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U.S.–CHINA TIES:

REASSESSING THE ECONOMIC RELATIONSHIP

HEARING

BEFORE THE

COMMITTEE ON 

INTERNATIONAL RELATIONS 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

OCTOBER 21, 2003

Serial No. 108–70

Printed for the use of the Committee on International Relations

(

Available via the World Wide Web: http://www.house.gov/international—relations 

(II)

COMMITTEE ON INTERNATIONAL RELATIONS 

HENRY J. HYDE, Illinois, Chairman 

JAMES A. LEACH, Iowa 

DOUG BEREUTER, Nebraska 

CHRISTOPHER H. SMITH, New Jersey, 

Vice Chairman 

DAN BURTON, Indiana 

ELTON GALLEGLY, California 

ILEANA ROS-LEHTINEN, Florida 

CASS BALLENGER, North Carolina 

DANA ROHRABACHER, California 

EDWARD R. ROYCE, California 

PETER T. KING, New York 

STEVE CHABOT, Ohio 

AMO HOUGHTON, New York 

JOHN M. MCHUGH, New York 

THOMAS G. TANCREDO, Colorado 

RON PAUL, Texas 

NICK SMITH, Michigan 

JOSEPH R. PITTS, Pennsylvania 

JEFF FLAKE, Arizona 

JO ANN DAVIS, Virginia 

MARK GREEN, Wisconsin 

JERRY WELLER, Illinois 

MIKE PENCE, Indiana 

THADDEUS G. MCCOTTER, Michigan 

WILLIAM J. JANKLOW, South Dakota 

KATHERINE HARRIS, Florida 

TOM LANTOS, California 

HOWARD L. BERMAN, California 

GARY L. ACKERMAN, New York 

ENI F.H. FALEOMAVAEGA, American 

Samoa 

DONALD M. PAYNE, New Jersey 

ROBERT MENENDEZ, New Jersey 

SHERROD BROWN, Ohio 

BRAD SHERMAN, California 

ROBERT WEXLER, Florida 

ELIOT L. ENGEL, New York 

WILLIAM D. DELAHUNT, Massachusetts 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

JOSEPH CROWLEY, New York 

JOSEPH M. HOEFFEL, Pennsylvania 

EARL BLUMENAUER, Oregon 

SHELLEY BERKLEY, Nevada 

GRACE F. NAPOLITANO, California 

ADAM B. SCHIFF, California 

DIANE E. WATSON, California 

ADAM SMITH, Washington 

BETTY MCCOLLUM, Minnesota 

CHRIS BELL, Texas 

THOMAS E. MOONEY, SR., Staff Director/General Counsel 

ROBERT R. KING, Democratic Staff Director 

FRANK RECORD, Senior Professional Staff Member 

SARAH TILLEMANN, Professional Staff Member 

LIBERTY DUNN, Staff Associate 

(III)

C O N T E N T S 

Page

WITNESSES 

The Honorable Grant D. Aldonas, Under Secretary, International Trade Administration, U.S. Department of Commerce .................................................... 10

Franklin J. Vargo, Vice President, International Economic Affairs, National 

Association of Manufacturers .............................................................................. 39

Nicholas R. Lardy, Ph.D., Senior Fellow, Institute for International Economics ........................................................................................................................... 50

Thea Lee, Chief International Economist, Public Policy Department, AFL–

CIO ........................................................................................................................ 57

Jonna Bianco, President and Chairwoman, American Bondholders Foundation ........................................................................................................................ 63

LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING 

The Honorable Henry J. Hyde, a Representative in Congress from the State 

of Illinois, and Chairman, Committee on International Relations: Prepared 

statement .............................................................................................................. 3

The Honorable Nick Smith, a Representative in Congress from the State 

of Michigan: Prepared statement ........................................................................ 9

The Honorable Grant D. Aldonas: Prepared statement ....................................... 14

Franklin J. Vargo: Prepared statement ................................................................. 41

Nicholas R. Lardy, Ph.D.: Prepared statement and materials submitted for 

the record .............................................................................................................. 51

Thea Lee: Prepared statement ............................................................................... 59

Jonna Bianco: Prepared statement ........................................................................ 65

APPENDIX 

The Honorable Adam B. Schiff, a Representative in Congress from the State 

of California: Prepared statement ...................................................................... 73

(1)

U.S.–CHINA TIES: REASSESSING THE 

ECONOMIC RELATIONSHIP 

TUESDAY, OCTOBER 21, 2003

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON INTERNATIONAL RELATIONS, 

Washington, DC. 

The Committee met, pursuant to call, at 2:10, p.m., in Room 

2172, Rayburn House Office Building, Hon. Henry J. Hyde (Chairman of the Committee) presiding. 

Chairman HYDE. The Committee will come to order. I take great 

pleasure in convening this hearing on the United States-China economic relations in the context of the ongoing Asia Pacific Economic 

Cooperation Leader Summit in Bangkok. 

President Bush will have the unique opportunity to advance both 

our security and our trade interests in the Asian region as a whole, 

and with China in particular. As many of my colleagues are well 

aware, our view of China has swung nearly full circle, from strategic partner to strategic competitor, from collaborator to antagonist, over the course of the past 2 decades. 

But, in the aftermath of September 11th, our relationship has 

shifted course once again in a more positive direction. 

China has played a constructive role in building consensus inside 

the U.N. Security Council in the deliberations over Iraq and the 

passage of key resolutions supporting the reconstruction of that 

country. 

Its mediation efforts in regard to North Korea have, over the 

past few months, been of invaluable assistance to our diplomats as 

they try to ease tensions in northeast Asia and reduce the threat 

posed by the development of weapons of mass destruction. 

Where trade and security concerns intersect in safeguarding 

international commercial traffic, we look forward to China’s constructive role in the proliferations security initiative, the container 

security initiative, and other anti-terrorist counter-proliferation 

measures put in place by the Bush Administration. 

On the trade front, the pace of globalization and the dynamism 

of the Chinese economy are reflected in the fact that, last year, 

China attracted more foreign direct investment than any other 

country in the world, including the United States. This year, Chinese imports are expected to surpass $380 billion, 

making China the third largest importer after the United States 

and Germany. It is rapidly becoming a major importer of industrial 

goods, and it has now surpassed Japan as the world’s leading 

source for information products and high-tech hardware. 

2

There are however, increasing storm clouds on the horizon in our 

bilateral economic relationship. China’s overvalued currency and 

our ballooning trade deficits are getting increased attention in Congress. 

Many United States policy makers and business and labor representatives believe that China’s currency is undervalued when 

compared with the dollar by as much as 15 to 40 percent, making 

Chinese exports into this country cheaper and our exports more expensive than they would be if exchange rates were determined by 

market forces. 

They point out that the undervalued currency has contributed to our trade deficit with China, which has grown sharply from $30 

billion in 1994 to $103 billion last year to an estimated $130 billion 

this year, which has hurt United States production and employment in several U.S. manufacturing sectors. 

The National Association of Manufacturers also reports that several industries, including tool-and-die and metal forming, are competing against Chinese products sold at prices so low they don’t 

even cover the cost of raw materials and shipping. These and other 

charges of export subsidies, particularly in the Chinese steel industry, need further investigation by appropriate government agencies. 

China’s rapid emergence as a major force in the world economy 

is all the more remarkable in light of its very high tariff barriers 

on industrial products, higher on average than those maintained by 

India. 

After 18 months of membership in the World Trade Organization 

(WTO), China still retains a number of trade barriers in contravention of that body’s key principles. 

According to a 2003 White Paper written by the American Chamber of Commerce in China and the American Chamber of Commerce in Shanghai, has complied with its WTO obligations in lowering tariffs and changing hundreds of laws and thousands of government regulations. However, there has been little progress in implementing World Trade Organization commitments in the key 

areas of financial services, agriculture, and distribution and trading rights. 

A recent Heritage Foundation background, The APEC Forum: 

Time to Make a Difference, reached a similar conclusion that China 

is not fulfilling its WTO accession commitment. 

It notes that there are substantial barriers to United States agricultural exports, rampant piracy of intellectual property, forced 

transfer of technology from firms launching joint ventures in 

China, and capital markets largely insulated from free-market 

pressures, with China largely ignoring its commitments to allow 

foreign banks to compete in its financial services market. 

To be sure, China can point to a number of extenuating circumstances affecting its ability to meet its international trade commitments. The SARS epidemic, for example, created short-term economic disruption inside the government and in many companies in 

the first half of this year. 

There have been changes as well in the leadership of the Chinese 

Communist Party and of the national government, including the establishment of a new ministry of commerce with authority over domestic and foreign trade. 

3

It should be said that a number of large United States firms are 

now profitably operating in China and exporting globally, including 

into the U.S. market. Nevertheless, there is a growing need to address problems in our relationship before they reach crisis stage. 

Some of the possible remedies should include the following steps: 

First, the APEC ministers should ensure that all members respect and fully meet their WTO commitments and redouble their 

efforts to conclude a successful Doha Trade Round. 

Second, China needs to take decisive and immediate steps to 

meet its existing commitments as a member of the World Trade 

Organization. Failure to implement its commitments could not only 

jeopardize our bilateral relationship, but could also affect our future support for the global trading body as a whole. 

Third, the United States and China must develop a plan to ensure that market forces more fully dictate the relative value of our 

currencies. 

Fourth, the U.S. Commerce Department’s International Trade 

Administration, together with all other appropriate United States 

and Chinese agencies, should develop an action plan to increase the 

growth rate of United States exports to China, particularly from 

small and medium-sized companies. 

Fifth and finally, an interagency task force should review all aspects of our trade and commercial relationship with China to ensure that China is taking adequate steps to meet its WTO commitments and other obligations under United States trade laws. 

On a wide range of security and political issues, the United 

States and China are working effectively, side by side, to frame a 

common position to global and regional threats. We cannot afford 

to do any less when it comes to putting our trade and commercial 

ties on a long-term, sustainable basis. 

[The prepared statement of Mr. Hyde follows:]

PREPARED STATEMENT OF THE HONORABLE HENRY J. HYDE, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF ILLINOIS, AND CHAIRMAN, COMMITTEE ON INTERNATIONAL RELATIONS

I take great pleasure in convening the hearing this afternoon on U.S.-China economic relations in the context of the ongoing Asia-Pacific Economic Cooperation 

(APEC) leaders’ summit in Bangkok, Thailand. 

President Bush will have a unique opportunity to advance both our security and 

our trade interests in the Asian region as a whole, and with China in particular. 

As many of my colleagues are well aware, our view of China has swung nearly 

full circle from strategic partner to strategic competitor, from collaborator to antagonist, over the course of the past two decades. 

But in the aftermath of September 11th, our relationship has shifted course once 

again in a more positive direction. 

China has played a constructive role in building consensus inside the UN Security 

Council in the deliberations over Iraq and the passage of key resolutions supporting 

the reconstruction of that country. 

Its mediation efforts in regard to North Korea have, over the past few months, 

been of invaluable assistance to our diplomats as they try to ease tensions in northeast Asia and to reduce the threat posed by the development of weapons of mass 

destruction. 

Where trade and security concerns intersect in safeguarding international commercial traffic, we look forward to China’s constructive role in the proliferation security initiative, the container security initiative and other anti-terrorist, counter-proliferation measures put in place by the Bush Administration. 

On the trade front, the pace of globalization and the dynamism of the Chinese 

economy are reflected in the fact that, last year, China attracted more foreign direct 

investment than any other country in the world, including the United States. 

4

This year, Chinese imports are expected to surpass $380 billion, making China 

the third largest importer after the U.S. and Germany. It is rapidly becoming a 

major importer of industrial goods, and it has now surpassed Japan as the world’s 

leading source for information products and high-tech hardware. 

There are, however, increasing storm clouds on the horizon in our bilateral economic relationship. China’s overvalued currency and our ballooning trade deficits 

are getting increased attention in Congress. 

Many U.S. policymakers and business and labor representatives believe that China’s currency is undervalued when compared with the dollar by as much as 15 to 

40 percent, making Chinese exports into this country cheaper and our exports more 

expensive than they would be if exchange rates were determined by market forces. 

They point out that the undervalued currency has contributed to our trade deficit 

with China, which has grown sharply from $30 billion in 1994 to $103 billion last 

year to an estimated $130 billion this year, and which has hurt U.S. production and 

employment in several U.S. manufacturing sectors. 

The National Association of Manufacturers also reports that several industries, 

including tool-and-die and metal forming, are competing against Chinese products 

sold at prices so low that they don’t even cover the cost of raw materials and shipping. 

These and other charges of export subsidies, particularly in the Chinese steel industry, need further investigation by our appropriate government agencies. 

China’s rapid emergence as a major force in the world economy is all the more 

remarkable in light of its very high tariff barriers on industrial products—higher 

on average than those maintained by India. 

And after 18 months of membership in the World Trade Organization (WTO), 

China still retains a number of trade barriers in contravention of that body’s key 

principles. 

According to a 2003 White Paper written by the American Chamber of Commerce 

in China and the American Chamber of Commerce in Shanghai, China has complied 

with its WTO obligations in lowering tariffs and changing hundreds of laws and 

thousands of government regulations. However, there has been little progress in implementing WTO commitments in the key areas of financial services, agriculture 

and distribution and trading rights. 

A recent Heritage Foundation backgrounder, The APEC Forum: Time to Make a 

Difference, reached a similar conclusion that China is not fulfilling its WTO accession commitments. 

It notes that there are substantial barriers to U.S. agricultural exports, rampant 

piracy of intellectual property, forced transfer of technology from firms launching 

joint ventures in China, and capital markets largely insulated from free market 

pressures, with China largely ignoring its commitments to allow foreign banks to 

compete in its financial services markets. 

To be sure, China can point to a number of extenuating circumstances affecting 

its ability to meet its international trade commitments. The SARS epidemic, for example, created short-term economic disruption inside the government and in many 

companies in the first half of this year. 

There have been changes as well in the leadership of the Chinese Communist 

Party and of the national government, including the establishment of a new ministry of commerce with authority over domestic and foreign trade. 

And it should be said that a number of large U.S. firms are now profitably operating in China and exporting globally, including into the U.S. market. 

Nevertheless, there is a growing need to address problems in our relationship before they reach crisis stage. Some of the possible remedies should include the following steps: 

First, the APEC ministers should ensure that all members respect and fully meet 

their WTO commitments and redouble their efforts to conclude a successful Doha 

trade round. 

Second, China needs to take decisive and immediate steps to meet its existing 

commitments as a member of the World Trade Organization. 

Failure to implement its commitments could not only jeopardize our bilateral relationship but could also affect our future support for the global trading body as a 

whole. 

Third, the U.S. and China must develop a plan to ensure that market forces more 

fully dictate the relative value of our currencies. 

Fourth, the U.S. Commerce Department’s International Trade Administration, together with all other appropriate U.S. and Chinese government agencies, should develop an action plan to increase the growth rate of U.S. exports to China, particularly from small and medium-sized companies. 

5

Fifth and finally, an interagency task force should review all aspects of our trade 

and commercial relationship with China to ensure that China is taking adequate 

steps to meet its WTO commitments and other obligations under U.S. trade laws. 

On a wide range of security and political issues, the U.S. and China are working 

effectively, side by side, to frame common positions to global and regional threats. 

We cannot afford to do any less when it comes to putting our trade and commercial ties on a long-term, sustainable basis. 

There are several compelling issues in Sino-American relations which also need 

to be addressed by this Committee. These will be examined at a future hearing. 

I would now turn to my friend, the Ranking Member, Mr. Lantos, for his opening 

statement.

Mr. LANTOS. Thank you very much, Mr. Chairman. 

Yesterday, on the Floor of the House of Representatives, it was 

my pleasure to express the delight of all of us on this side of the 

aisle that you have decided to continue your distinguished service 

in the House of Representatives. Let me, in the Committee, now 

again publicly express my extraordinary pleasure in looking forward to serving with you for many more years on behalf of our Nation. You have brought great statesmanship with wisdom and diplomacy to this very difficult task, and all of us are deeply in debt. 

Chairman HYDE. Mr. Lantos, if I had any idea you were going 

to say such words as you just said, I would have cut my speech in 

two. But I thank you from the bottom of my heart. That is very 

nice. Thank you, sir. 

Mr. LANTOS. Thank you, Mr. Chairman. Thank you for calling today’s hearing on United States-China economic and trade matters. 

Mr. Chairman, I have been traveling to China for decades, and 

I am pleased to be counted as one who appreciates China’s postCommunist economic revolution. In 20 short years, hundreds of 

millions of Chinese citizens have been lifted out of poverty. China’s 

cities have been transformed from economic backwaters to 

powerhouses in the global economy. And economic development has 

spread across some of China’s vast agricultural areas. 

Despite their horrendous performance on political and human 

rights matters, two generations of Chinese leaders have adeptly 

steered the Chinese economy to bring prosperity to many of China’s 

1.2 billion citizens. I wish our own Nation’s economic team would 

demonstrate similar leadership skills. 

As Americans have flocked to Wal-Mart to buy products manufactured in China, the Chinese government has resolutely closed its 

doors to purchases of American products and services. These formal 

and informal trade barriers, including the manipulation and undervaluation of China’s currency, have contributed to the loss of 3 million manufacturing jobs in America in recent years. 

Mr. Chairman, the business community told us that permanent 

normal trade relations and China’s subsequent succession to the 

World Trade Organization was a magic bullet for market access to 

China. Perhaps a decade or 2 from now, these leaders will recognize that success finally came. But for now, China’s entry into 

WTO has yet to have any positive impact upon our bilateral trade 

deficit. In fact, a quick look at the numbers tells us that the problem is getting worse. Four years ago, Mr. Chairman, the bilateral 

trade deficit that the United States had with China was about $70 

billion. Last year, the deficit had grown to $103 billion, and this 

year I estimate that it will be between $120 and $130 billion. 

6

It is simply impossible for American manufacturing workers to 

compete against China as long as Chinese businesses operate without regard to international labor and environmental standards. 

China’s leaders adamantly refuse to grant workers the right to organize freely into independent unions. In fact, 2 brave workers who 

organized street demonstrations in northeastern China last year in 

which some 30,000 citizens turned out on the streets to protest 

China’s management of state-run enterprises, were unceremoniously tossed into jail. Today, I call on China’s leaders to release these 

two courageous leaders of Chinese labor, and allow them to return 

to their jobs and to their families. 

Chinese enterprises will always be able to underbid their American counterparts as long as China refuses to enforce its environmental standards. When polluted industrial waste can be discharged directly into waterways and dumped by the side of the 

roads, China’s factories will always be able to produce at a fraction 

of the cost of American companies. 

Mr. Chairman, given the devastating impact of the yawning 

China trade deficit on our workforce, the Administration must develop a much more effective and forceful trade strategy vis-a-vis 

China. We must use our market leverage and diplomatic skills to 

convince China not only to meet its WTO obligations but also to 

comply with internationally recognized labor and environmental 

standards. 

While I recognize that our Administration cannot wave a magic 

wand at the trade deficit and wish it away, I believe that the efforts made by the Administration to protect American jobs from the 

Chinese economic juggernaut are dramatically insufficient. 

Before concluding my comments today, the presence of a highlevel Commerce Department official in the room today compels me 

to raise a matter of utmost concern. Commerce Secretary Don 

Evans’ mind-boggling reaction on Sunday to the virulently and viciously anti-Semitic remarks of Malaysian Prime Minister 

Mahathir. As everybody in this room knows, everybody in the 

United States and the world knows, Prime Minister Mahathir recently proclaimed in a speech that ‘‘Jews rule the world,’’ and asserted that ‘‘1.3 billion Muslims cannot be defeated by a few million 

Jews.’’ Such hate-filled statements, particularly from a national 

leader, should be met consistently and immediately with universal 

condemnation. 

But when Commerce Secretary Don Evans appeared on CNN on 

Sunday, a tape was played of Mahathir saying, I quote:

‘‘The Europeans killed 6 million Jews out of 12 million, but 

today the Jews rule this world by proxy.’’

Instead of expressing outrage at such hate-filled venom, Secretary 

Evans responded, and I quote, he didn’t ‘‘know all of the details behind’’ Mahathir’s remarks. And then elaborated, I quote again:

‘‘Everybody in the world wants the same thing; we all want to 

put a roof over our family’s heads, we all want to feed our children.’’

Mr. Chairman, Secretary Evans’ response to Mahathir’s comments can only be described as hallucinatory. Any member of the 

7

President’s cabinet, regardless of his or her portfolio, ought to be 

able to recognize hate speech when he hears it. I would like to ask 

Under Secretary Aldonas to hand-carry a letter from me to Secretary Evans expressing my outrage not only at Mahathir’s sickening statement, but at the appalling response of the Secretary. I 

am asking from the Secretary a public apology. 

Mr. Chairman, I commend you for calling today’s hearing, and I 

look forward to the testimony of our witnesses. 

Chairman HYDE. Does anybody have an opening statement? 

Mr. Sherman. 

Mr. SHERMAN. Thank you, Mr. Chairman. I would like to echo 

what Mr. Lantos said, starting off with his great joy that you will 

be seeking to serve with us in the 109th Congress. The expertise 

and judgment that you bring to this Committee will make you an 

outstanding Ranking Member. 

I want to echo Mr. Lantos’s comments, and the Secretary should 

regard many of us as endorsing the letter that he is giving to the 

Under Secretary. 

Now, focusing on China. There are four reasons that I have been 

able to identify why we have the most lopsided, I would say, cancerous trading relationship, a $120 or $130 billion deficit. I have 

never seen a trading relationship where the imbalance is 10 times 

the American exports. 

In other words, if we doubled our exports, it would still be a lopsided and cancerous relationship. This is outrageous. As Mr. Lantos points out, it comes in part from the fact that labor and environmental laws are ignored and are nonexistent in China. I would 

go on about that except Mr. Lantos covered it so well. 

The dollar is massively overpriced worldwide compared to all currencies, and that is one of the reasons why we have a half trillion 

dollar deficit with the world. And if the dollar does not slide, it will 

plummet. Let us hope that the recent little hints from the Administration that the dollar should decline will become slowly—because 

you shouldn’t do this all at once—a dramatic crescendo, probably 

next year, year after, calling for a realignment of the dollar’s value. 

But then you look at the yuan currency of China, which we know 

is underpriced by 40 percent, and it is absolutely outrageous that 

we continue to allow imports to enter our ports for a single day 

without a commitment from China to change that by the end of the 

year. 

And then, finally, and usually not remarked upon, is the political 

pressure sometimes almost hinting on a threat of death to those 

Chinese business people who might want to import goods from the 

United States in quantities that their government would not like 

to see. Imagine, if you will, that you are a business person in China 

thinking of buying from America. You get a telephone call suggesting that a well-educated person such as yourself would not 

choose to buy goods from America. After all, you are well educated, 

and you would hate to think that you needed reeducation. But 

nothing can explain this lopsided trading relationship other than 

political pressure not to buy American goods. And, of course, it is 

not a violation of WTO, because WTO only makes written pressure 

from the government a violation. The secret phone call can never 

be the subject of a complaint. 

8

The more public version of this is in co-production. Look at our 

major exports to the world. Entertainment, we don’t export to 

China, they just steal it. Airplanes, well, Boeing gets a coproduction agreement so that they will eventually be exporting more parts 

back to us than we sell planes back to them. And every day our 

ports operate under this Administration, every day you tolerate 

this. Every day, you tell us it is good. And when toward the end 

of this decade there is a collapse of the U.S. trading system because 

of what you have accepted, we will remember we just let it happen 

$120 billion at a time. And I yield back. 

Chairman HYDE. The gentleman from Indiana, Mr. Burton. 

Mr. BURTON. Well, I wasn’t going to comment on this, but we 

had a similar problem—the previous speaker, I wish he would listen to this. This is not a problem that is germane just to this Administration. The previous Administration for 8 years tolerated the 

same thing. So don’t cast rocks at this Administration——

Mr. SHERMAN. Oh, I can throw a lot of rocks at the last Administration, too. 

Mr. BURTON. I just want to make sure that that is clear. 

Mr. SHERMAN. But the problem is now bigger. 

Mr. BURTON. You are absolutely correct. It is bigger, and we have 

got to deal with it. There has to be not only free trade, but there 

has got to be fair trade. I noticed that the President, in some of 

his most recent speeches, instead of talking about free trade, I 

heard him say the word ‘‘fair’’ as well. And I think it is high time 

that the Administration starts talking about fair trade. And when 

we are talking about fair trade, we are talking about making sure 

that the labor in places like China is not artificially held to such 

a level that we can’t compete. 

In addition to that, they still have 10 million people in slave 

labor camps that are getting virtually nothing, and they are making products that we are buying here in America. 

The fact of the matter is, it is intolerable that we would have a 

trade deficit of the magnitude that we have with China. And our 

government, whether it is this Administration or a Democratic Administration, has to deal with this. And I realize that there is risk 

in putting the hammer to the Chinese, but something has to be 

done. It has to be done, and it has to be done relatively quickly; 

otherwise, we are going to suffer the consequences. 

One of the emerging huge powers in this world is China. And if 

we are not careful, we are going to be ending up subservient to 

them in 20 or 25 years because we are not dealing with these problems as we should right now. 

I think it is extremely important for a number of reasons that 

we start dealing with them with a much stronger hand than we 

have in the past. If it involves import tariffs on some of their products to send a message, then we ought to consider that. Teddy Roosevelt, when he was President, believed in some protectionism in 

order to protect the American economy, and he was a pretty darn 

good President, and I think we ought to consider that same approach right now because we can’t go on with this indefinitely. 

Thank you, Mr. Chairman. 

Chairman HYDE. Is there anyone on the Democratic side who has 

an opening statement? If not, Mr. Smith of Michigan. 

9

Mr. SMITH OF MICHIGAN. Mr. Chairman, thank you. 

The valuation of a currency of a company of a vetting country, 

of course, has both positive and negative consequences. I would 

offer the question, how would America react if China said everything we produce we will give free to the United States. I am sure 

a lot of good shoppers in America would say well, gosh, that seems 

like a pretty good deal, in effect, having a yuan that may or may 

not on the free market go up or down, and some economists suggest 

that it could very well go down on a free market, which would 

make the consequences even more negative in terms of the impact 

on our manufacturing. 

So, Mr. Chairman, I guess I would be as much, maybe even more 

concerned with the restrictions on trade such as phyto-sanitary, 

such as the tariff rate quota, such as the advantages that China 

has in some goods by using forced labor. And so I think all of these 

together I hope that we will take up at this hearing today. And 

make no mistake, in past history, both recent and far past, the 

United States has had some effort to do some manipulation on the 

value of our currency to make a difference in our exports and imports. 

So with that, Mr. Chairman, I would ask that my complete statement be entered in the record at this point, and I look forward to 

the testimony. 

Chairman HYDE. Without objection, so ordered. 

[The prepared statement of Mr. Smith follows:]

PREPARED STATEMENT OF THE HONORABLE NICK SMITH, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF MICHIGAN

Mr. Chairman, as we meet here today, we are all, of course, aware of the public 

and Congressional concern over Chinese trade practices that we fear may be costing 

us American manufacturing jobs. We have many concerns regarding Chinese utilization of forced labor, lack of environmental safeguards, and use of tariff-rate quotas 

and phyto-sanitary obstructions to block the sale of American agricultural goods. 

Most recently, however, our attention has been focused on the Chinese government’s 

policy of undervaluing currency. 

It is through this practice, that we accuse the Chinese of boosting their exports 

and reducing the importation of American goods. The fixed Chinese exchange rate, 

however, is only one of many factors affecting US-China competitiveness. More fundamentally, it should be recognized that China is a low wage emerging economy 

that focuses on export-led growth by specializing as a leading processing center for 

other countries. The IMF estimates that half of China’s exports are from foreign 

owned firms. 

Still, regardless of the reasons, American manufacturing job loss is a major concern. While manufacturing accounts for a larger share of the total jobs lost since 

the recession than in the past, its not clear whether these losses are cyclical, due 

to the business cycle and the collapse of the high tech bubble, or due to other factors. Manufacturing’s share of total US employment (21% in 2002) has been declining for several decades due to fundamental economic forces: changing technology 

and a greater specialization into research, design, and utilization of products—not 

just building them. While currency manipulation may play a part in our current 

manufacturing woes, it is a minor factor of a more complex dilemma. 

Even within this limited scope, the beneficial effects of an undervalued yuan for 

the U.S. are often not mentioned. American consumer purchasing power has increased as a result of lower-priced imports that has reduced inflation and spurred 

competition. US producers have become more competitive through the importing of 

less costly Chinese capital equipment and component parts. US borrowers have benefited from lower interest rates and higher investment spending created by Chinese 

purchasing of U.S. Treasury securities. As interest rates are lowered, our government’s interest payments are lower and spending in interest rate sensitive sectors 

is similarly increased. Though overlooked, these are the positive side-effects of the 

Chinese policy. 

10

But how significant are these benefits? On net, the Congressional Research Service says in a report that: 

‘‘Nationwide, these effects {beneficial effects on consumption, interest rates and investment spending} should offset job loss in the trade sector, at least in the medium 

term . . . It {an undervalued yuan} is expected to have no medium or long run effect 

on aggregate US employment or unemployment . . . some areas will gain while others will lose. And by shifting the composition of US output to a higher capital base, 

the size of the economy would be larger in the long run as a result of the capital 

inflow/trade deficit.’’ [CRS report RS21625, September 29, 2003, italics added.] 

Mr. Chairman, thank you for opening up this important hearing regarding the 

trade relationship between the U.S. and China. As we explore this issue, I would 

encourage us to take an objective look at all the implications of these trade-distorting measures. It is only with a balanced look that we can positively impact the 

future for our economy without picking winners and losers among our constituents.

Chairman HYDE. And I would like to welcome the Honorable 

Grant Aldonas to our Committee this afternoon. Grant Aldonas 

was confirmed as Under Secretary for International Trade Administration at the U.S. Department of Commerce on May 10, 2001. 

Prior to joining the Commerce Department, Under Secretary 

Aldonas served as Chief International Trade Counsel to the Chairman of the Senate Finance Committee, helping to pass significant 

trade legislation. 

While working as a partner with the law firm Miller & Chevalier, Mr. Aldonas served as Counsel to the Bipartisan Commission 

on Entitlement and Tax Reform, and as an advisor to the Commission on U.S. Pacific Trade and Investment. 

We welcome you, Mr. Under Secretary. And please proceed with 

a 5-minute summary. We shall be flexible. Your full statement will 

be made a part of the record. Mr. Secretary Aldonas. 

STATEMENT OF THE HONORABLE GRANT D. ALDONAS, UNDER 

SECRETARY, INTERNATIONAL TRADE ADMINISTRATION, U.S. 

DEPARTMENT OF COMMERCE 

Mr. ALDONAS. Thank you, Mr. Chairman, and Mr. Ranking Member. And I just want to say, Congressman Lantos, that I know 

whenever Secretary Evans says we all want the same thing, he 

was speaking in general terms, and certainly wasn’t endorsing the 

Prime Minister’s, what I would regard as horrific comments. 

Mr. LANTOS. With all due respect, he should have denounced 

them and expressed his outrage, and to express hallucinatory observations is an unacceptable response for a Secretary. 

Mr. ALDONAS. I appreciate what you are saying, and I will convey those thoughts directly to the Secretary. 

Mr. LANTOS. I thank you. 

Mr. ALDONAS. I do want to make the point, that certainly from 

our perspective, the statements of Prime Minister Mahathir are 

equivalent to pouring gasoline on a fire right now, given the situation in the world. Not only are they abhorrent, but completely 

uncalled for under the circumstances, particularly in the setting in 

which he was speaking. 

I would like to turn to the topic at hand, if I could, Mr. Chairman. It is an incredibly timely hearing, both because of the nature 

of our trading relationship, but equally important because of what 

is going on in the U.S. manufacturing sector. And I want to touch 

on both as a part of my discussion today. 

11

The other thing I want to underscore is that we are in the midst 

of what I would describe as a 3-month dialogue with our Chinese 

counterparts about precisely these issues. And there is no doubt 

that the level of interest expressed by the Committee, this Committee in particular, in our relationship with China and our economic relations is incredibly important at this time. And I know 

when I will be traveling to Beijing this coming week I will make 

use of the vigor of the Committee’s statements in terms of our discussions with the Chinese. 

That dialogue that has been going on has been taking place at 

the highest levels. President Bush will meet with President Hu this 

week in Thailand on the margins of the APEC summit. Treasury 

Secretary Snow laid the groundwork for that visit with his visit to 

Beijing in late August. Ambassador Zellick will follow the President’s meeting with a session to Beijing on our trading relationships. Secretary Evans and I will be in Beijing next week to discuss 

the same set of issues. And this will wrap up with Premier Wen’s 

visit to the United States in late November, early December, as 

well as an annual meeting, the meeting of the Joint Commission 

on Commerce and Trade in December. 

We expect that—from the Chinese, frankly, we have for a very 

long time, I think, both Congress and the Administration in the 

first year of China’s implementation of its WTO obligations have 

been extraordinarily patient, but the time has come to measure up 

as a practical matter. So the weather is definitely changing in 

terms of the context of our economic relationship. 

The stakes are high. As a number of the statements have pointed 

out, China has become our fourth largest trading partner, although 

China’s trade is in rough balance with the world as a whole. 

United States exports to China are growing faster than any other 

market. China, nonetheless, currently runs a $100 billion heading 

toward a $120 billion trade surplus with the United States. The 

reason for that seeming inconsistency, in my view, is the rise in 

China as the final assembly point for much of what we used to import from Asia as a whole. 

There is an obvious upside to China’s growth. The economic policies that they have pursued over the last 20 years have pulled 200 

million people out of poverty, which means there is about 900 million to go. A lot of their policies are driven toward maintaining employment, encouraging sectors that involve manufacturing because 

it is employment they want to see. They have their policies. I think 

our job is to make sure that we are very clear about what the lines 

are in terms of the trading system. 

Now, having said that, their policies do translate into an expanding market for goods and services. The fact that China’s trade is 

in balance overall, although it is running a huge surplus with the 

United States, reflects the fact that there is a rising level of import 

demand. 

And I do take some exception to Congressman Sherman’s statement simply because our exports have grown on the order of 21 

percent in the first 8 months of this year, and that falls on roughly 

similar sorts of growth in the last 2 years since the WTO agreement. What that reflects, in my view, is that the WTO agreement 

at least on paper is an enormous success, knocks down many of the 

12

barriers to entering China’s market. Today, the tariff rates that 

China imposes are lower on average than much of the rest of the 

developing world and, in fact, lower in some instances than our developed country trading partners. The WTO agreement obliges 

China to protect the intellectual property of the United States 

manufacturers and service suppliers. 

It also eliminated of the barriers to the free distribution of American goods in the Chinese economy. But what has become clear, 

both in economic and political terms, as we move deeper into the 

second year is that we now need to see actual enforcement of the 

laws and enforcement of the rules in other areas. 

The gains from trade—and this is probably the more fundamental point than even the WTO rules—the gains from trade come 

when we trade between economies and we gain from the benefits 

that comparative advantage yields. But where one economy is organized on principles that are inconsistent with that of the free market model, it can cause an enormous amount of injury and friction 

within our trading relationships. And that, in my view, is the current situation in China. 

Fundamentally, China has changed from a nonmarket economy 

to one that operates fully on market principles; and it is far from 

complete. Whereas United States companies face continuing pressure from our capital markets to turn a profit, that pressure simply 

does not exist in many instances in China. It is time for that to 

end. There is no reason, given its relative competitiveness, that its 

industry needs that kind of support either in China or in other 

Asian countries where we still have these same problems. It is precisely these sorts of practices that are so injurious and lead to the 

concerns of our manufacturers about the fact that there is not a 

level playing field internationally. It also undermines, I think, the 

support in the country, particularly from our manufacturing sector 

for a trade liberalizing agenda, as I know you pointed out, Mr. 

Chairman, and as did the Ranking Member. 

That is why one of the most forward leaning recommendations 

we tend to make regarding our trade is the establishment of an office within the Commerce Department, the sole function of which 

would be to investigate these sorts of practices. Traditionally, 

under the trade laws the way Congress has set those up, we will 

wait for a petition and industry will have to prove that they are 

injured before they could come in and request relief. And, in my 

view, it is not a question of requesting the relief. We in the Commerce Department should be acting on a proactive basis, identifying the problems and sorting these things out with our trading 

partners; and only if we fail at that should we have to resort to 

something like imposing prohibitive tariffs on commodities coming 

into the United States. I would rather try to solve the problem 

positively if we can. 

We will vigorously pursue China’s compliance with its WTO commitment and will enforce our domestic unfair trade laws rigorously. 

As both President and Secretary Evans have made clear—and Congressman Burton, I know you noted the rhetoric in the President’s 

speeches. And I just want to confirm that, in fact, that has been 

a part of his rhetoric since the campaign, as a practical matter, because there is no doubt that in this trading system, we have always 

13

put a little more on the table than other people in terms of opening 

up our market to keep the system moving. There is a point in 

which the bill comes due, and we are at that point now, frankly. 

That was reflected in many of the proposals we took into the 

Doha Round and into Cancun where we are really asking for the 

developing world and China in particular to reduce their tariffs to 

United States levels before we all went to zero. We were willing to 

go that far, as was our manufacturing sector, but really, it is time 

that the rest of the world measures up as well and addresses some 

of the imbalances in the trading system. 

Now, I want to spend a little bit of time with what time I have 

remaining, Mr. Chairman, on the President’s manufacturing initiative, because it provides a context for much of our discussions in 

terms of our trade with China. 

In March of this year, Secretary Evans, during Manufacturing 

Week in Chicago, announced the initiative. He directed me at the 

time to undertake a 6-month inquiry into the challenges facing our 

manufacturers, and what we did was conduct 23 roundtables across 

the country with virtually every manufacturing industry with businesses from very large to very small to identify the challenges. And 

what I most want to focus on, frankly, and particularly with this 

Committee, is one salient point that I think came out of it, and it 

was probably reinforced for me most a couple of weeks ago when 

I was in Maine. 

Senator Snowe was chairing a field hearing of the Senate’s Small 

Business Committee, which she chairs. And in the discussion, she 

had Pam Olson, the Assistant Secretary of Treasury and me on the 

first panel; the second panel was a group of seven manufacturers. 

And while much of the discussion did focus on China and did focus 

on international trade, when Senator Snowe put the question to 

every member of the manufacturing panel and asked them what 

the one single thing was that the United States Government could 

do, every one of them identified a domestic economic policy choice 

that is in front of Congress right now. 

My point in saying that is I think the time has come where we 

have to understand that in a global economy, that there is no domestic economic policy choice we make that doesn’t have implications for the competitiveness of our manufacturing sector. And 

probably the single most important message that I took away from 

the roundtable, the 23 discussions across the country, was increasingly the need in global economy to think about all choices we 

make, whether they are on trade policy, whether they are on energy policy, whether they are on tort reform, through the lens of 

competitiveness of our manufacturing sector on a global basis. 

Now, in addition to that, the concerns that have been registered 

here were registered by manufacturers, whether it was about exchange rates, whether it was about trade practices. It was an important part of the dialogue, I think, to understand and underscore 

for them the degree to which we have tried to tackle these things 

inside the Administration. I thought it was helpful for the manufacturers to understand that of the many dumping cases that have 

been taken up by this Administration, fully 50 percent of them or 

more are against China. It is where there is an awful lot of friction 

in the trading system right now. And the goal has to be to go after 

14

those trade practices as aggressively as we possibly can. And I am 

willing to stand on our record in that respect. 

We will be issuing a report I hope in November, which will include the recommendations. It certainly will include some things 

that bear on discussions that we have had here in the past with 

respect to our export promotion programs, Mr. Chairman. We have 

always appreciated your support and the Committee’s support on 

a bipartisan basis of what we are trying to do. China represents 

some unique challenges, and I think we are going to work hard together to try and meet those challenges. Increasingly, when we 

think about promoting exports, we are going to have to think not 

so much about exporting to geographic destinations but exporting 

into global supply chains so that if you are a participant as a component manufacturer, you may not export directly, but your livelihood may well depend on your ability to satisfy Caterpillar’s needs. 

We may increasingly have to think about exporting to Toyota as 

opposed to exporting to Japan, because Toyota will take our component suppliers globally. As a matter fact, that is the nature of competition today. 

That is a flavor of some of the things that have come up in our 

discussions, and I will be following through. Let me stop there, because I definitely want to get to your questions, Mr. Chairman. 

Chairman HYDE. Thank you, Mr. Aldonas. 

[The prepared statement of Mr. Aldonas follows:]

PREPARED STATEMENT OF THE HONORABLE GRANT D. ALDONAS, UNDER SECRETARY, 

INTERNATIONAL TRADE ADMINISTRATION, U.S. DEPARTMENT OF COMMERCE

Mr. Chairman, thank you very much for inviting me to participate in this hearing 

to discuss the ‘‘U.S.-China Ties: Reassessing the Economic Relationship.’’ The topic 

is particularly timely since it comes in the midst of an ongoing dialog with our Chinese counterparts about our economic relationship in general and our trade relationship in particular. 

That dialog is taking place at the highest levels. President Bush met with President Hu a few days ago in Thailand at the Asia-Pacific Economic Cooperation summit. Treasury Secretary Snow laid the groundwork for those discussions with his 

visit to Beijing in late August. Ambassador Zoellick is also in Beijing this week. Secretary Evans and I will travel to Beijing next week. Those discussions will culminate this year with the visit to Washington of Premier Wen and the annual meeting of the Joint Commission on Commerce and Trade, also here in Washington, in 

December. 

I appreciate the opportunity to appear before the Committee for another reason 

as well. It offers me the chance to review with the Committee some of our findings 

from the six-months of more than 20 roundtable discussions the Department held 

with U.S. manufacturers, both large and small, across the country. In particular, 

it offers the chance to put our trading relationship with China in an appropriate 

context among the other issues raised by U.S. manufacturers due to their impact 

on our industrial competitiveness. 

The Economic Context 

Let me start by setting the economic context for discussing both the health of our 

manufacturing sector and our trade relationship with China. I want, first, to take 

the argument that American manufacturers are weak and being ‘‘hollowed out’’ 

head on. They are not. We have the strongest, most dynamic manufacturing sector 

in the world. While focusing on the legitimate concerns raised by our manufacturers, we tend to forget that the United States remains far and away the largest producer and exporter of manufactured goods in the world. Standing alone, our manufacturing sector would rank as either the 4th or 5th largest economy in the world. 

Far from being hollowed out, our manufacturing sector is, in fact, larger than the 

entire economy of China. 

For those of us old enough to remember many of the industrial policy debates of 

the 1980s, we recall that the issue, in the face of an onslaught of Japanese imports, 

15

was the decline in American productivity. The debate recognized that a healthy 

manufacturing sector is critical to the U.S. economy not only because it currently 

makes up 14 percent of our gross domestic product and 11 percent of total employment, but also because of the innovations that it creates that allow us to be more 

productive. Even the severest critics of President Bush’s economic policies acknowledge that productivity is a key measure of our manufacturing sector’s and our 

economy’s health. Paul Krugman, for example, put it this way—

Productivity isn’t everything, but in the long run it is almost everything. A 

country’s ability to raise its standard of living over time depends almost entirely 

on its ability to raise output per worker.

How do the U.S. manufacturing sector and our economy measure by Krugman’s 

standard today? In fact, productivity is higher today than it was even during the 

late 1990s when everyone was glorifying the ‘‘new economy.’’ The U.S. manufacturing sector’s hard won gains in productivity, and the policies that we have adopted 

to reinforce them, allowed the United States to reclaim the top spot in the World 

Economic Forum’s 2002–2003 rankings as the most competitive economy in the 

world. 

Having said that, there is no doubt that our manufacturers face a uniquely challenging competitive environment today. The combined effects of rapid changes in 

communications and transportation technology have made more trade possible just 

as trade barriers have been falling worldwide and the end of the Cold War ended 

the decades-old division of the world economy. That has meant continuing pressure 

on pricing power and profit margins due to the excess capacity on the market for 

manufacturers worldwide, not just in the United States. A week ago, the Wall 

Street Journal reported on the decline in factory employment worldwide. For purposes of this hearing, it is probably useful to contrast the roughly 11 percent decline 

in manufacturing jobs from 1995 to 2002 against the more than 15 percent decline 

in manufacturing employment in China. 

What is different for U.S. manufacturers is the fallout from several macroeconomic events that have flowed through the trade accounts. Starting with the 

Asian financial crisis in 1997, U.S. exports of manufactured goods have faced a considerable slow down in foreign demand. The fact that major trading partners like 

Germany and Japan, which still make up over 20 percent of the world economy, fell 

into recession at roughly the same time as the United States meant that they could 

not act as a counterweight when the U.S. economy fell into recession in late 2000. 

Significantly, the recession in manufacturing began 10 months earlier in the 1st 

Quarter of 2000. What that meant, as then-Secretary of Treasury Lawrence Summers said, was that the ‘‘[w]orld economy is flying on one engine,’’ and that engine 

is the United States. The net effect was upward pressure on our trade deficit. 

Fortunately, as the stimulus of the 2001 and 2003 tax cuts have begun to kick 

in, the U.S. economy has returned to a vigorous rate of growth—3.3 percent in the 

second quarter of this year and the pace of economic activity, according to most private sector economists’ estimates, appears to have accelerated since then. It now appears that manufacturing, after many months of very slow growth, is beginning to 

participate in that broader economic recovery. Durable goods’ orders have been up 

generally, although down in August. And, the Purchasing Manager’s Index, a key 

indicator of future economic growth, is now consistently above the level that means 

stronger growth ahead. 

Even on the unemployment front, there are signs of job growth consistent with 

a stronger economy. The most recent figures reflect that unemployment claims are 

falling and the Labor Department’s household survey, which generally picks up on 

job growth faster than its survey of employers, shows rising employment. Just to 

put that in perspective, virtually all economists agree that due to rapid policy responses, the recession was shallower than most and unemployment, with the exception of a rise to 6.3 percent in June of this year, generally stayed within 5.5 and 

6 percent throughout the recession and the early stages of the recovery. Not long 

ago, according to an article in the Wall Street Journal, then-President Clinton was 

encouraging this Committee to take a hard look at our unemployment insurance 

programs on the grounds that we were at full employment by historical standards—

at the time President Clinton made that statement, unemployment stood at 6.8 percent. 

Having said that, I want to reiterate, as the President has, that the Administration is committed to working towards an economic climate where everyone that 

wants a job has one. And there is an important story to tell about the unemployment figures in manufacturing. The job losses began in 2000 when, as I noted, the 

manufacturing sector entered into a recession about 10 months earlier than the 

economy as a whole. The economy was just beginning to cope with the effect of a 

16

sharp drop in business investment as industry pulled back from a period of heavy 

investment in technology. Not surprisingly, the industries with the most significant 

job losses in manufacturing are precisely those industries—telecommunications 

equipment and computing—that benefited most from the boom in investment related to the ‘‘dot.com bubble’’ of the late 1990s and then fell when that bubble burst 

and the stock market began to decline sharply. 

What has surprised most economists has been the fact that manufacturing continued to shed jobs deep into the recovery of the economy. Employment in manufacturing has been declining for decades as productivity gains have significantly reduced the number of worker-hours needed to produce a given product. In the last 

15 years, in particular, those gains have averaged 3 percent or more, demand for 

manufactured goods has grown less than that amount, and employment in manufacturing has fallen commensurately. Some share of the recent reduction in manufacturing employment during the initial stages of the recovery and expansion is directly attributable to the efforts of manufacturers to cut costs and raise productivity. 

Under considerable competitive pressure, American manufacturers are finding ways 

to do more with less. And, the labor market is responding by shifting jobs to other 

industries where growth in demand outstrips rises in productivity. 

With that as context, I want to focus on the link between the competitive pressure 

that has driven American manufacturing to pursue those productivity gains and 

what is going on in the international environment, particularly with respect to our 

trade with China and its emergence from a fully state controlled economy to become 

a major force in manufacturing globally. 

On the international front, one of the most frequently cited statistics is our trade 

deficit, which has been growing overall and particularly with China. Although the 

trade deficit is often thought of as an indicator of our competitiveness, it is better 

understood as a reflection of the relative growth in our economy compared to our 

trading partners. Perhaps the best example comes from the 1991–92 recession, 

when the trade deficit contracted sharply. No one would suggest that the decline 

in the trade deficit was due to a further opening of world markets to U.S. exports—

neither the NAFTA nor the Uruguay Round of multilateral negotiations were yet 

complete at that stage. Nor had Japan, which saw the greatest decline in its trade 

surplus with the United States, suddenly opened its economy to U.S. goods and 

services. Instead, the decline in the deficit was directly attributable to the differences in the rates of growth in the U.S. economy and the world economy as a 

whole, Japan’s in particular. 

In past recessions, continuing growth abroad mitigated the effect of the U.S. recession on our manufacturers. In the most recent recession, that did not happen. 

The data behind the trade deficit bear out the effects of differences in economic 

growth rates between economies. In eleven of the last twelve years, US economic 

growth has outpaced that in Japan, Germany, and the European Union. What’s 

more, slow growth among our leading trading partners is not new. Japan’s economy, 

which still represents close to 2/3 of the gross domestic product of Asia, has barely 

grown for a decade. Germany’s economy has not grown appreciably in three years. 

On top of that, the rest of Asia, with the notable exception of China, has presented 

a very mixed picture in terms of economic growth since the onset of the Asian financial crisis in 1997. While some economies have recovered, others have not. And, 

these are markets that were once among the fastest growing in the world B markets 

that had become significant consumers of the sorts of advanced technology capital 

goods that our manufacturers sell. 

What that should tell us, both in terms of the economy as a whole and the manufacturing sector in particular, is that perhaps the most significant single action we 

could take is to step up encouragement of our trading partners, particularly Japan 

and Germany which together make up 20 percent of the world economy, to jettison 

their anti-growth policies and to adopt policies that are designed to boost economic 

growth. We need to preach what we practice because the alternative to growth is 

always a zero-sum game of dividing up the existing pie, and that leads directly to 

the sort of strains we are seeing now in our trade relationships. 

But, those statistics also bear on our economic relationship with China in two respects. First, it is clear that China’s extraordinary growth—currently estimated to 

grow 8.6% this year and another 8% in 2004—has helped our manufacturers in that 

it has provided a source of foreign demand that would not otherwise exist in today’s 

world economy. It is worth underscoring that, for U.S.-based automotive companies, 

earnings in China may well be the difference between profitability and losses. That 

has a very human dimension that I do not want us to lose sight of in our discussions 

on China—growth there right now is one of the reasons our automobile companies 

can continue to keep their U.S. workers employed and to pay the pension benefits 

they have guaranteed their retirees. 

17

Our Trade Relationship with China 

Which leads me to China. In the more than 20 roundtables the Department held 

with manufacturers across the country over the past six months, there was no single 

topic that garnered more attention than China, its emergence from state-imposed 

economic isolation to become a major center of manufacturing, and our trade with 

China. The Chinese have made considerable progress over the last two decades in 

lifting more than 200 million people out of poverty by relying ever more heavily on 

the market to direct resources within its economy. 

The stakes involved are high. China is our fourth largest trading partner. Bilat- eral merchandise trade reached $147.2 billion in 2002. Last year, China overtook 

Japan to become our third largest source of imports. In July of this year, China surpassed Mexico to become our second largest source of imports. Our imports from 

China are more than five times greater than our exports. The bilateral trade deficit 

hit $103 billion in 2002 and reached $65 billion in the first seven months of this 

year. 

A large share of what we now import from China used to be imported from other 

Asian countries. China’s role in the restructuring of global manufacturing is that 

of the final assembly point for most Asian electronic equipment destined for the 

United States China becomes the exporter of record before would have been export 

to the United States from other Asian countries. What that means in practical 

terms is that it would be more appropriate to look at our trade account with China 

as an indicator of our competition in manufacturing across Asia, as opposed to the 

rise of Chinese manufacturing alone. 

There is an obvious upside to China’s growth and the benefit the Chinese derive 

as investment in Asia shifts toward China for final assembly. That shift, together 

with China’s economic policies, has brought about a rising standard of living in 

China and a considerable rise in disposable income for the average Chinese. And, 

what that has created is a consumer demand that did not previously exist in China. 

What that means is an expanding market for goods and services, as opposed to the 

largely one-way street of the past. The fact that China’s trade is nearly in balance 

overall, even though it runs a huge surplus with the United States, reinforces the 

point about rising consumer demand and growth in imports. 

To put that in perspective, China, along with the United States, currently accounts for most of the current growth in the world economy. It is worth noting that 

since 2001, China has been our fastest growing export market by far among our top 

ten trading partners. Our exports to China surged 19 percent in 2001, 15 percent 

last year, and more than 22 percent from January to July of this year, even while 

our exports to the world as a whole declined 7 percent in 2001, and 5 percent in 

2002, and rose less than 3 percent during the first six months of this year. 

All of that makes China an attractive market for much of what we produce in 

the United States, including for our manufacturers. We are far more likely to sell 

the sorts of capital equipment in which we have a comparative advantage in China 

than in most world markets based simply on the growth in the Chinese economy 

and the nature of that growth. If, for example, we continued to see the construction 

industry boom in China and a major investment in infrastructure to link the western provinces with the coast, companies like Caterpillar will find a growing market 

for what they sell. The same is true for Boeing. 

Here, it is worth stressing that we need companies like Caterpillar and Boeing 

to succeed in the Chinese and other overseas markets because their supply chains 

are filled with what are known in business as tier 3 and tier 4 suppliers. Many of 

those suppliers are small and medium-sized businesses that do not export directly, 

but their future success depends on whether Cat and Boeing remain globally competitive. 

But, it is not just the Boeings and Caterpillars of the U.S. manufacturing sector 

that see growth in the Chinese market as an opportunity. Direct exports by small 

and medium-sized businesses in the United States have grown as well. For example, 

Bitrode Corporation is a Fenton, Missouri, company that manufactures equipment 

used by the battery manufacturing industry. The company produces testers as well 

as chargers, and all their equipment is for use by battery manufacturers or researchers. Many of Bitrode’s products are destined overseas, including two specific 

products for China. Last year the company sold equipment to China to the tune of 

$1.5 million. The company says their exports to China are growing about 15 percent 

annually, while their sales in the United States are holding even at best. 

Similarly, Numatics, a Highland, Michigan, company that works in a highly specialized field, developing and manufacturing components for automated machinery 

used in many branches of industry, including automotive, petro-chemical, aerospace, 

and medical equipment, participated in a Commerce Department trade mission in 

early May, 2002, to China and signed deals with four new distributors, each covVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
18

ering different geographic regions of China. Last year, Numatics staff worked closely 

with the new Chinese distributors to complete training and set up inventory. In 

2003, Numatics reports that sales are picking up. The company is planning to participate in a Chinese trade show in November. 

One of the basic reasons for negotiating for 15 years with the Chinese over their 

accession to the World Trade Organization was to ensure that we would knock down 

the many barriers to entering China’s market. On paper, the accession agreement 

represents a considerable success. Today, the tariff rates that China imposes are 

lower on average than much of the rest of the developing, and in some instances, 

the developed world. In addition, the WTO agreement obliges China to protect the 

intellectual property of U.S. manufacturers and service suppliers. The agreement 

also phased out many of the barriers to the free distribution of American goods 

throughout the Chinese economy. American goods are freer to move through a variety of channels instead of being beholden to trading through a Chinese state enterprise as in the past. The situation facing our manufacturers from a competitive perspective was far worse prior to China’s entry into the WTO. Our manufacturers 

lacked access to the Chinese market, but their manufacturers had relatively free access to ours. 

In the first year following China’s accession to the WTO, I think both Congress 

and the President showed an extraordinary amount of patience as China reviewed 

literally thousands of laws and regulations in an effort to make the necessary 

changes to bring them into compliance with WTO rules. Now, as we move deeper 

into the second year of China’s participation in the WTO, we need to see actual enforcement of those laws and basic compliance with WTO rules in other areas. I 

know that the President, Secretary Evans, Ambassador Zoellick, and most recently 

Secretary Snow have all made that point vigorously with their counterparts in 

China. And, I can attest that, at a working level, the rest of us have taken up the 

cause just as vigorously. 

But, there is still a very, very long way to go. And, that distance goes to the heart 

of the complaint many manufacturers have about China. It is the pace of the ongoing reform of the Chinese economy toward a market model, of which the implementation of the Chinese WTO obligations is a part, that causes friction within our 

trade relationship. The WTO rules, and, indeed, the whole concept of trade is based 

on free competition in the marketplace. The gains from trade arise when countries 

open their economies to gain the benefits that comparative advantage yields. But, 

where one economy is organized under principles that are inconsistent with that 

free market model, it can cause an enormous amount of injury and friction within 

our trading relationships. That is, in my view, the current situation with China. 

The recently concluded plenum of the Central Committee of the Chinese People’s 

Congress reinforced the commitment of the Chinese government to undertake the 

reforms needed to push their economy toward a market-based model. That renewed 

commitment is welcome. That said using WTO compliance as a surrogate for China’s overall movement toward a free market model reflects the distance we still 

have to go. We have considerable challenges in terms of WTO compliance, particularly in areas like the protection of intellectual property that represents the key 

U.S. competitive edge in many manufacturing industries. 

In fact, no country raised more attention as a source of concern than China during 

the roundtable discussions. Our manufacturers complained about rampant piracy of 

intellectual property; forced transfer of technology from firms launching joint ventures in China; a broad range of trade barriers; and capital markets that are largely 

insulated from free-market pressures. We also heard rising concerns about the timeliness and direction of China’s implementation of its WTO commitments in areas 

such as transparency, trading rights and distribution services, agriculture, financial 

services, and standards. 

In the area of standards, the Commerce Department and U.S. Government complaints on a new Chinese standard for cadmium levels in fertilizer has led to an 

indefinite delay in China’s finalization of the standard. Strong export sales of U.S. 

fertilizer to China continue and industry representatives are pleased with the results of our engagement with the Chinese standards authorities in this matter. We 

will continue to work to ensure that any mandatory standards China issues, in this 

sector or others, fully comply with its WTO obligations in the area of Technical Barriers to Trade. 

Construction services are another area in which we have made some progress. 

Working with the Department of State and others, Commerce successfully convinced 

China’s Ministry of Construction (‘‘MOC’’) to extend the deadline for non-Chinese 

construction companies to incorporate as either foreign invested construction enterprises or construction design firms. This will allow foreign firms to continue to operate on a project-by-project basis. MOC officials have also agreed to meet with indusVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
19

try to discuss the new rules. Commerce and State currently are working to organize 

this meeting. 

Fundamentally, China’s change from a non-market economy to one that operates 

fully on market principles is incomplete. Although the Chinese often make the case 

that they are a market economy because they want the benefits that designation 

would yield under our antidumping laws, the simple fact is that many of the main 

drivers of the Chinese economy remain in state hands. Whereas U.S. companies face 

continuing pressure from our capital markets to turn a profit, that pressure simply 

does not exist in many cases in China. 

In one sense, this problem is not new. American firms have seen the same pattern 

in other Asian markets for years. Even the 1997 financial crisis has not weaned industries or governments from those unhealthy practices—witness Korea’s continuing 

support for the Hynix semiconductor operations, a company that was otherwise 

headed for liquidation. On the other hand, we need to make clear that it’s time for 

this to end. There is no reason today for this kind of support either by China or 

by other Asian countries of their manufacturing industries. It is precisely these 

sorts of practices that are so injurious, not only to our own industry, but to the process of trade liberalization that all can benefit from as long as we are all playing 

under the same rules. 

I recognize that many commentators see a demand for a Alevel playing field@ as 

a demand for protection, but that is not always, or even usually the case. Most manufacturers I have spoken with over the last six months did not want protection; they 

wanted the unfair trade practices that rigged the game against them eliminated. A 

good example is the forest products industry, which has an enormous fight with 

Canada over subsidies. Yet, in the context of our roundtable on forest products manufacturing what these firms sought was not protection—they asked that the President negotiate the elimination of the barriers they faced abroad and the subsidies 

they faced in terms of competition from imports. The same held true for most manufacturers with whom we discussed China. There was a strong recognition that we 

were better off in a world in which the rules were observed and the competition was 

fair, than a world segmented by trade barriers which would mean less trade and 

slower economic growth for all. 

At the same time, I also must stress that there are significant parts of our manufacturing sector that are under extraordinary pressure to adjust to new levels of 

competition from imports, particularly from China. Industries like textiles and apparel in the South and tool and die in the Northeast and Midwest offer examples 

of the sorts of pressures our manufacturers face. Both the challenges and the pain 

felt in many communities are very real. In the case of textiles and apparel, the challenges are particularly intense because the industry is emerging from a 40-year period when it was protected by quotas on imports of competing material and clothing. 

As a consequence, the industry remains highly fragmented and is being forced to 

go through, all at one time, the adjustment and consolidation that most U.S. industries went through in the 1970s and 1980s. 

In the last round of world trade negotiations, President Clinton agreed to phase 

out the quota system that had protected the textile industry. Most of the truly sensitive items from the perspective of U.S. industry were given the longest phase-outs. 

But, the quotas will come to an end on January 1, 2005, and that will mean still 

stronger competition from imports. What is not generally understood is that most 

of the sharp increase in Chinese imports has come at the expense of our other trading partners. As new products have been freed of quota arrangements, retailers no 

longer face the need to source products from multiple countries. Instead, much of 

what was previously shipped to the United States from other Asian countries now 

comes to us from China. But, that has not meant less pressure on U.S. manufacturers in terms of price competition. 

While the argument most frequently raised about China by commentators seems 

to be the difference in wage rates, most of my conversations with manufacturers, 

particularly in textiles, suggested other reasons for increased Chinese competition. 

What is not often understood is that, today, the textile industry is actually very high 

tech. There is very little labor involved in many products that come out of the industry and wages are a relatively small portion of the total cost of production except 

in the case of products that require considerable hand stitching. 

The truth of that statement was brought home to me in a conversation with a 

North Carolina manufacturer of textile products used in the luggage industry. Most 

bags today are made with some form of rip-stop material, none of which is hand 

sewn. Nor is the frame of most roll-on bags manufactured by hand. Yet, the North 

Carolina manufacturer showed me 5 suitcases, one nesting inside the other, that 

sold for a total price—delivered from China—of under $30. In other words, the total 

20

cost of the five bags was below the North Carolina manufacturer’s cost of materials 

alone. 

The point to that story is simply that it is not wages alone that allowed the Chinese manufacturer to sell the 5 pieces of luggage for a delivered price of less that 

$30. The cost of most of the materials is determined in world markets, so if the Chinese economy were open to international trade and competition, then the Chinese 

manufacturer’s materials costs would be comparable to that of the U.S. costs. This 

means that to get the delivered price down to below $30 there must be a very large 

amount of government subsidy, express or implied, to the manufacturer—a subsidy 

that can take the form of an outright cash grant to the exporter, but more often 

will take the indirect form of tariff protection against competition, the forgiveness 

or rebate of taxes, or the continuing extension of credit to noncredit worthy enterprises. 

In my view, although the textile industry is commonly criticized for seeking protection based on the past 40 years of quotas, the complaint that has led the industry 

to seek safeguards against Chinese imports stems from a different motive. There is 

no real argument that the Chinese market operates fully on a market basis, and 

the reasons for the industry’s request for help stem from that simple difference between the pressures they face in our market on a day-to-day basis and the pressures 

that their Chinese competition does not. 

What that also points out is the fact that, in addition to pressing the Chinese at 

every opportunity on their compliance with their WTO commitments, we also have 

to be extraordinarily vigilant regarding the injurious effects of other forms of government support for Chinese industry that are not covered by current WTO rules. 

Those sorts of practices require a different type of tool—one that requires digging 

out the facts regarding the underlying competitive differences that our industry 

faces in terms of import competition from China. 

As I noted above, the textile industry is not alone in facing Chinese subsidies and 

protection. Other industries like tool and die and U.S. foundries face similar competitive conditions. That is why one of the most forward-leaning recommendations 

we intend to make regarding our trade is the establishment of an office in the Commerce Department, the sole function of which will be to investigate these sorts of 

practices. When we find these anti-competitive practices, we will vigorously seek 

their elimination by the Chinese and by other trading partners. 

The one thing I can assure you is that the Department of Commerce is dedicated 

to making sure China does play by the rules. We will vigorously pursue China’s 

compliance with its WTO commitments and we will enforce our domestic unfair 

trade laws rigorously and fairly, as both President Bush and Secretary Evans have 

made clear. And, that will be the single most important topic of conversation with 

our counterparts this coming week. 

The Department of Commerce’s Role in Trade With China 

The Department of Commerce, in close coordination with USTR and other agencies, has adopted an aggressive and multi-pronged approach to ensure that China 

honors its WTO commitments and that U.S. companies benefit from these opportunities. We will target unfair trade practices wherever they occur. We are exploring 

the use of new tools to expand our trade promotion activities in China. We are expanding efforts to engage Chinese officials to make sure they Aget the rules right@ 

as they continue their enormous task of restructuring their economic system. 

The Commerce Department has actively provided WTO-related technical assistance to China since September 2000, well before China’s accession to the WTO. Initial programs focused on increasing the awareness of general WTO principles among 

Chinese government officials. As China developed an increasingly sophisticated understanding of the WTO system, our programs have been tailored to more specific 

areas, such as standards development and intellectual property right (IPR) protection. For example, in 2003 Commerce sponsored or coordinated programs on fertilizer standards, antitrust, government procurement, medical device regulatory 

training, and information and communication technologies standards and conformity 

assessment. 

Despite China’s commitments to crack down on rampant piracy, counterfeit CDs, 

DVDs, and pharmaceuticals continue to flood the market. In addition, piracy and 

counterfeiting in China has a significant impact on U.S. intellectual property rights 

holders in China itself. In fact, the International Intellectual Property Alliance estimates that business software, music, movie and entertainment software piracy rates 

in China exceed 90%, with damages of $1.85 billion in 2002. We have raised specific 

IPR concerns during our meetings with senior Chinese government officials and 

have repeatedly demanded that the Chinese government uphold its bilateral and 

multilateral IPR commitments. 

21

Through the annual Special 301 process, we scrutinize China’s IPR conditions in 

close coordination with our colleagues in other agencies. To make sure that China 

has the tools to implement its commitments, we have organized a series of seminars 

with Chinese officials. Programs in development for later this year include a WTO 

pharmaceutical regulatory seminar and anti-counterfeit training, and IPR criminal 

& border enforcement seminars. We have worked on these programs on an intra and 

inter agency basis, using the resources of US Patent and Trademark Office, Department of Justice and other agencies. We think China can and should do better in 

these areas. We continue to press for progress. 

However, keeping our focus on China’s WTO implementation and the country’s 

other trade practices is only part of the solution. We must continue to enhance the 

ability of U.S. businesses to compete in China. We are increasing our efforts to ensure that U.S.-developed technical standards are accepted in China just as they are 

throughout the world. We are launching ADoing Business in China@ seminars in 

cities across the country to address concerns about the Chinese market from small 

and medium-sized businesses. We are exploring ways to develop more trade leads 

in China and to provide even more targeted information on opportunities in China 

for companies in the U.S. 

Combined with these domestic efforts, we regularly engage Chinese government 

officials to ensure trade agreement compliance and market access for our products 

and services. Secretary Evans will visit China in October to advance U.S. interests 

and advocate for a level playing field in our economic relations with China. We will 

have another opportunity to raise outstanding issues during the 15th U.S.-China 

Joint Commission on Commerce and Trade (JCCT) to be held in Washington in 

early December. 

The President’s Manufacturing Initiative 

With that, I would like to turn to the topic of the President’s Manufacturing Initiative and the context it provides for our discussion of trade with China. In March 

of this year, during Manufacturing Week, Secretary Evans had the opportunity to 

speak before the National Association of Manufacturers in Chicago. At that time, 

he announced the President’s Manufacturing Initiative. As a part of that initiative, 

Secretary Evans directed me to lead a comprehensive review of the issues influencing long-term competitiveness of U.S. manufacturing. The central goal of the review is to develop a strategy to ensure that government is fostering an environment 

that promotes a dynamic manufacturing industry. The review will conclude with the 

release of a report later this fall. 

The Commerce Department’s senior management, including Secretary Evans and 

Deputy Secretary Bodman, all pitched in. We held roundtable discussions with manufacturers in the aerospace, auto, semiconductor, and pharmaceutical sectors, 

among others, in more than 20 cities across the United States—from Manchester, 

New Hampshire to Columbus, Ohio, to Detroit to Los Angeles—to develop the report 

and recommendations. 

What we heard from manufacturers in terms of the challenges they face was significant. While the international competition is what has garnered most of the attention in the press, by far the greater weight of the manufacturers’ comments focused on domestic issues—what I call ‘‘keeping our side of the street clean.’’ What 

I mean by that is simply paying attention to the needs of our manufacturers as we 

develop legislation or implement regulations. It is the steady accumulation of multiple burdens, rather than a single cause, that has had the most severe impact on 

the competitive environment in which our manufacturers operate. 

The list of issues our manufacturers identified should not surprise anyone who 

has taken a serious interest in manufacturing. While our manufacturers have tightened their belts and raised their productivity in an effort to remain competitive and, 

in fact, to succeed in the day-to-day competition in the marketplace, they have seen 

that advantage and the hard-won productivity gains eroded by everything from 

higher energy costs to higher medical and pension costs to higher insurance costs 

due to a run-away tort system. 

Just a few examples might suggest why manufacturers have seen their costs rise. 

We heard from manufacturers in New Jersey that 30 cents of every dollar of revenue went to pay health benefits for employees. Manufacturers gladly pay for their 

employee’s health benefits because they see their own interest served by a healthy 

and motivated workforce, but if we are serious about manufacturing, we have to be 

serious about grappling with the underlying drivers that have created 145 percent 

increases in health care insurance costs that obviously are not sustainable indefinitely. 

In Michigan, I met with auto parts suppliers that faced continuing pressure from 

the auto companies to lower their prices by 20 percent or face the prospect that the 

22

auto companies would turn to overseas sources of supply. The concern those parts 

suppliers reflected involve the terms on which they compete with those overseas 

suppliers, particularly in China. But the auto parts suppliers knew that the ultimate source of the problem lay in an auto industry that is grappling with the same 

sorts of legacy costs that burdened the steel industry. If we are serious about manufacturing, then these industries will have to get those financial obligations under 

control. 

In Columbus, Ohio, Des Moines, Iowa, and in my hometown of Minneapolis, Minnesota, I met with manufacturers in the plastics and adhesives businesses that are 

heavy users of natural gas. The companies in the plastics businesses in particular 

risk seeing whole new markets fall to their foreign competitors who see lower natural gas prices. If we are serious about manufacturing, we have to adopt a national 

energy plan that will help us access new sources of supply and improved transmission to reduce the cost of energy to our manufacturers as well as to consumers. 

Another example we heard from virtually every manufacturing trade association 

we met with was the need to eliminate the complexity and the disincentives our tax 

system creates for investing in manufacturing in the United States. A number of 

issues fall in that category. Take the bias in the current tax code against equity financing, which raises the cost of capital, thereby reducing the investment. This bias 

also translates into a preference for debt, which yields highly leveraged companies 

and a highly leveraged country, all the while encouraging the worst sorts of gaming 

as clever tax lawyers try to find ways to take what is an equity interest and call 

it debt in order to qualify for an interest deduction. Taken together, even without 

cutting rates, reforms of the tax code could make a profound difference to the relative attraction of investing in manufacturing in the United States. 

But, perhaps the most egregious example comes out of the tort system in this 

country. One issue, in particular, stood out among the manufacturers’ concerns 

about the tort system. That was the ongoing asbestos litigation. There, the continuing litigation has yet to help many individuals who were harmed by prolonged 

exposure to asbestos, while, at the same time, the litigation hangs over virtually all 

U.S. manufacturing, raising their insurance costs and dampening their returns. 

Clearly, if we are serious about manufacturing, we have to get serious about reforming the tort system. 

Manufacturers also pointed to declining vocational school programs, declining enrollments in engineering and the funding of scientific research, all of which are essential to the productivity gains that keep our manufacturing sector competitive and 

keep a skilled workforce employed. 

Finally, as I noted above, in addition to keeping our own side of the street clean, 

U.S. manufacturers demanded a level playing field. For most, that translated into 

a demand that we negotiate down tariff rates that are higher than ours and break 

open new markets. Or it translated into a demand for the enforcement of rules barring the theft of intellectual property. It translated into a demand for the enforcement of our unfair trade laws or laws against customs fraud. 

What I did not see was an interest in outright protection. Rather, most manufacturers saw trade as a simple question of equity. If we keep our markets open to 

our trading partners goods, they should do the same for us. But, where our trading 

partners did not live up to the terms of our agreements or otherwise heed the rules, 

our manufacturers expected that those trading partners should pay a price. 

That is where what we do domestically bears on our trade with China. In my 

view, if we have done what we can to grapple with the disincentives we create for 

investing in manufacturing here in the United States, our manufacturers will be in 

a far better competitive position to gain access to the supply chains that will take 

them global and into the Chinese market in particular. In addition, we would come 

to our discussions with the Chinese knowing that any disparity in competitiveness 

between U.S. and Chinese manufacturers is not attributable to our own actions, but 

to the function of the market or the intervention of the Chinese government on behalf of their firms. Most manufacturers I have met with are prepared to live with 

the first result; they are not prepared, nor is this Administration, to live with the 

second. 

While we are still in the process of finalizing the report and recommendations 

across many fronts, Secretary Evans has outlined several new initiatives in response to the concerns we heard from manufacturers, particularly the need for a 

stronger focus within the U.S. government on manufacturing and the most immediate cases of unfair trade affecting our manufacturers. The first initiative, announced by the President on Labor Day, is a new Assistant Secretary of Commerce 

to serve as the point person in the Administration and within the U.S. government 

for manufacturers and as an effective advocate for the manufacturing sector’s competitiveness. There are many programs within the federal government that bear on 

23

manufacturing, but heretofore there was no one person or one office responsible for 

bringing their efforts into a coherent strategy. The second would call for the creation 

of Assistant Secretary for Trade Promotion to boost our exports, particularly to 

those markets that our negotiators have recently opened to our trade like China. 

And, the third is the establishment of an Unfair Trade Practices Team to track, detect, and confront unfair competition before it injures an industry here at home. 

We expect the manufacturing report and the remainder of the recommendations 

to be out soon. In addition to moving on the implementation of those recommendations, we intend to do two things to follow up. The first is to go back to the manufacturers we visited earlier this year to get their reaction on what we have suggested 

and to help us refine our approach as we move forward. The second is to discuss 

the next set of issues we intend to tackle as part of our on-going commitment to 

support our manufacturing sector. 

That concludes my testimony. I would be pleased to answer any questions that 

you may have.

Chairman HYDE. We will now entertain questions. Mr. Lantos. 

Mr. LANTOS. Thank you very much, Mr. Chairman. 

Mr. Secretary, you will be traveling to China next week, as I understand it. Can you pledge to this Committee that you will raise 

with your Chinese interlocutors the issue of their total lack of compliance with internationally recognized standards of labor? Will you 

pledge to raise the issue of the two labor leaders who have been 

unjustly imprisoned, and as we speak, are still in prison? Will you 

raise the issue which we have been doing unsuccessfully for over 

a decade of intellectual property rights? Pirated CD ROMs are 

being pedaled at the very gates of the United States Embassy of 

Beijing. And the Chinese are laughing at us, because apart from 

the ceremonial raising of these issues, nothing happens. 

Now, you don’t have to be a genius in understanding relationships to clearly see that with a $120 billion trade deficit, we have 

enormous leverage over China. I agree with my friend, Mr. Burton, 

that neither the Clinton Administration nor this Administration 

has used our enormous leverage. At what point will the Department of Commerce and the Administration go beyond simple oratory and no action? Because so far we have seen no action. 

Mr. ALDONAS. First, with respect to the labor laws and the labor 

leaders, both Secretary Evans and I make it a routine part of our 

discussions with our counterparts to raise the human rights issues 

as well as the economic issues. 

Mr. LANTOS. But if you will allow me to interrupt. You know, 

Cicero finished every speech by saying, pro forma, that he recommends the destruction of Carthage. And that was a throwaway 

sentence. And it seems to me that you and Secretary Evans and 

your predecessors have these pro forma pronunciamentos to placate 

the Congress. And that is all these perfunctory pronouncements 

mean. You are not using the leverage which is at your disposal; you 

are making standard statements so that you can tell us that you 

raised the issue. But nothing happens. 

Mr. ALDONAS. Well, it won’t surprise you if I quarrel with your 

description of the discussions we have had with our Chinese counterparts, Congressman Lantos, because when I raise these issues, 

the two things I point out is, not only is it inconsistent with human 

dignity and human rights in terms of their practices, but I also 

point out to them that one of the key features, frankly, of moving 

in a direction that is going to best serve their interests economically as well as their participation in the trading system, is to 

24

make sure that the freedom they want to give firms and enterprises also extends to individuals. 

And as long as an individual in Chinese society has to hold a 

card which tells them where they have to work, that is not a society that is free. And that point is both political and economic. And, 

frankly, I think we all have to be honest, that increasingly and to 

the extent that we can increasingly individuate the economic interests of any actor, whether it is someone, a worker or whether it is 

an enterprise, we are sowing the seeds of political pluralism. And 

that is as much in our interest from an economic point of view as 

it is from a political point of view as it is from a human rights perspective. 

So I don’t want to say that it is a throwaway when we raise 

these issues. I am very conscious not only of the concerns, but I am 

very conscious of the sorts of things that the President has said 

about the conditions of human rights around the world, particularly with respect to China. And it does affect our trade. There is 

no doubt about that. 

In terms of intellectual property laws, there is probably no issue 

that is more important in some respects. And I say that because 

people have a tendency to forget about the importance of our manufacturing sector, not just because it is 14 percent of the GDP or 

11 percent of the employment. But it really is a crucible within 

which most of the innovation in our society is created. Those productivity gains that we have seen are now higher in the United 

States’ economy than it was even during the 1990s when we were 

talking about a new economy. Those productivity gains flow largely 

from the manufacturing sector. And if you think about how we 

trade globally, the one thing you have to do is protect the ideas 

that are the source of that innovation. 

What we have in China right now, you can take software as an 

example, is that about 90 percent by some industry estimates of 

the software is currently pirated. A fair amount of that is pirated 

software is use in the halls of the Chinese government. That has 

to the end. And I agree with you, absolutely, Congressman Lantos, 

that a price has to be paid in the absence of compliance with the 

rules that they have signed up to, particularly on intellectual property, because it is so critical to the future of our manufacturing sector. 

As we have all talked I think throughout the 1990s about the 

need to move up the value chain and what that will require from 

U.S. manufacturing, the keystone has always been our ability to 

maintain the technological edge. And at the end of the day, that 

means that we have to protect the intellectual property. So that 

definitely will be the top item in terms of the specifics of trade. 

The leverage of the market, I have no quarrel with the idea of 

using the leverage of our market. But I would object to the notion 

that we have not been vigorous. You can’t look at 50 percent of the 

anti-dumping cases taken up by this Administration and the consistent pressure we put on the Chinese to reform the underlying 

practices and say that that is not action. The range of duties that 

apply to these are extremely large. 

We pointed out that they will maintain a nonmarket economy 

status until we have seen the changes that you and I would both 

25

agree are part of the status of a true market economy. And until 

such time, they will face the penalties under our unfair trade laws. 

We are always happy to have a conversation with the Chinese 

about what it take to be a market economy if they want to engage 

in that discussion. But until such time as they have taken those 

steps, they will continue to be nonmarket economy status and face 

those penalty under the law. And we will be aggressive in enforcing 

them. 

Chairman HYDE. Mr. Green. 

Mr. GREEN. Thank you, Mr. Chairman. 

Mr. Under Secretary, one issue you didn’t deal with directly in 

your oral statement is Chinese currency exchange rates. Does the 

Administration believe that Chinese currency policies have, in fact, 

caused or constricted to the trade imbalance between the two nations? 

Mr. ALDONAS. I should leave the specifics of the value of the dollar to the Treasury Department. But I have a tendency to look past 

the exchange rate and try and understand the underlying dynamic 

in the Chinese economy. And one of the reasons the exchange rate 

is a surrogate is the fact that you have an economy where the capital markets aren’t functioning. They don’t function like you would 

be used to. It is not as if the banker comes to the door and says, 

you are not turning a profit; I am not going to lend you any more 

money. That doesn’t happen. And as long as there is less of that 

pressure in their system—it is fundamentally different than ours. 

And that does contribute directly to the trade surplus that they 

currently enjoy and their competitors. 

Mr. GREEN. I guess the answer is yes? 

Mr. ALDONAS. Ultimately, the exchange rate protects what they 

view as a very fragile financial system. And so whether it is the 

peg or whether it is grappling with the underlying issues, you have 

to tackle the problem. I will say that this President and this Treasury Department has been much more forthcoming than any other 

in recognizing the nexus between exchange rates and trade. And I 

recall not that long ago where the discussions took place, as if 

there was no relationship between exchange rates and trade. Certainly what Secretary Snow did and what the President has been 

doing this week in Thailand is a direct reflection of the understanding of the dynamic issue. 

Mr. GREEN. And I would agree that the statements that we have 

seen in recent weeks have been a step in the right direction. I 

think they have been a recognition of the problem. What steps can 

the Administration take to push the issue and to try to actually 

produce some results of the issue of—and I am going to focus on 

currency rates because I think it is something tangible that many 

of us here think are important. What steps could the Administration take? What steps does it plan to do? What is it the Administration is willing to do to force this issue to try to get some 

progress made here? 

Mr. ALDONAS. Well, probably first and most importantly is, as I 

was alluding to, Congressman Green, is to try to tackle the underlying issue. And one of the things that the President succeeded in 

doing was getting the Chinese agreement to focus on that problem. 

Because while they have made the commitment that they are willVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00029 Fmt 6633 Sfmt 6601 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
26

ing to move in the direction of flexible exchange rates, what they 

have also said is they have problems they have to solve in their underlying capital market. What the President was saying was, let us 

get to those problems. He wasn’t saying that you shouldn’t be moving in terms of the exchange rate itself. 

Now, beyond that, you know, I think you always have to be very 

clear with any of our trading partners, I would say with the Chinese in particular, about what your expectations are and what the 

consequences are of those expectations. And right now, within the 

traditional trade tools we have, there certainly has been a liberal 

application of the anti-dumping laws to address them on an industry specific basis. There certainly are opportunities to continue 

more aggressively to investigate those sorts of practices on the theory, should industry present it, that what that alleged undervaluation represents, in fact, is just to draw some full circumstance on 

it, Congressman Green, in fact, the largest subsidy that the Chinese system confers is the lack of the capital market pressure. 

Mr. GREEN. You refer to it as alleged undervaluation. I have seen 

the White House fortunately be a little bit more specific. They don’t 

refer to it as alleged undervaluation; they refer to it as a factual 

undervaluation. But let us be more specific. You talk about the 

need to present the issues and talk about consequences. What are 

those consequences potentially? What is it that is taking place in 

these conversations that would cause representatives of the Chinese government to do anything other than nod their heads and 

say, well, we promise to talk to you about this? 

Mr. ALDONAS. Well, in the discussions, certainly with my counterparts, the point that I am making, have been making to them, 

and will be making again this coming week is that what we are 

facing right now in this context is either we have to have a change 

in the Chinese behavior, or what you will see is the Administration 

itself leading the investigations. This isn’t going to be something 

where we are simply going to wait for an industry to be injured 

and then file a petition, because, as we have been around the country talking with manufacturers, whether it is textiles and apparel, 

which lots of times people think they are just looking for outright 

protection, but right now are facing difficult circumstances precisely because of things like a 17 percent value added tax rebate, 

the work that our foundries produce, machine tools, furniture. You 

can certainly go down that list. Where we feel price competition, 

that is where the stuff that the Chinese do has the greatest impact, 

and those are going to be the target. 

Chairman HYDE. The gentleman’s time has expired. 

The gentleman from Oregon, Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you, Mr. Chairman. 

Mr. Secretary, I appreciate your comments. I have been sort of 

turning them over from the perspective of somebody who has supported the initiatives of the last two Administrations to try and 

normalize the trade relationship, with the understanding that if we 

had a framework, if we had the protections, if we opened it up, that 

it would—it was a good gamble that we would have a softening effect on some of the Chinese practices, a philosophy that I would 

hope this Administration would consider extending to China. If we 

27

can do this with Godless Communist China, then we can do this 

with Cuba as well. 

A little symmetry might help. But I bought into this, but I have 

been deeply concerned that we continue to have the reports, and 

you have heard from some of my colleagues here, and there is excellent testimony that I have had a chance to scan that talks about 

the barriers that are being thrown up contrary to the intent of 

what we have tried to do with WTO. Not just the abuse of labor 

rights, but human rights, continuing slave labor. And nothing that 

I saw in any of the testimony that I scanned, but you cannot spend 

any time in China without being stunned at the lack of investment 

in environmental standards, just trying to breathe the air and the 

disadvantage that some of our competitors here in this country 

have. 

And last, but by no means least, I am hearing from American 

manufacturers that they are being directly pressured to locate 

manufacturing offshore, not because that is where it is in the best 

interest of their company or the company for whom they are customers of American entities, but that this is part of an effort to 

simply placate the Chinese by moving more production offshore to 

China. 

I am wondering if there is any contemplation of using the tools 

that are available to us under WTO to start bringing about a rebalancing. I would appreciate your positive words, but to this point, 

I don’t think we have filed any actions, and I wonder where we are 

in that process and what is going to have to happen until some action occurs. 

Mr. ALDONAS. They are all good questions. Do you want me to 

take up Cuba, or was that a throwaway? 

Mr. BLUMENAUER. That is not a throwaway. It is something that 

I hope the Chairman will be able at some point to come back and 

deal with some sense of parity. 

Mr. ALDONAS. If I could then, Congressman. To me, I think there 

is one elemental difference, which is, we have not seen—although 

the President has outlined the willingness on the part of the 

United States to adopt a different approach if we saw something 

forthcoming from Fidel at this point, which we haven’t seen with 

Cuba actually as any degree of movement toward a market economy as you have seen with the Chinese. What you won’t see in 

Cuba my strong guess is, based on the recent statements and the 

oppression of human rights activists in Cuba, is the sort of thing 

that the Chinese are doing, which is about to enshrine private 

rights of property in constitution. That isn’t going on. 

The second thing that I think is important to understand is that 

even where other countries trade freely with Cuba, the profits end 

up going to the Cuban government. They don’t end up extending 

to the individuals in Cuban society. And the net result has been 

that has been a bad deal not only for the Cuban people, it has also 

been a bad deal for the companies involved. 

Mr. BLUMENAUER. Reclaiming my time. I would be happy to continue that. I think the magnitude of the human rights abuses that 

continue in China and the relative tiny environment with which we 

are talking about in Cuba, I would think that there are some of my 

Republican colleagues here who would join me in thinking that 

28

there is a more productive dialogue. But if you could address when 

you are going to be moving under WTO, it would be useful, before 

my time disappears. 

Mr. ALDONAS. Well, a couple things. One is, one shouldn’t adopt 

the approach that if we file a case, that is the only thing that 

means we are moving under WTO. There has been consistent pressure for compliance with respect to the WTO rules, and we have 

had successes in individual instances, particularly on agricultural 

commodities, with moving the Chinese in the right direction. 

Where we have had the biggest problems, I would suspect those are 

the targets for future cases. And the reason is, things like intellectual property. You know, if it is within the government’s power to 

ensure that at least within the government through its purchases 

they are acquiring Microsoft software through the legal means, 

then they should be adopting that practice. And those are the sorts 

of things that I think are the likely targets. 

Chairman HYDE. The gentleman’s time has expired. 

Mr. Tancredo of Colorado. 

Mr. TANCREDO. Thank you, Mr. Chairman. 

During the debate on PNTR the last time, there were three or 

four arguments that were made that were designed to get people 

to support PNTR. One was that if we did it, we would begin to reduce the imbalance of trade with China. Of course, we know that 

that has not happened. 

Two, it was that if we did it, we would reduce the instances of 

human rights abuses that were prevalent in China. Of course, we 

know from testimony and from comments from Members of the 

Committee here that that has not occurred. 

We were told that it would inspire the Chinese to, in fact, clean 

up their act literally by doing some of the environmental work that 

is necessary to make them a little cleaner in their manufacturing 

capabilities. Of course, we know that is not happening. 

We also were told, well, eventually Jeffersonian democracy would 

break out all over China and we would see the end of the Chinese 

dictatorship, and I know that hasn’t occurred and I don’t see anything that would lead in that direction. 

But the one question that I don’t know the answer to, I suppose, 

we were also told that if we did this we would see a reduction in 

the rates of investments on the part of the Chinese government in 

military as opposed to the civilian side of their economy. What has 

happened there? 

Mr. ALDONAS. I don’t know about the investment by the military 

in terms of a military buildup. I am sorry. I will get back to you 

on that particular question. 

Mr. TANCREDO. Do you know if the Chinese military is still a significant stakeholder in most of the economic enterprises, especially 

the most important economic enterprises? 

Mr. ALDONAS. To put it bluntly, at least since the 1980s under 

their own policy they were supposed to be out of the business. The 

phenomenon in China of what was known as wearing two hats was 

supposed to have been ended. As a practical matter, does it still go 

on? Certainly. I know from my own experience when I was in private practice you would see that investment in commercial transactions periodically. So I would not argue that there isn’t still some 

29

involvement. But by their own policy they are supposed to be out 

of the business. 

Mr. TANCREDO. I have searched in vain for any indication that 

that has happened. I believe that we would be able to identify in 

fact several cases where the Army in particular is the main stockholder in a number of the most significant and high-tech corporations in China. 

Well, that makes us 0 for 5 in terms of the reasons we were 

given to support the PNTR. I am glad I did not support it, I should 

say, and I thank you very much for clearing that last one up for 

me or at least attempting to. 

Chairman HYDE. Mr. Sherman. 

Mr. SHERMAN. I think the gentleman from Colorado has expressed it well. We are in this odd circumstance where whatever 

China needs temporarily, well, that is okay. So if someone loses 

their job and that leads to alcoholism, that leads to domestic abuse 

or suicide, well, that is okay for now because China has problems. 

We know that currency is 40 percent undervalued and they will do 

nothing about it. And there will be a suicide in America as a result 

because, well, we don’t want to deal with it today. 

Mr. Lantos quoted Cicero. I think the more apt analogy is Nero 

who fiddled while Rome burned, and we are fiddling around with 

a dumping case here or there. A 40 percent violation every day on 

every item and we don’t do anything except, well, we have talked 

to them about it. I have got to commend the Chinese negotiators 

for one thing. 

They are able to wait until the Americans leave the room before 

they start laughing, and that takes a level of self-control that I can 

only admire. I come from a city of actors, most of whom would find 

that difficult. 

I am particularly concerned about the businesses in China that 

demand co-production agreements or in any other way basically say 

you can’t export to China unless you do a number of things that 

is illegal for them to ask us to do. I am also concerned about the 

Chinese businessmen and women who are told they better not import from the United States. Sir, what level of refugee status for 

a business person and their entire family could be granted on an 

emergency basis if they had evidence of governmental pressure not 

to purchase American goods? 

Mr. ALDONAS. You have to ask the State Department. 

Mr. SHERMAN. Would the Commerce Department regard that as 

something to be taken up at the very highest levels? Would the 

Secretary himself welcome these people with open arms or is that 

something that your Department doesn’t care about? 

Talking about people who have evidence that can explain why we 

have the largest, most cancerous trade deficit. 

Mr. ALDONAS. At the same time, Congressman Sherman, I think 

you have to put that right side by side the fact that exports to 

China have been growing at 20 percent the first 8 months of this 

year. So the idea that somehow everybody is having a gun held to 

their head——

Mr. SHERMAN. Well, not everybody. Obviously China wants to 

have some imports from the United States. 

30

Mr. ALDONAS. Having said that, if you look at the automobile industry in this country, the hottest growing market is in China. And 

in the absence——

Mr. SHERMAN. Do you really believe that we are going to see 

100,000 vehicles assembled in this country and shipped to China? 

Mr. ALDONAS. Congressman, right now, General Motors, the difference between being profitable and maintaining employment in 

the United States is the earnings they are generating in Asia. And 

when you think about the workers in Detroit, you need to be thinking about the enterprise that General Motors represents. 

Mr. SHERMAN. So basically whatever is good for General Motors 

is good for America? 

Mr. ALDONAS. I didn’t say that. But if you want to draw that conclusion, you might draw the conclusion what is good for General 

Motors is good for the UAW. 

Mr. SHERMAN. When the UAW comes before this Committee and 

says let us import all of our auto parts from China and let us ignore a 40 percent acknowledged problem on the currency value and 

let us go to sleep for another day or week on that——

Mr. ALDONAS. Congressman, do you ask them at that point how 

they are going to pay for the contract that General Motors just 

signed with the UAW, where the profits are going to come from? 

Mr. SHERMAN. It is incredible that you would come here and say 

what we need to do to help American workers is to export their 

jobs. 

Mr. ALDONAS. What is incredible is not understanding the fact 

that in a global economy with a globalized auto industry, that 

being the most competitive market in the world today where the 

demand is rising fast enough, is not in the interest of auto workers 

in this country. 

Mr. SHERMAN. So we have to export our jobs so that General Motors can make enormous profits because some crumbs may go to 

some of the workers here. What—no one in Beijing believes that 

the way to help Chinese workers is to run a $120 billion trade deficit with the United States. Their leaders understand that workers 

need jobs, and our leaders understand only that General Motors 

can make huge profits in exporting those jobs. 

Chairman HYDE. The gentleman’s time has expired. However, I 

think the Under Secretary may want to respond to the last several 

questions from the gentleman. 

Mr. ALDONAS. I think it is always important to realize when you 

think about the manufacturing sector in this country is that while 

we have real concerns about different parts of it, it is still standing 

alone, the fifth largest economy in the world, fourth largest economy in the world, larger than the size of the Chinese economy. It 

is one of productivity rates are higher than they were in the 1990s. 

And at the end of the day what makes them competitive is being 

globally competitive. 

I don’t want to take away or penalize a company for being globally competitive because at the end of the day the jobs that exist 

in this country depend on them succeeding on a global level. That 

is the only point I was saying, whether it is the Chinese market 

or anywhere else in the world. And if you think that China is the 

only place we are running a trade deficit, you ought to take a look 

31

at Europe, where we have seen it balloon more than China. What 

you have right now——

Mr. SHERMAN. You are saying $120 billion of deficit for $20 billion of exports? 

Mr. ALDONAS. The rate of growth. What you need to focus on——

Chairman HYDE. The gentleman’s time has expired, if you don’t 

mind. 

Mr. Burton of Indiana. 

Mr. BURTON. Well, hopefully the grilling will be a little less severe from this side of the aisle, but nevertheless I think we do have 

some very difficult questions that need to be asked. We have lost 

about 3 million jobs. One of the things that saved the world in 

World War II was the industrial base of the United States. And 

there is a lot of concern about the erosion of our industrial base in 

the past 20, 30 years and all these jobs, industrial jobs, going elsewhere. 

The President has imposed some import tariffs on steel for the 

very reason that there was dumping taking place. So I would like 

to know what the Commerce Department can do to make sure that 

our industrial base erosion stops. The Bible tells us there are going 

to be wars forever. And for us to carry out our number one responsibility, and that is to protect the American people, we have to 

have a very strong industrial base. 

The small tool industry for all intents and purposes is gone. And 

so I would like to know, and this is a very general question, what 

the Administration or what the Commerce Department views as 

the long-term solution to making sure that we don’t have a continuation of the erosion of our industrial base and how we are 

going to deal with it. 

Mr. ALDONAS. Thank you, Congressman. Let me answer it in two 

parts. The first side is keeping our own side of the street clean. If 

you are serious about manufacturing and you listen to manufacturers about what they need, what they will tell you is they have to 

have a tax environment with what they have got that is less complexity, less cost compliance, and lower tax rates to be able to compete. 

What they tell you is we have to have a comprehensive energy 

strategy that is designed to increase the sources of supply and decrease our dependence on foreign oil. What they will tell you is you 

have to make sure you have the kind of pipelines that are in place 

that will get natural gas prices down, because it is both the feedstock and it is something they use for power. And industries like 

plastics, where we have a comparative advantage but won’t if energy rates keep going up, what they will tell you is you are going 

to have to clean up a run away tort system and you are going to 

have to do something about asbestos, which is just a cloud hanging 

over the manufacturing sector in this country. That is that sort of 

the street. 

On the international side, if I could, Congressman, you have to 

press consistently, particularly among your trading partners, for a 

system of exchange rates that is based on the market. It has to be 

driven by the market. Even in the absence of all the economics behind it, the goal has to be to remove those things that are a friction 

in the trading system. 

32

The second thing is you do have to press, and this has to happen 

at the negotiating table. And all the manufacturers we met said we 

want an aggressive trade liberalizing agenda. They sit behind that 

protective wall and make it a competitive advantage competing 

back in the U.S. market. So it is both a barrier to our exports as 

well as a subsidy to domestic producers who then try and compete 

in the U.S. market. So their goal was to get things down. And finally you got to enforce the trade laws. 

Mr. BURTON. I am for free trade and fair trade. The one thing 

that worries me is the loss of industry and jobs going overseas. Has 

there been any thought by the Administration, the Commerce Department and other departments collectively to submit to the Congress a tax structure or tax proposals that would encourage industry to stay here instead of going overseas. It seems to me there has 

to be some kind of incentive in view of the fact that wage rates are 

so much lower elsewhere and the environmental concerns are so 

much lower elsewhere and environmental costs, there has to be 

some inducement for American industry to stay here. Have we 

given any thought to change in the tax structure that would encourage industry to stay here? 

Mr. ALDONAS. It takes two forms. One of course is the bill going 

through Congress right now that is—there are two pieces of legislation, one on the Senate side and one on the House side that Chairman Thomas is developing that offers slightly different approaches, 

but both are designed to grapple with that issue and it approaches 

it by cleaning up some of the complexity in the existing system so 

it reduces the cost of compliance and gets rid of what the manufacturers call the anti-manufacturing tax or application of the alternative minimum task to allot the small corporations that are basically small- and medium-sized businesses, family-owned, things 

like that. 

The flip side of it is it also takes a nick out of the rates that 

apply to manufacturing income, as I understand it. So I think there 

is good positive movement. It also helps us solve the trade problem 

with respect to the WTO ruling on the Foreign Sales Corporation. 

But that is a very healthy package for manufacturing in terms of 

grappling with some of those. 

My own view of the tax system, having spent a fair amount of 

time with it in private practice, is you have to really eliminate an 

awful lot of rules that exist now that penalize manufacturing. Currently, depreciation rates are completely inconsistent with where 

manufacturing is in the kind of turnover and capital equipment. So 

there is more to be done there I think in terms of reform. 

Chairman HYDE. Mr. Faleomavaega. 

Mr. FALEOMAVAEGA. Thank you, Mr. Chairman, and I certainly 

want to welcome Mr. Aldonas before the Committee. 

I thought maybe I would add a little humor to our dialogue here 

with Secretary Aldonas. I remember former Governor Connelly of 

Texas was nominated by President Nixon to be Secretary of the 

Treasury, and there were some questions raised as to his qualifications since he was not an economist. Governor Connelly said he 

could add 2 plus 2 and that was all that he wanted to stress to the 

people who were questioning his qualifications. 

33

I want to say, Mr. Secretary, I would be the last person to claim 

that I would be qualified, because I am not an economist. But I do 

have a different historical perspective from some of my colleagues 

here on the Committee. The fact that our country being about 227 

years old, and the colonial legacy that some of these Asian countries have had to endure, the French in Indochina and Vietnam 

and the British in China, some very difficult historical events have 

transpired. The fact is the People’s Republic of China was founded 

in 1949. They already had 400 million people in place since 1949. 

I wanted to ask you, if you were a chief policy maker of a country 

now of 1.3 billion people, what kind of an economic system would 

you recommend to make sure that all these people are going to be 

provided for? I suspect if our country had 1.3 billion people, we 

would have some serious problems as policymakers as to how to go 

about finding some sense of equity and fairness in the process. We 

want to repeat this process. This country is only 54 years old and 

we are expecting them to reach the highest levels of economic fairness with the other countries like ourselves? 

I am not tooting China’s horn here, Mr. Secretary. I am trying 

to show with some sense of historical perspective here that we 

seem to be treating the Chinese people and leaders as greedy and 

adversarial. I respectfully have to say we need to rethink this. Your 

comments that our exports have grown to 21 percent in the last 8 

months seems to indicate that we are doing something on an equal 

and fair basis with the Chinese, despite the fact that there may be 

some issues. But you show me one country or one region that we 

are not fighting against regarding their own economic policy. Let 

us take our European friends for example. We are still fighting 

over foreign subsidies. 

I just want to share this perspective with you, and I want to ask 

you what kind of an economic system would you recommend to a 

country that is only 54 years old and trying to provide for the 

needs of 1.3 billion people? 

Mr. ALDONAS. I would recommend a market economy, and there 

is a reason for it. It is the one way you can ensure that the resources within that society are being allocated to their highest and 

most effective use. A lot of the problems that China is having right 

now in its own economy are directly a part of the fact that the 

state-owned bank subsidizes the state-owned enterprises to provide 

employment. 

At the same time, the best vehicle for creating employment is to 

make sure that they are moving in the direction of a market economy. And you really got your finger on something in the sense that 

what causes the friction in the trading relationship between us and 

China, particularly for our manufacturers, is that process of change 

isn’t moving fast enough. If these guys were a market economy, it 

would be a different story. When I go talk with manufacturers everybody is content, just as you were saying, Congressman Burton, 

if the playing field is level they are willing to compete basically. 

And the bottom line is how do you get to that point because we are 

not there yet with China. And it is the very nature and structure 

of their system that is the principal difference. 

So even as a second order of preference, I would be moving in 

the direction of a market economy because they recognize the 

34

United States is the market they have to participate in. If they are 

going to succeed economically, they have to prove they are a player 

in this market because it is the most competitive market in the 

world. And the only way to do that and not face the pressure they 

are going to face on trade is to make sure you have that process 

continuing to move toward a market economy. 

Mr. FALEOMAVAEGA. At least from the time of Mao Tse-Tung, 

which nobody disagrees was an extreme situation. They all realize 

this is not the way to go. It may be that they are trying to get into 

a market economy like other countries. Give them some credit for 

their efforts. Certainly I would like to think that they understand 

the situation and hopefully that they will make every effort to work 

as mutual partners and not as adversaries. 

Mr. ALDONAS. And I do have to say that our discussions with the 

Chinese leadership, our counterparts, are very pragmatic. They 

have specific economic goals. It is up to us to draw the line for the 

United States. We have to defend our interests. They have a pretty 

clear idea where they are going and where they think they need 

to move in terms of the pace of change, and it is our job to tell 

them that pace of change has to accelerate otherwise you are going 

to see the friction. 

Mr. FALEOMAVAEGA. My time is up, but I want to note, Mr. 

Chairman, the loss of jobs has been mentioned a couple of times. 

This did not just happen yesterday. This has been going on for the 

past 10 years. Fifty thousand jobs for textile workers are gone and 

it wasn’t necessarily to China. There were other regions of the 

world that got these jobs. I wanted to make that point. 

Chairman HYDE. Thank you, Mr. Faleomavaega. Mr. Smith. 

Mr. SMITH OF MICHIGAN. The reports indicate that most of the 

imports from China are produced in factories and companies owned 

by the United States and other non-Chinese companies; is that correct? 

Mr. ALDONAS. It depends very much on the industry. If you look 

at textiles and apparel right now, which is under assault, actually 

most of the factories would be Chinese owned. On the other hand, 

in the electronics area most of the investment is from other Asian 

countries. 

Mr. SMITH OF MICHIGAN. I am from Michigan. A lot of our automotive industry is now being produced in China. What is the reason? Why are our manufacturers, why are our companies moving 

to China? What is the greater influence to take advantage of the 

China market by producing over there or to take advantage of the 

low cost labor by being able to better compete and send their products back to this country? 

Mr. ALDONAS. It is both, and both relate to being globally competitive, in the sense that if it is General Motors, Ford, Chrysler, 

what they are trying to operate is a globally competitive supply 

chain and what that makes them move on a variety of components 

is to the lowest price. Unfortunately what our guys are facing in 

the tier 3, tier 4 suppliers in the automotive market is a real 

crunch on their pricing power, because everyone in the auto industry, since they have to pay for their health benefits and pension retirees and the contracts they have signed, is trying to drive the cost 

down and they drive that cost all the way down their supply chain. 

35

And in fact some of the best businessmen I met when I was going 

across the country are from Michigan and they are in tier 3 and 

tier 4 and they have to be the best business people to grapple with 

this cost structure that the OEMs in the auto industry drive down. 

So it basically boils down to price. Some of what they are doing 

certainly is to access the Chinese market. General Motors, for example, manufacturing in China, doesn’t export the vehicles back 

here. Those are for sale in China. 

Mr. SMITH OF MICHIGAN. The finished product. But the components—still there are a lot of components coming in. 

Mr. ALDONAS. Yes. 

Mr. SMITH OF MICHIGAN. And I am trying to figure out a couple 

things. One is the advantages and disadvantages. Certainly, the 

low cost imports and the imbalance of trade that I am told that—

roughly 11 percent of the imbalance of trade comes from China as 

opposed to trade throughout the rest of the world? 

Mr. ALDONAS. It is a little higher, it is about a fifth. 

Mr. SMITH OF MICHIGAN. So the——

Mr. ALDONAS. China’s share of the trade deficit about a fifth. 

Mr. SMITH OF MICHIGAN. In terms of that influence on our economy, in terms of the downward pressure on interest rates, in terms 

of what we need to finance this huge deficit spending that government is undertaking, so that 100 billion of positive balance that the 

Chinese has, where is it going? Is it going into treasuries or equities? 

Mr. ALDONAS. Actually there has been a shift recently and this 

is true not just of Chinese investors, but investors generally moving into treasuries relative to stocks. And it has been a movement 

in part because of the performance of the stock market. It was a 

shifting out toward bonds. But some of it recently is no doubt because we are in the market more in the way of public funding. 

They are finding security in those treasuries. So there is a circle 

where that stuff is coming back to the United States in the form 

of investment, but the mixture has shifted. One of the things that 

I think when we look out and we worry about is the degree to 

which the investment that is coming back in is going into direct 

productive investment that will generate a profit that helps you 

pay the folks back as opposed to going to current consumption. 

Mr. SMITH OF MICHIGAN. Do you have any kind of substitute 

crystal ball that can project at what point in the future there is 

going to be a balancing out of the advantage—short-term advantages that China has? I am not so much concerned about the shortterm consequences. In fact The Wall Street Journal yesterday, 

wherever they come up with their figures, said that China has lost 

more manufacturing jobs than the United States has. What I am 

concerned with is our long-term ability to increase our competitive 

position, our productivity, because if we don’t do that and it starts 

looking like other places are a better place to invest, we have become so dependent and so desperate on the investments to finance 

our overspending in this country, our overspending in government 

to finance our research and development as far as investment in 

our equities. Do we know what percentage of our equities and what 

percentage of our treasuries are owned by foreign investors? 

36

Mr. ALDONAS. You know, I don’t know off the top of my head, but 

I can get you the answer to it. But the answer to your underlying 

question is something quite different than the topic of the underlying hearing. Probably the two best measures of our competitiveness are, one, our productivity. It is way up. It is sky high. And 

indeed, some of the productivity gains are putting pressure on the 

ability to generate jobs in the manufacturing sector; in other words, 

the more productive you become, you make goods with less things, 

you make goods with less people. 

Mr. SMITH OF MICHIGAN. In fact, the percentage of our GDP that 

comes from manufacturing has slightly increased. 

Mr. ALDONAS. While the employment has been going down. What 

you are really seeing is the other factor. The other factor is the 

share of world trade made up by our exports, and that actually increased from 1980 until about 2001. And then what you saw is a 

sharp drop in the share of world trade made up by our exports. 

And what that tells you is you are looking at very small growth 

with our trading partners. 

So while much of the discussion has been about China, one of the 

things you have to focus on there is there is no growth in Germany 

and there is no growth in Japan, and that is still 20 percent of the 

world economy. Basically you have a world economy that is flying 

on one-and-a-half engines, the United States and China. China has 

grown about 10 percent and we are growing roughly at 4 right now. 

And what you are looking at in Japan is still 2⁄3 of the GDP in 

Asia. You have to buy an awful lot of things from the United States 

but the demand is way down because there is no growth. And that 

is where you see the sharp fall in our exports. 

To address the trade balance, as a practical matter, you have to 

see growth abroad. The only other way you will get the trade balance down is if our economy slows, and nobody is interested in 

doing that. 

Chairman HYDE. Gentleman’s time has expired. The gentleman 

from Texas, Mr. Paul. 

Mr. PAUL. Thank you, Mr. Chairman. I have a couple of comments and then two questions. It seems like the argument is that 

we have lost manufacturing jobs and everybody is concerned about 

it and rightfully so and that our dollar is too strong. If we only 

could raise the yuan and if they don’t do that we add tariffs. That 

seems to be one of the arguments going on in Congress right now, 

and I think that is overly simplistic and that it is more complicated 

than that. It has to do with the world dealing with fluctuating fiat 

currencies. Everybody has the paper currency and everybody is 

printing it at a different rate and everybody’s perceptions are different. It is an unmanageable affair in that, if the world had a single currency that could be agreed upon that had real value we 

wouldn’t even be talking about this. 

That is not the case. A good example of what could happen if we 

had that would be something that does actually occur in our country. We have poor States and rich States and we don’t even measure the difference in the trade between the States. It balances it 

out and it becomes a nonissue because everyone is dealing with the 

same currency. But politics gets involved. Military gets involved. 

Perception gets involved, all sorts of things that create these probVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00040 Fmt 6633 Sfmt 6601 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
37

lems. And I think this whole idea, this notion—this idea that if we 

could just lower the—or raise the value of the yuan, everything is 

going to be okay. 

I am interested in the bigger picture of the current account deficit, which is made up of more factors than trade. It is made up 

of the goods and services as well as earnings. But if you are a free 

market person and you don’t want to deal with that, you are getting involved. Then we get into these WTO fights and these trade 

fights and they don’t ever get anywhere. If you want to deal with 

earnings, then you have to get into capital controls. And that of 

course is an end stage of this whole process. 

But there is a third element that adds—contributes to our current account deficit, and that is our unilateral transfer payments. 

Now there is where I think we have the responsibility and we 

never talk about it. And yet China has tremendous benefits from 

unilateral transfer. If you look at the EX–IM Bank, it is into the 

billions of dollars. So we provide their credit for them at a discount 

rate, which takes it away from somebody here. At the same time, 

they then have dollars left over that they can monkey around with 

and prop up their currency. It seems to me—and I have some bills 

that would deal with this, that removes these subsidies to our competitors. That to me seems to be going in the right direction of a 

more free market rather than going in the wrong direction of 

threatening our partners for them to do something that they may 

be able to or they may not be able to. And if they don’t, we are 

going to threaten with tariffs. That is certainly going in the wrong 

direction. 

So I would like you to comment on that as well as the whole idea 

of competitive devaluations because we are talking about competitive devaluations. Now I never could understand this because they 

seem on the short run to have these tremendous advantages. That 

is like saying I worked all my life, I put my money in the bank and 

I am going to live off my CDs and then somebody comes along and 

says, I want to devalue your money. I want you to get a lot less 

for your money. It is criminal. It is immoral and wrong. I don’t 

think there should ever be an advantage, you know, to devalue the 

money that somebody has saved and it is a further incentive not 

to save. 

Give me an idea of what you think about the economic history 

of competitive devaluations. Have they worked? Are they really 

worth getting involved in that or is there a good argument of just 

forgetting about competitive devaluations? 

Mr. ALDONAS. Competitive devaluations don’t work for two reasons. You are right on target there, Congressman Paul, in the 

sense that either one, they may give you a short-term advantage, 

but it is a hugh cost to your own economy. It is really what assumption you are working under in terms of the economy. You are 

trying to raise living standards or you are simply trying to drive 

production out the door and keep people employed at any cost. So 

those who adopt the latter more mercantilistic approach will generally say, yes, I am going to engage in a competitive devaluation. 

The second thing is that in the longer term, what they generate 

is so much friction in the trading system that you will see retaliation. And generally what we saw—although lots of people point to 

38

Smoot-Hawley as the source of the Great Depression, it wasn’t. 

That was a reaction to the Fed, but it certainly exacerbated the Depression as did the competitive devaluations of that era. And what 

it became was just a game of tit for tat where everybody lost. 

At the same time, the President’s request that at least among 

our major trading partners that the market govern is not consistent with the right approach economically. It is not suggesting 

anybody should engage, including us, in any form of competitive 

devaluation. What it is saying is the market ought to decide it at 

the end of the day because that is going to be the best resource allocator. 

One thing you always put your finger on, which I think is exactly 

right, there is always a difference you can see at the approach of 

the macro level and the micro level approach that our manufacturers face where they just have to grapple with the things that are 

shaping their own personal competitive environment. And where 

trade policy is right at the interstices between these two things because I think what you got the target on is the right macro picture 

and then how that plays out for the individual manufacturers is 

where we see the friction. And my point has always been, if what 

you are preaching is getting the economic fundamentals right here 

in the United States as well as with China, and that means moving 

toward a market economy, there should be no doubt about that. 

That is the greatest way to relieve the trade friction in the system, 

because when you put things in any part of your economy that constrains that sort of thing it generates a sense of unfairness. 

Mr. PAUL. Could you comment on the unilateral transfers? 

Mr. ALDONAS. There, I think of course you understand that the 

perception is going to be you are seeing this competition in that 

micro setting and so what you want to do is be able to compete. 

So you are right in a sense it is a unilateral transfer to China. 

They are benefiting from unilateral transfers not only from the 

United States, but from a variety of other players in the market. 

But from the guy who has to export, he is looking at how do I compete with the guy who is getting financing from Germans. And the 

pressure in terms of the Administration policy has been to try and 

clean up that side of it. Let us get out of business at that point. 

Until we do though, I think in defense of our exporters, we got to 

make sure that we are at least trying to put them on the same 

competitive terms. 

Chairman HYDE. The gentleman’s time has expired. I want to 

thank you, Mr. Secretary, for an exciting afternoon. You certainly 

earned your salary today, and we do appreciate your instructive 

testimony. Thank you so much. 

We have a second panel and I would like to welcome Mr. Frank 

Vargo. Mr. Vargo is Vice President of International Economic Affairs at the National Association of Manufacturers, commonly 

known as NAM. NAM is the nation’s largest industrial trade association, representing 14,000 member companies, with a mission to 

enhance the competiveness of American manufacturers. Mr. Vargo 

is the Association’s chief spokesman on trade issues and is leading 

the manufacturing community effort to reduce foreign barriers to 

American industrial products. Prior to joining NAM he had a distinguished career at the U.S. Department of Commerce, serving as 

39

Deputy Assistant Secretary for Asia, Deputy Assistant Secretary 

for WTO Affairs and trade agreements compliance, and Deputy Assistant Secretary for Europe. 

Our next witness is Dr. Nicholas Lardy, a Senior Fellow at the 

Institute for International Economics. Prior to joining IIE, Dr. 

Lardy was a Senior Fellow in the Foreign Policy Studies Program 

at the Brookings Institution for 8 years. From 1991 to 1995, he was 

the Director of the Henry M. Jackson School of International Studies at the University of Washington. Dr. Lardy has taught at the 

University of Washington and Yale. He serves on the Board of Directors and Executive Committee of the National Committee on 

United States-China Relations and is a member of the Council on 

Foreign Relations. He is the author of numerous books and articles 

on the Chinese economy. 

I would like to welcome Ms. Thea Lee, Chief International Economist for the American Federation of Labor and Congress of Industrial Organizations, commonly known as AFL–CIO. This is a voluntary federation of 64 national and international labor unions. 

And Ms. Lee oversees research on international trade and investment policy in the AFL–CIO’s Public Policy Department. Previously she worked as an international trade economist at the Economic Policy Institute in Washington, DC and as an editor at Dollars & Sense Magazine in Boston. Ms. Lee is co-author of A Field 

Guide to the Global Economy. She has testified before several Congressional Committees on trade issues as well as a frequent guest 

on television and radio programs. 

Our next and final witness is Ms. Jonna Bianco, President and 

Chairwoman of the American Bondholders Foundation. Ms. Bianco 

represents over 150 American citizens from more than 25 States 

who are holders of over 18,000 Chinese government bonds dating 

to 1913. Welcome, Ms. Bianco. 

We are honored to have you four appear before us today. And 

Mr. Vargo, we will start with you and entreat you to try to confine 

your remarks, everyone, to 5 minutes or so, so we can finish at a 

decent hour. 

STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, 

INTERNATIONAL ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS 

Mr. VARGO. Thank you, Mr. Chairman. It is a pleasure to be testifying on behalf of the NAM. I appeared before this Committee 

many times over the years when I was at the Commerce Department. I have a prepared statement and just have very brief remarks at this time. 

The NAM is looking for a very positive and balanced relationship 

with China. China poses very formidable challenges to us, but it 

also poses enormous opportunities. Our trade with China is the 

most imbalanced in the world. One figure, so far this year China 

is accounting for 40 percent of the entire growth of all United 

States imports of manufacturers from the whole world. Imports 

from China are six times as large as exports and that is a very difficult number to deal with. 

My prepared statement shows a matrix on the last page, so you 

can see with various export and import growth rates just how difVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
40

ficult it is to level off our trade balance much less than having the 

deficit decrease. Unfortunately, it is clear that even at 33 percent 

annual rate of growth of our exports it is not going to be enough 

to begin to stabilize our deficit and keep it from growing rapidly. 

We are going to have to have a moderation in our import growth. 

And the whole question is how do we do that without resorting to 

protections because we can’t do that. We have been there in the 

1930s. It doesn’t work. It will just result in cascading protectionism. 

The first thing we need to look at is the Chinese currency. It is 

controlled just as the Chinese economy is not a market economy, 

and were it to become a market currency or to emulate a reasonable level, this would be a very good start in helping us get our export growth up and moderate the import growth by the market, not 

by United States Government intervention. 

Let me just briefly touch on outsourcing, because a couple of 

comments have been made that indicate that all this growth is 

coming from American companies in China. It is not. Under Secretary Aldonas may not be as familiar with the economic figures 

as I am. I once ran the Research Office at the Commerce Department, and the latest figures from Commerce state, and these are 

the figures, that only 3 percent of our imports from China come 

from United States production in China. The vast bulk of United 

States production in China is for the local market. And even if you 

take Japanese companies and other companies, all of the multinational companies that import into the United States are 20 percent of the total. So 80 percent is coming from Chinese companies. 

So it is certainly true that a lot of United States companies are 

saying they may have no choice but to move to China. 

This is still a manageable situation, particularly if we begin addressing the things that are raising the cost of manufacturing and 

making the U.S. a less hospitable place for American manufacturers to be. 

My second point is we must press harder for full implementation 

of China’s WTO requirements and commitments. It is my view if 

we had gotten China into the WTO 15 or 20 years ago, we wouldn’t 

have the size of the deficit we have today. We just let China stay 

as a closed market for too long, and now we have this situation 

where our imports are six times as large as our exports and we say 

it is a tough problem, which it is. 

But in areas such as semiconductors, Mr. Chairman, where the 

Chinese provide in essence a 14 percent subsidy for producing your 

chips in China rather than importing them, that is contrary to the 

WTO litigation and it has to stop. Ambassador Zoellick is in China 

now discussing this and other issues, but we all need to press to 

see that China does implement its obligation. 

Finally, Mr. Chairman, not all on China’s side, we have to put 

our own house in order both by looking at all the factors, the litigation costs, the health care costs, the energy costs and other things 

that are making it difficult for American companies to produce 

here. But we also have to recognize we have to do more to sell more 

to China. 

The NAM would like to work with this Committee, with the Appropriations Committees and with the Commerce Department to 

41

have a massive, massive increase in United States export promotion to China. We would like to look at ideas such as permanent 

American trade centers. We would like to increase the resources for 

something known as the Market Development Cooperative Program where vertical trade associations, not horizontal ones like the 

NAM, can engage in trade promotion using the Export Trading 

Company Act creatively with China so we can get thousands of 

American companies selling to China. One of the things we have 

to do is sell a lot more to China, and a lot of that is incumbent on 

us. So there is a lot that needs to be done all around, but the currency is certainly important. 

[The prepared statement of Mr. Vargo follows:]

PREPARED STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, INTERNATIONAL

ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. Chairman and Members of the Committee: 

I am pleased to testify today on behalf of the National Association of Manufacturers (the NAM) regarding the U.S.—China economic relationship. In my testimony 

today I would like to discuss the U.S.-China trade imbalance and its impacts on the 

U.S. and Chinese economies, the effects of China’s fixed exchange rate, U.S. investment in China, China’s record in implementing its World Trade Organization (WTO) 

commitments, and policies the United States needs to implement to do its part in 

bettering the bilateral economic relationship. 

The NAM represents 14,000 U.S. manufacturing companies, including 10,000 

small and medium-sized firms. Mr. Chairman, I can tell you that no other trade 

issue comes close to commanding the attention that China is getting from both large 

and small NAM member companies. China is simultaneously the greatest concern 

of our import-competing members and the fastest-growing global market for many 

larger companies that operate internationally. 

I want to stress at the outset that the NAM seeks a positive and balanced trade 

relationship with China that reflects market forces as closely as possible. The Chinese economy poses huge opportunities for U.S. exporters and investors, and these 

will grow rapidly. We need to nurture these opportunities as we simultaneously deal 

with the fact that so many import-competing U.S. firms are challenged by China 

as never before. 

It is also important to recognize that while the rising trade imbalance with China 

is a growing factor affecting U.S. manufacturing production and employment, it is 

far from the only factor. Domestic costs, falling U.S. exports, a generalized dollar 

overvaluation that is only now ending, regulatory pressures, and other issues are 

also at work. China must not be a ‘‘scapegoat’’ and an excuse for not tackling the 

other problems. Nonetheless, the economic relationship with China is so important 

that it must be addressed. 

MANUFACTURING: VITAL TO AMERICA

Since manufacturing only represents about 16 percent of the nation’s output, who 

cares? Isn’t the United States a post-manufacturing services economy? Who needs 

manufacturing? The answer in brief is that the United States economy would collapse without manufacturing, as would our national security and our role in the 

world. Manufacturing is really the foundation of our economy, both in terms of innovation and production and in terms of supporting the rest of the economy. For example, only about 3 percent of the U.S. workforce is on the farm, but they manage to 

feed the nation and export to the rest of the world. How did this agricultural productivity come to be? It is because of the tractors and combines and satellite systems and fertilizers and advanced seeds, etc. that came from the genius and productivity of the manufacturing sector. 

Manufacturing is truly the innovation industry, without which the rest of the 

economy could not prosper. Manufacturing performs over 60 percent of the nation’s 

research and development. It also underlies the technological ability of the United 

States to maintain its national security and its global leadership. Manufacturing 

makes a disproportionately large contribution to productivity, more than twice the 

rate of the overall economy, and pays wages that are about 20 percent higher than 

in other sectors. But its most fundamental importance lies in the fact that the manufacturing sector truly underlies the entire U.S. standard of living—because it is the 

principal way by which the United States pays its way in the world. 

42

Manufacturing accounts for over 80 percent of all U.S. exports of goods. America’s farmers will export somewhat over $50 billion this year, but America’s manufacturers export almost that much every month! Even when services are included, manufacturing accounts for two-thirds of all U.S. exports of goods and services. 

If the U.S. manufacturing sector were to become seriously impaired, what combination of farm products together with architectural, travel, insurance, engineering 

and other services could make up for the missing two-thirds of our exports represented by manufactures? The answer is ‘‘none.’’ That, most basically, is why the 

United States cannot become a ‘‘nation of shopkeepers.’’

Manufacturing went into recession in 2000 and only now—three years later—is 

showing signs of a turnaround. Shipments of manufactured goods have fallen an astonishing $270 billion since 2000, and 2.8 million American factory jobs have been 

lost—roughly one in every six jobs. Manufacturing represents 14 percent of the 

American workforce, but has accounted for nearly 90 percent of all the job losses 

since total U.S. employment peaked in March 2001. 

With the tax cuts that have been enacted, low interest rates, and appreciation of 

major foreign currencies from their previously highly-undervalued positions, the 

stage is now set for a turnaround in manufacturing. However, despite recent promising signs that the manufacturing sector is recovering from its three-year long recession, U.S. manufacturers continue to struggle in the face of weak demand and 

the most intense global competition in history. 

The NAM Board of Directors has identified four priority policy areas that demand 

prompt attention from government policy makers:

• Reducing the cost of producing in the U.S. by containing health care costs, 

enacting legal reforms, including asbestos litigation reform, ensuring adequate and affordable energy supplies, and reforming the regulatory process. 

This is the single most important problem, and the difficulties of its solution 

must not be allowed to preclude action.

• Leveling the international playing field by ensuring that our major trading 

partners, including China and other Asian nations, reduce trade barriers, 

comply with international trade rules and allow markets to determine exchange rates.

• Promoting innovation, investment and productivity through tax reforms that 

encourage investment and R&D, domestic and international tax rules that 

keep U.S. manufacturers competitive and promote inward investment, and 

strengthened R&D programs.

• Ensuring an adequate supply of skilled workers through greater emphasis on 

technical education, including engineering and science; expanded businessgovernment partnerships; and a redirecting of federal programs to assist displaced workers.

The NAM is very pleased with the rising level of awareness on the part of the 

Administration and the Congress. Last month Commerce Secretary Evans gave a 

major speech in Detroit announcing the launch of a new Administration initiative 

on manufacturing that includes many of the NAM’s own recommendations. In addition, Members of Congress have shown more interest in manufacturing issues and 

proposed several positive resolutions that address concerns the NAM has raised, notably on China’s undervalued currency. 

TRADE

In looking at why the manufacturing recession is so sharp and why the sector is 

behaving differently from the rest of the economy and why recovery is so slow, trade 

immediately stands out as a huge factor. Of the $270 billion drop in U.S. manufactured goods shipments since 2000 (through July 2003, at an annualized rate), $80 

billion stems from a drop in U.S. manufactured goods exports—accounting for 

roughly one-third of the fall in production. A one percent increase in import penetration of manufactured goods over that time accounted for a further $40 billion of the 

production decline—about 15 percent. All of the increase in import penetration came 

from China. Import penetration from the rest of the world has been flat since 

2000—meaning U.S. imports from them grew no faster than U.S. consumption. 

Since 1997 the U.S. merchandise trade balance has gone from a deficit of $180 

billion to an annual rate of $545 billion so far this year—an increase of over $350 

billion. The fundamental cause has been the extreme run-up in the value of the U.S. 

dollar since 1997. At its peak the dollar rose about 25 percent over its early 1997 

level according to the Federal Reserve Board’s (FRB) trade-weighted broad currency 

index. Using the Institute for International Economics’ rule of thumb that each one 

percent change in the value of the dollar leads to a $10 billion shift in the trade 

43

balance, the appreciation of the dollar could account for about $250 billion of the 

$350 billion increase in the deficit—or about 70 percent. 

This is why the NAM worked hard to seek a dollar policy based on market-determined exchange rates reflecting economic fundamentals. The Administration began 

enunciating such a policy last year. More recently, Treasury Secretary Snow has 

been very definite in his statements that markets must set currency values free of 

intervention. He has succeeded in achieving G–7 agreement, as reflected in their 

forceful support for market-determined currencies in the communique ́ from their 

September 2003 meeting. 

With the Administration’s insistence that currency values should be determined 

by market forces, major currencies have been adjusting for over a year now. The 

FRB index of industrial nation currencies today is virtually back to normal levels, 

standing only 5 percent above its early 1997 rate. This welcome development will 

do much to move trade toward greater equilibrium. However, the FRB’s broad index 

of currencies, which includes most Asian currencies, is still nearly 15 percent above 

the 1997 level, basically because Asian countries have not allowed their currencies 

to adjust. 

Together, four Asian economies—China, Japan, South Korea, and Taiwan—hold $1.2 trillion of official reserves, up $600 billion in the last four years and up $250 

billion in just the last 12 months as they have purchased dollars to prevent an excess supply of dollars from lowering the value of their currencies. It should be pointed out that these four countries account for 60 percent of the entire global U.S. 

trade deficit in manufactured goods. 

U.S.–CHINA TRADE

The U.S. trade deficit with China is now the largest in the world, standing at 

$103 billion last year, as shown in Exhibit 1. China now accounts for close to onethird of America’s total deficit in manufactured goods trade. Through July 2003, 

U.S. manufactured goods imports from China are up 24 percent over the same period of last year, while U.S. manufactured goods imports from the rest of the world 

are up only 4.8 percent. So far this year, China is accounting for 40 percent the entire increase in U.S. manufactured goods imports. That is why we hear so much 

about China from so many of our members. 

Trade with China is extremely imbalanced, with imports being six times as large 

as exports. This makes correction of the bilateral deficit extremely difficult. Exhibit 

2, attached to my statement, shows alternative U.S. trade balances with China in 

five years under various import and export growth rates. A continuation of the existing trends would result in a tripling of the trade deficit, to more than $330 billion. There is no question that such a level would result in enormous calls for widespread protection. This must be headed off while there is time. 

The important thing is that the trade situation with China is still manageable, 

if addressed now. While information from our member companies makes it plain 

that industries such as plastics, machine tools, hardware, furniture, tool and die and 

others are feeling strong pressures from China now, the situation will become considerably more serious unless corrective steps are taken. One good development is 

already apparent. U.S. exports to China have broken their long-term trend and are 

now growing close to 25 percent a year. I believe this reflects the fact that China’s 

market is beginning to open as a result of its entry into the World Trade Organization. 

Unfortunately, as the matrix in Exhibit 2 makes clear, no feasible sustained rate 

of export growth to China can slow the growth of the deficit, precisely because imports are six times as large as exports. Even a 33 percent annual rate of export 

growth would see the deficit grow two and a half times in five years, to $250 billion. 

Thus if the deficit is to grow more moderately or fall, the rate of import growth 

must decline from the rates we have seen. The question, though, is how import 

growth rates can be moderated without resorting to protectionism. Protectionism 

must be avoided. We cannot reverse the open trading system that has been such 

a source of growth for the United States and the rest of the world and risk a downward cycle of trade deterioration. The answer, therefore is that we must rely on 

market mechanisms—very importantly, including market-driven currencies. 

CHINA’S CURRENCY

There is no question that the Chinese currency is seriously undervalued and is 

having a major effect on U.S. bilateral trade and on the trade of other nations as 

well. 

China has maintained its currency at its 1994 level against the dollar for the last 

nine years—despite a huge increase in production capability, productivity, quality, 

44

production range, foreign direct investment inflows, and other factors that would 

normally be expected to cause a currency to appreciate. The currency is controlled 

by the government, and is not allowed to fluctuate freely. Were it able to float, the 

degree of upward pressure that the yuan would feel is amply indicated in the 

amount of reserves that the Chinese government has to accumulate to prevent upward movement of its currency. 

China is accumulating dollar reserves faster than any other country. China’s reserves at the end of August 2003 stood at $365 billion dollars—120 percent of China’s annual exports and nearly one-third of China’s $1.23 trillion GDP. China has 

added $110 billion to its dollar reserves in just the last 12 months. 

There are many estimates of where the currency would move if it were able to 

float—i.e., what its market value would be. The NAM commends the work of Dr. 

Ernest Preeg, of the Manufacturers Alliance, as well as that of the Institute for 

International Economics’ Dr. Morris Goldstein, as well as other economists’ estimates. Most estimates indicate an undervaluation between 15 and 40 percent. Given 

the price pressures expressed by many NAM member companies, I tend to believe 

the market price would be toward the upper end of that range. 

The Chinese currency is the key, not just because of the huge bilateral imbalance, 

but also because other Asian countries are all looking over their shoulders at Chinese competition and are reluctant to allow their currencies to move up against China’s. Once China’s currency appreciates, though, they will be less reluctant to allow 

theirs to move upward as well. 

Would a considerably stronger Chinese yuan have beneficial effects? Absolutely. 

Many of our member companies tell us that a 20 percent or more price shift would 

change the competitive situation dramatically. 

Moreover, China’s huge purchases of dollars are pumping so much local currency 

into the Chinese economy that it is getting overheated and risks a serious asset bubble and inflation that will worsen the living standards of many Chinese. The International Monetary Fund’s (IMF) recent international economic report makes it plain 

that currency reserve buildups by Asian nations are destabilizing to the world economy and need to be addressed. Thus a currency revaluation that would slow China’s 

reserve accumulation would be a ‘‘win-win’’ situation. 

Commentators who state that Chinese wages are so low that no amount of currency appreciation would make a difference overlook the fact that labor costs are 

only one factor in the production process. In fact, production worker wages and benefits are only 11 percent of the cost of U.S. manufactured goods, on average. An exchange rate reflecting market forces would shift the competitive equation significantly. Certainly many Chinese industries would remain extremely competitive, but 

others would find their artificial advantage diluted. U.S. exports would also grow 

more rapidly, helping to bring about a more sustainable trade position. 

At that same time, the currency situation and trade with China must be seen in 

their proper perspectives. While the undervalued Chinese yuan is a major aspect in 

our growing bilateral trade imbalance, it is not the only factor. Growing concerns 

over China’s shortcomings in implementing World Trade Organization (WTO) commitments and other factors are important factors in the imbalance as well, and I 

will turn to WTO implementation later in my statement. 

Additionally, it is important to recognize that not all of China’s rapid export 

growth to the U.S. market competes with U.S. production. For example, Japan’s 

share of U.S. imports has fallen as China’s has risen—implying the possibility of 

considerable substitution of Chinese for Japanese goods. China is now the largest 

supplier of computers and related components into the U.S. market. Yet in 2000, 

China was only our 5th-largest supplier. Though total U.S. imports of computers 

and components fell from 2000 to 2002, imports from China soared nearly 50 percent, while imports of these products from Japan fell 50 percent and from Korea 

fell over 40 percent. 

The Administration has recognized the importance of having a Chinese currency 

that reflects market forces, and the NAM applauds the initiatives the President has 

taken and the work that Treasury Secretary Snow has been doing to obtain progress 

in this direction. It is important that these efforts bear fruit. 

CHINA AS A MARKET

Let me stress that we are seeking a market-oriented approach to U.S.—China 

trade. The U.S.—China trade relationship needs to be among the largest and strongest in the world, and needs to proceed in a way that clearly benefits both countries. 

It is also very important to avoid viewing China in a one-sided manner. In addition 

to being a rapidly rising supplier of imports into the U.S. market, China is also a 

45

quickly growing market for foreign goods and services, and this must not be overlooked. 

Last year China was our fastest-growing export market. While our overall exports 

fell 5 percent, our exports to China were up 15 percent. Last year China was the 

second-largest market for U.S. commercial jet aircraft. China has the same potential 

for many products. 

There is enormous potential for expansion. Only 8 percent of China’s imports 

come from the United States. The European Union sells considerably more to China 

than we do. We need to examine why the U.S. has such a small share of China’s 

import market, and what—in addition to a currency shift—U.S. exporters need to 

do to change this situation and help boost two-way trade. 

Exporting is not the only way American companies sell abroad. In fact, investing 

overseas to produce in markets abroad is the predominant way that American companies compete around the globe. These investments strengthen the competitive 

ability of American firms globally and allow them to increase their market position 

in countries all around the world. 

American companies invest in China, as they do in other countries, but the size 

of the investments are surprisingly small. Ninety percent of U.S. foreign direct investment goes to the high-income countries, predominantly Europe, to enable U.S. 

producers to be close to the market. The vast majority of the production of U.S. affiliates is sold locally, in the country of production. Aside from Canada, whose economy is tightly inter-related with ours, only 10 percent of U.S. offshore manufacturing production is exported back to the United States. The rest is consumed locally or exported to third countries. 

The same is true with U.S. investments in China. First, they are still very small. 

Less than 5% of U.S. global foreign direct investment in manufacturing is going to 

China. Commerce Department data show that the bulk of the output of U.S. firms 

in China is sold in the local Chinese market. Commerce’s data imply that only three 

percent of U.S. imports from China came from U.S. manufacturing affiliates there. 

Census Bureau data show that imports into the United States by all multinationals 

(U.S., European, Japanese, etc.) from their Chinese affiliates account for only 20 

percent of total imports from China. 

Thus, the data do not support the view that a huge rush of outsourcing has resulted in our trade imbalance with China. Nevertheless, it is certainly true that 

more U.S. companies are beginning to talk about the necessity of moving to China 

to stay globally competitive. A growing erosion of our manufacturing base is a real 

possibility. The best way to ensure that investment flows follow economic fundamentals while maintaining growing manufacturing production in the United States is 

to have market-determined currencies and a better investment environment in the 

United States. We need to avoid artificial factors that distort trade and investment, 

but we must also take the steps necessary to reduce the cost of production in the 

United States and to improve the attractiveness of the United States as a place for 

both U.S. and foreign companies to invest. 

CHINA’S WTO COMPLIANCE

China’s accession to the World Trade Organization in December 2001 was an important positive development for manufacturers because China has now committed 

to abide by the same international trade rules that apply to the United States and 

most other countries. Prior to China’s accession to the WTO, we had very few enforceable rights in trade with China. Now, with its accession to the WTO, China is 

reducing tariffs and quotas, and is required to make far-reaching changes that will 

enable U.S. firms to have a much more open market in China. It is absolutely essential that those changes and commitments be fully implemented by China. 

The Office of the U.S. Trade Representative recently asked for views on China’s 

WTO compliance. In order to provide an accurate NAM view to USTR, we surveyed 

our members. What we found is that as China concludes its second year as a WTO 

member, its compliance record is decidedly mixed. 

While U.S. exports to China continue to increase (by 22 percent in Jan.–June 

2003) and a growing number of U.S. companies are trading and investing there, the 

NAM has also received far more complaints about unfair Chinese practices than in 

the previous year. These practices are playing a significant role in sustaining the 

large U.S.-China trade imbalance. 

Currency Manipulation—In the view of many manufacturers, China’s undervalued 

currency is the single most important factor driving the growing trade imbalance 

between the United States and China. As I have discussed this extensively already, 

I will only add that China’s tightly controlled currency creates a trade disadvantage, 

and we view this as going against the intent of the WTO, which seeks to remove 

46

trade barriers and allow markets to determine trade flows. Article XV, for example, 

states that ‘‘Contracting Parties shall not, by exchange action, frustrate the intent 

of the provisions of this Agreement . . .’’

Subsidized Exports—We continue to receive reports from different industries that 

Chinese products are being sold in the United States at prices so low that they could 

not even cover the cost of raw materials and shipping much less full production and 

marketing costs. These reports suggest the possibility of widespread use of subsidies, either direct or indirect, to help Chinese exporters gain a competitive advantage in the U.S. market. One important source of indirect subsidy is continued bank 

lending to money-losing and insolvent Chinese manufacturers, often state-owned or 

state-controlled enterprises. Since the Chinese banks providing these loans are either state-owned or state-controlled, the Chinese government bears responsibility 

for their lending practices. 

Counterfeiting and Ineffective Enforcement of IPR Protection—While Chinese laws 

on intellectual property rights (IPR) have improved considerably, the lack of effective enforcement of the IPR protection remains a serious problem. Violations of 

trademarks through product counterfeiting is rampant and on a massive scale. The 

violations involve a wide range of products, including consumer hygiene and health 

care products, athletic footwear, pharmaceuticals, food and beverages, motorized vehicles and even entire automobiles. And the also involve unauthorized use of U.S. 

testing and product quality marks. China needs effective laws and enforcement to 

criminalize counterfeiting. It also needs to enforce commitments to stop the export 

of counterfeit goods. 

Manipulation of VAT and Other Taxes—We have reports that China is manipulating the application of taxes, notably the Value-Added Tax (VAT), to both restrict 

imports and indirectly subsidize exports. For example, the scrap recycling industry 

and semiconductor industry have brought specific examples to our attention. In the 

case of semiconductors, the rebate to domestic, but not foreign, producers could provide as much as a 14% production advantage for firms to locate in China—and appears to be contrary to the WTO’s basic requirement that foreign firms receive national treatment for their exports to China. 

Inappropriate standards and product testing requirements—NAM members have 

raised concerns about application of technical standards and the ‘‘CCC’’ China quality mark system. We note several problems including the high cost of having Chinese inspectors audit factories in the United States and other foreign countries on 

compliance with the standards; continued delays in allowing U.S. testing and certifying bodies to certify compliance for the CCC mark; and lengthy delays and relatively high cost of obtaining testing and certification for the CCC mark in China. 

Product-specific problems were reported that affect electrical products and tires. 

In short, then, we see a variety of unfair practices that are impeding U.S. exports 

to China or providing Chinese products with competitive advantages in the U.S. and 

global marketplace. On the other hand, China has implemented most of its required 

changes, or at least has put laws into place. Some significant problems remain, 

though, despite the attempts of the Beijing government to bring about the necessary 

changes. 

The NAM recognizes that China is still in transition to a market economy and 

in the process of phasing in certain WTO market-opening commitments. However, 

because China is such an important global importer and exporter, it is vital that 

the United States work to ensure that China complies with all WTO obligations and 

particularly those that have a significant impact on U.S. economic interests. 

MASSIVE EXPORT PROMOTION PROGRAM

There is one more dimension to our trade I would like to discuss before concluding 

my statement, Mr. Chairman—and that is our exports to China. The NAM believes 

we must undertake a massive joint public-private export trade effort to increase 

U.S. exports to China. In 2003, China is set to become the world’s 3rd largest importer but the United States only has an 8 percent share of all Chinese imports. 

We believe that very rapid rates of U.S. export growth to China are possible—

rates of 25–33 percent annually. There is no reason the United States could not double or triple its share of China’s imports and benefit fully from China’s rapid 

growth. This would make a significant contribution towards more balanced and sustainable trade with China and would also make a substantial contribution to U.S. 

economic growth. 

We believe the time has come for a total revamping of the U.S. government’s export promotion efforts in China. The stage is set. With China’s market opening 

moves stemming from its WTO obligations, restoration of reasonable exchanges 

47

rates vis a vis our major competitors, and what we hope will be a Chinese currency 

that reflects a reasonable market valuation, U.S. export are set to boom. 

But they will not do so on their own. The Chinese market is too distant and unfamiliar to most U.S. companies, and they need a partnership with the U.S. government—and particularly the Commerce Department. The NAM envisions a bold program, which could include:

• Permanent American Trade Centers that will attract Chinese buyers to see 

U.S. products and technologies,

• A large increase in Commerce Department personnel in China, with a full 

market research program and tailored export promotion assistance to individual firms,

• A huge increase in export financing to put us on a par with competitors,

• A several-fold increase in the Market Development Cooperator Program enabling vertical industry associations (not horizontal ones like the NAM) to promote their industries’ exports, and

• Imaginative use of the Export Trading Company Act to create China-specific 

trading companies enabling thousands of U.S. companies to penetrate the 

Chinese market.

The NAM looks forward to working with the Congress and the Administration to 

discuss these and other ideas that could bring into reality our vision of a truly massive program to expand U.S. exports to China. 

CONCLUSION

I want to conclude by reiterating that China is only one of the problems facing 

American manufacturing. We will not succeed in preventing the migration of our 

manufacturing base to China and other foreign countries if we do not address the 

high cost of manufacturing in the United States and get the U.S. economy moving 

again. A fairly valued Chinese currency is important, but we must not forget that 

the bulk of our problems are home-grown. 

U.S. industry is burdened by legal and regulatory systems that retard growth and 

destroy jobs. Unrestrained asbestos liability alone, for example, could cost U.S. industry $250 billion, resulting in the bankruptcy of even large corporations. Rapidly 

rising health care costs are a constant worry, particularly for small manufacturers. 

Uncertainty over sources of energy supply has led to price volatility. Lack of support 

for research and development threatens to undermine U.S. technology leadership. 

And shortages of skilled workers have many manufacturers wondering how they can 

expand in the future. 

Additionally, bilateral, regional and WTO trade agreements must be negotiated as 

quickly as possible to get foreign trade barriers eliminated, or at least down to our 

own low level. U.S. tariffs on manufactured goods average less than 2 percent, while 

in many parts of the world U.S.-made goods face tariffs 10–15 times higher—or even 

more. 

Unless these challenges are also addressed, we can expect a growing erosion in 

the U.S. industrial base. Competition with China will only accelerate the trend. 

However, if we begin to act now, with both a refocused and positive trade policy toward China and a concerted strategy on economic growth and manufacturing renewal, we can restore the dynamism and competitiveness of U.S. industry and ensure the global leadership that is so central to our economic and national security. 

Thank you, Mr. Chairman.

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Chairman HYDE. Thank you, Mr. Vargo. 

Mr. Lardy. 

STATEMENT OF NICHOLAS R. LARDY, PH.D., SENIOR FELLOW, 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. LARDY. I am delighted to have a chance to be here and talk 

to you about this very important trade relationship between China 

and the United States. I think you have heard the numbers already. China is our third largest trading partner today. The United 

States is China’s second largest trading partner, and the trade between the two countries is growing extremely rapidly. 

I would like to begin talking primarily about the causes of the 

bilateral trade imbalance. We have heard a lot about it already this 

afternoon. It has been a continuous source of concern, and I want 

to underline what I think was one of the key points that Secretary 

Aldonas didn’t have time to elaborate, and that is that the bilateral 

trade imbalance has emerged primarily because China has become 

the leading location for the assembly of a broad range of goods that 

used to be assembled elsewhere in Asia. The parts and components 

for these goods come predominantly from elsewhere in Asia. The 

final goods are sold predominantly in North America and Europe, 

and the result is that China has a large and growing deficit in its 

trade with most of its Asian trading partners and a large and 

growing surplus in its trade with the United States and with Europe. 

I think this is a structural deficit. It reflects very little about exchange rates or Chinese protectionism. I have said for at least a 

decade that because of this underlying structural problem the surplus that China has with the United States is likely to continue to 

expand as we go forward regardless of what happens to the Chinese exchange rate. 

Now let me turn secondly to the question of whether or not this 

is an open or a closed economy. I think we heard a number of expressions today that China is basically a pretty closed economy and 

it is very hard to sell there. I would point out that over the last 

12 years; that is, from 1990 to 2002, Chinese imports grew at an 

annual rate of 15 percent. They went from $53 billion to $295 billion. In the first 9 months of this year, China’s imports rose by an 

additional 40 percent. Their imports this year will grow by more 

than 100 billion U.S. dollars. Chinese total imports this year will 

exceed those of Japan for the first time. This will make China the 

third largest importing economy in the world. 

If you look at the ratio of imports to GDP, which is a common 

indicator, it has roughly doubled over the last 13 years, up about 

15 percent from 1990. It will be more than 30 percent this year. 

In Japan that ratio is 8 percent. In the U.S., that ratio this year 

will be about 14 percent. As measured by the ratio of imports to 

what the economy is producing for a large continental size of the 

economy, China has a remarkably high import ratio. 

I point out finally that their import tariffs are very low. Their 

import tariffs on manufacturers are only 10 percent. They will go 

to 9 percent when China’s WTO commitments are fully phased in 

in 2005. If you take four other large economies, when they fully implement their Uruguay Round commitments in 2005, I am talking 

51

about Argentina, Brazil, India and Indonesia, their tariffs on manufactured goods will be 31 percent, 27 percent, 32 percent and 37 

percent, respectively. In other words, China already has the lowest 

tariffs of any emerging market economy. They are substantially 

lower than most other comparable economies. 

I will close finally with a few remarks on the exchange rate. I 

certainly agree with what has been said by several people already. 

The Chinese currency is undervalued. I think the Chinese leaders’ 

own actions already implicitly have acknowledged that. They are 

taking a series of ad hoc measures to try to reduce pressure on the 

currency. They do not want to, however, introduce a float. And indeed, I would say that a floating exchange rate with liberalized 

capital controls is desirable in the long one, but it certainly is not 

a viable strategy now even though it is highly desirable in the long 

run. I think the appropriate strategy now would be a revaluation 

in the range of 15 to 25 percent. I think that would help them end 

the buildup of foreign exchange reserves which is complicating the 

ability of the authorities to conduct monetary policy. I would hasten to add even if China were to revalue by this amount, the effect 

of the bilateral deficit would be modest, perhaps less than $10 billion. It could be somewhat larger if it led Taiwan and South Korea 

and perhaps other Asian countries to revalue their currencies as 

well. But a Chinese revaluation even in the 15 to 25 percent range 

would not make a huge difference to the bilateral trade imbalance. 

As I said earlier, I think there is a long-term structural problem 

that has very little to do with either the exchange rate or Chinese 

protectionism. 

Thank you very much. 

[The prepared statement of Mr. Lardy follows:]

PREPARED STATEMENT OF NICHOLAS R. LARDY, PH.D., SENIOR FELLOW, INSTITUTE

FOR INTERNATIONAL ECONOMICS

Thank you very much Chairman Hyde for inviting me to appear before this House 

Committee on International Relations hearing on United States China economic 

ties. 

Bilateral trade between China and the United States has grown rapidly in recent 

years. China is now our third largest trading partner. Firms located in China are 

now the second largest supplier of imports to the United States, having gone ahead 

of Japan in 2002 and Mexico this year. China is the sixth largest market for firms 

located in the United States. The United States is China’s second largest trading 

partner. The United States has long been the single largest export market for firms 

located in China, taking over 30 percent of total exports produced in China. It has 

been a more modest supplier of imports, for reasons explained below. 

Causes of the Bilateral Trade Imbalance 

While bilateral economic ties between China and the United States are robust, 

they have been characterized for more than two decades by a growing bilateral 

trade imbalance. Initially the balance in China’s favor was small. But in recent 

years it has grown substantially and now constitutes the largest single bilateral deficit of the United States. The principal cause of the growing imbalance is not the 

nature of China’s exchange rate system or Chinese protectionist measures that keep 

out foreign goods. It is rather that China has become a leading location for the assembly of a broad range of manufactured goods, most of which previously were assembled elsewhere in Asia. The major parts and components that comprise these 

goods are purchased mainly from other Asian countries and the final goods are sold 

predominantly in North America and Europe. The vast majority of these goods are 

assembled by foreign firms that have relocated their assembly activities to China. 

It is no accident that as the U.S. bilateral deficit with China soared from US$10 

billion in 1985 to over US$100 billion last year that the share of China’s exports 

52

produced by foreign firms rose from 1 percent to 52 percent over exactly the same 

period. 

As a result of China’s emergence as a major base for foreign firms to assemble 

manufactured goods, China runs a trade surplus with the United States and Europe 

and a significant deficit with Asian countries. Its overall trade surplus, however, is 

quite modest. As measured by its current account, its surplus has averaged only 2 

percent of gross domestic product since it pegged its currency to the U.S. dollar in 

1994. This year, for reasons explained below, its current account surplus will be 

below 2 percent. 

China’s global pattern of trade—surpluses with the United States and Europe but 

deficits with most of its Asian neighbors—stems from several sources. First, and 

most importantly, it reflects Chinese policies welcoming foreign direct investment, 

particularly in manufacturing. Foreign firms by the end of the first half of 2003 had 

invested about US$480 billion in China, far and away the largest amount of foreign 

direct investment in any emerging market. A little over half of all this investment 

has been in the manufacturing sector. Not only does China place few restrictions 

on foreign ownership of manufacturing firms, through its tariff and other policies 

it allows foreign firms that produce for the export market to operate at international 

prices. Machinery and equipment that goes into foreign joint ventures and wholly 

foreign-owned firms is entirely exempt from import duties. And the foreign-sourced 

parts and components that are assembled into finished goods are also exempt from 

all import duties when they are reexported in the form of finished goods. Moreover, 

manufacturers are eligible for a rebate of almost all domestic valued-added taxes 

they have paid for any content in their exported goods that is sourced from within 

China. Combined with relatively low cost, high productivity labor, these policies 

have made China one of the most competitive global locations for the assembly of 

manufactured goods for export. 

China’s globally competitive position is clearly reflected in the pattern of U.S. imports. China, not South Korea and Taiwan as in the past, became in the early 1990s 

the single largest source of imported footwear in the United States market. China, 

not South Korea, Taiwan, and Hong Kong as was the case in earlier years, for more 

than a decade has been the single largest source of imported toys and sporting goods 

in the United States market. And China last year replaced Japan and Mexico as 

the largest single source of U.S. imports of consumer electronic products and information technology hardware such as computers. 

The pattern of trade mentioned above, in which China runs trade surpluses with 

the United States and to a lesser extent the European Union while running trade 

deficits with its Asian neighbors, stems also from two additional factors. First, firms 

based in other Asian countries have undertaken the vast majority of foreign direct 

investment in China. Contrary to the common impression here, United States and 

European firms are relatively minor investors in China. Asian firms, notably those 

from Hong Kong, Taiwan, Korea, and Japan account for about 70 percent of China’s 

inward foreign direct investment. Firms based in these countries tend to source 

their high valued added parts and components for their China operations from their 

home countries. As a result China, for example, last year ran a massive trade deficit 

of more than $25 billion in its trade with Taiwan. Two-thirds of China’s imports 

from Taiwan last year consisted not of finished goods but of parts and components 

that subsequently were assembled in factories owned by Taiwan firms. The resulting final goods were exported into the global market, predominantly to the United 

States and Europe. 

A second factor is that unlike other Asian firms that tend to use China as an export platform, most U.S. and European firms operating in China have invested 

there primarily to sell into the domestic market rather than to export. The best example would be Volkswagen, which has had a dominant share of the Chinese car 

market for over a decade. The output of Volkswagen’s joint ventures in Shanghai 

and Changchun is sold entirely on the domestic market. Firms producing for the domestic market tend also to source their inputs largely on the domestic market rather than from their home countries. 

In short, American and European investment in China is relatively modest and 

geared primarily to the domestic market. The investment of Asian firms in China 

is not only much larger but it tends to be directed to sales in North America and 

Europe. And these Asian firms source a large share of parts and components they 

use from their home countries. The combination of these factors creates the pattern 

of trade sketched earlier. 

Finally, I would underline that China’s large and growing bilateral surplus in its 

trade with the United States does not constitute evidence that China’s trade practices are systematically protectionist. Yes, China does protect some specific sectors 

and products, at times in violation of its commitments to the World Trade OrganizaVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00056 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
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tion. But China is certainly one of the most open; perhaps the most open of all 

emerging market economies. 

China’s high degree of openness is reflected in several measures. First, its global 

imports have been growing at a prodigious rate in recent years. China’s imports 

grew from US$53.4 billion in 1990 to US$295 billion last year, a growth rate of 

more than 15 percent annually. This year China’s imports in the first nine months 

increased by 40 percent, more than double the rate of increase in the first nine 

months of 2002, and are on track to expand by well over US$100 billion for the year 

as a whole. China’s global imports this year, which are likely to exceed $400 billion, 

will for the first time exceed those of Japan, making China the third largest importing nation in the world after only the United States and Germany. China’s economic 

growth this year is exhibiting a distinct up tick. It is a measure of the relative openness of its economy that as economic growth has accelerated this year that Chinese 

import growth has accelerated at an even more rapid rate. 

A second measure of China’s economic openness is the ratio of its imports to gross 

domestic product, sometimes called the import ratio. China’s import ratio increased 

from under 15 percent in 1990 to almost 25 percent last year. This year the ratio 

likely will reach 30 percent. Thirty percent is almost four times Japan’s import ratio 

of 8 percent and twice the likely 14 percent import ratio for the US this year. 

A third measure of China’s openness is the degree of protection provided by its 

import tariffs. Even prior to the time China became a member of the World Trade 

Organization it had reduced its average import tariff rate by about three-quarters, 

from a peak of 55 percent in 1982 to 15 percent at the beginning of 2001. Today 

China’s average import tariff is 11.5 percent and the average tariff on manufactured 

goods is only 10.3 percent. This, of course, is significantly higher than the tariff levels of the United States and other advanced industrial economies. But China’s average tariff rate on imported manufactured goods is far lower than the rates prevailing in other large emerging markets. For example, when their Uruguay Round 

commitments are fully implemented in 2005 the average tariff on manufactured 

goods in Argentina will be 31 percent, in Brazil 27 percent, in India 32 percent, and 

in Indonesia 37 percent. China’s current import tariff rate of 10.3 percent on manufactured goods is scheduled to drop to 9 percent by 2005, only one-quarter to onethird the rates that will prevail in these four countries. 

In short by all three standards—the large size and rapid expansion of the volume 

of imports, the high and rising ratio of imports to gross domestic product, and the 

sharply declining and relatively low degree of tariff protection—China is a relatively 

open economy. That conclusion does not absolve China of its need to fully implement 

its WTO commitments. The Office of the United States Trade Representative and 

other U.S. government agencies should continue to press China to fulfill all of its 

trade commitments. While China’s full compliance with its commitments could be 

quite important for some individual U.S. exporters, it is important to bear in mind 

that it is unlikely that full compliance would have a major impact on the bilateral 

deficit the United States has in its trade with China. That deficit is a function of 

the structural factors discussed above, not protectionism in China. 

China’s Exchange Rate 

Is China’s currency undervalued? If so what is the appropriate Chinese response? 

What difference would this response make to bilateral trade between the United 

States and China? 

There is little doubt that the Chinese currency is undervalued. Since it pegged 

its currency to the dollar in 1994 China has had a current account surplus averaging two percent of its gross domestic product. And in the four years since the 

Asian financial crisis China has also had a capital account surplus of a little over 

1 percent of gross domestic product. To keep the currency pegged at 8.28 yuan to 

the dollar China’s authorities have had to purchase significant amounts of foreign 

exchange in recent years and reserves have risen accordingly. 

The Chinese authorities, through their own recent actions, have implicitly admitted that the yuan is undervalued. To date they have chosen to try to reduce the 

pressure on the currency through a series of ad hoc measures, rather than making 

any change to their exchange rate regime. Just last week the government announced that it would reduce by an average of three percentage points the rate at 

which it rebates the value-added tax on products that are exported. That will tend 

to make Chinese exports more expensive in international markets. But, unlike an 

exchange rate change, this will have no effect on the relative price of imports. The 

authorities also have signaled an easing in the approval process for outward-bound 

foreign direct investment; liberalized outbound Chinese tourism; and allowed one 

domestic financial institution to issue dollar-denominated debt. They are contemplating allowing domestic insurance companies to purchase foreign-currency deVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00057 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
54

nominated financial assets; approving a qualified domestic institutional investor 

program that would allow Chinese, within carefully defined limits, to invest in securities traded on foreign markets; and so forth. All of these measures would tend to 

increase the demand for or reduce the supply of foreign exchange, which would contribute to a lessening of the build-up in official foreign exchange reserves. 

The United States policy of encouraging China to adopt a more flexible exchange 

rate system is certainly appropriate as a long-term objective. The Chinese authorities over the years have repeatedly expressed the goal of moving toward a convertible currency and a more flexible exchange rate regime. There is no debate on the 

long-term desirability of such a policy. 

In the short and medium run, however, a convertible currency and a floating exchange rate is not a viable option for China. Chinese households have more than 

ten trillion yuan deposited in savings accounts in the banking system. Very few Chinese savers have had any opportunity to diversify the currency composition of their 

financial savings. Eliminating capital controls could well lead to a substantial move 

into foreign-currency denominated financial assets, most likely held outside of Chinese banks. Given the well-known weaknesses of China’s major banks, such a move 

could easily precipitate a domestic banking crisis. As a result, the authorities do not 

anticipate relaxing capital controls on household savings until they have addressed 

the solvency problems of the major state-owned banks. 

My colleague at the Institute for International Economics, Morris Goldstein, and 

I recently have written two articles outlining the case for a revaluation of the Chinese currency. Our tentative judgment is that the currency is undervalued by an 

amount in the range of 15 to 25 percent. We believe that the currency should be 

revalued and at the same time the authorities should widen the band within which 

they permit market forces to determine the value of the currency and that at the 

new parity the Chinese currency should be pegged to a basket of currencies rather 

than pegged simply to the U.S. dollar. I have submitted these two articles, which 

appeared originally in the Financial Times and The Asian Wall Street Journal, for 

the record so will not repeat the case for revaluation here. 

What difference would a revaluation of the yuan by 20 percent, the mid-point of 

our range, make to the bilateral trade relationship? A 20 percent revaluation of the 

yuan would reduce China’s current account position by about US$40 billion, that is 

imports would increase and exports would contract by an amount summing to 

US$40billion. Since the U.S. accounts for somewhat less than one-quarter of China’s 

trade, the expected reduction in the U.S. bilateral trade deficit with China would 

be under US$10 billion. Given the lags with which in the price effects of an exchange rate change work through the markets, the US$10 billion likely would be 

reflected in a slowdown in the rate at which the bilateral imbalance grows, rather 

than a reduction in the absolute size of the deficit. 

The effect of a Chinese revaluation on the overall U.S. current account, however, 

is likely to be much larger than the influence on the bilateral trade balance alone. 

The reason is that China may be the key to a general realignment of Asian currencies. Given China’s increasing competitiveness as a global exporter, Taiwan and 

South Korea, for example, have been reluctant to let their currencies appreciate. Instead they have been intervening in the market, adding substantially to their foreign exchange reserves to prevent their currencies from appreciating. China’s revaluation could well be a catalyst for revaluation of the Taiwan dollar and the Korean 

won, as well as helping to sustain the recent appreciation of the yen vis-a-vis the 

U.S. dollar. The cumulative effect on the overall U.S. current account deficit of such 

a general realignment of Asian currencies in response to a 20 percent revaluation 

of the yuan would be several times the $10 billion estimated reduction in the U.S. 

bilateral trade deficit with China. 

The Wall Street Journal 

September 12, 2003

COMMENTARY 

TWO-STAGE CURRENCY REFORM FOR CHINA

By MORRIS GOLDSTEIN and NICHOLAS LARDY

It was the unstoppable force meeting the immoveable object. During his recent 

visit to Beijing, U.S. Treasury Secretary John Snow stated that his objective was 

to get China to commit to moving to a ‘‘free-floating’’ currency, while senior Chinese 

officials stressed the contribution that a ‘‘stable’’ yuan had made to economic stability and development in China, Asia and the world. How then to square the circle 

55

that seems to call for three objectives: a near-term revaluation of the yuan, greater 

stability of the yuan in the medium term and greater flexibility and market determination of the yuan a little later down the road? 

Most proposals for Chinese currency reform fall prey to one of two problems. If 

revaluation of the yuan has to wait until China is willing to undertake full capitalaccount liberalization, then the rest of the world has to live for too long with a misaligned yuan. Alternatively, if China is asked to free float the yuan and adopt capital-account convertibility before it puts its domestic financial sector on a firmer 

footing, it would be casting aside one of the main lessons of the Asian financial crisis. 

Our answer to this dilemma is that China should view reform of its currency regime as a two-step process. The first step should be a medium-size (15% to 25%) 

revaluation of the yuan, a widening of the currency band (to between 5% and 7%, 

from less than 1%), and a switch from a unitary peg with the dollar to a three-currency basket peg, with weightings of roughly a third each for the dollar, euro and 

yen. Step two should be adoption of a managed float, after China strengthens its 

domestic financial system enough to permit a significant liberalization of capital 

outflows. 

The Chinese leadership implicitly recognizes the yuan is undervalued. But they 

apparently believe the disequilibrium in the foreign-exchange market can be ameliorated by selective liberalization of current- and capital-account transactions while 

leaving unchanged the current fixed parity with the dollar. 

The authorities recently increased the amount of yuan that Chinese tourists can 

convert to foreign currency and began to allow Chinese firms with certain types of 

foreign-exchange earnings to retain them rather than surrender them to the central 

bank. They have given the green light for a state-owned bank to issue its first dollar-denominated bond on the domestic market and have already signaled that requests for outward foreign direct investment are now more likely to be approved. 

They are also discussing a reduction in the value-added tax export rebate rate to 

11%, down from its current level of 15%. And they may allow mainland residents 

and certain financial institutions to purchase limited amounts of foreign securities. 

The authorities hope that these steps will either increase demand for, or reduce supply of foreign exchange, thus relieving the upward pressure on the currency. 

While the go-slow approach presumably appeals to the leadership because of its 

limited short-run effect on China’s exports, incoming FDI, and trade-related jobs, it 

is likely to do little to remove the misalignment of the yuan that has pushed China’s 

overall balance of payments into a larger surplus, fed a huge reserve accumulation 

over the past 18 months, and increasingly concerned many of China’s trading partners, including the United States, Euroland, Japan and South Korea. Very small adjustments could simply stoke further capital inflows by persuading market participants that speculation on the yuan is a one-way bet. Although the low interest rates 

paid on domestic central bank bonds has meant that sterilization of international 

reserves has so far been less onerous in China than in many other emerging economies, experience shows that sterilization becomes more costly and less effective the 

larger it is and the longer it goes on. 

With its mountain of bad loans, China cannot afford to let capital inflows exacerbate the already excessive expansion in bank lending, money-supply growth and investment. The recently announced increase in reserve requirements for banks indicates that overextension of the financial system is now clearly visible on the central 

bank’s radar screen. 

In contrast, consider the advantages of our proposal for a medium-size revaluation. This would immediately deal with the existing undervaluation of the yuan 

and remove the incentive for further speculative capital inflows and reserve accumulation. No longer would the foreign component of the money supply be working at 

cross-purposes with the needs of domestic stabilization. It would show trading partners that China is not attempting to manipulate its exchange rate, thereby lessening the threat of protectionist measures against China’s exports. It would make 

the yuan part of the solution to the global pattern of payment imbalances—not part 

of the problem. 

In doing so, it would add to the plaudits that China received during the Asian 

financial crisis for conducting a responsible exchange rate policy and for taking the 

wider interest of the region into account. It would also increase the odds that Japan 

and emerging economies elsewhere in Asia would be willing to allow their exchange 

rates to appreciate, reducing the burden on the euro contributing to the needed 

downward adjustment of the dollar and limiting the deterioration in China’s competitiveness. By adopting a wider band, China would gain valuable experience in allowing the exchange rate to be more responsive to market forces. 

56

Just as important, by moving to a three-currency basket peg, China would increase the stability of its overall trade-weighted exchange rate. In a context where 

the dollar needs to depreciate further to help reduce the unsustainable U.S. currentaccount deficit, a basket peg would permit the dollar to depreciate against the yuan 

without a series of yuan parity changes. That could not happen if China retains its 

present unitary peg to the dollar. 

The key to reconciling China’s desire for exchange-rate stability with the need for 

the yuan to play its proper role in global balance of payments adjustment is to recognize that a fixed rate for the yuan need not be at the present parity. Stability 

of China’s exchange rate should be interpreted against a wider set of reserve currencies than the dollar alone. The transition from ‘‘fix’’ to ‘‘flex’’ need not occur in 

one fell swoop, since liberalization of the capital account will proceed in stages. 

Looking farther down the road, China will find it in its interest to move to a regime of managed floating because capital mobility in and out of China will increase 

and because it will want to exercise greater monetary-policy independence for stabilization purposes. It would be unwise to float now because the domestic financial 

system is still far too fragile to rule out large-scale capital flight in response to bad 

news. In addition, the government still dominates foreign-exchange transactions to 

a degree that precludes the market functioning properly. But these obstacles to 

floating the exchange rate should lessen as China reduces its large stock of nonperforming loans in the banking system, government involvement in the credit-allocation process declines in favor of market forces, and the progressive dismantling of 

restrictions on international capital flows widens and deepens the scope and liquidity of foreign-exchange trading. 

As a host of emerging-market crises of the past decade have demonstrated so dramatically, high capital mobility vastly increases the vulnerability of a publicly announced target for the exchange rate. With China’s public debt burden rising under 

the weight of bank recapitalization and assumption of pension liabilities, fiscal 

pump priming will be more constrained and monetary policy is likely to take on an 

increased share of stabilization duties. Thus China will want to increase the flexibility of its exchange rate regime. 

But this need not mean slavish adherence to a pure float. If and when market 

forces push the yuan beyond the levels consistent with its economic fundamentals, 

China, like other countries, should retain the option to manage the float by intervening in the exchange market—so long as that intervention is not prolonged and 

not just in one direction. In short, a managed float should be the preferred regime 

choice for the second stage of reform. 

The currency regime that has served China well in the past is not the currency 

regime that will serve China best today or in the future. Likewise, if the U.S. wants 

to persuade China to reduce the serious undervaluation of the yuan and to play a 

larger role in the global adjustment process within the next year or so, it too will 

have to alter its opening negotiating position by dropping the suggestion that China 

move in one great leap forward to a free float and completely open its capital markets. With some compromise by all parties and with the right sequencing of China’s 

currency reform, a workable solution is in sight.

Messrs. Goldstein and Lardy are senior fellows at the Institute for International 

Economics.

URL for this article: http://online.wsj.com/article/0,,SB106332027691442300,00.html

 2003 Dow Jones & Company, Inc. All Rights Reserved 

Financial Times (London) 

August 26, 2003, Tuesday London Edition 1

A MODEST PROPOSAL FOR CHINA’S RENMINBI

By MORRIS GOLDSTEIN and NICHOLAS LARDY

The current debate on the renminbi exchange rate is appropriate given China’s 

role as a leading economic and trading power. But the debate has become so 

politicised that crucial facts are being ignored and dubious arguments are replacing 

sound analysis. A medium-size revaluation of the currency may not be as ‘‘sexy’’ as 

a large revaluation or no revaluation but it rests on a firmer foundation and is more 

consistent with China’s long-term interest. 

Those arguing for a large revaluation of the renminbi—35 per cent or more—

sometimes confuse bilateral trade balances with overall current account balances. 

While China is running a large (Dollars 100bn in 2002) bilateral trade surplus with 

57

the US, its trade balance with the rest of the world is in deficit, at Dollars 75bn 

(Pounds 47bn). Bilateral trade balances are especially misleading in this case because China processes goods previously exported to industrial countries by other 

emerging Asian economies. 

During the first half of this year, China’s current account surplus declined to 

about 1 per cent of gross domestic product. Adjusting for the recent overheating of 

its economy and other factors, China’s underlying current account surplus is probably no greater than 2 or 3 per cent of GDP. 

China’s capital account surplus is often overestimated by focusing too much on 

foreign direct investment. The overall capital account surplus during the 1999–2002 

period averaged a modest 1 per cent of GDP—far below the 4 per cent surplus for 

FDI. 

When China does liberalise capital account outflows, there will be downward pressure on the renminbi. With a stock of household savings equal to about 100 per cent 

of GDP, it would not take much international diversification to turn net capital 

flows from surplus to deficit. 

China’s build-up of Dollars 135bn in international reserves over the past 18 

months does not imply that it is passing up profitable investment opportunities. The 

investment share of GDP and the rate of expansion of bank lending are both too 

high. The real risk of an undervalued exchange rate is that it will handicap China’s 

efforts to achieve long-term financial stability. 

Those who maintain that a revaluation of the renminbi is unnecessary have done 

no better in their analysis. As long as China maintains controls on capital outflows, 

runs surpluses on both the underlying current account and capital account and accumulates reserves, there is a compelling argument that the renminbi is undervalued. Export processing means that it takes a larger revaluation to change China’s trade balance. 

China’s average import tariff rate has fallen following entry to the World Trade 

Organisation and future trade reform is likely to expand imports further. But clothing, one of China’s main exports, is likely to receive a big boost from the scheduled 

expiry of the multi-fibre agreement at the end of 2004, potentially doubling China’s 

share of the market. Thus, China will not necessarily switch to running current account deficits in the future. 

China’s exchange rate cannot be analysed in isolation from the pattern of global 

payment imbalances. At 5 per cent to 6 per cent of GDP, the US current account 

deficit is not sustainable and its correction would be aided by a further depreciation 

of the dollar. 

But an appropriate dollar depreciation will be frustrated if the Asian economies 

do not do their part on currency appreciation. China has a weight of nearly 10 per 

cent in the dollar’s trade-weighted index and an appreciation of the renminbi is a 

sine qua non for Asian currencies to appreciate more generally. 

Consumer prices have risen over the past two quarters and, with monetary 

growth expanding and good prospects for economic growth, exports and FDI, 

renmimbi appreciation need not drive China into Japan-style deflation, as some 

have argued. 

If China does not adjust its exchange rate, it risks further over-expansion in its 

financial sector, a reversal of the progress made against its bad loan problem, an 

upsurge of protectionism in the US and Europe against China’s exports and increased regional tensions within Asia. A medium-size revaluation of the renminbi—

between 15 and 25 per cent—would be the best response to the current 

disequilibria. It would be an investment in China’s financial stability and could set 

the stage for a wider international agreement on a more sustainable pattern of exchange rates and payments positions. By acting soon, China can lead the way.

The writers are senior fellows at the Institute for International Economics

 2003 The Financial Times Limited

Chairman HYDE. Thank you. 

Ms. Lee. 

STATEMENT OF THEA LEE, CHIEF INTERNATIONAL 

ECONOMIST, PUBLIC POLICY DEPARTMENT, AFL–CIO 

Ms. LEE. Thank you very much, Mr. Chairman. I appreciate the 

opportunity to come and testify today on behalf of the 13 million 

working men and women of the AFL–CIO. The issue of United 

States and China economic ties is of tremendous importance to our 

58

members, something we hear about pretty much every day from 

our local union leaders and activists. 

In our view, the United States Government has failed to act effectively to stem the job losses resulting from the burgeoning 

United States trade deficit with China. The Bush Administration 

has had opportunities and yet has failed to take concrete steps to 

ensure that the Chinese government live up to its international obligations on trade, currency manipulation and human rights. It has 

denied American businesses and workers import relief they are entitled to under the law and has taken positions at the World Trade 

Organization that will only worsen our trade relationship with 

China. 

John Sweeney, President of the AFL–CIO, said in a press statement released yesterday:

‘‘Despite this crisis at home and abroad, the Administration 

has been alarmingly slow to respond and their efforts to date 

appear to be little more than fig leaves.’’

I am submitting my testimony for the record, but I’d like to outline a few of the areas in which there have been opportunities for 

the Bush Administration to take action either on the trade front or 

the workers’ rights and the human rights front, but in fact we have 

seen a complete failure to act. 

In terms of WTO rules we have seen that China has consistently 

violated its WTO obligations in terms of market opening, and the 

United States Government has failed to take effective action. The 

Bush Administration has not used the Transitional Review Mechanism, which was established in China’s accession agreement to 

monitor China’s compliance with its WTO commitment, and part of 

the failure, according to the GAO, was that United States officials 

were not prepared for the TRM. 

In terms of currency manipulation, Mr. Vargo has already talked 

at some length about the problems of currency manipulation. In 

our view the Chinese government’s manipulation of the currency 

through the accumulation of reserves creates an enormous competitive disadvantage for U.S. products. It may be that there are advantages to some American businesses that are either producing in 

China for the United States market or importing from China, but 

for American workers and for companies producing here in the 

United States this creates an impossible competitive problem and 

it is in clear violation of WTO rules. 

WTO rules clearly prohibit currency manipulation to gain trade 

advantages that are inconsistent with GATT provisions. I think you 

can see why this would be so, why it doesn’t make sense for the 

WTO to put so much energy into reducing tariffs and to limiting 

subsidies and then to allow countries to manipulate their currency, 

which undermines all the other commitments that are made in the 

context of the WTO. 

We believe that it is crucially important for the Administration, 

and for the Congress to take whatever steps are necessary to force 

the Chinese government to cease the manipulation which has been 

so disadvantageous especially for American workers. We don’t have 

the opportunity to outsource ourselves to work in other countries. 

American workers need to find their jobs here, and if our currency 

59

is out of equilibrium with a major trading partner like China, that 

is something which creates a huge problem for us. 

I think the most serious problem, and I want to put most of my 

emphasis on this today, is the problem of the violations of workers 

and human rights in China. We see the Chinese government’s systematic repression of fundamental workers’ rights as a key contributor to the unfair advantage Chinese exports enjoy in the United 

States market. Chinese workers’ most basic rights are routinely repressed and they don’t even enjoy the political freedom to criticize, 

let alone change, their government. 

Mr. Aldonas, when questioned earlier, said he would recommend 

a market economy for China. I would say it would be important to 

start with a democracy. I know we are talking about political systems versus economic systems. But to the extent that Chinese 

workers in fact have no voice in their own government and don’t 

even enjoy the basic protections of the law in that country, they are 

not going to be able to benefit from the wealth that they are producing. We are not going to see the kind of growth and middle 

class growth in China that would in fact create a good market for 

American products and allow us to have the kind of trade relationship which would be mutually beneficial. 

We see a systematic suppression of wages and rights in China. 

I quote the Congressional-Executive Commission on China’s 2003 

Report. Chinese workers cannot form or join independent unions. 

They can’t even advocate for an independent union. Out of 1.3 billion people, it is a pretty devastating imbalance, and the Bush Administration has failed to even raise the case of China before the 

U.N. Human Rights Commission, even though this is something 

that has been done by the United States regularly in the past. And 

we think that this is a serious omission, that the very least that 

the United States can do is consistently raise these issues. 

And let me just say in addition that the United States has not 

implemented a China specific safeguard. It has not invoked the textile import surge protections that would allow extension of the 

quotas. It has not brought the dumping cases even when the ITC 

has found that there are dumping margins. 

Let me conclude by saying that American policymakers have an 

important choice to make in our trade relations with China. They 

can side with the importers and the outsourcers and stand by passively as the Chinese government takes advantage of its WTO 

membership and its access to the United States market, abusing its 

own workers and artificially undervaluing its currency in order to 

undercut American workers and domestic manufacturers or they 

can take a stand for American jobs and act now to ensure that 

China plays fair in the global economy. 

I thank you for your attention. 

[The prepared statement of Ms. Lee follows:]

PREPARED STATEMENT OF THEA LEE, CHIEF INTERNATIONAL ECONOMIST, PUBLIC

POLICY DEPARTMENT, AFL–CIO 

Mr. Chairman, Members of the Committee, I thank you for the opportunity to testify today on the U.S.-China economic relationship on behalf of the thirteen million 

working men and women of the AFL–CIO. As you know, addressing the problems 

in the U.S. economic relationship with China is of enormous importance to our 

members. 

60

The U.S. bilateral trade deficit with China hit $103 billion last year, up almost 

25 percent since China was granted Permanent Normal Trade Relations status in 

2000. The U.S. deficit with China is up another 22 percent in the first eight months 

of this year compared to the same period last year. Our imports from China continue to outstrip our exports by more than five to one, making this by far our most 

imbalanced trade relationship with any major trading partner. Meanwhile, the 

United States has lost more than 2.5 million manufacturing jobs since March 2001. 

While many factors contributed to this devastating job loss, it is clear that the 

Chinese government’s manipulation of its currency, violation of international trade 

rules, and egregious repression of its citizens’ fundamental democratic and human 

rights are key contributors to an unfair competitive advantage. The Chinese government is flouting its international obligations, and the U.S. government must act urgently to hold it accountable. 

Unfortunately, to date, the U.S. government has failed to act effectively to stem 

the job losses resulting from the burgeoning U.S. trade deficit with China. The Bush 

Administration has refused to take concrete steps to ensure that the Chinese government live up to its international obligations on trade, currency manipulation and 

human rights, has denied American businesses and workers import relief they are 

entitled to under the law, and has taken positions at the World Trade Organization 

(WTO) that will only worsen our trade relationship with China. As John Sweeney, 

president of the AFL–CIO, said in a press statement released yesterday, ‘‘Despite 

this crisis at home and abroad, the Administration has been alarmingly slow to respond, and their efforts to date appear to be little more than fig leafs.’’

Violations of WTO Rules Continue 

China became a member of the World Trade Organization (WTO) in 2001, and 

since then China has repeatedly and consistently failed to comply with WTO rules. 

The Bush Administration, rather than take advantage of the WTO’s formal dispute 

settlement mechanism to address these violations, has preferred to rely on prolonged discussions and informal consultations in its failed attempts to guarantee 

China’s compliance. Access to China’s markets has actually gotten worse for some 

products like meat and poultry, and China has used a host of new rules and tariffrate quotas to block access for a variety of products including soybeans, wheat, and 

cotton. 

China has taken few meaningful steps to protect intellectual property; piracy 

rates are still as high as 90 percent or more, and problems with piracy of textile 

designs and trademark infringement continue to grow. China has reneged on its 

commitment to allow certain high technology products into China tariff-free, continues to use unpredictable customs valuations procedures that do not assess tariffs 

based on the stated value of a product, and imposes value-added taxes on certain 

imports. But the U.S. has yet to launch one formal WTO complaint against China 

for all of these violations. China, on the other hand, has joined in the WTO challenge to the U.S. steel safeguard and has increased its use of anti-dumping actions 

against the United States. 

The Bush Administration has also failed to make the transitional review mechanism (TRM)—established in China’s accession agreement—an effective means of 

monitoring China’s compliance with its WTO commitments. The WTO committees 

that were supposed to review China’s compliance last year were not even able to 

outline the areas where China was violating WTO rules, and did nothing more than 

submit the minutes of previous meetings as their final TRM report. China insisted 

that the TRM take place in a single meeting, and refused even to give written responses to some questions. According to the GAO, part of the reason for the failure 

of the TRM was a lack of preparation among U.S. officials. 

Failure to Act on Currency Manipulation 

China has kept its currency—the yuan—pegged to the dollar at the same rate 

since 1994, and it is estimated to be undervalued by as much as 40 percent. This 

gives China an enormous competitive advantage in the U.S. market and creates an 

inherently unstable and unsustainable situation. 

WTO rules clearly prohibit currency manipulation to gain trade advantages inconsistent with GATT provisions. Article XV of GATT 1994, for example, provides that 

‘‘Contracting parties shall not, by exchange action, frustrate the intent of provisions 

of this agreement’’ (emphasis added). Currency manipulation nullifies tariff concessions made through WTO processes and amounts to a de facto illegal subsidy of Chinese exports. Deliberate undervaluation of the yuan vis-a-vis the U.S. dollar also 

violates the principle of most-favored-nation treatment, as it targets one country’s 

currency, adversely impacting that country’s trade. Certainly, the enormous bilateral U.S. trade deficit with China relative to other countries is evidence of the unVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00064 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
61

even impact of China’s currency policies on its trading partners. China’s choice to 

artificially bolster its own manufacturing sector at the expense of the United States 

(and other countries indirectly) is therefore a violation of its obligations under the 

WTO. 

As American University economist Robert Blecker wrote in a recent Economic Policy Institute briefing paper, ‘‘ [T]he sheer magnitude of the reserves accumulated 

by these East Asian countries, and the rapidity with which these reserves have increased in recent years, is prima facie evidence of efforts to keep their currencies 

undervalued and prevent their currencies from appreciating to exchange rates that 

would be conducive to more balanced trade relations with the United States. This 

is outright currency manipulation of a mercantilist nature, intended to maintain 

those countries’ trade surpluses with the United States, which by 2002 accounted 

for about 40% of the overall U.S. trade deficit’’ (‘‘The Benefits of a Lower Dollar: 

How the high dollar has hurt U.S. manufacturing producers and why the dollar still 

needs to fall further,’’ EPI Briefing Paper, May 2003). 

Professor Blecker estimates that the overvalued dollar (relative to all currencies) 

has resulted in about 740,000 lost jobs since 1995, as well as a loss of nearly $100 

billion in annual profits and $40 billion in annual investment over the same period. 

Blecker does not break out the impact of the dollar-yuan relationship specifically. 

The Chinese government must allow the yuan to reflect underlying economic and 

market forces. It must end the current peg and cease its accumulation of U.S. dollar 

reserves. While the Chinese government’s reluctance to take this action is perhaps 

understandable, the Bush Administration’s failure to act more forcefully in this regard is not. 

We call on the Administration to use all tools at its disposal, including initiating 

a WTO case, to send a clear message to the Chinese government that the current 

situation is unacceptable and will not be tolerated. We applaud efforts in Congress 

to force concrete action on this issue, as it is now clear that simple diplomacy and 

jawboning have utterly failed. 

Inaction in the Face of Violations of Workers’ and Human Rights 

In addition to the unfair competitive advantage gained through currency manipulation, the Chinese government’s systematic repression of fundamental workers’ 

rights is a key contributor to the unfair advantage Chinese exports enjoy in the U.S. 

market. Chinese workers’ most basic rights are routinely repressed, and they do not 

enjoy the political freedom to criticize, let alone change, their government. 

The Congressional-Executive Commission on China released its 2003 annual report a few weeks ago. The Commission concluded that: ‘‘Chinese citizens are detained and imprisoned for peacefully exercising their rights to freedom of expression, association, and belief. . . . Chinese workers cannot form or join independent 

trade unions, and workers who seek redress for wrongs committed by their employers often face harassment and criminal charges. Moreover, child labor continues to 

be a problem in some sectors of the economy, and forced labor by prisoners is common.’’ In addition, the Commission found that people seeking to practice their faith 

were subject to harassment and repression, while freedom of speech and freedom 

of the press were denied. 

Enforcement of wages, hours, and health and safety rules is lax or non-existent 

in many areas of the country. These abuses allow producers in China to operate in 

an environment free of independent unions, to pay illegally low wages, and to profit 

from the widespread violation of workers’ basic human rights. Together, these policies amount to a deliberate and artificial suppression of wages by the Chinese government. This exploitation impacts American workers, as well as those in other developing countries, and artificially lowers the price of Chinese exports in the U.S. 

market. 

During 2001 and 2002, the number of labor disputes and protests in China rose 

significantly. In response, the Chinese government jailed a number of workers for 

demonstrating for their rights and cracked down on any organization that might 

support the beginnings of an independent trade union. The official labor union—the 

All China Federation of Trade Unions (ACFTU), which is subordinate to the Communist Party—continued to discourage strikes and work stoppages, and to negotiate 

sweetheart deals with employers. 

In the face of these grave problems, the Bush Administration chose not even to 

raise the case of China before the UN Human Rights Commission in April of 2003, 

despite the United States’ regular practice of doing so previously. In addition, President Bush did not demand any specific improvements in human rights when he met 

with China’s President Hu in the summer of 2003. Instead, the Bush Administration has only engaged in ‘‘cooperative dialogue,’’ a strategy that has not worked. 

Since deciding to pursue a dialogue instead of UN action or public pressure, AdminVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00065 Fmt 6633 Sfmt 6621 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
62

istration officials have noted ‘‘backsliding’’ and a ‘‘deterioration in human rights’’ in 

the country during 2003, including arrests of democracy activists, harsh sentences 

for labor organizers, and the suppression of independent media, church groups, and 

Tibetans. 

A recent Wall Street Journal article reported that the Chinese government has 

cracked down on free speech and political dissent, closing four Web sites and clamping down on foreign funding and organizations (Kathy Chen, ‘‘China Curbs Growing 

Debate over Politics,’’ Wall Street Journal, September 24, 2003). The government 

issued a document warning against ‘‘hostile forces,’’ urging increased vigilance 

against Chinese organizations’ use of foreign funding or cooperation with foreign experts and organizations. In August, the Chinese government attempted to halt debate on three topics, now labeled ‘‘not allowed’’: political reform, constitutional 

amendments, and the reassessment of historical incidents (presumably referring to 

the 1989 crackdown on protesters in Tiananmen Square). 

The Administration’s failure to take concrete actions on human rights and workers’ rights in China allows rampant violations to continue. Workers in China, the 

United States, and around the world pay the price for this inaction, while companies 

producing in China enjoy the profits. 

In addition to inaction on China’s currency manipulation and workers’ rights violations, the Bush Administration has failed to enforce U.S. trade laws effectively 

with respect to China, denying American businesses and workers the trade relief 

they are entitled to under the law. 

Refusal to Implement China-Specific Safeguard 

In August of 2002, Motion Systems Corporation, a New Jersey manufacturer of 

pedestal actuators, filed the first petition for relief under a China-specific safeguard 

provision included in China’s WTO accession agreement with the United States. The 

U.S. International Trade Commission (ITC) found that China’s increased exports of 

pedestal actuators to the U.S. were indeed causing market disruption to domestic 

producers, and recommended that quotas be imposed on Chinese imports for three 

years under the special safeguard mechanism. Yet President Bush unilaterally refused to follow the ITC’s recommendations, instead siding with importers and the 

Chinese government in concluding that import relief ‘‘is not in the national economic 

interest of the United States.’’

Domestic wire hanger manufacturers filed the second petition under the special 

safeguard mechanism in November of 2002. Hanger imports from China exploded 

by 800 percent from 1997 to 2002, contributing to cost cutting and layoffs in the 

U.S. The ITC found unanimously in favor of the petitioners, and recommended the 

imposition of duties on wire hanger imports from China for two to three years. Despite this recommendation, President Bush again denied relief, citing many of the 

arguments made by importers and the Chinese government in the case. 

President Bush’s repeated refusal to act on the ITC’s recommendations left domestic manufacturers questioning the Administration’s willingness to ever use the special safeguard mechanism. In both cases, the ITC evaluated all of the facts from 

both sides in finding that safeguard action was called for, and in both cases President Bush made a political decision to dismiss the findings and deny import relief. 

After the wire hanger decision, one commentator remarked that the special safeguard was a ‘‘dead letter.’’

Awaiting Action on Textile Import Surges From China 

Another special safeguard mechanism created in China’s WTO accession agreement with the U.S. deals exclusively with textiles. In July of this year, a group of 

textile industry associations filed petitions under the provision, seeking the re-imposition of import quotas on brassieres, gloves, gowns, and knit fabric from China. In 

each category, imports from China have jumped sharply after the elimination of 

quotas—for example, dressing gown imports rose 698 percent in the 15 months since 

quota elimination, and glove imports jumped 291 percent during the same period. 

Yet the Commerce Department has already rejected the industry petition on gloves, 

and importers are urging that relief be denied in the other product categories as 

well. 

Inadequate Protection from Dumping 

One provision of our domestic trade law that U.S. companies have been able to 

use to secure some limited relief from unfair trade practices by China is in the area 

of anti-dumping. But much more could be done. Though the United States absorbs 

almost half of all of China’s exports to the world, we account for only 15 percent 

of the anti-dumping measures imposed against China, according to the WTO. In addition, in many cases the duties imposed under U.S. anti-dumping measures regarding China have been inadequate to provide real relief to U.S. companies. 

63

Anvil International succeeded in getting the Bush Administration to impose a 13 

percent tariff on Chinese steel pipe nipples that were being dumped on the U.S. 

market. But this duty level is far below the 100 to 200 percent dumping margins 

levied by the Canadian government on the same product. While Anvil’s operations 

have started to recover in Canada, Chinese nipple exports to the U.S. have continued to increase, causing Anvil to close one of its foundries and lay off 350 American 

workers. 

Ward Manufacturing filed an anti-dumping case on malleable pipe fittings from 

China in 2002, securing small dumping margins in the single digits. Mexico and the 

European Union, on the other hand, provided dumping margins on the same products from China of 42 percent and 48 percent, respectively, to provide relief to their 

own domestic producers. After the case was filed, U.S. imports of malleable pipe fittings continued to increase, and Ward has had to lay off workers as a result. A 

Ward executive testifying before Congress on the inadequacy of administrative action in this case stated, ‘‘Our company can either keep 800 Americans working and 

possible rehire 300 back to work at wages of $14 an hour plus health benefits or 

the same workers can go on state unemployment benefits, and pursue alternative 

jobs that pay minimum wage with no health benefits. All we ask for is the real enforcement of the trade laws passed by Congress.’’

The FMC Corporation’s anti-dumping petition resulted in the imposition of a 42.8 

percent duty on imports of Chinese persulfate in1997. The Administration began to 

use a methodology more favorable to Chinese producers in its 2001 review of the 

case, and in 2002 the duty was completely eliminated. The president of FMC 

charged that the Department of Commerce ‘‘inexplicably ignored clear evidence of 

fraudulent practices and failed to properly verify Chinese conduct,’’ and that the Administration has reduced the intensity of its oversight of Chinese export practices 

since China’s accession to the WTO. 

In each of these cases, the Bush Administration had the opportunity to effectively 

enforce U.S. trade laws, but chose not to do so, choosing to side with the importers 

and the Chinese government, at the expense of American workers and producers. 

Conclusion 

Rifts within the business community have contributed to the U.S. government’s 

passivity and failure to act to date. Companies that produce in China for the U.S. 

market, retailers, and importers clearly benefit from an undervalued Chinese currency, as well as from the abuse of workers’ rights. On the other hand, companies 

actually producing in the United States—whether for the domestic market or for export—face debilitating and unsustainable disadvantages from currency manipulation, illegal subsidies and dumping, and violation of workers’ rights in China. 

American policymakers have a choice to make in trade relations with China. They 

can side with the importers and outsourcers, and stand by passively as China takes 

advantage of its WTO membership and access to the U.S. market, abusing its own 

workers and artificially undervaluing its currency in order to undercut American 

workers and domestic manufacturers. Or they can take a stand for American jobs 

and act now to ensure that China plays fair in the global economy. 

Thank you for your attention and for the invitation to appear here today. I look 

forward to your questions.

Chairman HYDE. Thank you, Ms. Lee. 

Ms. Bianco. 

STATEMENT OF JONNA BIANCO, PRESIDENT AND 

CHAIRWOMAN, AMERICAN BONDHOLDERS FOUNDATION 

Ms. BIANCO. Thank you, Mr. Chairman. The American Bondholders Foundation is the incorporated organization representing 

the consolidated claims of the United States citizens located across 

America who are holders of full faith and credit sovereign bonds 

issued by the government of China in which that government has 

defaulted and continues to evade payment. 

The ABF has identified over 5,000 bondholders across this country. The bondholders are comprised of lower to middle class taxpaying citizens. Many of the bonds have been passed down through 

two or more generations in the same family. None of the ABF 

64

members are considered wealthy nor are there any representations 

of banks, corporations or businesses. 

While we realize this debt goes back three generations, that is 

how long our interest had been neglected. Our claims have been ignored for so long because we are not a syndicate of powerful financial institutions. Rather, we are thousands of American individuals 

and families that are living on Main Street and not Wall Street. 

These bonds were issued between 1912 and 1942. They were 

issued by a global syndicate comprised of international banks and 

were sold to investors in the United States, Japan and Europe. The 

language of the individual bond certificates as well as the language 

of the loan agreement authorizing the bond issue mandated that 

these obligations were to be considered as binding upon the government of China and its successors. 

These bonds were always endorsed and sold by two major banks, 

Hong Kong and Shanghai Banking Corporation, HSBC, and Deutsche Bank. These banks were paid 6 percent up front for these 

bond issues, and yet standards say they have no fiduciary responsibility to these bondholders. 

When the PRC and the United States normalized relations in 

1979, the Chinese government made a small payment to the 

United States as compensation for American owners of tangible 

property located in China that the PRC expropriated in 1949. However, this agreement did not provide for any compensation to American holders of defaulted Chinese government bonds. The PRC Chinese government did recognize the principle of its liability for prepayment and payment of 1949 bonds or pre-1949 bonds to Great 

Britain in 1987; however, they refuse to pay American citizens. 

They paid in 1987 to Great Britain because the people protested 

and wanted no more bonds dropped on their capital markets at 

that time. 

Russia assumed the debt obligations of the Soviet Union after its 

dissolution in 1991, and even agreed in the 1990s to honor the pre1917 Czarist era Russian defaulted bonds owed to French bondholders. Germany assumed all the debt obligations of Communist 

East Germany and other post-Communist Eastern European governments have continued to honor their Communist government 

era sovereign bonds. So there is quite a bit of precedent in this 

issue. 

The PRC has continued to have unlimited access to all of our 

capital markets. Find me a U.S. business or entity that is allowed 

to continue issuing stocks or bonds when they have not resolved 

the ones that are in default. Why is it that a foreign government 

is not subject to the same rules and regulations that we as Americans are? Why are the People’s Republic of China afforded special 

rights and privileges far beyond American businesses or individuals? 

The international law requires a successor government of a prior 

internationally recognized and legitimate government of the same 

nation to honor the financial obligations of the predecessor government. Accordingly, the current government of China is obligated to 

pay the defaulted full faith and credit bonds owed to Americans 

that were issued by a predecessor Chinese government. 

65

The Chinese government that issued the now defaulted full faith 

and credit bonds was a longtime United States ally that had full 

international legitimacy as a founding member of the United Nations and as the sovereign government of China at the time of 

issuance of the bunds. Now the PRC publicly mandates that international law be upheld in Iraq or that PRC is owed significant 

amounts of money. How hypocritical can these leaders be in the 

PRC when on one hand they demand that Iraq honor its debts from 

a prior government and on the other hand they choose to ignore 

international law when it comes to honoring China’s financial obligations to American citizens. 

In July of this year, ABF representatives went to Iraq. We met 

with Coalition Provisional Authority representatives, in particular 

Mr. George Wolfe, a Deputy Counsel with the U.S. Treasury. We 

presented a proposition to Iraq and its people whereby they have 

a significant amount of debt that is owed to the PRC. The American Bondholders Foundation which provided an opportunity for 

them to take our debt, use it under the term of an international 

offset to be used as payment to China for the debt that they owe. 

In return—which is an 80 percent savings to Iraq. And in return, 

our Coalition Provisional Authority receives hundreds of millions of 

dollars from these American bondholders to help in that situation, 

as well as funds to help provide for schools, education programs, 

security for council and cabinet members, and food baskets to help 

in Iraq. 

We have presented this proposal to the Committee on the record 

as well as my speech. We have met with Iraqi cabinet members 

and council members. They are very supportive of this. They believe it is good for Iraq, they believe it is good for the American 

people. It provides a significant amount of funding to programs 

across this country that have fallen upon deaf ears and massive 

shortfalls in budgeting. I thank you, Mr. Chairman. 

[The prepared statement of Ms. Bianco follows:]

PREPARED STATEMENT OF JONNA BIANCO, PRESIDENT AND CHAIRWOMAN, AMERICAN

BONDHOLDERS FOUNDATION

Mr. Chairman, Members of the Committee, Ladies and Gentlemen, on behalf of 

the American Bondholders Foundation members and their families, we thank you 

for the opportunity to present this important issue. 

What is the ABF: 

The American Bondholders Foundation, (ABF) is the incorporated organization 

representing the consolidated claims of United States citizens located across America who are holders of full faith and credit sovereign bonds issued by the government of China and on which that government has defaulted and continues to evade 

payment. The ABF has identified over 5000 bondholders across America. These are 

bonds that were issued between 1912 and 1942. 

Who are the Bondholders: 

The bondholders are comprised of lower-to middle class tax paying citizens. Many 

of the bonds have been passed down through two or more generations of the same 

family. None of the ABF members are considered wealthy nor are there any representations of banks, corporations or businesses. While we realize that this debt 

goes back 3 generations, that is how long our interests have been neglected. Our 

claims have been ignored for so long because we are not a syndicate of powerful financial institutions. Rather, we are thousands of American individuals and families 

living on Main Street, not Wall Street. 

66

What are the Bonds: 

The bonds were issued between 1912 and 1942. They were issued by a global syndicate comprised of international banks and was sold to investors in the United 

States, Japan and Europe. The language of the individual bond certificates, as well 

as the language of the loan agreement authorizing the bond issue, mandated that 

the obligations were to be considered as binding upon the Government of China and 

its successors. These bonds were also endorsed and sold by two major banks, Hong 

Kong and Shanghai Banking Corporation (HSBC), and Deutsche Bank. Both these 

banks have extensive operations in the United States. Both these banks were paid 

approximately 5% upfront to issue these bonds. They made their money, yet now 

clearly state that they have no fiduciary responsibility to the people that they sold 

these bonds to. 

With the outbreak of the Sino-Japanese war and then WW II, the Chinese Government ceased payments on the bonds in 1939 and never resumed payment. The 

Communist Chinese Government (the People’s Republic of China) assumed control 

of mainland China in 1949, and repudiated all outstanding debt incurred by the 

prior Chinese government. While the PRC Chinese Government has received the 

benefits of the revenues and assets that secured the bonds, it has consistently 

evaded the corresponding liabilities to American bondholders. 

Is there precedent for payment of these bonds? 

When the People’s Republic of China and the United States ‘‘normalized’’ relations 

in 1979 the Chinese Government made a small payment (totaling $81 million) to 

the United States as ‘‘compensation’’ for American owners of tangible property located in China that the PRC expropriated in 1949. This agreement did not provide 

for any compensation to American holders of defaulted Chinese Government bonds. 

The PRC Chinese Government did recognize the principle of its liability for payment of pre 1949 Chinese Government bonds when it paid Great Britain in 1987 

to settle the claims of British bondholders. British bondholders had protested when 

the PRC tried to sell new Chinese Government bonds in London’s capital markets 

without first resolving the claims of British bondholders for pre 1949 Chinese Government bonds that the PRC Government was refusing to honor. Americans own 

some of the same series of defaulted pre 1949 Chinese bonds that China acknowledged responsibility for in 1987 to British bondholders. 

Russia assumed the debt obligations of the Soviet Union after its dissolution in 

1991 and even agreed in the 1990’s to honor the pre-1917 Czarist era Russian defaulted bonds owed to French bondholders. Germany assumed all the debt obligations of communist East Germany and other post communist Eastern European governments have continued to honor their communist government era sovereign bonds 

and debts. 

The PRC has continued to have UNLIMITED access to all of our capital markets. 

Find me a US business or entity that is allowed to continue issuing stocks or bonds 

when they have not resolved the ones that are in default? Why is a foreign government not subject to the same rules and regulations that we as Americans are? Why 

are they afforded special rights and privileges far beyond American businesses or 

individuals? 

Failure to resolve these defaulted bonds has allowed the PRC free and unfettered 

access to sell bonds in America in possible contravention of the Johnson debt default 

act which prohibits US firms from selling securities of sovereign issuers who have 

defaulted on their full faith and credit obligations owed to America. To date no one 

in the federal government has thought it necessary to enforce United States laws 

when the violator is the PRC. Why are the People’s Republic of China afforded special rights and privileges far beyond American businesses or individuals? 

International law requires a successor government of a prior internationally recognized and legitimate government of the same nation to honor the financial obligations of the predecessor government. Accordingly, the current government of China 

is obligated to pay the defaulted full faith and credit bonds owed to Americans that 

were issued by a predecessor Chinese government. 

Unlike the pariah Saddam Hussein regime in Iraq, which was subject to condemning United Nations sanctions and resolutions prior to the April 2003 liberation 

of Iraq, the Chinese Government that issued the now-defaulted full faith and credit 

Chinese bonds between 1912 and 1949 was a long-time United States ally that had 

full international legitimacy as a founding member of the United Nations and as 

the sovereign government of China at the time of issuance of the bonds. Now the 

PRC publicly mandates that International Law be upheld in Iraq, where the PRC 

is owed significant money. How hypocritical can the leaders of the PRC be when 

on one hand they demand that Iraq honor its debt from a prior government and on 

67

the other hand they choose to ignore International Law when it comes to honoring 

China’s financial obligations to American citizens? 

The People’s Republic of China has become an economic powerhouse with full financial ability to pay its foreign debts. They choose to evade payment on the lawful 

claims of American citizens who hold these bonds. The Chinese Government and its 

controlled agencies and businesses own large sums of bonds issued by the U. S. 

Treasury. The People’s Republic of China presently receives approximately $4 billion 

each year from American taxpayers in the form of interest income on U.S. Treasury 

bonds held by the Chinese government. The PRC also enjoys a $100 billion annual 

trade surplus with the United States, giving them an estimated $400 billion current 

account. Yet the government of China continues its discriminatory evasion of payment to American bondholders. It is the position of the Chinese government that 

China should not have to honor their nation’s full faith and credit sovereign obligations if they choose not to. Such an insular worldview, flaunting the flagrant disregard of established principles of international trade and commerce, will not serve 

the interests of the PRC in the community of nations and is inconsistent with the 

status of the PRC as a most favored trading partner and member of the World 

Trade Organization. Such a posture can only act to harm the long term interests 

of both the United States and China. 

On June 13, 2001, at the direction of the White House Counsel, the United States 

Department of State and the Securities and Exchange Commission, the ABF contacted the Foreign Bondholders Protective Council (the ‘‘FBPC’’) to initiate collection 

proceedings on these defaulted obligations. The FBPC was created by Presidential 

Executive Order to assist U.S. citizens in collecting on foreign defaulted debts. The 

FBPC has successfully completed collection of 47 previous defaulted bond settlements. All of the previous bond settlements have been with the direct involvement 

and assistance of all three Executive Branches of the US Government. The ABF has 

appealed to the U.S. Department of State for assistance in resolving this disgraceful 

situation. Our appeals have fallen on deaf ears anytime it involves China. 

Direct appeals to China have been met with the response of: ‘‘We do not honor 

the debts issued prior to the Communist Government coming to power’’. What they 

should say is that we do not honor debts to American citizens, even though we have 

recognized and honored these debts to others. 

US citizens need your support. They work hard, they pay their taxes and are then 

slapped in the face over and over by the continuation of interest payments which 

are basically their tax dollars going to China for the Treasuries that they hold of 

ours which we do pay; to losing their jobs due to continual layoffs; to everything 

that they go to the store to buy is stamped Made in China. This is a shameful injustice to all Americans. The time is now to stop empowering China to continue to 

evade the rightful claims of American citizens and to uphold International Law. 

China acts as though the world owes them whatever they demand. Their actions 

and callous disregard for international law is mirrored in every other arena of international trade and commerce. The community of nations has rules. Hold China accountable. 

Solution: 

In July of this year, ABF representatives traveled to Baghdad and met with Mr. 

George Wolfe, Deputy General Counsel for the US Treasury and Director of Economic Development for Iraq through the CPA. The ABF proposed the following: 

We took the total amount of bonds that we are holding for our members, then 

divided them up into 5 billion dollar blocks at current value including principal and 

interest. We offered to transfer ownership of these blocks over to Iraq to be used 

as payment towards their debts to the PRC for an 80% discount. In other words, 

Iraq would pay to the ABF 20 cents on the dollar, yet use 100 cents on the dollar 

as payment towards their debts to the PRC. For each Block that was purchased and 

transferred to Iraq, the ABF would provide 100 million dollars to the CPA and an 

additional 50 million dollars towards construction of schools, school supplies, classroom furniture, food baskets in cooperation with USAID, and security for Council 

and Cabinet Members. Knowing that Iraq would not have the necessary capital to 

expend on this proposal, we structured it whereby a small percentage of oil would 

be used for payment, structured over time. This information has been shared with 

officials of the Department of Defense who have informed us that they have no opposition with this proposal. In addition, this has been met very favorably by some 

members of the Iraqi Council and Cabinet. They believe this would be good for Iraq 

and for America. 

In effect, we are accelerating future oil production to the immediate benefit of the 

people of Iraq and additionally, keep in mind, bondholders pay taxes so a good portion of whatever they receive, comes right back to Uncle Sam which in turn helps 

68

fund the $87 billion dollar request, plus provides funding through the foundation 

by which millions of Americans will benefit. 

In addition to Iraq, under very similar structures as aforementioned with Iraq, 

the ABF is in current negotiations and has pending contracts with several other 

countries that have outstanding significant debts with the PRC.

Chairman HYDE. Thank you very much. 

Mr. Faleomavaega. 

Mr. FALEOMAVAEGA. Thank you, Mr. Chairman. 

I would like to thank the members of the panel for their testimony, and the interesting observations made by Dr. Lardy and Mr. 

Vargo is worth mentioning here. I get the strong impression from 

Mr. Vargo’s statement that part of the problem is that we are putting the blame on China, and the exchange rate is not necessarily 

the issue. 

I wanted to ask, Mr. Vargo, you said that the high cost of manufacturing in the United States alone is one of the critical factors 

causing some of the problems in our own base and not the exchange rates and whatever other things. You also mentioned that 

there is too much red tape. This is domestic now, in terms of how 

our own economic structure is being placed, with rising health 

costs, uncertainty in the supply of energy, limitations of resource 

and development, even shortage of skilled workers. All these added 

together seems to indicate that it is more than just China as the 

culprit in all this. 

Mr. VARGO. Absolutely, Congressman, and we have never maintained anything other than that. China is, however, a significant 

problem, and it is going to grow if we can’t get our arms around 

it now. And when you get a chance, I hope you will take a look at 

the last page of my testimony and you will see. The problem is still 

manageable. There is no question that China is not the largest 

problem we face. There is no question that the bulk of our problem 

in manufacturing is home grown. 

For too many years and decades the Congress and successive Administrations have not given manufacturing the attention that it 

has needed despite the emergence of a much more competitive, 

globalized world. But this is not to diminish the fact that China is 

a significant problem and it is growing. 

Mr. FALEOMAVAEGA. Ms. Lee. 

Ms. LEE. Just a word. I would agree with you and with Mr. 

Vargo that China is not the only problem we face, and so there is 

no point acting as though if we address this problem we have 

solved everything. We have a lot of problems at home we need to 

take care of. But because it is not the only problem doesn’t mean 

it isn’t a problem. I would also just add that in terms of thinking 

about the high cost of manufacturing at home or cost of the regulation and so on, we see the broad picture of tax policy, health care, 

and labor costs that are all things that need to be addressed. 

But we certainly don’t want to see the United States think of 

itself as becoming competitive by getting rid of, let us say, public 

health and environmental regulations that are protecting our people that we put in place through a democratic process. We certainly 

don’t want to see the United States become competitive by destroying trade unions because we are competing with a country like 

China that doesn’t allow trade unions. We could also destroy our 

own democracy in order to become competitive. 

69

So I just want to make sure that we keep the focus on the terms 

of competition in the global economy and not just whether we have 

higher costs or not, but why and which things are valuable for us 

to keep and which ones aren’t. 

Mr. FALEOMAVAEGA. Well, I don’t want to disagree with what you 

just said, Ms. Lee. But I think the concern that I raise here is that 

let us not bash the Chinese and put the blame on them for our own 

economic problems. Even among our own economists there are disagreements in terms of what direction our country should be headed for as far as resolving some of the serious economic problems we 

now face. 

I wanted to add to what Dr. Lardy had stated earlier, which I 

think is worth mentioning; that the trade imbalance between our 

country and China is not necessarily because of the exchange rate 

or even the protectionism that we seem to be getting through the 

media reports and all of that. But it is simply because China now 

has become the black hole, if you will, of all the manufacturers. 

Things that were done previously in other Asian countries, China 

has now become the focal point globally for every country, including ours, that wants to go there and set up shop because for whatever reason the climate for manufacturing is very positive. 

Now, this doesn’t take away from Ms. Lee’s arguments about the 

serious problems of labor violations or the situation with human 

rights violations. But the fact is that this is what is happening. I 

would like to have Dr. Lardy elaborate on that, if I am wrong on 

that observation that you have made in your statement. 

Mr. LARDY. No. Thank you very much, Congressman. I would 

just make a few points of amplification. Part of the underlying reality is that China has adopted a very liberal foreign investment 

environment. They have very few limitations on the extent of foreign ownership. Getting permission to set up either a joint venture 

or wholly foreign owned company is relatively easy to do. China 

has a relatively low wage but, more importantly, a very highly productive workforce. There are many other countries in the world 

that have much lower wages than China, but you don’t see foreign 

manufacturers flocking there because they don’t have a highly educated workforce with basic education and literacy. Additionally, 

they don’t have the infrastructure to support the kind of manufacturing that is going on in China. By the end of the first half of this 

year, foreign companies had invested more than $480 billion, 

United States dollars, in China in the form of foreign direct investment, which is far more than any other emerging market, and a 

little bit over half of that has gone into manufacturing. 

So, you know, we say we want them to have a market economy. 

Well, this is an area where they have really liberalized and they 

are making it very easy for foreign countries to do business in 

China. 

Mr. FALEOMAVAEGA. One more quick observation. 

Mr. LARDY. Thirty percent of their manufactured goods are now 

made by foreign companies. 

Mr. FALEOMAVAEGA. My time is up, Mr. Chairman. I have one 

quick comment I think my friends should have mentioned: That for 

the Chinese community outside of China, I think the dollar value 

of their investments is well worth over $300 billion. Tremendous 

70

investments, and it isn’t coming out of nowhere. This is another serious factor to consider in terms of where this money, where the 

capitalization comes into focus. Many industrious and successful 

business people of Chinese ancestry are investing in China, and 

this is part of the success of that country. 

Thank you, Mr. Chairman. 

Chairman HYDE. Thank you. 

Mr. Blumenauer. 

Mr. BLUMENAUER. Thank you. I was curious to have an elaboration. I had made an inquiry to Secretary Aldonas about what it 

is that you are doing. I noticed that, Ms. Lee, you referenced in 

your testimony some concerns about a lack of aggressive action on 

the part of the United States to use the tools from the WTO, and 

I didn’t exactly hear the Secretary say we were moving with dispatch. It was, we were examining, we could. And I wondered if you 

or the other panelists would care to elaborate on that point a little 

bit. I still feel some discomfiture that we are not doing what we 

could do under the WTO structure. 

Ms. LEE. Yes. Thank you very much, Mr. Blumenauer, for the 

question. It is clear that the Administration has failed to act on a 

number of fronts, whether it is even enforcing United States trade 

laws or using the WTO structure to its full extent to ensure that 

China does open its markets and cease to manipulate its currency. 

And I know that there is talk of a 301 case against China for unfair trade practices and currency manipulation, and we would hope 

that the Administration would support that case, would take it up 

and do a thorough investigation and come to some sort of concrete 

settlement. 

We are also talking about bringing a 301 case with respect to the 

violation of workers rights. This is an unfair trade practice under 

U.S. trade law, to violate internationally recognized workers’ 

rights. And certainly China is one of the most egregious violators 

of workers’ rights, and it is one where there is a huge economic impact on the United States. 

So those are two concrete areas where the Administration could 

act and yet has not really indicated its willingness to do so. What 

we have seen instead are these polite requests, diplomatic ventures 

where the answer from the Chinese government seems to be pretty 

clearly: No, thanks. 

Mr. VARGO. Mr. Blumenauer, could I add to that? Because we 

share that concern. However, it is also necessary to understand 

that China’s obligations, for example, under the WTO are being 

phased in. They did not all kick in at once. And I think that there 

is a natural tendency to give China some initial time to see how 

they were doing. In our own NAM survey of our members, for example, last year we had very little—very few complaints came 

back. This year we had a lot. And I think that the Administration’s 

demeanor on this is about to change, and I know Ambassador 

Zoellick is over in China now, Secretary Evans is going over later. 

And it is our expectation that we will see the Administration get 

very vigorous in enforcing the problems that are becoming obvious. 

Mr. BLUMENAUER. Thank you. I wondered, Mr. Chairman, if we 

could have any of our witnesses supply an assessment of how much 

of this huge trade deficit is just merely a shifting from other supVerDate Mar 21 2002 10:21 Jan 29, 2004 Jkt 090363 PO 00000 Frm 00074 Fmt 6633 Sfmt 6601 F:\WORK\FULL\102103\90360 HINTREL1 PsN: SHIRL
71

pliers that we would have had in Indonesia or Thailand, or to the 

extent to which this is actually a loss of American manufacturing 

jobs. I know it is not an easy question. I hear different assessments. But the extent to which any of our panelists could point us 

in the direction at some point with their assessment or sources that 

they think are particularly useful, this is something that I am having trouble sorting out and I would find helpful. 

Chairman HYDE. I think all of our panelists can take a shot at 

it if they would like. 

Mr. VARGO. Could I begin? It is both. Certainly when you look 

in the electronics area and you look at the decreasing share of Japan’s sales into the United States and Korea’s and Mexico paralleling China’s increase. But in other industries, this is not so. We 

have no statistical analysis. But I can tell you from the phone calls 

and the pain we are hearing from a lot of our member companies, 

it is both. It is not exclusively a substitution for other imports, and 

it is not 100 percent at the expense of American producers. 

Chairman HYDE. Ms. Lee. 

Ms. LEE. Just one word on that topic. I don’t have the numbers 

in front of me. But even to the extent that China is taking export 

share away from other developing countries, that also creates some 

concerns for us. If you have a more democratic developing country 

with a strong trade union movement and that country is losing jobs 

to China because China is not democratic, because China is so repressive of workers rights, that becomes a problem for every developing country in the world, as well as for American workers. So it 

is something which is distorting the entire global economy and putting a lot of pressure for that kind of competition in countries. We 

hear it from our trade union counterparts in South Africa or Brazil 

or Malaysia or Bangladesh. They all have to ask themselves, ‘‘How 

do we compete with China?’’ And they are coming to the conclusion 

that they need to compete with China by also repressing independent trade unions and by also cutting back on dissent and free 

speech, and so on. So that is also very troubling to us. 

Mr. BLUMENAUER. And I appreciate your comment, Ms. Lee, and 

I would concur that it is not a benign effect. But in the meantime, 

if any of our panelists can help us track just the factual shift, it 

would help in terms of the analysis. 

Ms. LEE. Sure. 

Mr. LARDY. I would just offer a comment. If you look at the areas 

where our deficit is the largest, the biggest product categories of 

deficit, they are areas where there has been very little production 

in the United States for quite a long time. I would start with footwear, which is a huge deficit category. We buy about 80 percent of 

our footwear from China. We used to buy 80 percent from South 

Korea and Taiwan. A second huge category is toys and sporting 

goods, and so forth. This is a very heterogeneous product, but, 

again, we used to buy most of our toys from Hong Kong and to 

some extent Taiwan and South Korea. Those industries have 

moved lock, stock, and barrel to China, and we now buy most of 

our toys from mainland China. 

The same thing I would argue in broad terms is probably true 

in consumer electronics and IT hardware. Dell has never manufactured a notebook computer, they have always bought them from 

72

Taiwanese companies; until 3 years ago they were made entirely in 

Taiwan, now they are being made for the most part in China. The 

same Taiwanese companies are making them, and the product 

looks the same, but they are getting a lower cost and consumers 

are benefiting. 

I would point out, this is a very good example of where China is a huge importer. China imported $30 billion worth of semiconductors last year to feed its electronics industry. So it really is 

more of an assembly operation. High value added parts and components are coming in from other countries and the final product is 

going where the big consumer markets are, which is North America 

and Europe. 

Chairman HYDE. I want to thank the panel for very constructive 

testimony. I apologize for the paucity of attendees, but the time 

was such that everyone was fleeing to the airport. But your statements are all a part of the record. They will be resources for us 

as we tackle the very difficult problem of trade with China, and 

you made a great contribution. 

And, Ms. Bianco, your sector of this is not going to be ignored. 

Ms. BIANCO. Thank you. 

Chairman HYDE. You have lighted at least a good-sized candle. 

Ms. BIANCO. Thank you, Mr. Chairman. I appreciate it. It is kind 

of difficult. We were originally told we had 7 minutes for our 

speech, and we had it all made and then it got cut to 5. So I apologize for the very quick rush. I do want to appeal to this Committee 

to please take time to look at this Iraqi international offset. It is 

good for America, it is good for Iraq. It is going to save tax dollars, 

plus it is going to put tax dollars back into the coffers. And I want 

to appeal to all Members of this Committee to please contact Mr. 

Bremer. He has these contracts. Let us get this executed and get 

this show on the road. 

Chairman HYDE. Very well. And as they say—yes, Mr. Vargo. 

Mr. VARGO. Mr. Chairman, I know I speak for the entire panel 

when I say we want to echo the sentiments that your colleagues 

have expressed. We are very much looking forward to working with 

you in the next Congress. 

Chairman HYDE. Well, thank you very much. It was worth waiting for. Thank you. The Committee stands adjourned. 

[Whereupon, at 4:25 p.m., the Committee was adjourned.] 

(73)

A P P E N D I X 

MATERIAL SUBMITTED FOR THE HEARING RECORD

PREPARED STATEMENT OF THE HONORABLE ADAM B. SCHIFF, A REPRESENTATIVE IN

CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Chairman, any discussion of the economic relationship between the United 

States and China must include consideration of the effect of international intellectual piracy on the American economy. Piracy continues to have a devastating impact 

on our creative industries. It is an issue that must be dealt with, both at home and 

abroad. 

Consider the facts: Computer users illegally download more than 2.6 billion copyrighted files every month. At any given moment, more than five million users are 

online offering an estimated one billion files for copying through various peer-topeer networks. About 25% of the total number of files available on unauthorized 

peer-to-peer services are hosted outside the United States. Recording industry officials point to an estimated loss of $600 million in 2002 within its industry due to 

piracy. 

Piracy also has a devastating impact on the movie industry. During the 1999 release of the film Star Wars: Episode 1—The Phantom Menace, pirated copies of the 

film infiltrated the Asian market while the film was still in U.S. theatres. When 

the film opened in Asian theaters, attendance was way below expectations. Home 

entertainment retailers also lost vital business in the home video market due to the 

availability of pirated copies. 

What is happening in China? Certainly it is no surprise that China’s impact on 

the U.S. economy is significant. And certainly, intellectual property theft in China 

is having a considerable effect on the American economy. 

An August 2003 New York Times story reported that pirated discs in China can 

cost as little as $1. Given that there is a much broader selection of titles in the pirated world than in legitimate video and DVD stores, the business of pirated bootlegs becomes exceedingly lucrative. 

These factors led to China becoming the single largest concentration of pirated CD 

plants a decade ago. At one point, more than 2 dozen plants were operational while 

only one plant was necessary to meet all the nation’s legitimate business needs. 

These plants were working 3 shifts a day, producing pirated CDs mostly for export. 

In 1996, steps were taken to change this situation. Facing the imposition of U.S. 

sanctions of $1 billion a year, Chinese officials took action. Half of the plants were 

shut down, equipment was confiscated, and a new system was put in place for the 

remaining plants in an attempt to deter future piracy. 

While the export of such pirated work has been curtailed, the proliferation of pirated materials continues to be a growing problem in China. The facts remain 

alarming: In all categories of intellectual property, 90% is pirated in China. For 

music alone, the numbers are even worse. 

In China, unauthorized copies of ‘‘Harry Potter and the Sorcerer’s Stone’’ were 

being sold by DVD peddlers on the street just four days after the movie opened in 

the United States and Britain. Other blockbusters have hit the streets even before 

release. 

Chinese officials have expressed concern over the situation but have not taken significant steps to address the problem. Individual members of the Chinese government have attempted to find ways to stabilize the situation, but are hindered by 

a lack of manpower and a dearth of legal avenues to pursue. 

While Chinese officials have seized over two hundred million pirated CDs over the 

past two years, there have been no criminal proceedings against the perpetrators, 

and thus the problem continues to grow. 

74

According to the United States Trade Representative’s Special 301 Report, ‘‘Although China has revised its IP laws and regulations to strengthen administrative 

enforcement, civil remedies and criminal penalties, violations of IPR are still rampant. China remains one of the last countries in the world that fails to use, in practice, 

its criminal law to go after commercial copyright pirates and trademark counterfeiters.’’ Inadequate criminal deterrence and market access barriers that restrict the 

ability of US—companies to enter the music, entertainment software and filmed entertainment markets—exacerbate the piracy problem. 

The bottom line is that in excess of $3 billion annually in potential worldwide revenue is lost due to piracy. 

Earlier today, my colleagues Joe Biden, Gordon Smith, Bob Goodlatte, and I 

launched the Congressional International Anti-Piracy Caucus in an effort to stem 

this growing problem of global theft of intellectual property. Our bipartisan and bicameral group will work to keep Members and staff informed and updated on the 

serious problem of global piracy and look for ways to address this issue. With advances in technology, we will promote new and inventive techniques to combat piracy. 

Earlier this year, I took part in a Congressional Delegation trip to Asia with several other Members of Congress. Asia leads the world in broadband penetration, and 

its citizens are among the most Internet-savvy in the world. However, the digital 

marketplace in copyrighted works in several countries has significant piracy problems and often times the legal infrastructure is outmoded for a world of e-commerce. 

During my trip, I had the opportunity to personally raise a number of key copyright issues with high-ranking government officials. I urged government officials to 

enact Copyright Act amendments to align their law with global minimum standards 

contained in related WIPO treaties. In addition, I urged government officials to promote a workable framework for obtaining the cooperation of service providers in 

fighting online piracy. 

This Committee has an obligation to continue monitoring and combating this troubling situation. It is only by repeatedly raising the issue with foreign leaders and 

applying additional pressure that we will begin to see any progress.

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