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S. HRG. 111–1074 

THE U.S.-CHINA ECONOMIC RELATIONSHIP: 

A NEW APPROACH FOR A NEW CHINA 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JUNE 10, 2010 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

BLANCHE L. LINCOLN, Arkansas 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

CHUCK GRASSLEY, Iowa 

ORRIN G. HATCH, Utah 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

JOHN ENSIGN, Nevada 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

RUSSELL SULLIVAN, Staff Director 

KOLAN DAVIS, Republican Staff Director and Chief Counsel 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

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

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 3 

ADMINISTRATION WITNESS 

Geithner, Hon. Timothy F., Secretary, Department of the Treasury, Washington, DC ............................................................................................................. 5 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

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

Prepared statement .......................................................................................... 39 

Geithner, Hon. Timothy F.: 

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

Prepared statement .......................................................................................... 42 

Responses to questions from committee members ......................................... 48 

Grassley, Hon. Chuck: 

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

Prepared statement .......................................................................................... 72 

COMMUNICATION

National Retail Federation ..................................................................................... 75 

(III) 

(1) 

THE U.S.-CHINA ECONOMIC RELATIONSHIP: 

A NEW APPROACH FOR A NEW CHINA 

THURSDAY, JUNE 10, 2010 

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

The hearing was convened, pursuant to notice, at 10:07 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Bingaman, Kerry, Wyden, Schumer, Stabenow, 

Grassley, Hatch, Snowe, Bunning, Enzi, and Cornyn. 

Also present: Democratic Staff: Bill Dauster, Deputy Staff Director and General Counsel; Amber Cottle, Chief International Trade 

Counsel; and Ayesha Khanna, International Trade Counsel. Republican Staff: Stephen Schaefer, Chief International Trade Counsel; 

and David Ross, International Trade Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

According to chaos theory, a butterfly beating its wings in America might start a hurricane in China. As we emerge from the chaos 

of the worst financial crisis since the Great Depression, the relationship between what happens in America and what happens in 

China is as important as ever. 

The United States’ and China’s economies are increasingly interconnected. As consumer demand in the United States declined, 

China’s exports fell dramatically; and, as the United States fell into 

a deep recession, China’s economic growth slowed significantly. 

Now, both the United States and China must recover and rebuild, but we cannot do so in isolation. China has failed to recognize this fact. 

For too long, China’s economic policies have focused on unsustainable export-oriented growth at the expense of American ranchers, farmers, and workers. For too long, China has permitted the 

theft of U.S. intellectual property at the expense of American 

innovators. And for too long, China has protected its domestic industry at the expense of American businesses and exporters. 

America can no longer afford to be complacent. We no longer 

have the luxury of pursuing failed approaches. We must rethink 

the U.S.-China economic relationship. We must act, not just talk. 

China is the world’s fastest-growing economy. In 2009, China’s 

gross domestic product grew by almost 9 percent. China’s per capita GDP nearly doubled from 2005 to 2009. Consumer spending in 

2 

nearly a quarter of Chinese cities is expected to double over the 

next 10 years. 

China is fueling global economic growth, and, as China develops 

a new role in the global economy and global institutions, we must 

develop a new approach to a new China. 

Last month’s Strategic and Economic Dialogue reinforced the 

need to rethink and revitalize. We entered the S&ED with expectations that China would take concrete action to address its currency 

and so-called indigenous innovation policies. We walked away with 

promises to engage in further discussions. Dialogue is important, 

but discussion does not equal action. 

By seeking a new approach, we do not seek to start a hurricane. 

We do not seek to succeed at China’s expense. Rather, we seek to 

foster long-term mutual cooperation, recognizing that, in the short 

term, we may need to take strong unilateral and multilateral action. We seek to ensure the long-term economic progress of America, as well as China. 

But we must address a long-standing issue in our relationship. 

For example, a prominent CEO of a U.S. software company recently noted that many Chinese companies will legally purchase 

only 25 percent or less of their software needs. They illegally pirate 

the rest. We must take new steps to address persistent problems: 

that is, the fact that many Chinese companies illegally pirate the 

rest means that piracy of this magnitude reflects a policy choice in 

China. 

I propose four ways to define America’s approach to U.S.-China 

economic relations. First, the United States must formulate a comprehensive strategy to better manage our bilateral U.S.-China economic relationship. Different agencies are pursuing different, uncoordinated strategies. 

When we talk to different agencies in the U.S. Executive Branch, 

(A) they do not have a China policy and, (B) the policy they do have 

is different from another agency. It is not coordinated. There is not 

a country policy. We can no longer approach our economic relationship in this piecemeal way. 

We must craft a holistic strategy, orchestrated and led by the 

White House, to develop a strong, mutually beneficial U.S.-China 

economic relationship. In doing so, we must recognize that our bilateral economic relationship is an equal complement to our bilateral strategic relationship. Our economic relationship has, in my 

judgment, taken a back seat to our strategic relationship for too 

long. 

In fact, I would go farther. I read a book a long time ago by Paul 

Kennedy, who basically said that in the sweep of history, in the 

rise and fall of countries, those that decline are not defeated generally by armies from afar, but rather are defeated by internal 

decay from within. 

Strong economic policy is more important, because then we could 

project more political and strategic power. 

Second, we must approach China’s economic policies as a global 

concern, not just an American concern. China’s currency misalignment, ineffective protection and enforcement of intellectual property rights, and industrial policies, such as indigenous innovation, 

hurt businesses around the world, not just U.S. businesses. 

3 

We must work multilaterally with key trading partners, such as 

the European Union, Korea, and India, to make it clear to China 

that the world is watching and is united in its concern, and we 

must effectively address these concerns through key multilateral 

fora, such as the G–8 and the G–20. 

Third, we must look carefully at the tools offered by the international institutions, such as the International Monetary Fund and 

the World Trade Organization. Where these tools provide effective 

recourse, we must be willing to aggressively pursue it. Where these 

tools are not adequate, we must work to strengthen them. 

Fourth, we must be willing to take strong unilateral action. In 

April, the Treasury Department postponed publication of its biannual currency report until after the S&ED and G–20 meetings. As 

I noted, we must work multilaterally to resolve the currency issue, 

but we cannot expect our trading partners to take strong action if 

we are unwilling to do so. 

America must be willing to take the lead, even as we ask others 

to join. As part of a coordinated strategy, America must take steps 

now to address the U.S.-China economic relationship. 

The Treasury Department must negotiate effective solutions to 

address China’s currency manipulation. The Commerce Department must apply a rigorous analysis when investigating antidumping and countervailing duty petitions regarding Chinese imports. 

The Office of the U.S. Trade Representative must take all necessary steps to improve China’s protection and enforcement of U.S. 

intellectual property rights and to suspend China’s discriminatory 

indigenous innovation policy. And Congress must assess whether 

the administration needs stronger enforcement tools to address the 

U.S.-China economic relationship. 

With these efforts, I am confident we will build an effective new 

approach for this new China policy. We can recast the U.S.-China 

economic dialogue, and, by doing so, both the United States and 

China can recover from the global hurricane, to build interconnected economies that are stronger than ever before. 

Senator Grassley? 

OPENING STATEMENT OF HON. CHUCK GRASSLEY, 

A U.S. SENATOR FROM IOWA 

Senator GRASSLEY. Thank you, Mr. Chairman. And, Mr. Secretary, I will be in and out this morning, because down the hall 

here, we have some important votes on in Judiciary. 

Thank you, Mr. Chairman, for this very important hearing. 

Mr. Secretary, some things I may say about you and this administration I have said about predecessors of yours in the Bush administration. So this is a long policy that this government—our 

government—has screwed up over a long period of time that has 

let China do whatever they want to do. 

Today’s hearing provides us an opportunity for the committee to 

engage you, Secretary Geithner, on the outcome of last month’s 

Strategic and Economic Dialogue in Beijing. I have serious concerns about the direction that China’s government is taking with 

respect to its economic and trade policies. 

4 

So I want to hear you speak specifically on what these meetings 

accomplished and what the Secretary sees in the way of next steps 

in our bilateral relationships. 

For example, what are China’s intentions with regard to its currency exchange? I emphatically disagree with the Treasury Department’s decision in April to delay issuance of its currency report. 

The time has long passed for the Treasury Department to admit 

publicly what everyone else already knows, namely, that China is 

manipulating the value of its currency in order to gain an unfair 

advantage in international trade. 

I know every time that we mention that, they say we are interfering in their internal affairs. How many times have I heard them 

lecture us, in the right way, that we ought to get our budget deficit 

under control? And, if they are a 5,000-year-old society, they are 

members of the World Trade Organization, they are members of 

the U.N.—we are 400 years old on this side of the Pacific, and they 

are a mature nation—they need to grow up and be citizens of this 

world, mature citizens, and know that, in globalization, it is not 

just economics that is globalized. Politics is globalized. And we 

ought to be able to discuss these things without one country being 

incensed because the other one brings something up. We are all 

mature people. 

Treasury, obviously, felt differently. I would like to hear what 

this delay in issuing the report has accomplished. I worry that, by 

delaying the report, Treasury raises expectations that will not be 

met. 

Is the Chinese government going to make a significant adjustment in its exchange rate just because our Treasury Department 

held off issuing a report? I doubt it. 

I also want to hear the Secretary’s discussion regarding China’s 

so-called indigenous innovation policy, which is a government policy that gives preferences in China’s procurement market to products that contain intellectual property developed in China. 

Our ambassador to the WTO has described this policy as one of 

several Chinese policies indicating, ‘‘a policy direction that seems 

designed to limit market access for imports and foreign investors, 

and pressure enterprises to localize research and development in 

China, as well as transfer technologies.’’ 

In other words, instead of doing everything it can to comply with 

the letter and spirit of its WTO obligations, the Chinese appear to 

be looking for ways to evade those rules and to find loopholes and 

gaps in the rules that it can exploit. This is a troubling development, and it calls for careful rethinking about our overall approach 

to China on trade matters. 

For example, if China continues to refuse to make a serious offer 

to join the government procurement agreement in the WTO, we 

should take a harder look at our own procurement policies as they 

apply to procurement of goods and services from China. 

Separately, if China chooses to apply what they call a national 

economic security test when it reviews foreign investment through 

mergers and acquisitions, perhaps we should do the same with respect to Chinese investment in the United States. 

The point is, if one of the major beneficiaries of the world trading 

system engages in a pattern of refusing to play by the same rules 

5 

as everyone else, then we should reconsider the rules that we apply 

to that country. 

I look forward to hearing your testimony. 

The CHAIRMAN. Thanks, Senator. 

Now, I would like to introduce our guest, Treasury Secretary 

Geithner. Secretary Geithner, welcome back. We enjoy having you 

before our committee. You know the usual custom: prepared statement automatically included, and I ask you to summarize. 

STATEMENT OF HON. TIMOTHY F. GEITHNER, SECRETARY, 

DEPARTMENT OF THE TREASURY, WASHINGTON, DC 

Secretary GEITHNER. Thank you, Mr. Chairman, Ranking Member Grassley. It is a pleasure to be back here today to talk about 

China. 

Our policy towards China is about protecting the interests of the 

United States, our national-security interests and our economic interests, and our strategy is to expand opportunities for American 

workers and American businesses. 

We are seeing progress, but we still face many challenges. China 

is on its way to quickly becoming the world’s second-largest economy and could soon become the largest foreign market for American goods and services. China is now consuming more and importing more from the United States. As a result, China’s overall trade 

surplus has fallen sharply over the last 2 years, by roughly half as 

a share of its economy. 

As we emerge from this global financial crisis, U.S. exports to 

China have rebounded much more rapidly than overall U.S. exports 

to the world and are now running 20 percent above pre-crisis levels. In fact, in the first quarter of 2010, U.S. exports of goods and 

services to China rose almost 50 percent compared to the same period in the previous year, which is about double the rate of growth 

in U.S. exports to the rest of the world. 

We are seeing double-digit growth across the American economy 

in exports, from high-end manufactured goods to agricultural 

goods, like soybeans. This is important for American businesses, 

and it is good for American jobs. The strength in exports to China 

and to the world is one reason why we have seen 10 consecutive 

months of expansion in the manufacturing sector of the United 

States, and why, in April, manufacturing jobs grew faster than any 

month since August 1998. 

Now, our economic relationship with China is not without challenges, and this morning I want to focus on three. The first is promoting a level playing field for American workers and businesses. 

This is a simple principle of fairness. When American workers have 

the chance to compete on fair terms, we do exceptionally well, and 

it is especially important to us that the policies China is considering putting in place to promote what they call indigenous innovation do not disadvantage American workers, businesses, and American technology. 

Now, these policies, as I think you both said, include government 

procurement preferences, protections for intellectual property, the 

design of product standards, and other forms of government support for specific products the government designates. 

6 

Now, we have been very aggressive in pursuing the full remedies 

available under U.S. law and in the WTO to address unfair trade 

practices by China. Last year alone, we won two WTO cases 

against China and successfully settled another. 

China has taken some steps to modify these innovation policies. 

It has committed, for example, to remove some of the most troubling elements of this initial proposal, such as the requirement that 

products eligible for government procurement in China have intellectual property that is owned by Chinese companies and developed 

in China. 

China has pledged that its innovation policies—of course, we all 

promote innovation—but it has pledged that its innovation policies 

are consistent with the following principles of non-discrimination, 

of market competition, of open trade and investment, strong enforcement of intellectual property rights, and that the terms of 

technology transfer will be left to agreements between individual 

firms. 

Now, these actions do not resolve our concerns, and they have 

committed to a high-level negotiation, led on our side by Ambassador Kirk and Secretary Locke, to move forward, find ways to address these concerns, and it is very important to us that we make 

further progress in this area. 

Mr. Chairman, a second core challenge is about promoting more 

balanced economic growth. The United States and China recognized that the pattern of growth in both our countries and globally 

was simply unsustainable, so we have taken action. 

In the United States, we are saving and investing more. China 

is moving to rely more on domestic demand, less on exports, to 

drive future growth. China has increased spending on infrastructure, on health and education. It is raising wage rates. It is removing restrictions on the service sector. It is promoting financial reforms, and these reforms have increased consumption and led to 

more rapid growth in imports than would otherwise have occurred. 

As China unwinds its stimulus measures, this shift to domestic 

consumption has to be sustained through continued economic reform. 

A third core challenge is about China’s exchange rate policy. It 

is in China’s interest to allow the exchange rate to reflect market 

forces, and it is critically important to the United States and to all 

of China’s trading partners. We share the concerns of many members of this committee that China’s exchange rate policy is both unfair and hurts the interests of American producers. China has committed to resume the process of reform, and we hope China takes 

advantage of the opportunity to move soon. 

Mr. Chairman, I just want to conclude by emphasizing that our 

ability as a Nation to play a major role in China’s future growth 

and our ability to deal effectively with the challenges we face in 

our relationship with China depends on our success in strengthening the fundamentals of the American economy. 

That is why we are making substantial investments in innovation, in education, in research and development, in basic science, 

in new energy technologies, in public infrastructure, and in investment incentives. 

7 

These reforms and these investments, along with actions to restore fiscal sustainability as the economy recovers from crisis, are 

essential to the future growth of the United States. They are essential to strengthening the manufacturing base of the American economy and to providing greater opportunities for American workers. 

The economic strengths of America and China are complementary. We in the United States are exceptionally good at making the 

goods and providing the services that the most rapidly growing 

parts of the world need to grow. 

Right now, our job, our job in Washington, as the government, 

is to help the private sector do what it does best. Our job is to help 

American businesses expand and create more jobs. Our job is to 

make sure that, as China continues to develop and grow, it does 

so in ways that do not disadvantage our firms. 

Now, we maybe have some different ideas on how best to achieve 

these objectives, but there is no difference between us—between us 

and the members of Congress, who care so much about this issue— 

in the basic view that our workers, our companies, our innovators 

have to have the chance to compete fairly in the global market. 

They have to have the chance to compete in China on a level playing field. When they have that opportunity, they do, as I said, exceptionally well. 

I look forward to working closely with this committee to make 

sure that happens. 

Thank you. I look forward to trying to answer your questions. 

[The prepared statement of Secretary Geithner appears in the 

appendix.] 

The CHAIRMAN. Thank you, Mr. Secretary. 

My key concern, as I mentioned in my statement, though, is we 

do not have a strategic, coordinated United States economic policy, 

that I can determine, with respect to China. Different agencies 

have different non-policies. It is just not coordinated. There is not 

a plan. 

It reminds me a little bit of—this is not original to me—the analogy of a football team. You have a quarterback, you have fullbacks, 

and the running backs and so forth, and if they do not all run according to the same plan, same play that is called, sometimes that 

team loses. So whoever is best-organized tends to do better. 

I am not saying that we want to win at China’s expense. I am 

just saying that we just do not want to lose. 

What about that? Why can’t there be a White House-led, standalone office somewhere that coordinates and develops the China 

economic policy? We have a similar problem with trade policy. I do 

not know what this administration’s trade policy is. I have not seen 

it. 

For months, we heard there is going to be a framework, a trade 

framework. We have never seen one. And I do not see an economic 

China framework. How are we going to solve this? 

Do you not think it is a good idea for the administration to develop, in one location—I think it should be the White House. Sometimes there is the tension between Treasury and State and Commerce and all that, as to who is going to do all this. So I suggest 

it be in the White House. What is wrong with that? 

8 

Secretary GEITHNER. Mr. Chairman, let me just say that you 

have laid out four things that are important to the strategy moving 

forward, and I think that they are right. 

We need to have a comprehensive strategy, we need to make 

sure we give our economic interests appropriate priority in the 

broader relationship, we need to make sure that we are using the 

tools we have multilaterally to protect our interests, and we need 

to make sure we use the tools we have in the United States effectively to promote those interests. 

That makes sense. I like that basic framework. The White House 

is responsible now for coordinating policy on China. They do now 

play that role. They pull the Cabinet together on a regular basis 

to figure out what are priorities across agencies, to make sure that 

USTR, Commerce, the State Department, the Treasury Department, everybody else, are pursuing objectives with the right basic 

sense of priorities. That is the role they play now. 

But I agree with you completely. If we are going to be effective, 

we have to come with common purpose, common objectives. And 

the three core things we are pursuing on the economic side are the 

ones I laid out in my statement, and I think you made in your 

statement: level playing field for American workers and producers, 

which means stronger protections for intellectual property, less discrimination against U.S. businesses in China; stronger growth in 

China that relies less on exports, so China is importing more from 

the United States as they grow; and reforms to their exchange rate 

mechanism, which, of course, is an important part of a level playing field. 

Those are the three core objectives we are pursuing. They are 

what guide our strategy. And absolutely, you—we are about action, 

not about talk. You should measure us by what these results 

achieve. And we have a lot of concerns still about where we are. 

But just for context, as I said in my opening statement, it is very 

important to point out that the U.S. economy is doing better today. 

Our manufacturing sector is getting stronger. Exports are growing, 

in part, because we are so competitive and doing such a good job 

of competing for a larger share of that rapidly growing economy in 

China; not just in China, of course, but around the world. 

The CHAIRMAN. Well, I understand what you are saying, but just 

because it is better does not mean we should stop there. 

Secretary GEITHNER. Absolutely. I completely agree. 

The CHAIRMAN. It does not mean that China is not discriminating—— 

Secretary GEITHNER. Absolutely. 

The CHAIRMAN [continuing]. Or taking advantage of us—— 

Secretary GEITHNER. Absolutely. 

The CHAIRMAN [continuing]. In many areas. 

Secretary GEITHNER. Yes. 

The CHAIRMAN. So I am asking what the White House is doing, 

what Treasury is doing to address those areas where we are being 

discriminated against. 

As a general policy, too, I am a little concerned about your first 

goal, which is level playing field. Everybody espouses a level playing field. We all want that. Then you say that is a matter of fairness. 

9 

I think, to a significant degree, the United States is more 

process-oriented, and China is more results-oriented. 

Secretary GEITHNER. Well, I do not agree with that, Mr. Chairman. 

The CHAIRMAN. We love due process. We love fairness. We love 

that everybody has an equal chance to talk and so on and so forth, 

and rights are respected along the way. 

I tend to think that in China, it is not quite the same. It is more 

results-oriented. It is more making sure that certain quotas are 

met, either issued by the central government or whatnot. It is 

much less concerned about, say, the rule of law than the United 

States, and that has to be recognized. That has to be dealt with, 

which means we have to get results, too. 

They are just different systems. The United States is not China, 

and China is not the United States. 

Secretary GEITHNER. I completely agree, and China is not going 

to become like the United States overnight. China still has a government that plays an overwhelmingly dominant role in economic 

activity. And as you said and as we all recognize, there is still a 

range, a broad range of practices that China pursues today that are 

designed to protect their workers and their firms at the expense—— 

The CHAIRMAN. At the expense—— 

Secretary GEITHNER [continuing]. Of China’s trading partners, 

absolutely. And intellectual property is a very good example of 

that. 

The CHAIRMAN. It is. 

Secretary GEITHNER. There is still very widespread piracy. 

The CHAIRMAN. How much do you think? How many American 

patents do you think are infringed? How much U.S. intellectual 

property do you think is pirated in China? 

Secretary GEITHNER. Well, I think you had the right statistic, 

Mr. Chairman, which is to say that, if you look at the revenues 

American software producers get from sales to China, of things 

that include U.S. software, they are a tiny fraction of what they 

earn in other emerging-market economies, much less Europe or the 

United States, and that is a reflection of the fact that it is still easy 

in China, despite improvements in their laws, to steal and pirate 

those products. You are absolutely right. 

There have been substantial improvements in protections in 

some manufacturing goods, in the medical technology and pharmaceuticals areas, in part, because it is harder to pirate, harder to 

copy, and in part because China perceived appropriately that they 

would be severely disadvantaged if they allowed piracy to erode the 

basic protections those provide. 

But you are absolutely right, and intellectual property is one example. Indigenous innovation is another example. Again this policy 

is worth spending a few minutes on. 

What China proposed to do was to say, this is a list of specific 

products, and to be on that list, initially, they suggested, the intellectual property and the products had to be owned by, developed 

in China. And, if you were not on that list, you would not be eligible for a whole range of preferences, government procurement, et 

cetera. 

10 

Now, that is fundamentally a problem for the United States, and 

it has raised huge concerns across the American business community and, frankly, China’s other trading partners, as being fundamentally unfair. 

So we have made a centerpiece of the—and the President has, 

too—of these concerns in our broader economic relationship. And as 

I said, China has made some movements in our direction, but not 

enough. 

We are hoping, by getting them to agree to some basic principles 

of nondiscrimination, to make clear that government is not going 

to play a role in forcing technology transfer. By committing to those 

basic principles, we hope to get them to change that policy further 

in our direction, so it does not pose these risks to us. So that is 

just one example. 

The CHAIRMAN. I hear you, Mr. Secretary. My time has way expired. 

Not to be disrespectful: those are great words, great intentions, 

and great goals, but I am not yet persuaded that we and the administration have come up with enough of a framework here that 

is actually going to make a difference here. 

We have heard a lot about piracy for years and years and years, 

and not a lot has been done, and we have heard a lot about the 

Chinese taking advantage of us, and not a lot has been done. 

I do not disagree with your intent and your goal, but I, frankly, 

am not yet persuaded that the administration has come up with 

something sufficient to address these concerns. 

Secretary GEITHNER. But, Mr. Chairman, I just want to say that, 

again, our test, too, like yours, is going to be about what happens 

in terms of U.S. exports to China. That is our test. Our test is not 

whether they agree to a principle. That is just a means of leverage 

to get improvements and results. 

I completely agree with you that our test is not about whether 

we get some broad process commitments. Our test is about whether 

things change in ways that benefit American companies directly. 

The CHAIRMAN. Senator Grassley? 

Senator GRASSLEY. I want to talk currency. April 3, you cited two 

upcoming meetings of the G–20, as well as our bilateral Strategic 

and Economic Dialogue with the Chinese as reasons, back then, to 

delay issuance of the Department’s exchange rate report. 

You said your objective was to use those meetings as an opportunity to make material progress—‘‘material progress,’’ I think, are 

your words—on the currency issue in the coming months. 

Now that two of these meetings are behind us, are we, in fact, 

making material progress in addressing the currency issues? And 

how do you envision that this issue will develop over the next 

month or two? 

Secretary GEITHNER. Senator Grassley, I, to be honest, do not 

know whether we are at the point now where we are going to see 

meaningful progress in the short term. It is very important to us 

that we see that. China understands that. 

China has made it clear, in public, that they have decided to resume the reform—that is the phrase they used—resume the reform 

of their exchange rate policy, meaning they have decided to resume 

11 

the process of letting the market play a greater role in determining 

the rate of the currency. 

But as you know, they clearly have not decided when and how 

they are going to act, and they are watching closely developments 

in the world economy as they make that basic decision. 

As we said in April, and as I have said publicly, again, and as 

the chairman said, we want to make sure that we are using every 

effective means to encourage them to move, including taking advantage of the fact that the leaders of the G–20 meet in Canada 

later this month; in fact, in just 2 weeks, I believe. 

I think that Chairman Baucus said that this is a global issue; it 

is not simply an American issue. This is an issue that all of China’s 

trading partners have a stake in changing. And so we are trying 

to do everything we can to maximize the odds of them moving sooner in a more substantial way, and that is what is guiding our basic 

strategy. 

Again, China has to make this move. It is China’s choice. They 

are a sovereign country. And our hope is, of course, they are going 

to decide, as you heard the President, President Hu, say a few 

weeks ago, that it is in China’s interest to move. 

Senator GRASSLEY. Going back to your words, ‘‘I honestly don’t 

know,’’ my cynical view of the Chinese and my view of you and our 

government, both under Republicans and Democrats, being very, 

‘‘diplomatic’’ towards the Chinese, is that they probably told you 

what they were going to do, but you promised not to discuss it, because somehow they do not want to think that they are doing 

something because we are pushing them to do it. That is my cynical view. 

Secretary GEITHNER. That is not true in this case. 

Senator GRASSLEY. Well, I will take your word for it. But I wanted to bring that out to you. 

In your responses to the questions for the record that you submitted to the committee after your confirmation hearing, you wrote 

that, ‘‘President Obama, backed by the conclusions of a broad range 

of economists, believes that China is manipulating its currency.’’ 

Does President Obama still believe that? 

Secretary GEITHNER. Senator, as you know, that is a judgment 

we make twice a year in this report, and we will make that judgment when we release this report. 

Senator GRASSLEY. But I am not asking about your study of it 

and your Department’s study of it. I am asking that President 

Obama said that he believes that China is manipulating its currency, and that is what you wrote to us when you were confirmed. 

So what does President Obama believe? You have had discussions with him. 

Secretary GEITHNER. I have. 

Senator GRASSLEY. If you said in January of 2009 that he felt 

that China was manipulating its currency, has he changed his 

mind? 

Secretary GEITHNER. We have issued two reports, two exchange 

reports since then, and, as you know, we delayed the issuance of 

our latest report. But when we release that report, we will provide 

the judgment of the Treasury. Of course it will reflect the broader 

12 

views of the administration about that basic important question 

again. 

But, Senator Grassley, our objective is to encourage China to 

move as quickly as possible. Everything we are doing is trying to 

maximize the chance that happens, and we will keep this committee closely informed of the progress we achieve and continue to 

underscore why this is important to the United States, of course, 

not just to China’s other trading partners. 

Senator GRASSLEY. The United States is not the only country affected by China’s undervalued currency. Many of China’s neighbors 

in Asia maintain similarly undervalued currencies in order to avoid 

losing their competitive position to China. 

To what extent is Treasury working with other countries to form 

a united front on China’s currency issue? 

Secretary GEITHNER. We are working very closely with the countries in the G–20, which include countries that make up 85 percent 

of the world economy, including all of China’s major trading partners, to help make sure there is a—well, how should I say—that 

China understands this is a global issue, not just an American 

issue, and we are doing it for exactly the reasons you implied, 

which is, again, and as the chairman said, it is important we use 

all the multilateral tools we have in institutions to reinforce these 

interests, not just do it on our own. 

Senator GRASSLEY. Thank you, Mr. Chairman. Thank you, Mr. 

Secretary. 

The CHAIRMAN. Thank you, Senator. 

Senator Bingaman? 

Senator BINGAMAN. Thank you for being here, Mr. Secretary. You 

cite these three areas of concern with the Chinese on trade issues. 

The first one, let me burrow down on a particular in that. You say 

the best way to limit China’s use of government procurement preferences to promote its industrial policies is having China join the 

rules-based WTO agreement on government procurement, and then 

you say China has now committed to submit a revised offer by July 

of 2010. 

I assume that that revised offer relates to this agreement? 

Secretary GEITHNER. Exactly. It relates to the scope of commitments they would make, the range of government entities they 

would cover, and the types of commitments they make to the 

United States and other signatories to the government procurement agreement. 

Senator BINGAMAN. Is there no remedy under the WTO when 

countries just choose not to pursue or not to adopt non-preferential 

procurement policies? Do we have no remedy under WTO on that? 

Secretary GEITHNER. Senator, that is really a question for my colleagues on the trade side. But I think our only strategy we have 

in this area, consistent with the way the WTO works, is to get 

countries like China, who have not signed, to sign; and, when they 

sign, not just sign, but take on as broad a set of obligations to nondiscrimination as possible. 

That is the most effective way to make sure that these policies 

do not discriminate against American companies. Again, the Chinese government—this is very important to us, because the ChiVerDate Nov 24 2008 19:57 Oct 05, 2011 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 R:\DOCS\68350.000 TIMD
13 

nese government plays a much larger role in its economy than, of 

course, the American government plays in this economy. 

Senator BINGAMAN. You then go on in your testimony to say just 

before the S&ED—that is the Science and Economic Dialogue that 

we had. Is that the S&ED—— 

Secretary GEITHNER. It is called the Strategic and Economic Dialogue. 

Senator BINGAMAN. Right. That is with secretaries—yourself and 

Secretary Clinton and others were involved. 

Just before that, you say it issued a public comment draft regulation on the determination of domestic products, under government 

procurement law, containing a 50 percent local content provision. 

Now, I think you are reporting that to us or putting that in your 

testimony as good news. Am I correctly interpreting that? 

Secretary GEITHNER. Let me say it this way. They came out with 

a draft product accreditation scheme to promote Chinese technology and Chinese companies, I believe, back in the fall of 2009. 

There were a lot of troubling things in that proposal. That is like 

a draft legislation or draft rule. 

But the basic concern was, again, that that would discriminate 

against American producers or American technology and would be 

another step towards a broad strategy that parts of the Chinese 

government have promoted over time to say, in effect, if you want 

to sell in China, you need to come produce here; if you want to 

come produce here, you have to transfer technology; and, ultimately, they say, and then we want you to serve your exports markets from China. 

This was part of the policy strategy like that, and, as you can 

tell, this is troubling to us, as well as to the broad American business community. 

Now, one of the most troubling aspects of this was the suggestion 

that, to be eligible for these preferences, the intellectual property 

in a product would have to be owned by Chinese companies, developed in China. That would be enormously consequential. 

So we were very concerned, raised those concerns to the highest 

level, and they agreed, in the run-up to this meeting, to remove 

that explicit provision from that list, to submit to receive public 

comments and concerns from around the world on this proposal, 

and to delay implementation until those comments have been provided. 

Then at the meetings themselves, as I said to Chairman Baucus, 

they agreed that these policies would be governed by a set of broad 

principles of discrimination going forward, and they would negotiate with us changes to those policies to address our concerns. 

But we do not know yet how far they are going to go. They have 

only moved this much in our direction, and we need them to go 

substantially further. 

Senator BINGAMAN. Would it not make sense—if they move far 

enough in our direction, to only require 50 percent local content for 

things that they procure, why should we not adopt that policy for 

everything we procure? 

Secretary GEITHNER. I think, again, the way the system should 

work is that, in government procurement, we should not provide to 

China benefits, access to government procurement, that they do not 

14 

provide in China. That is the basic—that is our policy. Now, that’s 

not enough. 

Senator BINGAMAN. Are we implementing that? 

Secretary GEITHNER. We are implementing that policy. But that 

is not enough, because, again, that will still leave us in a position 

where we are forgoing lots of potential opportunities in China. 

So our policy is to encourage China to submit to the disciplines 

and constraints and fairness provisions of the government procurement agreement so that the vast range of its companies, entities 

that are government-associated in China, would be eligible to buy 

goods from the United States. 

So it is not enough just to say what we say now, which is to say 

that we are not going to give you rights to government procurement in the United States you do not give us in China—that is our 

current policy. It is that we want to get China to do better than 

that and expand opportunities to the Chinese market to American 

firms. 

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

The CHAIRMAN. Thank you. 

Senator Bunning? 

Senator BUNNING. Thank you, Mr. Chairman. 

Mr. Secretary, the 1988 omnibus trade law requires the Secretary of the Treasury to submit a report on exchange rate policy 

to Congress twice a year. That is the law. The report must be completed by October 15 each year and updated every 6 months. The 

statute says ‘‘the Secretary shall’’—I think you are smart enough 

to know what ‘‘shall’’ means—not ‘‘the Secretary may’’ submit this 

report. It is now June 10, nearly 2 months after the deadline you 

missed. 

What made you think that the deadline in this statute is optional? And do you understand that you are violating the law by 

not issuing this report? 

Secretary GEITHNER. No, I would not say it that way, Senator. 

I would say you are right, though, as we announced, we were going 

to delay, for better or worse—— 

Senator BUNNING. Whoops, it does not say in the statute that 

you may delay. It is not optional. 

Secretary GEITHNER. Senator, again, I am not sure this will reassure you, but there is a long tradition, unfortunately, over—since 

that report was—since that law was passed—— 

Senator BUNNING. Yes. The Bush administration also violated 

the law. 

Secretary GEITHNER. Well, I would not say it that way. They did 

occasionally delay the report, for a broad range of factors, sometimes just because they were busy. 

Senator BUNNING. But, see, we are not like the Communist Chinese government. 

Secretary GEITHNER. I agree with you on that. 

Senator BUNNING. We make the laws up here. You are supposed 

to be acting under our laws. The Communist Chinese government 

is a top-down government. That is why they negotiate with you 

rather than us, because they know that you cannot make a law, 

but we can. 

So tell me why you are in violation of the law. 

15 

Secretary GEITHNER. Well, Senator, as we said publicly at that 

time, and as your colleagues have noted, we made a decision—we 

made a conscious decision in early April that delaying would improve the prospects that they would move. 

Senator BUNNING. Well, but we did not say you could do that. 

Secretary GEITHNER. No. We have the ability to do that. And as 

I said, my predecessors have done that many times before. 

Senator BUNNING. Wrongly. 

Secretary GEITHNER. Well, I do not know. I am not sure I would 

agree with that. But anyway, we made that judgment because we 

thought it was the best strategy for protecting our interests. 

Senator BUNNING. Believe me, Mr. Secretary, from the chairman 

all the way over to the other end of the table, every time the Bush 

administration did this, they were criticized out the you-knowwhat. 

Secretary GEITHNER. Well, I am not—— 

Senator BUNNING. And you are going to get criticized just like 

they did. You even got criticized by the chairman for not complying. 

Secretary GEITHNER. Yes, and I recognize that, sir. I do, yes. And 

that is the privilege of my office. And I did not mean by saying 

that, just because my predecessors in the Bush administration had 

done it, it was the right thing to do. 

I know in this case, it was the right thing to do, and I suspect 

it was—they had their reasons back then, too. 

But, Senator, I understand your concerns on this. And everybody 

is concerned about whether there is a strategy in place that will 

induce China to move. That is an understandable concern, and I 

understand that concern. 

Senator BUNNING. But you are talking my time away. Headline 

today in the New York Daily News: ‘‘Stop Trading Away American 

Jobs.’’ It specifically states 2.4 million jobs, mostly industrial and 

other types of jobs, have been traded away by our government’s 

policy; not only the last administration, but the current administration. 

Now, we have spent approximately $4 trillion to stimulate this 

economy in different ways, either through Treasury or through the 

Fed, and we have also had a policy of change that was supposed 

to be implemented by this administration. And yet, there are 15.5 

million people either part-time or full-time unemployed, in spite of 

all the stimulus. 

Was Treasury afraid to issue the report on April 15? Can we assume the report would have finally cited China for currency manipulation, or would it have continued your practice that we saw in 

the last two reports of ignoring the fact that is obvious and pretending that China is not a currency manipulator? 

Secretary GEITHNER. Mr. Chairman, may I proceed and answer? 

The CHAIRMAN. Yes. 

Secretary GEITHNER. Senator, you are absolutely right to point 

out that this crisis caused enormous damage to the American economy. It caused more than 8.5 million Americans to lose their job. 

Senator BUNNING. Fifteen and a half, if you count part-time. 

16 

Secretary GEITHNER. Yes. But by every measure, the American 

economy is in a much stronger position today than when we took 

office, and because—— 

Senator BUNNING. Well, I do not agree with that one darn bit, 

no matter what you or the Chairman of the Federal Reserve says. 

Secretary GEITHNER. Well, I am just saying if you look at the 

basic numbers everyone uses to measure—— 

Senator BUNNING. The basic number says the market is going 

the wrong way instead of the right way. 

Secretary GEITHNER. Again, every measure of business confidence, employment growth, innovation, investment, broad confidence in the American economy is substantially stronger today 

than it was a year ago. 

Senator BUNNING. Except in the housing and credit markets. 

The CHAIRMAN. Senator Kerry? 

Senator KERRY. Mr. Secretary, thank you. Thanks for being here, 

and thank you particularly for being willing to take on a tough 

task at a tough time in our country’s history. We appreciate your 

leadership and the difficult decisions that you have had to make 

in the wake of months of losing 750,000 jobs a month and so forth. 

I think the evidence is we have turned it around, but there are, 

obviously, tough issues ahead of us. I would like to ask you a little 

bit in terms of the China relationship. 

American and Chinese workers and producers, obviously, ought 

to compete on fair terms, and we all understand that. I think there 

are two principal things. 

I know currency has been brought up by a number of our colleagues, and that is one component of the relationship where a lot 

of Americans feel they are being put at a disadvantage. But, also, 

the Chinese government radically favors domestic producers, and it 

does it in the market through the government procurement practices and, also, through its industrial policy. 

I was over there last year, and I remember meeting with a bunch 

of our companies that were deeply frustrated, because they would 

go through the bidding process, and there just was such a clarity 

to the fact that they were written out of any of the winning, even 

though they were bidding well and competitively and so forth. 

I would like to ask you what—I know you just delivered a very 

frank message to our G–20 counterparts with respect to the global 

growth being slowed if China does not boost domestic demand and 

make up for the retrenchment of U.S. consumers. 

Help me with both of these: what can China and should China 

do with respect to the fairness of the playing field; and, two, what 

should they do with respect to demand in order to—because I think 

the whole European-global community is going to be stalled, and 

I think you would agree with me, if China does not do its part with 

respect to the demand side. 

Secretary GEITHNER. Senator, you are exactly right. I think I 

should start by noting, though, that it is very important what Europe does and what Japan does, too. It is very important to recognize, even with China’s extraordinarily rapid growth, Europe and 

Japan are still much larger, have a much larger influence on the 

global economy. And, if Europe and Japan are not growing, with 

17 

domestic demand leading growth, then the risk is that growth 

around the world will be slower than it could be, than it should be. 

China is important to that, too, of course. And again, the most 

important things for China to do are to put in place reforms that 

will reduce reliance on exports, increase how much of future 

growth comes from consumption spending in China and, therefore, 

results in faster import growth for the United States and around 

the world. The exchange rate reform is a very important part of 

that. 

On the trade and investment side, to remove/reduce the barriers 

to market access and to remove the preferences, reduce the preferences that they now provide their domestic companies. 

Senator KERRY. Let me just stop you there for a minute, if I can, 

because I just want to follow-up on it. Obviously, members of this 

committee have been pursuing these questions with former secretaries for some period of time. This is not a new debate in our relationship. 

What indications, if any, are there that you have that China is 

prepared to undertake these steps or respond to our continual complaints and raising of this issue? 

Secretary GEITHNER. Well, on the growth strategy, reducing export reliance stage, you can just look at what they are actually 

doing in terms of policies and reforms and look at the effect that 

is having. 

For the first time now, you are seeing domestic demand in 

China—not exports—domestic demand grow much faster than 

GDP, grow much faster than the overall economy. You are seeing 

consumption rise substantially as a share of growth. That is promising. 

Those effects are exaggerated by the crisis, because exports fell 

so much in the crisis. But they are encouraging in the sense that, 

as the global economy recovers, you are seeing growth in China 

start to move in a way that is, again, promising. 

But, of course, our job is to make sure that we reinforce—they 

reinforce that process. 

Senator KERRY. Our exports have risen. Have they risen at a 

rate that you are satisfied with? And what is the impact of the falling euro on our effort to increase our exports? 

Secretary GEITHNER. We are never satisfied on the export front, 

but U.S. export growth has been leading recovery in the United 

States. That is one reason why investment is strong in the United 

States and, as I said, why, even though the manufacturing sector 

is still operating at a fraction of its former level, that you are seeing the manufacturing sector start to come back. 

U.S. export growth to China, as I said, in just, again, the first 

quarter of 2010, over the same 2009 quarter, is growing at about 

50 percent, roughly double—I think more than double the rate of 

growth in our exports to the rest of the world. 

So, again, that is a sign that is really important to recognize, because it shows that growth matters, how China grows matters. 

That can have powerful effects on how much the U.S. is able to 

produce and sell to China, and has direct effects on increasing 

manufacturing jobs, because a huge part of what we sell to China 

is real things you can see. It is not just high tech and technology 

18 

and software. It is steel, airplanes, technology. It is, across the 

American economy, things that Americans are uniquely good at, 

and China needs desperately. And, because we are the best in the 

world at making it, we are likely to get a substantial share of that 

growth, as long as we can continue to make progress reducing 

these preferences for American producers. 

The CHAIRMAN. Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. 

Mr. Secretary, I supported China’s accession to the World Trade 

Organization. I thought it would be better to have the Chinese inside a rules-based trading system, and I thought it would be good 

for American exports, and especially Oregon exports. 

But there is now a long trail of broken promises that can no 

longer be ignored. On the point that you have been asked about 

this morning, indigenous innovation, where 23 Senators joined Senator Hatch and I in a bipartisan effort to get it changed, the Chinese pledged to join the government procurement agreement 10 

years ago. 

So 10 years ago they promised to do what they are now offering, 

to use your words, a robust offer to go forward, a decade later. 

So here is my question. By my calculation, at least five of your 

predecessors have been slow-danced by the Chinese. Secretary 

Rubin, Secretary Summers, Secretary O’Neill, Secretary Snow, and 

Secretary Paulson have all been part of this process where they 

push to try to get changes. And somehow robust offers are made, 

murky language is debated, but we constantly seem to be in this 

situation where someone in your position gets slow-danced off the 

dance floor. 

My question is, what are you going to do to change that? 

Secretary GEITHNER. Senator, again, I think that I would just 

offer two things as a context. China did move, in the period between 2005 and 2008, to allow a very substantial appreciation in 

the value of its currency against the U.S. dollar by more than 20 

percent. 

If you look at what has actually happened to U.S. exports to 

China over this period of time, there has been, by any measure, 

dramatic growth, and that growth is something that broad swaths 

of the American economy have participated in. 

Now, I think you are exactly right to point out that, although I 

think we are better off because China is in the WTO, that there 

are a range of things that China did not commit to do and has not 

yet delivered on that are part of that agreement. 

That is why we are going to continue to work to make sure that 

we expand the protections, rights, and obligations the WTO provides to cover things that are very important to our economy and 

their economy, like government procurement. 

Again, China’s government plays a much larger role in their 

economy than is true typically for major economies, and that is 

why opening up the government procurement market is such an 

important part of that. And we are going to pursue every effective 

means we have available to encourage them to do that more quickly than they have in the past. 

19 

Senator WYDEN. Mr. Secretary, I would only say, to cite an incremental step along the way, when we have a net loss, that is what 

our constituents are so angry about. 

I mean, take this piracy issue. That has been a flagrant problem 

for years on end. We sought to change it. Your predecessors, again, 

the five that I mentioned, have sought to change it. It did not get 

done. 

Now, we are fighting this question of indigenous innovations, flagrant protectionism, and we still have a piracy problem. 

Secretary GEITHNER. We do. I agree with you. 

Senator WYDEN. So the question is, given the fact that we have 

a piracy problem, given the fact that we have a protectionist policy 

with respect to getting our products of the future, the innovation 

goods, the technology goods into China, and we still are not there 

on currency, I still want to know at what point you are going to 

stop the slow dancing. At what point will we take stronger action? 

Is there a point, for example, where we say so many jobs have 

been lost that we have to take stronger action? Because we have 

heard this before. That is what the chairman highlighted, Senator 

Grassley highlighted. And we still are being slow-danced. 

Secretary GEITHNER. Senator, again, I do not think that I am 

going to disagree with you on the scale of the challenge ahead or 

the progress. And I agree completely with what you said. I think 

it is good to point out that—and you chose a good example—that 

on areas where they committed a long time ago to move, they still 

have not moved yet, and that is a problem for the United States 

of America. 

Again, I am happy to work with this committee, but we will look 

for every effective way we can to try to—— 

Senator WYDEN. How long, Mr. Secretary—— 

Secretary GEITHNER [continuing]. Be more persuasive and get 

more progress. 

Senator WYDEN. My time is almost up. How long are you going 

to give them to take what you cite as their robust offer on changing 

indigenous innovation, this protectionist policy, before you take 

stronger action? 

Secretary GEITHNER. That is not quite the language I used. And 

that stuff is the responsibility of my colleagues on the trade side, 

the Secretary of Commerce and Ambassador Locke, and it is worth 

listening to their strategy in that case. 

The CHAIRMAN. That is my point. It is not coordinated. 

Secretary GEITHNER. No. It is coordinated. 

The CHAIRMAN. You say you pass it off to Locke. You pass it off 

to USTR. 

Secretary GEITHNER. No, no. I am just saying to be—— 

The CHAIRMAN. I mean, this is a basic problem that this country 

faces. 

Secretary GEITHNER. No, Mr. Chairman. I am not doing that. I 

am saying that—— 

The CHAIRMAN. I do not want to take the time from my colleague, but that is the problem. 

Secretary GEITHNER. I am being respectful of the fact that, as 

you said in your statement, those responsibilities, they negotiate 

20 

them. They are charged under our system of government as part 

of a coordinated strategy for—— 

The CHAIRMAN. I understand that. 

Secretary GEITHNER [continuing]. Those negotiations. 

The CHAIRMAN. I understand that. I have already made my 

point. But I am not persuaded, frankly, that we have this coordinated the way it should be. 

Senator Wyden? 

Senator WYDEN. Thank you, Mr. Chairman. I believe I have 

made my point. Think about your predecessors. Go back and read 

their testimony. Literally, I have gone and done it, Mr. Secretary, 

in looking and preparing for this hearing. 

You can take it out, and you can practically change the name of 

your predecessor, and they say the same things—we are making 

progress. They cite some modest step. And, after we make one modest step forward, we take three steps in the hole. Our constituents 

get angrier and angrier, and that is what is fueling, of course, this 

protectionist drive in this country that I think will be a great, great 

challenge for the innovators and the future of this country. 

Secretary GEITHNER. I agree, and I share those concerns. But, 

again, what is different, though, what is different is, if you look at 

the best measure that we have about the benefits we get—and one 

of the measures we have is the scale of exports to China in things 

the U.S. creates and makes—those numbers are getting stronger at 

an accelerating rate, and that is very important. 

Now, we have a long way to go. I completely agree with you. But 

it is not fair to say, Senator, that the results of these efforts over 

time have not translated into dramatically increased opportunities 

for American companies. 

You talk to any company in the United States that is in a technology that is going to be important to our future, and they have 

a huge interest, not just in the market they have in China today, 

but a huge stake in being a larger part of that market, and we are 

committed to making sure that they are able to enjoy that basic 

privilege. 

The CHAIRMAN. Senator Schumer? 

Senator SCHUMER. Thank you, Mr. Chairman. 

Thank you, Mr. Secretary. 

Senator CORNYN. Mr. Chairman, may I ask? Are we going to be 

back and forth or just—— 

The CHAIRMAN. It is the early bird rule. 

Senator CORNYN. Well, I have been here for the last hour, so that 

is why I asked. 

The CHAIRMAN. Well, there are other Senators—— 

Senator SCHUMER. I was here at the beginning. 

The CHAIRMAN [continuing]. Who preceded you. They came and 

they left. Senator Schumer was here at the beginning. I am sorry, 

Senator, you are down—there are two ahead of you. 

Senator CORNYN. Every other committee I have ever been in, Mr. 

Chairman, we always had gone back and forth as opposed to go all 

on one side, but you are the chairman and you can—— 

The CHAIRMAN. No, no. Sorry, Senator, that is not—— 

Senator CORNYN [continuing]. You can do anything you want. 

21 

The CHAIRMAN. That is not a fair description. This committee 

has an early bird rule that pays no attention to parties. 

Next, Senator Schumer? 

Senator SCHUMER. And thank you for those bipartisan remarks, 

Mr. Chairman. [Laughter.] 

Mr. Secretary, welcome. As you know, I share the frustration 

that my two colleagues have just talked about. And it is true, we 

do—America is gaining exports to China, but every one of us who 

visits our companies, we hear of China not playing by the rules in 

every way. 

We could gain a lot more exports, and look at all the imports 

that come in from China. I know you are trying hard. I know you 

are doing the best you can. But I do not think anyone on either 

side of the aisle is satisfied with the results, and that is why we 

need to take stronger action than just diplomatic back-and-forth. 

I want to talk about currency. As you know, it is something I 

have cared about, some might say been obsessed with, for the last 

several years, 5 years. China’s policy of large-scale intervention in 

the exchange markets and the significant undervaluation of its currency subsidize Chinese exports to the United States and make 

U.S. exports more expensive. 

Billions and billions of dollars, millions and millions of jobs flow 

to China simply because their currency is manipulated. There is no 

excuse for it—none. CEOs all over New York tell me they are able 

to compete with China based on labor cost differences, but a builtin cost advantage of 30 to 40 percent due to currency is difficult 

to overcome. 

I have been talking about this issue, as you know, for more than 

6 years. You are the third Treasury Secretary who has come to 

hear about it. First—and this relates to what Senator Wyden 

said—we waited for John Snow to make progress, and during his 

tenure, the Chinese did halt the dollar-yuan peg after Senator 

Graham and I threatened to push our initial tariff bill to a vote. 

Then while Hank Paulson was Secretary, there was some very 

modest progress for about 2 years. But in mid-2008, China restored 

the peg, and there is no progress since, which means the level of 

undervaluation is back to where it was in 2005. 

We have not made progress. We take a step forward and then 

take a step back. So, back in 1975, there was a huge hit on the 

Hit Parade. It was called ‘‘Right Back Where We Started From,’’ 

by Maxine Nightingale. 

Do you remember that one, Mr. Chairman? Jim Bunning does. 

[Laughter.] 

If the current state of our China currency had a theme song, that 

is where it would be, ‘‘Right Back Where We Started From,’’ and 

we are tired of it. 

China’s mercantilist policies continue to undermine the health of 

U.S. industry. So this is fair warning. My colleagues and I, bipartisan, despite the administration asking us not to do it, are going 

to move forward with our bipartisan legislation to provide specific 

consequences for countries that fail to adopt appropriate policies to 

eliminate China currency. And let me just say, we are going to do 

it soon. Be prepared. 

22 

The bill—Senator Stabenow, to my right, Senators Graham, 

Brown, Brownback, Snowe—Senator Snowe here, as well—bipartisan—will get the currency alignment corrected. 

So here are my questions. First, where is the currency report? 

Why do we always shy away from telling the truth? That is question number one. 

Second question, would it not be a good signal for the administration to support the bill that the six of us have, because it will 

do a lot more to create jobs than lots of the other things that we 

are doing? 

Secretary GEITHNER. Senator, I would just say at the beginning 

that I believe that your efforts on this over the past 6 years—I 

would even go back before that—were effective, have been effective 

at decisive moments. 

I recognize, and I think it is very important for China to understand, that your current legislation or the legislation that you 

helped create in cooperation with Senator Stabenow and others has 

very broad support, not just on your side of the aisle, but very 

broad bipartisan support. 

I think the strength and the sentiment in the Congress on this 

is overwhelmingly strong. It is bipartisan, and it reflects, again, 

how important this is to the United States. So I understand that. 

I think it is important that China understands that. And you have 

been very consistent, not just in private with us, but in public, in 

saying that you believe that it is important for China to understand that Congress will act if China does not act. 

Senator SCHUMER. And for the administration to understand and 

put it in its calculations. 

Secretary GEITHNER. Of course, I understand that, and I understand exactly what you are trying to do and what you have tried 

in the past in this case, and I understand why you think it would 

be effective. 

Senator SCHUMER. Do you disagree? 

Secretary GEITHNER. With what? 

Senator SCHUMER. That it would be effective? 

Secretary GEITHNER. I think it is very important, again, for 

China to understand not just that other countries care a lot about 

this, not just that we care about it and the President cares about 

this, but that there is very broad support, on a bipartisan basis, in 

the Congress for them moving on this issue, absolutely. 

The CHAIRMAN. Senator Stabenow? 

Senator STABENOW. Thank you, Mr. Chairman, for this important meeting. And welcome, Mr. Secretary. 

Just if I might add to what Senator Schumer has said. We have 

worked very hard. We have combined two approaches into one, into 

this bill, that deal with both countervailing duties and antidumping. And we have put together something that, as you know, 

addresses concerns about the WTO. We use the IMF definition as 

it relates to currency misalignment. 

We both direct authority to Treasury and Commerce, and I think 

it is a very thoughtful approach that addresses concerns of the 

past. And I would share with Senator Schumer his analysis, as 

well as yours, that there is broad bipartisan support. 

23 

We are tired of losing jobs and losing American contracts as a result of an unfair advantage that gives a lower price on products 

coming in. 

Let me also thank the administration and thank you for efforts 

that have been taken. The Chinese tire case, the efforts on raw materials, we are seeing efforts, and I appreciate that moving forward. 

I do want to speak, though, also, to this indigenous innovations 

policy. And you and I have spoken about this. As you are hearing, 

again, from colleagues on both sides of the aisle, this needs to be 

addressed. And, in fact, Senator Graham and I are moving forward, 

and I expect strong bipartisan involvement and support on a bill 

that would address what is being talked about today. 

We have given China 10 years to sign onto the government procurement agreement. They have chosen not to do that. And I believe that we need to strengthen your hand in terms of making 

sure that taxpayer money, Federal dollars, do not go to Chinese 

companies or the Chinese for products or services until they sign 

this. 

Even though you have indicated that is the current policy, the 

reality is there are holes in that right now. We know, unfortunately, around the Census, we had two things brought to our attention—key chains and baseball caps, both of which were made in 

China, bought by the Federal Government for the Census. 

So we want to close that, in working with the chairman, working 

with the committee, and, basically, we will be offering legislation 

I am hopeful that you will be supportive of, and will work with us 

on. 

It will simply say that, until they sign that agreement, we will 

not waive provisions in law that relate to Buy America or other 

provisions that would allow Federal tax money to be used to purchase goods or services from China. 

I wonder if you might respond to that. 

Secretary GEITHNER. Well, Senator, again, you are absolutely 

right that this is a very important issue, and I would be happy to 

take a careful look at that legislation and work with you on how 

best to promote this interest in opening up that market in China. 

And I agree, I think it is not enough just to say we are not going 

to give China rights to our market because they do not give rights 

in their market. We want them to expand the rights that they offer 

in China. 

I just want to underscore, again, what I have said and compliment you on this, too, which is that, again, an effective strategy 

in protecting our interests in this area requires not just that we be 

effective and forceful on the trade side with China, not just that 

we enforce our laws and our protections, as we are doing very 

forcefully, but it requires, again, as you have recognized, that we 

invest in innovation and strengthening the U.S. manufacturing 

base. 

It is important for people to recognize that our fate on these 

basic questions lies in our hands. It lies in the hands of people in 

Washington, in the Congress, who have to make decisions about 

the scale of investments we make in innovation in the United 

States, and we need to continue to work with you on how best to 

24 

make sure we are designing those incentives in a way that can 

have the most effect in strengthening our manufacturing base. 

Senator STABENOW. Well, Mr. Secretary, I do agree with your 

comments that we are seeing at least the last 5 months an uptick 

in manufacturing. We are seeing some changes. 

We know that China is a huge market for us. I had the opportunity to speak at the Global Auto Leaders Summit in Beijing and 

attend the Beijing auto show not long ago, saw American companies there selling automobiles. The interesting part is the fact that 

80 percent of the people who are buying automobiles in China have 

never owned an automobile, even in their family. So it raises interesting challenges about auto maintenance and driving and a whole 

series of things that we do not usually see at an auto show. 

But I raise this because the good news is, actually, they want to 

buy American automobiles. The bad news is I saw a vehicle made 

not very far from my home in Lansing, the Cadillac CTS—great 

car. It has a 25-percent tariff coming into China, and they do not 

have a tariff coming into the U.S. 

So I support the President’s effort to double exports, and I am 

pleased to be a part of his export council to make that happen. But 

all of these issues go back to what we are all saying today, which 

is, we have to have fair trade. We have to have a level playing field 

if we are going to make sure that the Chinese who want to buy our 

products are able to do that and we are able to sell to them. 

So thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator. 

Senator Enzi? 

Senator ENZI. Go ahead. Senator Cornyn was here before I was. 

The CHAIRMAN. Just to explain things here so there is full transparency. You were here first in the anteroom. That is why the clerk 

indicated you were next. 

If Mr. Cornyn wants to go ahead of you, that is fine, but according to the rules of the committee—— 

Senator CORNYN. Mr. Chairman, you are in charge. I will defer 

to Senator Enzi. 

The CHAIRMAN. Nobody is in charge here. That is just the rules. 

So you two can figure out—— 

Senator ENZI. Thank you, Mr. Chairman. 

The CHAIRMAN. You two figure out between yourselves who 

wants to go first. 

Senator ENZI. Thank you, Mr. Chairman. I did not realize that 

the anteroom counted. 

The CHAIRMAN. Yes, it counts. 

Senator ENZI. I was getting some additional instructions on the 

questions. 

The CHAIRMAN. Yes, you were here. 

Senator ENZI. And I am going to shift gears a little bit, because 

I have already asked about China’s soda ash policy, which could increase exports from the United States if we took care of the VAT 

tax, and I am interested in what is happening on that. 

But I am also interested in what the IRS is doing in a number 

of instances that I think would make a difference in the economy, 

not necessarily with China. And I have asked for an appeals officer 

to be in every State, and I have not gotten a response on that. 

25 

But I want to talk a little bit about what is happening on the 

floor of the Senate right now, which is that we have a tax extender 

package, and it has some provisions that I do not think have been 

vetted by congressional tax-writers either in the House Ways and 

Means Committee or necessarily here, and it disturbs me greatly. 

It is mostly dealing with applying the self-employment taxes to 

the distribution of subchapter S corporations. That tax would apply 

when the principal asset of the S corporation is the reputation and 

skill of three or fewer professionals in a professional services corporation. 

I know this is fairly technical, but I think it is very important 

for what we are doing now. And I need to know why that provision 

is necessary. I think the IRS already has an audit procedure in 

place to prevent tax evasion. And I have copies of the Internal Revenue Service rulings that address the tax treatment of dividends in 

lieu of compensation. 

I also have pages of case law that the IRS has successfully litigated in the issue of dividend in lieu of compensation and the applicability of employment taxes. 

Plus, Congress just codified the economic substance doctrine, 

which says a transaction must have an economic purpose aside 

from the reduction of tax liability in order to be considered valid. 

So my real question is, why can the IRS not do its job with the volumes of legislative, regulatory, and judicial tools it already has? 

Secretary GEITHNER. Senator, again, I would be happy to come 

and talk to you and walk through the merits of this proposal and 

listen to your concerns about it. As always, of course, we are trying 

to figure out how to make sure that we provide greater clarity in 

how companies meet their obligations, to meet their obligations on 

the tax side, and this is part of that. But I would be happy to come 

spend some time with you and talk through the details of it. 

Senator ENZI. Well, I would appreciate that, because I am concerned about how we are going to define this principal asset. If I 

am a small accounting firm, but my S corporation owns the building in which the tax practice is located, is the principal asset the 

accounting practice or would it be the real estate that it held? The 

current IRS standards for determining the application of the taxes 

for S corporations is the payment of a reasonable wage. And this 

new standard, I think, is going to get in the way of these people 

being able to reinvest. And it is the small businesses that are keeping this country going, and they are the ones that will pick up the 

unemployment first and make a difference. 

But if we start taxing what they could reinvest and doing it differently than we have been doing it in the past, I think we are 

going to have some real repercussions. And I do not think that the 

policy really covers the situation where, if three children are shareholders and they do not have anything to do with the services, they 

are just receiving dividends, which would be the same with any 

major corporation. But under this proposal, their dividends would 

be subject to self-employment tax. 

So I will look forward to sitting down and visiting with you about 

this. I do not know if you have any other comments you would like 

to make. 

26 

Secretary GEITHNER. Well, just that I know that members of this 

committee have spent a lot of time and care on this question in the 

past, and we will be very careful in making sure we apply the law, 

and that the IRS designs regulations to apply this law in a way 

that is careful and sensitive to the complexity involved. 

But, again, I’d be happy to come spend some time to listen to 

your concerns about it. 

Senator ENZI. I would like that, because it looks to me like we 

are doing some things that are already covered by law and have 

been—that have been established over a long period of time, and 

I would hate to see that change. And I will look forward to the answers that I have requested on China economic policy, as well as 

the appeals process. 

I would yield back the rest of my time, Mr. Chairman. 

The CHAIRMAN. Thank you, Senator Enzi. 

Senator Cornyn, here you are. 

Senator CORNYN. Good morning, Mr. Secretary. 

Secretary GEITHNER. I thought you were here first, by the way, 

I just want to point out. [Laughter.] 

Senator CORNYN. Thank you. I think your eyesight is better than 

the chairman’s. [Laughter.] 

Secretary GEITHNER. No. I fully support the chairman and the 

rules of the anteroom, but I thought you did take your seat first. 

The CHAIRMAN [continuing]. I do not like gratuitous comments, 

Mr. Secretary. 

Secretary GEITHNER. I said I fully support the view of the chairman on the anteroom. 

Senator CORNYN. Mr. Secretary, I have a question about our debt 

and who owns our debt. Senator Obama, at the time, in 2006, 

spoke in opposition to an increase in the statutory debt limit, and 

he said increasing America’s debt weakens us internationally and 

domestically. 

As you know, since that time, the debt has actually increased. 

Would you agree with that statement by then-Senator Obama that 

continued growth of U.S. debt will weaken the United States’ international standing? 

Secretary GEITHNER. Senator, I would say it this way. It is critically important to the economic future of our country, to our economic security, our financial security, to the basic prosperity of 

Americans that we work together to bring down these fiscal deficits 

to a sustainable level as the economy recovers. It is absolutely imperative, and we need to work together to make sure that the 

world has confidence that we are going to be able to do that over 

time. Absolutely. 

Senator CORNYN. So you would agree with that statement. 

Secretary GEITHNER. I would agree, again, that the fiscal position 

of the United States is unsustainable. I mean, again, as you know, 

just to go back a little bit, when I left the Treasury in 2001, we 

were paying down the debt. Projected surpluses were in the 

$5.6-trillion range over the next 10 years. There was a dramatic 

swing to deficits and huge increasing debt burdens in the ensuing 

8 years. When we came into office, we had a deficit of $1.3 trillion, I 

think. But we recognize, as you do, I think, that we need to bring 

27 

restored gravity to our fiscal position, bring down those deficits, 

and we look forward to working with you on how best to do that. 

Senator CORNYN. Secretary of State Clinton has urged Congress 

to address the Federal budget deficit as a matter of national security. Do you believe there are national security implications associated with our growing national debt, and who owns that debt? 

Secretary GEITHNER. Senator, I believe that our national security 

depends significantly on our economic strength at home. And part 

of making this country stronger economically in the future, as we 

are doing, is making sure, again, the world has confidence, as I believe they do, that we are going to be able to find the political will 

to bring these deficits down over time. 

So absolutely, our economic strength is critically important to our 

national security, and a critical part of our economic strength is, 

again, making sure that the world has confidence in Washington’s 

ability to bring down these deficits. 

Senator CORNYN. Are you familiar with the reported statement 

of a retired Chinese People’s Liberation Army 2-star general, who 

currently remains working as a civilian at the People’s Liberation 

Army, who was quoted in the news articles as saying that, because 

of American policy of selling defensive weapons to Taiwan, that the 

Chinese government could choose to retaliate by dumping American bonds and destabilizing our economy, and using that as leverage? Are you familiar with that report? 

Secretary GEITHNER. I am certainly familiar with that concern, 

but I am not familiar with that specific statement. But, again, Senator, I would say this. Our economic fate and our financial fate as 

a country lies in our hands. It rests in our capacity to continue to 

convince the world—not just Americans, but the world—that we 

have the political will to deal with these things. 

Again, it is just important to point out, and this is very important, in the last 18 months, when the world was going through, 

again, the worst financial crisis in generations, you saw investors 

around the world seek the basic safety and security of U.S. financial assets, because they had confidence in this country and our 

ability to act to fix our problems. 

We are going to do everything we can to make sure we continue 

to earn that confidence, because it is so important to our economic 

strength. And again, a lot of it depends on our capacity together— 

people in Washington, in this room, and in this body of Congress— 

to demonstrate that we have the political will to fix what we got 

wrong, fix what is broken, and bring down these deficits over time. 

Senator CORNYN. Mr. Secretary, last night, the Senate passed an 

amendment called Transparency Requirement for Foreign-Held 

Debt. The title is ‘‘The Foreign-Held Debt Transparency and Threat 

Assessment Act.’’ And in the findings in the bill, and I would commend it to you and your staff, if you have not had a chance to read 

it—it only passed last night—it cites the potential economic and 

national security risks of foreign ownership of our debt, and, of 

course, China is the number-one owner of U.S. debt. 

It asks for transparency and periodic reports from the President 

and others so that not only the administration, but Congress, can 

make objective assessments about the risks involved and inform 

28 

our decisions on how to deal with either reducing the debt or otherwise addressing the matter. 

Do you support the basic concept of transparency and periodic reports to Congress and other policymakers so we can deal with this 

in a realistic way, and in a way that protects both our economic 

and national security interests? 

Secretary GEITHNER. Senator, I am very concerned about—although I understand your concerns, I say this with respect. I am 

very concerned about the language in your legislation and the signal it sends about the United States. But I very much support the 

basic objectives of making sure there is broad transparency, information available, not just about our budget deficits and their expected path and our debt burden, but about the level of ownership 

of those investments. 

I am committed to doing whatever we can to improve transparency in that area and, again, happy to make sure that we are 

responsive to the concerns of this committee and making sure we 

are reporting regularly on those foreign holdings. 

Senator CORNYN. Well, I would be happy to hear of your specific 

concerns. Of course, this bill passed with a strong bipartisan support, the amendment did and, I think, represents a concern of the 

Senate that increasing debt and the lack of transparency as far as 

who owns it and the concentration of that debt in the hands of people on whom we have to depend for their tender mercies, that that 

is not an optimal situation for the U.S. Government. 

So I would be happy to visit with you and your staff about any 

specific concerns you might have. 

Secretary GEITHNER. Again, Senator, I just emphasize what we 

have in common on this. I think it is very encouraging and very 

important—and important for the world to see this—that there is 

broad bipartisan concern about our future fiscal position and broad 

bipartisan interest, and it is very encouraging to see it. 

We have to see it translate into action to make sure that we are 

working to bring these deficits down as the economy recovers. That 

is very important to the future of this country, to the future 

strength of our economy. And, again, we look forward to working 

with you on how best to achieve that. 

The CHAIRMAN. Senator Snowe? 

Senator CORNYN. Mr. Chairman, thank you. 

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

Secretary. 

It is, obviously, an enormous frustration because of the lack of 

action on the part of our government, frankly, for years. We have 

been sitting in this committee, I certainly have, for the better part 

of this last decade, and we are talking about the very same issue, 

precisely, the same dimensions of our problems with China, the 

same problems with respect to the manipulation of currency, and 

actually we have the status quo. 

I understand about all of these meetings that you have had in 

China, but I do not see it reflected in any concrete, specific actions 

or a timetable that would suggest that they will be revising their 

currency any time soon. 

So beyond soothing words, what can we expect? Frankly, because 

I represent a manufacturing State—and we have seen the withVerDate Nov 24 2008 19:57 Oct 05, 2011 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 R:\DOCS\68350.000 TIMD
29 

ering of our manufacturing base since 2001 when China joined the 

WTO—we have lost 10,000 jobs just directly related to China. Nationally, we have lost 2.4 million jobs. 

We can expect, according to leading economists, to lose another 

1.4 million over the next few years as a result of the manipulation 

of the currency and, also, subsidy. So I do not exactly know what 

course of action, what road map we have that is going to make any 

profound change. 

Then, today, on the revised estimates for May, with respect to 

China’s imports, those to the United States climbed 44 percent, up 

from 19 percent, between April and May, compared to April and 

May of last year. 

So we went from 19 to 44 percent over the same period of time 

compared to last year. So, obviously, we are moving entirely in the 

wrong direction. 

So I would like to ask you, first of all, what were you encouraged 

about as a result of the Strategic and Economic Dialogue meeting? 

You said afterwards that—you were quoted as saying that you 

were very, very encouraged by the meeting. 

Was there anything specific that developed at the meeting that 

we could be encouraged about? 

Secretary GEITHNER. Well, absolutely. In the run-up to these 

meetings, again, China committed to resume its process of exchange rate reform to allow its currency to begin to reflect market 

forces. Although, as you have seen, of course, they have not decided 

when they are going to do that, how quickly, and we want them 

do it quickly. 

They committed to change and modify aspects of this indigenous 

innovation policy to remove some of the most discriminatory aspects of it and to a process of negotiation to try to resolve our remaining concerns. They agreed to a range of specific commitments 

to increase opportunities for U.S. investors in China in a range of 

sectors. 

But I agree with your concerns, Senator, and, again, the test of 

these things is not what people say, and it is not how many meetings you have. The test is what actually happens to the terms and 

conditions in which U.S. companies compete on and what the results are in terms of increased exports to China. 

Again, I think that it is important to note that U.S. exports to 

China are growing much more rapidly than they are to the rest of 

the world. Now, we think they can do better than that. They are 

growing at roughly double the pace of U.S. exports to the rest of 

the world, in part, because China is just growing so fast. But we 

do not feel like we face a level playing field now in China, and we 

need to work together to make that better. 

Again, we are willing to work closely with this committee to figure out how we can strengthen the tools we have to get more rapid 

progress in these questions. 

Senator SNOWE. Well, according to today’s report, their exports 

overall are up 48 percent. 

Secretary GEITHNER. Yes. You are right. Their exports were up 

almost 50 percent, and their imports were up almost 50 percent, 

too. Now, they export more than they import, which is something 

that is important we change over time, which is why we want to 

30 

see future growth in China come more from domestic spending, less 

from exports. 

Senator SNOWE. Following the 2 days of the Strategic and Economic Dialogue talks, China’s Assistant Finance Minister said the 

U.S. clearly understands China’s stance on the yuan and went on 

to say that the U.S. understands that China will decide on the exchange rate reforms by taking into account world economic conditions and China’s own development trends. 

Do you agree that the United States clearly understands China’s 

stance on its currency? What do we understand about it? 

Secretary GEITHNER. Well, I do not know what actually he said 

or what he meant. But what China has said publicly—and I think 

that is the best measure—is that they are going to resume the 

process of reform to let the exchange rate reflect market forces. 

That will, over time, allow the exchange rate, as it has done in 

the past, to move up against the dollar. They have said in making 

that decision about how they move, when they move, they are 

going to look at what is happening around the world, as in China, 

but you would expect them to say that. I do not think there is anything particularly interesting in that observation. 

So, again, this is something that we think is in China’s interest. 

It is, obviously, in our interest. We think it is in the world’s interest. And we hope they recognize how important it is to us that they 

move. 

Senator SNOWE. Well, I mean, what can you suggest to this committee or to the Congress or, more importantly, to the country 

about where do we go from here? What exactly can we expect from 

China? 

I mean, we are seeing a bleeding of manufacturing jobs. That is 

the only picture that I know, regrettably, right now. We are not 

creating jobs in this economy. We have shown no capacity to create 

jobs, and we are losing manufacturing jobs. 

There is just no definitive certainty of policy that is coming out 

of Washington right now to give anybody confidence, and then you 

add that in conjunction with what we are dealing with in China. 

So what direction can we expect from you in coordination with 

the other agencies to get this done? I mean, because we clearly are 

bleeding jobs. It is true frustration, and I just keep hearing, ‘‘Well, 

we are doing great.’’ 

I know you do not want to call China a currency manipulator. 

You can call them misaligned currency, whatever the case may be. 

But we expect some definitive action. I mean, we are losing thousands of jobs, and that is not going to abate any time soon. 

Secretary GEITHNER. Senator, it is absolutely true that the U.S. 

economy is still showing devastating effects of this crisis in this recession, not just in manufacturing, but across the American economy. We have lost millions and millions of jobs. 

But it is important to note that the U.S. economy has now been 

growing for 4 quarters. We have seen positive job growth across the 

economy now for almost 6 months. You are seeing income start to 

increase again, hours worked increase again, and that is happening, importantly, in manufacturing, and this is very important. 

We are seeing the beginnings of the recovery. And we have a 

long way to go, and it is still very, very difficult, very, very hard 

31 

out there. But you are seeing private investment increase, and the 

recovery is being led by private investment and by exports. 

Now, the best strategy for the United States is to make sure we 

focus on continuing to provide greater incentives for investment, for 

innovation in this country, to strengthen our manufacturing base. 

As part of that, of course, we want to expand opportunities for 

American exporters around the world, make sure we are using the 

U.S. trade laws to protect Americans from unfair trade practices, 

and we are doing that very aggressively. 

But you have to do both these things. You have to make sure 

that we are making this economy stronger at home, which we are 

making a lot of progress on doing, and we have to make sure we 

are aggressively protecting Americans from unfair trade practices 

and opening up foreign markets. 

Again, if you look at the best measure of results in this area, 

which is what is happening to American exports for what is the 

most rapidly growing market for American exports in the world, 

they are growing very rapidly because Americans are so good at 

and so productive and so competitive in producing the things that 

so much of the rest of the world needs, and that is true across manufacturing. 

It is true in high tech, it is true in software, and it is true in 

agriculture. It is true in all the basic strengths of the American 

economy. So we are, obviously, going to continue to work, are 

happy to work with this committee still and figure out how we can 

make sure that you can reinforce, give us more leverage, more traction in our efforts. But that has to be the basic strategy. 

The CHAIRMAN. Do you have other questions, Senator? 

Senator SNOWE. Well, can I just make a comment? 

The CHAIRMAN. Sure. 

Senator SNOWE. Yes. Mr. Secretary, I still do not believe, and I 

think the evidence is abundantly clear with respect to job creation, 

that it is just simply not happening. And I just hope that we can 

get together on a policy, certainly on small business, on trade, because there is no demonstrative change. Job creation is simply not 

happening, by any measurable standard. 

Secretary GEITHNER. Well, I do not think it is strong enough yet. 

Senator SNOWE. It is not evident. And I am just telling you, and 

I hope everybody on the other end of Pennsylvania Avenue understands, we are not creating jobs. It is as simple as that, and it is 

horrific. So jobless recovery is not a true recovery, and we have to 

create jobs. 

I just do not understand why we have lost the focus. It is very 

frustrating, and I am expressing all my constituents’ frustration 

and probably Americans’ frustration, and I just want it to be heard: 

we are not creating any jobs. 

Secretary GEITHNER. Again, the Senate is in the process of considering a range of targeted measures to help ensure that, as we 

grow, we see more job creation. Now, you mention, and I think it 

is very important, not just the trade export agenda, but also small 

businesses, and we hope that Congress will move quickly, including 

the Senate, to pass a package of measures to help small businesses 

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32 

ness lending as a complement to the tax incentives the Senate is 

now considering. 

I think that would be very important, but, again, that is something the Senate has to do. We have proposed it. The Senate has 

to act, along with the House. 

Senator SNOWE. Well, we require leadership on both ends of 

Pennsylvania Avenue, frankly, and I have been working for 6 

months on that small business package, and I have not seen it. 

And people are suffering, and I just want you to understand, and 

I think the administration better understand, the President needs 

to understand, Congress needs to understand. You had better wake 

up to it. 

Secretary GEITHNER. Senator, we understand. That is why—— 

Senator SNOWE. Because we are just dithering, and I think it is 

regrettable. 

Secretary GEITHNER. That is why we proposed this, as you said, 

more than 7 months ago. 

Senator SNOWE. Yes. Well, and where is the action? 

Secretary GEITHNER. Again, we, under the Constitution—— 

Senator SNOWE. I would be glad to work here day and night. I 

am dead serious. We better take charge, because a lot of people are 

suffering, and I think we better understand that and get focused 

on job creation. And that is just simply not happening here, and 

it requires leadership on both ends, both in Congress and the 

White House, to get this done. 

Secretary GEITHNER. On that I completely agree. 

Senator SNOWE. It is in everybody’s interest. 

Secretary GEITHNER. And I completely agree with you. And it is 

something we cannot do alone. 

Senator SNOWE. It is in our national interest. 

Secretary GEITHNER. And I think, Senator, there will be broad— 

I hope there will be broad support for the small business package 

on both sides, not just because of your commitment to it, but there 

are a lot of colleagues on your side of the aisle who want to be supportive of this. 

Senator SNOWE. Thank you. 

The CHAIRMAN. Thank you, Senator. 

Mr. Secretary, why is it in China’s own self-interest to let the 

currency appreciate? Could you just outline why it is in China’s 

best interest, as well as the U.S.’s best interest? 

Secretary GEITHNER. I would put it this way, Mr. Chairman. 

China, by tying its currency to the dollar, does not have the capacity to run an independent monetary policy. You cannot run an 

independent monetary policy, meaning set interest rates, set the 

overall level of conditions so that you do things sensible for growth 

and inflation in China, if you tie your currency to somebody else’s 

currency. So that is one reason. 

A natural part of development is to make sure you have the independence to pursue an independent policy to make sure you are 

supporting growth and price stability in your country. 

A second very important objective is to make sure that, by letting 

the exchange rate reflect market forces, they are more likely to do 

a more effective job in encouraging this shift to greater reliance on 

domestic demand, domestic consumption, and reduce incentives for 

33 

export, reduce the excess dependence on exports that has characterized China’s growth for the last 3 decades. 

They recognize that they are getting too big for that to be an effective strategy, and they need to recognize, as we change how we 

grow, as we save more as a country, that the world is going to be 

able to rely less on spending by U.S. consumers fueled by borrowing in the United States. So that is the second reason for doing 

it. 

A third reason is that, again, it is very important to China’s trading partners. It is very important to the basic sense of fairness and 

balance that China’s trading partners expect. So those are three 

reasons why I think it is in their interest. 

The CHAIRMAN. Well, will it help address the asset bubble? 

Secretary GEITHNER. It will give China more—part of flexibility 

to run an independent monetary policy is the flexibility to act to 

contain the risk of inflation or asset price inflation in China, and, 

again, you have heard many Chinese officials speak to that imperative as one rationale for moving on the exchange rate. 

The CHAIRMAN. Now, when you talk to them, do they indicate 

they understand in some degree and might agree with those reasons? 

Secretary GEITHNER. Absolutely. 

The CHAIRMAN. What are your thoughts on delinking the strategic policy of the United States from economic components of our 

bilateral relationship? 

Secretary GEITHNER. Well, Mr. Chairman, I think—— 

The CHAIRMAN. There are many who think that economic issues 

are not adequately pursued because they are linked too much with 

U.S. strategic concerns. For example, making progress on economic 

issues is linked with trying to influence China to vote appropriately 

in the U.N. Security Council with respect to Iran sanctions or to 

encourage China to act appropriately with respect to North Korea. 

Some think, and I tend to agree with this, that economic policy 

is a stepchild, a second cousin. It takes a back seat to larger strategic interests. 

Why not just de-link? Why not just pursue our economic policies, 

because they are so important and, as I mentioned earlier, I think, 

in some ways, are more important, because the more important we 

are as a country economically, the stronger we are as a country 

economically, the more we project power, the more we project results that we want overseas. 

Why not de-link? 

Secretary GEITHNER. Senator, I completely agree with you on 

this. We cannot pursue our national security interests with China 

without pursuing our economic interests with China. It is very important for people to recognize that. 

It may have been a concern. People may have concerns about 

U.S. policy in the past, getting that balance right, but it is not true 

now. The President believes very strongly that we have to pursue 

these two things together, and that is what he is doing. And I can 

tell you from direct experience these last 18 months that we have 

put these economic issues at the center of our concerns in the relationship with China. 

34 

Now, of course, countries have broader interests, too. We have to 

recognize all those interests, too. But I completely agree with you 

that we cannot pursue our national security objectives effectively 

with China without also pursuing our economic interests. 

The CHAIRMAN. Now, as you pursue our economic interests, do 

you have deadlines? For example, with the Strategic and Economic 

Dialogue, you indicated, I think, that China committed to address 

its indigenous innovation practices, and to address some procurement issues. 

Do you have a deadline for addressing these issues? 

Secretary GEITHNER. Our basic deadline is always the sooner, the 

better, and yesterday would be better. 

The CHAIRMAN. We all know that. 

Secretary GEITHNER. But in the agreements reached as part of 

this dialogue, there are, in a number of areas, very specific deadlines, time-tables for actions, objectives for actions for followthrough, as you would expect. 

Now, it is not true everywhere, but in a variety of important 

areas, there are specific objectives for progress, and there are specific time-frames identified for next steps. 

The CHAIRMAN. All right. Now what happens? What is the 

backup plan if they are not met? 

Secretary GEITHNER. We try to be as persuasive as we can. 

The CHAIRMAN. That is more talk. 

Secretary GEITHNER. No, not necessarily. 

The CHAIRMAN. If it is not necessarily, what is it? 

Secretary GEITHNER. As I said, we have a variety of basic tools 

and instruments and protections under U.S. trade law and in the 

WTO. Those are some forms of leverage. We use those where we 

think they are going to be effective, and we will continue to do 

that. 

Again, we try to use all means available that we think are going 

to be effective in convincing them to move on things that are important to the United States, as you would expect us to do, and we 

are going to continue to do that. 

Again, I am happy to work with you on how best to make sure 

that those tools are as effective as possible. 

The CHAIRMAN. What about on patents? That is one of the most 

glaring areas of discrimination. 

Secretary GEITHNER. I could not agree with you more. I could not 

agree with you more. It is, for so many people, in some ways, like 

the exchange rate: it is a basic symbol of commitment by the government to play by a basic set of rules that we all play by. 

I completely agree with you. And it is completely unacceptable to 

the United States that you continue to see, despite improvements 

in the laws, such inadequate enforcement, such inadequate deterrence of basic piracy and theft of intellectual property in the 

United States. 

Again, I am happy to work with you and this committee on how 

to make sure we can strengthen the tools available to—— 

The CHAIRMAN. But does the administration have a plan to address it? 

Secretary GEITHNER. Again, my colleagues at U.S. Chamber of 

Commerce are working very hard on how to improve this, and I am 

35 

sure they would welcome a chance to come brief the committee on 

where they think they are and what is ahead. 

The CHAIRMAN. Are you aware of that plan? 

Secretary GEITHNER. Senator, I do not think it would be fair for 

them for me to speak to their strategy on this stuff, but again, they 

completely agree with the objectives. It is important to the President. The President sets these priorities, and he has made it clear 

to them that he wants to see progress in these areas, and they 

have a very detailed, extensive, intensive negotiating process in the 

Joint Committee on Commerce and Trade to try to work through 

these things. 

Now, what we try to use at these higher level meetings, we try 

to make sure that, when the President meets with the head of the 

country and we meet as Secretary of the Treasury and Secretary 

of State, we are reinforcing that and making it clear that they understand it is important to us, too. 

Again, we are happy to work with you on how best to make sure 

that we—— 

The CHAIRMAN. China agreed to the benchmarks in the Joint 

Committee on Commerce and Trade plan? As I hear it, there is a 

plan with other agencies. Commerce, for example, has a plan. 

Secretary GEITHNER. In some areas, again, they have—you 

should ask them to come up and talk to you about it, but they have 

a set of detailed objectives for making progress, and they have a 

bunch of negotiations ongoing in specific areas to try to get more 

progress in this area. 

But, again, you are right to underscore this, and this is the way 

I approach life, too. What matters is not whether you meet, agree 

to have a meeting, sit down and talk. What matters is whether 

that results in changes in policies that matter to us. 

Again, you can measure very directly whether this is getting better, and, in the intellectual property area, particularly in software 

or in entertainment products of the United States, it is still terrible. 

The CHAIRMAN. Yes. 

Secretary GEITHNER. It has gotten better in some areas, but in 

these areas, it is still, based on all measures, it is still terrible. 

The CHAIRMAN. Yes, it is. In prior trade laws, such as Special 

301, countries were put on watch lists and, if certain actions were 

not taken, USTR would begin enforcement actions against those 

countries. 

As I recall, that worked very well. It got countries’ attention. 

I would just encourage you to be thinking of ways to come up 

with a similar procedure, 

Secretary GEITHNER. I agree with you about that history. And 

one of the WTO cases against China that we recently won was a 

copyright case, and U.S. companies seem to be having a little success in China in winning cases in Chinese courts, which would be 

helpful, too. 

But, again, we are looking for ways to try to make sure that we 

can use these tools we have in the WTO to be as effective as possible in getting better progress in these areas. 

The CHAIRMAN. When does Treasury plan to issue its report on 

the currency? 

36 

Secretary GEITHNER. At the right moment. 

The CHAIRMAN. When is that? 

Secretary GEITHNER. It will be at that time that we decide is the 

right moment. 

The CHAIRMAN. Can you help us out a little more? 

Secretary GEITHNER. Do we need what? 

The CHAIRMAN. Can you help us out a little bit more and be a 

little more precise? 

Secretary GEITHNER. Well, I have not decided yet. As we said 

when we announced in April that we were going to delay, as, of 

course, has been done many times in the past, we made it clear we 

wanted to take advantage of this window between then and the 

G–20 meeting to see if we could make some progress in the area. 

So once we get through the G–20 meeting, we will take some 

stock. 

The CHAIRMAN. Is delay in part to try to encourage China to take 

action we want in the U.N. on sanctions, because we want China 

to take other action with North Korea, for example? 

Secretary GEITHNER. I would say it this way, Mr. Chairman. 

The CHAIRMAN. But we have not de-linked. 

Secretary GEITHNER. Everything we are doing in this area is designed to improve the chance that China moves on things that are 

important to the United States. And our strategy is going to be 

guided, again, by what is going to improve the chances that they 

move on things that matter to the United States. 

Now, again, we may disagree occasionally on what is the best 

path to get there, and you are going to judge us by what happens. 

I completely agree with that. And we will have to see. But after 

the G–20, we will take stock a little bit and see what makes sense. 

The CHAIRMAN. It sounds like you are not de-linking. It sounds 

like these are all linked. 

Secretary GEITHNER. Linked to what? 

The CHAIRMAN. The currency reports are linked to—— 

Secretary GEITHNER. No, no. I did not mean to imply that. I am 

saying, look, we are a Nation with interests. We have interests on 

the national security side. We have interests on the economic side. 

We are pursuing those together, as we should, as a country, and 

I think you would do that in our shoes, too. 

We are going to figure out, again, the most effective way to make 

sure we can get as much progress in those things as we can. China 

is a sovereign nation. It has interests, too. Our job is to try to make 

sure how—how we can make sure that we are getting them to be 

responsible on things that are essential to the United States. 

The CHAIRMAN. Well, I understand all that. I, frankly, I hate to 

use the phrase—‘‘lead the effort’’—but we did need that kind of 

leadership to end the annual conditional MFN status for China. It 

needed to be eliminated, and we finally, finally—I have a lot of 

scars to show how hard that was—eliminated that and then replaced it with PNTR. 

I pushed hard for PNTR for China, very hard. I thought it was 

the right thing to do. I remember talking personally to President 

Clinton about it, because I thought it made good sense for China 

to be much more part of the world community, a member of WTO, 

et cetera. 

37 

But China now has to live up to its obligations. It has to be a 

responsible stakeholder; not just a stakeholder, but a responsible 

stakeholder. And I believe that, generally, no country altruistically, 

out of the goodness of its heart, ever lowers a trade barrier. They 

do not do that. It requires leverage. 

It is up to you, the administration, to find that leverage to show 

that we will undertake certain actions if China does not do what 

it should do. So I just urge you very much to find that leverage. 

It is not going to happen without leverage. No country altruistically, out of the goodness of its heart, ever lowers a trade barrier; 

they just do not. 

We have to find ways to encourage them to do the right thing 

in our mutual self interests. 

Senator Enzi? 

Senator ENZI. Thank you, Mr. Chairman. And I want to thank 

you for the comments that you have made and the questions that 

you have just asked. I think they are very, very pertinent and 

things that we need an answer to. 

I want to thank the Secretary for all of the times that he has appeared before us and your tremendous ability to both answer questions and to deflect questions. [Laughter.] 

Secretary GEITHNER. I am sorry. I will not respond to that, 

but—— 

Senator ENZI. And I understand that sometimes the deflection 

has to do with a national strategy and the need to keep that strategy private rather than public until the appropriate time, and I appreciate that. 

I will have some questions that I will submit in writing that 

probably fall more into that category, but they are something that 

I would like to have a little bit more direction on as we go into 

some of these things. 

I also want to thank the Senator from Maine, Senator Snowe, for 

her emphasis on small business and would hope that you would encourage the administration to bring that to the forefront. We have 

a lot of issues that we are talking about out there that I think are 

long-term issues that probably will not result in a lot of action or 

resolve, but that small business package has potential, and it is bipartisan, and that is where the jobs are created in this country. 

One of those small businesses is the soda ash business that I 

keep bringing up, and I would ask if you would kind of elevate that 

in these strategic and economic development talks, the dialogues, 

so that it could actually be emphasized a little bit. I think with 

some emphasis, that that might be a place that we could make a 

huge difference in the economy. 

As a final comment, I hope that our discussions on the small 

business, the S corporation tax can happen soon, because that tax 

extenders package could really be a detriment to the small businesses, not just in figuring out what it means, which is a major 

problem, but in the way that it will affect their ability to reinvest 

in new jobs. 

Secretary GEITHNER. Mr. Chairman, can I just say that I very 

much appreciate your support on the small business side and Senator Snowe’s support. This package of small business measures includes a very powerful package of tax incentives for small busiVerDate Nov 24 2008 19:57 Oct 05, 2011 Jkt 000000 PO 00000 Frm 00041 Fmt 6633 Sfmt 6633 R:\DOCS\68350.000 TIMD
38 

nesses. It includes a substantial increased expansion, carefully designed, of the Small Business Association credit programs. And it 

includes a new lending facility designed to make sure that community banks across the country are able to expand lending to small 

businesses and, as part of that, includes a targeted set of programs 

that go directly to States to also help support small business lending. 

So it is very carefully designed, it is very well-designed. It is not 

expensive, and we think it has the highest return on use of scarce 

resources of almost any of the programs we have looked at. So we 

hope we can move on it, and I agree with you that it is a critical 

priority. 

Senator ENZI. Well, the incentives for small business, of course, 

will help, but that package seems to be way off in the future, 

whereas this detriment to the small business, this tax that we will 

be undoubtedly voting on next week—— 

Secretary GEITHNER. Well, Senator, I think the intention of the 

leadership in both houses is to move on this small business package very quickly. 

The CHAIRMAN. If the Senator will yield. This is exactly—the 

only thing that is holding it up, frankly, is the extenders bill. When 

that is out of the way, we are going to jump into the small business 

and get that passed, because it is so important for the reasons you 

both indicated. 

Senator ENZI. Well, I am concerned that the tax extenders package, with the taxes on the S corporations, is going to offset any 

gains that we might get by doing the small business bill. 

The CHAIRMAN. On that, too, Senator, if I might just say, I deeply understand and appreciate the concerns you raised about that 

provision. It came over from the House to us. It needs some work 

to address some of the concerns you mentioned. 

The whole purpose of it, though, is to prevent an abuse that very 

significantly occurs among some professional, some S corporations, 

where the management will give itself just a very small salary, 

then pay itself large dividends, to avoid payroll taxes, to avoid 

FICA, as well as the Medicare payroll tax. And we are just trying 

to correct an abuse there, but in a way that is not burdensome. 

Senator ENZI. Well, I think I brought a number of documents 

that are designed to make sure that people are getting a reasonable compensation, which will eliminate—I think everything is in 

place to eliminate the fraud part of it. I think that the tax extender 

package is more designed to provide offsets and add liability to 

those corporations and actually violates the economic substance 

document, the doctrine that we mentioned earlier. 

The CHAIRMAN. I am very sensitive to your concerns. 

Senator ENZI. Thank you. Thank you, Mr. Geithner—Mr. Secretary. 

The CHAIRMAN. Well, thank you, Mr. Secretary, for spending a 

couple of hours with us. And we have a lot of work ahead of us, 

and let us make history. Let us get some results here. 

Secretary GEITHNER. Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you. The hearing is adjourned. 

[Whereupon, at 12:02 p.m., the committee was adjourned.] 

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