U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001

30–355 PDF 2006

CHINESE BARRIERS TO TRADE: DOES CHINA PLAY

FAIR?

JOINT HEARING

BEFORE THE

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE & TECHNOLOGY AND SUBCOMMITTEE 

ON TAX, FINANCE AND EXPORTS

OF THE

COMMITTEE ON SMALL BUSINESS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

WASHINGTON, DC, JULY 20, 2006

Serial No. 109–61

Printed for the use of the Committee on Small Business

(

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

COMMITTEE ON SMALL BUSINESS 

DONALD A. MANZULLO, Illinois, Chairman 

ROSCOE BARTLETT, Maryland, Vice 

Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

SAM GRAVES, Missouri 

TODD AKIN, Missouri 

BILL SHUSTER, Pennsylvania 

MARILYN MUSGRAVE, Colorado 

JEB BRADLEY, New Hampshire 

STEVE KING, Iowa 

THADDEUS MCCOTTER, Michigan 

RIC KELLER, Florida 

TED POE, Texas 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

LYNN WESTMORELAND, Georgia 

LOUIE GOHMERT, Texas 

NYDIA VELA ́ ZQUEZ, New York 

JUANITA MILLENDER-MCDONALD, 

California 

TOM UDALL, New Mexico 

DANIEL LIPINSKI, Illinois 

ENI FALEOMAVAEGA, American Samoa 

DONNA CHRISTENSEN, Virgin Islands 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MADELEINE BORDALLO, Guam 

RAU ́ L GRIJALVA, Arizona 

MICHAEL MICHAUD, Maine 

LINDA SA ́ NCHEZ, California 

JOHN BARROW, Georgia 

MELISSA BEAN, Illinois 

GWEN MOORE, Wisconsin 

J. MATTHEW SZYMANSKI, Chief of Staff 

PHIL ESKELAND, Deputy Chief of Staff/Policy Director 

MICHAEL DAY, Minority Staff Director

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE AND 

TECHNOLOGY 

SAM GRAVES, Missouri, Chairman 

STEVE KING, Iowa 

ROSCOE BARTLETT, Maryland 

MICHAEL SODREL, Indiana 

JEFF FORTENBERRY, Nebraska 

MARILYN MUSGRAVE, Colorado 

JOHN BARROW, Georgia 

TOM UDALL, New Mexico 

MICHAEL MICHAUD, Maine 

ED CASE, Hawaii 

RAU ́ L GRIJALVA, Arizona

PIPER LARGENT, Professional Staff 

SUBCOMMITTEE ON TAX, FINANCE AND EXPORTS 

JEB BRADLEY, New Hampshire Chairman 

SUE KELLY, New York 

STEVE CHABOT, Ohio 

THADDEUS MCCOTTER, MICHIGAN

RIC KELLER, Florida 

TED POE, Texas 

JEFF FORTENBERRY, Nebraska 

MICHAEL FITZPATRICK, Pennsylvania 

JUANITA MILLENDER-MCDONALD, 

CALIFORNIA

DANIEL LIPINSKI, Illinois 

ENI F. H. FALEOMAVAEGA, American 

Samoa 

DANNY DAVIS, Illinois 

ED CASE, Hawaii 

MICHAEL MICHAUD, Maine 

MELISSA BEAN, Illinois

ADAM NOAH, Counsel

(II) 

C O N T E N T S 

WITNESSES

Page 

Goodpasture, Mr. Tom, President, Pride Manufacturing Company, Inc. ............ 5

Russell, Mr. George E., Corporate Legal Administrator, Auto Meter Products, 

Inc. ......................................................................................................................... 8

Duggan, Mr. Brian, Director of Trade and Commercial Policy, Motor & Equipment Manufacturers Association ........................................................................ 9

Duesterberg, Dr. Thomas, President and Chief Executive Officer, Manufacturers Alliance/MAPI ................................................................................................ 13

Coley, Mr. James W. ‘‘Will’’, Warehouser, National Cotton Council ................... 15

APPENDIX

Opening statements: 

Graves Hon. Sam .............................................................................................. 27

Bradley, Hon. Jeb ............................................................................................. 29

Prepared statements: 

Goodpasture, Mr. Tom, President, Pride Manufacturing Company, Inc. .... 31

Russell, Mr. George E., Corporate Legal Administrator, Auto Meter Products, Inc. ........................................................................................................ 37

Duggan, Mr. Brian, Director of Trade and Commercial Policy, Motor 

& Equipment Manufacturers Association ................................................... 46

Duesterberg, Dr. Tom, President and Chief Executive Officer, Manufacturers Alliance/MAPI .................................................................................... 56

Coley, Mr. James W. ‘‘Will’’, Warehouser, National Cotton Council ............ 64

(III) 

(1)

CHINESE BARRIERS TO TRADE: DOES CHINA 

PLAY FAIR? 

THURSDAY, JULY 20, 2006 

HOUSE OF REPRESENTATIVES

SUBCOMMITTEE ON RURAL ENTERPRISES, AGRICULTURE

AND TECHNOLOGYJOINT HEARING WITH THE

SUBCOMMITTEE ON TAX, FINANCE, AND EXPORTS

COMMITTEE ON SMALL BUSINESS

Washington, DC 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

2360 Rayburn House Office Building, Hon. Sam Graves [Chairman 

of the Subcommittee on Rural Enterprises, Agriculture and Technology] presiding. 

Present from Subcommittee on Rural Enterprises, Agriculture 

and Technology: Representatives Graves, Barrow. 

Present from Subcommittee on Tax, Finance, and Exports: Representatives Bradley, Chabot, Lipinski. 

Chairman GRAVES. Good morning. I want to welcome everybody 

to the Joint Committee on Rural Enterprises, Agriculture and 

Technology Subcommittee and the Tax, Finance, and Exports Subcommittee joint hearing. It is my pleasure today to hold this hearing with Chairman Bradley as we explore the question of Chinese 

trade and fair policy when it comes to Chinese trade. 

I also want to announce that Representative English is not going 

to be able to testify today due to another hearing that he has. Unfortunately, we have conflicts and they get in the way sometimes. 

But everything should go well. We have already seated our panel 

and we will just get started with that once we finish with opening 

statements. 

Trade with China has grown faster than with any other U.S. 

trading partner. Currently, China is our third-largest trading partner, the second-largest source of U.S. imports, and the fifth-largest 

U.S. export market. The growth of the Chinese economy, in particular, their exports to the United States, has reached record levels and has created trade deficits of roughly $202 billion in 2005. 

Some of the reasons for these discrepancies are as follows. 

First, since 1994, the Chinese government has kept its currency 

pegged at 8.2 yuan to the dollar. While in recent years, the dollar 

has weakened, the yuan has remained the same against our currency. Many economists estimate that the yuan is undervalued by 

as much as 40 percent, which means Chinese manufactured goods 

are 40 percent cheaper than their competitors. 

2

Under intense pressure, China announced that it would appreciate the yuan to 8.11 yuan to the dollar, an increase of 2.1 percent, 

as well as pegging its currency to a basket of currencies rather 

than only the dollar on July 21, 2005. While I am not an economist 

or mathematician, if the yuan was 40 percent undervalued previously, then this slight adjustment still has the currency undervalued by 38 percent. I do appreciate that China has moved slightly by allowing its currency to increase by two percent, but much 

more needs to be done to level the playing field. 

China has experienced economic growth, gains in productivity, a 

large export sector, and increased foreign investment. Their currency manipulation gives their manufacturers an advantage and 

creates an enormous disadvantage to ours. 

Second, theft of intellectual property rights is another significant 

problem that U.S. companies must take into account when dealing 

with China. It is estimated that counterfeits constitute between 15 

and 20 percent of all products made in China and account for about 

8 percent of China’s GDP. It is also estimated that US companies 

lose $25 billion annually to copyright violations. 

I have heard it said that if you are a manufacturer and the Chinese are not copying your products, you are not running a successful business. While many people believe that this problem is restricted to purses or polo shirts, it is only the tip of the iceberg. 

Many people believe that it is a victimless crime; unfortunately, 

Chinese counterfeits or pirated items can impact our safety. 

More and more often car parts, aircraft parts and even drugs are 

being copied. People buy what they believe are legitimate items 

only to find out later that their purchases were counterfeits. If this 

trend continues, more people will be harmed by fake medicines, 

faulty mechanical parts and even exploding batteries, whatever the 

case may be. 

Worldwide, the market for counterfeit goods is growing and ex- panding. Global sales exceed $500 billion annually, although China 

is the biggest culprit. Over the last two decades the U.S. has 

pressed China to improve its protection of intellectual property 

rights. While China has passed new laws that provide protection 

of intellectual property rights, it has done little to enforce these 

laws, allowing for rampant piracy and counterfeiting. China needs 

to crack down and be an active part of the solution. 

We need to ensure that U.S. firms compete on a level playing 

field in the global market and not be at a competitive disadvantage. These unfair barriers not only affect our economy but job 

growth, much of it fueled by small business, in this country. 

I am pleased to recognize Representative Barrow for his opening 

statement. 

[Chairman Graves’ opening statement may be found in the appendix.] 

Mr. BARROW. Thank you, Mr. Chairman. The focus of this hearing is to discuss the impact of Chinese trade policies on the U.S. 

economy, specifically the impact that trade has on our nation’s 

small businesses. 

I have asked a fellow Georgian to come join us today and talk 

about the cotton industry in Georgia and nationwide and how China’s trade policies are affecting this industry. Mr. Will Coley is a 

3

managing partner of Savannah Warehouse Services headquartered 

at the Port of Savannah. 

I want to thank him for taking the trip up here and participating 

in this hearing. 

Exporting goods has become more and more important to our nation’s small businesses and farmers opening up new markets for 

our products and new opportunities for American industry. In the 

emerging global market base trade has become a common component for any successful small business plan. In today’s global market it is that much more important that our small businesses compete on a level playing field. 

Much of this country’s success in the world market depends on 

small business and agriculture. Today 97 percent of exporters are 

small businesses and they make up over 50 percent of our nation’s 

GDP. This includes many of our family farms. While access to overseas markets is important to our economy, we need to examine the 

impact that trade policy has on small business exporters in our 

country. 

China is our third largest trading partner. 

We are China’s largest overseas market and China’s exports represent 13 percent of U.S. imports. U.S. exports to China have been 

growing rapidly but competition from China is one of the biggest 

threats facing the small business sector of the American economy. 

In the agriculture industry trade with China has produced mixed 

results. Historically the agricultural industry has maintained the 

largest of our nation’s trade surpluses. Since 1998 that surplus has 

lost half its size with remaining export balance of only three billion 

and 450 million dollars. 

As Chinese farm imports continues to surge in this country, increasing overall by almost 20 percent since last year alone, it will 

likely decrease exports sales for domestic agriculture business even 

more and harm the entire agricultural industry. 

When it comes to setting currency regulations China isn’t playing 

fair. This manipulation makes Chinese exports of the U.S. cheaper 

and U.S. exports to China more expensive. When it comes to honoring or depending our property rights China isn’t playing fair. 

Piracy and counterfeiting practices in China are costing U.S. 

farms billions of dollars in lost sales. This is of great concern to our 

nation’s agricultural sector. Clearly China needs to start playing 

fair if we are going to avoid future damage to our agricultural sector and decrease agricultural imports. 

Our trade policy seems to be one of letting small businesses have 

access to compete in the global marketplace but not giving them 

the means to succeed. We must give our small business entrepreneurs a fair chance at competing in these markets. It is important that we support this nation’s entrepreneurs in all of their efforts to be successful. I believe members of this committee must not 

lose focus on how to guarantee the small businesses regardless of 

what country we trade with are competitive and have access to 

those markets. 

It is clear that trade is and will continue to be an important aspect of the success of small business in this country. In the global 

marketplace we have got to stand up for American interest and 

also make sure that our small businesses remain competitive. 

4

Standing by while small businesses, family farms, and American 

workers lose out is just not an option. 

Mr. Chairman, I want to thank you for calling this hearing and 

look forward to the testimony of the witnesses. 

Chairman GRAVES. Thank you, Representative Barrow. 

Next we are going to hear from Chairman Bradley, Chairman of 

the Tax, Finance, and Export Subcommittee. 

Chairman BRADLEY. Thank you very much, Chairman Graves. I 

will just submit my statement for the record so that we can more 

expeditiously get to the panel and I thank you for holding this 

hearing. 

[Chairman Bradley’s opening statement may be found in the appendix.] 

Chairman GRAVES. Thank you, Mr. Chairman. 

Mr. Lipinski. 

Mr. LIPINSKI. Thank you, Mr. Chairman. As we previous members have talked about here, we face, and especially small businesses face, a terrible problem right now with our trade deficit, 

over $200 billion in trade deficit with China. I have many manufacturers, especially in my district, and other small businesses, but 

manufacturers are especially hurt because China simply does not 

play fair. That is all that we are asking for. 

I think it is time for us to really stand up and do something 

about this. There has been a lot of talk about it. We all know that 

the Chinese currency is terribly undervalued. No real steps have 

been taken to move forward to do anything about this. Also, problems with intellectual property. We know China is not doing anything, or doing very little to protect intellectual property. 

What this is doing is wiping out American small businesses. A 

lot of these are family-owned businesses. Continually in my district 

they come to me and tell me if nothing is done soon, we are losing 

these businesses. They are never coming back. It is not a situation 

where they are down now. We can wait a while and do something 

in the future and they will come back. 

Once they are gone they are gone forever. They are not coming 

back. I have seen so many small businesses close in my district 

over the years and so many more are telling me they are doing everything they possibly can right now just to hang on but it is so 

difficult to compete against China. All they are asking for is a level 

playing field. 

I am very happy that we are having this hearing today. I look 

forward to hearing from our witnesses here. I think it is time to 

do more than just talk. It is important that we continue to work 

to find the best way to level the playing field. 

I know this hearing is not specifically supposed to be discussing 

it but I also believe we should be talking about H.R. 1498 which 

I think is a bill with real teeth in it telling China that if they do 

not make their currency really—let it float, or, at least, unpeg it 

so that it gets closer to what it should be valued at, the United 

States can’t respond to that because it clearly is—to me China is 

clearly giving unfair advantage to their businesses by having their 

currency at that level. It is very clear to me. I want to hear from 

our witnesses today what their thoughts are on this and what they 

5

believe we should be doing here in Congress to change the situation. 

The only way this is just going to go away is when our small 

businesses who are working right now when they go away, when 

they disappear because we have not done anything to stand up to 

what China has done to unfairly manipulate the system. I am not 

saying we should be protectionists. I am just saying a fair level 

playing field. I look forward to hearing our witnesses today and 

what they recommend that we should do about this. Thank you. 

Chairman GRAVES. Thank you, Mr. Lipinski. 

All these statements made by the witnesses and the members 

will be placed in the record in their entirety. We will get started 

with our panel. I will introduce you as each come up. 

First we are going to hear from one of my constituents, Tom 

Goodpasture, who is President of Pride Manufacturing Company in 

Liberty, Missouri. He is here representing the National Tooling and 

Machining Association. Tom has testified before this Committee before. 

Welcome back. I appreciate you being here. 

STATEMENT OF TOM GOODPASTURE, PRIDE MANUFACTURING 

COMPANY, INC. 

Mr. GOODPASTURE. My name is Tom Goodpasture President, and 

owner of Pride Manufacturing Co., Inc. I started our machining job 

shop in Liberty, Missouri in 1997. Our company has grown to 28 

employees and we service the machining needs for the following 

key industries: automotive, defense, railroad, medical, aircraft, 

computer and construction. 

I appreciate the opportunity to discuss China’s barriers to trade 

and its impact on manufacturing across the country and especially 

in Missouri. 

I am an active member in the National Tooling & Machining Association and through this testimony hopefully I can voice the concerns of our company and our 1,600 member companies across the 

nation. 

NTMA is one of the largest metalworking associations in America. It consists primarily of small-to-medium sized companies with 

average employment of 27. 

The manufacturing sectors hardest hit by the China factor are 

the tool, die and mold industry, and the precision-machined parts 

industry. Every product that is manufactured is formed by a tool, 

die, or mold made by our industry. Precision machining and tooling 

industry is truly the backbone of manufacturing. 

Our industry operates in a very competitive global marketplace. 

Many of the big name/large U.S. manufacturing firms have picked 

up and moved plants, or work to China with little regard for communities, employees and families. Vendor chains previously supplying tooling, components and assemblies to these plants while in 

the states have lost a tremendous amount of business. 

I visited with Kim Hayden of Supreme Tool & Die in St. Louis 

a few weeks ago. Their company was so negatively affected by the 

amount of work going to China that their employment was forced 

from 65 to 32 almost overnight. Their sales revenue was cut in 

6

half. By making huge adjustments they have survived and that is 

a success story. 

One small die shop in Portage, Michigan lost 30 percent of its 

business due to the recent outsourcing by the Big Three automakers to China. The owner estimates that labor costs in China 

are one-tenth as much as those in the United States. 

As component industries and design work follow assembly lines 

to China, key elements of the U.S. industrial base are beginning 

to erode. Nationwide, the National Tooling & Machining Association reports that 28 percent of the country’s toolmakers have shut 

their doors since 1998. In the state of Missouri, we have gone from 

239 shops down to 162 shops, that represents a 48 percent reduction of its tooling and component shops from 1998 to 2004. 

As I talk to shop owners across the nation the plea is common, 

‘‘Level the playing field. We are not afraid of competition, but make 

it fair competition.’’ If U.S. manufacturing is to compete, we need 

to level the playing field. Manufacturing produces some of the highest paying jobs with the best benefits in the country. At Pride our 

‘‘cost burden’’ over wages, with benefits, averages in excess of 35 

percent. 

A shopowner at a recent meeting who just received his company 

healthcare renewal and it was increased by 40 percent this year 

alone. We need the Small Business Health Plan legislation passed 

by Congress so we can negotiate association health plans to reduce 

costs. One employee’s health issue should not rate an entire organization to the point that health care is unaffordable. 

Currently it is almost impossible to compete with the low wages 

being paid in China. The only way we can keep our costs as low 

as China is by having automation that runs unattended and requires zero labor. That is how many of our businesses have survived. At Pride, we have invested in robotic equipment and Swiss 

Turn Lathes that run unattended ‘‘lights out.’’ 

Our machinists have now become technicians as well. I am proud 

to say that currently, we are producing component parts 24/7 for 

our local customer, which is being sold to China to be used in the 

Light Rail being constructed from Beijing to Shen Yang. 

American manufacturers need the R&D Tax Credit. This critical 

tax credit, which expired at the end of 2005, needs to be reinstated 

retroactive so we can continue making investments in automation. 

This will offset high labor with zero labor so we can compete in the 

world market. After these investments into technology are made, 

we need the Estate Tax altered so that the next generation does 

not lose the business to taxation. These are things that could be 

done to level the playing field. 

Last fall, I spent nine days in China on a NTMA Study Mission. 

I found that what we see and hear on the American news does not 

accurately reflect the China that I saw. Most of the manufacturing 

jobs are not the slave labor sweatshop jobs that I would have envisioned. Technology that I was hoping we could keep from China, 

is already there in abundance. The German, Swiss and Japanese 

influence in the plants is apparent and it is obvious that they were 

there long before us. 

Although many of the laborers are young and less skilled that is 

rapidly changing. Firms from the U.S. and other countries, setting 

7

up plants in China, send teams of engineers over to accelerate 

plant operation, in turn accelerating the Chinese manufacturing 

economy. I came away from that trip with two thoughts: 

1. Whatever the United States decides to do or not do about manufacturing in China would make little or no difference to the Chinese. 

2. The United States, because of our adversarial position, is missing a huge opportunity to sell to the commodity market in China 

while many other countries are selling to them. 

China made a conscious decision several years ago to be a manufacturing community. They have been very successful in drawing 

large corporations from every major country in the world, to their 

low cost surplus labor society, while allowing them to escape the 

regulations that haunted them in their home countries. 

Does China play fair? No. Factor in the alleged subsidization of 

the Chinese government, currency manipulation, no safety and environmental standards, and low wages, it is clearly not a level playing field. In many cases payment terms are different. Chinese companies require as much as 100 percent to be paid for prior to shipment from China. In contrast, the U.S. tool shops are forced to wait 

long periods of time to collect their money. Large businesses are 

forcing small businesses to carry their debt in this country. 

Chinese manufacturers have no problem creating exact duplicates of components and equipment without regard for American 

intellectual property and patent laws. We have several area food 

equipment manufacturers that sell on the world market, whose 

products were reproduced and sold by China manufacturers. Even 

if the counterfeits are not sold in America, they have stolen these 

company’s market share elsewhere that took years and large investments to create. Does China manipulate the currency? All evidence would say that it does. It is obvious that China’s economic 

strategy over the past decade has been to keep the value of its currency low, boosting its exports and holding down imports. There is 

no free market for the yuan. 

Companies relocating to China can benefit from the currency manipulation that is, in reality, a tremendous subsidy. When this subsidy is added to the very substantial differential in labor costs between our two nations, Chinese products become irresistible, and 

it makes investment in Chinese manufacturing extremely attractive. 

I saw China prices adjusting according to what they can charge. 

A hotel room that should cost 12 cost 100 to 125. That is equivalent 

to almost a thousand dollars in the U.S. Many prices just do not 

follow the exchange rate. What to do about China is a complicated 

issue. China has made the wise choice to purchase their future in 

the world of manufacturing and thus far have been very successful. 

That is history. Now we are left with some hard truths. 

We do not have enough mills to produce the raw stock to supply 

our own needs. Prices are going up in some cases at a rate of 30 

to 40 percent for steel, stainless, aluminum, brass, and copper or 

more just because there is no supply there is no supply. 

Although the actual numbers are being disputed, China is still 

graduating many more engineers than the U.S. We have an aging 

8

and depleting manufacturing employee base that will reduce drastically over the next decade. 

I urge our government to do what China has done. Make a conscious decision to keep a strong manufacturing base in America. 

We have lost ground. We must do everything that we can to regain 

our position and maintain it. In years to come without a strong 

manufacturing base our security and defense could be at risk. 

China has not played fair; we cannot change the past. We must 

take hold of our future, and not allow our security and defense to 

be in the hands of China or anyone else. We must make American 

manufacturing strong and competitive. Thank you. 

[Mr. Goodpasture’s testimony may be found in the appendix.] 

Chairman GRAVES. Next we are going to hear from George Russell who is the Corporate Legal Administrator for Auto Meter Products, Inc. He is here on behalf of the Special Equipment Market 

Association. 

George, thanks for being here. 

STATEMENT OF GEORGE E. RUSSELL, AUTO METER 

PRODUCTS, INC. 

Mr. RUSSELL. Good morning, Mr. Chairman, and members of the 

Committee. My name is George Russell and I am appearing on behalf of Auto Meter Products, a member of the Specialty Equipment 

Market Association (SEMA). SEMA has 6,817 member companies, 

represents the $34 billion specialty automotive industry. This industry provides appearance, performance, comfort, convenience and 

technology products for passenger and recreational vehicles. 

Auto Meter is a medium-sized company headquartered in Sycamore, Illinois that manufactures automotive measuring devices, 

gauges and tachometers, for the past 50 years, and for the highperformance automotive aftermarket. 

In my prepared testimony I use Auto Meter has an example to 

illustrate what can happen to a medium-sized company when faced 

with the unscrupulous copying of American design and manufactured goods by Chinese competitors. I hasten to say that the experience of Auto Meter is illustrative of the wider problem faced by 

a variety of American manufacturers ranging from pharmaceuticals 

to aircraft parts. 

Auto Meter manufacturers the highest quality performance automotive gauges in the world. Auto Meter’s products are used in approximately 98 percent of all NASCAR racers, and a vast majority 

of performance racing cars on all tracks today. Approximately 10 

to 12 years ago Auto Meter began to face competition from cheaply 

made imitations that copied its design and trademarks some coming from Taiwan and others from the People’s Republic of China. 

As indicated in my written statement, Auto Meter has used a variety of strategies to counter this threat including sourcing some of 

its components in the far east and exercising its legal remedies 

here at home. 

Although Auto Meter has prevailed in its legal cases, the cost of 

victory has been significant. Over the last seven years the expense 

of Auto Meter defending and enforcing its intellectual property 

rights against counterfeit goods, primarily from China, has grown 

9

from less than a 10th of 1 percent to over 4 percent of its gross annual revenues. 

Auto Meter has spent well over $2 million in the last three years 

pursuing infringers and counterfeiters in the federal courts, the 

International Trade Commission and the Customs Service, and at 

trade shows in cooperation with SEMA and others. However, unscrupulous importers continue to source infringing and counterfeit 

products from China for sale in the United States. This has imposed on Auto Meter a significant burden and expense of continued 

efforts to find and stop new infringements. 

Simply put, Chinese manufacturers have used all manner of duplicity to conceal their continued cloning of Auto Meter’s products 

and enforcement is continually problematic and expensive for the 

victim. 

Clearly, more needs to be done to protect legitimate U.S. manufacturers from this sort of mugging. Small and medium-sized businesses need the active and aggressive support of their government 

if they have any hope of competing, even on their home turf. 

While Auto Meter welcomes the statements of commitment by 

the U.S. trade representative, the Department of Justice, and the 

Department of Commerce pledging to fight counterfeits, this is 

more rhetorical than real for companies such as Auto Meter. 

Negotiations with the Chinese government have yielded commitments on their part to do something sometime. What is needed at 

the minimum is more active enforcement of laws already on the 

books to prevent this sort of conduct. In our view the Chinese 

would get a powerful message if the Customs Border Patrol inspections of the imports from China were significantly enhanced to detect illegal products before they entered the United States. 

While I recognize that the first priority of Customs and Border 

Patrol is to protect the U.S. from terrorist activity, the cancer of 

imported counterfeits poses an equivalent threat to our economy 

and to thousands of jobs provided by companies like Auto Meter. 

Stricter border enforcement against counterfeit and infringing 

products, of course, would not address the other matters you are 

considering today such as the disparity in the yuan evaluation but 

would signal that the United States is serious about protecting 

small businesses from the deprivations of counterfeiters and pirates. 

I would be pleased to answer any questions you may have concerning Auto Meter’s experience or that of other U.S. manufacturers in general who are facing these challenges. 

[Mr. Russell’s testimony may be found in the appendix.] 

Chairman GRAVES. Thanks, George. 

Next we are going to hear from Brian Duggan who is the Director of Trade and Commercial Policy with the Motor and Equipment 

Manufacturers Association here in Washington, D.C. 

Brian, thanks for being here. 

STATEMENT OF BRIAN DUGGAN, MOTOR & EQUIPMENT 

MANUFACTURERS ASSOCIATION 

Mr. DUGGAN. Thank you very much, Mr. Chairman. My name is 

Brian Duggan and I am Director of Trade and Commercial Policy 

for Motor and Equipment Manufacturers. We represent 700 manuVerDate 0ct 09 2002 19:56 Nov 21, 2006 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\HEARINGS\30355.TXT MIKE
10

facturers of motor vehicle parts, components, technology, tools, and 

related products used in the repair and maintenance and original 

production of all classes of motor vehicles and heavy trucks. These 

manufacturers are known collectively by the term ‘‘automotive suppliers’’ and that is a term that I will use in my testimony. 

What I think has already been made pretty clear here in the previous testimony is that the damage done by Chinese product counterfeiting is disproportionately serious for small businesses because 

they can least afford the lost sales on a limited number of brands 

and product lines and have fewer, if any, resources to protect their 

trademarks and patents, especially outside the United States in 

China or in third markets. Many of business’ financial problems 

caused by Chinese counterfeiting and patent infringement in the 

autoparts industry are occurring across the board, small, medium, 

and large. 

I plan to cover just in the testimony briefly some of the dangers 

posed by trafficking in counterfeit autoparts including consumer 

safety hazards, loss of brand image, and loss of export markets for 

American suppliers. Lastly, I would like to provide just a few of our 

views on work underway through the STOP program, which is 

Strategy Targeting Organized Piracy, that you may be familiar 

with, and other Federal efforts to help industry. 

Product counterfeiting and other willful intellectual property 

theft is not a trade problem or a competitiveness problem in the 

usual sense. Product counterfeiting and IP theft is first and foremost a global crime. American automotive suppliers are now, on 

top of everything else, competing with global criminal networks out 

to steal from legitimate producers that play by the rules and work 

to provide value and service to their customers in the United 

States and abroad. 

To the extent the People’s Republic of China is now used as a 

hub by criminals for production and trafficking of counterfeit automotive parts and components, it is essentially offloading the cost 

of law enforcement and public safety to American industry and the 

U.S. Government. 

Automotive suppliers have been targeted by Chinese-made counterfeit products for several years. Just as Chinese manufacturers 

have become more competent in the manufacture of legitimate 

goods over the past several years, they have also become more competent and aggressive in manufacture of counterfeit goods. 

Patent infringement and product counterfeiting, which has already been explained here, are the primary forms of intellectual 

property violations against all American automotive suppliers. 

I have brought here just a few samples. I won’t go through them 

because there isn’t time but later on if you or your staff would like 

to inspect any of these, you will see two things. First of all, you 

will see how similar the counterfeit and the real look. Visual inspection you cannot tell. Even the manufacturer has to go back and 

check the metallurgy and the fittings and things like this. 

But when you cut this stuff open, then it is pretty clear which 

one is counterfeit and which one isn’t. Unfortunately for a lot of 

these products, whether the consumer buys them or whether you 

are a garage mechanic buying them or whoever, you buy by the 

brand, you buy by the box, you buy by the SKU number. 

11

A little bit on the measurement of the problem which I know is 

on your mind. Private companies and industries are well suited to 

measure sales, cost of production, and profits. We are not, however, 

well suited to measure global crime and, therefore, unfortunately 

no authoritative estimates of the production and sales of counterfeit automotive parts and components in China, the United States 

and around the world. 

The OECD is in the process of doing a study on this. The study 

is due out in the fall. We provided information for the study. I am 

sure several others did, too, and we will see what that produces. 

Nevertheless, the industry does indicate the parts most often counterfeited are for the repair and replacement market. 

They tend to be products that can sell quickly in high volumes. 

Examples of such parts would include spark plugs, shock absorbers, oil filters, fuel filters, fuel pumps, break components including 

pads and linings, suspension and steering components, windshields, tires, headlights, taillights, engine mounts, and other engine parts. 

There are some astonishing and disturbing examples of product 

counterfeiting in our industry, including the following: Federal agents in Queens and Manhattan seized $700,000 worth 

of unsafe, counterfeit brake parts, taillights and other parts that 

were being installed by dealers on city taxicab fleets. The danger 

of installing critical safety parts on city taxicabs in New York is 

enormous. 

An investigation by one American automotive supplier found a 

company in China switching signs in front of their factory, making 

customers believe they produced legitimate branded parts. The Chinese producer further misrepresented itself to customers by using 

phony stationery and signs in the factory and they could just 

change these. 

As different customers came through they could change their 

identity. Investigators for the company staked this out and found 

this. This Chinese producer infringed on the trademarks of several 

American and European automotive brands. That is another thing 

to point out, the guys don’t specialize. They will rip off anybody. 

A Midwest automotive supplier reported lost sales from product 

counterfeiting of $40 million and additional legal costs of $5 million 

annually. 

Counterfeit oil filters made in China found in the United States 

contained cardboard and foam instead of filter material and was illegally labeled ‘‘Made in the USA.’’ 

A Chinese-based website has been barred from participating in 

America’s largest automotive aftermarket trade show for trafficking 

counterfeit automotive parts and components. 

The inferior quality, durability and workmanship of counterfeit 

automotive parts leads to another very serious problem for legitimate producers and that is brand destruction. When a customer 

unwittingly purchases a counterfeit product, and the product fails 

to perform and provide value, the reputation of the brand is diminished. 

What I mean by that is if you would buy this counterfeit 

sparkplug set and after a short period of time it stopped working, 

you are probably not going to go back and buy that same brand, 

12

or your shop isn’t. Measuring loss of customer good will, brand destruction caused by fake parts is very, very difficult. 

The losses caused by brand destruction are as great, or even 

greater, to a company than the loss of sales caused directly by the 

original sale of the counterfeit auto parts. This is particularly acute 

for small businesses where their whole business may be built on 

four or five or six products and two brands. That is it. If one of 

those gets hurt, you have lost half the shop. 

Product counterfeiting is destroying export markets for American 

automotive suppliers and genuine American brands. American 

manufacturers cannot export product or build their brands around 

the world if their products are already widely available in counterfeit form. This is a serious problem in China and many other developing markets. 

Looking forward to the matter of managing the problem, I would 

say that the cost, time and complexity of defending intellectual 

property rights at home and abroad is a serious challenge for small 

and medium-sized automotive suppliers. Federal, State and international actions aimed at addressing this core problem of the cost 

will deliver the most value to small businesses and we believe deserve Congressional support. 

Also, maintaining a focus on law enforcement and actions that do 

not depend entirely on near-term changes in China (which is highly 

uncertain at best) are also a priority. Just to be clear about it, 

elimination of the production and trafficking of counterfeit goods, 

auto parts and others, in China is an ultimate long-term goal. Absolutely no doubt about it. In the meantime, there are meaningful 

near-term action is necessary. 

The Federal Government has taken some very useful actions to 

combat trafficking in counterfeit goods that help industry. For example, the Department of Justice has increased the number of 

prosecutors and the FBI has increased a number of intellectual 

property undercover operations. These actions make Federal assets 

more accessible to small businesses. ‘‘Victims Conferences’’ and 

legal seminars organized by the Justice Department and the Patent and Trademark Office provide specialized training and guidance to small businesses at no charge. 

The Patent and Trademark Office in cooperation with the Department of State is deploying intellectual property attaches to 

trouble centers around the world, including China. These attaches 

will be a resource for small companies that cannot afford foreign 

staff. More programs of this kind deserve Congressional support. 

There are other Federal actions that if done properly could provide a valuable service to small business and help them manage 

the high cost of protecting their brands. I would like to get into one 

particular area regarding trade shows. I am over so I will go quickly. 

Many small and medium-sized automotive suppliers build their 

domestic and foreign sales by displaying at trade shows. Trade 

shows are a long-standing institution in the automotive industry 

domestically and abroad. Counterfeiters, unfortunately, also use 

trade shows to traffic in fake goods. According to our members, 

many foreign trade show organizers take little or no action to help 

13

American companies who find counterfeits of their products on the 

show floor. 

Organizers of prominent trade shows in the United States enforce rules against counterfeiting. 

Over half of our members, MEMA and other private sector organizations including the Coalition Against Counterfeiting and Piracy, are urging the Foreign Commercial Service to conduct a targeted fact-finding aimed at raising standards of intellectual property protection at foreign trade shows. In our request for assistance 

we would as this fact-finding to be conducted using the agency’s 

overseas staff and work with the private sector and the Patent and 

Trademark Office to determine standards of intellectual property 

protection and enforcement at many foreign trade shows in developing markets. 

Current the FCS supports and endorses many trade shows 

abroad and has a long-standing relationship with show organizers. 

We believe that the Foreign Commercial Service can perform an 

important service by conducting this fact-finding requested by industry and leveraging its relationship with foreign show organizers 

to raise standards of intellectual property protection. 

We would ask this Committee to review this problem with the 

Foreign Commercial Service and encourage them to work collaboratively with industry and rights holders on this problem. 

In conclusion, the automotive supplier industry and MEMA 

would like to thank the Committee for turning its attention to this 

problem and I would be glad to answer any questions you might 

have. Thank you. 

[Mr. Duggan’s testimony may be found in the appendix.] 

Chairman GRAVES. Thanks, Mr. Duggan. 

Next we are going to hear from Dr. Tom Duesterberg who is 

President and CEO of the Manufacturers Alliance here in Washington. Thank you for being here. 

STATEMENT OF DR. TOM DUESTERBERG, MANUFACTURERS 

ALLIANCE/MAPI 

Dr. DUESTERBERG. Mr. Chairman, thank you for having me. It is 

a pleasure to be here on this panel today discussing this very timely subject. 

The Manufacturers Alliance is a research and educational organization representing over 500 small to large companies. This subject is timely partly because China continues to be a major competitor of ours and we are estimating that this year China will surpass the United States as the world’s leading manufacturing exporter. 

I am going to focus a little bit on the aggregate or the macroeconomic questions that have been raised in the past and continue 

to be an issue with regard to trade with China. I am going to focus 

on some of the reasons why we are not exporting more to China. 

We generally are supporters of open markets but we have noticed 

that even though China is the fastest growing large economy in the 

world, China also is at this stage of development in huge need of 

capital goods. The United States manufacturing sector is the leading producer of capital goods in the world. Our exports simply 

should be growing much more vigorously than they have been. 

14

Some of the reasons that our exports are not growing more rapidly, first, is the anomalous rate of private consumption in China 

relative to investment and government spending. China has an unprecedented low level of consumer spending that has never been 

seen in the world, at least in the modern world. 

Only 47 percent of the Chinese economy is represented by the 

household sector and that compares with 70 percent in the United 

States. The Chinese level is about 20 percent lower than it is in 

India, Poland, and Brazil, pure countries that it can be compared 

to. Part of the reason for that is the undervalued currency which 

I will turn to in a minute. 

Second, the United States is actually losing market share in Asia 

to China and to other producers in Asia. Again, this is partly due 

to undervalued currency. I provide some figures in my testimony 

showing that our market share in the eight leading economies of 

Asia has declined from 38 percent in 2000 to 26 percent in 2005. 

We have lost market share in places like Japan where exports have 

actually declined this decade partly because China has taken market share from us there as well. 

The Chinese are leading regional integration movement in East 

Asia trying to sign up a series of free trade agreements that exclude the United States. The regional identity of the Asians is part 

of the reason that we are losing market share there. 

Third, I note that tariffs are still high. This is a mundane point 

but Chinese tariffs are much higher than U.S. tariffs and these 

need to be lowered. 

Fourth, we have been making a case at the Manufacturers Alliance for years that the Chinese systematically undervalue their 

currencies. This, in turn, leads other Asian nations to undervalue 

their currencies to remain competitive with the Chinese. 

Finally, and this is especially important to small businesses, 

there are a number of non-tariff barriers to trade in addition to the 

theft of intellectual property which has been eloquently expressed 

here already. I listed a few things that are worth looking at, the 

hidden cost of doing business. We call them hiring costs, firing 

costs, paying taxes, enforcing contracts, dealing with licenses. 

All are much more difficult in China than here obviously. They 

are much more difficult for the small businesses who are trying to 

penetrate that market. That is partly why only eight percent of 

small businesses, small and medium enterprises, rely on exports 

for more than 25 percent of their revenues and that number is really not growing. 

Some of the things that we think should be addressed in order 

to begin to rectify this situation, we think that the United States 

must energetically seek to participate in the growing Asian free 

trade movement. We have made a good start by opening free trade 

negotiations on a bilateral basis with South Korea, Thailand, and 

Malaysia but ultimately we need to be a part either through APEC 

or some other multi-lateral institution we need to be part of the 

Asian free trade area. 

Second, the United States needs to be more aggressive in working with China to address some of these IPR questions and the fundamental question of the undervaluation of their currency. We believe there are mechanisms out there such as working with the 

15

IMF and the World Trade Organization both of which prohibit systematic undervaluation and manipulation of currency for the benefit of a domestic economy such as China has been doing. We need 

to be much more aggressive in working with the Chinese, working 

with our own partners like the Europeans and the Japanese to address this problem. 

Third, we continually shoot ourselves in the foot here in this 

country by imposing higher costs on U.S. suppliers than our competitors do. We call these ‘‘structural costs.’’ We have estimated 

that we had 22 percent or more to the cost of producing a product 

here in the United States in comparison with our trading partners. 

We need to do things like look at the energy crisis, look at regulatory costs, look at taxes to try to bring down those costs. 

Finally, as Brian mentioned, there are many things that the U.S. 

Government can do to help small and medium exporters especially 

through the commercial service at the Department of Commerce 

and through the Small Business Administration. We need to take 

a stronger look, I think, at working with the commercial services, 

especially in their programs to help small business. 

I would be happy to answer any further questions. 

[Dr. Duesterberg’s testimony may be found in the appendix.] 

Chairman GRAVES. Thank you, Mr. Duesterberg. 

Mr. BARROW. Thank you, Mr. Chairman, for this opportunity to 

introduce my witness as the Ranking Member of the Subcommittee 

on Rural Enterprise, Agriculture and Technology, I wanted to take 

this opportunity to shine the light on the impact that China trade 

has on the agricultural sector of our economy. 

There are very few people who are in as good a position to address that subject for us is my friend Mr. Will Coley from Savannah. He is here representing the National Cotton Council. He is a 

member of their current leadership class, the National Cotton 

Council’s leadership class. He is in the cotton export business. He 

is going to shine the light on the problems we are having with 

China trade as it affects agriculture in this country. 

Mr. Coley, thank you for being with us today. 

STATEMENT OF JAMES W. ‘‘WILL’’ COLEY, NATIONAL COTTON 

COUNCIL 

Mr. COLEY. Thank you, Mr. Chairman. I will do what I can. I 

would like to thank you again and all the members of the Subcommittee for inviting me to discuss trade with China. I especially 

want to thank Representative Barrow for his courtesy and his recognition of the significance of trade with China to the U.S. cotton 

industry. 

As he said, my name is Will Coley. I own and operate a cotton 

port warehouse in Savannah, Georgia. 

There are few international trade relationships more complicated 

or dynamic than that of U.S. cotton and China. The U.S. cotton industry is exporting an ever-increasing amount of cotton fiber to 

China. At the same time, our long-standing and best customer, the 

U.S. textile industry, continues to contract and face of competition 

from textile imports. 

China is the most competitive textile and apparel manufacturer 

in the world. With the elimination of all quotas from January 1, 

16

2006 and even with the imposition of special safeguards and a bilateral agreement covering trade in key textile products, China is 

rapidly becoming the dominant supplier of textile and apparel 

products in world trade. 

In fact, China now accounts for almost 50 percent of all textile 

imports into the U.S. This development has ramifications for the 

U.S. textile industry as well as for virtually every other textile producing country, particularly less developed countries, or LDCs, in 

Central and South America and Africa. 

A few statistics will illustrate the dynamic nature of the trading 

relationship between U.S. cotton industry and China. In 1998, 

China imposed a quota on cotton imports and imported only 

359,000 bales of cotton from all those countries. In 2005 China imported a total of 19 million bales. At least nine million of those 

bales were supplied by the U.S. You can see the drastic difference 

there. 

At the same time China exports of cotton textile products to the 

U.S. continues to increase dramatically while U.S. mill consumption of cotton declined from 11 million bales to about 5.5 million, 

a 50 percent reduction in cotton consumption by U.S. mills in just 

a 10-year period. 

During the same period U.S. consumers have increased their 

purchases of cotton products at retail but almost 90 percent of all 

purchases are imports. With this astounding rate of increase in cotton production, cotton mill use and cotton imports China has rapidly become the dominant force in world cotton trade. 

The reduction in domestic consumption has required the U.S. cotton producer to identify new export markets and none have been 

as challenged as south eastern producers who previously sold the 

bulk of their production domestically. In fact, my warehouse is located on the port of Savannah to better service the growing volume 

of exporters for producers in our area. 

With that brief background, I can better address the subject of 

today’s hearing. The answer is yes, China does maintain barriers 

to fair trade and engages in practices that provide unfair advantages to its manufacturers. The cotton industry is deeply concerned 

by the use of tax rebates to encourage exports. 

We are troubled by the widespread use of subsidized or forgiven 

loans provided to China’s domestic textile industry. We believe that 

the maintenance of an undervalued currency constitutes an unfair 

trade practice. As a small business operator I know it is impossible 

to compete with a firm that enjoys a 30 plus percent cost advantage due to undervalued currency and has access to free capital in 

the form of loans that never have to be repaid. 

I know that U.S. textile farms are concerned about the piracy of 

their fiber designs and unauthorized use of their logos and brands 

similar to what these gentlemen have been discussing. They have 

spent millions of dollars developing all these brands and logos. If 

these unfair practices are allowed to continue much longer, U.S. 

manufacturers simply can’t compete to provide jobs and continue to 

serve as an economic engine for our country. 

While part of the cotton industry enjoys the benefits of a growing 

trade in raw cotton there are problems. We have consistently exVerDate 0ct 09 2002 19:56 Nov 21, 2006 Jkt 000000 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 G:\HEARINGS\30355.TXT MIKE
17

pressed concerns for the way China has implemented its market 

access commitments under the WTO accession agreement. 

We have worked closely with the USDA and the USTR to attempt to convince China to modify its administrative tariff rate 

quotas, or TRQs, so mills producing for the domestic market have 

equal access to imported cotton as do those who produce for export 

markets. 

Recently China has begun imposing a variable rate tariff on imports of cotton over the TRQ. This will increase the price of cotton 

to the mills compared to domestically produced synthetic fibers and 

effectively amounts to a price support program for Chinese cotton 

farmers. 

By effectively reducing demand for cotton over synthetics affects 

all cotton farmers. We have also worked with the USDA, USTR, 

and the Chinese government and industry to resolve contractual 

issues, arbitration practices and quality standards. 

Mr. Chairman, China is the dominant factor in the world of cotton and textile market and it is imperative that the U.S. cotton industry continue to cultivate China as a customer for our fiber. It 

is also critical that we work with Congress and the administration 

to insist that China honor her WTO commitments. We believe it is 

important that the China economy grows and merges into the 

world economy and that the U.S. manufacturing base does not become a casualty of that. 

That is why we are actively supporting efforts to convince China 

to move to allow her currency to be valued by the market. We believe support for H.R. 3004 creates an incentive for China to allow 

her currency to be valued by the market, not by artificial means. 

We also support the use of textile safeguards as authorized under 

the WTO accession agreement to allow the U.S. industry to adjust 

to the elimination of quotas. We urge the USTR to favorably respond to the proposal to conduct secretarial negotiations in textiles 

and apparel as part of the DOHA round to ensure that the textile 

and apparel industries in truly less developed countries are not totally displaced by the Chinese market. 

We have heard criticism that the U.S. industry has had ample 

opportunity to adjust. As a business operator I contend that the adjustment can’t be accomplished as long as Chinese manufacturers 

have the competitive advantages provided by an undervalued currency, tariff rebates, nonperforming loans, and unchecked piracy of 

valuable designs and labeling brands. 

We welcome China to the WTO and we value her as a trading 

partner but she must be held accountable to the rules and commitments of the WTO membership. 

Mr. Chairman, again, thank you for allowing me to testify. I will 

be pleased to respond to any questions at the appropriate time. 

Chairman GRAVES. Thank you, Mr. Coley. 

[Mr. Coley’s testimony may be found in the appendix.] 

Chairman GRAVES. We will start out with questions. Again, all 

the statements made by the witnesses will be placed in the record 

in their entirety. 

The first one I have, I guess, is not really directed at anybody. 

Mr. Duggan, you might want to answer it to start off, or Mr. Russell, or Mr. Goodpasture. You mentioned the only way you can tell 

18

a counterfeit from the real thing is if you cut it open but nobody 

is going to cut it open if they are buying something new. 

If they are buying a gauge, they are not going to cut it open to 

see if it is the real thing or not. How is a consumer or how is a 

mechanic or somebody that is operating a store, how are they supposed to tell or how are they supposed to know what is counterfeit 

and what is not counterfeit? 

Mr. DUGGAN. That is why we are so concerned about this because 

right now we don’t really have a good way to tell. The individual 

consumer or the guy that runs an Auto Zone or an NAPA, obviously if he has a relationship with the supplier, that is built on 

some business trust there. The thing is, you know, the people who 

are trying to do this are criminals and so they are slipping it into 

the system, you know. 

A lot of times the garage mechanics and the distributors are 

duped every bit as much up and down the line as anybody else. I 

mean, I guess the answer is no, we don’t really have a system right 

now. There is some practical business advice which is deal with 

people who you know. That helps but that is not a full solution. 

Chairman GRAVES. Go ahead. 

Mr. RUSSELL. Mr. Chairman, to support what Mr. Duggan just 

said, I guess the best way to explain it from a manufacturer’s perspective is Auto Meter has prided itself on having a warranty policy that is without reproach. We stand by the goods that we manufacture. That brand identity and that brand recognition is what is 

most appreciable by the consumer market. 

The only thing that could reasonably be done, in my opinion, 

would be that we would have to determine some way in which 

brands and brand identify would be protected up front. That is why 

I made the statements regarding Customs and Border Patrol inspections of incoming goods. Beyond that point it is very hard for 

the average consumer, as you can see by Mr. Duggan’s examples, 

and I could speak for quite a while, about goods that are essentially identical in appearance that are counterfeit and, thus, the 

consumer gets defrauded. 

I guess if I could summarize to answer that question, there needs 

to be some kind of methodology developed that enhances or further 

enables Customs, Customs and Border Patrol, Immigration and 

Customs Enforcement, with the ability to discern when products 

are coming in that are not of that brand, whether that is intercepted at a port of entry or it is being reported by a manufacturing 

concern within the country once it has been discovered. 

Chairman GRAVES. Another question. I don’t remember if it was 

Mr. Duggan or Mr. Duesterberg mentioned the added cost of hiring 

and firing, regulatory licensing. I am assuming that is aside from 

the currency issues we have. Those are just issues that obviously 

are in the United States. You don’t have to deal or you have a lot 

tougher time dealing with those in, say, a company in China. 

Mr. Goodpasture, you actually mentioned, and I think you said, 

you have lights-off manufacturing going on. It runs all night long. 

I think I read in maybe your testimony that you have a shift that 

nobody is there but you continue to manufacture 24 hours. Is that 

in direct response to trying to compete? 

19

Mr. GOODPASTURE. Oh, sure. If there is no labor, it doesn’t matter if the machine is sitting here in China. We can produce it 

equally as well and probably better and for a competitive price. 

Labor is the cost so that is a direct response to dealing with China 

on our part so we can produce at the same price. 

Chairman GRAVES. Coming back to Mr. Duesterberg, I would add 

litigation to that, too. You have litigation issues in the United 

States. You have regulatory issues and licensing issues. You have 

environmental issues. The list goes on and on and on that you have 

to deal with, regulatory in the United States that you don’t have 

to deal with anywhere else. 

Dr. DUESTERBERG. You have to deal a lot less in some other 

places. I highlighted in my testimony that the recent rise in the 

cost of natural gas, which is on average tripled in the United 

States over the last six or seven years, we are now the highest cost 

location in the world for natural gas. That is a feed stock that goes 

into chemicals. It goes into fertilizers and so on and so forth. 

I think with regard to the first part of your question, the sort of 

hidden cost that occur in trying to do business in a place like 

China, a perfect example is with all this counterfeiting there are 

mechanisms available to try to pursue that in the Chinese courts 

but they are enormously opaque. They are enormously expensive. 

Some of the data that the World Bank is now providing comparative data on how much it cost to do these sorts of things in various 

parts of the world, for instance, in terms of enforcing contracts in 

China it takes on average about one quarter of the total amount 

you’re seeking to recover in terms of a debt if you are using the 

court system, whereas in the United States that number is much 

less. 

That is a special burden on small businesses because the margins are typically thin in manufacturing to start with and it sometimes is just not worth the cost of doing business so that locks us 

out of the market itself. 

Chairman GRAVES. Mr. Barrow. 

Mr. BARROW. Thank you, Mr. Chairman. 

Mr. Coley, I want to follow up on something you were talking 

about because I have a concern about what is going on with our 

cotton trade with China. The concern I have is that we are exporting so much more raw material to them but we are not really getting into their market because they are directing the raw material 

we are exporting to their country into their textile export market 

rather than their domestic textile market which will allow the cotton we grow here in this country to end up on the backs and in 

the homes of Chinese which will open up that huge potential marketplace to us. 

They are steering our cotton into their textile export markets. 

Our raw materials are shipped from this country over to theirs, 

processed in that country and shipped back here for us to purchase 

so the only net thing we have achieved in this is the exporting of 

our manufacturing jobs, the processing jobs in the middle. 

What is contributing to that? How are they doing that and what 

can we do to do and get them to open up their markets so we get 

market access out of this deal? 

20

Mr. COLEY. Well, hopefully obviously their domestic consumption 

has to increase if our cotton goes as opposed to, like you say, sending them back here. I think hopefully with them entering into the 

WTO we might see some changes that way. The biggest thing is 

more domestic consumption and purchasing by the Chinese people 

of the cotton goods that are being produced there as opposed to just 

turning around and being shipped back. 

Right now it has just been official for them to send a t-shirt back 

to Wal-Mart here in the States to resell it as opposed to actually 

having it there. That ends up making their huge domestic product 

the capital of their domestic cotton growers and denies us access 

to that market. They produce twice as much of the cotton they currently consume themselves. 

In other words, for what they grow themselves in China they are 

actually consuming twice the amount they produce there locally. 

There is a market there certainly with the population. Certainly 

the idea that the clothing they are buying is not being marketed 

and U.S. cotton is not being directly marketed to those people and 

they are getting to use their own domestic consumption more or 

less. 

Mr. BARROW. I hear you and I will tell you what I hear from 

other folks. Membership in the WTO has its opportunity and also 

has its responsibilities. Floating currency is one of the things that 

is part of the deal. We are not getting that. 

Enforcement of our intellectual property rights in their economy 

is supposed to be part of the deal and we are not getting that. My 

concern in particular as it affects agriculture is we are exporting 

our own materials but we are not getting any excess of their market and that is something we are also supposed to be getting out 

of that deal. I have been hearing that a lot. Thank you very much. 

Chairman GRAVES. Mr. Lipinski. 

Mr. LIPINSKI. Thank you, Mr. Chairman. Mr. Goodpasture had 

said in this statement that China really made a decision to—I don’t 

remember the exact words but potentially become a manufacturing 

country to really support manufacturing jobs, made a conscience 

decision to do that. I feel that China makes this decision. They put 

the policies in place. 

We sit here and we say, ‘‘We are just going to have a free market.’’ A free market means if someone else is exploiting it on the 

other end. Free market means jobs freely flowing out of out country 

because China is unfairly manipulating its currency and not enforcing intellectual property. They have something they are trying to 

do and they have been very good at doing it. 

Now, one thing I wanted to ask Mr. Goodpasture to expand on 

a little bit is the impact on national defense. You had talked about 

tool die and mold industries are really being especially hurt. I have 

Atlas Tool and Die in my district and I am always hearing about 

the difficulties that they are having. When we lose these manufacturers what does that do to our ability to defend ourselves? How 

does that have an impact? 

Mr. GOODPASTURE. I think right now we have a lot of defense 

equipment and storage that has been made. For example, in 1994 

we were producing, I think, 840 tanks a year, M1A1 tanks. Right 

now we are not producing any. I work for General Dynamics. That 

21

was for another company I previously worked for. I was at a meeting at General Dynamics about a year ago to just begin the process 

of doing work with Pride and I was told they could not get armor 

steel. 

There are shortages of steel so, I mean, if we actually get into 

a situation that we need to produce tanks again, the Defense program has dropped. We have made a lot of things and we have 

dropped off production on a lot of items. If those situations would 

take off, No. 1, we don’t have enough material. No. 2, we are losing 

our manufacturing base to produce. If that needed to pick up in a 

big hurry, we would be in trouble. As you can see by my testimony 

how many shops we have lost in this country. That will not be 

gained back. 

Once we lose that employee base, we don’t just say we are going 

to be a manufacturing country again. Again, we have to take away 

the attractiveness of the large businesses going over to China and 

setting up shop because it is further taking away from our ability 

to manufacture here. 

Mr. LIPINSKI. And once we cannot produce those things we need 

to defend ourselves, we really have lost our defense if we are relying on other countries for those types of things. 

Now, the other thing I want to get into is the currency manipulation. It made news recently that there is essentially a battle in 

NAM. The small manufacturers were able to win over, at least up 

to some point and it is still in process, support for H.R. 1498, the 

Hunter and Ryan Bill, that would apply U.S. countervailing laws 

to countries that manipulate their currencies. 

The question I want to ask each one of you is do you think—this 

is certainly a bill that I support. Do you think that this is good legislation? Would this definitely be helpful? Obviously it is a battle 

between the small manufacturers and the larger manufacturers. 

The small ones are the ones who really supported this in NAM, the 

larger ones did not. I just want to ask each of you what you think 

of that bill. 

Mr. Goodpasture. 

Mr. GOODPASTURE. There is a good reason NAM wouldn’t support 

that is because a lot of the large business. They have really become 

an organization that are large business, not NTMA, small business. 

A lot of NTMA used to be part of NAM and they have dropped out 

because a lot of their customers have picked up and moved to 

China so there is a reason, I think, they would not be in support 

of that. 

How much that would help, I think it is a start. I still think 

there are a lot of issues as far as controlling and how much the 

yuan is actually—I saw so many prices being structured when I 

was in China that didn’t go along with the yuan rate so I don’t 

know. I think the whole thing is we have to make it less attractive 

for our major corporations here in this country to go to China. 

Mr. LIPINSKI. Mr. Russell. 

Mr. RUSSELL. Unfortunately, sir, I must apologize. I am not familiar with that house bill but, if given the opportunity to review 

it, I would be glad to respond at a later time. 

Mr. LIPINSKI. Thank you. 

Mr. Duggan. 

22

Mr. DUGGAN. Sure. I was at that NAM meeting, as a matter of 

fact. The collective position of NEMA as an umbrella organization 

is that the currencies of major economies should be set by market 

forces. At that meeting, though, NEMA has members on both sides. 

I think we all agree that congressional pressure is helpful to all 

manufacturers, administrative pressure on China and talking to 

China is helpful but we unfortunately could not arrive on a consensus and NEMA abstained on that vote so I am afraid I can’t 

give you a good answer. 

Mr. LIPINSKI. Mr. Duesterberg. 

Dr. DUESTERBERG. Mr. Lipinski, I think it is an excellent question. 

Dr. DUESTERBERG. We are not a member of NAM. We are an 

independent organization and not part of that discussion. It is my 

view that the Hunter Ryan Bill is a very blunt instrument and I 

don’t believe we are ready to use that yet. The problem is we have 

other instruments available to us and we simply haven’t tried to 

use them. It is very clear in the articles of both the international 

monetary fund and the World Trade Organization that currency 

manipulation is a prohibited action. 

The administration every six months has an opportunity to make 

a declaration. In fact, they are required to make a declaration to 

the Congress about whether or not any countries are manipulating 

their currencies with a view to enhancing their own commercial advantage. They have systematically hunted on that decision. It is 

quite remarkable that they have. I think the pressure needs to be 

on the administration. 

We do have a new Treasury Secretary who at least has made 

some preliminary signals that he is sensitive to the problems created by currency manipulation. We could be smarter about trying 

to attract some international support for this position. The Europeans, for example, have hid behind us for years on this issue. Now 

they are facing a trade deficit of as much as $150 to $175 billion 

this year with China so it is becoming in their interest. 

The Japanese are losing market share to the Chinese. We don’t 

have to do this alone. We could go to the World Trade Organization, bring an action and try to get some international support for 

us. I think we ought to go that route first and try in a vigorous 

and systematic way to use the tools that are already available to 

us before we go down the path of a really blunt instrument. 

Mr. LIPINSKI. Thank you. 

Mr. Coley. 

Mr. COLEY. Yes, Mr. Chairman. I also have to apologize that I 

know little or next to nothing about NAM or how it relates to my 

particular industry if it does at all. 

Mr. LIPINSKI. I certainly understand if you came up to me and 

honestly asked me about some bill that I may not know anything 

in particular about either. If you ask me about cotton I couldn’t tell 

you a whole lot about that so I understand. Thank you all. 

Chairman GRAVES. Mr. Chabot. 

Mr. CHABOT. Thank you, Mr. Chairman. I want to apologize for 

not being here to hear the testimony but, as oft times happens 

around this place, we have several hearings going on at the same 

time and I will review your testimony. Just a couple of questions. 

23

First, relative to counterfeiting, Mr. Duggan, could you comment 

on what actions private companies are taking in the U.S. and 

abroad to combat counterfeiting? How big a problem is it? 

Mr. DUGGAN. Private companies are doing things like, for example, if a product like this when it gets counterfeited sometimes they 

undergo—often they will undergo the expense of changing the 

packaging and then they inform the distribution chain that, ‘‘Look, 

the new packaging looks like this. If it is not this, it is not genuine.’’ That strategy worked for a while. 

The problem is that the counterfeiters got very good at very rapidly intimating the packaging so that didn’t work. What they are 

doing is expending money where they can on investigations. In 

other words, their sales force will go around the United States, 

around the world, and they will see something that is not quite 

right. Then they will do some investigating on their own and then 

if they think it is serious enough, they will actually go to professionals, someone in country or someone in the United States that 

is in the business of chasing this down. 

I think Tom referred to before they get into the problem of cost 

benefit. In all these companies brand protection is not a revenue 

center. It is an overhead. While over the long-term it certainly 

makes sense to do it, in the near and mid-term they go, ‘‘Well, we 

know we are getting ripped off but how much do we spend to solve 

this problem and then what about the next one?’’ 

Some of the other things they are doing is inscription technology. 

You probably have seen holograms. I haven’t seen this so much in 

the auto parts industry necessarily but some where you will see 

holograms or other types of inscripted material actually built into 

the product. 

Then what you do is give the people in your distribution chain 

some sort of a reader so they can wave it across and they can tell. 

Those are the services and the kind of products that they are 

doing. They are spending resources on it but, again, in some companies, medium companies in particular, but as well as in big companies it is not a revenue center and margins are small and it is 

very difficult to manage the cost of protecting your brand. 

Mr. CHABOT. Thank you. My other question I would ask any of 

the panel members to comment on this if they would. If you already touched on this in your testimony, again, I apologize, but relative to the expectation by some Chinese either government officials or otherwise that they be, for lack of a better term, paid off 

or bribed, that sort of thing. 

Some of the other countries are much more willing to look the 

other way than the United States is. Could you either comment on 

any instances that you have experienced in your own companies or 

yourselves and in your own experience, or stories that you have 

heard that you believe are credible from others where they have 

had a situation where this is something they have had to face. I 

will invite anybody who wants to talk about this. 

Mr. RUSSELL. How much time have you got? 

Mr. CHABOT. I will ask the Chairman. I am sure he will give us 

enough to hear the response. 

Mr. RUSSELL. I will ask my counsel to nudge me if I start to digress or chase rabbits in too many different directions at once. I 

24

have had opportunity to have conversations with my peers professionally with Oakley sunglasses, Nike shoes, Anheuser Busch, Harley Davidson. Those last two entities don’t have the level of irritation that Oakley and Nike and Auto Meter have encountered. I 

know that the gentleman at Oakley has a budget for IP rights enforcement that has gone from zero dollars. 

I don’t know the years. Don DeKeefer, my counsel, could prob- ably better speak on this. It is now over $5 million a year that he 

spends just investigating or examining counterfeit infringing goods 

worldwide, primarily manufactured in China. 

Oakley is not necessarily a small business but I use that as a—

he has told me in personal conversation on the phone that his 

budget now is over $5 million just for the investigation and enforcement of his rights worldwide. If you are a small business manufacturer, like I really have a strong degree of empathy for Mr. 

Goodpasture here, innovation is the key that is going to drive our 

economy. There is no two ways around that. 

Mr. Goodpasture is presented with an opportunity here to develop a product or a service and he can find a way to be cost advantageous or cost competitive and still maintain a good profit margin 

which enables him to hire people to put dinners on tables in homes 

in Liberty, Missouri. That is part of the American dream. 

He can’t afford necessarily to hire, to expand, to become more 

competitive because he is spending money that instead of going to 

R&D to serve his purposes is going to brand protection, or IP protection or investigation. That has diminished his capabilities as a 

business enterprise. That is the affect that a lot of American companies are feeling right now. You spend anywhere from $15,000 to $30,000, I will say, in my 

experience securing a utility patent. That is an investment, especially if you are a small manufacturer, if you are employing 20 people. Auto Meter employs 200. 

After you have made that investment for that patent, the idea 

that you have to spend 10 times that amount simply to enforce it 

as well as the costs that are incurred going around trying to find 

out who is infringing it and the litigation cost involved, it would 

give, I am certain, a number of small manufacturers good cause to 

say, ‘‘What is the point?’’ 

My personal feeling, sir, is if we lose small manufacturing in the 

United States, we have lost a basic bedrock element of the American economy. It was the small manufacturers going back to the 

times of the Revolution that decided they weren’t going to pay the 

Stamp Tax. It was the small manufacturers that decided to leave 

their homes for the time being to their sons while they fought in 

the Civil War. 

It was the small manufacturers that really provided services to 

the big companies because the big companies aren’t flexible 

enough, don’t have the knowledge, don’t have the experience or 

whatever. The cost of intellectual property rights enforcement 

against counterfeiting and pirating, and let’s not even stop to consider what should happen if a small manufacturer is named in a 

litigation for a wrongful death, per se. 

Even though he may be vindicated after a considerably expensive 

defense trial, what has happened to his brand as a result of the 

25

negative PR that has gone with that, how does he recover that? I 

can’t emphasize enough this issue. 

Mr. CHABOT. Mr. Chairman, I don’t know if I have any time left 

or not and I appreciate the response. The one thing that wasn’t 

covered that I was interested in was basically the desire of Chinese 

officials or others to require bribes, for lack of a more politically 

correct term here, in order to do something that one would expect 

a person to do in this country because it is their job. 

They want to be paid off basically and my understanding is our 

rules and laws, etc., are much stricter than are being enforced by 

the French and others and, therefore, we have a competitive disadvantage as a result of that. If any of the other members have 

heard instances or have some sort of knowledge about that, I would 

be interested to hear your comments. 

Mr. DUGGAN. In our brand protection meetings, and this is a collection of peer group of executives that are involved in brand protection and intellectual property. They do talk about things like 

that but I think, at least in the companies I have encountered, it 

seems strange but they may not even know that there is a law 

against bribes but they are not going to pay them because they 

generally—again, my impression of the people I talked to is, ‘‘I 

can’t do this in the U.S. so I am not going to do it here.’’ 

You know, I think if you ask they would say, ‘‘I don’t know if 

there is a law against it but we are not going to do it.’’ Do they 

compare notes with their competitors, the Germans and the 

French? I think some do. You do hear talk like that, ‘‘Oh, everything is fraudulent. We don’t do that.’’ I don’t really know about 

others, German, French, Japanese. 

It is my general understanding that, yeah, you are right, they 

are more lose about that and more strict about it. It is a factor. It 

is hard to say how much of a factor that it is. They will refer to 

more, particularly in provinces and towns and cities, where basically things are run, you know, you can tell that the business owners and the mayor and the municipal authorities and the people 

doing licensing. 

They have all lived in the same village or province for generations. They all know each other and you are an outsider. You are 

at a disadvantage even if you are providing jobs and even if you 

do have a partner. 

One thing that does happen, I don’t know if it is a cash bribe but 

it is very common that, let’s say, you want to do business in a particular area, either sell or invest or something like that, they basically hook you up like some kind of a shotgun wedding and say, 

‘‘If you want to do anything here, sell or manufacture, you are 

going to have to work through this person.’’ Very often that person 

is someone who is acquainted with the local officials. 

Dr. DUESTERBERG. Could I comment, Mr. Chairman? I have 

heard lots of anecdotes about activities of various sorts. In a political environment like that of China, which is basically an authoritarian system, there are ample opportunities and you see even the 

local people who are affected by mal-administration of justice and 

favors being given to local officials and riots all over the place that 

are not widely reported. 

26

There is a group Transparency International that you probably 

know of that endeavors to have a systematic measure of how much 

bribery is going on. I don’t have at the tip of my tongue the latest 

rankings but I know that China doesn’t rank very highly in that 

regard. I provided a number in my testimony about how long it 

takes to get the average licenses to open a business in China compared to the United States it is 363 days basically a year. The average in the United States is 70 so each day provides an opportunity for a local official in an authoritarian economy to exercise 

some mischief. 

I think Brian’s point, the last point that he made, is also an important one. There are other ways that are sometimes above board 

and sometimes not above board that the Chinese try to extract 

some advantage out of companies doing business there. Perhaps 

that is even a bigger problem. General Electric wants to sell power 

plants. The Chinese will negotiate until the cows come home to try 

to get a transfer of the most sensitive technology that General 

Electric has. 

That is a very common practice. You want to set up a cell phone 

factory. You want to sell them Boeing aircraft. They want to 

produce part of it and they want to have the technology that goes 

along with that. Because it is an administered licensed based economy, companies have to make a determination whether or not it is 

worth succumbing to their demands for transfer of technology or 

taking on local partners which frequently will steal the technology 

that they learned. I think it is still a rather large problem. 

Mr. CHABOT. Thank you very much. 

Thank you, Mr. Chairman. 

Chairman GRAVES. I want to thank all the witnesses for coming 

in today. Some of you have traveled a long ways. I think it was 

very good testimony. This is actually the second hearing we have 

had on this particular issue and we want to continue to shed light 

on the problem and continue to try to pressure ourselves, the administration, Congress into paying more attention to this issue and 

try to get something done about it. 

I think we have some great opportunities with China when it 

comes to trade but we have to have a level playing field as many 

of you have pointed out. Again, I want to thank you for being here. 

I appreciated all your testimony. 

[Whereupon, at 11:32 a.m. the Subcommittee adjourned.]

27


30355.043
28


30355.044
29


30355.045
30


30355.046
31


30355.001
32


30355.002
33


30355.003
34


30355.004
35


30355.005
36


30355.006
37


30355.007
38


30355.008
39


30355.009
40


30355.010
41


30355.011
42


30355.012
43


30355.013
44


30355.014
45


30355.015
46


30355.016
47


30355.017
48


30355.018
49


30355.019
50


30355.020
51


30355.021
52


30355.022
53


30355.023
54


30355.024
55


30355.025
56


30355.026
57


30355.027
58


30355.028
59


30355.029
60


30355.030
61


30355.031
62


30355.032
63


30355.033
64


30355.034
65


30355.035
66


30355.036
67


30355.037
68


30355.038
69


30355.039
70


30355.040
71


30355.041
72

Æ


30355.042