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75–737 PDF 2012

S. HRG. 110–1166 

U.S. TRADE RELATIONS WITH CHINA 

HEARING 

BEFORE THE

SUBCOMMITTEE ON INTERSTATE COMMERCE, 

TRADE, AND TOURISM 

OF THE

COMMITTEE ON COMMERCE, 

SCIENCE, AND TRANSPORTATION 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

JULY 25, 2007 

Printed for the use of the Committee on Commerce, Science, and Transportation 

( 

(II) 

SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

DANIEL K. INOUYE, Hawaii, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BYRON L. DORGAN, North Dakota 

BARBARA BOXER, California 

BILL NELSON, Florida 

MARIA CANTWELL, Washington 

FRANK R. LAUTENBERG, New Jersey 

MARK PRYOR, Arkansas 

THOMAS R. CARPER, Delaware 

CLAIRE MCCASKILL, Missouri 

AMY KLOBUCHAR, Minnesota 

TED STEVENS, Alaska, Vice Chairman 

JOHN MCCAIN, Arizona 

TRENT LOTT, Mississippi 

KAY BAILEY HUTCHISON, Texas 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

JOHN THUNE, South Dakota 

MARGARET L. CUMMISKY, Democratic Staff Director and Chief Counsel 

LILA HARPER HELMS, Democratic Deputy Staff Director and Policy Director 

CHRISTINE D. KURTH, Republican Staff Director and General Counsel 

KENNETH R. NAHIGIAN, Republican Deputy Staff Director and Chief Counsel 

SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISM 

BYRON L. DORGAN, North Dakota, 

Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

JOHN F. KERRY, Massachusetts 

BARBARA BOXER, California 

MARIA CANTWELL, Washington 

MARK PRYOR, Arkansas 

CLAIRE MCCASKILL, Missouri 

JIM DEMINT, South Carolina, Ranking 

JOHN MCCAIN, Arizona 

OLYMPIA J. SNOWE, Maine 

GORDON H. SMITH, Oregon 

JOHN ENSIGN, Nevada 

JOHN E. SUNUNU, New Hampshire 

(III) 

C O N T E N T S 

Page 

Hearing held on July 25, 2007 ............................................................................... 1 

Statement of Senator DeMint ................................................................................. 2 

Statement of Senator Dorgan ................................................................................. 1 

Statement of Senator Sanders ................................................................................ 6 

WITNESSES

Brown, Hon. Sherrod, U.S. Senator from Ohio ..................................................... 4 

Hoffa, James P., General President, International Brotherhood of Teamsters .. 18 

Prepared statement .......................................................................................... 21 

Nichols, Robert S., President and COO, The Financial Services Forum ............ 56 

Prepared statement .......................................................................................... 58 

O’Shaughnessy, M. Brian, Chairman, CEO, and President, Revere Copper 

Products, Inc. ........................................................................................................ 27 

Letter, dated September 21, 2006, from Richard L. Wilkey; L. Patrick 

Hassey; and M. Brian O’Shaughnessy to Hon. John Engler ..................... 29 

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

Paul, Scott N., Executive Director, Alliance for American Manufacturing ........ 49 

Prepared statement .......................................................................................... 52 

Sanders, Hon. Bernard, U.S. Senator from Vermont ........................................... 6 

Spooner, Hon. David M., Assistant Secretary of Commerce for Import Administration, U.S. Department of Commerce ........................................................... 8 

Prepared statement .......................................................................................... 9 

(1) 

U.S. TRADE RELATIONS WITH CHINA 

WEDNESDAY, JULY 25, 2007 

U.S. SENATE, SUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND

TOURISM, COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:33 p.m. in room 

SD–562, Dirksen Senate Office Building, Hon. Byron L. Dorgan, 

Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF HON. BYRON L. DORGAN, 

U.S. SENATOR FROM NORTH DAKOTA 

Senator DORGAN. I’m going to call the hearing to order. This is 

the hearing of the Subcommittee on Interstate Commerce, Trade, 

and Tourism of the Senate Commerce Committee. Today we’re 

holding the second in a series of hearings that will examine our 

country’s trade policies. Our first hearing was in the month of 

April. We looked at the general direction of trade policies. Today 

we’ll look at our trading relationship with China, the country with 

which we have the largest trade deficit that one nation has ever 

experienced with another. 

I indicated at the last hearing that I’m in favor of trade and 

plenty of it, but I demand that it be fair. And, we have a trade circumstance in this country that is unfair in so many ways and what 

has happened to us is we have seen the dramatic growth of a trade 

deficit that is going to injure this country. 

Let me just say with respect to China, when the United States 

granted permanent normal trade relations with China in the year 

2000 our merchandise trade deficit with China was $83 billion a 

year. By last year, that trade deficit had exploded to $233 billion. 

For every six dollars of merchandise we purchase from the Chinese, 

the Chinese buy one dollar of merchandise from us. That is a staggering indictment of a trade policy, regrettably, that I believe is not 

fair trade and reflects, I believe, a wide range of problems as well. 

Those problems include vast intellectual property theft and piracy, 

currency manipulation, unfair barriers against U.S. exports, and 

an unfair playing field in which U.S. jobs go to China because of 

sweat shop conditions, a subject on which we will hold a future 

hearing as well. 

Recently we read of a decision to begin importing cars into this 

country from China and the decision to import an automobile from 

China into this country is an interesting one, because I have raised 

questions about bilateral automobile trade. It is interesting to me 

2 

that the circumstances of bilateral automobile trade in this country 

are such that when the Chinese automobiles come to our shore 

they will be assessed a 2.5 percent tariff. By mutual consent, if we 

were to export automobiles to China, China will impose a 25 percent tariff. 

Now, think of that. A country with whom we have a $200-plus 

billion trade deficit; we have agreed that on bilateral automobile 

trade it’s just fine for them to enact a tariff that is ten times ours. 

That is unbelievably ignorant of our economic well-being in my 

judgment. I use that as one small example. I will describe others 

today. 

But part of the problem is unfair trade from a trading partner 

that does not own up to the rules of trade. Part of it is our own 

incompetence in negotiating bad trade agreements. But a significant part of it as well, the overlapping portion of it is the mantra 

that we keep chanting in this country about free trade that turns 

out to be so fundamentally unfair to this country’s economic interests. 

It’s interesting to me that there seems to be very little interest 

or concern by those that support the current trade policy, even as 

the evidence mounts with dramatic, increasing trade deficits that 

this trade policy is a failure. 

So we will have a good discussion about a range of issues and 

solutions. We are joined today by the Ranking Member, Senator 

DeMint, on this Subcommittee. I’ve invited Senator Brown, who 

has written extensively, in fact written a book on this subject. Senator Sanders had asked to be the opening witness and we will hear 

from Senator Sanders before we go to the list of the witnesses that 

we’ve also invited. 

I want to mention that in addition, after Senator Sanders has 

testified, we will hear from the Honorable David Spooner, the Assistant Secretary of Commerce for International Trade Administration, U.S. Department of Commerce; Mr. James Hoffa, General 

President, International Brotherhood of Teamsters; Brian 

O’Shaughnessy, Chairman and CEO and President of Revere Copper Products in Rome, New York; Mr. Scott Paul, Executive Director, Alliance for American Manufacturing; and Mr. Robert Nichols, 

President and COO of Financial Services Forum. I appreciate the 

witnesses coming today and let me call on my colleague Senator 

DeMint. 

STATEMENT OF HON. JIM DEMINT, 

U.S. SENATOR FROM SOUTH CAROLINA 

Senator DEMINT. Thank you, Mr. Chairman. I appreciate you 

holding the hearing today. China is a critical trading partner and 

we should continually examine the relationship that we have with 

them as well as the trade agreements, as you’ve mentioned. 

As most of us know, China is the world’s fourth largest economy, 

likely to become the world’s third largest economy this year. More 

importantly, it’s a rapidly developing country, with 1.3 billion consumers, with a rapidly growing middle class. While we export nearly the same amount of goods to China as we do to Japan, Japan 

is a developed country whose population is ten times smaller than 

China’s. As we develop a strong relationship with China, the marVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\75737.TXT JACKIE
3 

ket for American products will grow exponentially when the Chinese middle class matures and they begin to consume goods on a 

similar scale to other developed countries like Japan. 

But unfortunately, I don’t think we are going to discuss the opportunities available in China at today’s hearing. I fear we’re going 

to spend a good portion of this afternoon attacking the Chinese. I 

anticipate that some of my colleagues will express concern about 

subsidies and frustrations about currency issues, all as a foundation for taking action against China—revoking permanent normal 

trade relations, levying onerous duties, or some other creative form 

of punitive trade policy. 

In the 1980s and early 1990s, we heard a similar call for protectionism, protectionist measures, but then the Japanese were the 

source of our woes. Today it’s the Chinese, and tomorrow maybe it 

will be the Indians. Before we blame some foreign capital for our 

woes, maybe we should take the time to examine what we’re doing 

wrong at home that is making us less competitive. 

America has a legal system where trial lawyers rush to the 

courthouse, litigating every little difference and sucking massive 

amounts of productive energy out of our economy. The United 

States tort system costs Americans over $245 billion annually. It 

costs the average small business $150,000 a year. This is money 

that could have been better spent conducting research and development, hiring new staff, or finding opportunities in new markets, 

and even lowering the price of our goods abroad. Instead, this 

money was needlessly wasted enriching trial attorneys. 

If the drag on American competitiveness from an abuse-prone 

tort system isn’t enough, our byzantine tax system compounds the 

problem. Individuals and businesses in the United States spend 

over 6 billion hours a year complying with the Federal income tax 

code. They waste over $250 billion annually just making sure they 

fill out the forms correctly. And this is all before they open their 

checkbooks and write a check to Uncle Sam. 

Regardless of whether someone is a supporter of big government 

spending and high taxes or wants a lean, efficient government, you 

should be appalled that the tax code forces Americans to waste 

over 6 billion hours a year, the yearly output of 3 million Americans, just filling out tax forms. Just think of what a shot in the 

arm it would be for American competitiveness if we unleashed the 

innovative and creative energies of 3 million Americans. 

After American companies have been squeezed by frivolous lawsuits and burdensome taxes, they’re faced with the high cost of regulation. Businessmen around the country are worried every day 

that their shop is going to be fined or closed down because they’ve 

somehow run afoul of the minutia in some Federal regulation. 

They’re forced to spend money that should be spent innovating on 

compliance officers who can protect them from the threat of an 

OSHA audit. 

The costs last year of regulatory compliance exceeded $1.14 trillion. Even if half of all regulations are useful and necessary, there 

is still over $500 billion in productive energy being sucked out of 

our economy by government regulations each year. 

Colleagues, Ross Perot famously described what he thought 

would be a ‘‘giant sucking sound’’ of jobs from America being shiftVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\75737.TXT JACKIE
4 

ed overseas. While he was wrong about the impact of NAFTA, he 

was right that there is a giant sucking sound. The giant sucking 

sound we hear is the sound of Washington sucking creative energy 

out of the American economy in the form of energy wasted filling 

out tax forms and complying with burdensome regulations. There’s 

a giant sucking sound of trial lawyers sucking billions of dollars 

out of the pockets of American companies in the form of frivolous 

lawsuits. And maybe most troubling, there’s a giant sucking sound 

of the big-spending politicians here in Washington sucking billions 

of dollars out of the pockets of families and businesses to pay for 

their big government initiatives. 

I’m sure this afternoon we’re going to hear a chorus of complaints about the Chinese. We’ll hear all the stories about how the 

Chinese are eating our lunch and how the plight of the American 

worker is in peril. Many fingers will be pointed at Beijing and 

much scorn will certainly be heaped upon the People’s Republic of 

China. But I would submit to you that you’re pointing the finger 

at the wrong capital. You need to look no further than this body 

to find where fault lies. It’s the U.S. Government that has let the 

lawyers run wild, the U.S. Government that has promulgated nearly 75,000 pages of Federal regulation, and the U.S. Congress that 

has drafted an Internal Revenue Code that is thousands of pages 

long and siphons billions of dollars out of our economy each year. 

Colleagues, American competitiveness is at stake, but it’s not because some foreign government is trying to stick it to America. It’s 

because America’s government has decided that it wants to stick it 

to business and make them shoulder an ever greater burden from 

the government. If government would just step back and lessen the 

burden on American businesses and innovators, the impact on domestic jobs and international commerce would be stunning. 

I thank the Chairman for taking the time to hold this hearing 

and I look forward to comments from the witnesses. 

Senator DORGAN. Well, Senator DeMint, we are going to have an 

interesting hearing indeed. I think—let me put up a chart I didn’t 

put up. You look at that chart, I think it’s very hard to be one of 

the blame America first crowd. That chart has nothing to do with 

what’s wrong with America. That chart has everything to do with 

an imbalance in trade and unfair trading practices. But we will 

have an interesting time, apparently, discussing these issues. Your 

opening statement did not—— 

Senator DEMINT. I’ve got some charts of my own. 

Senator DORGAN. Your opening statement did not discuss trade, 

but I’m happy also to discuss the economy and a range of other 

issues that you have raised. At any rate, it’ll be an interesting 

afternoon. 

Senator Brown? 

STATEMENT OF HON. SHERROD BROWN, 

U.S. SENATOR FROM OHIO 

Senator BROWN. Thank you, Mr. Chairman, and thank you, Senator DeMint, for allowing me to sit in on this Committee, of which 

I’m not a member, but have a burning interest, as Senator Dorgan 

has, on trade issues, and as Senator Sanders has led in his years 

in the House. 

5 

I remember back in the late 1990s when the CEO’s of America’s 

largest companies wandered the halls of Congress in the House at 

least. Typically, CEOs of that stature didn’t stop in the offices of 

ordinary, everyday members from Vermont and Ohio. They went to 

the leadership offices. But in those days, because PNTR was so important to the largest companies in this country, they stopped in 

individual offices. And they continued day after day, CEO after 

CEO, talking about how they couldn’t wait to have access to one 

billion Chinese consumers. 

What they failed to mention is that they really had way more interest in one billion Chinese workers, and that’s what fundamentally the issue was about in China PNTR. They told us that PNTR 

would ensure China’s move to more of a market economy. They 

said it would help promote growth and opportunity for the people 

of both our nations. Unfortunately, on both counts they proved 

wrong. 

Experts, including James Mann of the John Hopkins School of 

Advanced International Studies, who ran the Beijing Bureau for 

several years for a major American newspaper, have stated that 

the argument used to pass the China trade deal was a false paradigm. Eating at McDonald’s and wearing blue jeans does not make 

China a vibrant democracy. The word from the business elite in 

this country and from the newspaper publishers of this country is, 

if you can tell the difference, has been over and over that the more 

we engage China economically that democracy automatically would 

follow, and there has simply been no evidence of that and the 

American public’s on to that. 

In addition, the Economic Policy Institute recently reported, as 

Senator Dorgan suggested, on the trade deficit, nearly 2 million 

lost U.S. jobs since China’s admission to the WTO. My state, one 

of the hardest hit, has lost somewhere in the vicinity of 66,000 jobs 

directly attributed to Chinese—to our relationship with China. 

We know that what’s happened to manufacturing is a national 

security issue that as our manufacturing base declines our ability 

to defend ourselves declines, especially in the steel industry and especially in big manufacturing, if you will. And we are giving away 

much of our technology. We know about the Boeing deals. We know 

about Westinghouse. We give away much of our technology to another country that’s not necessarily a friendly country. 

I am particularly amused by my colleague from South Carolina’s 

discussion about regulation. To be sure, we have more regulation 

in this country. We probably are less likely in our country to have 

contaminated pet food, contaminated toothpaste, toys like Thomas 

the Tank, tires that malfunction, because we do in fact have a regulatory structure in our country whose primary responsibility, in 

spite of efforts by people perhaps of Senator DeMint’s philosophy 

to undercut those regulations and to weaken those protections, 

from consumer product safety to OSHA to the EPA, American values to protect our middle class and protect our people and protect 

our families from unsafe food products and unsafe toys and our 

children and all of that. 

I would never trade our regulatory structure for the Chinese regulatory structure. It’s simply not a surprise—it came as a surprise 

to none of us who have been skeptical of the trade relationship beVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 S:\GPO\DOCS\75737.TXT JACKIE
6 

tween the United States and China that China has sent us products that are unsafe, whether it’s vitamin C or toothpaste or pet 

foods. We know that when a country is that wide open with no real 

safety and health and food safety and health regulations that that 

kind of wide-open trade policy, as we cut the number of inspectors 

at our borders, that that’s going to happen. 

Basically, what we’ve had is free trade on the cheap. When you 

have free trade on the cheap, you end up with less environmental 

protection and less food safety. 

I thank the Chairman. 

Senator DORGAN. Senator Brown, thank you very much. 

I know Senator Sanders has to leave to be at another Committee. 

But Senator Sanders, you have asked to testify. We’re very much 

appreciative of your being here, and why don’t you proceed. We will 

by consent ask that the full statements of the witnesses and the 

full opening statements of the panel will be included in their entirety in the record. 

STATEMENT OF HON. BERNARD SANDERS, 

U.S. SENATOR FROM VERMONT 

Senator SANDERS. Thank you very much, Mr. Chairman, and 

thank you for your work and Senator Brown’s work in highlighting 

an issue that in their guts the American people understand, but 

has not yet permeated this institution or certainly the corporate 

media. 

We have got to ask some hard questions and that is why is it 

that the middle class today is shrinking despite an explosion of 

worker productivity and technology? Why is it that since Bush has 

been President, five million more Americans have slipped into poverty? Now, I don’t think trade is the only reason that the middle 

class is shrinking and poverty is increasing, but it is certainly a 

major reason. 

Mr. DeMint, I am not here to attack the Chinese government. I 

am here to talk about what our government has done. The Chinese 

government is doing its best to represent their people and some of 

us would like to see our government do its best to represent the 

working people of this country rather than just the CEOs of large 

corporations, although I must say I do find it interesting that not 

so many years ago many of our conservative Republican friends 

were telling us how we had to spend tens and tens of billions of 

dollars to oppose and fight authoritarian communism, and now 

many of those same people in Congress and in corporate America 

are telling us what a wonderful country an authoritarian communist nation is. 

The bottom line of this discussion is, Senator Brown has indicated, is that we are in a race to the bottom. I would love somebody 

to explain to me how free trade means forcing American workers 

to compete against people who make 20 cents an hour, 30 cents an 

hour, 50 cents an hour, who go to jail when they talk about democracy in their country, who go to jail when they try to form a union. 

That to me is not anything having to do with free trade. That is 

an effort to force a race to the bottom by which American workers 

are seeing in many cases a decline in their wages and in their 

standard of living. 

7 

Here’s what we’re looking at in America today. Eighty percent of 

the toys sold in the United States are made in China. Ninety percent of the vitamin C made in America is made in China. Eighty 

percent of the footwear in this country is made in China. It is estimated in a few years 90 percent of the U.S. furniture production 

will be moved to China. Eighty-five percent of the bikes are made 

in China. 

As Senator Dorgan indicated, this alliance between Chrysler and 

Chery where for the first time automobiles will be manufactured in 

China that can be sold in the United States could likely mean the 

end for all intent and purposes of the automobile industry in this 

country. To my mind, the time is long overdue for this Congress to 

stand up for the working families of America, not just the CEOs 

of large corporations and all of the campaign contributions that influence what we do here. 

Trade is an enormously important issue if we are going to protect 

the middle class. All of us, as Senator Dorgan indicated, believe in 

trade and plenty of it. But we believe that there has got to be a 

level playing field and not a process by which we race to the bottom. 

So I want to congratulate Senator Dorgan for raising this issue. 

I want to conclude by saying we’re not just talking about blue collar manufacturing jobs. We’re talking about white collar information technology jobs. And if we don’t get this issue right, the fate 

of the middle class in this country will be very uncertain to say the 

least. 

Senator, thank you very much. 

Senator DORGAN. Senator Sanders, thank you very much. I understand you have to be at another hearing. Thank you very much 

for your testimony. 

I would like to call up the other witnesses and, with consent, I 

would like to ask the Honorable David Spooner, Assistant Secretary of Commerce for International Trade Administration, to 

come forward. Mr. Spooner, if you would sit on the right side. I 

want to ask the other witnesses to come up as well. We will ask 

you to testify first and if we have questions of you we will ask 

those questions. Then I will hear from the other witnesses. But I 

thank you very much for being here. 

Mr. Hoffa, if you would come to the witness table, the General 

President of the International Brotherhood of Teamsters. Mr. Brian 

O’Shaughnessy, the Chairman, CEO, and President, Revere Copper 

Products, Inc., in Rome, New York; Mr. Scott Paul, the Executive 

Director, Alliance for American Manufacturing; and Mr. Robert S. 

Nichols, President and COO, Financial Services Forum. 

Let me thank all of you for being here today. I know some of you 

have come some distance, and this is a very important topic, one 

that people feel passionately about. 

Mr. Spooner, you’re coming to us from the U.S. Department of 

Commerce. We appreciate your willingness to be here. You have 

submitted your testimony previously. We would ask that you summarize. The testimony of all of the witnesses will be included in the 

record in their entirety. 

Mr. Spooner, you may proceed. 

8 

STATEMENT OF HON. DAVID M. SPOONER, ASSISTANT 

SECRETARY OF COMMERCE FOR IMPORT ADMINISTRATION, 

U.S. DEPARTMENT OF COMMERCE 

Mr. SPOONER. Thank you, Mr. Chairman, Senator DeMint, and 

Senator Brown. I’m pleased to be here today to share some 

thoughts on the United States’ trade relationship with China. 

American companies face a number of challenges as they try to 

compete with China, from market barriers and intellectual property issues to unfair trade practices. Nevertheless, the relationship 

with China is generally a positive one, with benefits to U.S. manufacturers, farmers, service industries, and consumers. 

For 35 years it has been the policy of the United States across 

every administration to engage China as it moves toward market 

economics. The United States derives clear benefits from trading 

with China and by doing so within a framework which requires 

China to abide by international obligations. This policy culminated 

in China’s accession to the WTO in 2001, so that for the first time 

China had both rights and responsibilities in the international 

trading system. 

U.S. exports to China are booming. China is our fastest growing 

major export market and is now our fourth largest overall export 

market. U.S. exports to China totaled $55 billion in 2006, up 32 

percent from the prior year. U.S. exports to China are now greater 

than U.S. exports to India, Brazil, and France combined. Our companies and consumers derive benefits from imports from China as 

well. 

At the same time, we face real challenges with our trade relations with China. To use one example, China is on the path of creating global oversupply in the steel industry. Chinese steel capacity 

is now greater than that of the U.S., Europe, and Japan combined. 

Further, we have recently faced some serious challenges regarding 

the safety of Chinese imports. Challenges which the administration 

is addressing by establishing an inter-agency working group on import safety, to be chaired by the Secretary of Health and Human 

Services. The working group will identify where improvements can 

be made and ensuring the safety of imports through cooperation 

with Federal, State, and local government agencies, foreign governments, and U.S. importers. 

Commerce is addressing these and other challenges with a 

multipronged approach to bring about positive changes in China’s 

trade policies, regulations, and practices to level the playing field. 

Commerce’s China efforts fall into three general areas: tough-minded negotiations to achieve better market access, aggressive enforcement of our trade laws to fight dumping and subsidies, and high 

energy trade promotion to help U.S. companies compete and win in 

the Chinese marketplace. 

Our negotiations take place primarily through the Joint Commission on Commerce and Trade, which meets once a year and is 

chaired by the Commerce Department and USTR, with high level 

participation from USDA, and the Strategic Economic Dialogue led 

by the Treasury Department. Because of our aggressive trade enforcement, 27 percent of our antidumping duty orders are in imports from China, and recently we preliminarily determined to reverse a 23-year-old government policy by applying our anti-subsidy 

9 

law to China. Indeed, I was in China last week to lead our on-theground investigation of subsidies and the rest of the China team 

is still in China conducting verification and will return to the 

United States at the end of this week. We can and should remedy 

subsidies in China when they exist and it’s in our mutual interest 

to do so. 

Our export promotion activity means that we devote more personnel and activity to China than to any other market, with substantial benefits to U.S. exporters. The Commerce China team, a 

staff of 130 supported by our China trade specialists in Washington 

and field offices throughout the United States, work directly with 

companies, particularly small and medium size enterprises, interested in exporting to China to develop market opportunities, facilitate business, and to solve problems. 

We believe this threefold strategy provides the right mix to help 

American workers and to help China continue on the path of reform and to become a responsible stakeholder in the global economy. 

Thank you, Mr. Chairman, and I’m happy to take any questions. 

[The prepared statement of Mr. Spooner follows:] 

PREPARED STATEMENT OF HON. DAVID M. SPOONER, ASSISTANT SECRETARY OF

COMMERCE FOR IMPORT ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

Mr. Chairman, Senator DeMint, Members of the Subcommittee, I am pleased to 

be with you today to share some thoughts on the United States’ trade relationship 

with China. In our view, this relationship is in general a positive one, with benefits 

to U.S. manufacturers, workers, farmers, ranchers, and service providers. However, 

at the same time, we recognize that U.S. companies face a number of challenges as 

they try to compete in China, from market barriers and intellectual property issues, 

to unfair trade practices in which Chinese companies might engage in the U.S. or 

other markets. Further, we have recently faced some serious challenges regarding 

the safety of Chinese imports. Let me begin with an overview. 

Overview of U.S.-China Relations 

Since China started down the path of reform some thirty years ago, it has enjoyed 

some of the highest rates of sustained economic growth the world has ever seen. We 

welcome China’s move toward market-based economics. 

Indeed, it has been the policy of the United States, across all administrations to 

engage China politically and economically as it has struggled to move toward market economics. In the 35 years since the signing of the Shanghai Communique ́, U.S. 

economic policies have had two main goals: to help China move to a rules-based system and to help China internationalize its economy. These policies culminated with 

China’s accession to the WTO in 2001, which resulted in China’s membership in the 

world’s primary forum for economic engagement. China now has both the rights and 

responsibilities that come with membership in the international trading system. 

The U.S. has also benefited from this policy. China is one of our fastest growing 

markets and is now our fourth largest export market. U.S. exports to China totaled 

$55 billion in 2006, up 32 percent from the previous year. To put this in perspective, 

U.S. exports to China were greater than U.S. exports to India, Brazil and France 

combined. According to industry surveys, U.S. companies in China are generally 

successful and report solid sales in the China market. And our companies and consumers derive benefits from imports from China as well. 

At the same time, we must recognize that there are a range of trade and economic 

practices in China that most would consider unfair. For example, the non-market 

driven growth of China’s steel industry risks creating global over supply, and China’s efforts to legislate policies that protect significant segments of domestic industry at the expense of foreign competitors, as evidenced by the latest draft of China’s 

Anti-Monopoly Law, foster an unlevel playing field in China. 

At the Department of Commerce our China work falls into three general areas: 

tough-minded negotiations to achieve more access to markets; aggressive enforcement of our trade laws to fight illegal dumping and subsidies; and a strong commitVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00013 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75737.TXT JACKIE
10 

ment to trade promotion to help U.S. companies compete and win in the Chinese 

marketplace. 

Let me provide a description of some of the things we are doing in each of these 

areas. 

Commerce’s Role in Trade Policy 

The most important mechanism we have to promote policy change in China is 

through trade negotiations. We regularly consult with China on a range of trade 

policies, regulations, and practices in order to improve the business environment in 

China for our companies and for exported goods and services. 

To achieve our objectives, we are engaging the Chinese through bilateral consultations, chiefly the Joint Commission on Commerce and Trade (JCCT), co-chaired by 

the Commerce Department and USTR, and the Strategic Economic Dialogue (SED), 

led by the Treasury Department. 

Joint Commission on Commerce and Trade (JCCT) 

For almost 25 years, the JCCT has served as a bilateral consultative mechanism 

to resolve specific trade concerns and promote commercial opportunities. Since 2004, 

the JCCT has met at an elevated level, with Secretary Gutierrez and U.S. Trade 

Representative Schwab now chairing the U.S. side and Vice Premier Wu Yi chairing 

the Chinese side. At the last JCCT in 2006, the U.S. and China reached agreement 

on a number of matters, such as: (1) eliminating some redundant regulatory requirements for medical device imports; (2) improving enforcement of intellectual property 

rights by requiring installation of legitimate operating systems software; (3) a deadline for China to commence formal negotiations to join the WTO’s Government Procurement Agreement; and (4) reviewing export control cooperation. In addition, 

China announced that its State Council issued a notice requiring that all laws, regulations, and measures affecting trade be published in a single official journal. We 

expect to hold the 18th session of the JCCT in late fall in Beijing. 

Chinese and U.S. officials meet in a number of JCCT Working Groups throughout 

the year to address issues such as tourism, IPR, high technology, subsidies and export controls. In addition, we continue to engage China on rising steel imports 

through a dialogue on steel. 

Strategic Economic Dialogue (SED) 

The U.S.-China Strategic Economic Dialogue (SED) provides an additional forum 

for advancing our trade agenda. The second meeting of the SED was held May 22– 

23 in Washington, and the third will be held in December in Beijing. 

The SED is a mechanism for maintaining strong and mutually beneficial economic 

and trade relations between the United States and China. The Commerce Department works closely with Treasury, USTR, State and other agencies to promote longterm structural change. At the meeting in May, leaders from both countries agreed 

to liberalize air services rights, undertake further financial sector reforms, work to 

foster energy security, and take additional steps to protect the environment and 

strengthen the rule of law. 

Commerce’s Enforcement Role: Enforcing Trade Laws and Agreements 

The second area in our approach to China, the focus of my responsibilities at Import Administration within the Department of Commerce, is aggressive enforcement 

of our trade laws to ensure a balanced playing field for American manufacturers, 

a task to which the Administration is fully committed. Commerce currently maintains 62 antidumping duty orders on imports from China, including consumer goods, 

steel products, agricultural products, seafood, and chemicals. These orders represent 

27 percent of the total antidumping duty orders we currently have in effect globally 

and cover almost $6 billion in imports. 

Earlier this year, Commerce preliminarily modified a 23-year-old government policy by applying the anti-subsidy law to China. In the countervailing duty investigation of coated free sheet paper from China, Commerce preliminarily determined that 

the current nature of China’s economy does not create the obstacles to applying the 

anti-subsidy law that were present in the ‘‘Soviet-style economies’’ at issue when we 

originally developed our policy more than 20 years ago. China of 2007 is not the 

Soviet Bloc of 1984. Our preliminary determination reflects the view that we can 

and should measure and remedy subsidies in China when they exist. We will be 

issuing our final determination in October of this year. 

Just as China has evolved, so should the range of tools available to make sure 

that China trades fairly. Indeed, I was just in China last week for an on-the-ground 

investigation of subsidies to China’s paper industry. Additionally, my agency is now 

investigating subsidies to China’s steel industry. 

11 

To further ensure that China lives up to its trade commitments, the U.S. also 

makes use of the WTO dispute resolution process. In January 2006, the U.S. warned 

China about the imminent filing of a WTO case challenging an antidumping order 

imposing duties on imports of kraft linerboard from the United States, and the Chinese side quickly rescinded that order. We now have four WTO cases against China. 

In 2006, the United States, Europe, and Canada brought a WTO dispute challenging 

China’s discriminatory charges on imported auto parts. In February 2007, the 

United States filed a case challenging China’s use of prohibited export and import 

substitution subsidies. In April 2007, we filed two more WTO cases against China— 

one raised a number of IP enforcement issues, and the other focused on market access restrictions affecting U.S. copyright-intensive products such as publications, 

and audio and video products. In addition, China remained on the Priority Watch 

List in USTR’s Special 301 report and subject to Section 306 monitoring based on 

their record of IP protection. 

Clearly, a fair and tough-minded approach to enforcement of our trade laws and 

agreements is a critical component of our engagement with China. 

Commerce’s Trade Promotion Role: Assisting U.S. Exporters in China 

Beyond negotiations and our trade enforcement work, the Commerce Department’s mission is to ensure that American companies can compete and win in the 

Chinese market. Our Commerce team in China constitutes our largest overseas 

presence, with a staff of 130. The China Team, supported by our China trade specialists in Washington and our export offices across the United States, work directly 

with companies, particularly small and medium-sized enterprises (SMEs), interested 

in exporting to China to develop market opportunities, facilitate business and solve 

problems. 

Developing Market Opportunities: Activities in China 

Through our Commercial Service, we assist U.S. companies in areas such as export counseling, customized market research, qualified international contacts and 

trade leads, match-making, and trade events. 

• In response to a 2004 Congressional mandate, we have opened American Trading Centers in 14 key cities. The American Trading Centers initiative opens up 

large and growing, but underserved markets, helping U.S. firms compete for 

major local infrastructure projects and sell directly to Chinese importers. These 

Centers provide targeted market research; counseling; match-making with local 

Chinese buyers, importers, etc.; and representation at trade shows. 

• The Commerce Gold Key Program helps U.S. companies find a buyer, partner, 

agent or distributor. In FY 2006, 182 companies participated in this program 

in China, up from 103 in 2005. 

• In 2006, the China team recorded 719 export successes related to China, with 

a value of $3.1 billion, compared to 250 export successes in China, valued at 

$1.9 billion in 2001. 

• In 2006, the Department participated in 37 major trade shows in China, compared with only four shows in 2004. Additionally, we supported more than 50 

trade missions in China in 2006. 

Business Outreach: Activities in the United States 

Commerce manages a range of outreach programs across the United States: road 

shows, websites, webinars and a hotline. Through these programs, Commerce assists companies of all sizes to enter the China market and provides additional information on Federal resources and assistance. 

• China Business Information Center: The China Business Information Center 

(CBIC) provides China-related information to enable U.S. exporters to promote 

products and services, understand Chinese laws and customs, obtain market research, and take steps to enter the Chinese market. Since its October 2004 

launch, the CBIC has organized or participated in more than 213 outreach 

events in 41 states, reaching almost 13,600 business executives with information, advice and direction on exporting to China. The CBIC website attracts 

more than 1,400 visitors per day on average and has recorded more than 24 

million hits. 

• Commerce works with industry associations and local governments on a series 

of Doing Business in China seminars targeting SMEs around the country. In 

2006, Commerce hosted 70 outreach events, attended by 5,250 participants. 

• The Commerce Advocacy Center serves as a central U.S. Government (USG) 

point of contact through which U.S. companies can access government resources 

12 

and request USG advocacy in competing for international government tenders. 

To date in FY 2007, USG advocacy has already successfully assisted American 

companies in winning tenders in China worth about $4.4 billion, with more 

than $3.8 billion in U.S. export content. 

• To assist U.S. companies (particularly SMEs) in protecting their intellectual 

property rights, Commerce has developed a wide range of services to provide 

up-to-date information on protecting and enforcing IPR at home and abroad, including information on registration, border enforcement, and criminal enforcement. A Commerce hotline, 1–866–999–HALT, allows U.S. exporters to submit 

requests for assistance. 

• Commerce’s China Office hosts free monthly webinars and gives presentations 

on China IPR issues to assist U.S. industry. More than 850 online participants 

have participated in the 13 webinar programs, with more than 3,000 visits to 

the archived programs. In 2006, our China Office and Office of Intellectual 

Property Rights experts gave presentations in cities across the United States 

providing guidance to SMEs on how to protect their IPR abroad. Further, from 

2005 to the present, the United States Patent and Trademark Office (USPTO) 

has also been actively engaged in assisting U.S. companies on how to protect/ 

enforce intellectual property rights through its China Road Shows, 2-day seminars, and workshops conducted throughout the U.S. 

• ITA’s Office of Intellectual Property Rights has recruited the expertise of the 

Patent and Trademark Office and the Small Business Administration to develop 

an online training program for SMEs to learn how to evaluate, protect, and enforce their intellectual property rights. The program will be offered online at 

StopFakes.gov free of charge, and is scheduled to be launched in September 

2007. 

Problem-Solving in China 

When U.S. companies encounter problems in China, our China team is available 

to provide on-the-ground assistance. In addition to our trade specialists who cover 

a wide range of trade issues, the Commerce Department has experts dedicated to 

resolving IPR, subsidies, dumping, and export control issues. With IPR problems, 

Commerce has developed industry partnerships linking businesses with lawyers 

who have China expertise, and a program with the Chinese Government to ensure 

that specific IPR cases are passed to relevant Chinese agencies to be resolved. 

• Commerce has posted two ‘‘Intellectual Property (IP) Attaches’’ at our Embassy 

in Beijing, and an additional IP attache ́ will be joining the Consulate in 

Guangzhou. These IPR attache ́s work with the Chinese government to ensure 

that China is living up to its IPR commitments and to assist American businesses in protecting their IPR in China. One of the key tools they use to help 

U.S. industry is the ‘‘IPR Case Referral Mechanism’’, where China’s Ministry of 

Commerce serves as the point of contact for individual IPR cases raised by the 

United States. In addition, last year Commerce’s China Office effectively handled IPR concerns raised by U.S. SMEs by partnering with industry associations on the China Advisory Program—offering U.S. businesses free IPR consultation with an attorney. Forty-seven companies have utilized the program 

since its inception. The success of this program has led to expanded advisory 

programs for SMEs doing business in Brazil, Russia, India, Egypt, and Thailand. 

• Commerce has also posted two ‘‘specialists in dumping and subsidies law’’ at 

our embassy in Beijing to assist our Washington-based Trade Remedy Compliance Office, which specializes in China trade remedy cases. 

• We have a Trade Facilitation Office at the U.S. Embassy in Beijing which assists companies with compliance and market access problems and hosts industry-specific IPR roundtables in China with U.S. companies based in China to 

discuss the protection and enforcement of IPR in China, and how the U.S. Government and the private sector can work cooperatively to address industry’s 

specific IPR issues. 

• Commerce’s Bureau of Industry and Security (BIS) has an Export Control Officer posted in Beijing to conduct end-use visits and work with Chinese government and industry on export control issues. End-use visits help increase confidence that sensitive U.S. technology is used for legitimate purposes and therefore facilitates high tech trade. 

13 

Consumer Safety Issues 

Finally, I would like to say a few words on the issue of the recent high profile 

alerts and recalls by the FDA, Consumer Products Safety Commission, and the National Highway Traffic Safety Administration (NHTSA) as a result of imports from 

China. Safety, of course, is of paramount importance to all of us. The Administration’s response to unsafe—imports has been aggressive. HHS recently announced 

the creation of a food safety czar within FDA, the Administration is working constructively with the Chinese and will continue doing so in order to ensure the safety 

of all food, medicines and other products imported from China, and on July 18 

President Bush issued an Executive Order establishing the Interagency Working 

Group on Import Safety, led by HHS Secretary Leavitt and including Secretary 

Gutierrez and other Cabinet Officials, to identify further steps we can take to enhance the safety of all imports into the United States. 

Closing 

The engagement I have mentioned constitutes a multi-pronged approach, designed 

to bring about positive changes in China’s trade policies, regulations, and practices 

to level the playing field. This overall trade strategy is pursued by Commerce, 

USTR, State, Treasury, and many other U.S. agencies involved in U.S.-China trade 

relations. This integrated, mutually reinforcing strategy is the best way to ensure 

successful outcomes in U.S.-China trade relations. 

A strong, healthy trade relationship is essential for the benefit of both our countries. We will continue to work to ensure that the Chinese Government provides 

market access for U.S. firms, and lives up to its international trade commitments. 

American companies, workers and farmers can compete with anyone in the world, 

given a level playing field, and we are committed to working with our Chinese counterparts to achieve this goal. 

As China continues to reform its economy, we believe our approach will move 

China away from its reliance on industrial policies and subsidies and toward greater 

adherence to its international trade obligations and more progress on the path toward a market economy. After all, a China that is part of the international trade 

community and that is open and fair in its economic dealings, is very much in the 

interests of the United States. 

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

Senator DORGAN. Mr. Spooner, thank you very much. 

You indicated that exports are booming, to use your term, to 

China. It is the case, isn’t it, that imports are rising even faster 

in dollar terms than exports? 

Mr. SPOONER. In dollar terms, yes, sir. In percentage terms, our 

exports are growing more quickly. But in dollar terms, imports are 

rising. 

Senator DORGAN. If you have a very low amount of exports from 

the United States to China and double it, you can say we’ve doubled exports and they’re booming, but it’s not nearly as consequential as taking a look at the bilateral trade balance. The bilateral 

trade balance has mushroomed to a $130 plus billion deficit. Isn’t 

that the case? 

Mr. SPOONER. That is certainly true. And indeed, I firmly agree 

that it’s our responsibility to level the playing field to the extent 

we possibly can. 

Senator DORGAN. I raised the question, and so did Senator Sanders, about the bilateral automobile trade. We negotiated this under 

Republican administrations and Democratic administrations. You 

can put a blindfold on and not tell which administration is speaking on free trade issues. We negotiate deals, and let me describe 

the deal with automobiles. I said in my opening statement, we said 

to the Chinese: If and when you begin exporting automobiles, you 

can put them into our country at 2.5 percent tariff and you’re welcome to charge a 25 percent tariff on U.S. cars we sell to China. 

14 

We did that with a country with whom we have a very large 

trade deficit. Is there any justification for that that you’re aware 

of? 

Mr. SPOONER. I think the response to that, Mr. Chairman, is that 

the WTO accession package with China or with any other country, 

as you know well—I used to work on the Hill—is about that thick 

[indicating] when it arrives up here, and it’s a package involving 

not only automobile tariffs but thousands of tariff lines and all 

sorts of non-tariff commitments. And the administration before 

they, whatever administration it is, before they sign the deal 

makes the judgment that the package as a whole is fair to the 

United States, and Congress in its ultimate wisdom votes on the 

package itself. 

Senator DORGAN. But the question, I’m just taking this as an example, and I could use many examples. But on bilateral automobile 

trade, the Chinese are ramping up an automobile export market. 

They’re very aggressive, they’re very anxious to move. My understanding is that Chrysler is going to introduce into this country an 

automobile called the Chery, made by a company called Chery, 

which is one letter away from ‘‘Chevy,’’ which is interesting because General Motors itself took Chery to court, saying that they 

had stolen their production designs for that car. It was settled out 

of court and you can’t determine what the settlement was because 

no one will say. 

But nonetheless, we’re apparently now going to get the product 

of Chery imported into this country, in terms which provide them 

a tariff that is one-tenth the tariff that we will meet when we try 

to export cars to China. I mean, I don’t think there’s anybody that 

can say, yes, that makes a lot of sense from the standpoint of all 

those workers, all those companies that are trying to produce U.S. 

automobiles. 

Mr. SPOONER. I agree. Again, I think the only response I can give 

is that when we sign and then vote on the WTO accession package 

it involves every tariff line, not only automobile tariffs. 

Senator DORGAN. Would you agree with this, that when we 

signed and allowed, gave the green light to China to join the WTO 

and reached a bilateral agreement, that at the time we reached our 

bilateral agreement our trade deficit was $83 billion a year with 

China and now it is $230 billion a year? Would you agree that’s 

movement in the wrong direction? 

Mr. SPOONER. Yes, although—that’s certainly correct, of course, 

Mr. Chairman, although I would argue that it’s not necessarily the 

Government’s role to artificially manage trade. It’s our role to make 

sure the playing field is level, that China is living up to its commitments and that we enforce our rights to the extent we can and negotiate better rights if our rights aren’t good enough. 

Maybe the trade deficit is indicative of—it’s indicative of other 

things as well as trade enforcement. But it’s our role as the Government to enforce our rights as thoroughly as we can. 

Senator DORGAN. But if a bilateral trade agreement produces from $83 billion to $230 billion, it seems to me that there’s something wrong. 

Mr. SPOONER. Sure, but the trade agreement is there or China’s 

WTO accession is there. It’s a fact and, at least as an administrator 

15 

of the law, the Commerce Department’s role is to enforce our rights 

under that agreement as best we can. 

Senator DORGAN. Do you think part of the reason we have this 

big trade deficit is because we have regulations in this country to 

protect the air and the water and won’t allow somebody to put poisons in pet food and so on? Is this a regulatory problem? 

Mr. SPOONER. To be honest, that’s a little bit out of my lane because I handle trade. But on the flip side, I should probably opine 

that it’s frankly free trade agreements that allow us to address 

labor and environmental issues in other countries. I know we have 

a vigorous debate over trade and environment provisions of FTAs, 

but right now we have no rights at the WTO or anywhere else to 

improve the environment in China, and should we engage China 

further on trade that might give us additional rights to exercise. 

Senator DORGAN. On the issue of the environment and the rights 

of the workers, as you know, the administration has opposed by 

and large up until this point putting anything in with respect to 

those issues in trade agreements. The only trade agreement in 

which anything was included with respect to labor issues was the 

Jordan trade agreement, and we’ve had a hearing in this Committee about that. In fact, although Jordan has a provision which 

is good, that we’ve forced that in that one trade agreement, and 

this administration has opposed that ever since. In Jordan, we 

have testimony and pictures and eyewitnesses and descriptions of 

workers being brought in by the planeload to work in sweatshop 

conditions, paid pennies, in some cases paid nothing, nearly imprisoned and beaten, the most unbelievable circumstances you can 

imagine in sweatshops, bringing in workers from Sri Lanka, textiles from China, to produce sweat shop garments to be sold in our 

marketplace. 

We’re trying to shut all that down, but one of my great concerns 

about all of these trade agreements is there’s no labor provision, 

there’s no environmental provision in most cases. 

Mr. SPOONER. I think that’s a great point, Mr. Chairman. I believe all of our free trade agreements contain some labor provisions, although Jordan was very different than the other FTAs that 

we’ve negotiated since 2001. And stating the obvious, to say we 

have a vigorous debate over what those provisions should be and 

whether they’re adequate in our FTAs. 

But the Jordan example is probably a good one because it was 

our FTA with Jordan that enabled us to improve labor conditions 

in Jordan. There was an allegation that Jordan was violating the 

terms of our free trade agreement, but when those allegations came 

to light and we threatened to exercise our authority under the FTA 

Jordan supposedly has worked to clean up its act. 

Another good example is probably in a parallel agreement we 

have with Cambodia that was negotiated back in 1998 that allowed 

Cambodia to ship more apparel to the United States, but sort of 

made the quotas or the amount of apparel contingent on labor conditions in Cambodia. I think it’s folks’ unanimous view that that 

trade agreement has significantly improved labor rights in Cambodia. 

Of course, to a certain extent when we trade with other nations—and this is probably somewhat uncontroversial, but—when 

16 

we trade with other nations, American companies bring their good 

labor practices to those other countries, and when business conditions improve labor conditions improve. 

Senator DORGAN. Senator DeMint? 

Senator DEMINT. Thank you, Mr. Chairman. 

Thank you, Mr. Spooner. I understand—and I’m sure you’re familiar with the Commerce Department study that showed, irrespective of labor costs, that the cost of doing business in America, 

the cost of regulation, litigation, and taxes, is over 20 percent more 

than our leading trading partners. There is a connection between 

the trade deficit if our products cost more. 

Am I correct in my memory that the manufacturing output in 

America is at an all-time high? 

Mr. SPOONER. Yes, sir, that is correct. 

Senator DORGAN. That is true, and because of productivity the 

employment side of it is certainly not growing, but it is growing in 

other areas, because our unemployment rate is as low as it has 

been in many, many years. 

I need to correct my colleague who was here earlier. He was trying to suggest that poverty is related to trade, when all the research shows that it’s directly related to our failing government 

education system and the breakdown of our families. 

I think on the food safety issue there have been many more 

poisonings in this country from American-made, such as spinach 

just a short while back. And the pet food that did come here came 

through Canada, and the toothpaste never got here. So layer after 

layer of regulation does not necessarily give us safety, and certainly we can show that safety in this country is as much suspect 

as it has been in China. 

But Mr. Spooner, I want to direct one question to you because 

this trade deficit figure is used a lot and it actually misrepresents 

what happens. Some researchers at the University of California— 

if you could just reference this particular chart here. On just the 

Apple iPod, to find out where the pieces came from, where the costs 

came from, if you look at the iPod itself, the hard drive, which is 

about 25 percent of the cost, $75, was made in Japan. About $15 

worth came from the U.S. of just parts itself; from other Asian 

countries, 20 percent; and the non-hardware, which is a lot of the 

marketing research and development, most of that was done in the 

United States. 

So you’ve got a $299 Apple iPod. At the very bottom here, this 

little yellow sliver that you can hardly see says two dollars worth 

of the components of that Apple iPod were made in China. Yet the 

product arrived here as a Chinese product and it adds $150 to our 

trade deficit with China. 

Now, what I don’t understand is why the Commerce Department 

doesn’t update the way it collects its information and reports it, because clearly this is not a $150 trade deficit with China. But yet 

we’re showing that. And we’re compounding the charts we’re showing here year after year when a lot of assembly is done in China, 

but we actually have more American productivity in this iPod than 

China does. Yet it’s a trade deficit. 

Now, can you explain why the Commerce Department hasn’t 

given us better information? 

17 

Mr. SPOONER. Boy. Frankly, I can’t. But I think you raise a good 

point and I’ll go back and try to see what we can do to improve 

our data if it needs improving. 

But I know what you say is true. You often hear that trade has 

become the final assembly point for inputs that are made throughout Asia and sometimes from our own country, and that when the 

assembled product enters the United States from China the total 

value of that product is accounted for in the trade deficit, even 

though some of the production may have occurred in Malaysia or 

even here. 

But just to be frank, Senator DeMint, I should go back and talk 

to our statistical folks to see how we can improve that if possible. 

Senator DEMINT. Well, it would be very important, because, as 

you know, economies are interwoven increasingly, and I can’t go 

into a plant in South Carolina that is not making things from parts 

from all over the world. Many times they come from another part 

of the world. Actually, one of our fastest growing export countries 

is China, but we’re exporting all over the world material that came 

in from China. And we’ve got to be real careful as a Congress when 

we start saying we’re going to penalize the currency, we’re going 

to add 20 cents or 30 cents or whatever we’re talking about, which, 

first of all—do you happen to remember the figure of how much 

each American family saves each year from less expensive imports? 

Mr. SPOONER. I believe it’s—although I’d have to verify this num- ber, sir, I believe it’s $3,000 a year according to the—— 

Senator DEMINT. That’s the figure that I remember. So it’s more 

complicated than just socking it to the Chinese by adding a tariff 

that’s going to affect American manufacturing as much or more 

than Chinese manufacturing, and that will likely add to the cost 

of living to American families. 

So while the pursuit here I think is good, and I have questions 

about some trade agreements as you do and certainly the enforcement, which I don’t think our government has been as aggressive 

on enforcing as we should and hopefully we can continue to improve, but there’s more here than meets the eye and there’s a lot 

we can do as a Nation to reduce that deficit and improve the quality of life of the American worker. 

Thank you, Mr. Chairman. 

Senator DORGAN. Senator Brown? 

Senator BROWN. I will be brief. I will add one thing to Senator 

DeMint’s comments about products maybe coming from other Asian 

countries through China. It counts against the Chinese trade deficit. Products sometimes assembled in China or partially assembled 

where those components then go to Jordan and then are sent to the 

United States counts against the Jordan bilateral trade deficit. So 

I think it can cut a little bit both ways there. 

Just a question, and I’m really looking for ideas. I look at what’s 

happened with consumer products and food products coming from 

China. We understand—and maybe Senator DeMint thinks their 

regulatory system is better for the public at large than ours. I can’t 

really tell, reading between the lines of his comments. But putting 

that aside, how big a concern is it that this wide open trading system, where we’ve actually cut the number of FDA inspectors from 

30-some hundred to 20-some hundred over the Bush years as we 

18 

import significantly more fruits and vegetables, as you can see in 

the supermarkets in February and March in northern states like 

mine—how big a problem is that and what should we do about 

that? 

Is increasing the number of inspectors enough, or should we even 

bother doing that? Is that going to cost too much, that the President might veto the FDA legislation, the appropriations? What 

should we do so we can say to our families in Shelby, Ohio, and 

Hamilton, Ohio, that the food you buy and the toys you get for your 

kids are safe? 

Mr. SPOONER. That’s a great question, Mr. Senator. Indeed, I 

should say as a father of a 2 year old and a 3 year old who had 

some Thomas the Trains at home, I get an earful from my wife 

about the importance of product—— 

Senator BROWN. You should listen to her. 

[Laughter.] 

Mr. SPOONER. But I can say it is a tremendous concern to the 

administration. That’s why the President assembled a panel of 17 

different Federal agencies that now are responsible in some way for 

food and product safety together and directed them to report to him 

within 60 days about—first we’re supposed to assess what each 

agency does, whether there’s overlap, whether we can do things 

better, and to report back in 60 days on how we can improve. 

But I can tell you—I frankly have attended initial meetings of 

this group—that it is a tremendous concern. 

Senator BROWN. And they are considering sort of bilateral trade 

issues, not just inspections at the border? 

Mr. SPOONER. Yes. 

Senator BROWN. Thank you. 

Senator DORGAN. Mr. Spooner, thank you very much for being 

with us. Are you able to stay for a bit? 

Mr. SPOONER. Yes, sir. 

Senator DORGAN. If you’re able to stay, I appreciate it in the 

event we have a chance to ask further questions. 

We will ask the other four witnesses to testify. We thank you, 

Mr. Spooner, for being here to represent the Commerce Department. Mr. Hoffa is President of the International Teamsters. Mr. 

Hoffa, thank you for joining us. If you would pull the microphone 

close, and your entire statement will be made part of the record 

and we would ask you to summarize. Thank you very much. 

STATEMENT OF JAMES P. HOFFA, GENERAL PRESIDENT, 

INTERNATIONAL BROTHERHOOD OF TEAMSTERS 

Mr. HOFFA. Well, thank you, Chairman Dorgan and Ranking 

Member DeMint and members of the Subcommittee. Thank you for 

inviting me to testify today on behalf of the Teamsters and its 1.4 

million members. 

Ideally, trade and globalization policies should be used as a tool 

to advance the priorities of the American people, American foreign 

policy and our national safety interests. In reality, the U.S. trade 

policies have achieved exactly the opposite effect, especially with 

regard to trade with China. 

Recently I visited China. I went to Hong Kong, Shanghai, and 

Beijing. And while I don’t hold myself out as an expert, I saw a 

19 

lot of things there that really make you reflect on what our relationships are with that country. My clearest impression with regard to China is that their number one priority is economic 

progress, building up their nation. That’s number one and the people basically come second. 

We visited the Shanghai deep water port and container terminal, 

which by the way is brand new. It’s a brand new terminal that’s 

the second largest terminal in the world, and it was built within 

a short period of time. The port management and union members 

that welcomed us very openly said that they had set a world production record that day because they knew we were coming, and 

it was a record that was set that was unbelievable with regard to 

what we can do here in the United States. It’s amazing what you 

can do in a communist country. 

We were briefed on a large scale about what they’re doing in 

their country with regard to the projects they’re doing, massive 

projects. They’re building the world’s largest dam. They’re building 

bridges and tunnels that would be in the National Geographic if 

they were done here. They’re building railroads. They’re doing 

amazing things in Beijing and Shanghai. 

When you go to their downtowns, it’s like going to a construction 

site. There are cranes everywhere and there is a bustle everywhere. So we really see what’s going on there. 

We were supposed to see a dramatic improvement in workers’ 

rights in China according to those who are supporters of PNTR. 

Unfortunately, that’s not what has been the case. In fact, increased 

trade and investment have only promoted the continuation of workers’ rights violations and the rising unrest which we see throughout China. 

We had extensive talks with the ACFTU, which is the All China 

Federation of Trade Unions, and we talked about what they’re 

doing there as a trade union. They talked about the contract labor 

law, which is a minor improvement to try and basically raise the 

standard of living in that country. I was shocked to find out and 

extremely disappointed that American companies, the General Motors and all the big companies that have moved over there, the 

Motorolas, the Microsofts, were lobbying very hard against that law 

to dilute it so that the workers wouldn’t have any rights, the few 

small rights that they have over there. U.S. multinational corporations have resisted these changes and have been successful in watering down many of the reforms. 

An important action that Congress can immediately take to remove any incentive a country may have to manufacture and import 

goods under terrible working conditions is Senate Bill 367, the Decent Working Conditions and Fair Competition Act, introduced by 

Senator Dorgan. Also, we must demand that any future administration accept section 301 petitions on labor rights in China. As you 

know, this administration has routinely rejected section 301 petitions. If China does not comply with basic internationally recognized workers’ rights, the U.S. should pursue remedies against 

China. It’s as simple as that. 

Today we see much in the paper about what’s going on with regard to workers. In 2000 when China PNTR passed, I said then 

and I say it now: China PNTR has nothing to do with the access 

20 

of U.S. businesses to sell goods in China and everything else to do 

with U.S. companies moving out of the United States and moving 

over to China and then bringing their products back. It’s just like 

NAFTA. 

Almost 60 percent of China’s exports come out of foreign investment firms. In other words, there are American companies going 

over there setting up plants, and they’re the ones that are doing 

most of the work, 60 percent. Yet we have few laws on the books 

that provide—we have laws on the books that actually provide tax 

preferences for companies to move offshore. In other words, we 

make it so they can make it better off if we encourage people to 

leave. That must be stopped immediately. That doesn’t make any 

sense for America. 

Proponents of China’s entry into the WTO claimed that it would 

create jobs in the United States, increase U.S. exports, and improve 

the trade deficit with China. What have we seen? The exact opposite. In fact, we have seen the closure of thousands of U.S. factories 

and the disruption of our manufacturing base here in the United 

States. 

The U.S. trade deficit with China has increased from $50 billion 

in 1997 to $235 billion in 2006, an increase of $185 billion. This 

dramatic increase in the trade deficit with China has displaced production that could have supported more than 2 million U.S. jobs. 

We must really start enforcing our trade agreements. The problem we have with China is not only that we have a one-way trade 

relationship, but there is a disregard of the rule of law and international commitments that China has made. And on our part, 

we’re just as much at fault because we haven’t enforced what is in 

WTO and in trade agreements. Since China entered the WTO it 

has consistently refused to grant access to its markets and has 

done so in a way that anybody else would call cheating. 

The U.S. Government has allowed the cheating to occur, but 

never utilized the legal action we have available to us to address 

illegal subsidies, dumping, dangerous imports, and currency manipulation. The U.S. Government should address China’s refusal to 

fully and faithfully implement its WTO commitments. Also, before 

any additional preferences are given to China or any other country 

in future WTO or Doha negotiations, that country must live up to 

and implement the very promises they made in the trade agreement. 

We’ve all heard about the manipulation of the Chinese currency. 

Foreign ownership of U.S. debt has reached more than $3 trillion, 

a dangerous level that is another potential threat to our very national security. China alone holds $353 billion of U.S. Treasury securities. Conceivably, they could cash out any time and cause a financial crisis in this country. 

Unfortunately, some have used that very argument to say we 

shouldn’t enforce our laws because we’re at their mercy. I say we 

should enforce that and make sure there’s fair trade. Our indebtedness to China should not delay efforts to offset trade imbalances 

aggravated by the exchange rate misalignment. 

In essence, the China undervalued yuan is effectively a 40 percent tax on U.S. agriculture. There basically has been a misalignVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00024 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75737.TXT JACKIE
21 

ment of currencies and the 40 percent difference between their currency and ours gives a subsidy to their exports to our market. 

The Teamsters believe it is imperative that Congress pass the 

Stabenow-Bunning-Bayh-Snowe bill, which is Senate Bill 796, and 

its counterpart in the House, the Ryan-Hunter bill, H.R. 782. These 

bills recognize that undervalued exchange rate misalignment by 

China or any other country is prohibited under U.S. and international law and we can ensure that action will be taken if these 

things happen. 

The biggest things in the headlines recently have been unsafe 

trade, unsafe pet food, poisonous toothpaste, contaminated catfish, 

defective tires, and we mentioned Thomas the Train with lead 

paint on it. These things have really risen to the level now that 

everybody’s talking about them. Why aren’t we inspecting what we 

have now? Senator Brown said how we’ve cut the number of inspectors. Only 1 percent of the products coming into this country from 

China, whether it’s food or anything else, is inspected, which 

means 99 percent is not inspected. 

We do, we do need increased inspections. We need to have more 

consumer activity with regard to watching what is coming in here 

and are we being poisoned by the very things we’re buying. Congress needs to pass legislation by Senator Brown and Senator Durbin that gives the FDA the authority to approve or disapprove of 

countries eligible to import into this country. 

In conclusion, it’s not that the Teamsters Union is against trade, 

but we want fair trade. We want trade that is one that’s fair to everybody, that creates jobs in this country and does not promote jobs 

leaving this country. When that is done, the American labor movement will be for fair trade. 

Thank you. 

[The prepared statement of Mr. Hoffa follows:] 

PREPARED STATEMENT OF JAMES P. HOFFA, GENERAL PRESIDENT, 

INTERNATIONAL BROTHERHOOD OF TEAMSTERS

Chairman Dorgan, Ranking Member DeMint, and Members of the Subcommittee, 

thank you for inviting me to testify today on behalf of the 1.4 million union members of the International Brotherhood of Teamsters on this important issue. Under 

my leadership at the International Brotherhood of Teamsters, the issue of trade and 

how it impacts workers, families, and our national security has always been a top 

priority. Our workers have seen directly the impact that our trade policies, especially with China, have had on them. This hearing is especially timely, not only because I have recently returned from my first trip to China, but also in light of all 

of the alarming news recently regarding Chinese imports, and the fact that China 

legislation is expected to be considered soon. 

Ideally, trade and globalization policies should be used as a tool to advance the 

priorities of the American people, the worker, and American foreign policy and national security interests. In reality, U.S. trade policies have not achieved this; in 

fact, our trade policies have achieved the opposite effect in all areas, especially with 

respect to trade with China. 

Visit to China 

My fact-finding visit to China in May included stops in Hong Kong, Shanghai and 

Beijing. Our delegation included Teamster Vice Presidents Chuck Mack from Oakland, California and John Coli from Chicago as well as Andy Stern of SEIU, Arturo 

Rodriguez from the United Farm Workers, Edgar Romney from UNITEHERE, and 

Anna Burger and Greg Tarpinian from Change to Win. I went because I wanted to 

learn first-hand about challenges that working people face in China. I wanted to 

know more about working conditions, pay and benefits, and worker organizations. 

22 

I know that corporations operating globally are profiting handsomely from expanded 

operations in China, but what about workers? 

China is now a global economic powerhouse and I wanted to take a fresh look at 

what that means for Teamsters. I believe that a constructive China policy can unite 

workers in the United States, China and around the world, all of whom have an 

interest in stopping the race to the bottom. Many of us in the labor movement are 

seeking alternatives to the flawed ‘‘free trade vs. protectionism’’ debate seeking new 

ideas about how the U.S. should respond to globalization. 

We met with the All China Federation of Trade Unions—ACFTU, the only legally 

sanctioned trade union body in China. We also met with union leaders and academics that are critical of that union and of the current government. We met with 

advocacy organizations that are documenting the poor working conditions of millions 

of Chinese workers in the special economic zones that are set up on China’s east 

coast. We met with Teamster employers with subsidiaries in China, and with the 

American Chamber of Commerce in Beijing. We visited key infrastructure facilities 

including Shanghai’s new deep water port and air hub distribution facilities. 

We were only there for 10 days so by no means do I claim to be any sort of expert, 

but I came away from the trip with some very clear impressions. 

My clearest impression is that economic growth is the top priority for the Chinese 

government. 

We visited the Yangshan Deepwater Port and Container Terminal. A twenty-mile 

causeway from Shanghai leads to the port which was inaugurated in 2005 and is 

now by some measures the second largest port in the world. The Port management 

and union welcomed us by advising that they had set a world production record the 

prior evening in our honor. Our questions about what happened to the residents of 

the fishing village that formerly occupied the island were simply not understood. 

Any rights of those residents meant nothing in the push for economic growth. 

We were briefed on large-scale highway projects, bridges, tunnels, electric generation plants, dams, and railways. Parts of Beijing seemed like one big construction 

project as hotels and sports complexes were being erected in preparation for the 

2008 Olympics. But when we asked about the residents whose homes and livelihoods were displaced by these projects we were given vague, unconvincing answers 

about new housing projects. 

I had an image of folks all wearing the same design and color clothes and riding 

bicycles. This was not the reality in the cities I visited. I sat in heavy traffic with 

lots of late model cars. There are clearly a number of Chinese benefiting from the 

growth in trade. My impression was that while immigrants from the countryside to 

large cities and manufacturing areas along the east coast of China were living somewhat better than they did on the farm, Chinese workers linked to the globalized export economy are not getting their fair share of the wealth being generated. 

While we met with some workers whose wages and benefits were steadily improving, we also spoke to workers earning well below the minimum wage while working 

sixty and more hours a week with no holidays or vacations; all violations of local 

labor laws. The health care and pension systems do not afford basic benefits to the 

vast majority of workers and make it very difficult for workers to plan for the future. 

China will overtake Germany as the world’s third largest economy by the end of 

this year, this growth was a great source of pride for the government and union officials we met. We challenged our Chinese union counterparts to seek improvements 

in the wages and benefits for their members so prosperity is shared and growth can 

be sustained. 

China is currently not building a middle class capable of sustaining economic 

growth through a domestic consumer market. China is setting the global norm for 

working standards around the world; my conclusion is that those standards are 

much too low for workers in the U.S. and workers in China. We plan to work with 

all of the worker advocates we met to improve those standards. 

We learned about very weak enforcement of laws and regulations and that corruption in business and government are rampant and getting worse. These conditions 

make it even harder for workers to organize and demand their fair share in economic development. 

Labor Law Reforms in China 

China’s repression of labor rights has suppressed wages, thus subsidizing its exports and making them artificially cheap. This Administration has consistently 

failed to raise the issue of workers’ rights violations in China. Worker’s rights is just 

as much an economic issue as currency manipulation or illegal subsidies. This was 

also an area that we were supposed to see drastic improvement according to PNTR 

supporters—workers rights and human rights would be improved with China’s acVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00026 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75737.TXT JACKIE
23 

cession to the WTO. Unfortunately, this has not been the case. In fact, increased 

trade and investment have only promoted the continuation of workers’ rights violations, and rising worker unrest. 

In China, we had extensive discussions regarding the recently approved reforms 

to the Contract Labor Law. These modest reforms were proposed to address the 

widespread exploitation of workers who are often cheated out of wages due them. 

The reforms are intended to enforce employment contracts, protect temporary workers, limit employer rights to fire at will, enhance severance pay and require transparent workplace rules. 

I was extremely disappointed to learn that U.S. companies actively opposed these 

modest changes. All of the corporate talk about raising standards through investing 

in China is hollow rhetoric. Instead of using their influence as a force for democracy 

and social justice, U.S. companies are pursuing the low road. There was a time 

when U.S. multinational companies joined with the labor movement to actively oppose apartheid in South Africa and undermine military dictatorships in Latin America. Worker organizing and unions were encouraged at their facilities, unions were 

considered to be incubators for building democracy. 

And now there is a need, a movement to make drastic changes in China’s contract 

labor laws and yet U.S. multinational corporations have resisted these reforms and 

have even been successful in weakening the modest reforms. Some have even 

threatened to move to Vietnam, another country that Congress recently granted 

PNTR status. Global Labor Strategies has an excellent report on this issue titled 

‘‘Undue Influence: Corporations Gain Ground in Battle over China’s New Labor 

Law’’. I urge Senators to read the report. 

An important action that Congress can immediately take to remove any incentive 

a country, including China, may have to manufacture and import goods made under 

terrible working conditions, is to pass S. 367, the Decent Working Conditions and 

Fair Competition Act, introduced by Senator Dorgan. This legislation bans the importation or sale of products made in factories under sweatshop conditions. Such 

‘‘sweatshop conditions’’ include gross violations of the wages, hours, health and safety laws of the country where the labor is performed. 

Also, we must demand that any future Administration accepts a Section 301 petition on labor rights in China. If China does not comply with basic internationally 

recognized worker’s rights, the U.S. should pursue remedies against China. It is as 

simple as that, however this Administration refuses to act. 

Current U.S. Trade Policies with China Hurts U.S. Workers 

While China’s need for legal reform has hurt U.S. jobs, that is only a piece of the 

challenges we face with respect to trade with China and trade overall. Our nation’s 

flawed trade policies contribute to the anxiety and uncertainty many Americans feel 

about their jobs, their future, and even their children’s future. 

The public has lost confidence in our trade policies. U.S. trade policies lately seem 

to be more about the number of trade agreements signed rather than the results 

they achieve. 

Sound trade policy means job creation and strong communities. It impacts whether or not we have an industrial base that can supply the materials needed to defend 

our Nation or whether we need to depend on other countries to do so for us; it impacts whether our communities have a good public school for our children or one 

that is struggling and in desperate need of basic resources because the town’s factory has shut down and moved offshore to China taking with it the community’s tax 

base; it impacts whether the future jobs of this country will be technology based or 

burger flipping based. 

Mostly as a result of our trade policies, especially with China, we have lost more 

than 3 million manufacturing jobs since 2000. One in six manufacturing jobs has 

disappeared. This poses a serious threat, not just to the many families and communities who have been crushed as a result of this loss, but also our research and development capacity as a country. We are losing our capability to supply our military 

troops with uniforms, ammunition, and other essential items. If this trend continues, we will be completely dependent on other countries to provide everything to 

us. Our manufacturing loss is, in fact, a matter of national security. We are seeing 

first hand the limitations that our energy dependence has created with respect to 

our foreign policy and national security—we should not continue to follow down the 

same path of dependence and depend on China and others to supply us with all of 

our defense, food, and manufacturing needs. 

In 2000 when China PNTR passed, I said it then and I say it now—China PNTR 

has nothing to do with access for our U.S. businesses to sell goods to China, and 

everything to do with moving U.S. companies and jobs out of the U.S. and into 

China in order to take advantage of workers in China and lax labor laws in China. 

24 

It has always been about investment there, no matter what the consequences 

brought upon our workers. The crisis we face now is what I and the Chairman knew 

would occur back in 2000 during the China PNTR debate. 

Almost 60 percent of China’s exports come out of foreign-invested firms, not Chinese firms. And yet we have laws on the books that provide tax preferences for companies to move offshore. These preferences must be eliminated. 

China’s entry into the WTO was touted as a mechanism to bring it into compliance with an enforceable, rules-based regime, which would require that it open its 

markets to imports from the U.S. and other nations. However the WTO and China’s 

entrance to the WTO failed to include the necessary protections to improve or even 

maintain labor or environmental standards, which have resulted in an unfair playing field favoring large multinationals against domestic workers. Proponents of China’s entry into the WTO, just like proponents of every Free Trade Agreement from 

CAFTA to the pending Peru and Panama FTAs have claimed that it would create 

jobs in the Unites States, increase U.S. exports, and improve the trade deficit with 

China. We have seen only the opposite occur. In fact, we have seen the global raceto-the-bottom accelerate forcing the closure of thousands of U.S. factories, and the 

decimation of our manufacturing base in the U.S. 

The U.S. trade deficit with China has increased from $50 billion in 1997 to $235 

billion in 2006, an increase of $185 billion. Between 1997 and 2001, before China’s 

entry into the WTO, the deficit increased $9 billion per year on average. Between 

2001 and 2006, after China entered the WTO, the deficit increased $38 billion per 

year on average. 

According to the Economic Policy Institute, growth in trade deficits with China 

has reduced demand for goods produced in every region of the United States and 

has led to job displacement. The dramatic increase in the trade deficit with China 

between 1997 and 2006 has displaced production that could have supported 

2,166,000 U.S. jobs. More than 1.8 million of these jobs have been lost since China 

entered the WTO in 2001. 

The U.S. Must Enforce and Strengthen Our Trade Laws 

The problem we have with China is not only that we have a one-way trade relationship, but also there is a disregard of the rule of law and international commitments that have been made, and a lack of enforcement on our part, all of which 

have been devastating to workers. 

China provides significant subsidies to its companies to give them an advantage 

over all competitors which prevents our businesses from selling their products to 

China and floods our markets with their products. The U.S. Government must use 

existing trade enforcement rules aggressively and apply the remedies. We have 

failed to do this. 

When China entered the WTO it agreed to conditions, but it has consistently refused to grant access to its markets that we provide to it, and has done so in a way 

that one would call cheating. But the U.S. Government is also guilty because it has 

allowed the cheating to occur by never utilizing the legal actions we have available 

to address illegal subsidies, dumping, dangerous imports, and currency manipulation. 

The U.S. Government should be bringing more cases to address China’s refusal 

to fully and faithfully implement its WTO commitments. Also, before any additional 

preferences are given to China or any other country in future WTO or Doha negotiations, countries must live up to and implement their existing promises. 

China Currency 

Foreign ownership of U.S. debt has reached more than $3 trillion, a dangerous 

level that is another potential threat to our national security. China alone holds 

$353.6 billion of U.S. Treasury securities. Conceivably, it could cash out anytime 

and leave us in a financial crisis. Unfortunately, some have used this as a reason 

to not enforce existing trade laws, specifically China’s undervaluing of its currency. 

Our indebtedness to China should not delay efforts to offset trade imbalances aggravated by exchange-rate misalignment of the undervalued yuan. This enables Chinese exporters to gain up to a 40 percent price advantage over their competitors in 

the U.S. domestic industry. In essence, China’s undervalued yuan is effectively a 40 

percent tax on all U.S. agriculture and manufacturing exports and a 40 percent subsidy for China’s exports to our market. 

The reason for inaction is not that we do not have rules in place. We do have statutory and regulatory authority to address this problem. The World Trade Organization (WTO) and the International Monetary Fund (IMF) also have the rules in place 

to prevent countries from gaining an unfair advantage through exchange rate action. Yet our own government is not willing to implement the necessary provisions 

25 

of the law to protect our workers and our manufacturing sector because they do not 

want to offend or upset China. This Administration has yet to even identify China’s 

currency manipulation as a problem. 

The President rejected recommendations from the U.S. International Trade Commission (USITC) under Section 421 of the Trade Act to grant import relief to U.S. 

industries facing market disruption from Chinese imports. As you are well aware, 

Section 421 of the Trade Act of 1974 was added to U.S. trade law during the China 

PNTR debate in order to ensure protection to U.S. industries in the case of surging 

imports. Specifically, Section 421 allows U.S. domestic industries to obtain relief 

should an investigation by the USITC finds that Chinese products are imported into 

the U.S. in such increased quantities as to cause a market disruption. 

Recently, the Administration has rejected for the third time since 2003 a Section 

301 petition by lawmakers demanding action by the Administration against China 

for subsidizing its exports by keeping its currency exchange rate artificially low 

which is in violation of international trade laws. As you are well aware, Section 301 

of the Trade Act of 1974 allows the Office of the U.S. Trade Representative to initiate investigations of other countries’ trade practices and impose sanctions for discriminatory behavior. 

The USTR and the Department of Treasury continue to tell us that instead of acting to address China’s currency manipulation, diplomacy mechanisms need to be 

used to address this concern. Diplomacy has obviously not worked. Congressional action is needed in order to ensure that change occurs. 

The Teamsters are a member of the China Currency Coalition. We believe that 

it is imperative that Congress pass the Stabenow-Bunning-Bayh-Snowe bill, S. 796, 

and its counterpart in the House, the Ryan-Hunter bill, H.R. 782. These bills recognize that undervalued exchange-rate misalignment by China or any other country 

is a countervailable prohibited export subsidy under U.S. and international law, and 

ensures that finally action will be taken. The bill does the following: 

• Recognizes currency manipulation as a government subsidy and allows a U.S. 

industry to use the anti-subsidy (counterveiling duty) law to seek relief from the 

injury caused by imports that benefit from a subsidy in the form of foreign exchange-rate misalignment. This is important because an undervalued currency 

allows foreign producers to price their products more cheaply than would be the 

case if the currency were properly valued. This applies equally to any country, 

whether a market or non-market economy, whose exchange-rate is found to be 

unfairly aligned. 

• Clarifies that China’s exchange-rate misalignment is a condition to be considered under Section 421 of the Trade Act of 1974. This holds China accountable 

to its market-disruption agreements made as a condition to its accession into 

the WTO in 2001. 

• Protects our national security and defense industrial base by prohibiting the 

Department of Defense procurement of Chinese imports that compete with our 

domestic defense industrial base if China’s currency misalignment is determined to be contributing to the disruption of the U.S. industry that manufactures those products. 

• Requires the Secretary of the Treasury to analyze semi-annually whether there 

is a fundamental misalignment or exchange-rate manipulation by any trading 

partner, and bars the Administration from supporting increased voting rights 

in international financial institution such as the IMF for such violators. 

• Strengthens the definition of misalignment in order to make it tougher for the 

Treasury to avoid giving that label to China’s actions. This is critical in light 

of the fact that the Treasury Department recently admitted that there exists 

‘‘heavy foreign exchange market intervention by China’s central bank to manage the currency.’’ Yet Treasury still refuses to officially identify China as a currency manipulator, despite this evidence that the Chinese government is continuing to undervalue its exchange rate against the U.S. dollar. They fail to call 

it as they see it and this provision ensures that this will no longer be the case. 

I understand that the House Ways and Means Committee plans to introduce legislation and act on this issue in September. It should be the Ryan-Hunter bill or at 

the minimum consist of all of the essential provisions I have just listed. I am also 

pleased at the willingness of both the Senate Banking and Senate Finance Committees to each act on a currency bill. While both the Senate Finance and Senate Banking bills are not perfect, they take a step in the right direction to ensure action on 

currency manipulation bilaterally, at the IMF, and the World Bank. However, we 

need to ensure that the President cannot just avoid taking action on currency manipulation by creating loopholes that could potentially leave us in the same bind we 

26 

are in now, where the Administration just does not act which is a potential problem 

in the Baucus-Grassley bill. Also, both bills at the moment do not recognize currency 

manipulation as a countervailing duty or subsidy which is important in addition to 

using an anti-dumping remedy. 

I am pleased to see that action on currency is imminent. It is critical that whatever passes and finally becomes law is strong, real, and not an attempt to placate 

our concerns or put a temporary meaningless band-aid on a gaping wound—there 

is just too much at stake. Ensuring that this issue is finally acted upon can make 

the difference between having one’s job disappear to China; the difference of having 

health insurance provided for one’s family, and quite frankly about having an economically stable middle class. 

Food and Product Import Crisis 

Food imports constitute a growing share of what Americans eat and what we see 

on the shelves of our grocery stores. I care about this issue as a consumer, and as 

a President of a union that has food processing workers and farmworkers. 

Food imports are more than four times greater today than what they were in 

1996. Our Food and Drug Administration inspects less than 1 percent of imports. 

That means that 99 percent of our imports are entering our Nation unmonitored. 

This is especially troublesome when the bottom-line is put ahead of safety. 

Senators on the Committee have heard the stories. 

• Family pets have died from pet food containing wheat gluten that contained 

melamine. 

• Concentrations of carbon monoxide are found in seafood imports coming in from 

Asia. Carbon monoxide treatment makes seafood appear fresh, regardless of its 

condition. Residues of antibiotics have also been found in seafood imports from 

China. For now, the Food and Drug Administration has acted and banned the 

imports of shrimp, catfish, and other seafood from China. 

• Poisoned toothpaste from China, laced with diethylene glycol which is a chemical most often found in antifreeze and was substituted for the more expensive 

ingredient glycerin, has been imported into the U.S. I find it especially troublesome that China has stated that in small doses diethylene glycol is harmless, 

especially in light of the fact that cough syrup laced with diethylene glycol from 

China killed 100 people in Panama last year. 

• And its not just hazardous food and toothpaste being imported—Thomas the 

Tank engines made in China have been recalled for using lead paint. 

• As many as one million defective Chinese tires were sold in the U.S. 

China has taken extreme and shocking action recently by executing its former 

head of its Food and Drug agency, Zheng Xiaoyu, as a response to this crisis. This 

is by no means consoling or the end to our troubles. 

It is up to us to take responsibility and act thoroughly and quickly. The U.S. Government has not done enough to keep dangerous Chinese products out of the U.S. 

Products manufactured in China have so far accounted for more than 60 percent 

of the Federal Consumer Product Safety Commission’s 178 recalls so far in 2007. 

Congress needs to pass legislation by Senator Brown and Senator Durbin that gives 

the FDA the authority to approve or disapprove of countries eligible to import into 

the U.S. 

We need to re-examine and make changes to our country-of-origin rules. For example, the Netherlands is the principal source of wheat gluten imports, but most 

of it initially comes in from China—actually over 80 percent of wheat gluten in the 

world comes from China. The bags of wheat gluten can simply state that the supplier was in Amsterdam-Holland for example. Since food processors are not required 

to inform consumers of the origin of its ingredients, it is especially difficult for 

Americans to know where exactly the ingredients were produced and to seek damages from companies that sell products whose ingredients have harmed. And in 

cases where they do, the protections are not in place to ensure consumer safety. 

This brings me back to the tire case. When the National Highway Traffic Safety Administration told the importer of defective tires that they must recall the tires, the 

company declared bankruptcy. When U.S. distributors rely on cheap imports to then 

sell back to U.S. consumers, they should be bonded to ensure that our U.S. consumers are protected. 

We need more comprehensive food and ingredient labeling on products. Furthermore, the final purchasers of pet foods, meat, fish, and all consumer goods quite 

frankly, should be provided with the correct source of the goods. The FDA should 

implement new rules that require all food, vitamins, and other consumer products 

to list out the origin of all ingredients that come from outside the United States. 

27 

I was pleased to see that late last week the 2002 law requiring country-of-origin 

labeling for meat might finally be implemented. Animals born, raised, and slaughtered in the United States will be labeled ‘‘Product of the U.S.’’ The 2002 Farm bill 

also requires country-of-origin labeling for fresh fruits and vegetables—hopefully 

this too will finally become a reality. 

Only a minimal fraction of the 25,000 daily food shipments are ever tested by a 

government laboratory. We need to ensure that shipments of food and consumer 

products and ingredients are more readily tested, which is currently not the case. 

The U.S. Government has a responsibility to its people to ensure that the safety 

and health of its families are not threatened by contaminated and sub-standard bad 

food and product imports. The U.S. Government has a responsibility that China’s 

development does not come at the expense of America’s domestic workforce, and national security. I hope to see immediate action taken to reflect this. 

Conclusion 

While the Chinese government may disagree, I believe that our current trade relationship with China is not just bad for the U.S. and our workers, but also bad for 

China. China has become dependent on the U.S. consumer market for employment, 

has suppressed the purchasing power of its own middle class with a weak currency, 

and have held hundreds of billions of hard-currency reserves in low yielding, risky 

assets, instead of investing them in public goods. 

Unfortunately, the reality is that many of the U.S. jobs that have been lost are 

not coming back. But addressing all of the concerns that I have discussed and implementing actual reforms in China could help create new jobs in the U.S. 

It is not that the Teamsters Union or the American people are against trade, its 

that the our major trading partners are not abiding by the rules of trade, and we 

are not requiring them to either. Once we finally see the field leveled, the right 

rules in place and enforced, and actual good-paying jobs created, that will be a winwin for U.S. workers and families. You can be guaranteed that the American people 

will support expanded trade, but until this happens you will continue to sense the 

unease that currently exists and the strong opposition that we put forth when more 

FTAs are passed. 

Congress must take bold steps and big initiatives to address this current 

globalization crisis. Mr. Chairman, the title of your book comes to mind with what 

our current trade policies are about—‘‘Take this job and Ship it—How Corporate 

Greed and Brain-Dead Politics Are Selling Out America.’’ U.S. families can no 

longer afford to continue down this path of ‘‘Shipping jobs’’ and ‘‘Brain-Dead Politics.’’ We can no longer allow our trade deficit with China to continue to skyrocket; 

we can no longer allow rules to be broken, or fool ourselves that our current trade 

policies will create jobs here at home when they are just about investing abroad. 

Congress is actually set to pass two more Free Trade Agreements with Peru and 

Panama using more or less the same model that has been used. Yes, the labor chapter is improved and that is a great and significant step, but that will not ensure 

the creation of U.S. jobs, and certainly will not stem the loss of them. 

It is China’s right as a nation to develop and gain economically, but it is our right 

and duty as a nation to ensure that if we are to continue to have expanded trade 

with China to the extent that we do, we must enforce our trade laws and implement 

new rules and protections necessary for our own economic development. We need 

to demand access to their markets because so far, it is just one-way trade. I like 

the Chinese and wish them well, but I love and fight for U.S. workers and it is time 

that this Administration and all of us in this room take control of our globalization 

policies to ensure that our workers benefit and our families are kept safe. 

Thank you again for the opportunity to testify. I look forward to your questions 

and comments. 

Senator DORGAN. President Hoffa, thank you very much for your 

testimony. We appreciate your being here. 

Next we will hear from Brian O’Shaughnessy, the Chairman and 

CEO and President of Revere Copper Products in Rome, New York. 

Mr. O’Shaughnessy, you may proceed. 

STATEMENT OF M. BRIAN O’SHAUGHNESSY, CHAIRMAN, CEO, 

AND PRESIDENT, REVERE COPPER PRODUCTS, INC. 

Mr. O’SHAUGHNESSY. Good afternoon, Chairman Dorgan and 

Ranking Member Senator DeMint. My company is Revere Copper 

28 

Products. We were founded in 1801 by Paul Revere and believe 

we’re the oldest manufacturing company in the USA. Our modern 

copper rolling mill is in Rome, New York, and produces copper and 

brass sheet, strip, and coil. Since 2000 about 30 percent of the U.S. 

manufacturing facilities that were customers of the mill have shut 

down or moved offshore. 

One of Revere’s largest remaining customers recently presented 

Revere with a cost comparison of sourcing centrifugal chillers from 

China versus the USA. Revere supplies copper strip for these 

chillers. The first exhibit on the chart boards, which is the same 

as Exhibit 6 attached to my written testimony, shows how the costs 

would compare without the protectionist currency manipulation by 

China. 

Note that the total costs are about the same for both countries. 

Indeed, if freight costs to the USA were added the delivered cost 

of the chiller produced in China would be higher than the chiller 

produced in the USA. 

In the next exhibit, the cost of the product from China is adjusted to reflect the currency manipulation by China of 40 percent. 

Then, as you can see in the third exhibit, products from China also 

benefit from a 17 percent VAT rebate on exports to the USA. This 

results in a price war that American factories cannot win. 

Indeed, China is waging a mercantile war on the world and the 

world is sleeping. Why is the world sleeping? First we must look 

at the role of the multinationals. Remember in the 1980s when 

Japan was such a fierce competitor in so many U.S. markets. The 

reaction, as has been stated today, by our largest corporations was 

loud and largely one voice, calling for tariffs and restraints. Contrast that with today as most of the largest U.S. corporations are 

so much more international and produce in or outsource components from China. Many of the largest investment banking firms 

in the world are headquartered on Wall Street, but derive half or 

more of their income from foreign sources ranging from managing 

the reinvestment of U.S. dollars flowing overseas to the construction of manufacturing facilities in China. Unquestionably they are 

beholden to the government of China. 

If manufacturing in America must compete with the protectionist 

policies of any foreign government, that is not fair. And if meaningful corrective action by U.S. manufacturing and investment banking firms who gain from such protectionism, that’s wrong. 

CEOs of such multinational corporations are put in a very difficult position when considering national trade policies. They have 

to choose between their company and their country. So who should 

America listen to for advice on trade and tax policy? Obviously, 

none of the above. 

The Members of this Committee should take note that tomorrow 

the Senate Finance Committee is going to mark up legislation by 

Senators Baucus and Grassley that appears to address currency 

manipulation. It has several fatal flaws, including making remedies 

contingent on the President, as well as a Treasury Department 

finding that a country has, ‘‘failed to adopt appropriate policies to 

eliminate the fundamental misalignment,’’ of its currency. This is 

the same Treasury Department that does such a good job of repVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00032 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75737.TXT JACKIE
29 

resenting its friends on Wall Street by consistently failing to cite 

China for manipulating its currency. 

Nor does the bill allow injured manufacturing companies in the 

USA like Revere to file for countervailing duties to offset the subsidization of China’s currency. As such, the bill represents a cruel 

hoax on the American factory worker who is expecting real relief 

from the impact of the protectionist policies of China. 

I am making a public appeal to Senator Schumer. After 4 years 

of delay, now is the time to support effective legislation for your 

Main Street upstate constituency, which is in tatters. The current 

bill represents manufacturing workers, but they’re located in 

China, not the USA. 

Tomorrow, Senators Stabenow, Conrad, Bunning, and Snowe are 

going to introduce amendments that provide direct remedies to industry and workers in the USA. Of course, Wall Street lawyers say 

this amendment makes the bill noncompliant with WTO rules. But 

I can assure you that the Main Street lawyers who you should 

trust have the opposite opinion. I have here three such opinions 

you can trust that I would like entered in the record. 

[The material referred to follows:] 

FISHER-BARTON, INC. 

Watertown, WI, September 21, 2006 

Hon. JOHN ENGLER, 

President and Chief Executive Officer, 

National Association of Manufacturers, 

Washington, DC. 

Dear Governor Engler: 

I and my fellow board members listed below have supported the resolution passed 

at the June 27, 2006 meeting of the NAM IEPC that will be reviewed at the meeting 

of the NAM Board of Directors next week. 

This letter is prompted by your September 15th letter forwarding to NAM board 

members an opinion by Greenberg Traurig on the consistency of H.R. 1498, the 

Ryan-Hunter bill, with the obligations of the U.S. as a Member of the WTO. In your 

letter you state that the analysis by James Bacchus and Ira Shapiro of that law 

firm ‘‘shows that the provisions of H.R. 1498 appear incompatible with WTO obligations.’’ 

We respectfully disagree with that conclusion and feel it is only right that an alternative analysis is presented to the entire Board on this issue, especially since 

those of us who worked with the IEPC on this legislation for over a year and a half 

have repeatedly asked for specific legal issues with the bill and received none until 

this one at the last minute. We concur with you that WTO legality is critical to the 

NAM’s support of any trade initiative. The Ryan-Hunter bill was written to achieve 

consistency with the WTO’s agreements, and we believe that it succeeds in achieving that goal. 

Indeed, in certain respects, the Greenberg Traurig letter is supportive of the 

Ryan-Hunter bill (for example, in finding that manipulative undervaluation of a foreign currency confers a ‘‘benefit’’ upon an exporter within the meaning of the WTO’s 

Agreement on Subsidies and Countervailing Measures (‘‘SCM’’)). In our judgment, 

however, the Greenberg Traurig letter is flawed in other fundamental aspects (as 

explained in more detail in the enclosed opinion by Kelley Drye Collier Shannon): 

• Exchange-rate manipulation does involve a governmental ‘‘financial contribution’’ and is not a legitimate exercise of a country’s ‘‘general regulatory powers’’ 

for purposes of the SCM Agreement. 

• The governmental ‘‘financial contribution’’ can be seen as a direct transfer of 

funds or as a governmental provision of goods or services to exporters. While 

not strictly required by the SCM Agreement, there are real costs to the foreign 

government in making this ‘‘financial contribution’’ (such as the extensive costs 

entailed with ‘‘sterilizing’’ the foreign government’s currency). 

• Exchange-rate manipulation creates an incentive to export and clearly benefits 

only those who export, so that this subsidy is contingent upon exportation and 

30 

prohibited under the SCM Agreement. There is no requirement expressed in the 

SCM Agreement that a subsidy must be exclusively tied to exportation in order 

to be export-contingent and prohibited. 

H.R. 1498 is an important, carefully crafted, and well-reasoned effort to build on 

the clear intent and developing precedent of WTO law to eliminate trade-distorting 

subsidies. The currency policy now practiced by China and some other trading partners is the type of export subsidy WTO agreements are meant to prohibit and to 

provide a remedy against the resulting injury. We believe H.R. 1498 can be successfully defended against any potential challenge at the WTO. 

NAM members and other U.S. companies have every right to benefit from trade 

with other countries and investment abroad. However, these benefits cannot outweigh the injury done to domestic manufacturers because of unfair trade advantages 

caused by prohibited currency manipulation. For this reason, while we would prefer 

to work by consensus, we value the NAM for providing an effective forum for U.S. 

manufacturers to act decisively on critical issues like this and we believe debate and 

voting are a healthy part of that process. The IEPC resolution was passed due to 

the active involvement by many smaller NAM members who have become activists 

because of the injury they are experiencing from the unfair practices of some of our 

trading partners and should be upheld by the NAM’s Board. 

Enclosed are two documents: (1) a legal memorandum from Kelley Drye Collier 

Shannon regarding WTO consistency of H.R. 1498 (Ryan-Hunter); and (2) a background memorandum about currency manipulation, the NAM’s policy positions, and 

the reasons why H.R. 1498 is the best available policy response to currency manipulation. 

We would appreciate your sending this letter with its enclosures to the NAM’s 

Board of Directors in advance of next week’s meetings. Thank you. 

Very truly yours, 

RICHARD L. WILKEY, 

President, 

Fisher-Barton, Inc. 

L. PATRICK HASSEY, 

Chairman, President and 

Chief Executive Officer, 

Allegheny Technologies 

Incorporated. 

M. BRIAN O’SHAUGHNESSY, 

President and Chief Executive 

Officer, 

Revere Copper Products, Inc. 

ENCLOSURE 1 

Currency Undervaluation: What it Does, How it Violates NAM Principles, 

and Why H.R. 1498 Is the Best Solution 

As with other commodities, the value of a currency is a function of supply and 

demand. When market forces are free to determine the value, currencies move up 

and down as conditions change. However, when a government intervenes in currency markets to maintain an undervalued currency, it generates powerful and systematic advantages in its international trade. 

With regard to its exports, an undervalued currency conveys a subsidy if and 

when a good is shipped across the border. As shown in the attachment, the government by its intervention decides how much extra domestic currency an exporter of 

goods or services (such as tourism) will receive for each dollar it earns. That bonus 

is a subsidy provided by the foreign government. Under WTO rules, a subsidy benefit that is received contingent on export is prohibited. The prohibition rests on the 

longstanding legal judgment that export subsidies are inherently distortive and destructive of free and fair competition. 

With regard to the country’s imports, an undervalued currency serves as a hidden 

tax on all imported goods and services. The attachment shows clearly that undervaluation creates the need for importers, or would-be importers, to pay extra in domestic currency to purchase each dollar of foreign goods. Whether viewed as a hidden tariff or a hidden tax, the undervalued currency undermines the level playing 

field for imported products and distorts free and fair competition. 

The bottom line is that persistent currency undervaluation maintained by government intervention is incompatible with free trade and violates the letter as well as 

the spirit of the WTO agreements. 

Currency Undervaluation Violates NAM Principles 

In 2005, the Board approved two specific sets of priorities for NAM—one an overall trade agenda; the other, a China-specific agenda. The principles and specific objectives in those documents provide a strong basis for condemning persistent currency undervaluation. 

Specifically, NAM’s established policy objectives include: 

31 

• Eliminate trade-distorting subsidies & defend, preserve and enhance the effectiveness of WTO-consistent U.S. trade law. As noted above, export subsidies are 

prohibited because they are the most distortive of free trade. 

• Elimination of artificially created and maintained competitive advantages 

through WTO-inconsistent subsidization or other means. As shown in the attachment, currency undervaluation creates powerful advantages for a country’s exports as well as for domestic producers competing with imports. 

• Revalue the Chinese Yuan to Reflect Economic Fundamentals. The Board agreed 

that this step is viewed as ‘‘essential to creating more balanced and sustainable 

trade flows,’’ ‘‘giving U.S. companies a more stable period to adjust to changing 

economic relationships,’’ and ‘‘enabling other countries to free their [undervalued] currencies to better reflect market conditions.’’ 

• Immediate Revaluation of the Yuan by up to 40 Percent. This objective was ratified by the Board in early 2005. Since then, the yuan has strengthened vis-a`- 

vis the dollar by only 4.46 percent through September 20, 2006, according to 

figures published by NAM. In fact, this very modest, nominal appreciation has 

been exceeded by China’s inflation during this same period, so that the yuan 

is actually weaker in real terms than it was in July 2005. 

• Apply Countervailing Duty Laws to China to Offset the Effects of Chinese Subsidies. The Board agreed that ‘‘[t]he size of China’s industrial sector and its 

huge foreign exchange reserves should dictate that greater subsidy discipline be 

applied.’’ The need for such legislation has been heightened by China’s failure 

to fulfill its commitment to eliminate all export subsidies by the time of its accession to the WTO on December 11, 2001. 

Supporting a WTO-consistent remedy against persistently undervalued currencies 

is a logical next step in NAM’s traditional support for free and fair trade, the rule 

of law in international trade, and the elimination of trade-distorting subsidies. It 

would validate NAM’s leadership role on currency issues that led to the establishment of the Coalition for a Sound Dollar and the Fair Currency Alliance. It would 

underscore that WTO-consistent responses to mercantilism and protectionism by our 

trading partners is a key step in strengthening support in the United States for further trade liberalization. 

Why H.R. 1498 is the Best Approach 

H.R. 1498, introduced by Rep. Tim Ryan (D–OH) and Armed Services Chairman 

Duncan Hunter (R–CA), is the only bipartisan, WTO-consistent legislation that provides a remedy to persistent currency undervaluation. Thus far, 176 House members have cosponsored the bill, including 85 Republicans. As the 109th Congress 

draws to a close, H.R. 1498 stands out from all other currency legislation because: 

• Consistent with the anti-subsidy rules of the WTO, it makes ‘‘currency manipulation’’—undervaluation maintained by government intervention in any country—an export subsidy actionable under the U.S. countervailing duty law. The 

statute would apply in a nondiscriminatory way to all countries. The legislation 

addresses an unfair, mercantilist practice as a matter of principle and does not 

single out any foreign country for discriminatory treatment. 

• Consistent with the International Monetary Fund’s standards, a temporarily 

undervalued currency resulting not from government interference but from an 

imbalance in market forces would not be liable to CVD duties. 

• Consistent with established national trade law, domestic producers would be required to prove material injury caused by the subsidized imports to obtain offsetting duties. Frivolous cases would be screened out. 

• Application of CVD remedies would be contingent on the exporting country’s 

continued intervention to maintain an undervalued currency. Once the practice 

stops, the remedy stops. Thus, good behavior is rewarded. 

• Enactment of H.R. 1498 would provide an avenue of relief for injured industries, encourage foreign governments to desist in the market interference to 

suppress the value of their currencies, and act as a deterrent to this unfair 

practice in the future. 

H.R. 1498 is good policy and deserves NAM’s endorsement. 

32 

1 Importantly, at page 2 of Greenberg Traurig’s September 12th letter, H.R. 1498’s definition 

of ‘‘exchange-rate manipulation’’ for purposes of amending the U.S. countervailing duty statute 

has been misquoted in a way that wrongly suggests that amendment would apply only to China. 

In actuality, Section 3 of H.R. 1498 defines ‘‘exchange-rate manipulation’’ as a countervailable, 

prohibited export subsidy so as to apply in countervailing duty proceedings to any foreign country (not just China) engaged in manipulative undervaluation of its currency. The definition of 

‘‘exchange-rate manipulation’’ cited by Greenberg Traurig’s letter concerns Section 4 of H.R. 

1498, which deals with the China-specific market disruption provisions in U.S. law based upon 

China’s Accession Agreement with the WTO. Any implication that H.R. 1498 singles out China 

for discriminatory treatment under the U.S. countervailing duty statute is erroneous. 

The Simple Arithmetic of Currency Undervaluation: The Chinese Example 

Assume: 

• A market value for RBM of $1 = 5 RMB 

• An administered value for RMB of $1 = 8 RMB 

• An identical product is produced in the U.S. and China at a cost of US$100 or 

500 RMB 

A would-be Chinese buyer of the U.S. good would have to be able and willing to 

pay: 

500 RMB—market value of good 

+300 RMB—currency penalty 

lllllllll 

800 RMB 

Result: Huge Cost Disadvantage for U.S. Exporter 

A would-be Chinese seller to the U.S. would be able to sell it at: 

500 RMB—market value of good 

+300 RMB—currency bonus 

lllllllll 

800 RMB 

Result: Huge Cost Advantage for Chinese Exporter 

ENCLOSURE 2 

KELLEY DRYE COLLIER SHANNON

Washington, DC, September 21, 2006 

Memorandum 

To: Governor JOHN ENGLER

From: DAVID A. HARTQUIST

JEFFREY S. BECKINGTON

RE: THE WTO-CONSISTENCY OF H.R. 1498, THE RYAN-HUNTER BILL

This memorandum is being sent to you on behalf of the China Currency Coalition 

(‘‘CCC’’) and responds to an analysis provided to Mr. Jim Jarrett in a letter dated 

September 12, 2006, by Messrs. James Bacchus and Ira Shapiro of Greenberg 

Traurig, LLP. In their opinion, H.R. 1498’s treatment of manipulative undervaluation of a foreign currency as a countervailable, prohibited export subsidy would 

likely be found in dispute settlement to be WTO-inconsistent. The CCC respectfully 

disagrees. 

We would like to note at the outset that the Ryan-Hunter bill has been crafted 

to comply with the rights and obligations of the United States under the WTO’s various agreements, including particularly the Agreement on Subsidies and Countervailing Measures (‘‘SCM Agreement’’). It also should be observed that any legal contest at the WTO on this matter would be a case of first impression, so it cannot 

be known with absolute certainty what the final result of such proceedings would 

be. Nonetheless, H.R. 1498 has been scrutinized repeatedly since its introduction in 

April 2005, and 176 Members of the House of Representatives, virtually evenly split 

by party, have signed on as co-sponsors. 

Under the circumstances, having now been able to read Greenberg Traurig’s letter, we continue to believe that H.R. 1498 is WTO-consistent. Indeed, Greenberg 

Traurig’s letter in significant respects supports or concurs with the reasoning that 

underlies the CCC’s position. In the limited areas of disagreement that exist and 

in its outcome, Greenberg Traurig’s evaluation is very much open to challenge. On 

balance, by far the better view is that the Ryan-Hunter bill is WTO-consistent. The 

CCC’s further points follow.1

33 

• The CCC agrees that a measure constitutes a ‘‘subsidy’’ under the SCM Agreement only if (a) there is a governmental ‘‘financial contribution’’ involved, and 

(b) a ‘‘benefit’’ to the recipient is thereby conferred. 

• Greenberg Traurig’s evaluation acknowledges that exchange-rate manipulation 

likely would be found in dispute settlement to confer a ‘‘benefit.’’ The CCC concurs. When a country’s currency is manipulatively undervalued in relation to 

the United States dollar, goods from that country that are sold in the United 

States will realize for the exporter—upon conversion of the dollars into the exporter’s home currency—more of that country’s currency than if that currency 

were valued realistically in accordance with market forces. That difference, resulting in additional funds for the exporter, assuredly yields a ‘‘benefit’’ for the 

exporter. 

• Greenberg Traurig’s opinion is that exchange-rate manipulation would likely 

not be considered to be a governmental ‘‘financial contribution’’ and so would 

not be a ‘‘subsidy’’ under the SCM Agreement. To the contrary, the CCC submits that exchange-rate manipulation does constitute or produce a governmental ‘‘financial contribution’’ either as a direct transfer of funds by the foreign government to the exporter or as a governmental provision of goods or 

services to the exporter in which the foreign government is selling its currency 

and buying U.S. dollars. The foreign government prints the money and decides 

how much to give to each exporter. 

• In Greenberg Traurig’s view, a governmental ‘‘financial contribution’’ is not likely to be found (a) because the foreign government’s manipulative undervaluation of its currency is an exercise of its ‘‘general regulatory powers’’; and (b) 

because there is no ‘‘real cost’’ to the foreign government from a transfer of economic resources, as there is with an outright grant of governmental funds or 

a loan at below-market rates. But these attempted claims should fail. The vague 

yardstick of whether a measure is an exercise of ‘‘general regulatory powers’’ 

would wrongly excuse many measures like grants and preferential loans that 

already are recognized as governmental ‘‘financial contributions.’’ Moreover, not 

only is the notion of a ‘‘real cost’’ to the foreign government not articulated or 

defined in the SCM Agreement as a prerequisite for a governmental ‘‘financial 

contribution,’’ but exchange-rate manipulation does actually entail substantial 

costs for the foreign government. Such manipulation requires an extensive and 

costly regulatory system by the foreign government to maintain, not least the 

process of ‘‘sterilizing’’ the foreign government’s currency to avoid inflation. 

Again, there are solid grounds to treat exchange-rate manipulation as a ‘‘subsidy’’ under the SCM Agreement that involves both a governmental ‘‘financial 

contribution’’ and a ‘‘benefit’’ for the recipient. 

• Greenberg Traurig’s analysis also argues that the third criterion under the 

SCM Agreement for a prohibited export subsidy would not be met and that payments to an exporter by a foreign government’s exchange-rate manipulation are 

not ‘‘contingent’’ upon export performance, if the exchange rate is available to 

anyone who has U.S. dollars to be exchanged into the manipulatively undervalued foreign currency. But the fact remains that the foreign country’s exporters can only receive their home currency at the subsidized, advantageous rate 

by exporting and obtaining U.S. dollars. Availability of the subsidized rate to 

other groups, such as foreign investors or tourists (who are importers of services, such as lodging and transportation, as well as purchasers of goods to carry 

home), does not at all dictate a conclusion that the subsidy is not export-contingent. There is no requirement expressed in the SCM Agreement that a subsidy 

must be exclusively tied to exports in order to be export-contingent and prohibited. This distinction has been recognized and prohibited export subsidization 

has been found in dispute settlement at the WTO in similar situations. The fundamental issue is whether the subsidy creates an incentive to export; an undervalued currency clearly benefits only those who export. 

In summary, the CCC continues to believe that exchange-rate manipulation is a 

countervailable, prohibited export subsidy and would be considered as such in a dispute settlement at the WTO. 

34 

1Letter from James Bacchus and Ira Shapiro of Greenberg, Taurig, to Jim Jarrett, National 

Association of Manufacturers, September 12, 2006. 2The Letter states that ‘‘Exchange Rate Manipulation’’ is defined to mean ‘‘protracted large 

scale intervention by the Government of the People’s Republic of China. . . .’’ This definition 

is found in the proposed amendment to the special safeguard provision. 

WILEY REIN & FIELDING LLP 

RE: RESPONSE TO THE BACCHUS-SHAPIRO ANALYSIS OF THE CONSISTENCY OF

H.R. 1498, THE HUNTER-RYAN BILL, WITH THE WTO OBLIGATIONS OF THE UNITED

STATES

In their letter to the National Association of Manufacturers (‘‘NAM’’) dated September 12, 2006,1 James Bacchus and Ira Shapiro comment on the consistency of 

H.R. 1498 with the WTO obligations of the United States. They conclude that the 

Chinese exchange rate regime ‘‘probably does not fall within the meaning of ‘subsidy’ as defined by the WTO Agreement on Subsidies and Countervailing Measures, 

and even if it does, it is neither a prohibited nor an actionable subsidy under that 

Agreement.’’ (Letter at 11.) In this response, we evaluate the Bacchus-Shapiro analysis and conclude, contrary to their views, that there are persuasive reasons why 

H.R. 1498 could be deemed consistent with the U.S. obligations under the Agreement on Subsidies and Countervailing Measures (‘‘SCM’’) in the event it is challenged at the WTO. 

A. The Subsidy Defined by H.R. 1498 

Before turning to their WTO analysis, we note that the Bacchus/Shapiro Letter 

incorrectly describes the amendment to the countervailing duty law proposed by 

H.R. 1498.2 While it is true that the introduction to H.R. 1498 states that its purpose is to ‘‘clarify that exchange rate manipulation by the People’s Republic of China 

is actionable under the countervailing duty provision . . .,’’ the actual amendment 

proposed to the countervailing duty law would not be limited to China. In the proposed amendment to the countervailing duty law, H.R. 1498 states: 

[T]he term ‘exchange-rate manipulation’ means protracted large-scale intervention by an authority to undervalue its currency in the exchange market that 

prevents effective balance-of-payment adjustments or that gains an unfair competitive advantage over any other country. 

Thus, the amendment would apply to any country that manipulates its exchange 

rate, not just China. 

This is not an insignificant oversight. An amendment to the U.S. countervailing 

duty law that is country specific would be unquestionably WTO-inconsistent as a 

violation of the most-favored-nation clause found in Article III of GATT–1994. This 

result is avoided by H.R. 1498 by making the new countervailing duty provisions 

relating to currency manipulation generic as they are required to be under the MFN 

obligation. 

B. The Definition of a Subsidy in the SCM Requires a Financial Contribution and 

Benefit to the Recipient 

We agree with the Bacchus/Shapiro conclusion that Article 1.1 of the SCM provides that a subsidy exists only where there is both ‘‘financial contribution’’ and a 

‘‘benefit.’’ And, we accept their view that a WTO panel likely ‘‘would find that ‘exchange rate manipulation’ does confer a benefit . . .’’ provided there are facts sufficient to demonstrate that an advantage exists as a result of such action by the government authority. (Letter at 5.) 

We do not, however, share the Bacchus/Shapiro expectation of ‘‘difficulty’’ in demonstrating that the Chinese currency regime involves a financial contribution. Article 1.1(a)(1) provides that there is a financial contribution by a government where, 

inter alia, there are direct transfers to the recipient (such as grants, loans, and equity infusions). Bacchus and Shapiro argue that the exchange of U.S. dollars for 

RMB is not such a transaction and that none of the other three practices defined 

in Article 1.1(a)(1) are applicable. In their view, it is likely that the WTO would require persuasive evidence ‘‘of a real cost to the government from a transfer of economic resources,’’ and that ‘‘the existence of a financial contribution involves consideration of the transaction through which something of economic value is transferred 

by a government.’’ (Letter at 7, quoting Softwood Lumber (WT/DS 257/AB/R.) 

We fail to see why the settlement of foreign exchange holdings does not amount 

to a financial contribution. Under the Chinese currency regime, foreign exchange is 

in many cases, including export receipts, required to be settled through the People’s 

35 

3See Regulations on the Control of Foreign Exchange Settlement, Sale and Payment, Promulgated by the People’s Bank of China, June 20, 1996. 

Bank of China or a bank authorized to carry on a foreign exchange business.3 In 

exchange, the Bank provides RMB to the recipient at the prescribed rate of exchange. As the banks function at the direction of the government, the financial contribution would be deemed made by the government. See SCM Article 1.1(A)(1)(iv). 

This financial contribution from the government confers a benefit—as conceded by 

Bacchus and Shapiro—because the dollars exchanged are valued at a higher rate 

than would be the case in the absence of exchange rate manipulation. That is, the 

recipient does not pay ‘‘market rates for what it receives.’’ Canada-Dairy (WT/ 

DS103/AB/R), Para 87. 

This scenario is indistinguishable from the situation where a government transfers cash to a recipient in return for equity at a price that is above the market value 

of the asset transferred by the recipient. Such transactions are denied financial contributions because they involve a transfer of cash; they amount to a subsidy because 

the recipient benefits from the exchange of equity for more value than would have 

been received from a profit motivated investor. In the case of the Chinese currency 

regime, there is also a transfer of more cash to the recipient then would be transferred under a market driven exchange rate system, which Bacchus and Shapiro 

concede confers a benefit. 

The language of SCM Article 1.1(a)(1) does not indicate that the definition of ‘‘financial contribution’’ includes an implicit requirement that the transfer must involve a cost to the government. The word ‘‘transfer’’ means simply that there has 

been a conveyance from one party to another. This ordinary meaning of the word 

transfer should preclude incorporation of additional criteria. See Article 31 of the 

Vienna Convention on the Law of Treaties, which is the applicable rule of interpretation for WTO dispute resolution. 

C. The Subsidy Conferred by the Chinese Currency Regime Is Contingent on Export 

Bacchus and Shapiro conclude that even if there is a financial contribution and 

benefit, the Chinese currency regime is not ‘‘tied’’ to exports. While conceding that 

the currency benefit is available to exporters, they note that it is equally available 

to those who receive U.S. dollars from the repatriation of profits and from the inflow 

of foreign direct investment. Since the subsidy is not limited to exporters, they 

argue that the WTO would not likely find that the subsidy is contingent on export 

performance. (Letter at 10.) 

Bacchus and Shapiro do make reference to the Appellate Body decision in United 

States Upland Cotton (WT/DS 267/AB/R), where it was determined that export contingency can exist even though the subsidy is not limited to exporters. But, they 

argue, Upland Cotton is distinguishable because in that case, the ‘‘Statute and Regulations clearly distinguish between exporters and domestic users.’’ In contrast, they 

argue, the terms of the Chinese currency regime does not clearly distinguish between ‘‘exporters and others. . . .’’ (Id.) 

While it is true that the Appellate Body did cite differences in the domestic and 

export programs as a distinguishing feature in Upland Cotton, it did not elevate the 

existence of a distinction to a preclusive criteria. This interpretation is consistent 

with the Appellate Body decision in United States-Tax Treatment for Foreign Sales 

Corporations, Recourse to Article 21.5 of the DSU by the European Communities 

(WT/DSBRO8/AB/RW, 14 January 2002), which states: 

(a) 119. We recall that the ETI measure grants a tax exemption in two different 

sets of circumstances: (a) where property is produced within the United States 

and held for use outside the United States; and (b) where property is produced 

outside the United States and held for use outside the United States. Our conclusion that the ETI measure grants subsidies that are export contingent in the 

first set of circumstances is not affected by the fact that the subsidy can also be 

obtained in the second set of circumstances. The fact that the subsidies granted 

in the second set of circumstances might not be export contingent does not dissolve the export contingency arising in the first set of circumstances. Conversely, the export contingency arising in these circumstances has no bearing 

on whether there is an export contingent subsidy in the second set of circumstances. Where a United States tax player is simultaneously producing 

property within and outside the United States, for direct use outside the United 

States, subsidies may be granted under the ETI measure in respect of both sets 

of property. The subsidy granted with respect to the property produced within 

the United States, and exported from there, is export contingent within the meaning of Article 3.1(a) of the SCM Agreement, irrespective of whether the subsidy 

36 

4 Regulations, Article 10. 

given in respect of property produced outside the United States is also export contingent. 

The same result should apply here where the foreign exchange regime is applicable to more than exporters. 

There is reason to believe that a WTO review of the Chinese currency regime 

would take note of the fact there are numerous special rules and exceptions applicable to holders of foreign currency other than exporters. Not every dollar received in 

China must be settled in the same fashion. For example, while the Regulations of 

the People’s Bank of China require settlement of foreign exchange earned by domestic organizations from a variety of sources, including foreign exchange earned from 

export, remission of profits from foreign assets, transfer of patent rights, etc., there 

are numerous special regulations that allow foreign exchange accounts that are not 

available to exporters per se. Such accounts may be utilized by recipients of foreign 

exchange from participation in overseas projects, for foreign agency services, receipts of travel agencies and certain insurance premiums. In addition, there are special regulations applicable to enterprises with foreign investment which also allow 

foreign exchange accounts not available to exporters.4 These differentials in the 

treatment of foreign exchange receipts by domestic companies demonstrate that the 

‘‘subsidy’’ is not simply tied to having dollars as Bacchus and Shapiro contend. 

These differences indicate that the Chinese currency regime does distinguish between exporters and others, which suggests that even the most restrictive reading 

of Upland Cotton criteria would permit the characterization of the Chinese currency 

regime as contingent on export. 

STEWART AND STEWART

Washington, DC, September 22, 2006 

RE: RESPONSE TO BACCHUS/SHAPIRO ANALYSIS OF WTO—CONSISTENCY OF

HUNTER-RYAN BILL (H.R. 1498) 

A. Introduction 

The following analysis is offered to provide a response to the September 12, 2006, 

memorandum prepared for NAM by James L. Bacchus and Ira Shapiro (hereinafter 

‘‘Bacchus/Shapiro memo’’). That memo concludes that the Chinese exchange rate regime is not a prohibited (or actionable) subsidy under the SCM Agreement and, 

therefore, H.R. 1498 (the Hunter-Ryan bill) is unlikely to be WTO-consistent at least 

as applied to China. The authors are well-known and well-regarded trade law practitioners, and their views on WTO matters should certainly be respected. However, 

reasonable minds may disagree about issues such as the WTO-consistency of proposed legislation where no directly similar measure has previously been considered 

by a WTO dispute settlement panel or the Appellate Body. In addition, the Bacchus/ 

Shapiro memo recognizes the seriousness of the problem and does not suggest that 

nothing should be done to address it. Rather, they suggest that the chances of a 

successful offensive challenge to the Chinese currency regime based on a GATT 

1994 Article XV:4 violation would be better than the chances of a successful defense 

of H.R. 1498 in a WTO dispute. The initiation of such an offensive challenge was, 

of course, the purpose of the Section 301 petition filed by the China Currency Coalition (‘‘Section 301 petition’’), which unfortunately was not accepted by the Administration. 

The Bacchus/Shapiro memo acknowledges that the question of whether a measure 

is a prohibited (or actionable) subsidy under the SCM Agreement requires a highly 

fact-specific analysis. The memo then proceeds on the basis of the authors’ understanding of the operation of the Chinese currency regime without considering the 

practical implications and effects of that regime on Chinese exporters. Bacchus/Shapiro memo, at 2–3. Instead, the memo finds two fundamental problems that they 

view are likely to weigh against a WTO panel finding that the Chinese exchange 

rate regime is a prohibited export subsidy within the meaning of Article 3.1(a) of 

the SCM Agreement. First, the memo foresees difficulty in arguing that the regime 

provides a ‘‘financial contribution’’ or ‘‘income or price support’’ and, thus, does not 

provide a subsidy within the meaning of Article 1.1(a) of the SCM Agreement. Second, the memo concludes that even assuming arguendo that the regime does provide 

a subsidy, the subsidy is not contingent in fact on export performance. 

Because there are differing views on these fact-intensive issues, as evidenced by 

the Section 301 petition, and because any challenge of H.R. 1498 would be a case 

of first impression for the WTO, we provide the following supplemental analysis, 

37 

1 Unlike the Bacchus/Shapiro memo, the Section 301 Petition relies on the Second Report on 

AD/CVD Duties adopted in 1960 as well as a panel report in Brazil—Aircraft to argue that a 

financial contribution does not require a ‘‘payment’’ but can include ‘‘measures having an equivalent effect.’’ Section 301 petition at 59–60, n. 67. According to the Second Report on AD/CVD 

Duties, ‘‘the word ‘subsidies’ covered not only actual payments, but also measures having an 

equivalent effect.’’ BISD 9S/194, 200, para. 34. 2See also US—Softwood Lumber IV, WT/DS257/AB/R, para. 19 (‘‘The concept of subsidy defined in Article 1 of the SCM Agreement captures situations in which something of economic 

value is transferred by a government to the advantage of the recipient’’). 3While the Bacchus/Shapiro memo, at 6, notes that the Appellate Body in the US—DRAMS 

CVD dispute was reluctant to find that a Member’s exercise of general regulatory powers constituted a ‘‘financial contribution,’’ the Chinese exchange rate regime is more than an exercise 

of general regulatory powers. Moreover, the US—DRAMS CVD case involved an alleged indirect 

financial contribution through a private body under SCM Agreement Article 1.1(a)(1)(iv) not a 

‘‘direct transfer of funds’’ or government revenue foregone within the meaning of SCM Agreement Articles 1.1(a)(1)(i) or (ii). US—DRAMS CVD, WT/DS296/AB/R, para. 115. 

which concludes that, while the WTO-consistency of any U.S. law is subject to possible challenge, there are strong arguments that H.R. 1498 is consistent with U.S. 

obligations under the SCM Agreement. 

B. Financial Contribution 

According to the Bacchus/Shapiro memo, the government’s pegging of the value 

of the yuan to the value of the U.S. dollar does not ‘‘involve a transaction of the 

nature, or the kind of transfer of economic resources, that constitutes a ‘financial 

contribution’ under any of the subparagraphs of Article 1.1(a)(1)’’ of the SCM Agreement. Bacchus/Shapiro memo, at 7. Likewise, the Bacchus/Shapiro memo finds that 

exchange-rate manipulation would not be a form of income or price support in the 

sense of GATT Article XVI and within the meaning of Article 1.1(a)(2) of the SCM 

Agreement. Bacchus/Shapiro memo, at 8. According to the memo, Article 1.1(a)(2) 

is likely to refer to conventional income or price support programs for specific products intended to maintain income or prices at levels higher than they otherwise 

would be.1

It is not clear, however, why the exchange of currency at an undervalued rate 

would not be a ‘‘direct transfer of funds’’ or at the very least government revenue 

foregone within the meaning of SCM Agreement Articles 1.1(a)(1)(i) or (ii). According to the Appellate Body, ‘‘a ‘subsidy’ involves a transfer of economic resources from 

the grantor to the recipient for less than full consideration.’’ 2 3 US—DRAMS CVD, 

WT/DS296/AB/R, para. 125, n. 212, citing Canada—Dairy, WT/DS103/AB/R, WT/ 

DS113/AB/R, para. 87. While the Appellate Body in US—Softwood Lumber IV recognized that ‘‘not all government measures capable of conferring benefits would necessarily fall within Article 1.1(a),’’ it also recognized that a ‘‘wide range of transactions’’ and ‘‘government measures’’ fall within the meaning of that provision. WT/ 

DS257/AB/R., para. 20, n. 35. In other words, a ‘‘financial contribution’’ is not limited to a governmental transfer of money directly to the recipient. 

For example, in US—Softwood Lumber IV, the Appellate Body considered whether 

Canadian provinces provided a financial contribution by ‘‘provid[ing] goods’’ within 

the meaning of SCM Agreement Article 1.1(a)(1)(iii). The Appellate Body explained 

that it was the consequence of the transaction that must be considered in determining whether or not the government has provided goods. Id. at para. 43. In that 

case, stumpage arrangements gave tenure holders a right to enter onto government 

lands, cut standing timber, and enjoy exclusive rights over the timber that was harvested. The Appellate Body concluded that the consequence of the transaction was 

that the government provided harvesters with standing timber. Id. The Appellate 

Body further noted that the evidence suggested that ‘‘making available timber is the 

raison d’etre of the stumpage arrangements.’’ Id. Therefore, the Appellate Body 

upheld the panel’s finding that the U.S. determination that the Canadian provinces 

provided a financial contribution in the form of goods by providing standing timber 

to timber harvesters through stumpage programs was ‘‘not inconsistent’’ with Article 

1.1(a)(1)(iii). Id. at para. 76. 

The Appellate Body in the EC—Sugar case has also broadly construed Agriculture 

Agreement Article 9.1(c), which imposes reduction commitments on export subsidies 

provided through ‘‘payments on the export of an agricultural product that are financed by virtue of governmental action. . . .’’ The Appellate Body in EC—Sugar 

upheld the panel’s conclusion that the government’s cross-subsidization of the production of C sugar constituted a ‘‘payment’’ in the form of transfers of financial resources on export financed by virtue of governmental action resulting from the operation of the EC sugar regime within the meaning of Article 9.1(c): 

38 

7.331 The Panel is thus of the view that EC sugar producers finance sales of 

C sugar at below cost of production directly by participating in the domestic 

market and making sales internally at high prices as regulated by the European 

Communities (and from the purchase of discounted C beet as discussed earlier). 

The European Communities’ governmental action controls virtually all aspects 

of domestic sugar supply and pricing. The European Communities provides this 

control through a combination of guaranteed intervention prices, production 

quotas and import restraints which limit the quantity of quota sugar that may 

be sold in the internal market, and the resulting high domestic price for A and 

B quota sugar. The domestic sales offer lucrative and attractive returns to producers. Government action controls the supply of domestic sugar by way of 

quotas in pursuit of protecting high domestic prices well above the intervention 

price. 

Additionally, penalties levied against sugar producers that divert C sugar production into the domestic market are evidence of further governmental control. 

The collection of production levies and distribution of export refunds also contribute to the high degree of EC governmental control. Last, the imposition of 

high import tariffs illustrates again governmental action in the EC sugar regime. 

7.332 Accordingly, the EC sugar regime uses the high profits on A and B 

quota sugar to cover fixed costs for C sugar and, most importantly, requires C 

sugar to be exported and diverted from the domestic market. Again, the result 

of the EC sugar system is not the production of C sugar in marginal or superfluous amounts simply in the pursuit of ensuring quota fulfillment. Rather, as 

the EC Court of Auditors stated, over the past years, C production has varied 

between 11 and 21 percent of quota production, a significant portion of the European Communities’ entire sugar production. 

7.333 In the Panel’s view, the EC sugar regime and the cross-over benefits 

that it creates are thus the direct and foreseeable consequences of actions by the 

European Communities, within the meaning of Article 9.1(c) of the Agreement 

on Agriculture, not merely the decisions of private sugar producers responding 

to market incentives. 

7.334 Therefore, the Panel finds that the production of C sugar receives a payment, through cross-subsidization resulting from the operation of the EC sugar 

regime; there is a payment. in the form of transfers of financial resources on export financed by virtue of governmental action. 

7.335 Pursuant to Article 10.3 of the Agreement on Agriculture, the Panel finds 

that the European Communities has not demonstrated that exports of C sugar 

that exceed the European Communities’ commitment levels since 1995 and in 

particular since the marketing year 2000/2001, are not subsidized. Consequently, the European Communities is acting inconsistently with Articles 3 

and 8 of the Agreement on Agriculture. 

WT/DS265/R, WT/DS266/R, WT/DS283/R, paras. 7.331–35 (emphasis added); WT/ 

DS265/AB/R, WT/DS266/AB/R, WT/DS283/AB/R, para. 278. 

Likewise, in Canada—Dairy, the Appellate Body found that Canada’s dairy regime constituted an export subsidy under Agriculture Agreement Article 9.1(c) because the provision of milk at reduced or below market prices constituted ‘‘payments’’ within the meaning of Agriculture Agreement Article 9.1(c). The Appellate 

Body specifically considered whether the transfer of economic resources constituting 

a ‘‘payment’’ within the meaning of Article 9.1(c) had to be in the form of money 

or could take other forms. WT/DS103/AB/R, WT/DS113/AB/R, para. 107. In the Appellate Body’s view, the payments could be made in a form, other than money, that 

confers value, such as by way of goods or services, and includes revenue foregone. 

Id. at 107, 112. The Appellate Body explained that the ‘‘foregoing of revenue usually 

does not involve a monetary payment.’’ Id. at para. 110 (citing Agriculture Agreement Article 1(c)). The Appellate Body found that the provision of milk at discounted prices to processors for export constituted non-monetary ‘‘payments’’ within 

the meaning of Article 9.1(c) in an amount equal to the portion of the price not 

charged. WT/DS103/AB/R, WT/DS113/AB/R, para. 113. 

While Article 9.1(c) of the Agriculture Agreement is not identical to Article 1.1(a) 

of the SCM Agreement, the Appellate Body’s recognition that a ‘‘payment’’ on the 

export of agricultural products can occur through the effects of a government regime 

should not be overlooked. 

The plain language of Article 1 of the SCM Agreement and the WTO case law 

to date confirm that a government need not issue a check to an exporter to provide 

a ‘‘financial contribution.’’ As explained in the Section 301 petition, China’s currency 

39 

4The Section 301 petition points out correctly that ‘‘[t]o the extent that the Chinese government entrusts or directs any private bodies to assist in effectuating the yuan’s undervaluation, 

which assistance appears also to take place, the conclusion still holds under Article 1.1(a)(1)(iv) 

that the Chinese government is providing a financial contribution and service as defined by the 

SCM Agreement.’’ Section 301 petition at 60, note 68. 

regime provides a real financial contribution to Chinese exporters through the exchange of currency at an undervalued rate: 

The Chinese government requires its citizens to exchange their dollars for local 

currency, sets the rate of exchange by fiat, and prints the money to fund the 

transaction. By directing the conversion of U.S. dollars at an extremely undervalued rate of 8.28 Yuan for each U.S. dollar, the Chinese government provides 

a financial contribution. . . . 

Section 301 Petition, at 60. In other words, the Chinese exchange rate regime requires banks to exchange U.S. dollars by overpaying them Chinese Yuan. The additional Chinese Yuan received by exporters in the form of cash represents a direct 

transfer of funds, within the meaning of SCM Agreement Article 1.1(a)(i), or at the 

very least government revenue foregone, within the meaning of Article 1.1(a)(ii).4

The Section 301 petition also suggested that: 

China’s currency manipulation further contributes financially to Chinese exports to the United States and elsewhere by shielding Chinese exporters from 

expenses involved with hedging against foreign-exchange losses or purchasing 

guarantees to guard against exchange-rate fluctuations. These costs are avoided 

thanks to the Chinese government’s guarantee of a substantially undervalued, 

pegged-exchange rate that prevents any currency fluctuations between the 

Yuan and the U.S. dollar. 

Id. at 61. Moreover, the currency exchange can also be viewed as a financial contribution because it provides Chinese exporters a ‘‘service’’ at non-market rates 

within the meaning of Article 1.1(a)(1) (iii). Hence, while the Bacchus/Shapiro memo 

conservatively concludes that the ‘‘financial support’’ requirement is not met, a review of the WTO case law set out above supports a contrary conclusion, and the 

particular facts at issue have never been considered in a WTO dispute settlement 

proceeding. 

C. De Facto Contingent Upon Export Performance 

The Bacchus/Shapiro memo concludes that, assuming arguendo that the Chinese 

currency regime is a subsidy, it is not a prohibited export subsidy because its grant 

is not ‘‘tied to’’ exports. Bacchus/Shapiro memo, at 9. 

With respect to de facto export contingency, footnote 4 to Article 3.1(a) of the SCM 

Agreement states that the standard ‘‘is met when the facts demonstrate that the 

granting of a subsidy, without having been made legally contingent upon export performance, is in fact tied to actual or anticipated exportation or export earnings. The 

mere fact that a subsidy is granted to enterprises which export shall not for that 

reason alone be considered to be an export subsidy within the meaning of this provision.’’ Thus, the critical issue is whether or not the grant of the subsidy is ‘‘tied to’’ 

actual or anticipated exportation or export earnings. 

There have been at least two adopted panel or Appellate Body decisions finding 

de facto export contingency within the meaning of Article 3.1(a): Australia—Automotive Leather II and Canada—Aircraft. According to the adopted panel report in 

Australia—Automotive Leather II, the sales performance targets set out in the grant 

contract constituted export performance targets because (1) the government was 

aware that the producer would have to continue and probably increase exports to 

reach the targets, and (2) the Australian market was already too small to absorb 

the producer’s production, much less any expanded production that might result 

from financial benefits accruing from the grant payments and required capital investments which were to be specifically for automotive leather operations. Australia—Automotive Leather II, WT/DS126/R, paras. 9.67, 9.71. Therefore, the panel 

found that the producer’s ‘‘anticipated export performance was one of the conditions 

for the grant of the subsidies’’ and was compelling evidence of a close tie between 

anticipated exportation and the grant of the subsidies. Id. 

The Appellate Body in Canada—Aircraft upheld the panel’s finding that the TPC 

program was de facto export contingent. In doing so, the Appellate Body explained 

that the legal standard to establish de jure and de facto contingency was the same, 

but the evidence required to establish their contingency differed. Specifically, proof 

of a de facto export contingency is based on an inference from the ‘‘total configuration of the facts constituting and surrounding the granting of the subsidy, none of 

40 

which on its own is likely to be decisive in any given case.’’ Canada—Aircraft, WT/ 

DS70/AB/R, para. 167. The Appellate Body then agreed with the panel that the relevance of particular facts will depend on the circumstances of the particular case 

and that ‘‘there can be no general rule as to what facts or what kinds of facts must 

be taken into account.’’ Canada—Aircraft, WT/DS70/AB/R, para. 169. 

Interpreting the language of footnote 4, the Appellate Body explained that the 

words ‘‘tied to’’ in footnote 4 required that a relationship of conditionality or depend- ence must be demonstrated. Canada—Aircraft, WT/DS70/AB/R, para. 171. The Appellate Body also interpreted footnote 4 as not permitting an affirmative finding 

based solely on (1) evidence that a government granting a subsidy anticipated that 

exports would result, or (2) evidence that a government knew that a recipient’s sales 

were export-oriented. Canada—Aircraft, WT/DS70/AB/R, paras. 169–173. While evidence of these facts may be taken into account, they cannot support an affirmative 

finding alone. 

Applying the legal test to the facts in that case, the Appellate Body affirmed the 

panel’s finding that the TPC assistance to the Canadian regional aircraft industry 

was de facto export contingent based on consideration of the sixteen factual elements, including: TPC’s statement of its overall objectives; types of information 

called for in applications for TPC funding; the considerations, or eligibility criteria, 

employed by TPC in deciding whether to grant assistance; factors to be identified 

by TPC officials in making recommendations about applications for funding; TPC’s 

record of funding in the export field, generally, and in the aerospace and defence 

sector, in particular; the nearness-to-the-export-market of the projects funded; the 

importance of projected export sales by applicants to TPC’s funding decisions; and 

the export orientation of the firms or the industry supported. Canada—Aircraft, 

WT/DS70/AB/R, para. 175. 

The lack of the requisite ‘‘tie’’ in Canada—Aircraft II, however, led the panel in 

that case to reject allegations of de facto export contingency based on the size of the 

domestic market. Specifically, the panel acknowledged that the government ‘‘was 

very likely aware that the Canadian domestic market was too small to absorb Bombardier production’’ but concluded that the program was not operated in a way to 

suggest that the equity guarantees were de facto export contingent. Canada—Aircraft II, WT/DS222/R, paras. 7.360, 7.377–78. In doing so, the panel distinguished 

the TPC program discussed in Canada—Aircraft which (1) required TPC employees 

to focus on the volume of export sales resulting directly from the project, (2) involved TPC business plans which recorded the proportion of the aerospace and defense industry’s revenue allocable to exports, and (3) involved firms exporting 80 

percent of their shipments. Id. 

In the case of China’s currency regime, the subsidy is de facto export contingent. 

As the Section 301 petition explained, ‘‘the subsidization would not occur if exports 

did not occur. In order for the foreign-exchange program to operate, products must 

be traded internationally. Without export performance, there would be no foreign 

currency to exchange.’’ Section 301 petition at 65. Thus, there is a ‘‘relationship of 

conditionality or dependence.’’ Canada—Aircraft, WT/DS70/AB/R, para. 171. The 

granting of the subsidy is not based merely on ‘‘knowing that a recipient’s sales are 

export-oriented.’’ Canada—Aircraft, WT/DS70/AB/R, para. 173. Without exportation 

there can be no subsidization. Hence, the subsidy provided by China’s currency regime is ‘‘tied to’’ exports within the meaning of the SCM Agreement. This conclusion 

is supported by WTO case law. 

D. A Subsidy’s Availability to Non-Exporters Does Not Dissolve the ExportContingent Nature of the Payments to Exporters 

The Bacchus/Shapiro memo concludes that a WTO panel would not find the currency regime to be a prohibited export subsidy that is de facto contingent on export 

performance because it lacks the requisite ‘‘tie to’’ exports. Bacchus/Shapiro memo, 

at 9–10. Instead, the memo explains that any alleged subsidy is ‘‘tied to’’ having 

U.S. dollars, as a result of foreign profits, foreign investments or from exports. The 

memo also notes the lack of evidence indicating that exports are singled out for special treatment or subject to different conditions. Bacchus/Shapiro memo, at 10. 

Yet, SCM Agreement Article 3.1(a) specifically states that a subsidy can be contingent upon export performance ‘‘whether solely or as one of several other conditions.’’ 

Indeed, the Appellate Body has twice rejected arguments that receipt of subsidy 

payments by non-exporters somehow dissolves export contingency for exporters. For 

example, in US—Upland Cotton, the Appellate Body rejected the U.S. argument 

that its Step 2 payments were not export contingent because they were also available to domestic users. US—Upland Cotton, WT/DS267/AB/R, paras. 564, 576. The 

Appellate Body explained that the fact that a subsidy was also available to domestic 

users did not ‘‘dissolve’’ the export-contingent nature of the payments to exporters. 

41 

5Trade Policy Review, Report by the Secretariat, People’s Republic of China, Revised, WT/ 

TPR/S/161/Rev.1, at 257, Annex A1.1 (June 26, 2006) (‘‘China TPR’’). 6 China TPR, at 24, note 79. 

7Website of the Ministry of Commerce of the People’s Republic of China (MOFCOM), 

http://english.mofcom.gov.cn/aarticle/statistic/foreigninvestment/200607/20060702705397 

.html (Accessed Sep. 21, 2006). 8 China TPR, at 5. 

Id. at para. 578. Rather, the Appellate Body found that program to be de jure export 

contingent because the statute and regulations (1) distinguished between two types 

of recipients (eligible exporters and eligible domestic users), and (2) established different conditions for each type to receive payments, i.e., an exporter had to demonstrate that the upland cotton had been exported to receive a payment. Id. at 

paras. 576–77. 

In doing so, the Appellate Body relied on its decision in US—FSC (Article 21.5— 

EC). In US—FSC (Article 21.5—EC), the Appellate Body found that the fact that 

subsidies may not be export-contingent in all ‘‘situations’’ in which they provide benefits did not affect its conclusion that the subsidy was export-contingent in one of 

those ‘‘situations.’’ WT/DS108/AB/RW, at para. 119. In that case, the ETI measure 

at issue contemplated two different factual situations, one involving property produced within the United States and held for use outside the United States, and the 

other involving property produced outside the United States and held for use outside the United States. Id. The Appellate Body observed that the conditions for the 

grant of the subsidy with respect to property produced outside the United States 

were distinct from those governing the grant of the subsidy in respect of property 

produced within the United States. Id. at para. 114. Therefore, the Appellate Body 

examined the two situations separately and concluded that the first situation would 

require the exportation of property produced within the United States to receive the 

tax exemption. Id. at paras. 115, 119. The fact that the same measure grants subsidies that might not be export contingent to those in the second situation did ‘‘not 

dissolve the export contingency arising in the first set of circumstances.’’ Id. at para. 

119. 

Thus, the simple fact that enterprises in possession of dollars from inflows of foreign direct investment or repatriation of profits earned abroad benefit from China’s 

currency regime, along with exporters, does not make the action of the Chinese government any less of an export subsidy. In addition, the value of foreign direct investment in China and Chinese overseas investment (and consequently repatriation 

of profits) pales in comparison to the value of Chinese exports. In 2005, the value 

of Chinese exports was US$762 billion,5 while the value of foreign direct investment in China was only US$60.3 billion 6 and the value of Chinese overseas investment 

was just US$6.92 billion.7 Moreover, as the recent WTO Trade Policy Review of 

China explained, ‘‘FDI has served as a platform, enabling China to manufacture 

products that meet world-market specifications with regard to quality, design, and 

technological content, thereby greatly contributing to the export orientation of the 

economy.’’ 8 So, even foreign direct investment is generally oriented toward export 

production, which in turn leads to greater subsidization through China’s currency 

regime. 

In any event, it cannot be the case that a program that primarily benefits exports 

is deemed to not be an export subsidy simply because a relative handful of non-exporting enterprises also benefit. As explained, WTO case law supports this conclusion. 

E. Conclusion 

The Bacchus/Shapiro memo addresses the question of whether H.R. 1498 is consistent with the WTO Agreement. With various qualifications which recognize that 

any actual WTO challenge of any U.S. law treating China’s foreign exchange regime 

as a subsidy would be dependent on the facts of the case presented, the Bacchus/ 

Shapiro memo nonetheless draws the conclusion that such a law would likely be 

found WTO-inconsistent if challenged by China. We respectfully disagree. While we 

agree with much of the Bacchus/Shapiro memo’s review of the basic elements identified as needing to be addressed, we disagree with the conclusion drawn. As this 

memo has reviewed, WTO case law supports the view of those who support H.R. 

1498. China’s foreign exchange rate program should be viewed as a financial contribution, the resulting subsidy is tied to exports such that it is an export subsidy, 

and hence it is prohibited under the SCM Agreement, or in the least it is actionable 

and may be addressed by U.S. countervailing duty law. 

As is true with any law or regulation adopted by a WTO member government, 

no one can know with certainty that the law or regulation, if challenged at the 

WTO, will not be found to violate some aspect of a WTO Article or WTO Agreement. 

42 

The same can be said with respect to review by domestic courts of a law’s consistency with the U.S. Constitution or of a regulation’s consistency with U.S. law. The 

Bacchus/Shapiro memo acknowledges this uncertainty as do we. Such uncertainty 

by itself is not a basis to oppose legislation where existing WTO provisions and decisions provide a basis for believing that the legislative approach would be WTO-consistent. The portion of H.R. 1498 that deals with recognizing that currency manipulation is a countervailable subsidy fairly can be viewed as WTO-consistent. The concerns raised in the Bacchus/Shapiro memo are, in fact, addressable under the facts 

of the situation as they pertain to China, and as decided by adopted WTO panel 

and Appellate Body reports. 

Sincerely, 

TERENCE P. STEWART, AMY S. DWYER, J. DANIEL STIRK. 

Senator DORGAN. Without objection. 

Mr. O’SHAUGHNESSY. I am requesting Senator Schumer as well 

as Senators Rockefeller, Kerry, Cantwell, Ensign, and Smith of this 

Committee to join Senator Snowe in supporting effective trade legislation to offset currency manipulation with these amendments. 

Ladies and gentlemen, in conclusion, I feel a special trust has 

been placed in me, handed down from Paul Revere, to represent 

not only the workers in my company, but the workers throughout 

the United States, the factory workers. There is no company that 

more closely represents the interests of Main Street and factory 

workers in the USA than Revere. Please listen to us. Time is of the 

essence here as the damage to the economic structure of our Nation 

and its industrial base worsens every day and many domestic manufacturing companies cannot hold on for much longer. This sense 

of urgency is no less important to resolve tax issues as well as currency manipulation as they are related and directly linked to the 

competitive position of USA manufacturing in the world. 

Mr. Chairman, thank you for this opportunity to testify. 

[The prepared statement of Mr. O’Shaughnessy follows:] 

PREPARED STATEMENT OF M. BRIAN O’SHAUGHNESSY, CHAIRMAN, CEO, AND

PRESIDENT, REVERE COPPER PRODUCTS, INC. 

Who should America listen to for trade and tax policy? 

Three million manufacturing jobs have been lost in the USA since the year 2000. 

Some attribute it to increased productivity—but previous recoveries typically resulted in a loss of about one million jobs in spite of productivity increases. Even so, 

some economists cite data that the manufacturing sector is doing just fine as it is 

producing more than ever before. Such data is misleading and you should consider 

the source. For example, U.S. produced products include Dell computers which are 

assembled in the USA from components produced abroad. Foreign outsourcing has 

a significant impact on productivity and renders the data on productivity useless. 

Indeed, an article in Business Week describes the ‘‘Phantom GDP’’ and states ‘‘the 

growth of domestic manufacturing (and productivity) has been substantially overstated in recent years.’’ This is directly linked by Business Week to foreign 

outsourcing. 

We could argue endlessly about this but the facts are the facts and the fact is 

we have become a nation with a colossal trade deficit. 

In 2005, for the first time in over a hundred years, our Nation imported more food 

products than it exported and our trade deficit in manufactured goods continues to 

soar. Indeed, our Nation’s trade deficit is growing by $2 billion a day! Some think 

it is our country’s responsibility to support fledgling economies because we are the 

strongest, most powerful nation in the world. Some say we need to set a good example and others will follow. 

No matter how we try to rationalize it, millions of manufacturing jobs are going 

overseas. 

My company is Revere Copper Products. We were founded in 1801 by Paul Revere 

and believe we are the oldest manufacturing company in the USA. Our modern copVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00046 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75737.TXT JACKIE
43 

per rolling mill is in Rome, New York and produces copper and brass sheet, strip 

and coil. Many of our customers are located throughout the USA and use our products to manufacture industrial or consumer products. 

Since 2000, about 30 percent of the manufacturing facilities that were customers 

of this mill have shut down or moved offshore. It is easy to see for yourself if you 

simply go to any big box store and look at any item made of copper and brass. Turn 

the package over and you will likely see that the product is now made in China. 

That’s because the cost of manufacturing in China is so much cheaper, you believe. 

At least, that is what you have been told . . . 

Once you start looking at the facts, however, you will see a very different picture. 

Let’s say the production cost of a brass doorknob in China is 100 yuan. You can 

see in Exhibit 1 that if the exchange rate for converting yuan to dollars is controlled 

by the government of China at 8 yuan to $1, then the production cost is equivalent 

to $12.50. But if the exchange rate was allowed to be set by free market forces, it 

would be about 5 yuan to $1 and the production cost in China would be equivalent 

to $20. So a company that produces that doorknob for $18 in the USA is going to 

get driven out of the market and that factory in the USA is going to shut down or 

move to China. Conversely, if the yuan were to have an exchange rate based on 

market forces, U.S. companies would be competitive. 

Exhibit 1 

In other words, the government of China manipulates its currency so that it subsidizes the cost of manufacturing in China. 

The current and the former U.S. administration have refused to take any concrete 

actions against such manipulation by China and have chosen instead to jawbone. 

The problem with this approach is that currency manipulation by the Chinese Government is serving China’s strategic best interests at the expense of U.S. manufacturing and employment. 

The manipulation of its currency reduces the competitiveness of every other product, good and service in the world when compared to its production in China. 

This form of protectionism by China is reaping huge rewards as its export-based 

economy is growing 3 or 4 times faster than the rest of the world with factories 

being built at a pace beyond the imagination of anyone just a few years ago. Meanwhile, factory jobs are disappearing in the USA and throughout the rest of the 

world. Even manufacturing plants in Mexico are moving to China. 

But this is more than an economic battle. 

Did you catch the statement by Congressman Tim Ryan of Ohio concerning the 

strategic paper (‘‘Unrestricted Warfare’’) written by two Chinese military strategists? They suggested that military supremacy could be gained by undermining the 

manufacturing base of the United States by maintaining its currency at artificially 

low levels to gain an economic advantage for Chinese manufacturing and destroying 

the manufacturing base of the United States. Seems to be working, doesn’t it? 

The importance of a strong domestic manufacturing base to national security and 

national defense cannot be overstated. 

Shortly after the Revolutionary War, the U.S. Government became concerned 

about the ability of the United States to respond to a second war with the British. 

Many scoffed at such a thought but were sadly mistaken when the War of 1812 

erupted. Fortunately our forefathers had foresight. They knew that the USS CONSTITUTION would need copper sheathing to prevent barnacles from growing on its 

sides. Barnacles slow down ships and lead to time consuming maintenance on shore. 

So Paul Revere was offered a $10,000 U.S. Government loan to build a copper rolling mill. The loan was paid back when Paul Revere built the first copper rolling 


725REVER1.eps
44 

mill in the New World and rolled the copper sheets that were used to sheath the 

USS CONSTITUTION which prepared it for the War of 1812. 

Personally, I admire the Chinese culture and believe that China does not need 

such a disruptive currency policy to compete in the world given its many other advantages. The Chinese economic policy is export driven by taxing its citizens 

through currency manipulation which takes away their disposable income. A market 

driven currency exchange rate policy would drive China’s economy toward domestic 

consumption and a better life for its citizens. 

But make no mistake about it, China is waging a mercantile war on the world 

and the world is sleeping. 

Why is the world sleeping? First, we must look at the role of the multinationals. 

Remember in the 1980s when Japan was such a fierce competitor in so many U.S. 

markets? The reaction by our largest corporations was loud and largely one voice 

calling for tariffs and restraints. Contrast that with today as most of the largest 

U.S. corporations are so much more international and especially with their investments in China. Many that do not have direct investments in China buy substantial 

numbers of components from China’s factories. Many have set their strategic plans 

to produce components or products in China. 

Today, many of the largest investment banking firms in the world are 

headquartered on Wall Street but derive half or more of their income from foreign 

sources. This ranges from managing the reinvestment of U.S. dollars flowing overseas to the construction of manufacturing facilities in China. Unquestionably, they 

have become beholden to the government of China. 

It may surprise you to learn that I don’t have a problem with any company that 

sets up or finances a plant offshore or imports components or products. But if manufacturing in America must compete with the protectionist policies of any foreign government . . . that is not fair. And if meaningful corrective action by the U.S. Government is thwarted by U.S. manufacturing and investment banking firms who gain 

from such protectionism . . . that is wrong. CEOs of multinational companies are 

put in a very difficult position when considering national trade policies. 

They have to choose between their company and their country. (See Exhibit 2) 

Exhibit 2 

So who should America listen to for advice on tax and trade policy? (See Exhibit 

3.) Obviously, none of the above . . . Let me explain. Earlier I mentioned that 

China practices a policy of managing its currency at artificially low levels to gain 

a 40 percent competitive advantage for any export products or services produced in 

China. Now, you must realize a simple truth, a multinational corporation that manufactures in China and benefits significantly from this advantage doesn’t want this 

to change. 


725REVER2.eps
45 

Exhibit 3 

At a 2006 meeting of an international economic policy committee of an association 

of manufacturing companies, one domestic manufacturing company said that it buys 

components from China and does not want the currency to change. Now there’s a 

breath of honesty. Maybe not patriotic but at least he’s honest. 

Patriotic . . . why bring that word into the mix? Well, you see the strength of 

manufacturing is an inherent strength of our country. Some economists believe our 

country is in a transition from a manufacturing economy to a service economy just 

as it transitioned from an agricultural economy to a manufacturing economy years 

ago. But maybe the manufacturing economy was simply layered on top of our agricultural economy just as the service economy is layered on the manufacturing economy. And it is certainly hard to argue against the proposition that a weak manufacturing sector threatens our national security. 

Sounds like our Nation needs some advice from the real world. 

The measures that have not worked are jawboning the Chinese to change . . . you 

know, throwing adjectives and words at them ‘til they stop. The multinationals have 

endless arguments for stretching out the process like. . . . ‘‘We don’t want to start 

a trade war now, do we?’’ But we are already in a trade war, aren’t we? Of course 

we are and we are losing. We are pacifists in this war. How about this one by the 

multinationals . . . your policies are protectionist! Yes, they actually say that, can 

you imagine? Blame the victim is frequently their approach. Often the accuser benefits from China’s export subsidies which are clearly prohibited by the WTO as protectionist. 

The irony is that domestic manufacturing companies are the victims of protectionism not the benefactors. 

Another argument we hear is, ‘‘What about their fragile banking system?’’ This 

one has been around for years and of course, it is impossible to improve a banking 

system that depends on subsidies to such an extent without removing the subsidy, 

isn’t it? Besides, their banks are owned by the same government that is holding almost a trillion U.S. dollars. Maybe their banks are not quite as insolvent as you 

have been lead to believe . . . 

China’s GNP has been growing about 10 percent a year since it established a new 

system to manage its currency about 2 years ago while the U.S. economy has been 

growing about 3 percent. This alone should have translated into an appreciation of 

the yuan against the dollar of at least 5 percent a year. Since this change, however, 

the government of China has allowed its yuan to appreciate only about 4 percent 

a year, thereby exacerbating the problem. 

So, China has successfully continued to stonewall any real movement of its currency thanks, in part, to the support of some prominent multinationals and investment bankers. 

That support is manifested in U.S. trade policy which is oriented to process rather 

than results. Multinationals and investment bankers are usually results oriented 

but not when it comes to China’s currency manipulation. But then again, the delaying tactics are good results because this form of protectionism by China suits them 

just fine. At any rate, they are certainly beholden to the government of China. So 

their policy positions are in alignment with the policy of China. 

There is no easy solution to this Chinese puzzle. Even I have supported the verbal 

approach . . . for years. Our nation could simply slap a tariff on all imports from 

China but I think we must take measured concrete steps with each one increasing 


725REVER3.eps
46 

in severity. The final step would be a tariff scheduled well in advance to force China 

to end its currency manipulation. 

It is important to understand that the end of currency manipulation will not end 

the depreciation of the U.S. dollar against other currencies including China’s yuan. 

For this reason, it is difficult and perhaps impossible to develop a coherent trade 

policy to deal with China and the rest of the world without considering the tax policies of our own country. In addition to manipulating its currency, China and 138 

other countries use Value Added Taxes (VATs). VATs discriminate in favor of domestic production of goods and services. (See Exhibit 4). The USA is the only major 

trading nation which does not use VATs to protect its domestic production of goods 

and services. (See Exhibit 5). VATs are a tax but they are also a form of tariffs 

which are legally exempt from WTO rules. VAT revenues are used to lower taxes 

on jobs and help fund government programs such as national health care. 

Exhibit 4 

Exhibit 5 

How can a manufacturing facility in the USA compete with a similar facility in 

China or any other country if the U.S. facility must carry the burden of the health 

care cost of its workers and its foreign competitor does not? 

One of Revere’s largest remaining customers recently presented Revere with a 

cost comparison of sourcing centrifugal chillers from China versus the USA. Revere 

supplies copper strip for these chillers. Exhibit 6 shows how the costs would compare without the protectionist currency manipulation by China. Note that the total 

costs are about the same for both countries and indeed, if freight costs were added, 

the delivered cost to the USA of the chiller produced in China would be higher than 

the chiller produced in the USA. In Exhibit 7, the cost of the product from China 

is adjusted to reflect currency manipulation by China of 40 percent. As you can see 

in Exhibit 8, products from China also benefit from a 17 percent Chinese Government Value Added Tax or VAT rebate on export to the USA. This results in a price 

war that American factories cannot win. 


725REVER4.eps 725REVER5.eps
47 

Exhibit 6 

Exhibit 7 


725REVER6.eps 725REVER7.eps
48 

Exhibit 8 

Of course, if the U.S. producer shipped any product to China, it would be hit with 

a 17 percent VAT on entry to China. China will use revenues from that VAT tax 

to fund weapons systems and provide health care benefits for its people. Just think 

about it, the U.S. factory worker produces a product that must bear the health care 

cost of the U.S. worker and the Chinese worker he competes against in order to export. Of course, some will argue that the American worker or management is to 

blame because the product made in the USA just can’t compete because we are so 

inefficient. 

Market determined exchange rates simply put all nations back at the starting 

gate for the race to determine who will win the battle to produce competitive goods 

and services assuming all other things are equal. Of course, all other things are not 

equal and because of this our Nation’s inability to compete with China and the rest 

of the world simply means that our currency will continue to depreciate and the 

standard of living of all Americans will decline and our Nation will grow weaker. 

The loss of manufacturing jobs to date in the USA is only the tip of the iceberg. 

The impact of currency manipulation, VAT taxes and health care costs are not limited to manufactured goods. Future losses will go far beyond the continued loss of 

manufacturing jobs and extend to the agriculture, food processing and service industries. Indeed, Alan Blinder, former Federal Reserve Vice Chairman, was quoted in 

The Wall Street Journal on March 28th saying that, ‘‘. . . as many as 40 million 

American jobs (are) at risk of being shipped out of the country in the next decade 

or two.’’ 

So, the looming question is, ‘‘What should be done to counter this offensive and 

protective behavior by China and other nations?’’ 

The first step in the battle to offset currency manipulation should be to pass the 

Stabenow-Bunning-Bayh bill in the Senate and Ryan-Hunter bill in the House that 

would define currency manipulation as an illegal subsidy and allow the application 

of countervailing duties (CVDs) to offset the impact of the currency manipulation 

for companies that are being injured. 

In addition, the remedies should not be contingent on Treasury Department approval. This is the same Treasury Department that does such a good job of representing its friends on Wall Street by consistently failing to cite China for manipulating its currency. Please lead Congress to represent Main Street not Wall Street 

and factory workers in the USA not China. 

These bills are designed to be compliant with the rules of the WTO. That being 

said, if the WTO refuses for any reason to sanction the use of CVDs to offset currency manipulation, we must assume that the system that governs world trade is 

broken and must be fixed. Immediately! If the use of CVDs to offset currency manipulation does not lead China and other nations to stop manipulating their currency, 

then the USA must take increasingly stronger measures, even if it means stepping 

outside WTO rules. 

At the same time, the USA must reform its tax system and institute VATs on a 

scale that gives production of goods and services in the USA a competitive advantage. 


725REVER8.eps
49 

If you are competing with somebody else, you just don’t look at where they are. 

You try to figure out how to get ahead of them. That’s pretty simple, but that is 

how you develop a winning strategy. 

So the competitive objective should be to beat the competition, not simply match 

them. 

In order to achieve this objective, the USA should eliminate all national taxes, 

both corporate and personal, including income, dividend, capital gain, estate, FICA 

and unemployment taxes as well as lifting the burden of health care costs off employers who provide jobs. (See Exhibit 9). A new national VAT system would replace 

these costs. 

Exhibit 9 

Notice these items are referred to as costs not revenues because one must look 

at them as a burden on jobs. 

The new system should be designed to be revenue neutral for all classes. Adverse 

impacts on charitable and lending institutions need to be considered by matching 

charitable grants and providing housing subsidies which would help offset the regressive VAT system and make it fair. The regressive nature of a VAT system would 

be further offset by the provision of a national health care system funded by a VAT 

for the USA. 

This step is critical to the health of manufacturing in the USA. 

A national health care system similar to that employed by Great Britain has features that would appeal to Americans. It provides universal health care for all but 

allows any citizen to opt out to private care as long as they are willing to pay the 

cost. I am not aware of the citizens of any nation that are considering having their 

country adopt the system used in the USA which eats up twice as much GNP per 

capita and burdens the domestic production of goods and services to such an extent. 

The lack of a VAT system in the USA allows European nations to gain market 

share from the USA partially offsetting the impact of China’s manipulation of its 

currency on the production of goods and services in Europe. That’s one reason why 

Europe is less vocal about China’s mercantile war on the world. 

When Paul Revere tried to rouse the countryside with his wake up call, what did 

the people do? They certainly didn’t go back to sleep. Our nation is being destroyed 

by the international trade, tax and health care policies of our own country. We all 

need to wake up and listen. But we must be careful who we listen to . . . 

Wake Up, America! 

Senator DORGAN. Mr. O’Shaughnessy, thank you very much for 

your testimony. 

Next we will hear from Scott Paul, the Executive Director of Alliance for American Manufacturing. Mr. Paul, you may proceed. 

STATEMENT OF SCOTT N. PAUL, EXECUTIVE DIRECTOR, 

ALLIANCE FOR AMERICAN MANUFACTURING 

Mr. PAUL. Senator Dorgan, Senator DeMint, thank you for the 

opportunity to testify this afternoon on our flawed trade relationship with China. First I’d like to briefly introduce you to the Alliance for American Manufacturing. We’re a new public policy orgaVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00053 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75737.TXT JACKIE

725REVER9.eps
50 

nization formed by some of America’s leading manufacturers with 

their workers. We focus on issues like China. Our goal is singular 

in purpose. It’s to strengthen American manufacturing and therefore our economic and national security. 

Mr. Chairman, this debate, the debate on China, on trade, and 

on manufacturing, is portrayed by too many elites in a fundamentally flawed way. You’re either an enlightened free trader or a jingoistic protectionist. Trade produces many winners and a few unfortunate, unskilled losers who must be retrained for the jobs of the 

future, or so the argument goes. 

You’ll hear assertions that our trade relationship with China is 

a no-brainer and a win-win. These labels are completely inaccurate. 

It’s because our trade relationship with China is no longer a matter 

of philosophy, speculation, or forecasting, but rather one of cold 

hard facts. It’s not anti-China or protectionist to insist that we hold 

China and other trade partners accountable for the commitments 

they made to gain access to the U.S. market. In fact, it is shameful 

for anyone to suggest that a blind eye be turned to market-distorting practices that are harming America’s workers, businesses, 

farmers, and consumers. 

Our trade deficit with China was a record $233 billion last year. 

It was responsible for a staggering 42 percent of the U.S. total nonoil trade deficit. China’s exports to the United States were six 

times greater than American exports to China, as you have pointed 

out, which were $52 billion. In 2006 alone, we saw a dramatic 

surge of imports from China in nearly every category of goods. In 

steel the increase was more than 65 percent. In paper and wood 

products the increase was greater than 30 percent. Even in computer and electronic goods, the increase was more than 22 percent. 

Every day we export more know-how, jobs, technology, and intellectual property to China than high-value-added products. Some of 

our fastest growing exports to China tend to be unprocessed commodities and waste, like scrap metal. This one-way trade relationship with China has simple yet devastating consequences: lost 

American jobs and a declining American manufacturing and innovation base. Our Nation has lost more than 3 million manufacturing jobs over the past 6 years. More than 40,000 manufacturing 

facilities have shut down, largely because of import competition or 

shifts of production abroad, but certainly not as a result of productivity. 

A new study by the Economic Policy Institute helps illuminate 

the egregious impact of our lopsided trade relationship with China. 

The report, ‘‘Costly Trade With China,’’ concludes that the trade 

deficit with China has displaced 1.8 million American jobs since 

China joined the WTO in 2001. Dr. Robert E. Scott, the report’s author, found that jobs were displaced in every state as well as the 

District of Columbia and that nearly three-quarters of the job 

losses were in manufacturing industries. 

The study is critical because it is one of the few that looks at the 

entire trade picture, that is both imports and exports, and their 

consequences for employment. 

Due to our trade deficit with China, states like New Hampshire 

and North Carolina lost at least 2 percent of their overall employment, while California shed an estimated 269,300 jobs and South 

51 

Carolina an additional 29,900 jobs. In state after state the story is 

the same. The losses from opening up trade with China have far 

outweighed the gains for American workers and manufacturers. 

What has gone wrong? Dr. Peter Navarro of the University of 

California at Irvine has documented the systematic undercutting of 

prices by China, which has allowed its producers to establish a 

dominant position in the manufacturing of many consumer goods 

as well as strategic materials. Professor Navarro estimates that 

lower labor costs, which include some labor market forces but also 

widespread artificial factors, including the nonenforcement of wage 

laws and migration restrictions, account for nearly 40 percent of 

the price advantage. 

Export subsidies, which are illegal under the WTO, account for 

an additional 17 percent of the price advantage. Undervalued currency, the product of government manipulation, which is illegal 

under our trade laws, accounts for an additional 11 percent price 

advantage. Counterfeiting and piracy add 9 percent and lax labor, 

environmental, health and safety regulations contribute an additional 5 percent to the price advantage and have made product 

safety a key issue that must be addressed to safeguard American 

consumers. 

It is well documented that China continues to follow a policy of 

export-led growth to buildup its own manufacturing base at the expense of other countries. Almost 60 percent of Chinese exports 

come not from Chinese firms, but from foreign-invested enterprises. 

Many of these multinational companies set up operations hoping to 

serve the Chinese market, only to face a web of policies and practices to limit the opportunities there, instead finding incentives to 

export back to the United States. 

In industries ranging from telecommunications to steel to machinery and many others, China’s leaders have made it clear that 

the state will continue to exert its control, making it virtually impossible for American firms to compete against massive governmental subsidies. 

American company after company has been adversely affected by 

a Chinese government policy that simply needs to be described for 

what it is, cheating. China must be held accountable. It agreed to 

certain conditions when it joined the WTO, but time after time it 

has refused to grant the kind of access to its markets that we provide to it and it has engaged in unfair and predatory practices to 

increase its exports. Subsidies, dumping, currency manipulation, 

violation of labor rights, and lax or nonexistent environmental enforcement are just some of the egregious practices that must be addressed. 

But that is only half the story. The inability and in many cases 

the unwillingness of the trade bureaucracy in Washington to enforce current trade laws with respect to China has allowed the deck 

to be stacked against U.S. manufacturers and workers. The rules 

of international trade are just that, rules, not suggestions. Unfortunately, they haven’t been treated that way. Quite literally, these 

laws—and President Hoffa mentioned this as well—including our 

antidumping and countervailing duty laws—when enforced can 

level the playing field. These laws must be aggressively deployed 

52 

and appropriately enhanced to ensure that our workers and firms 

have the opportunity to benefit in the global marketplace. 

As the debate on China and trade policy continues this summer, 

I’d urge you not to lose sight of the stark reality that U.S. manufacturers and workers face when trade laws are not enforced. A 

study we released in May entitled ‘‘Enforcing the Rules’’ found 

that, for instance, from 2001 to 2003 American furniture manufacturers lost $333 million in revenue as a result of wooden bedroom 

furniture dumped into the U.S. market from China. Producers and 

workers in industries as diverse as steel, ball bearings, cement, 

shrimp, raspberries, semiconductors, and honey were all harmed by 

unfair and illegal foreign trade practices and lost billions upon billions of dollars. 

The study concluded that there is a 50 to 1—that’s 50 to 1—economic advantage to enforcing trade rules. The economic losses suffered by communities battered by unfair trade more than offset any 

minimal consumer gains that result from dumping products at 

below cost on the U.S. market. 

The time is long overdue for the U.S. to enforce our trade laws 

and to hold China accountable for its unfair trade practices. It’s 

time for trade officials to stand up for American workers and 

American manufacturers. 

Mr. Chairman, we look forward to working with you to hold the 

Chinese government accountable for its unfair trade practices so 

that our workers and manufacturers will continue to have the opportunity to strengthen the American economy. Thanks for allowing me to testify today. 

[The prepared statement of Mr. Paul follows:] 

PREPARED STATEMENT OF SCOTT N. PAUL, EXECUTIVE DIRECTOR, 

ALLIANCE FOR AMERICAN MANUFACTURING

Mr. Chairman and distinguished Members of the Subcommittee, I commend you 

for taking the time to study America’s trade relationship with China and thank you 

for inviting me to testify on behalf of the Alliance for American Manufacturing. I 

am honored to be before this Subcommittee to discuss an issue of such importance 

to our economy and our national security. 

First, I would like to introduce the Alliance for American Manufacturing (AAM) 

and our perspective on this topic. We are a new partnership formed by some of 

America’s leading manufacturers and their workers to explore challenging public 

policy topics such as trade, health care, retirement, energy, currency valuation, and 

other issues of mutual concern. AAM works in a cooperative, non-partisan way, 

bringing together labor and management, Democrats, Republicans and independents, to work for one goal: strengthening American manufacturing and therefore bolstering our Nation’s economic and national security. Our mission is to provide policymakers like you with useful analysis of the issues, as well as innovative policy 

ideas to move us toward effective solutions. 

With respect to trade and currency, conscious policy choices and crimes of omission—like the unwillingness of our trade bureaucracy and the World Trade Organization (WTO) to enforce the rules of trade or to apply new ones that were never 

negotiated—are damaging U.S. workers and businesses in every state in the Nation. 

Our nation has lost more than 3.2 million manufacturing jobs over the past 6 years. 

More than 40,000 manufacturing facilities have shut down nationwide; our annual 

trade deficit stands at more than $764 billion. 

The largest single source of our trade woes is China. China’s trade surplus was 

responsible for a staggering 42 percent of the United States’ total, non-oil trade deficit last year. Our trade deficit with China skyrocketed for the sixth consecutive 

year in 2006, reaching a record high of nearly $233 billion. China’s exports to the 

United States were six times greater than American exports to China, which were 

only $52 billion. 

53 

In just the past year, we have seen a dramatic surge of imports from China in 

nearly every category of goods. In steel, the increase is more than 65 percent; in 

paper and wood products, greater than 30 percent; and in computers and electronic 

goods, over 22 percent. Every day, we export more ‘‘know-how,’’ jobs, technology and 

intellectual property to China than high-value added products, which we depend on 

for good jobs and strong economic growth. Some of our fastest-growing exports to 

China tend to be unprocessed commodities and waste like scrap metal. The truth 

is, if you removed the names of the countries and looked only at the underlying 

trade data, you might assume that the United States was the low-cost, industrializing economy and China was the powerful economic engine. 

The consequences of illegal trade practices to American manufacturers and workers are severe. For example, research conducted for AAM found that from 2001 to 

2003 American furniture manufacturers lost $333 million in revenue as a result of 

wooden bedroom furniture being dumped into the U.S. market from China. 

A new study by the Economic Policy Institute helps illuminate the egregious impact of this lopsided trade relationship. The report, ‘‘Costly Trade with China,’’ concludes that the trade deficit with China has displaced 1.8 million American jobs 

since China joined the WTO in 2001. Dr. Robert E. Scott, the report’s author, found 

that jobs were displaced in every state and the District of Columbia, and nearly 

three-quarters of those jobs were in manufacturing industries. The study is important because it is one of the few that looks at the entire trade picture. It estimates 

the labor that would be required to produce a given volume of exports, and the labor 

that is displaced when a given volume of imports is substituted for domestic output. 

The job losses in the study represent an estimate of what employment levels would 

have been in the absence of our growing trade deficit with China. 

Due to our trade deficit with China, New Hampshire and North Carolina have 

lost at least 2 percent of their states’ employment while California shed an estimated 269,300 jobs. In state after state, the story is the same: there may be scattered success stories of exporting to China, but trade can both create and destroy 

jobs, and the losses from opening up trade with China have far outweighed the 

gains for American workers and manufacturers. 

The flood of subsidized imports from China, aided by currency manipulation by 

the Chinese government, has denied American workers the opportunity to continue 

their own manufacturing careers, and has denied their children the opportunity for 

a future career in manufacturing of their own. While many of these workers are 

able to find new jobs, more than one-third of workers displaced from manufacturing 

do not. Workers who have lost their manufacturing jobs due to international trade 

are able to find employment only in lower-paying industries, often without many of 

the health and retirement benefits offered by manufacturing. 

In industries as diverse as agriculture, computer chips and other high-tech goods, 

strategic materials, steel, and many, many others, American businesses and workers—who are highly productive and efficient—are facing a torrent of subsidized 

products made by workers in China who are paid artificially low wages in deplorable conditions. There is nothing free about that sort of trade. American workers 

and businesses need rules that are fair to everyone, and they need those rules enforced. 

The sheer size and structural nature of this trade deficit with China raises serious 

questions about its causes, including to what extent the deficit is driven by Chinese 

government interventions in its own economy. In particular, China maintains numerous policies including state-sponsored subsidies aimed at promoting investment, 

exports and employment. Those policies have a direct role in increasing the U.S.- 

China trade imbalance and negatively affect the well-being of our domesticallybased manufacturers, service providers and farmers. 

Dr. Peter Navarro of the University of California at Irvine has documented the 

systematic undercutting of prices by China, which has allowed its producers to establish a dominant position in the manufacturing of many consumer goods and some 

strategic materials. Professor Navarro estimates that lower labor costs, which include legitimate labor market factors as well as widespread artificial factors including non-enforcement of wage laws and migration restrictions—account for nearly 40 

percent of the advantage. Export subsidies—illegal under the WTO—account for 17 

percent. Undervalued currency, the product of government manipulation illegal 

under trade laws—accounts for an additional 11 percent. Counterfeiting and piracy 

add 9 percent and lax environmental, health and safety regulations contribute an 

additional 5 percent. 

Is this the free market at work? Of course not. It is a deliberate strategy on the 

part of China’s government to grow its economy, providing incentive for many of the 

world’s manufacturers to shift their production to China. When China became a 

member of the WTO, proponents argued just the opposite: that it would herald in 

54 

a new age of opportunity and expand market opportunities for American companies. 

Unfortunately, China continues to follow a policy of export-led growth to build up 

its own manufacturing base at the expense of other countries. Almost 60 percent 

of China’s exports come not from Chinese firms, but from foreign-invested enterprises. Many of these companies set up operations hoping to serve the Chinese market, only to face a web of policies and practices to limit their opportunities there, 

instead finding incentives to export their products back to their home countries or 

other markets. 

Just a few months ago, the director of the Chinese Government’s State-owned Assets Supervision and Administration Commission (SASAC), announced a new policy 

that raises serious questions of governmental control, involvement and intervention 

in a number of major industries. In industries ranging from telecommunications to 

steel to machinery and many others, China’s leaders have made it clear that the 

state will continue to exert its control, making it virtually impossible for American 

firms to compete. 

China also has provided massive subsidies to its companies to give them an advantage over our farmers, workers and businesses trying to sell their products to 

China, at the same time China is flooding our market with its products. American 

company after American company has been adversely affected by a Chinese government policy that simply needs to be described for what it is: cheating. 

China needs to be held accountable. It agreed to certain conditions when it joined 

the WTO but, time after time, it has refused to grant the kind of trade access to 

its markets that we provide to it and it has engaged in unfair and predatory practices to increase its exports. The result is one way free trade and, as noted above, 

skyrocketing trade deficits. Subsidies, dumping, currency manipulation, violation of 

labor rights, and lax or nonexistent environmental enforcement are just some of the 

egregious practices that must be addressed. 

It is regrettable that the choices on trade with China are often presented to you 

as absolutes: you are an enlightened ‘‘free trader’’ who wants to engage China, or 

you are a jingoistic ‘‘protectionist’’ who seeks to shore up unproductive industries. 

These labels are not helpful and they are not accurate. In fact, they needlessly cloud 

the debate on China. America is demanding action on China; the calls for a Congressional response are coming from Red States and Blue States, from groups who 

have supported free trade agreements, as well as those who have opposed them, and 

from Senators and Representatives who supported permanent Normal Trade Relations with China, as well as those who opposed it. Our trade relationship with 

China is no longer a matter of philosophy, speculation and forecasting, but rather 

one of cold, hard facts. 

In an era when we expect increased accountability from our own government, it 

is disgraceful for anyone to suggest that a blind eye should be turned to international trade violations that are contributing to an enormous loss of American jobs 

and income. Now, as the Congress is considering measures to strengthen trade enforcement, is the perfect time for Congressional consideration of appropriate interventions. 

To ensure that American manufacturers and workers have the same opportunity 

as their competitors in the global marketplace, Congress must exercise the responsibility given to it under Article 1, Section 8 of the Constitution, and ensure that 

international commerce is appropriately regulated. The Alliance for American Manufacturing commends the Chairman and the Subcommittee for being at the forefront 

of these efforts. 

Congress and the Administration have some tools already at their disposal to ensure that businesses operating in the United States and in China have the same 

opportunity to compete. Quite literally, our trade laws—including anti-dumping and 

countervailing duty laws—when enforced, level the playing field and allow individual companies, farms and even whole industries in America to remain competitive. We believe those trade laws should be steadfastly maintained, appropriately 

strengthened, and aggressively deployed. 

Some critics argue, however, that these trade laws are shortsighted in this era 

of globalization and that the end results of these laws are limits on consumer choice 

and thus higher prices. When China’s illegal practices have been challenged, alarm 

bells have been rung by those who fear escalation into a ‘‘trade war’’ whose victims 

will be American consumers. 

Those fears are unfounded. 

The Alliance for American Manufacturing’s ‘‘Enforcing the Rules’’ study concludes 

that when our trade laws are enforced, our workers, communities and businesses 

are able to contribute 50 times more to the economy than any resulting increase 

in consumer prices. 

55 

The reality is that enforcing the law works. Imposing clear and direct penalties 

on China for illegal activities is vital to ensuring that we all have the same opportunity to benefit in the global economy. The rules of international trade are just 

that—rules, not suggestions. The time is long overdue for the United States to enforce our trade laws and hold China accountable for its unfair trading practices. It 

is time to stand up for American workers and American manufacturers. Americans 

should expect—and deserve—nothing less. 

The continued inability and sometimes the unwillingness of policymakers in 

Washington to enforce current trade laws have allowed the deck to be stacked 

against American manufacturers and workers in too many cases. The Chinese government is clearly violating scores of its WTO commitments without facing any real 

consequences in most cases. As a result, our manufacturers are often forced to play 

by a different set of rules than their competitors. 

The Commerce Department has correctly allowed countervailing duty laws to be 

applied to non-market economies such as China, which may lead to some relief for 

American paper producers who have been devastated by illegal subsidies. The Administration has initiated dialogues with China on steel and currency and cases at 

the WTO on some Chinese subsidies and its theft of some intellectual property. 

These are important and significant first steps, but the size and scope of the issues 

I have mentioned demonstrates the urgent need to do more. 

Every nation in the world faces similar challenges from China, but nearly all of 

our industrialized competitors have managed to maintain an overall balanced current account. Germany, Japan, Korea, Brazil and other industrialized nations understand the importance of a strong and growing manufacturing base. So should we, 

before it is too late. 

Manufacturing has been the engine that drives the American economy for more 

than a hundred years, and it will continue to be well into the 21st Century. 

Manufacturing in the United States generates about $1.4 trillion, or 12 percent 

of our gross domestic product. 

Manufacturing is responsible for nearly two-thirds of private sector research and 

development in the United States. Nearly 80 percent of all patents filed in the 

United States originate in the manufacturing sector. 

Over the past two decades, manufacturing productivity has increased at twice the 

rate of the rest of the private sector. 

Manufacturing is a vital part of the economies of most states. As a share of gross 

state product (GSP), manufacturing in 2001 was among the three largest privateindustry sectors in all but ten states and the District of Columbia. Manufacturing 

is the largest sector in ten states and in the Midwest region as a whole. It is the 

second largest in nine states and the third largest in 21 others. 

Manufacturing directly employs 14 million Americans and supports eight million 

more. Each manufacturing job supports anywhere between four and seven other 

jobs, providing a boost to local economies. For example, every 100 steel or every 100 

auto jobs create as many as 700 new jobs in the rest of the economy. This contrasts 

with the retail sector, where every 100 jobs generate 94 new jobs elsewhere, and 

the personal and service sectors, where 100 jobs create 147 new jobs. This multiplier 

effect reflects how manufacturing’s linkages run deep into the economy, providing 

the means that translate improvements in manufacturing productivity to the economy as a whole. 

We depend on domestic manufacturing to supply our advanced materials for 

equipment like the Joint Strike Fighter, the Bradley Fighting Vehicle, the Abrams 

Tank, and our naval fleet. If we continue to lose our manufacturing base, our Nation’s military could lose its primary source of strategic resources, and we as a nation would become dangerously dependent upon foreign sources of supply. 

The Congress and the American people have become all too aware of the limitations that dependency on foreign sources of energy creates for foreign policy and national security purposes; it makes no sense to exacerbate that problem by depending 

on China and other nations to supply our critical defense needs. Just as our Nation 

is seeking to achieve energy independence from the Middle East, we also should 

avoid becoming more dependent on others to supply our national and homeland defense needs. 

Our Nation’s flawed trade relationship with China unquestionably contributes to 

the anxiety and uncertainty many Americans feel about their jobs, their future, and 

perhaps most importantly for them, their children’s future. An effective and meaningful change in trade policy with China can make a difference to the American people in the following ways: 

• Whether tomorrow brings the layoff notice or the productivity bonus; 

56 

• Whether their community has a top-notch public school, or one that is struggling to keep it doors open because the town’s factory—its largest source of tax 

revenue—shut down and shifted production to the People’s Republic of China; 

• Whether the jobs of the future for their children will be flipping burgers or careers in nanotechnology and advanced manufacturing; and 

• Whether their nation will have an industrial base that can supply the critical 

materials that allow us to defend our nation, or if we will be forced to depend 

on the goodwill of other nations to do that for us. 

AAM believes that America’s leadership in the information age does not mean 

that we have to accept defeat when it comes to manufacturing and our trade relationship with China. On the contrary, the nation that has the ideas and innovation, 

as well as cutting-edge technology and manufacturing, is the nation that will win 

the global economic battles of the future. That is why we look forward to working 

with you to ensure that our nation puts into place policies that will allow manufacturing to thrive well into the 21st century. America’s future growth, security and 

leadership in the global economy will depend on the strength and viability of our 

manufacturing base. 

Contrary to popular misconceptions, the industrial age is not over. In fact, just 

the opposite is true. From nanotechnology and robotics to lasers and biotechnology, 

we are on the cusp of incredible advances in manufacturing. America must be the 

nation that leads the world into the next stages of development. Manufacturing is, 

and will continue to be, an integral part of the ‘‘new economy.’’ With manufacturing, 

the new economy will thrive. Without manufacturing, much of this new economy 

would not even exist. Federal Reserve Chairman Ben Bernanke recognized this fact 

on February 28 when he said, ‘‘Our economy needs machines and new factories and 

new buildings and so forth in order for us to have a strong and growing economy.’’ 

Mr. Chairman and Members of the Subcommittee, we respectfully urge you to enforce our trade laws and hold China accountable for its unfair trade practices so 

that our workers and manufacturers will continue to have the opportunity to 

strengthen the American economy. Thank you again for the opportunity to testify 

today. I am happy to answer any questions you may have. 

Senator DORGAN. Mr. Paul, thank you very much. 

Finally, we will hear from Robert Nichols, who is President and 

Chief Operating Officer of the Financial Services Forum. Mr. Nichols, welcome. You may proceed. 

STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND COO, 

THE FINANCIAL SERVICES FORUM 

Mr. NICHOLS. Thank you. Chairman Dorgan and Ranking Member DeMint, thanks for the opportunity to participate in this important hearing. I appreciate your leadership and attention to these 

timely issues. 

The emergence of China will not only be one of the notable economic stories of the 21st century, but one of the more significant 

events in economic history, with profound implications for U.S. economic growth and job creation. Given the reality of China’s continued emergence, the task before Congress and other key U.S. policymakers is to ensure that America participates constructively in 

China’s development so that this event takes place on terms that 

work for America, our producers, our workers, and our consumers. 

The Financial Services Forum is strongly of the view that a more 

open, competitive and effective Chinese financial sector is a prerequisite if China is to achieve its own economic goals, but, more 

importantly, if the issues that have complicated the U.S.-China economic relationship, particularly the need for further currency reform and the trade imbalance, are to be successfully addressed. 

Thus my comments today will focus on the importance of market 

access and the benefits that market access of U.S. financial services firms will bring here to America. 

57 

Mr. Chairman, the rate of China’s expansion and the impact of 

its integration into the global trading system are quite singular in 

the history of the world’s economy. A couple of data points to underscore that observation. One, their economy has grown at an average annual rate of better than 9 percent for the last 2 decades. 

As recently as 1999, China was the world’s seventh largest economy. Senator DeMint, as you noted, it is now the world’s fourth 

largest, likely to overtake Germany as the third largest perhaps 

later this year. If their growth rate is maintained, China could pass 

Japan as the world’s second largest economy by 2020. And of 

course, today the U.S. and China already account for half the 

world’s economic growth. 

Additionally, since China joined the WTO in 2001 trade between 

the U.S. and China has nearly tripled. Exports to China have 

grown at roughly five times the pace of U.S. exports to the rest of 

the world and China has risen from our ninth largest export market to our fourth largest. 

China’s continued economic development is important for the 

U.S. economy in that a growing, more diversified Chinese economy 

that emphasizes a more active Chinese consumer is more stable, 

less dependent on exports, more in keeping with China’s responsibilities in the global trading system, and, tremendously important, as an ever-expanding market for American-made products 

and services. 

But if China’s economy is to continue growing and diversifying 

and in doing so serving as an ever-increasing source of U.S. economic growth and job creation, it needs a more open, modern, and 

effective financial system. Unfortunately, Mr. Chairman, at present 

China’s non-modern and ineffective financial system represents 

perhaps the greatest threat to their continued development. 

I’ll expand a little more on the point I noted earlier, namely that 

a more effective and efficient financial sector in China lays the 

groundwork to successfully addressing the issues that have complicated and provided significant friction in the U.S.-China economic relationship, chief among them the need for further currency 

reform and meaningfully reducing the trade imbalance. 

Regarding the currency, Chinese authorities have repeatedly argued that an immediate shift to a fully market-determined yuan is 

very difficult, given the underdeveloped state of their capital markets. More specifically, Chinese banks, securities firms, and other 

businesses lack the expertise to develop and trade derivatives and 

other structured instruments used to hedge the risk associated 

with greater currency volatility. Sophisticated derivative products 

and hedging techniques provided by foreign financial services firms 

would clearly diminish such concerns. 

Turning to the trade deficit, reorienting the financial habits of 

China’s population to achieve a better balance between savings and 

consumption while progressively bringing more than a billion Chinese into the global economy, which is roughly a fifth of the world’s 

population which is not participating in the global economy, in our 

view is the most powerful remedy for the U.S.-China trade imbalance. 

Chinese households, Mr. Chairman, historically save from a third 

to as much as half of their income, as compared to the single digit 

58 

1 American Bankers Association, American Council of Life Insurers, American Insurance Association, The Council of Insurance Agents & Brokers, The Financial Services Forum, The Financial Services Roundtable, Investment Company Institute, and the Securities Industry and Financial Markets Association. 

savings rates here in the U.S. and in Europe. This pronounced propensity to save is related to the declining role of the state and the 

fact that most Chinese depend on their families and private savings to pay for retirement, health care, and the economic consequences of accidents or disasters. 

Activating the Chinese consumer requires the availability of financial products and services that we in this room take for granted: personal loans, credit cards, mortgages, 401K’s, pensions, and 

life, property, health insurance products that will eliminate the 

need for such precautionary savings and facilitate consumption. We 

want to get into that market to provide those. 

Mr. Chairman, the fastest way for China to develop the modern 

financial system it needs to achieve more sustainable economic 

growth, allow for a more flexible currency, and increase consumer 

consumption is to import it, that is by opening its financial sector 

to greater participation by foreign financial services firms. By providing the financial products and services that China’s citizens and 

businesses need to save, invest, insure against risk, raise standards 

of living and consume at higher levels, foreign financial institutions, including U.S. providers, would help create what every U.S. 

manufacturer, exporter, and service provider wants—a China that 

is less dependent on exports, more consumption-driven, and therefore an enormously important and ever-expanding market for 

American products and services. 

Thank you very much for the opportunity to testify. 

[The prepared statement of Mr. Nichols follows:] 

PREPARED STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND COO, 

THE FINANCIAL SERVICES FORUM

Introduction 

Chairman Dorgan and Ranking Member DeMint, thank you for the opportunity 

to participate in this important hearing on the impact of U.S.-China trade relations 

on American manufacturers, consumers, and workers. The emergence of China will 

not only be one of the great economic stories of the 21st century, but one of the most 

significant events in economic history. The integration of a fifth of the world’s population into the global economy—not overnight, but over time—has truly profound 

implications for U.S. economic growth and job creation. Given the reality and inevitability of China’s continued emergence, the task before Congress and other U.S. 

policymakers is to ensure that America participates constructively in China’s development, and in ways that work for American producers, workers, and consumers. 

I am here as President and Chief Operating Officer of the Financial Services 

Forum. The Forum is an association comprising the Chief Executive Officers of 20 

of the largest and most diversified financial institutions with business operations in 

the United States. The Forum works to promote policies that enhance savings and 

investment and that ensure an open, competitive, and sound global financial services marketplace. As a group, the Forum’s member institutions employ more than 

1.5 million people and hold combined assets of more than $12 trillion. 

In addition to our other activities, the Forum is also the chairing organization of 

the ENGAGE CHINA coalition—a partnership among eight financial services trade 

associations united in our view that active engagement with China remains the 

most constructive means of ensuring that our two nations mutually benefit from our 

growing economic relationship.1 More specifically, the coalition is strongly of the 

view that a more open, competitive, and effective Chinese financial sector is a prerequisite if China is to achieve its own economic goals, and if the issues that have 

complicated the U.S.-China economic relationship—particularly further currency reVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00062 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75737.TXT JACKIE
59 

2See ‘‘China Growth Revs Faster, Escalating Policy Pressure,’’ The Wall Street Journal, July 

20, 2007. 3See ‘‘China’s GDP Poised to Top Germany’s as Power Shift Speeds Up,’’ The Wall Street 

Journal, July 16, 2007. 

form and the trade imbalance—are to be satisfactorily addressed. I’ll have more to 

say on this topic in a few moments. 

Importance of China to the Global and U.S. Economies 

The 20 member CEOs of the Financial Services Forum meet twice a year, our 

most recent meeting occurring this past April. At each meeting, we conduct a survey 

regarding our members’ outlook on the U.S. and global economies. As part of the 

survey, we ask our CEOs to rate a number of factors, including technological innovation, improved education, freer and more open trade, and growth in a number of 

regions around the world, to reflect their likely contribution to global economic 

growth over the next decade. Our CEOs have consistently rated China as the single 

most important source of growth for the global economy. 

Mr. Chairman, the rate of China’s expansion and the impact of its integration into 

the global trading system are unprecedented in the history of the world’s economy. 

As recently as 1999, China was the world’s 7th largest economy. China is now the 

world’s 4th largest economy and will likely overtake Germany as the 3rd largest 

later this year.2 Government figures released last week showed that China’s economy expanded at an annualized rate of 11.5 percent in the first half of 2007, its 

fastest rate of growth since 1994. China has grown at an average annual rate of 

better than 9 percent for two decades. If such growth is maintained, China could 

surpass Japan as the world’s second largest economy by 2020.3 Together, the United 

States and China already account for half of the world’s economic growth. 

China’s emergence is also stimulating growth and job creation in the United 

States. Since China’s joined the World Trade Organization (WTO) in December of 

2001, trade between the United States and China has nearly tripled, exports to 

China have grown at five times the pace of U.S. exports to the rest of the world, 

and China has risen from our 9th largest export market to our 4th largest. 

It’s important to point out that as staggering as these figures are, they represent 

only the beginning of China’s eventual impact. Nearly all of China’s economic activity is currently centered in the large, industrialized cities of China’s eastern coast, 

and involves only about 35 percent of China’s 1.3 billion people. More than 800 million people in China’s central and western interior—an eighth of the world’s population—are poor subsistence farmers, completely unengaged in the global economy. 

Even the 500 million people who live in China’s eastern cities, produce its manufactured goods, and comprise China’s rapidly growing middle and affluent classes have 

so far had a somewhat muted impact on the global economy. 

This is because Chinese households historically save anywhere from a third to as 

much as half of their income, as compared to single-digit savings rates in the United 

States and Europe. This pronounced propensity to save is related to the declining 

role of the state and the fact that most Chinese do not have access to the financial 

products and services that we take for granted—mortgages, 401ks, pensions, credit 

cards, and life, property, and health insurance products—that would help them 

save, borrow, invest, insure against risk, and, therefore, consume at higher levels. 

If China’s economy continues to grow and diversify, and if greater availability to 

a wider range of modern financial products and services helps to eliminate the need 

for such ‘‘precautionary savings,’’ China’s 1.3 billion potential consumers will begin 

to consume at more normal levels, with profound implications for global economic 

growth and job creation, as the following comparison demonstrates: 

Last year, the United States exported to Japan goods and services worth $60 billion—approximately the same amount exported to China ($55 billion). But China’s 

population of 1.3 billion is ten times Japan’s population of 127 million. In per capita 

terms, therefore, China consumed one-tenth the amount of American goods and 

services as Japan. If China’s citizens were to eventually consume American-made 

goods and services at the same rate that Japan’s citizens did last year, the United 

States would export more than $600 billion worth of goods and services to China, 

11 times what America exported to China last year, an amount equivalent to 5 percent of America’s GDP, and more than twice what we imported from China last 

year—replacing the trade deficit with a significant surplus. 

China’s Growth has Created Challenges—for China and the United States 

Despite China’s remarkable economic development over the last 25 years, the 

structure and pace of its economic growth has produced significant problems, both 

economic and social. The country’s fixed investment- and export-driven developVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00063 Fmt 6633 Sfmt 6621 S:\GPO\DOCS\75737.TXT JACKIE
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4 According to an unpublished report by the World Bank that has been shared with the Chinese government, from 2001 to 2003, as China’s economy expanded by nearly 10 percent a year, 

average incomes of the poorest 10 percent of Chinese households fell by 2.5 percent. See ‘‘In 

China, Growth at Whose Cost,’’ The Wall Street Journal, November 22, 2006. 5See Wen Jiabao, closing speech at the Specialized Research Course for Province-Level Cadres 

on ‘‘Establishing and Implementing a Scientific Developmentalist Viewpoint,’’ February 21, 

2004. 6The Five-Year Plan, the 11th since 1953, was approved by the fifth plenary session of the 

16th Communist Party Central Committee in October of 2005 and ratified by the National People’s Congress this past spring. 

ment—more factories to produce more goods for world markets—has left China vulnerable to economic slowdown elsewhere in the world (particularly in the United 

States), and to rising energy, materials, and labor costs. The manufacturing and export focus of the economy has also led to widening disparities between rich and 

poor, made worse by the closing or privatization of state-owned enterprises, which 

had provided most healthcare services in China. There are, in effect, two Chinas— 

a wealthy elite and a developing middle class along the coast, and the 800 million 

poor in the central and western interior.4 The worsening wealth gap and the resulting social dichotomy have led to increasing political instability. Reports indicate that 

as many as 100 significant incidents of protest occur in China every day. 

Almost immediately after assuming leadership at the 16th Chinese Communist 

Party Congress in 2002, President Hu Jintao and Premier Wen Jiabao sought to distinguish themselves as the ‘‘putting-people-first administration.’’ They also articulated the notion of a ‘‘scientific viewpoint of development,’’ by which economic 

growth is to be balanced with social priorities such as a more equitable distribution 

of income, poverty reduction, education, improved medical care, and environmental 

protection.5 Such adjustments were necessary, according to the new leadership, to 

establish a more sustainable course for China’s long-term economic growth and to 

achieve a more ‘‘harmonious’’—which is to say, a more equitable and stable—society. 

These priorities became the framework of China’s 11th Five-Year Plan,6 which 

broadens China’s development policy beyond simply promoting rapid economic 

growth to include a clear emphasis on ‘‘common prosperity’’—that is, an effort to extend westward the economic gains enjoyed principally in China’s east coast urban 

areas. The Five-Year Plan seeks to address the twin problems of an economy perceived as being too dependent on external demand and the social consequences of 

the widening wealth gap by: (1) maintaining high rates of growth and job creation; 

(2) encouraging a structural shift from industry to services; (3) promoting the development of domestic consumer demand; (4) reducing poverty; and, (5) ensuring a 

more equitable distribution of opportunity and prosperity. 

It is important to note that each of these goals is utterly aligned and consistent 

with the interests of the U.S. economy and working Americans. A growing, more diversified Chinese economy that emphasizes a more active Chinese consumer is more 

stable, less dependent on exports, more in keeping with China’s responsibilities in 

the global trading system, and an enormously important and ever expanding market 

for American-made products and services. 

But if China is to achieve these ambitious economic goals—and, in doing so, serve 

as an ever-increasing source of U.S. economic growth and job creation—it needs an 

open, modern, and effective financial system. Unfortunately, Mr. Chairman, at 

present, China’s primitive and ineffective financial system represents perhaps the 

greatest threat to the continued growth and diversification of the Chinese economy. 

Critical Importance of Financial Sector Reform in China 

Capital is the lifeblood of any economy’s strength and well-being, enabling the investment, research, and risk-taking that fuels competition, innovation, productivity, 

and prosperity. The financial system can be thought of as an economy’s cardiovascular system—the institutional and technological infrastructure for the mobilization and allocation of the economy’s lifeblood, investment capital. 

As a financial sector becomes more developed and sophisticated, capital formation 

becomes more effective, efficient, and diverse, broadening the availability of investment capital and lowering costs. A more developed and sophisticated financial sector 

also increases the means and expertise for mitigating risk—from derivatives instruments used by businesses to avoid price and interest rate risks, to insurance products that help mitigate the risk of accidents and natural disasters. Finally, the 

depth and flexibility of the financial sector is critical to the broader economy’s resilience—its ability to weather, absorb, and move beyond the inevitable difficulties and 

adjustments experienced by any dynamic economy. For all these reasons, an effective, efficient, and sophisticated financial sector is the essential basis upon which 

the growth and vitality of all other sectors of the economy depend. It is the ‘‘force 

61 

7See ‘‘Putting China’s Capital to Work: The Value of Financial System Reform,’’ by Diana 

Farrell, Susan Lund, and Fabrice Morin, The McKinsey Global Institute, May 2006. 

multiplier’’ for progress and development, amplifying and extending the underlying 

strengths of a growing economy. 

Given the unique and critical role an effective and efficient financial sector plays 

in any economy, reform of China’s financial sector is a prerequisite to China achieving its own economic goals. Financial sector reform is also a prerequisite to meaningfully addressing issues that have complicated the U.S.-China economic relationship, particularly greater currency flexibility and reducing trade imbalances. 

Achieving China’s Economic Priorities 

• Maintaining High Rates of Growth and Job Creation: Maintaining exceptional 

rates of economic growth and job creation in China increasingly depends on an 

effective system for mobilizing investment capital. At present, China’s weak 

banking system intermediates nearly 75 percent of the economy’s total capital, 

compared to about half in other emerging economies and less than 20 percent 

in developed economies. Despite some improvements in recent years, Chinese 

banks’ credit analysis, loan pricing, risk management, internal controls, and 

corporate governance practices remain inadequate. Meanwhile, China’s equity 

and bond markets are among the smallest and least developed in the world. 

More fully developed capital markets would provide healthy competition to Chinese banks and facilitate the development and growth of alternative retail savings products such as mutual funds, pensions, and life insurance products. And 

by broadening the range of funding alternatives for emerging companies, more 

developed capital markets would greatly enhance the flexibility and, therefore, 

the stability of the Chinese economy. 

• Shifting from a Manufacturing-for-Export to a Services-Based Economy: Facilitating China’s desired transition to a more services-based economy will require 

that competitively priced capital and credit be channeled to the most promising 

emerging service businesses, and that the array of financial products and services emerging businesses require—loans, letters of credit, accounts management 

services, asset management, and insurance products—be made available. 

• Activating the Chinese Consumer: Activating the Chinese consumer requires the 

availability of financial products and services—personal loans, credit cards, 

mortgages, pensions, insurance products, and insurance intermediary services— 

that will eliminate the need for such ‘‘precautionary savings’’ and facilitate consumption. 

In sum, a more modern, open, and competitive financial system would greatly enhance the productive capacity and stability of the Chinese economy and facilitate 

the achievement of China’s economic goals, as described in the 11th Five-Year Plan. 

Indeed, research conducted by McKinsey indicates that genuine reform of its financial system would expand China’s economic output by as much as 17 percent, or an 

additional $320 billion a year.7

Addressing Issues with the United States 

A more effective and efficient financial sector in China is also a prerequisite to 

successfully addressing issues that have complicated the U.S.-China economic relationship, particularly further currency reform and meaningfully reducing the trade 

imbalance. 

• Market-determined exchange rate: As Chinese authorities have repeatedly argued—reasoning generally acknowledged by most foreign analysts—that a more 

rapid shift to a market-determined yuan is not possible given the underdeveloped state of China’s capital markets. More specifically, China’s banks, securities firms, and other businesses lack the expertise to develop and trade derivatives and other structured instruments used to hedge the risk associated 

with greater currency volatility. Sophisticated derivative products and hedging 

techniques provided by foreign financial services firms would clearly diminish 

such concerns. 

• Reduction of trade deficit: Reorienting the financial habits of China’s population 

from precautionary savings to a better balance between savings and consumption—while progressively bringing more than a billion Chinese into the global 

economy—is the most powerful remedy to the U.S.-China trade imbalance. 

62 

Status of Financial Sector Reform in China 

In addition to working to meet its WTO commitments, China has also taken important steps to liberalize its financial sector and improve financial regulation. For 

example: 

• The financial sector has been transformed from a single-bank system to a more 

diversified system with a central bank—the People’s Bank of China—at the 

helm. 

• Meaningful steps have been taken to eliminate state-directed policy lending, 

and amendments to the Law on Commercial Banks and the Law on the People’s 

Bank of China have laid the foundations for commercially viable lending. 

• The China Banking Regulatory Commission (CBRC) was established in April of 

2003 to oversee all banks in China, investigate illegal banking operations, and 

punish violations of law. 

• Interbank, equity, and foreign exchange markets have been established and important progress made toward implementing monetary policy through market 

mechanisms rather than by government fiat. 

Despite these achievements, China’s financial sector still faces serious challenges: 

• Non-commercial lending to state-owned enterprises continues, although on a diminishing scale. 

• The stock of nonperforming loans on banks’ balance sheets remains high. 

• Banks are undercapitalized and lending practices, risk management techniques, 

new product development, internal controls, and corporate governance practices 

remain inadequate. 

• Prudential supervision and regulation of the financial sector is opaque, applied 

inconsistently, and lags behind international best practices. 

• China’s equity and bond markets remain small and underdeveloped. 

With these problems in mind, efforts to build on the progress achieved to date 

should focus on: 

• The critical importance of open commercial banking, securities, insurance, pension, and asset management markets to promoting the consumption-led economic growth that China’s leaders seek; 

• The clear benefits to China of increased market access for foreign financial services firms—namely the introduction of world-class expertise, technology, and 

best practices—and the importance of removing remaining obstacles to greater 

access. 

Foreign investors in Chinese banks remain limited to 20 percent ownership 

stakes, with total foreign investment limited to 25 percent. The China Securities Regulatory Commission (CSRC) continues to limit foreign ownership of Chinese securities firms to 33 percent and foreign ownership of Chinese asset management companies to 49 percent. Worse, since December of 2005, a de facto 

moratorium on foreign investments in Chinese securities firms has been imposed. Foreign life insurance companies remain limited to 50 percent ownership 

in joint ventures and all foreign insurers are limited to 25 percent equity ownership of existing domestic companies. 

While these caps were agreed to in the course of WTO accession negotiations, 

the limitations are among the most restrictive of any large emerging market nation and stand in the way of a level playing field for financial service providers. 

Most importantly, they limit access to the products, services, know-how, and expertise that China needs to sustain high rates of economic growth, and that 

China’s businesses and citizens need to save, invest, and create and protect 

wealth. For these reasons, the United States and other WTO members have 

urged China to relax these limitations. 

China also continues to restrict access by foreign credit card companies. Banks 

in China are permitted to issue cards with a foreign logo only if they are cobranded with the logo of China Union Pay (CUP), an entity created by the 

PBOC and owned by participating Chinese banks. In addition, all yuan-denominated transactions must be processed through CUP’s network, while the network of the foreign credit card company is used only to process foreign currency 

transactions. 

• Non-discriminatory national treatment with regard to licensing, corporate form, 

and permitted products and services. 

63 

8 China’s WTO accession included the Transitional Review Mechanism (TRM) as a means for 

ongoing review of China’s compliance with its obligations, and to provide those elements of the 

Chinese government supportive of further economic reform with information and evidence to 

urge full compliance with China’s WTO commitments. 

• Non-discriminatory national treatment with regard to regulation and supervision. 

• Regulatory and procedural transparency. 

• Attracting sophisticated institutional investors to China’s capital markets 

through the expansion of the Qualified Foreign Institutional Investor (QFII) 

and Qualified Domestic Institutional Investor (QDII) programs. 

• Priority issues from the Transitional Review Mechanism that remain unresolved.8

Conclusion 

Mr. Chairman, the fastest way for China to develop the modern financial system 

it needs to achieve more sustainable economic growth, allow for a more flexible currency, and increase consumer consumption is to import it—that is, by opening its 

financial sector to greater participation by foreign financial services firms. Foreign 

institutions bring world-class expertise and best practices with regard to products 

and services, technology, credit analysis, risk management, internal controls, and 

corporate governance. In addition, the forces of competition brought by foreign institutions would accelerate the development of modern financial techniques and methodologies by China’s financial institutions. 

By providing the financial products and services that China’s citizens and businesses need to save, invest, insure against risk, raise standards of living, and consume at higher levels, foreign financial institutions—including U.S. providers— 

would help China develop an economy that is less dependent on exports, more consumption-driven and, therefore, an enormously important and expanding market for 

American products and services. In doing so, U.S. financial services firms can help 

China become a more stable and responsible stakeholder in the global economy and 

trading system. 

Thank you very much for the opportunity to appear at this important hearing. 

Senator DORGAN. Mr. Nichols, thank you very much for being 

here. 

Let me thank all of you for your testimony and appreciate the 

time you’ve taken to come. I’d like to ask a series of questions. Regrettably, Senator DeMint had to leave for another engagement. I 

appreciate his being here as well. 

President Hoffa, let me ask you. You indicated you have just returned from a trip to China. Describe for me again the circumstances of what the Chinese government had advertised as 

some sort of effort to allow the creation of what appeared to be 

unions, but only unions that were government-sponsored or government-controlled unions of some type, and then the pushback by 

American firms against that and then the actions of the Chinese 

government? Would you describe that for me again? 

Mr. HOFFA. We had a chance to meet with the ACFTU, which 

is the All China Federation of Trade Unions. It is the one union 

for all of China and it’s sponsored by the communist government. 

It’s part of the government. But they have chapters in every major 

city. They claim 122 million members. 

They are working basically on what’s called a contract labor law 

and it’s something that is a reform. You have to understand, over 

there they don’t have anywhere near the standard of living we do. 

These people are very, very poor, especially in the rural areas. 

They’re very relatively primitive with regard to their lifestyles, and 

any kind of an uptick is good for them. 

I do believe that the contract labor law was intended to try and 

stabilize working conditions with regard to hours of work, with reVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00067 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75737.TXT JACKIE
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gard to some semblance of regulation on how hard you work, 

whether you have days off, the number of hours, the safety at 

work, job safety. It’s not there, but at least it’s a start. 

What we found when we were over there was that the American 

Chamber of Commerce and all of the major companies—General 

Motors, Microsoft, all these big companies—are over there trying to 

water down these very basic improvements which were contained 

in the contract labor law, which I found absolutely appalling. First 

of all, the contract labor law was at least something, and then we 

see American corporations, which do have influence over there because they’re 60 percent of what’s being made there, are actually 

working with the government and doing everything they can to say 

we don’t need this right now, leave us alone, we’ll take care of it, 

as we’ve always heard from American business. 

It was very indicative of even in China they’re trying to keep the 

standard of living down as they profit. I thought that was appalling. 

Senator DORGAN. Mr. Hoffa, thank you very much. 

Mr. O’Shaughnessy, you indicated that the company that you run 

was owned by Paul Revere, so that has some history. 

Mr. O’SHAUGHNESSY. Yes. 

Senator DORGAN. Tell me about a Paul Revere-owned copper 

company? Describe to me what you now produce and describe the 

circumstances of the difficulty you have with China trade in specific relationship to your company’s marketing and your company’s 

production? 

Mr. O’SHAUGHNESSY. OK. There has always been a member of 

the Revere family associated with Revere, and indeed the last fulltime employee, Paul Revere, the fifth generation direct descendant, 

retired 10 years ago. His son Paul is an attorney that we use. 

We produce sheet, strip, and coil products not unlike if you consider an aluminum rolling mill or a steel mill that produces these 

big coils of steel or aluminum. We would produce them made out 

of copper and brass. So our customers are OEMs, other manufacturing companies in the United States that take our product and 

produce other products. So for example, many of our customers 

used to be companies that made lock sets in California for doors. 

You know, you just go to any big box store now and you see that 

those are made in China. But of course the reason why they’re 

made in China is because of currency manipulation. 

Labor costs are not as big a factor as you think they are. Nucor 

makes the case that the cost of shipping a coil of steel from China 

to the United States is greater than the cost, the labor cost of producing that coil of steel in the United States. 

Revere is the same situation. We see our customers disappearing 

because of China’s currency manipulation. 

Senator DORGAN. So because of currency manipulation your customer base has migrated to China? 

Mr. O’SHAUGHNESSY. Correct. 

Senator DORGAN. And they are customers of Chinese manufacturing rather than U.S. manufacturing? 

Mr. O’SHAUGHNESSY. That’s right. So they send over the products 

to the United States that used to be produced by our customers 

when they manufactured in the United States. When they moved 

65 

to China, they no longer look for us as a source company to supply 

them. 

Senator DORGAN. Let me, if I might, ask Mr. Nichols. You talked 

about the China economy and all of us understand the growth rate 

in China is substantial, 9, 10 percent. But you described China’s 

economy as being number 10, 6, 4, perhaps number 2 at some 

point. 

Isn’t it the case, though, that you would better measure an economy on GDP per capita, how much are you producing per person? 

And by that measurement, my understanding is that China ranks 

87th, somewhere behind Belize, Macedonia, and many, many others. So while one talks about the size of a country, one has to understand there are 1.4 plus billion Chinese and you allocate the 

production over the number of people and you have a per capita 

GDP that is really not very substantial at all. And you will grow 

this for many, many, many, many years before you get anywhere 

near reaching a U.S. per capita GDP number; is that not correct? 

Mr. NICHOLS. Absolutely, Mr. Chairman. The broader point I was 

trying to make was simply that it’s a deep market, it’s a growing 

market. But certainly it is not a extremely sophisticated economy, 

which is in part why we’re trying to achieve greater market access 

in there so they can start to consume and we can start to export 

more U.S. goods there. 

Senator DORGAN. And that gets to the point that my colleague 

Senator DeMint made, and I respect that he’s not here. But he was 

talking about Japan and how Japan has matured into a consumer 

economy. But it’s also the case that it didn’t matter much to us 

that Japan matured into a consumer economy. Last year the trade 

deficit with Japan was $88 billion because they’re engaged in managed trade, not free trade, and they’re very interested in having a 

very large trade surplus with us or we a deficit with them, and 

that’s the way they manage their trade system. 

So building a broad middle class and a consumer base in another 

country does not mean that our producers will necessarily have access to that and doesn’t mean we won’t have a very large trade deficit with a country if we’re playing softball and they’re playing 

hardball. If you have two different kinds of trade, ours a so-called 

chanting free trade and theirs is a managed trade economy with 

which they meet their objectives. 

Mr. Spooner, you described—and I wanted to run these numbers 

by you—the robust boost in exports to China. But here are the 

numbers. We increased our exports to China from $41 billion to 

$55 billion from 2005 to 2006. That’s correct? That’s a pretty good 

increase, a $14 billion increase. The increase in imports from China 

was a $45 billion increase. 

So understand that the increase in imports was triple our increase in exports. Now, I understand you used a percentage and I 

understand why people do that. But it really is a pretty meaningless percentage because you will never gain ground. You will always lose ground measuring it that way if in fact we’re importing 

triple the quantity in real dollars of what we’re exporting. Do you 

agree with that? 

Mr. SPOONER. Mr. Chairman, I’d argue, though, that it’s our responsibility not to manage trade, but to make sure the playing field 

66 

is level. And we’ve heard testimony today about tax breaks or 

breaks to foreign invested enterprises in China, about export subsidies to Chinese companies, about dumping and subsidies and all 

those sort of unfair trade practices. And I’d argue that those are 

wrong and that the administration is aggressively attacking those 

challenges. We have WTO cases challenging tax breaks to FIEs, 

foreign invested enterprises, and have WTO cases challenging China’s subsidies, and we’ve heard reference to furniture, paper, textiles, steel, shrimp, honey industries being hurt by unfair trade 

from China. Well, we have dumping orders protecting on behalf of 

all those domestic manufacturers. 

Senator DORGAN. Yes, there has been some recent action there. 

The fact is we have not had the backbone we should have had all 

of these years. We’ll see what happens on recent actions. 

But my only point was that when we hear people say, gosh, we’ve 

got robust growth of exports to China, one has to look at the imports from China which are tripled in real dollars. 

Let me make a point before I ask further questions. This hearing 

is not about, nor are my comments ever about, being anti-China. 

China is a big country. China is a country with whom we have substantial interactions and relationships that are very important. So 

it is portrayed sometimes as being anti-China, some giant adversarial relationship. The fact is I believe that our trade circumstances with China injure this country, are unfair to this country, and are advantageous to the Chinese. They know it. They manipulate it that way and we ought to go after it. 

But the fact is we will always have, I think, a substantial 

amount of interaction with this big country and this important 

country, and it’s important to understand the difference about what 

this hearing’s about. 

Mr. O’Shaughnessy, you wanted to make a comment. 

Mr. O’SHAUGHNESSY. Yes. Part of the increase in our exports to 

China is the increase in scrap we ship over there. In other words, 

we’re shipping over raw materials, select copper scrap. We’re shipping over billions of dollars worth of copper scrap. Ten years ago 

we shipped over less than $100 million worth of copper scrap. So 

part of that export growth is not final manufactured products. 

Senator DORGAN. You’re right about that, Mr. O’Shaughnessy. I 

made an observation once that the largest export by volume from 

this country to Asia is waste paper, and The Wall Street Journal, 

some cute writer in The Wall Street Journal, said, well, so what? 

Well, so what? Well, it’s the largest by volume export of our country, waste paper. It ought to tell you a little something about the 

circumstances and the problems that exist. 

Mr. Paul, if I might and then I’ll call on Mr. Hoffa. You wanted 

to make a comment. Mr. Paul, you described the work by Dr. 

Navarro from the University of California and you indicated that 

his recent study talked about the undercutting of prices by China, 

which has allowed their producers to have a dominant position. 

You indicated that lower labor costs account for 40 percent of the 

advantage, export subsidies 17 percent, undervalued currency 11 

percent. These are at odds with Senator DeMint’s comments and 

also Mr. O’Shaughnessy’s comments, I think, in terms of what has 

been stated. I think Senator DeMint was saying that the regulaVerDate Nov 24 2008 08:35 Sep 05, 2012 Jkt 075679 PO 00000 Frm 00070 Fmt 6633 Sfmt 6601 S:\GPO\DOCS\75737.TXT JACKIE
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tions in this country play a large role. This study seems to suggest 

it is not a large role at all, it’s a relatively small role. 

Mr. O’Shaughnessy, you indicated you believe it is not labor costs 

that reflect the substantial difference. Mr. Paul, how do you respond to that? 

Mr. PAUL. Well, I can explain the difference with Mr. 

O’Shaughnessy’s comments. It depends on the industry you’re looking at. In a resource-intensive industry like steel, the labor costs 

are going to be a smaller percentage of the output than, say, energy or raw materials. In a more labor-intensive occupation like assembly, labor costs are going to be higher. I think Dr. Navarro’s 

study looked at a broad range of industries, but it certainly does 

not conflict in fact with what Mr. O’Shaughnessy argued. 

The point that Dr. Navarro’s study was making is that this is not 

the free market at work. It’s not simply levels of development that 

are making Chinese products cheaper than the United States. Part 

of it is because of a direct government strategy to subsidize its domestic industry. Part of it is based on an enforcement regime 

which is nonexistent. Part of it is based on an artificially low labor 

cost based on, as President Hoffa pointed out, the denial of basic 

worker rights to the Chinese workforce, migration policies, and the 

nonenforcement of wage. Up to 80 or 85 percent of Chinese workers 

who should be getting the minimum wage are not in fact paid the 

minimum wage, and there are no consequences at all. 

The point that the study was trying to make is that this is an 

artificial advantage that is market-distorting and it does not reflect 

the free market, and that’s what we’re up against. American companies can compete against foreign companies. They just can’t compete against foreign governments. 

Senator DORGAN. Thank you, Mr. Paul. 

Mr. Hoffa? 

Mr. HOFFA. I’d like to also make the comment, as you did, that 

my comments are not anti-China, because China is doing what’s 

best for them. The answer is we’re letting them do it. They’re taking advantage of every crook in the law. They’re doing whatever 

they’re doing. They’re doing it because they’re very nationalistic, 

very mercantilistic. So that is their goal and there’s nothing wrong 

with doing that. 

But what are we doing to protect Americans? I think that’s the 

flip side of it. We have basically lost that when we negotiate these 

agreements, to make agreements that are so one-sided, as you 

pointed out, a 2.5 percent tariff as opposed to 25 percent. It’s ridiculous. 

I’d like to make an observation that when I was in Shanghai we 

met with the American Chamber of Commerce. So here we are in 

China and we meet with a group of Americans that represent the 

Chamber of Commerce. Amongst them were at least four or five 

people, very bright, college-educated Americans, highly educated, 

very attractive people. And I said: What do you do? And they said: 

Well, we’re consultants. Well, who do you consult with? We basically consult with American corporations that want to leave the 

United States and come to China, and we basically facilitate them 

finding a manufacturer to manufacture their product and to basically do everything we can so that they can have the connection to 

68 

have their product made so it can be shipped back to the United 

States. 

I think that was really a comment about what’s going on, that 

these are Americans taking advantage of our laws with regard to 

basically moving jobs from the United States over there. These are 

American consultants dealing with American corporations, facilitating their leaving. 

Also, as I talked about in my testimony, the fact is that we actually give subsidies to companies that leave the United States. 

That’s got to come to an end. 

The other point I’d like to make is when I was at the Port of 

Shanghai, it is amazing to see these ships go out loaded to the top 

with chain binders on containers so high you wonder if the ship is 

going to be able to make it to the United States. When the ships 

come back they are high out of the water, empty, with just a few 

containers on top. That basically tells you what the trade is. 

When I was there I talked to the leaders, the people that ran 

that port, and I tried to get out of them what percentage of trade 

is export and import. They kept on dancing around. They really 

didn’t want to tell me. The best I got out of them was 70–30 and 

I think it’s a lot more than that. When you see these ships go out, 

that’s the answer. It’s empirical. You can see what’s going out and 

when they come back they’re empty. 

Senator DORGAN. Mr. Hoffa, I have not talked about the companies, but there are many companies that have just closed shop in 

America and moved to China because China has become a low-cost 

offshore platform to produce for manufacturing. Huffy Bicycles are 

gone to China. In fact, the Huffy story is a fascinating story because it’s a company that is now a, quote, ‘‘Chinese company.’’ The 

actual corporate shell was sold to the Chinese. But people that 

made $11 an hour that made bicycles in this country; they’re now 

made for 20 cents to 30 cents an hour. They’re still sold in the 

same stores, Kmart, Walmart, Sears, and so on. And the Huffy 

workers all lost their jobs and the pensions for the Huffy workers 

have now been pawned off, as I understand it, to the U.S. Pension 

Benefit Guaranty Corporation, so the American taxpayers have the 

honor of paying pensions for a company that left for China. 

But it’s not just Huffy. It’s Little Red Wagon, made in Chicago 

for 110 years, gone to China. The list goes on and on—Levi’s, allAmerican Levi’s; Fruit of the Loom. I won’t ask who’s wearing 

them here, but Fruit of the Loom underwear. You know, the fact 

is we could go on forever talking about this. 

Mr. Hoffa, you are correct, there is a pernicious and unbelievable 

tax break that says fire your workers, close your plant, move to 

China, move anywhere out of the country, we’ll give you a tax cut. 

I’ve tried four times to shut that down here in the U.S. Senate and 

failed four times. For my colleagues who might read this transcript, 

they should understand there will be a fifth, sixth, and seventh 

time, because one of these days I’m going to win. I got 42 votes the 

first time, I think 44 votes the last time. In 20 years I’ll probably 

win this issue. 

But we ought not under any circumstance provide tax breaks to 

those who are willing to move their jobs overseas. I mean, that’s 

69 

just, to use a word I used earlier, that is ignorant public policy in 

my judgment. 

Mr. Nichols, and let me ask a couple others of you the same 

question. I’ve spoken to Warren Buffett a good many times about 

this subject. I’ve invited him in to meet with my colleagues on this 

subject. He has said and Mr. Greenspan, former Chairman of the 

Federal Reserve Board, has said that the current trade deficit is 

unsustainable. It is just unsustainable, and at some point when 

you get to where we are, over 5 percent of GDP and so on, at some 

point this thing’s going to burst. Something’s going to happen. 

It is just as with respect to every bubble. The law of bubbles is 

that bubbles eventually burst. Just as it did with the housing 

boom. The question is when, not whether. 

So Mr. Buffett has given a number of speeches. I don’t know 

whether any of us have an idea of who’s a better prognosticator of 

what works and what doesn’t than Warren Buffett, but I’d like to 

hear any suggestions if there’s a more informed or more successful 

investor over 30 years in this country than Warren Buffett. He 

warns that we are on an unsustainable path with respect to these 

trade deficits. 

You’re in the financial industry and review all of these things. 

Is it possible that one day someone will take a look at the fundamentals of all of this, the well over $1 trillion in combined real 

deficits per year at the Federal level, and say, wait a second, and 

then the electronic herd moves against our currency in a way that 

pulls the rug out from under and the stilts out from under our currency, and has dramatic consequences for our economy, and we 

stand around and all of us scratch our head and say, man, why did 

we not see that coming? Is that a possibility, or is that too pessimistic? 

Mr. NICHOLS. I don’t—I honestly don’t know if that day would 

come. I certainly hope it does not come. There are—while I would 

say that generally speaking the underlying fundamentals of our 

economy today are reasonably sound, there are some things that 

we should think about, and you’ve pointed out some of those. For 

one, the trade imbalance, the deficit. It is a concern. It should be 

addressed. I’ve obviously outlined a way that we think we can address that successfully. 

I would also note that we as a Nation need to save more. I mean, 

our savings rates, Mr. Chairman, I think are low, and that’s also 

a concern. So while we’re in a reasonably positive set of underlying 

fundamentals, there are some concerns, let alone—and you’ve done 

a lot of work on this and the hearing’s not on it—but if we start 

talking about the unfunded liabilities, looking out 20, 30 years, our 

Nation’s balance sheet has some significant concerns, as you well 

know better than almost anybody. 

So that would be my kind of initial observation to your question. 

But I would just touch on a couple of things, going back to a couple 

of earlier points you made. One is, the imbalance with China which 

we want to address—and again, one way we think is to activate the 

consumer, and there are some estimates, Mr. Chairman, that there 

are roughly $2 trillion in what we’ll call mattress money. That’s 

just sitting in China. That’s not being spent. We’d like them to stop 

saving that, consume that. Certainly some of the consumption 

70 

would occur there, some would be in Europe, and some would be 

here, providing deeper markets for our exporters. 

Senator DORGAN. Mr. Nichols, might I interrupt you—— 

Mr. NICHOLS. Yes, sir. 

Senator DORGAN.—and excuse myself for doing it. But isn’t it the 

case that, with respect to the middle class in China or whatever 

the class is that has this mattress money, as you describe it, isn’t 

it also the case that the Chinese would very much want them to 

spend that money on Chinese manufactured goods? And take a look 

at Walmart in China. Walmart in China has mostly Chinese goods 

and the Chinese don’t want American-produced goods in a Walmart 

in China. 

Mr. NICHOLS. Right. 

Senator DORGAN. So that’s a serious problem in a trade relationship, isn’t it? 

Mr. NICHOLS. That’s absolutely something that we need to pay 

attention to, that the people at USTR and Commerce and those in 

Congress focus on, absolutely. 

I would simply—what I wanted to note was that we do have actually a surplus with China in the services area. It’s small, $3 billion last year, but that was up roughly 27 percent from 2005. We’d 

like to see that grow certainly because roughly 80 percent of our 

GDP is in the services sector, and roughly the same percentage of 

our work force. 

But no, we need to—there are a lot of things we need to do. Let 

me not suggest our trading relationship with China is perfectly 

rosy. There are a lot of things we need to do. But having them integrated fully into the global trading system I think is the right approach. 

Senator DORGAN. Let me make one additional point and ask your 

response to it, perhaps to Mr. Hoffa and Mr. O’Shaughnessy especially. There are some who are part of the so-called ‘‘free traders,’’ 

as they brand themselves—and branding is a very important activity these days, in the last 2 or 3 decades. That branding is assisted 

by institutions like The Washington Post that will carry only one 

side of the argument, one side of the debate. 

So the branding has been successful, let me quickly admit. Free 

trade, that’s wonderful, that’s like tourism, that’s all-American; and 

whatever the alternative is is some sort of isolationist, xenophobic 

stooge that just can’t see over the horizon. You know, their thinking is back in the 1800s. So that’s kind of the thoughtless approach 

to how the debate on trade has ensued. 

But there are some who have swallowed all of this medicine on 

free trade and they say: You know what, it’s a world economy, a 

global economy. You may not like it, but that’s what it is. And if 

your workers, by God, can’t compete, then shame on them, they deserve to lose their job. There are a billion and a half people around 

this world that are willing to work for 20 cents an hour. Good for 

them. Why shouldn’t we move manufacturing there and have an 

opportunity for the consumers in this country to buy lower priced 

goods? 

I mean, that’s the argument. I think it’s specious, but that’s the 

argument by some. It seems to me—and I’ll ask you this question. 

It seems to me that what that argument denies is a century of 

71 

struggle to lift American standards and to say: Here’s the standard 

for air, for water, for workers, for the way we want to allow people 

to organize. And to ignore those standards and to say whatever is 

around the world and it’s a global economy, so let’s access whatever 

parts of it we wish to. 

Mr. Hoffa, you were just in China. I know you know and I certainly know the names of people who are sitting in prisons in 

China right now because they decided they wanted to form a labor 

union. For that they’re put in prison. 

So give me your response to this notion that to the extent that 

there are those of you who, I think Mr. O’Shaughnessy and Mr. 

Hoffa among the group, believe that there’s a problem with this 

trade, you’re kind of xenophobic here. What do you want to do, 

withdraw from the world? Don’t you understand it’s a global economy? I mean, that’s what you’d be hit with. 

Mr. HOFFA. Of course we hear that. But basically, other countries aren’t buying into that. The European Union isn’t buying into 

that. They protect their markets. We have to protect our standard 

of living, and one of the goals of any government is to protect their 

citizens. The fact that there’s somebody that will work for less does 

not mean that everybody should lose their jobs, and that is part of 

what government is about. Not only do you provide water and police, but basically you provide a standard of living. That’s why we 

have laws in this country. That’s why we have a minimum wage. 

That’s why we have supposedly good trade laws, which we haven’t 

been doing. Basically, the job of America and all countries is to 

avoid this Darwinistic approach to trade, where if you can’t compete you lose your job and they throw you in the street. In another 

time they would have thrown you into debtor’s prison. Thank God 

we’ve moved from there. 

But basically I think that people realize that this country has 

evolved where there are our standards that we are here, the government is to protect its employees and basically protect its citizens from unfair trade so that they can have the life they deserve. 

Senator DORGAN. Mr. O’Shaughnessy, some of the free traders 

would say, you know what, tough luck, tough luck to you, you and 

your company, you can’t keep up. 

Mr. O’SHAUGHNESSY. Well, I’d say there’s no such thing as free 

trade, at least in today’s world. If American workers have to compete with workers who benefit from a 40 percent subsidy because 

of currency manipulation and a 17 percent VAT tax, you’re adding 

up there almost a 60 percent cost difference. It has nothing to do 

with free trade. It has everything to do with the protectionism that 

China exhibits and practices and uses to develop its own internal 

industry. 

This is not a textbook scholar, let’s discuss and debate these 

issues. It’s happening every day. Our workers can compete. They’re 

highly productive, they’re getting better every year, and we’re producing better every year. But we cannot compete under that regime. 

Think about this. How can a factory in the United States that 

has to pay the health care costs of its workers compete with a factory overseas that doesn’t pay for the health care costs of its workers? So what this country needs in my opinion is a VAT tax that 

72 

eliminates all taxes on jobs, plus a leveling of the playing field on 

currency manipulation, and then we will compete big time and we 

will be successful. 

Senator DORGAN. Mr. O’Shaughnessy, I think that every trade 

agreement should have a shock absorber for currency manipulation 

and currency fluctuations. We did a trade agreement with Mexico 

and immediately following the trade agreement where the negotiators said they sweat blood because they were trying to reduce 

tariffs by 5, 10, 20 percent, immediately following that the peso 

was devalued 50 percent. So we lost ground rather than gained 

ground. 

So I happen to think that every trade agreement ought to have 

some sort of a shock absorber with respect to the issue of currency 

fluctuation and manipulation. 

Mr. Nichols? 

Mr. NICHOLS. Mr. Chairman, if you’d indulge me, your thoughtful question is a perfect segue. With your permission, I’d like to 

enter something in the record. It’s a report we just commissioned 

at the Financial Services Forum called ‘‘Succeeding in the Global 

Economy: A New Policy Agenda for the American Worker.’’ It’s essentially a study that we had commissioned. It just came out a couple of weeks ago and we briefed people in the House and Senate 

leadership about it. The point of the study simply, it makes the 

point that there are large massive gains due to trade. That said, 

there are dislocations associated with trade on the part of industries, regions, and individuals; and we need to come up with a new 

set of ideas for the private and public sector to work together to 

help those who are facing dislocations and not feeling and sharing 

in the full benefits of globalization. 

So while there have been massive benefits to globalization in 

terms of better standards of living, lower cost of goods, things of 

that nature, there are some who are not feeling and sharing in the 

full benefits, and we need to help those people. 

So with your permission, I’d like to enter our study into the 

record, please. 

[The material referred to is retained in Committee files and is 

available at http://www.financialservicesforum.org.] 

Senator DORGAN. We will do that. Without objection, the study 

may be made part of the record. 

I was just thinking as you were speaking, Mr. Nichols, I appreciate your testimony because I think the testimony on the financial 

side is very important. But we use the term ‘‘dislocation.’’ That’s a 

euphemism for somebody losing their job, getting fired. It’s somebody that comes home at night and says, ‘‘hey, Mildred, guess 

what. I got fired today. My job got moved to China because they 

closed the plant.’’ 

We call that dislocation, but it’s much more serious. You know, 

the fact is we’ve got some mainstream economists—Alan Blinder, 

a mainstream economist, says that there are 42 to 56 million 

American jobs that are potentially, ‘‘tradeable.’’ He says not all of 

them will be exported to low wage countries, but even those that 

remain here will have downward pressure on their income because 

others in other parts of the world would be able to do that job. 

73 

Now, what I think has happened is we have galloped along on 

globalization, but the rules have not kept pace. I believe this country has every right to decide here is the method or here is the way 

in which we will participate in the global economy. We will participate in the global economy in a way that helps lift others up, but 

we will not participate in a way that pushes us down. We spent 

a century building standards that have made this a great country 

and we will not spend the next decade trying to push down those 

standards in order to compete with conditions around the world 

which we should not be expected to compete with or against. 

So those are the issues. I think we’ve covered many of them 

today. What we need to do as a Congress is try to evaluate what’s 

happening, what is the cause of it, and what are the potential remedies. We have had a variety of opinions today. I very much appreciate the time you have taken to come and share with the Committee your thoughts. We’ll have additional hearings and then we 

will have additional recommendations and legislative vehicles by 

which we try to address these issues. 

This hearing is adjourned. 

[Whereupon, at 4:18 p.m., the hearing was adjourned.] 

Æ