poland and Romania, the continued ability to use NME methodology has been made explicit.

Without a clear provision in China’s protocol, there is a risk that applying NME

antidumping rules to post-accession imports from China would be found inconsistent

with the WTO agreements. Accordingly, clear language must be included in China’s

protocol that specifically guarantees the right of the United States and other countries to continue to apply NME antidumping rules with respect to goods of Chinese

origin—at least until such a time as substantial state control over prices no longer

exists in China. The language included in the current draft protocol, intended to

meet this concern, has not been accepted by China.

Because this is such a fundamental requirement for an acceptable protocol, it

should be addressed decisively at an early stage in the discussions. Experience has

shown that such issues cannot be effectively addressed in the pressured atmosphere

that prevails at the end of a negotiation.

PURCHASING BY STATE-OWNED ENTERPRISES

China, although the world’s largest producer of steel, continues to import some

steel products from countries such as Japan and Russia. However, the Chinese Government is undertaking a significant effort to boost domestic steel production, with

the goal of reaching self-sufficiency and ending imports of basic steel by the year

2000.

There exists, therefore, an increasing risk that the Chinese Government will exercise the power it maintains over state-owned enterprises in the steel sector and

downstream industries in order to induce these enterprises to purchase only domestic steel. If Chinese state-owned enterprises do not make purchases of steel on the

basis of commercial considerations, and are instead influenced by the Chinese Government’s import substitution policies, foreign steel products will no longer be able

to be sold in China.

A closing of the Chinese market to imports of steel will not only affect U.S. exports, but will divert third-country exports away from China and toward the world’s

few open markets for steel. The United States—the single largest open market for

steel—would face an even greater onslaught of excess world steel production, often

at dumped prices.

Accordingly, China’s protocol of accession should include an affirmative obligation

on the part of the Chinese Government to ensure that state-owned enterprises make

purchases solely on the basis of commercial considerations. The protocol should also

provide for a regular review of purchasing decisions by Chinese state-owned enterprises to ensure compliance with this obligation.
147

SUBSIDIES

The accession protocol should commit China fully to WTO subsidy rules and include a realistic and enforceable schedule for phasing out existing subsidies. The

protocol ‘‘annex’’ establishing a timetable for phasing out Chinese subsidies has not

been made publicly available, but must be fully vetted with Congress and affected

U.S. industries well before any accession pact is finalized.

Equally important is ensuring, through appropriate protocol provisions and statutory amendments, that U.S. anti-subsidy laws can be applied to offset and deter

such subsidies. While China already is a prolific subsidizer, the risk of improper use

of subsidies in an economy like China’s increases as the economy becomes more

market-oriented. U.S. trade remedies must be capable of responding effectively to

this problem both during and after China’s transition.

CONCLUSION

Carbon steel producers welcome the Subcommittee’s active oversight of what

promises to be one of the most significant U.S. trade policy initiatives over the next

several years. As U.S. trade with China continues to grow, the domestic and international rules applicable to that trade will take on ever-greater importance.

Joining the WTO will require China to reform its legal and commercial structures

to make them compatible with the international trading system and its rules. It is

widely stated and accepted that the accession pact itself must be ‘‘commercially viable’’ if accession is to be in the U.S. national interest. From the carbon steel industry’s perspective, no protocol can be ‘‘commercially viable’’ unless it successfully addresses the fundamental issues of antidumping rules, purchasing by state-owned enterprises, and subsidies.

UNITED STATES

f

COUNCIL FOR INTERNATIONAL BUSINESS

NEW YORK, NY

November 18, 1997

The Honorable Philip M. Crane

Chairman, Trade Subcommittee

Committee on Ways and Means

1104 Longworth House Office Building

Washington, DC 20515–6354

Dear Chairman Crane:

The future of United States trade relations with China and China’s accession to

the World Trade Organization (WTO) are very important issues for the members of

the United States Council for International Business (USCIB). Your November 4

hearing on this subject was very timely and we encourage you to maintain your

Subcommittee’s focus on these issues.

In the context of our work for U.S. business on issues relating to the WTO,

USCIB takes the position that all prospective members regardless of size must comply with established disciplines and commit to comparable trade liberalization. It

would be damaging to the WTO rules, which define the trade opportunities for all

our companies, and to the WTO institution itself if a two-tier set of rules is created

through accession requirements that accord certain countries a lesser discipline. The

specific requirements for comparable trade liberalization that our members seek in

China’s accession are elaborated in two recent letters to the United States Trade

Representative. We would respectfully request that these letters (which are attached) be included in the written record of your hearing.

USCIB membership comprises 300 American corporations, professional firms and

business associations. A copy of our membership list is also attached for the Subcommittee’s reference.

Thank you for your consideration. We appreciate your attention to this very important trade issue.

Sincerely,

ABRAHAM KATZ

President

Attachments
f

148

UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS

NEW YORK, NY

March 17, 1997

Mr. Frederick L. Montgomery

Chairman, Trade Policy Staff Committee

Office of the United States Trade Representative

600 17th St., NW

Washington, DC 20508

Dear Mr. Montgomery:

The U.S. Council for International Business is pleased to submit the recommendations of its China Working Group in response to your request for public comments

on negotiations regarding China’s accession to the World Trade Organization

(WTO).

The U.S. Council is the American affiliate of the International Chamber of Commerce (ICC), the Business and Industry Advisory Committee (BIAC) to the OECD,

the International Organization of Employers (IOE). As such, it officially represents

U.S. business positions both in the main intergovernmental bodies and with foreign

business communities and their governments. The U.S. Council formulates its positions in over forty committees and other working bodies composed of experts drawn

from its membership of 300 multinational corporations, service companies, law firms

and business associations.

China’s WTO accession negotiations offer an important opportunity for the U.S.

Government to effectively address various barriers to trade with that country. We

support China’s accession to the WTO under a commercially acceptable protocol that

commits China to comply with established WTO disciplines and includes specific

market-opening measures.

To assist you in addressing market access issues in particular, we sent out a questionnaire asking our working group members to prioritize specific market access

issues of concern to U.S. businesses operating in China. The results are summarized

below.

TRANSPARENCY AND UNIFORMITY OF LAWS

The majority of respondents cited a lack of transparency and uniformity of laws

as the most serious obstacle faced by American companies operating in China. Companies mentioned ongoing problems with undisclosed rules and regulations, laws

that are vague and subject to varying interpretations, and inconsistent application

and enforcement of laws at different levels of government and between different entities.

GATT Article X calls for trade regulations to be published promptly and administered in a uniform, impartial and reasonable manner. The U.S. Government should

press China to publish in advance and circulate laws, directives and regulations

governing foreign trade and investments. Further, many existing laws require clarification and additional details on procedural guidelines, requirements, and consequences. There should be a uniformity of laws and their implementation at all levels.

This complaint applied across numerous sectors, including consumer products,

manufacturing, natural resources, services companies, etc.

TARIFFS AND NON-TARIFF MEASURES

Companies cited tariffs and non-tariff measures together as the second most

pressing set of issues. While China announced at the APEC Summit in November,

1996 that it would lower tariffs by 30 percent on 4,000 items, duties on many products remain over 50%, particularly raw materials, chemicals, and some finished

goods. The U.S. Government should press China to substantially reduce its overall

tariff rate (which currently stands at 32%) to a level comparable to the commitments of WTO members.

Many companies also indicated that import licensing restrictions and quotas on

hundreds of imported products inhibit their competitiveness in China. The U.S. government should insist that China adhere to GATT Article XI, which prohibits such

practices.
149

SERVICES

China continues to maintain barriers to foreign service providers in areas such

as financial services, telecommunications, publishing and tourism. The U.S. Government should press China to provide non-discriminatory market access and to liberalize existing limitations so as to bring its practices into conformity with the obligations in the General Agreement on Trade in Services (GATS) and it annex on telecommunications services.

Moreover, now that the WTO negotiations on basic telecommunications have concluded successfully, it is especially important that basic telecommunications be addressed as part of the process of China’s accession to the WTO. Chinese commitments on basic telecommunications must be meaningful and commensurate with the

stature and importance that China has assumed in the world economy, including

full adoption of the regulatory principles.

INTELLECTUAL PROPERTY PROTECTION

On paper, China has made significant progress toward bringing its intellectual

property regime up to international standards, particularly since the 1992 and 1995

agreements signed with the U.S. on this subject. However, piracy of U.S. software,

books, magazines, videos and sound recordings remains a serious problem. And

some companies argued that the IP laws in place are not enforced objectively. As

one respondent put it, the ‘‘rule of men’’ still takes precedence over the rule of law.

The U.S. Government should continue to press China to vigorously enforce its IP

laws under the terms of the two bilateral agreements and the WTO Agreement on

Trade-Related Intellectual Property Rights (TRIPs).

INVESTMENT POLICIES

Some companies noted that they are generally prohibited from retail marketing,

that investment approvals by the Chinese Government are set at extremely low levels, and that foreign firms are generally forced to joint venture with local firms. China’s requirements of foreign investors to enter into commitments regarding technology transfer, import substitution, exchange rate balancing and export performance are overly restrictive and in violation of GATT Article III and the WTO Agreement on Trade-Related Investment Measures (TRIMs). Automotive companies complained about China’s lengthy transition period for phasing out barriers to investment in the auto sector. China must take on the TRIMs obligations within the time

frame prescribed in the WTO.

OTHER ISSUES

Members raised several other issues, including the following:

Trading rights

Some companies cited concerns with the Chinese policy of limiting the import of

goods into China to authorized trading companies.

Dispute resolution

Problems mentioned in this area include difficulty enforcing contracts in court;

difficulty enforcing judgments/decrees from Chinese courts; the fact that foreign arbitral decrees are often ignored by Chinese courts; and that arbitration awards

made in one region of China are not enforced in other regions.

Customs

Some companies complained that the Chinese customs authorities do not apply

their regulations uniformly. Chinese customs practices need to be modernized to incorporate the key procedures set out in the ICC International Customs Guidelines,

which include implementation of the WTO agreement on valuation, rules of origin

and preshipment inspection.

Access for agricultural products.

Some companies suggested that, before joining the WTO, China must remove

GATT-illegal barriers to foreign agricultural products. The Chinese Government’s

phyto-sanitary measures, for example, operate as disguised trade restrictions.
150

I hope that this information is useful to your discussions with the Chinese government. We stand ready to meet with you to discuss these concerns in more detail,

if necessary.

Sincerely,

ABRAHAM KATZ

f

President
151
f

152

UNITED STATES COUNCIL FOR INTERNATIONAL BUSINESS

NEW YORK, NY

October 30, 1997

The Hon. Charlene Barshefsky

United States Trade Representative

Office of the U.S. Trade Representative

600 17th St., NW

Washington, DC 20506

Via FAX: 395–3911

Dear Charlene:

I am writing to follow up on my correspondence with your office of March 17 regarding the negotiations on China’s accession to the World Trade Organization. The

U.S. Council for International Business is particularly concerned that the interests

of service providers should be vigorously pursued in the negotiations. Our earlier

letter covered the full range of WTO issues; I would like to take this opportunity

to elaborate on the issues affecting the services sector.

As you know, the U.S. Council’s position is that China’s accession to the WTO

must be based on a commercially viable terms that commit China to comply with

WTO disciplines and to open its markets to additional imports of both goods and

services. The terms should include special measures to ensure that the transparency

of China’s laws and regulatory procedures is improved significantly. This issue is

vitally important to all our members, but it has special implications for those companies, such as service providers, many of which require a local commercial presence and operate in more regulated environments. The accession negotiations offer

an important opportunity to seek improvements in China’s administrative and regulatory procedures to bring about a high degree of transparency and to bring them

more into line with practices in other major markets.

With regard to market access for services, China’s adherence to the General

Agreement on Trade in Services will be a welcome step forward, but China must

include in its GATS schedule specific market access and national treatment commitments on a broad range of service sectors. Many of the other GATS rules (in addition to market access and national treatment) only apply to service sectors for which

the signatory has scheduled specific commitments, so the quality of China’s GATS

schedule is especially important to our service providers. With regard to specific sectors, we strongly recommend the following measures.

TELECOMMUNICATIONS

As with other countries acceding to the WTO, China should make meaningful

commitments under the WTO Agreement on Basic Telecommunications. At a minimum, meaningful commitments would include a date certain for full liberalization

and adoption of the Reference Paper in its entirety.

FINANCIAL SERVICES

China should make high-quality commitments under the GATS to liberalize access to its financial service sector, including banking, insurance, securities and diversified services.

PROFESSIONAL SERVICES

In its scheduled GATS commitments, China should cover the full range of professional services, including accounting, auditing and bookkeeping services, as well as

tax and management consulting, legal services, services related to advertising and

media sales, and advertising and marketing services. Those commitments should

eliminate a variety of de facto impediments. For example, in the accounting sector

China should assure the right to choose local affiliates on contractual terms substantially equivalent to worldwide norms; permit the establishment of branches or

other offices authorized to perform statutory work; adopt the use of international

standards; and remove the ban on the advertising of professional services. As another example, China should extend complete reciprocity to legal services and permit American firms to hire Chinese attorneys licensed to practice law in China.
153

There should be no restrictions on the number of licenses or locations for legal practice.

PUBLISHING

China should make timetabled commitments to liberalize both investment (including joint ventures) and access to publishing services for books, magazines and newspapers, such as financial information services. As a related matter, it is essential

that China demonstrate a significant commitment to enforcing its intellectual property protection legal system and to stop piracy and exploitation of copyrighted materials.

TOURISM

China should agree to repeal by a date certain its law prohibiting non-Chinese

companies from establishing full service travel agencies in China. As part of this

liberalization, China should permit non-Chinese companies the same rights that are

enjoyed by travel companies in other WTO countries. A full service travel license

would permit the sale of standard tourist financial services such as selling travelers

checks and would permit all licensed travel agencies to act as ticketing agents for

international and domestic airlines.

In addition to the specific service sectors mentioned in this letter, a broad issue

of concern to many U.S. firms remains the ability of foreign firms to distribute their

products within China. Currently foreign firms are not permitted to distribute directly their products within China, but must instead use government-authorized

Chinese distributors. Such restrictions on the ability to distribute goods within

China impose a significant barrier to market access for foreign firms. China should

agree to provide all foreign firms with the right to determine how their products

are distributed within China. This is a fundamental market access issue which must

be resolved in the services negotiations related to China’s WTO accession.

In closing, while all the areas we identified in my March 17 letter remain important to our members, we believe that the United States cannot afford to accept Chinese membership in the WTO without clear and meaningful commitments on services. The U.S. is the world’s leading service exporter, and China is an increasingly

important market for our service providers and for the international companies they

serve. China itself, moreover, will benefit from access to modern, state-of-the-art

services which provide an essential infrastructure for business growth and development.

I wish you every success in completing the negotiations with China, and want to

assure you that the U.S. Council stands ready to assist your effort in any way we

can.

Sincerely,

ABRAHAM KATZ

President

Æ