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UNITED STATES - CHINA ECONOMIC RELATIONS

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 23, 2005

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

CHARLES E. GRASSLEY, Iowa, Chairman

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

RICK SANTORUM, Pennsylvania

BILL FRIST, Tennessee

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

MAX BAUCUS, Montana

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JAMES M. JEFFORDS (I), Vermont

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

KOLAN DAVIS, Staff Director and Chief Counsel

RUSSELL SULLIVAN, Democratic Staff Director

(II)

(III)

C O N T E N T S

OPENING STATEMENTS

Page

Grassley, Hon. Charles E., a U.S. Senator from Iowa, chairman, Committee

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

Baucus, Hon. Max, a U.S. Senator from Montana ................................................ 3

CONGRESSIONAL WITNESSES

Collins, Hon. Susan M., a U.S. Senator from Maine ............................................ 6

Bayh, Hon. Evan, a U.S. Senator from Indiana .................................................... 8

Graham, Hon. Lindsey O., a U.S. Senator from South Carolina ......................... 11

Stabenow, Hon. Debbie A., a U.S. Senator from Michigan .................................. 13

ADMINISTRATION WITNESSES

Greenspan, Hon. Alan, Chairman, Board of Governors, The Federal Reserve

Board, Washington, DC ....................................................................................... 15

Snow, Hon. John W., Secretary, U.S. Department of the Treasury, Washington, DC ............................................................................................................. 17

PUBLIC WITNESSES

Rogoff, Dr. Kenneth, Thomas B. Cabot Professor of Public Policy, Department

of Economics, Harvard University, Cambridge, MA ......................................... 38

Bredehoeft, Neal, president, American Soybean Association, Alma, MO ........... 40

Maloney, Sean, executive vice president, Intel Corporation, Santa Clara, CA,

on behalf of the U.S. Chamber of Commerce ..................................................... 42

Lubrano, Al, president, Technical Materials, Incorporated, Lincoln, RI, on

behalf of the National Association of Manufacturers ........................................ 44

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

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

Bayh, Hon. Evan:

Testimony .......................................................................................................... 8

Bredehoeft, Neal:

Testimony .......................................................................................................... 40

Prepared statement .......................................................................................... 53

Bunning, Hon. Jim:

Prepared statement .......................................................................................... 56

Collins, Hon. Susan M.:

Testimony .......................................................................................................... 6

Crapo, Hon. Mike:

Prepared statement .......................................................................................... 57

Graham, Hon. Lindsey O.:

Testimony .......................................................................................................... 11

Grassley, Hon. Charles E.:

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

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

Greenspan, Hon. Alan:

Testimony .......................................................................................................... 15

Prepared statement .......................................................................................... 62

Responses to questions from Senators Baucus and Kyl ................................ 65

Page

IV

Lubrano, Al:

Testimony .......................................................................................................... 44

Prepared statement .......................................................................................... 70

Maloney, Sean:

Testimony .......................................................................................................... 42

Prepared statement .......................................................................................... 93

Statement of the U.S. Chamber of Commerce ............................................... 102

Statements of the Semiconductor Industry Association ................................ 120

Rogoff, Dr. Kenneth:

Testimony .......................................................................................................... 38

Prepared statement .......................................................................................... 137

Santorum, Hon. Rick:

Prepared statement .......................................................................................... 140

Snow, Hon. John W.:

Testimony .......................................................................................................... 17

Prepared statement .......................................................................................... 142

Responses to questions from Senators Baucus and Kyl ................................ 146

Snowe, Hon. Olympia J.:

Prepared statement .......................................................................................... 150

Stabenow, Hon. Debbie A.:

Testimony .......................................................................................................... 13

Prepared statement .......................................................................................... 155

COMMUNICATIONS

Advanced Medical Technology Association (AdvaMed) ........................................ 161

American Apparel and Footwear Association ........................................................ 166

American Forest and Paper Association ................................................................ 170

American Iron and Steel Institute ......................................................................... 177

Masch, Dr. Vladimir A., and Professor Mark Perlman ........................................ 187

National Retail Federation ..................................................................................... 197

Stewart, Terence P., Esq., Stewart and Stewart ................................................... 206

The U.S.-China Business Council .......................................................................... 215

(1)

UNITED STATES - CHINA ECONOMIC

RELATIONS

THURSDAY, JUNE 23, 2005

U.S. SENATE,

COMMITTEE ON FINANCE,

Washington, DC.

The hearing was convened, pursuant to notice, at 10:15 a.m., in

room G–50, Dirksen Senate Office Building, Hon. Charles E. Grassley (chairman of the committee) presiding.

Present: Senators Kyl, Thomas, Smith, Bunning, Baucus, Kerry,

Wyden, and Schumer.

OPENING STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S.

SENATOR FROM IOWA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. As you probably know, we had a vote just now.

So while we are waiting for members to come, particularly the Senators that are going to testify, Senator Baucus and I will give our

opening statements.

Our hearing will explore economic relations between the United

States and China. I would like to offer some comments on that relationship.

The fact that we are holding this hearing demonstrates the importance of our trade with China. Ninety-five percent of the people

of the world live outside the United States.

The United States is an exporting economy. If we want to prosper, we market to the 95 percent of the people outside the United

States, and 20 percent of that 95 percent happens to be Chinese.

The way we approach this developing relationship with China

has vast implications for both nations. We must be thoughtful in

our actions and get it right. We cannot afford to act rashly and get

it wrong.

There are a number of policy prescriptions floating around: some

say that China’s currency is a problem, so we need to slap 27 percent duties on Chinese imports; some say Chinese subsidies are a

problem, so we have to apply our countervailing duty laws to

China; some say we should call for more cases to be brought

against China in the World Trade Organization. And those are just

a few of the ideas floated.

Maybe those folks are right. But before I rush to any conclusions,

I think we need to take stock of the problems that exist and the

efforts of the administration, and others, to address those problems, and then consider whether additional legislation is appropriate.

2

This hearing is such a step. Today, Senator Baucus and I are

taking another step by requesting that Ambassador Portman appear before the committee after he completes his top-to-bottom review of the administration’s trade policy towards China.

The fact is, we have had some important successes in securing

China’s compliance with its trade obligations. I want to further

those efforts, not undermine them. Therefore, I intend to wait to

hear from Ambassador Portman before I consider supporting new

legislation.

The administration has a responsibility to keep this committee

informed about developments in its Chinese trade policy, but we

also have a responsibility to ensure that the U.S. Trade Representative has the resources it needs to effectively administer that policy.

Earlier this year, I joined some of my colleagues in trying to get an additional $2-million appropriation to fund 16 new positions at

the Trade Representative’s office, and to cover unplanned security

costs, but I was stymied in that effort. I hope my colleagues will

join me to see that those funds are appropriated by the end of the

year.

I supported China’s World Trade Organization accession because

that offered the dual benefits of opening China’s market to U.S. exports, and also committing China to respect the rule of law in our

international trade relations.

We have reached some benefits, to some extent, from that accession. Exports from my home State of Iowa have almost tripled between the years 2000 and 2004. Pennsylvania and New York saw

their exports to China more than double during the same period,

and exports from Tennessee to China increased 7-fold.

We cannot be complacent. China’s words must be matched by actions that demonstrate full adherence to its obligations. The fact is,

China’s compliance record has been very spotty. I have been vigilant in monitoring our trade relations with China.

I fought to ensure that Iowa’s exporters enjoyed the market access they expected from Chinese accession to the WTO. That is the

bottom line, and I will remain vigilant, demanding no less from the

Chinese.

I will not stop until our exporters in Iowa and across the United

States enjoy the access to China’s market that they were promised

and, once in the Chinese market, that they enjoy the legal protections that our international agreements require.

Now, today’s hearing is primarily meant to explore the macroeconomics of our trade relations with China. The committee will

hear from some distinguished witnesses, and their testimony will

help inform the development of appropriate policy to improve our

trade relations, particularly as this committee is involved with

that.

Right now, the United States and China are the engines of global

economic growth. We need to ensure that growth occurs in a positive, sustainable manner.

This brings me to our bilateral trade deficit with China. Some

argue that our bilateral trade deficit means jobs are migrating

from the United States to China. However, the primary factor driving the increase in U.S. imports of goods from China is that manuVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
3

facturers have shifted final assembly of many of their products

from other countries in Asia to China. It seems to me that this

changing pattern of trade has broad policy implications.

A policy designed to reduce our trade deficits with China could

simply have the effect of redistributing a portion of that deficit to

other countries in Asia, and that would not reduce any potential

instability associated with our overall trade deficit, nor would it

help retain and grow jobs here in our country. I want to hear the

views of our witnesses on that point.

Another issue to explore is China’s fixed exchange rate. I believe

a flexible, market-based valuation of China’s currency is necessary

for China’s long-term economic growth, and it is important for

America’s growth as well. I have stressed that to the Chinese and

to our administration.

Without a floating exchange rate policy, China runs the risk of

impeding its economic competitiveness and fostering inefficient economic decision making. That could make an eventual currency adjustment that much more painful for China and for China’s trading

partners.

Finally, this hearing is also intended to provide Senator Collins,

Senator Bayh, and other Senators the opportunity to discuss a bill

they are co-sponsoring that would extend our countervailing duty

laws to non-market economies such as China.

I am still not persuaded of the need for this legislation. Just this

week, the Government Accountability Office released a report that

raises legal and administrative concerns that need to be addressed

if this concept is to be developed legislatively. At a minimum, I

would need to feel certain that those concerns are allayed before

I consider supporting such legislation.

Senator Baucus?

OPENING STATEMENT OF HON. MAX BAUCUS,

A U.S. SENATOR FROM MONTANA

Senator BAUCUS. Thank you, Mr. Chairman. Thank you for calling this hearing.

It is difficult to overstate the importance of our economic relationship with China. China has been an economic power for 5,000

years. From ancient times, merchants traveled the Silk Road carrying grapes, cotton, and pomegranates from Europe to trade for

silk from China. Marco Polo took that road and wrote of a China

whose economy dwarfed that of Europe. China literally invented

paper money, making modern economies possible.

China has become a main driver of the world economy again. The

last century of economic isolation and turmoil, a century of foreign

occupation, civil war, the disastrous great leap forward in the Cultural Revolution, now seems to have been a relatively short blip in

China’s long history.

Some in the United States fear China and seek to close off U.S.-

China trade in response. Others see opportunity in China and advocate increasing U.S.-China trade at almost any cost.

I have long believed that we should engage China, engage with

our eyes wide open. That is why I led the charge to grant China

permanent normal trade relations. It is why I strongly supported

Chinese accession to the World Trade Organization. It is why I conVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
4

tinue to support an active and robust economic relationship with

China.

Engagement with China has largely been a success. Between

1999 and 2004, a short, 5-year period, the United States’ exports

to China increased nearly 10 times faster than U.S. exports to the

rest of the world.

Montana’s exports to China were 15 times greater at the end of

that period than they were at the beginning. That is good news.

But a rising China poses a competitive challenge. Chinese companies are becoming world players.

Just yesterday, a Chinese state-owned oil company, CNOOC,

launched an unsolicited bid to acquire Unocal. CNOOC is challenging Chevron’s control for Unocal, a 115-year-old Californiabased oil and gas company. China is here and now.

China’s competitive challenge makes Americans nervous. From

Wall Street to Main Street, Americans are nervous about China’s

effect on the American economy, on American jobs, on the American way of life.

Yet, in the face of this challenge, the administration, it seems to

me, has no plan. They have no plan to make sure that China plays

by the rules. They have no plan to deal with countries that play

around with currency values.

They have no plan to address our gaping trade deficit, and they

have no plan to maintain America’s role as the most competitive

economy on earth. Is it any wonder why America’s mood on trade

and globalization has soured?

Since the administration has not offered solutions—real solutions, not just words—on how to deal with the rising China, let me

give you some of mine.

First, we have to make sure that China lives up to its trade commitments. That should be at the heart of our trade policy. There

are many enforcement problems in China. Piracy rates for intellectual property, like movies and software, top 90 percent. That translates into an estimated loss of between $2.5 billion to almost $4 billion to U.S. innovators.

Agricultural trade continues to face opaque and discriminatory

barriers that keep out quality products from States like Montana

and Iowa.

So, is the administration using all of its resources to tackle these

problems? No. It is too busy negotiating economically meaningless

free trade agreements with tiny economies.

We need to refocus USTR on enforcement. To do so, I intend to

introduce a bill that will create a new trade prosecutor at the

USTR. This bill will also give Congress a far greater role in shaping the USTR’s trade enforcement priorities with China and other

countries.

Second, we must reduce our huge trade and current account deficits. Our 2004 current account deficit was $665 billion, 6.4 percent

of our economy, if you can imagine. We are on track to post a $780

billion current account deficit this year.

Why is this important? A current account deficit means that we

spend more than we earn. It is that simple: we are spending more

than we are earning. Because our deficit is so big, we have to borVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
5

row $2.1 billion a day—$2.1 billion a day—to cover our shortfall.

Until we act, that number just keeps growing.

What is the administration’s plan? Again, they have none. They call borrowing $2.1 billion a day a sign of strength. Well, strength

is not the first word that comes to my mind. Our current account

deficit is a problem, and we must address it.

China is part of the problem. It keeps its currency, the RMB,

pegged to the dollar. Their undervalued RMB keeps China’s exports cheap, and as a consequence, exacerbates our current account

deficit.

An undervalued RMB is bad for our economy and bad for the

world economy, but I believe focusing so heavily only on Chinese

currency revaluation is a mistake. Revaluation by China alone will

not make our trade or current account deficit vanish.

Japan, Korea, and other Asian countries also depress the value

of their currencies, and there are deeper domestic problems that

fuel our current account deficit than currency valuations.

So what do we do? First, we should get our trading partners to

the table to forge a solution that gets China, as well as Japan,

Korea, and other Asian countries, to end currency interventions.

Those are big countries now. They have to exercise responsibility.

A large, diversified economy like China should not be playing

games with currency values. We also need to help foster growth in

the sluggish economies of Europe and Japan.

Second, we have to recognize that our economic problems do

begin at home. Our problems are not simply that Europe grows too

little or that Asians save too much, as the administration likes to

claim. In truth, our economy has become less able to handle the

challenge posed by rising China. We need to get our national house

in order, and we need to do so now.

It is time to stop talking about reducing our trade deficit. We

need to take steps to do so now. I am tired of just talking about

how we are losing our competitive edge. We need to take steps now

to improve basic education, train more scientists and engineers, increase research, and reign in health care costs.

There is not a CEO I meet who does not say that rising health

care costs are a top concern. I would be surprised if that is not true

of every member of this committee. What is the administration’s

plan? Again, they have none.

These are things that America must do to confront the challenge

of a rising China. These are things that America must do for its

own safety. We should continue to deepen our trade relationship

with a growing and more competitive China, clearly. We should ensure that China plays by the rules. We should also ensure that

America’s economy and America’s workers are the best that they

can be.

I look forward to hearing from the witnesses on these very important issues.

The CHAIRMAN. Thank you very much, Senator Baucus.

We will hear now from Senator Collins, then Senator Bayh, then

Senator Graham, then Senator Stabenow. It is my understanding

that Senator Graham will go, and come back before this panel completes. Is that right?

Senator GRAHAM. Yes, sir.

6

The CHAIRMAN. All right.

I would ask my colleagues not to ask questions of our colleagues,

because Chairman Greenspan is on a tight time constraint, and we

want opportunities to explore in depth with Chairman Greenspan

and Secretary Snow before they go.

Senator Collins?

STATEMENT OF HON. SUSAN M. COLLINS,

A U.S. SENATOR FROM MAINE

Senator COLLINS. Thank you, Mr. Chairman.

Mr. Chairman, Senator Baucus, members of the committee, I

very much appreciate having the opportunity to appear before you

today.

All too often, trade issues in this country are seen through the

prism of dying industries struggling for survival in an economy

that has passed them by. I do not see these issues that way. I

strongly believe that American manufacturers can flourish in the

global market.

Why, then, do so many very efficient U.S. industries hemorrhage

jobs in the face of global competition? The answer, in my judgment,

is that they are competing with countries that use illegal and unfair trade practices to get a leg up on their competition. In short,

these countries cheat in order to win at the expense of U.S. manufacturers that play by the rules.

No State, Mr. Chairman, understands this more than my home

State of Maine. According to a 2003 study by the National Association of Manufacturers, on a percentage basis, Maine has lost more

manufacturing jobs in the previous 3 years than any other State

in the Nation.

I hear from manufacturers time and again whose efforts to compete successfully in the global economy simply cannot overcome the

practices of illegal pricing and subsidies of nations such as China.

Over the past 2 decades, there have been some significant economic changes in China. Beginning in the early 1980s and continuing today, China has undertaken major economic reforms by

joining the World Trade Organization and by working towards the

establishment of a modern commercial, financial, legal, and regulatory infrastructure.

The problem is not with China’s economic liberalization and modernization. Indeed, China holds the promise of offering American

businesses significant investment opportunities and a potentially

profitable export market.

The problem is this: now that China is a key international economic player, the country has repeatedly refused to comply with

standard international trading rules and practices.

China seems not to recognize that the principles of fair trade

must apply to both sides of the trading relationship. Consider, for

example, that China is currently facing more than twice as many

American antidumping investigations than any other country, with

tariffs imposed in 17 different cases.

One industry important to my State, the residential furniture industry, has experienced the devastating losses of jobs due to surges

of unfairly priced furniture imports from China.

7

According to the U.S. Bureau of Labor, 28 percent of the workforce has been lost in the American furniture industry since 2000.

One furniture manufacturer in Maine, Moosehead Manufacturing,

has been forced to eliminate a quarter of its employees due to unfair market conditions.

Unfairly priced and subsidized imports from China are a leading

cause for these job losses. China’s bedroom furniture exports to the

United States, which amounted to just $169 million in 1999,

reached an estimated $1.2 billion in 2003.

There are a great many trade issues over which the United

States simply must be more assertive in dealing with China. I have

focused on one particular problem with my colleague, Senator

Bayh. That is China’s use of illegal subsidies.

China uses illegal subsidies to provide advantages to many of its

exporting industries. It has been known to provide preferential access to loans, for example. A news report last year by the Chinese

government news agency states that the Chinese government plans

to boost the forest product industry’s production by ‘‘encouraging

investment of $24 billion in the industry over the next 10 years.’’

Last year, former U.S. Trade Representative Bob Zoellick filed a

complaint with the WTO, alleging discriminatory tax policies from

China that are disadvantaging our semiconductor industry.

Along with my colleagues Senator Bayh and Senator Grassley,

who are here this morning, I have introduced a bill, S. 593, also

known as the Stopping Overseas Subsidies Act.

It would revise the current trade remedy laws to ensure that

U.S. countervailing duty laws apply to imports from non-market

economies such as China, although I would argue that China increasingly has elements of a market economy.

Our Nation’s trade remedy laws are intended to give American

industries and their employees relief from the effects of illegal

trade practices. Under current Commerce Department practice,

however, American industries competing with these unfairly advantaged foreign producers can file an anti-subsidy petition against

any market economy, such as Canada or Chile, but not against

what is considered to be a non-market economy, such as China.

As a result, those countries such as China that subsidize their

industries the most heavily and cause the most injury to American

companies and workers are exempt from the reach of American

anti-subsidy laws. Illegal subsidies distort fair competition, regardless of the economic system in which they are used.

The Collins-Bayh legislation gives U.S. industries the tools to ensure that no country gets a free pass on trade enforcement. Our

legislation is a bicameral, bipartisan bill that has a broad range of

support. The Senate bill currently has 26 co-sponsors, and is

backed by more than 20 organizations and a number of private

companies and labor groups.

Of particulate note, the National Association of Manufacturers

has listed this bill as one of its top trade agenda items. In addition,

the United States Economic and Security Review Commission, a bipartisan organization established by Congress in 2000 to provide

recommendations to Congress on the relationship between the

United States and China, has formally recommended that Congress

8

urge the Department of Commerce to make countervailing duty

laws applicable to non-market economies.

Mr. Chairman, countries such as China want to have all the benefits of engaging in international trade. They cannot continue to be

allowed to cheat on a system with no penalties. It is time that

these countries were held to the same standards as other countries

around the world.

Thank you, Mr. Chairman, for the opportunity to testify.

I would ask the Chairman and my prime co-sponsor to excuse

me, because Secretary Rumsfeld is testifying before the Armed

Services Committee. So, if I could be excused, Mr. Chairman.

The CHAIRMAN. You are excused.

Senator COLLINS. Thank you.

The CHAIRMAN. Now, Senator Bayh?

STATEMENT OF HON. EVAN BAYH,

A U.S. SENATOR FROM INDIANA

Senator BAYH. Thank you very much, Mr. Chairman. I want to

express my appreciation to you, to Senator Baucus, and the other

members of the panel for convening this hearing today.

Our relations with China are profoundly important. Our success

in dealing with these relations will go a long way towards shaping

the next generation and the future of America.

We want good relations with China, but the issue we are seeming to address today is, what do we do when the Chinese themselves engage in conduct that undermines the process of achieving

those good relations, because it is contrary not only to the internationally accepted norms of economic behavior, but to the interests of our country, workers, and businesses in our country?

That is the issue that we address today. As I said, it is profoundly important, and I thank you and other members of the committee for enabling us to air our opinions on this today.

I also wanted to express my appreciation to Senator Collins.

Without her leadership and determination, we might not be here

today. As you can see, she is an eloquent advocate for these issues,

and I am very grateful for our partnership that we have established together.

The issue that we address today, our economic relations with

China, is a subset of a broader topic, the topic of globalization.

What do we do about it? How do we benefit from it? What do we

do when it is not working as it should, for the interests of not only

our country, but the global order?

I suggest we must do three things. First, we need a strategy for

success. As the economists might say, what is our comparative advantage? What do we need to do in terms of research and development to create new products and services? What do we need to do

in terms of education to enable every American to succeed in the

new, emerging global economy?

What are the investments that we must make in infrastructure

to improve the productivity of our economy? What do we need to

do in terms of being more innovative, creative, to be constantly on

the cutting edge of growing our economy in a much more competitive environment?

9

I think Senator Baucus was exactly right: we need to first get

our own house in order, have a strategy for success in a globalized

world. That, by far and away, is the most important challenge facing America today. That is a subset of what we are talking about

here and is perhaps a topic for another occasion, but it is vitally,

vitally important.

Second, what do we do when there are dislocations within our

country? Many Americans will be winners in the new global marketplace, but some, through no fault of their own, will be dislocated. We owe it to them—we have an obligation—not to say,

well, you are on the scrap heap of history, and too bad for you.

We have to create a system where people can work hard, think

smart, and get back on the ladder of success. We are not being

nearly aggressive enough in doing that today for people who feel

the adverse consequences of globalization through no fault of their

own.

Finally, the subject that Senator Collins was addressing and that

both of us together, with many members of this panel have sought

to address, along with Senator Stabenow, what do we do when

cheating takes place?

What do we do when American businesses and workers embrace

free and open competition, but we have trading partners who do

not, who seek an artificial advantage? What do we do? The answer

must be something other than nothing.

But as Senator Baucus so rightly pointed out, all too often, nothing has been the response that they have received from our government. They have a right to expect something more from us than

that, and that is the issue that I would like to address, very briefly,

today.

The reason I support the Stopping Overseas Subsidies Act and

agree with what Senator Collins was saying? There are three principal reasons. First, is the issue of fairness.

It is simply not right, Mr. Chairman, when American businesses

and workers are willing to do their part to think smart, to work

hard, to make the investments, to play by the rules of the game

to succeed. It is not right when they do those things.

The fruits of those labors, of that ingenuity, of those investments,

are taken away from them, not because others are smarter, or work

harder, or have more ingenuity than do they, but because of artificial reasons, because of cheating. That is simply not right.

We face the situation a lot like Batesville Tool and Dye in Ripley

County in my State, where the products sold by their competitor

in our marketplace here in our country are sold for one-half of a

penny—one-half of a penny—beyond the cost of just the raw materials, leaving nothing for labor, nothing for transportation, nothing

for marketing, nothing for electricity, nothing for rent. This simply

is not possible.

I know there are companies in Iowa, Montana, and elsewhere

who face a similar situation. But do not take my word for it. Do

not take Senator Collins’ word for it, or Senator Stabenow’s. Talk

to the businessmen and women who are out there in the marketplace every day facing this kind of unfair competition. Something

must be done, and I hope that something is what we are going to

address here today.

10

Senators Collins, Stabenow, and I have our own suggestions. I

think that they are worthy. If there are changes and improvements

that can be made, then we should do that, but something must be

done. Talk to your businessmen and women. Do not just take our

word for it.

The second thing is, it is in our economic and financial interest

to enforce the rules and to deal with artificial situations such as

currency manipulation and unfair subsidies.

Senator Baucus touched upon this in his opening statement.

These current account imbalances are not sustainable. He mentioned the current account imbalance for last year. The current account imbalance for this year will be much, much larger. I believe,

for the first quarter, it was about $195 billion, suggesting that we

are on our way to about an $800 billion current account imbalance

this year alone.

This inevitably—inevitably—will lead to lower currency values,

higher interest rates, lower investment and productivity because of

that, and a lower standard of living for the American people. That

is what is at stake here today. That is what is at stake.

We need to address this in a way that is responsible, otherwise

we run an increasing risk of a severe readjustment which could

lead to profound adverse consequences for the American economy,

the global economy, and our financial situation. We must be prudent and act before that day arrives, and that is why we are here

today as well.

Finally, Mr. Chairman, I must say that the American people’s

support for global trade and a rules-based system is very much at

stake here. I speak as someone who has voted for trade agreements, even though they are not always popular. I have supported

them.

I believe a majority of the American people understand, as you

said and Senator Baucus said, that it is in our interest to trade,

to compete, to have open borders for that kind of activity. We benefit, in the aggregate, from that.

But, Mr. Chairman, subsidies are against the rules. Currency

manipulation is against the rules. When we do not enforce the

rules, when we do not act to do what is already considered to be

fair and just under the current system, we undermine the credibility of the system itself.

We undermine the American people’s support for trade, for a

rule-based system, and you get all sorts of non-helpful behavior. If

someone asks why there was not as much support for CAFTA as

for previous agreements, therein lies the answer.

If we are not going to enforce the rules, if we are not going to

stand for what is right under the current system, then how can we

expect the American people to support further agreements? We undermine our credibility. That is at stake here today as well.

Two final things, Mr. Chairman. I noticed today as I was getting

dressed, I like to turn on some of the news channels. As a matter

of fact, I saw the Chairman. You were very eloquent.

The CHAIRMAN. You dress late in the morning. [Laughter.]

Senator BAYH. Well, you were very eloquent. And I noticed that

one of the economists was asking, after you were off the panel—

or perhaps it was before—and he said, ‘‘How do we address protecVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
11

tionism?’’ This is the topic before the panel today. How do we address protectionism?

I must say, Mr. Chairman, I am not for protectionism. I found

it to be a little Orwellian that, when we stand against cheating,

somehow or other it is portrayed as being for cheating.

When we stand for enforcing the rules, it is somehow or other

portrayed as seeking an unfair competitive advantage. When we

stand against artificial manipulation in mercantile policy, it is

somehow warped into saying that we stand for that.

When we stand, Mr. Chairman, for free and open markets, for

having marketplaces determine currency values, for standing

against artificial subsidies, for letting the hard work, the ingenuity,

the creativity of workers here and everywhere else determine who

the winners and losers are, when we stand for that, it is portrayed

as protectionism. Mr. Chairman, only in Washington, DC could it

be interpreted as that. It is not.

So the final thing I would say is this. All over my State today,

men and women got up to go to work, businessmen and women,

working men and women. It happened in Maine, it happened in

South Carolina and Michigan, it happened in Iowa and Montana,

and the other States of our country.

And before they got out of bed and got dressed to go to work,

many of them started off 20, 25 percent, 30 percent behind the

competitive game, not because they are not as smart, not because

they are not as hard-working, not because they are not as creative

or innovative, but simply because of illegal subsidies and illegal

manipulation. It is not right. They have a right to expect more

from us than that.

I believe that is why we have gathered here today. We must act

to correct the situation. I want to thank you, the Ranking Member,

and the other members of this panel for enabling us to do just that.

Thank you, Mr. Chairman.

The CHAIRMAN. We cannot give each of the Senators 10 minutes,

so would you stay to your 5 minutes, please, the remaining two?

I would ask Senator Schumer maybe not to give his opening statement that he has to give, because I want to get Chairman Greenspan up here.

Senator Graham?

STATEMENT OF HON. LINDSEY O. GRAHAM,

A U.S. SENATOR FROM SOUTH CAROLINA

Senator GRAHAM. Thank you. I promise you, I will stay within

5 minutes.

Thanks for having the hearing. I can understand why you want

to hear from Chairman Greenspan.

I am here, Mr. Chairman, about the currency issue. I mean, you

know where I am at. Senator Schumer and I have introduced legislation a couple of years ago to put tariffs on Chinese products, unless they float their currency. The valuation is 15 to 40 percent in

terms of how below-market the Chinese currency is. I know the

tariff solution is a difficult choice. It is tough. We all admit that.

Senator Bunning has been a co-sponsor. I would like to associate

myself with Senator Bayh’s comments about, fighting back is not

protectionism. But right now, the American economy needs some

12

protection against unfair trade practices, and that is what we are

all trying to provide.

But as to the substance of currency manipulation, President

Bush: ‘‘There have been some indications that the Chinese government is thinking about an interim step toward floating the currency. We are constantly urging them, if they are going to take

that step, to take it as soon as possible and eventually get to a currency which floats. Obviously, we are at a competitive disadvantage

to the extent that their currency will not float.’’ I agree with the

President.

Secretary Snow: ‘‘We feel there is a lot of mischief associated

with China’s fixed rate system. It is a way to get your currency out

of alignment with underlying realities, and thus confer an unfair

advantage on your own manufacturers and producers, to the detriment of American manufacturers and producers. The way to deal

with that is to let the currency reflect those underlying market

forces so nobody can be manipulating the currency.’’ —October 26,

2004.

The China Commission, U.S.-China Economic Security Review

Commission chartered by the Congress in a bipartisan fashion, has

recommended that the Chinese revalue their currency up to 25 percent because it is out of line with its true value, creating problems

for the world, particularly the United States.

I have a list of international organizations. The IMF: ‘‘It is in the

interest of the Chinese people and the advantage of the Chinese

economy to move towards a more flexible exchange rate system.

For China, this is a good moment to make that move. If policies

do not adapt, do not change to react to these imbalances, we run

the risk of an abrupt correction of the markets when confidence, for

different reasons, could evaporate or could be reduced. There is a

need for Asian countries to be more flexible in their exchange

rates.’’

There are a lot of people who see it this way, that their currency

is unfairly valued, the President being at the top of my list. The

question is, what are we going to do about it?

I am very open-minded to the idea of working with the Chinese

to get their currency in a situation that is fair to their economy and

fair to the world. It will create some relief to American manufacturers who have suffered because of the artificial low value of their

currency.

We have a bill scheduled for a vote. I think it is very important

to note to this committee, and really to the world, that 67 Senators

chose to not table our bill. That, to me, is a sea change. I have been

here 11 years talking about China, and I was surprised.

They asked Senator Schumer and myself what we wanted, and

we said we did not think we would get 67 votes. We do not have

a 67-vote strategy. There is something going on here in this Senate

that is a fundamental sea change.

I would like to take that ‘‘something’’ and be constructive with

it. I would like to engage with the Chinese government to come up

with a constructive solution to a variety of problems, because, Mr.

Chairman, it is in their best interests and our best interests to do

business on a level playing field.

13

China does not go away, never will, do not expect it to. I do not

want to build a wall around my country, but I do believe the Senate has an opportunity, working with the administration, to get

movement across the board that would be good for better relations

between the United States and China, and one place to start was

currency reevaluation in a business-like way. No more saber-rattling. We want results. We are willing to work, but we are not

going to ignore the problem.

I appreciate the time you have given me to talk about this matter, Mr. Chairman.

The CHAIRMAN. Thank you, Senator Graham.

Now, Senator Stabenow?

STATEMENT OF HON. DEBBIE A. STABENOW,

A U.S. SENATOR FROM MICHIGAN

Senator STABENOW. Thank you, Mr. Chairman. I appreciate your

patience and willingness to hear from us all today on this very important topic.

I want to congratulate my colleagues here on the panel, Senators

Collins, Bayh and Graham, as well as Senator Schumer. I appreciate the opportunity to work with all of them on this very important issue. I know that, from colleagues speaking who are on this

panel who are on the Banking Committee, this same issue has

been raised.

I appreciate, also, working with you, Mr. Chairman, on the Agriculture Committee, where we have worked for fair practices and a

level playing field.

I cannot think, Mr. Chairman, beyond the issue of health care,

of a more ominous issue for my State of Michigan, and so many of

our States and our economies, than this whole question of illegal

trading practices, particularly with China.

In Michigan, we are experts at a lot of things. We make things

and we grow things, and we do it very well, whether it is cars, office furniture, apples or cherries, we lead the way in innovation

and efficiency. These jobs are the lifeblood of our communities.

Even today, Michigan forges ahead as the forerunner of micro

and nanotechnology development. But, on the other hand, we have

one of the highest unemployment rates in the United States right

now. Unfortunately, Michigan has added 9,600 people to our unemployment rolls, as there have been jobs added across the country.

Our current economy is moving through a great period of uncertainty, and it would be easy to say that this is just a bad business

cycle, a business cycle that will eventually correct itself.

But, unfortunately, I believe that overlooks what is fundamentally happening, as we are now in a global economy and having to

address the issues of the rules and how we are going to relate and

do business with other countries around the world.

That threat, the lack of a level playing field for American businesses and workers in the global economy, is very, very real, and

it is critical that we all address this together.

For example, China currently exports to the United States some

$160 billion more than it takes in. Five products come here for

every one product that goes to China.

14

A significant portion of this deficit is driven by consumer demand

here, we know that. But a shockingly large portion of it is due to

illegal trade practices, namely currency manipulation, and the theft

of intellectual property.

Since 1995, China has pegged its currency. We know that. We

know it is illegal. It gives a distinct advantage to Chinese companies. In fact, it means that their products cost less, our products

cost more.

One example. In China—and I should say also in Japan—a mid- sized American car costs $2,000 more just because of currency manipulation, and their products cost $2,000 less.

Last week, I spoke with employees at one of our large auto parts

suppliers who told me that recently they had had the lowest bid

against a Chinese company for a parts manufacturing contract, but

when they figured in Chinese currency manipulation, the Chinese

company won the bid. That is just wrong and it is affecting our jobs

and our businesses.

Let me go on to say that we also have another very important

issue that I want to briefly address, in addition to currency manipulation. And again, I want to thank Senator Schumer and Senator

Graham for their outstanding work, and I am looking forward to

that vote in July.

But I would be remiss, Mr. Chairman, if I did not also mention

the fact that we have counterfeiting going on with automotive parts

and other areas of the economy where essentially patents are being

stolen. This has an enormous impact on us.

I would just mention that the Federal Trade Commission estimates that the automobile parts and components industry alone

loses an estimated $12 billion annually in automotive parts. It is

also a safety issue for us.

This is an issue of jobs. They estimate that, if in fact those sales

were brought into legitimate companies in the automotive industry,

we could hire 200,000 more workers—200,000 more workers—in

the United States.

So, this is a life-and-death issue, I believe, for our way of life, for

our economy, for who we are as Americans, and the great middle

class that has strengthened and basically moved our country forward in so many very, very positive ways.

I would just show you an example, in closing, Mr. Chairman.

Peter Perez, who is the president of Carter Products in Grand Rapids, Michigan, is also the national president of the Wood Machinery

Manufacturers of America. He employs 15 people. He has a lot of

different patents. One of them is for something called the Carter

Stabilizer Guide. What that is, is it supports a band saw blade in

such a way as to allow a woodworker to make all kinds of angled

cuts.

I raise this only because, shortly after Mr. Perez put this on the

market in Grand Rapids, the product, the installation instructions,

and the instruction photos were copied by a Chinese company, were

re-sold on the American market, and under normal circumstances

this would cost $70. They were able, through stealing the information and the hard work of this company, to make it for less than

$10, which was far less than the cost of the raw products necessary

to create the product.

15

Carter products can compete, Mr. Chairman, if the rules are fair,

we know, whether it is our farmers or our manufacturers. Give us

a level playing field and they will compete and they will be successful. We are all here today saying, we have the responsibility, working together, to make sure there is a level playing field and that

we are enforcing the law internationally on behalf of American

businesses and workers.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you, Senator.

Now, Chairman Greenspan and Secretary Snow will come and

testify. We will start out with Chairman Greenspan. Chairman

Greenspan is on a tight schedule, so I would ask my colleagues,

when you ask questions, to keep within the 5-minute rule that we

generally have, and that the Chairman follows.

Chairman Greenspan? And welcome, Secretary Snow. Welcome.

Secretary SNOW. Thank you.

The CHAIRMAN. Secretary Snow, I have asked Chairman Greenspan to start out.

STATEMENT OF HON. ALAN GREENSPAN, CHAIRMAN, BOARD

OF GOVERNORS, THE FEDERAL RESERVE BOARD, WASHINGTON, DC

Chairman GREENSPAN. Mr. Chairman, I have somewhat longer

remarks than I will read, and ask that the full remarks be included

in the record.

The CHAIRMAN. Without objection. That is our practice anyway,

that your entire statement will be printed in the record.

Chairman GREENSPAN. Thank you very much.

[The prepared statement of Chairman Greenspan appears in the

appendix.]

Chairman GREENSPAN. Mr. Chairman and members of the committee, I am pleased to be here to offer my views on China’s trade

and exchange rate regime. I would like to emphasize that the views

I will express are my own and do not necessarily represent those

of the Federal Reserve Board.

Some observers mistakenly believe that a marked increased in

the exchange value of the Chinese renminbi, the so-called RMB,

relative to the U.S. dollar, would significantly increase manufacturing activity and jobs in the United States. I am aware of no

credible evidence that supports such a conclusion.

The enhanced integration of China into the world trading system

is having a notable effect on Asia’s trade with the rest of the world

and on trade within Asia. After having risen rapidly through the

1990s, U.S. imports from Asia, excluding China, have flattened

since 2000.

This has occurred as production within Asia has evolved, with

the final stages of assembly and exporting to the United States and

elsewhere becoming increasingly concentrated in China.

As a consequence, because exports by country are reported on a

gross basis rather than as value added, the widening of the United

States’ bilateral trade deficit with China, measured gross, has

largely been in lieu of wider deficits with other Asian economies,

including Japan.

16

Measured by value added, our bilateral deficits with China would

have been far less, and our bilateral deficits with other Asian exporters would have been far more.

Accordingly, an increase in the exchange rate of the RMB relative to the dollar would likely redirect trade within Asia, reversing, to some extent, the patterns that have emerged during the

past half-decade.

However, a revaluation of the RMB would have limited consequences for overall U.S. imports, as well as for U.S. exports, that

compete with Chinese products in third markets.

Such a revaluation would affect Chinese value added, but not the

dollar cost of intermediate goods imported into China from the rest

of Asia, which represents a significant share of the gross value of

Chinese exports to the United States and elsewhere.

To the extent that exporters to China revalued as well, of course,

the impact on overall Asian exports would be somewhat greater.

The broad tariff on Chinese goods that has recently been proposed,

should it be implemented, would significantly lower U.S. imports

from China or it would comparably raise U.S. imports from other

low-cost sources of supply at only slightly higher prices than prevail at present.

U.S. imports of textiles, light manufacturers, assembled computers, toys, and similar products would, in part, shift from China

as the final assembler to other emerging market economies in Asia,

and perhaps in Latin America as well. Few, if any, American jobs

would be protected.

More generally, any significant elevation of tariffs that substantially reduces our overall imports, by keeping out competitively

priced goods, would materially lower our standard of living.

A return to protectionism would threaten the continuation of

much of the extraordinary growth in living standards worldwide,

but especially in the United States, that is due, importantly, to the

post-World War II opening of global markets.

Such an initiative would send the adverse message to our trading

partners that the United States, while accepting the benefits of

broadened world trade, is not willing to absorb the structural adjustments that are often necessary.

To maintain a rising standard of living, a dynamic economy such

as ours requires a continual shifting of resources toward the most

up-to-date technologies financed not only by saving, but also, importantly, by the depreciation of increasingly obsolescent facilities.

This highly dynamic process is mirrored in our labor markets,

where jobs are constantly being created and destroyed at a rapid

pace. New hires in the United States currently average more than

a million per week, half resulting from voluntary job change.

At the same time, during a typical recent week, about 150,000

workers are temporarily laid off, and another 225,000 are subject

to permanent job loss. Any effect of trade with China on U.S. employment is likely to be very small relative to the scale of job creation and job loss in our economy.

A policy to dismantle the global trading system in a misguided

effort to protect jobs from competition would redound to the eventual detriment of all U.S. job-seekers, as well as of millions of

American consumers.

17

Policy should aim to bolster the well-being of job losers through

retraining and unemployment insurance, not to stave off job loss

through counterproductive efforts to impede the process of incomeenhancing international trade and globalization.

While the presumption that a reevaluation of the RMB would notably increase jobs in the United States by constraining imports or

expanding exports is without statistical or analytical support, it is

nonetheless the case that a more flexible RMB would be helpful to

China’s economic stability, and hence to world and U.S. economic

growth.

Rapid accumulation of foreign, largely dollar, reserve holdings by

the People’s Bank of China, China’s Central Bank, as a consequence of support for the RMB, would boost the growth of the

money stock, with the accompanying risk of triggering upward

pressure on inflation and a general overheating of the Chinese

economy.

The Chinese Central Bank’s issuance of liquidity management

bonds to lessen potential increases in the money supply created by

foreign asset accumulation has accelerated since regular issuance

began in April of 2003, posing threats to China’s financial stability.

Hence, the sooner the Chinese, in their own self-interests, move

to a more flexible currency regime, perhaps leading other Asian

currencies to become more flexible as well, the better for all participants in the global trading system.

In the decades ahead, Mr. Chairman, it is in our interest, and

that of the global economy, that China continue to progress towards becoming a more market-based, productive, and dynamic

economy in which individual initiative, not government decisionmaking, is the fundamental strength behind economic activity.

For our part, it is essential that we not put that outcome or our

future at risk with a step back into protectionism. Thank you very

much.

The CHAIRMAN. Yes. Thank you, Chairman Greenspan.

Now, Secretary Snow, please?

STATEMENT OF HON. JOHN W. SNOW, SECRETARY,

U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC

Secretary SNOW. Thank you, Mr. Chairman, members of the committee. It is always a pleasure to join you.

I am delighted to be here and have a chance to renew our conversation on the important subject of China, the U.S.-China economic relationships, and in particular the currency issues that are

receiving so much attention these days.

Recently, Mr. Chairman, you know the Treasury Department released its semi-annual currency, so-called foreign exchange, report,

pursuant to the Trade Act of 1988.

The report this year was a little different as it relates to China

than in prior periods, in that we indicated clearly that China is

now ready to move to a more flexible system, and, therefore, since

it is ready to move, it should do so now in a manner and a magnitude that reflects the underlying market conditions.

In other words, it is time for China to move to greater flexibility

to get its currency better-aligned with underlying, real market conditions.

18

We concluded that the current policies on the currency are highly

distortionary and that they pose a risk to China’s economy, to its

trading partners, and to the growth and stability of the global trading system.

It is in China’s best interest to move, and to move quickly. The

Chinese have acknowledged their objective of moving to a flexible

regime—I think in large part because of the work of Treasury over

the course of the last 2 years.

We now have built a consensus among the global institutions of

the world—the World Bank, the IMF, the G–7, APEC—and any

number of individual countries that China should move to a flexible exchange rate regime.

In addition, working with China—and I have tried to keep this

committee and the Banking Committee advised—China has made

a number of steps to make its banking and financial system better

able to accommodate flexibility.

We are now at the point, Mr. Chairman, as I indicated, if China

fails to move and if current trends continue without substantial alteration, China’s policies on the currency will likely meet the statute’s technical requirements for a designation.

China’s 10-year-long pegged currency regime may at times in the

past have contributed to global stability, particularly at the time of

the Asian crisis, but that time has passed.

So, we are going to continue to engage the Chinese vigorously on

this issue and we will keep this committee well-advised of our efforts.

Let me say, I fully appreciate the sentiments, the frustration,

that lies behind some of the pending legislation before this committee, a subject that I have engaged on with virtually every member of this committee. China needs to play by the rules.

We want to have China part of the global trading system, but it

is a 2-way street. They have to deal with the intellectual property

rights issues. They have to deal with the counterfeiting issues, the

knock-offs issues. They have to enforce their laws. They have to

open up their markets. And they need to move to a flexible exchange rate. No one should interpret, Mr. Chairman, our failure to

designate China as acquiescence in China’s currency regime.

I thank you for the opportunity to be here.

[The prepared statement of Secretary Snow appears in the appendix.]

The CHAIRMAN. Thank you very much, Secretary Snow.

Now we will take 5-minute rounds. That would be, in the order

of coming: Grassley, Baucus, Bunning, Wyden, Kyl, Thomas, and

Schumer.

I am going to start with Chairman Greenspan, so 5 minutes

would apply to me as well.

The argument is made that trade deficits are evidence of job

losses in the United States. I would like to have your response.

Chairman GREENSPAN. Mr. Chairman, there is no evidence of

which I am aware that indicates that trade deficits have a significant impact on the level of jobs in an economy.

Indeed, if you go back over the record of the United States, we

have had periods of trade deficits, trade surpluses, intermixing

19

with various levels of an unemployment rate, and it is very difficult

to find any significant relationship.

Trade changes the structure of jobs within our country among industries and skills, et cetera. But we tend, because we have a flexible economy, to gradually move towards full employment, irrespective of the level of our trade deficits.

The CHAIRMAN. Another point, Chairman Greenspan. It seems to

me that the trade deficit is best understood as the funding of our

consumption with foreign capital, so our trade deficit is really a

function of our low rate of saving and investment relative to our

consumption.

Do you think policies designed to increase our national savings

rate would be more effective in tackling our trade deficit than

measures in restricting trade flows?

Chairman GREENSPAN. It is a very complex issue, but there is no

question that, in general, policies which would enhance our national saving are generally good, and the evidence is certainly in

the direction that the higher the national savings rate, other things

equal, the lower the size of the current account deficit.

Indeed, we do find evidence, for example, that if the Federal

budget deficit were brought down, about 20 cents on the dollar of

the reduction also reduces the current account balance.

So, I do agree that we ought to be moving in that direction, and

it is certainly a major policy initiative which the Congress should

move in the direction of.

The CHAIRMAN. Again, Chairman Greenspan, could you describe

some of the pitfalls the Chinese face the longer they avoid moving

towards a freely floating currency, particularly in terms of inefficient economic decision-making?

Chairman GREENSPAN. In the short run, they are confronted with

the problem of sterilizing, as economists put it, the accumulation

of foreign assets to support their exchange rate, obviously, U.S.

Treasury bills. They do this by selling RMB-denominated debt to

sop up the domestic reserve increase that occurs as a consequence

of the intervention.

This grosses up the Central Bank’s balance sheet. There is a

tendency, as we are observing, to impact the structure of finance

within China, but because they have only sterilized about half, the

rest, as I indicated in my prepared remarks, shows up as increased

money supply. Eventually, they get a highly unstable, inflationary

environment, which will create very severe difficulties for them.

In addition, fixing the exchange rate where they are tends to

misallocate capital to their most efficient uses, to the detriment of

the long-term growth of the Chinese economy.

So far as I can see, as they observe the problem emerging and

as they watch the underlying inflationary forces begin to expand,

this will induce them, sooner rather than later, to move their exchange rate to a more sustainable level.

The CHAIRMAN. Again, Chairman, in your view, is there an optimal way in which the Chinese should move to a market-based

valuation of their currency?

Chairman GREENSPAN. There are numbers of ways of doing it,

and they are far better at understanding various implications of

the move than we. Remember, they are still, to a very large extent,

20

a command-and-control economy. As a result, they do not get the

same responses that we do as a market economy. So, as they move

towards a market economy, they have to recognize that the adjustments they make should not be destabilizing.

So they have a little more difficult problem in how one moves,

and therefore, I think, since there are so many different ways to

create a degree of flexibility which solves the problem that we are

confronted with, that they are far more able than we, for example,

at the Federal Reserve, to devise what would be the most effective

way to do that.

The CHAIRMAN. Thank you. Now my time is up, so I will turn to

Senator Baucus if he is ready now, or I will go to Senator Bunning.

Senator BAUCUS. I appreciate it, Mr. Chairman.

The CHAIRMAN. All right. Go ahead, then.

Senator BAUCUS. Mr. Chairman, it has often been stated, and by

the Federal Reserve, that the increased flexibility of the American

economy will likely facilitate any adjustment without significant

consequences.

You know better than I of the huge current account deficit we

are projected to face into the year. The figure I get is $780 billion,

which would need about $3 billion daily to finance.

At the same time, our economy appears increasingly dependent

on cheap credit to fund consumer spending. There are certain segments of our housing sector that have bubble-like appearances. My

question really is, should we not do more than just let the ‘‘free

market’’ take care of it?

By definition, market flexibility will correct. By definition. The

trouble is, there are very significant adverse consequences for a lot

of Americans when that happens. If I might, Mr. Chairman.

For example, people dislocated from jobs. They are put out of

work. There are some who can adapt to market flexibility a lot

more easily than can others. So, do you not really think that we

need stronger policy options to minimize the adverse consequences

of free market flexibility, which, by definition, will correct some of

this?

Chairman GREENSPAN. Senator, let me just preface my remarks

by suggesting that what we are confronted with is the consequences of an extraordinary change in globalization in recent

years, which has augmented trade and current account balances

throughout the world. At the same time, that process has created

an increasing rate of growth in economic activity virtually worldwide, and has redounded very specifically to the benefit of the

United States’ economy.

We are looking at the extension of what went on in this economy,

our economy, when we moved from local markets to national markets. What we are observing now, and it is very specifically in the

last decade or so, is the emergence of national economies, the trade

in national economies which had been restricted to national economies, spilling over sovereign borders and in the process creating a

much broader global market system. The statistics will begin to

show very significant increases in the dispersion of current account

balances and trade balances, in the same way that, had we in the

United States been measuring trade imbalances among the 50

21

States, we would have found a very large increase in the dispersion

of trade surplus and trade deficit within the United States.

So, this is a process, really, which reflects a broadening of

globalization, which is, in my judgment—and I presume almost all

economists’—some significant positive force for world economic

growth and prosperity.

Senator BAUCUS. But if I might, Mr. Chairman, again, because

our time is so limited here.

Chairman GREENSPAN. I was going to get to your question.

Senator BAUCUS. All right. Thank you. Hopefully now, because

we have so little time here.

Chairman GREENSPAN. I was just about to get to that. In the

process, you create a very significant number of winners and losers.

The basic problem that we confront is, given that the advantages

are so much greater than the deficits, how do we take care of those

who are on the wrong side of this process?

I do emphasize that what our international trade policy should

be focusing on is finding how we put resources, basically among the

resources that we gain from globalization, to assist those who are

on the wrong side of the adjustment, to retrain, come back, and if

necessary, to at least get a means of redress which recognizes that

there are very significant problems in any competitive advance in

economic activity.

Indeed, you cannot have an advance in economic activity unless

you have obsolescent industries’ cash flow moving to finance cutting-edge types of capital investments which we are engaged in in

the United States.

It would be nice if it were different, but the world only gives us

the choice of stagnation or advance. If we choose advance, it occurs

only in the context of moving capital from older industries to newer

industries, with the consequences that that clearly has. It is that

problem which I think we should direct our efforts to adjust.

Senator BAUCUS. Well, you are very good in using my time. You

have been around.

Mr. Chairman, the slight problem is this, though. I do not see

a plan. I do not see a plan in the United States. I think, frankly,

too much of a burden is on your shoulders. Too many people in this

country think, well, the Federal Reserve will take care of it.

It is all monetary policy, and that the administration, the Congress, because we are in a free market era, do not have to do anything. Apparently, I think that philosophy is controlling too much

in this country. Our country is great because of free markets. It is

the strongest country in the world because of the free market system in our country.

But at the same time, there are huge dislocations. Increasingly,

fewer and fewer people are able to adapt to those dislocations. You,

yourself, said we need some kind of a readjustment, a plan of some

kind in this country, an education. I do not see one. I do not see

one. I do not see the administration proposing any plan that addresses that, and I do not see the Congress coming up with anything significant that addresses that.

I also do believe, and will give you a chance to respond, if you

think this country should or should not spend comparatively more

time on legislative policy and fiscal policy to take some of the burVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
22

den away from the Federal Reserve, which is trying to correct for

some of this with monetary policy.

Chairman GREENSPAN. I think the critical problem, as you point

out, Senator, is the issue of education. The problem, as I have emphasized—and I do not want to go over it in detail right at the moment—where the real adjustment process is going to be required,

where the retraining and the like rests, is in the problems that are

associated with our inability to move our children sufficiently

through primary and secondary education into college and beyond,

to create an adequate level of skilled workers to staff the ever-increasing and complex——

Senator BAUCUS. Do you see that in this country? Do you see the

United States sufficiently addressing that?

Chairman GREENSPAN. I do not.

Senator BAUCUS. Thank you. I do not, either. I think that is a

huge problem.

Chairman GREENSPAN. If we do not, whatever else we do is not

going to be helpful.

Senator BAUCUS. I agree with you. Thank you very much.

Chairman GREENSPAN. If we do, nothing else will be necessary.

Senator BAUCUS. Thank you very much.

Thank you.

The CHAIRMAN. Senator Bunning?

Senator BUNNING. Yes. Thank you, Mr. Chairman.

In 1994, our trade deficit with China was $18 billion; in 2004,

$162 billion. Since China joined the WTO, to say what its record

is on living up to its obligations, is a joke.

For starters, they have been violating the WTO prohibition on

export subsidies and the IMF rules against currency manipulation

by systematically devaluing their currency. They have kept their

currency at artificially low numbers. All in all, it is an effort to

keep their goods cheaper on the market than our goods when we

go the other way.

Furthermore, the record of the Chinese on protection of intellectual property is also a joke. Other countries that we trade with

that we have allowed in the World Trade Organization are trying,

at least, to clean up their act. China has ignored us and ignored

the administration’s trying to get them to shape up.

So, Mr. Greenspan, no matter how much we all love free trade,

it has got to be fair trade also. So, it is a 2-way street. All of the

nice things that you say occur when we trade are only good if it

is fair. So, we would like your suggestion on how we can have fair

trade with China, not only free.

Chairman GREENSPAN. Senator, let me first start off by saying,

the distinction between ‘‘free’’ and ‘‘fair’’ is a difficult one to make.

The problem is that most economists would presume that free

trade is fair trade, so that our job is essentially to make it free.

We do have mechanisms in the international arena to resolve

disputes, and indeed——

Senator BUNNING. What happens when nobody pays attention to

them?

Chairman GREENSPAN. Well, if you begin to find that those systems break down, what will tend to occur is the free trading system

23

in the world will begin to break down, to the detriment of everybody, especially the United States.

Let me just say this, to make sure that we understand something

important here. If China had never developed from its fully command-and-control economy, never entered into the marketplace as

it has, never engaged in opening up its administrative system, its

central planning and market forces——

Senator BUNNING. Mr. Chairman? Mr. Chairman, I am sorry, but

China, out of necessity, could not feed their people, so they opened

their markets.

Chairman GREENSPAN. Senator, I do not care what the reason

was. The fact that they have has been of advantage to the world

at large, and especially to the United States.

Senator BUNNING. Everybody is entitled to their own opinion.

Chairman GREENSPAN. Indeed.

Senator BUNNING. Secretary Snow, in the Banking Committee

last month you said, ‘‘China does not yet meet the technical requirements needed to be considered a currency manipulator.’’ Can

you tell us why they failed to meet that technical definition?

Secretary SNOW. Yes, Senator. It is only recently that we concluded that the progress in China with respect to the banking system, financial institutions, modernization of the way their financial

infrastructure works, achieved a sufficient robustness that it could

accommodate flexibility. Flexibility in the currency puts some pressures on the underlying financial infrastructure.

Senator BUNNING. Are you telling me that they do not fix their

currency to a given rate with the dollar?

Secretary SNOW. Oh, no. They definitely do.

Senator BUNNING. They do?

Secretary SNOW. They definitely peg it. They now are at a point,

though, that their system would accommodate movement to flexibility. We have urged them to move to flexibility. We have technical teams over in Beijing working with them. They come here.

Senator BUNNING. Mr. Secretary, they have kind of told us to

take a hike. They have not followed through very well, the Chinese.

Secretary SNOW. Senator, we are not satisfied. I want you to

know that. It is time for them to move. We have made that clear

to them in no uncertain terms, it is time to move.

Senator BUNNING. I hope that the Congress of the United States

does not have to force you to make that move, because there are

a lot of us who are sitting up at this table that feel that we are

not moving fast enough.

Thank you.

Senator BAUCUS. Thank you, Senator.

Senator Wyden?

Senator WYDEN. Thank you, Mr. Chairman.

I think both of you know that I consider myself a free trader,

voted for CAFTA last week, against slapping these tariffs on

China. I think that would boomerang on our companies. But I do

not think being a free trader is synonymous with being a sucker

and being a patsy.

I have one question for each of you this morning. Mr. Secretary,

as you know, the headline all across this country today was: ‘‘Chinese Oil Giant in Takeover Bid for U.S. Company.’’

24

Now, under the 1988 Omnibus Trade Act, there is an ExxonFlorio amendment that requires that a Treasury-led committee, a

committee that you chair, review foreign bids to acquire U.S. assets

that may have a national security impact.

My question to you is, do you intend to review the Chinese bid

to buy Unocal, and what is your initial read of this particular bid?

Secretary SNOW. Well, Senator, of course, the Exxon-Florio process provides for the national security review that you alluded to,

where a foreign company seeks to acquire a U.S. company.

It is hypothetical at this point, though, because we do not have

a transaction. I would fully contemplate that the parties to a transaction would want to avail themselves of that process.

That is normally what happens on a voluntary basis: the parties

to a transaction involving a foreign purchase of a U.S. company

that could have security implications file for the review.

Senator WYDEN. I would only tell you, Mr. Secretary, if you do

not review this one, that law is meaningless. I am telling you, and

you and I have talked about this, those of us that consider ourselves free traders have got to be aggressive in terms of using the

existing tools on the books. I am telling you, I do not see the arguments for not doing a review there.

Secretary SNOW. Senator, I would just say, under the CFIUS

process chaired by Treasury, we do consider all threats to national

security in that process. Of course, the composition of the board includes the major parts of the government: Homeland Security, Defense, USTR, Treasury, and Commerce.

Senator WYDEN. But you chair the committee under the statute.

I think I have made my case.

Secretary SNOW. Yes.

Senator WYDEN. Chairman Greenspan, I thank you for the discussions we have had about free trade in the past as well. I think

you know that I am concerned that a significant portion of China’s

economic growth simply is due to a conscious policy of stealing our

technology.

China is the world’s number-two purchaser of computer hardware, but ranks only 25th in purchases of computer software. Ten

percent of China’s software purchases are thought to be legal.

Now, there is a step that I believe that could be taken that would

not require any legislation at all. I would like to ask you, and perhaps you as well, Secretary Snow, what your thoughts would be to

the idea that the Treasury Department would publish, on a regular

basis—it could be available online, offline—a list of products made

in China with stolen U.S. intellectual property that are sold in the

United States.

That way, if we had that kind of list, every time a U.S. consumer

walked into a major store in this country they would know who in

China was ripping them off, and people could vote with their wallets.

I would be interested in the reaction of you, Chairman Greenspan, and you, Secretary Snow, each to that idea, because it could

be done immediately and could be done without any legislation.

Mr. Chairman? Chairman Greenspan?

Chairman GREENSPAN. Well, if you put the word ‘‘verified’’ in so

it is just not an allegation, I think it is not a bad idea. The reason,

25

essentially, is that all trade implies that the seller has a property

right to what is being sold. Indeed, if you do not have property

rights, trade—domestic or international—cannot exist.

To the extent that an ever-increasing proportion of world trade

is intellectual property, our inability to enforce rights under such

laws is an extraordinarily important detriment to the movement of

goods and services, specifically intellectual property.

I think, in addition to what you are suggesting, which I think is

a very interesting idea, it is important that we convene a much

broader international forum to make certain that efforts to protect

intellectual property rights advance, because, if we get to the point

that a very large part of the trade is what our globalization is all

about, but rights are not protected, it must ultimately fail, to the

detriment of all parties.

Senator WYDEN. My time is up. But Secretary Snow, could you

just respond to this idea? Again, this is something that you all

could do in Treasury. You could do it now, with no legislation. I

think it would send a real message.

Secretary SNOW. What we are talking about here is theft, plain

and simple. As the Chairman said, open, free trade cannot work

unless property rights are respected and theft is dealt with. I think

it is a very interesting idea. Let me think about it and talk to Ambassador Portman, and see if we cannot come back to you with

some suggestions on it. Thank you very much.

Senator WYDEN. Thank you, both. I look forward to working with

both of you.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

Senator Kyl?

Senator KYL. Thank you, Mr. Chairman.

I appreciate both of you testifying. You have obviously experienced the bit of frustration that we have here, much of it based

upon what we hear back home. You both have expressed frustration with a system that must comply with a set of rules in order

to work.

The question I have, very specifically, for both of you, is this. It

is more a matter of education here. I am asking to be educated, not

for interesting, innovative policy suggestions, like Senator Wyden’s,

which I agree is a very intriguing thought. Transparency in commerce is critical, and abiding by the laws, as well.

Review for us, if you would—since you have rejected the idea of

tariffs by the United States to enforce compliance with both intellectual property, with the U.S. law, as well as WTO requirements,

all of which China is violating—the U.S. legal means, and WTO

and any other mechanisms, by which we could, as a practical matter, begin quickly putting pressure on China to begin playing by

the rules that they have signed up to play by, or that they should

abide by.

First, Mr. Greenspan, then perhaps Secretary Snow.

Chairman GREENSPAN. Any set of rules has built into them, either explicitly or implicitly, a set of enforcement capabilities. To

the extent that there is violation of agreements, there are mechanisms to be employed to redress that particular problem.

26

Indeed, to the extent that there are violations, you cannot maintain a system in which contracts are violated, because that, in the

context of property rights, is the firm, unequivocal base of a trading system. So, you have to have a mechanism for redress where

there are, in fact, violations of a contract. You need a form of adjudication.

The question is, can you do it bilaterally? The answer is, not

properly, in an international system. What we need to do, if we are

not getting contractual relationships and rules of international

commerce lived up to, we have to find out why that is, and how

to redress that. But I do not believe that you can effectively do it

with bilateral tariffs. First of all——

Senator KYL. Excuse me, Mr. Greenspan. We know we agreed

with China’s accession to WTO status with a commitment to meet

certain milestones, which they are not meeting, apparently not

even trying to meet a lot of them. WTO is an international arrangement which has enforcement mechanisms. Which of the

mechanisms involved in WTO do you think we could reasonably

employ under these circumstances?

Chairman GREENSPAN. Senator, may I answer that for the

record? There are a number of detailed issues within the statutes

which I would like to address.

Senator KYL. That would be very helpful, because we are searching for the right way to enforce international law with respect to

trade with China. To the extent we are told, well, you should not

do it this way, you cannot do it that way, we are looking for how

we could do it. So, an answer for the record, utilizing WTO provisions, would be very, very helpful.

[The information appears in the appendix.]

Senator KYL. Is there anything else during this time that you

would recommend?

Chairman GREENSPAN. I would think that that should be sufficient.

Senator KYL. All right.

Secretary Snow?

Secretary SNOW. As you know, Senator, we are trying to encourage the global community—IMF, World Bank, G–7, Asia Development Bank, and others—to convey to the Chinese their displeasure

with the Chinese peg. They have done that. I think creating a consensus in the global community about the right behavior is a positive thing. I think it will help foster the right outcome.

In terms of the U.S. Government, I know that Ambassador

Portman and Secretary Gutierrez, who have principal responsibility for this, are conducting a thorough review of the options we

have, and how to make them fully effective.

One of the areas we have, of course, is the safeguards. The textile safeguards now are much in evidence. Other possible actions

are being reviewed. Conveying to the Chinese our firm commitment, they have got to live up to the rules, is a starting place.

In Ambassador Portman and Secretary Gutierrez, I think we

have seen new, forceful people, bringing a strong message to the

Chinese about the importance of living up to, and actually accelerating, those WTO commitments. We are engaged.

27

Senator KYL. Since the red light is now on, let me ask you to

submit for the record as well, if you would, please, the specific

steps we can take.

Secretary SNOW. I would be pleased to.

Senator KYL. Since both of you have suggested that some of the

ideas emanating from Congress would not be helpful, in your view,

what specifically can be done, other than expressing our displeasure? That is a wonderful start.

It has been going on now for about 5 years. And I am not talking

about the currency. In my case, I am not talking about the currency. Others are talking about that as well. I am talking about

the violations of rules, whether it be from intellectual property, to

WTO requirements.

I must say this. I am just a little bit disappointed that, in 5 minutes, it is not possible to identify a couple of specific things that

we can do, and should do, within the framework of our laws and

international laws, to gain compliance with what everybody recognizes are violations by the Chinese.

However, I am very happy to receive the commitment to get on

the record some specific suggestions from both of you about how we

might do that in ways that do not run afoul of some principles that

you have articulated here, and I certainly agree with some of those

principles.

Secretary SNOW. Senator, obviously one thing we can do, and

have to continuously do, is look at violations and WTO legal enforcement actions.

The CHAIRMAN. Now, Senator Schumer.

Senator SCHUMER. I want to thank you, Mr. Chairman. First, I

was going to be here for a brief opening statement, given that our

bill has been one of the focuses of this hearing, and then I will ask

a couple of questions. I will try to stay within my time limit.

The CHAIRMAN. Secretary Snow has to go at noon.

Senator BAUCUS. Mr. Chairman, I have got a lot more questions.

That is going to cause a problem.

The CHAIRMAN. Secretary Snow, can you stay longer for Senator

Schumer?

Senator SCHUMER. No, I will be fine. He does not have to stay

longer for me. All right.

First, Mr. Chairman, I want to talk a little bit about our bill.

First, one of the biggest misconceptions of our bill is that it is protectionist. We want to make one thing clear. When it comes to the

issue of China currency manipulation, it is the opponents of our bill

who are the protectionists.

They are protecting China from joining the community of free

trade. Pressuring China to reform itself is the free trade position,

because free traders believe in floating currencies. We all know the

theory: when currencies float, the free market self-corrects the

trade imbalances.

The currency of a country with the trade deficit falls in value,

and that causes that country’s imports to shrink and its exports to

rise, correcting the deficit.

We can tolerate it when it comes to little countries, but if a major

country’s currency is artificially pegged, it causes distortions in

that country’s economy, in the country whose currency it is pegged

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to, and in the world economy. That is why the EU and Japan agree

with us, and with both of you, frankly, that China’s currency

should be allowed to float.

Getting China to play by the rules of the game is the free trade

position. If we do not, if we dither, the fragile, but very important,

support for free trade around the globe is going to wither away.

After years of inaction, we are frustrated. Everyone knows the

history of our bill. We introduced the bill 2 years ago, not yesterday, not 2 days ago, and we were asked by your predecessor, Mr.

Secretary, by you, Mr. Chairman, and by many others: delay, and

we’ll get something done. Just give the Chinese some time. Nothing

has happened.

In fact, the only real focus, heated focus, occurred after our bill

passed. My belief is, there are some in China who believe in free

trade. They tend to be in the economic departments: Central Bank,

the Finance Ministry.

I do not believe that the Communist leadership of China believes

in free trade. I believe they are mercantilists. They are of the view

that China should accumulate as much money as possible, and

when free trade helps them do that, they support free trade, and

when free trade does not help them do that, they do not. So, they

need some prodding. It is not an accident.

It is not just currency, it is intellectual property, and even abjectly, I know company after company in New York are just not allowed to trade in China. You cannot send your products there.

They find one reason or another.

How about the recent merger? It has been reported today that

one of China’s largest oil companies is trying to take over Unocal.

The problem, once again, is fairness and reciprocity, not the attempt to take over. Would the Chinese freely allow an American

company to take over a Chinese company?

Well, we know countless instances where that has not been allowed; well, you have to find the right Chinese partner; you have

to be 49 percent and let us be 51 percent; or you even have to get

the permission of the Chinese government.

So we go on and on and on. Maybe you gentlemen do not have

to do what we have to do, which is sit down with the workers who

have lost their jobs. I know company after company. I will tell you

of two just in Syracuse—that is what got me into this—Crucible

Steel and Stickley Furniture.

Both of them said they could compete against China and do well,

even with China having lower wage costs and lower other costs,

but they said that the 27.5 percent advantage knocks them out of

the box. That would be true of most companies. Capitalism works

pretty well. You do not have a 27.5 percent margin of error, if that

is what the currency is.

So our goal is not protectionist. It is to get China to play fair.

You know our bill is careful. We have talked to the administration.

We allow a 180-day negotiation period after it becomes law. The

President can certify at the end of the negotiation period that

China is making progress. That is another 180 days. That is a

year.

Even after that, if the President determines China is implementing an actual plan to revalue the currency, there is another

29

12-month delay. That is 2 years. And China is moving along. No

one is going to force anything to happen. All we have gotten is

words, and that is it. Nothing else.

What everyone agrees they should do, everyone who has testified

and everyone on this side, is they should revalue their currency.

We are not demanding they do it all at once, but we need two

things, Senator Graham and I, anyway. One, some real change,

and two, a timetable—it does not have to be adhered to minute-byminute—of when they will finally get to full revaluation. So, yes,

I am frustrated.

The CHAIRMAN. Thank you, Senator.

Senator SCHUMER. Wait. I have a question.

The CHAIRMAN. All right. Your time is up. Why do you not ask

one question?

Senator SCHUMER. One question.

The CHAIRMAN. Then hopefully they will give a short answer. Because Senator Baucus needs to ask a question of Secretary Snow.

Senator SCHUMER. All right.

My question is very simple. Let us say that the Chinese continue

to do nothing on currency revaluation. Let us say there are no actual changes. How much longer should we wait before we take

stronger action? It is not rhetorical. Should we wait another 2

years, with no action? I am not talking about some change.

Chairman GREENSPAN. Senator, I think you will find that the

Secretary and I agree with your general philosophy of coming at

this problem, that they should do something, and that we ought to

be taking action to bring them into compliance with many of the

areas where they are not in compliance.

A big problem is that, if you put a tariff of 27.5 percent out as

the end of the process, the question is, if that ever gets implemented, the consequences, in my judgment, are extraordinary and

negative.

I think that if you can find a way to do precisely what you are

trying to do, which I happen to think is a very sensible overall approach, with another, less destructive procedure——

Senator SCHUMER. Do you have a recommendation, other than

talking?

Chairman GREENSPAN. Well, basically, Senator Kyl raised an

issue which we will have to respond to.

All I can tell you is that you are dealing with a very complex

question, because we have China trying to move from essentially

a centrally planned economy, which views market forces as a positive direction.

You are getting a system which is still politically a Communist

system, recognizing that market capitalism is where they want to

be, which is an extraordinary change.

They have done it, frankly, far more rapidly and much more in

depth than I had anticipated, but there are certainly the problems

that you have correctly identified, and that they should be changing in ways which will, in my judgment, enhance their move effectively towards an effective market economy.

My basic concern is that, if we are forced to implement a very

significant unilateral tariff, the dangers to the overall international

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ulate that I agree with you in principle, but it is your particular

tactic which I find——

Senator SCHUMER. Mr. Chairman, that is why we give 2 years

after this should become law. Lots can happen in that 2 years.

The CHAIRMAN. Senator Baucus?

Senator BAUCUS. Thank you, Mr. Chairman.

Following along the general question to Secretary Snow, although I think we are all in the right direction, it is a little more

complicated. There are all kinds of areas where it is more complicated. But the one I am focusing on is this: it is not just China,

it is other Asian countries which also peg their currencies.

The real question is—and I am sure this is a problem facing

China, too, as well as facing the United States—if China revalues,

what effect is that going to have, honestly, on the U.S. current account deficit?

Then, secondly, what will other Asian countries do? Will they

continue to peg? Will they not continue to peg? Because they are

going to be competitive with China, as well as the rest of the world.

So does it not make more sense, is it not time for another Plaza

Accord? I can remember, it was not too long ago, early 1980s,

whenever it was, the dollar was high, and Japan, then, was the

issue. I remember Secretary Baker was very involved then. The

countries met at the Plaza Hotel in New York. They got together

to figure out a way to jointly intervene or coordinate a response.

Now it is more complicated. There are more countries. I do not

know that the United States has quite the same leverage, frankly,

now that it had back then. But Europe certainly has a role here.

Isn’t it time for something like that? Because China has grown

up. China is not a developing country any more. There are other

countries in Asia, they used to be called tigers. Well, that was a

long time ago, that we called them tigers. They are more powerful

now than they were then.

Doesn’t it all make more sense to get a coordinated response

here, because there are ramifications and ripples which have not

yet been brought out in this hearing?

Secretary SNOW. Senator, I think, in answer to your explicit

question, that there would be competitive adjustments throughout

the Pacific Rim that would also play out through the larger global

economy.

One reason we are so intent on seeing China move to a flexible

exchange rate is not just China, but the global economy and the

effect on a whole series of countries who view themselves as competitive with China.

I think their movement to greater flexibility would lay the foundation for a broad movement to greater flexibility, which would, in

and of itself, start a process that would be very beneficial to address the issue I know you opened with, and that is the current account deficit.

Senator BAUCUS. Why can the administration not, or should the

administration not, call for a Plaza-like get-together, sit-down,

maybe just the region, Asia? It just seems to me that it is time to

get some kind of order here.

Mr. Chairman?

31

Chairman GREENSPAN. The world is different from the days of

the Plaza.

Senator BAUCUS. Oh, much different.

Chairman GREENSPAN. I would merely indicate to you that the

huge changes that have occurred which I alluded to earlier with respect to the broadening of current account balances—vast movements of capital, the newer technologies—would make it extraordinarily difficult to fix any set of exchange rates in that global market, which is essentially what the Plaza was endeavoring to do.

I do not think it is technically possible, even if it were somehow

conceptually desirable. I am not sure that it is. In other words,

there are major changes that occurred as a consequence of the

international financial crisis, especially in Asia.

The 1998 crisis induced them, being caught very short of reserves, to become inordinately attracted to building reserves, to the

point where they are beginning to distort, in many cases, their financial systems, and specifically their central banks.

I do not think they can proceed very far along that way. If capital controls are removed generally from a lot of these countries,

you begin to get differing types of flows. But I do think that the

issue you are addressing is being focused on within the IMF, the

WTO, and indeed in the G–7 and G–8 meetings.

Senator BAUCUS. If I might, Mr. Chairman, because the light is

flashing here: there may be some general sorts of discussions, but

I do not know if there is much action. It seems to me that part of

the problem back in the late 1990s was there was massive intervention with the banks.

You were part of it, Secretary Rubin was part of it, Larry Summers was part of it. I mean, there was a coordinated response to

deal with the Asian currency crisis, very coordinated and very aggressive, and it worked pretty well.

Part of the problem, too, in a lot of those Asian countries, is a

capital flow problem. I mean, they opened up perhaps too quickly,

so capital flowed in when things were going well. The trouble is,

capital left when things were not going too well. It seems to me we

have two choices here: we try or do nothing. Let me ask if that

question is the answer.

I understand all the technical problems, but there has got to be

some attempt here, some way to sit down with the relevant countries and get some order here. We all know that, by and large, we

are all better off the more there is some stability in the currency

markets, if we are all pretty much working off the same game plan,

rather than if not.

Chairman GREENSPAN. Well, actually, Senator, I think the very

fact that there is this major set of discussions in the international

financial arena is leading us in that direction. Because, remember,

we all are groping as to what the appropriate balances are, because

we are dealing with something we have never seen before. We have

never seen the extent of the dispersion of current account balances

worldwide with the implicit, very large capital flows that we are

observing.

We have never experienced this before. We are learning how it

is working, and I think, as a consequence of that, we are gradually

32

approaching the point of addressing the types of issues, as you

placed them. There is no crisis at this particular stage.

Senator BAUCUS. No. We are trying to avoid one. We are trying

to avoid one.

Chairman GREENSPAN. There are problems. If there is a crisis,

we will all get together and solve it, or hopefully solve it. But that

is what we are trying to avoid. One of the ways you avoid it is not

introducing actions based on frustration, which do not address the

real serious problem.

Senator BAUCUS. If I might, Mr. Chairman, though, it just seems

to me that you run the risk of too many of these decision-makers

trying to address some of these subjects in private.

It is legislation, whether it is Senator Schumer’s, or whoever it

is; it is proposals by the administration; it is getting this a lot more

out in the open. I firmly believe, the more it is in the open, the

more we are going to have a better solution.

I firmly believe that the administration is not doing enough yet

out in the open to bring more people in, bringing the Congress in

on an honest basis, because we risk real peril here if we do not.

Secretary SNOW. Senator, let me just respond, briefly, here. The

United States is playing a crucial role in bringing the global community together on this fundamental issue of the global adjustment

process.

It was the United States that led the G–7, as the Chairman was

suggesting, to lay out a framework to deal with it, a framework

that calls on us to do some things, falls on Europe and Japan to

do some things, and calls on China to do some things. That framework, Senator, is the framework that is now widely accepted at the

IMF, at the World Bank, at the Asia Development Bank, at APEC,

at the Euro-Zone. I was in Europe last week talking with European

leaders. That is their framework, it is our framework. I agree with

the Chairman. There is a conceptual framework we are all working

with here now, and it is working.

The IMF is taking a lead, in its macroeconomic surveillance capacity for the global economy, to look at Asia and the adjustment

processes that are required in Asia, and carrying on continuing dialogue with leaders in Asia—Finance ministers, Central Bank governors, and country leaders. So, Senator, there is an awful lot going

on here to stitch the world together.

Senator BAUCUS. I do not believe it. Mr. Secretary, that is words.

I am sorry. The IMF is more of a monitoring agency. It does not

really do much. I do not see much. Look at how much China is intervening, buying our securities; current account deficits are getting larger.

I mean, there is just so much going on, they are just really, really risky. I do not sense that the administration senses the gravity

of the situation. The administration does not show that it senses

the gravity of the situation here. There is a lot of words, a lot of

talk. I just urge you and the others to step up.

Secretary SNOW. Well, then you would not be surprised if I disagree with your assessment.

The CHAIRMAN. Senator Kerry?

33

Senator KERRY. Thank you, Mr. Chairman. I apologize for being

late. We had the Iraqi Prime Minister. But I am glad I am here,

and I want to pick up on where Senator Baucus just left off.

You disagree, Mr. Secretary, but the record, since we have become engaged in a very significant way with China and other countries, and a number of us have been part of that journey here in

the Congress the whole time in the early 1990s, is one of this problem getting worse, and worse, and worse.

Just yesterday, there was an article about how the United States

presented the Chinese, in May, with a list of modest proposals to

curtail intellectual property violations. The Chinese rejected the

proposal outright. The administration responded, not by pressing

the Chinese, but by telling U.S. companies to go file lawsuits in

Chinese courts to defend their rights.

So the question is, are we powerless to stand up for American

companies that are losing $24 to $25 billion a year? You can walk

around the embassy in China, one block away, and you can go buy

counterfeit disks, right around from our embassy.

I mean, it is a joke, except that it has got serious consequences.

We have been talking about currency manipulation for several

years here. Intellectual property has gotten worse, and worse, and

worse in terms of the stealing from American companies, and the

disrespect for the law which they said they would agree to.

So are we powerless, or are you oblivious, or is it a combination

of the two?

Secretary SNOW. Senator, you missed the earlier discussion on a

variety of these issues.

Senator KERRY. Well, I heard, Secretary, that the Chairman said

that we could use the WTO, and you said that the JCCT and other

things are working. I am confronting that. I do not think it is working.

Secretary SNOW. Well, they are not working to our satisfaction.

Senator KERRY. So how do we get satisfaction?

Secretary SNOW. Well, I think by continuing to take the message

to the Chinese on what U.S. policy is, and what we expect of them.

That is a starting place.

Senator KERRY. What is U.S. policy?

Secretary SNOW. Well, U.S. policy is that our trading partners

live by the rules.

Senator KERRY. But they are not. So what is our policy?

Secretary SNOW. Well, that is a matter of enforcement, Senator.

Senator KERRY. What is the enforcement? Where is it?

Secretary SNOW. The enforcement is both in private and public

sector activities.

Senator KERRY. What is the public sector enforcement?

Secretary SNOW. Well, the new Trade Representative of the

United States, former Congressman Portman, has indicated he is

doing a bottom-to-top and top-to-bottom review of just what options

are available to us. He has been forceful——

Senator KERRY. You mean, over the last 4 years you have not

looked at those options?

Secretary SNOW. Well, he is doing a new review of the options.

Senator KERRY. I see. So a new review is our enforcement.

34

Secretary SNOW. A new review hardly qualifies as enforcement.

A new review is the basis for determining what enforcement actions to take.

Senator KERRY. And you do not know, over the last 41⁄2 years,

what they are?

Secretary SNOW. I do not know what the new actions will be.

Senator KERRY. What are the actions we have taken?

Secretary SNOW. Well, look at the textile actions that were taken

here just a few days ago. Look at the safeguards in other areas.

Senator, the question here is what course we want to stay on. Do

we want to stay on a course that basically embraces rule-based

trade, or do we want to impose protectionism? I do not think we

want to impose protectionism.

Senator KERRY. Of course we do not. Nobody here has suggested

protectionism. We suggested standing up for the rules. The WTO,

with respect to currency manipulation. How long have we talked

about currency manipulation? Do you believe it is taking place?

Secretary SNOW. Senator, we believe that the currency is pegged.

It should move to flexibility. Yes.

Senator KERRY. Well, I know you have gone over this somewhat

so far, but I must say to you, I reemphasize what the Ranking

Member has said, that I think there is just a deep frustration, and

our companies are turning to us. We have got a lot of them in Massachusetts. We have them all over the country, in California and

elsewhere. They are falling behind because we are not standing up

and enforcing, and a lot of people are asking why.

Mr. Chairman, in your testimony you said, ‘‘To maintain a rising

standard of living, a dynamic economy such as ours requires a continual shifting of resources toward the most up-to-date technologies, financed not only by savings, but also, importantly, by the

depreciation of increasingly obsolete facilities.’’ Obviously, I think

we would all agree with that.

But does it not also depend on sound fiscal decisions? I know you

mentioned education. You said, if education is not where it ought

to be, nothing is. We are $28 billion below the promise of No Child

Left Behind, of investment in education in this country.

The Chinese are investing in transportation. They are investing

in infrastructure. We are not. We are billions of dollars below

where we were last year in our transportation bill, and it is all of

these investments, the lack of them. Pell grants are more expensive, so it is harder for our kids to go to college.

China is turning out 300,000 engineers; India is turning out

300,000. We are not. The president of the Massachusetts Institute

of Technology came to me the other day lamenting the lack of

American kids going into science, the lack of commitment in our

country to this.

Now, here we are, committed to a tax cut we have not yet

passed, that we cannot afford, that is going to drive the deficit larger, require us to sell more, have Chinese invest more in America

and carry our debt.

So my question to you is, are we making the right fiscal decisions

with respect to the long-term investment and infrastructure capacities of our country so that we can compete with China through

this century?

35

The CHAIRMAN. Can you give a short answer, Mr. Chairman? Because Senator Smith is waiting for questions.

Chairman GREENSPAN. Senator, I cannot distinguish between fiscal actions on education and other actions. What we do know is

that the Boston College survey, which is done periodically, indicates that fourth grade children are above-average in math and

science in an international comparison.

By the time they get to twelfth grade, they are way below any

median, and indeed are pretty much at the bottom of the listings.

We do something there. Whether it is the lack of fiscal resources

or something else, I am not in a position to know.

All I can say to you is, the basic problem that we have, which

is showing up in very many aspects of our economy, is a very severe bifurcation of our labor markets, in which we have too few

skilled people where the demand for skills are very high, and

therefore their wages are rising very rapidly and we have left too

many people in the lesser skilled areas where they are in excess

relative to demand, inducing very weak growth. Now, that is an

educational issue. How one resolves it, whether it is by fiscal

means or other means, I do not know.

The CHAIRMAN. Senator Smith?

Senator SMITH. Thank you, gentlemen. Mr. Chairman, thank

you.

As we contemplate trade with China and the way it has grown,

I wonder if you can speak to the wisdom of reaching out with trade

agreements to less-developed countries, in Sri Lanka, and others

affected by the tsunami, as a way to foster competition with China.

Is that an advisable thing, in the opinion of you gentlemen, as

opposed to just giving aid, as we have done very generously as a

country? Should we not be looking to help them in a more longterm way by giving them a trade agreement, and also fostering

competition with China?

Chairman GREENSPAN. I would certainly favor such a direction,

Senator.

Secretary SNOW. Sure. Sure, Senator. We should do it, as well,

through the WTO, the Doha Round, on a multilateral basis.

Senator SMITH. Senator Feinstein and I have introduced such a

bill, and I appreciate your response.

Thank you, Mr. Chairman.

The CHAIRMAN. I would like to call the next panel. Can you

maybe make your questions short? I have got another panel, and

you guys will go eat while I am conducting the meeting. [Laughter.]

Senator Wyden?

Senator WYDEN. Thank you. I will be very short.

Chairman Greenspan, I think you made the case for our trade

adjustment assistance amendment, which we are trying to make

part of CAFTA and part of trade agreements in the future, so that

when workers are dislocated as a result of changes in global markets, we could have some help, a safety net for them.

Could you give us your thoughts on trade adjustment assistance?

Because we are trying to get that as part of CAFTA in these upcoming agreements.

36

Chairman GREENSPAN. I am certainly in favor of it, in principle.

The real problem you have is that it is very difficult to determine

whether a job has been destroyed because of domestic technology

or international trade. But the principle of endeavoring to address

the problem of adjustment, to me, is where our focus ought to be

firmly put.

Senator WYDEN. Thank you, Mr. Chairman.

Senator SCHUMER. Mr. Chairman, I have one question as well.

The CHAIRMAN. Go ahead.

Senator SCHUMER. Thank you, Mr. Chairman.

I just would like to ask Secretary Snow the question I asked

Chairman Greenspan. I appreciate Chairman Greenspan being

sympathetic to where we want to go.

So far, we have just heard about two solutions; one, our bill; and

two, talking, continuing to talk to the Chinese, which we have done

for a long time.

Is there a third alternative that you see? If not, how long do we

continue to talk if no action occurs?

Secretary SNOW. Senator, as I indicated earlier, we are not satisfied with this situation at all. China has made sufficient progress

in modernizing their financial infrastructure. They are not the U.S.

yet, but they are capable of adjusting to flexibility.

It is time for them to move. We said that in the clearest way possible. I share your frustration totally. You and I have talked about

this in your office, and in the halls of the Congress, and in hearing

rooms many times.

I think they are going to move. If they do not, then when we do

the report next time, if conditions continue as they are unaltered,

then I think we will be left little option but to do the designation.

Senator SCHUMER. I would just say, Mr. Chairman, I thank both

witnesses, and thank you for your patience. We have heard a lot,

but so far I have not heard anyone present an alternative to trying,

begging the Chinese to change verbally, and the kinds of solutions

that Senator Graham and I have put forward. Thank you.

Senator KERRY. Mr. Chairman? Just one quick question.

The CHAIRMAN. All right.

Senator KERRY. Chairman Greenspan, do you believe, just to follow up on the other question, that the fiscal and debt situation we

face now is having some impact on other choices, such as basic scientific research, technology development, et cetera? I mean, those

are zero-sum choices, are they not?

Chairman GREENSPAN. I cannot see how it could be otherwise.

Senator KERRY. All right. Thank you.

The CHAIRMAN. Thank you both.

Senator BAUCUS. If I might, Mr. Chairman. Just one little question. It is not long at all. It is kind of a technical issue. That is,

the various components of the current account deficit. We have the

trade account, the income account, and the transfer account. Of

course, the trade account is the largest of the three.

But I have seen data that indicates that the income account, although it is slightly positive now, is going to be negative, and very

much negative, in the next several years.

For example, in 2003, it is positive, but by 2005, this year, it is a $40 billion deficit. By 2008, the figure I have is about $270 bilVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
37

lion. That is on top of the trade account deficit. It just seems to me,

this is starting to escalate here a little bit and it is going to cause

problems.

Either of you can comment on that, briefly.

Secretary SNOW. Senator, I fully agree with you. The current account needs to be addressed. It is a shared responsibility. It is why

we put in place this framework through the G–7, the IMF, the

World Bank, and other multilateral institutions.

It is why we are calling on the Chinese to adjust. I agree with

the Chairman and his observations on that. But it would set in motion a broader and wider global adjustment process.

Senator BAUCUS. I am addressing the income account portion of

the current account.

Secretary SNOW. Unfortunately, the trend line, as you said—

what we could expect to see in the future—suggests that will be

the case.

Senator BAUCUS. And does that exacerbate the problem?

Secretary SNOW. Well, it is another source of a negative on the

current account, certainly.

Senator BAUCUS. Also, with all the investment that is coming

into the United States, it does not go into plants, machinery and

equipment. It is going into our securities. That is with China, anyway.

That is not productive. People talk about direct investment. That

is not direct investment. At least, it is not direct investment in

matters that count. It enables them to consume and spend, but not

invest, say, in education. Is that not true? Is that not the practical

effect?

Chairman GREENSPAN. Well, remember, the financial system is

a whole set of intermediaries. If you invest in securities, ultimately

it affects the investment in hard assets. But you are quite correct.

There is an issue here as to what extent those investments in securities finance consumption rather than investment.

Senator BAUCUS. Exactly.

Chairman GREENSPAN. But, in general, the mere fact——

Senator BAUCUS. That is right. Per se, it is not necessarily the

case. But that is the trend.

Secretary SNOW. But it becomes part of the supply of loanable

funds, which are available for capital generally.

Senator BAUCUS. I thank the Chairman.

The CHAIRMAN. All right. Thank you, both, very much.

Our next panel is Kenneth Rogoff, Thomas D. Cabot Professor of

Public Policy, Department of Economics, Harvard University; Neal

Bredehoeft, president of the American Soybean Association; Sean

Maloney, executive vice president of Intel Corporation; and Al

Lubrano, president of Technical Materials, Incorporated, on behalf

of the National Association of Manufacturers.

We will start off with Dr. Rogoff. Dr. Rogoff, would you start

with your testimony, please?

38

STATEMENT OF DR. KENNETH ROGOFF, THOMAS D. CABOT

PROFESSOR OF PUBLIC POLICY, DEPARTMENT OF ECONOMICS, HARVARD UNIVERSITY, CAMBRIDGE, MA

Dr. ROGOFF. Yes. Thank you. Thank you, Mr. Chairman and Senator Baucus, for the privilege of addressing the committee and adding my remarks to those of the Senators, as well as Chairman

Greenspan and Secretary Snow, and the other panelists.

There has been a lot very sensible said here. I have submitted

written remarks, and I will just try to abstract them.

[The prepared statement of Dr. Rogoff appears in the appendix.]

Dr. ROGOFF. The first thing to say is, we are talking about this

trade balance problem in the context of a global problem. The stunning fact is not simply that the United States is borrowing over 6

percent of GDP last year, looking on track to do it the next year.

The stunning fact is, if you add up all of the current account surpluses—that is an extended measure of the trade balance—of

Japan, Germany, the OPEC oil producers—and they are, by the

way, much larger than China in their current account surpluses—

take all the surplus countries in the world, we are soaking up 75

percent of it. It is utterly unprecedented.

Chairman Greenspan referred to a dispersion of current account

deficits. Well, yes, I mean, in the sense that it is very lopsided dispersion, that the United States is absorbing such a large amount.

Senator BAUCUS. Say it again. The United States is absorbing 75

percent?

Dr. ROGOFF. Seventy-five percent of all the world’s current account surpluses are being eaten up by the United States. I will

note that when Britain sort of ruled the roost in the 1800s, it was

running surpluses up towards 10 percent. It is a highly unusual

situation.

Now, maybe it will all unwind in a very benign way. I think the

most likely way that that would happen is if it ended slowly and

gradually went away over 15 or 20 years, and that is possible.

But I think there is also a possibility, because markets have a

way of behaving in an unpredictable fashion, that it could be worse

and we could see a very sharp drop in the dollar of 20 percent or

more. Even that might be benign, but maybe it will not be. We look

around, and Europe, Japan, and Latin America have very inflexible

economies.

This could boomerang on the United States. It could lead to a

sharp rise in our borrowing costs. Senator Baucus mentioned earlier the interest we pay on our loans.

Charles DeGaulle once described the United States as having an

‘‘exorbitant privilege,’’ that it got to borrow at a much lower interest rate than anybody else, or to be precise, people will hold a lot

of our debt, and we get to buy equities, plants, equipment, and

risky things.

Well, we could lose that exorbitant privilege some day, or at least

have to share it with the rest of the world. It would cost a lot. We

have more than $10 trillion in debt, $11 trillion. If our borrowing

costs were just to go up to what we get on bonds to the rest of the

world, that would add $150 billion a year to our deficit. It is a significant problem.

39

There is no painless way to defuse this at this point. There is no

magical solution. Certainly a mix of factors have been discussed.

One would be more saving in the United States.

I do not know how you are going to persuade people to save more

when their housing prices are going up at 15 percent a year, but

more saving would be a good thing. The Federal Government, the

State and local governments, clearly play a role. If they were to

save more or to save less, it would be a factor.

I do not think anybody has a good number for how that would

translate into the current account, although I think the 20 percent

on the dollar that Chairman Greenspan cited, I would sort of say,

is on the low side. I think it would make a bigger contribution than

that under most plausible scenarios. But in the context of closing

up the current account, these global imbalances, it is true that having more flexible exchange rates in Asia would help.

Now, I want to be clear that if they were fixing their exchange

rates through, say, expanding domestic demand or lowering interest rates, if they were holding down their exchange rates that way,

I mean, in terms of the way the global system works, we would

have no beef. That is what these surplus countries are supposed to

do, expand domestic demand. Some of it spills onto our goods, and

that helps balance things.

But it is true that that, in large part, has not been what is going

on. They have been accumulating reserves. I want to remind everyone—we heard it earlier—that we told them to accumulate reserves

after the Asian crisis.

The IMF, the U.S. administration said, you should save for a

rainy day. You need to build up your reserves. Well, of course, now

China has $660 billion in reserves; Japan, $900 billion; Korea and

Taiwan, over $200 billion. Even India has over $100 billion.

I think at this point we are not talking about saving for a rainy

day, we are talking about building Noah’s Ark in these regions. It

is clearly an issue that needs to be addressed. It is not something

that can go on.

I want to make two final points. One, is that I do think China

should move to a more flexible exchange rate, but I do not think

we should pretend that this is an easy step, that this is painless,

that this is riskless.

Nobody quite knows how it is going to work. My experience in

watching other countries over the years is the leaders tend to be

terrified of floating, and, when they try it, they find out it is not

so bad. But there are huge risks.

China is a very diverse economy. There are 450 million people

who live on the coast, who live in this vibrant, dynamic economy,

but there are 850 million people who live in the 18th century. They

are much poorer. For them, their needs are different. Of course,

just as Europe is having a hard time finding one system to balance

its needs with the euro, it is not an easy problem for China.

Although I think within the G–7, within the IMF and other agencies, we need to press for Asian currencies to be more flexible, or

at least to make their domestic demand more responsive. We have

to acknowledge our role in this.

We cannot just say we are doing a good job, we are doing our

share, you do ours, because that is patently not true. We are runVerDate 11-MAY-2000 11:55 Feb 02, 2006 Jkt 095484 PO 00000 Frm 00043 Fmt 6633 Sfmt 6633 25379.000 SFINANC2 PsN: SFINANC2
40

ning significant fiscal deficits in a situation where our economy is

growing in a healthy fashion, our private savings rates are very

low. I do not think we can just say to this other great nation that

we are doing our job, you do your job. I do not know if it calls for

another Plaza agreement.

I agree with Chairman Greenspan, it is very hard to fix exchange

rates. But it is a global problem, it needs a global solution. We

need also to do our share. We cannot just tell the Asians, and the

Chinese in particular, that they need to absorb and they need to

take risks if we are not doing anything ourselves.

I think that the responsibility for the U.S. trade deficit is a

shared global responsibility, but it has a large U.S. component,

that the U.S. trade balance deficit is one thing that is still largely

made in America.

The CHAIRMAN. Mr. Bredehoeft?

STATEMENT OF NEAL BREDEHOEFT, PRESIDENT,

AMERICAN SOYBEAN ASSOCIATION, ALMA, MO

Mr. BREDEHOEFT. Good afternoon, Mr. Chairman and Senator

Baucus. I am Neal Bredehoeft, a soybean and corn farmer from

Alma, Missouri. I am currently serving as president of the American Soybean Association.

ASA represents 26,000 producer members across the country on

national issues important to all U.S. soybean farmers. It is an

honor to be here this afternoon to appear before you today on the

vitally important subject of U.S.-China economic relations.

It is really impossible to overstate the importance of China as a

market for U.S. soybeans. In 1996, the U.S. sold $414 million

worth of soybeans to China, really a significant market at that

time.

This year, the value of our soybean exports is expected to reach

a record $2.96 billion. This represents a 7-fold increase in a decade

which has seen China emerge as the largest foreign buyer of U.S.

soybeans.

The 440 million bushels we expect to export to China in 2005

represent 40 percent of our total U.S. soybean exports, and 18 percent of last year’s U.S. soybean harvest. In other words, today,

nearly 2 out of every 10 rows of soybeans grown in the United

States are destined to be exported to China.

Prospects for continued rapid growth in Chinese imports are excellent. China’s population continues to expand and is becoming increasingly urban. As a result of dynamic economic growth, more

Chinese consumers can afford, and are seeking, a higher standard

of living, including more protein and vegetable oil in their diet.

China’s ability to supply these needs through increased production of soybeans and other feeds and all seeds is limited, so most

of the increased demand will be filled by imports.

Development of Chinese demand for soybeans has not been driven only by demographics and economic growth. Twenty years ago,

the American Soybean Association established a presence in Beijing to develop what was then a very small market for U.S. soybeans.

Working with the Foreign Agricultural Service of USDA and the

Soybean Check-Off, we have undertaken a variety of programs to

41

educate the Chinese on economic, nutritional, and other benefits of

utilizing U.S. soybean meal for animal feed and soybean oil for

human consumption. These efforts have clearly paid off.

We have also worked very closely with this and previous administrations to increase access to the Chinese market through trade

negotiations.

ASA provided specific objectives to U.S. negotiators during talks

on China’s accession to the World Trade Organization and strongly

supported approval of this agreement. We look to the current negotiations under the Doha development agenda to further improve

the rules governing market access.

Our industry’s trade relations with China have not been without

difficulties. In 2002, Chinese government agencies began to require

import permits and safety certificates for import of U.S. soybeans

derived through biotechnology. These requirements went through a

number of revisions and deadlines, resulting in disruption of deliveries and increasing risk and cost to U.S. exporters.

The situation was resolved only through the personal intervention of President Bush with the Chinese leadership, which U.S.

soybean producers deeply appreciate.

We have also seen China act to restrict or quarantine imports of

soybeans, both from the U.S. and other regions, due to the reported

presence of diseases such as white mold, or of unapproved fungicide

products. Additionally, we have seen China use its import inspection procedures as a de facto import licensing scheme to slow or

limit imports.

Imposition of these restrictions and the resulting increase in soybeans processed in the domestic Chinese market have tended to coincide with anticipated harvests of China’s soybean crop in the fall.

While we have not experienced similar disruptions in the past year,

they remain a serious and ongoing concern for the future.

Despite these difficulties, Mr. Chairman, we are hopeful that

China is coming to accept greater access to its market for imported

soybeans, and the imposition of illegal non-tariff barriers will become less frequent.

We believe improved behavior results from the constant application of even-handed pressure to respect trade agreements through

discussion and negotiations. ASA and other U.S. agricultural organizations actively support this approach.

We certainly do not support measures that would try to force

China to revalue its currency through imposition of punitive tariffs

on imports of Chinese products. Such punitive, rather than constructive, measures are not likely to have the desired effect of

changing China’s policies, and could trigger retaliation by China.

The Chairman and others will recall another occasion when the

United States used trade sanctions in an attempt to punish or correct international behavior. When we cut off grain exports to the

Soviet Union in 1980, it sent a shock wave through world agricultural markets.

Not only were the Soviets able to source wheat and soybeans

from alternative suppliers, but other major U.S. customers decided

we were an unreliable supplier. The Japanese, in particular, invested heavily in development of soybean production in southern

Brazil.

42

Today, Brazil has become our largest competitor for soybean exports and is rapidly emerging as an aggressive seller of cotton,

sugar, rice, and bio-fields products. Twenty-five years ago, U.S. policymakers convinced themselves we could control agricultural

trade.

Today, with the emergence of Brazil and other South American

exporters, there can be no mistake. In response to trade sanctions,

China could easily replace U.S. soybeans and other agricultural

products from other sources. The result would be the loss of a

growing $3-billion soybean market for U.S. soybean farmers that

has taken us 20 years to develop.

China is a vital and growing market for U.S. agriculture sales.

It is one of the strongest arguments for supporting efforts to open

world markets through the Doha trade negotiations.

Any action to force changes in China’s economic policies by imposing punitive tariffs would have the most negative consequences,

not only for U.S. soybean exports, but also for efforts to liberalize

the global trading system.

Thank you again for this opportunity to be here today.

The CHAIRMAN. Thank you, Mr. Bredehoeft.

[The prepared statement of Mr. Bredehoeft appears in the appendix.]

The CHAIRMAN. Now, Mr. Maloney?

STATEMENT OF SEAN MALONEY, EXECUTIVE VICE PRESIDENT, INTEL CORPORATION, SANTA CLARA, CA, ON BEHALF

OF THE U.S. CHAMBER OF COMMERCE

Mr. MALONEY. Mr. Chairman and members of the committee,

thank you for the opportunity to appear before you today at this

important hearing. My name is Sean Maloney. I am executive vice

president at Intel Corporation, and I am pleased to testify today on

behalf of Intel and the U.S. Chamber of Commerce.

Our industry is a strong supporter of expanding free trade. Our

ability to sell products in foreign markets is a critical part of what

made us successful. On average, 3 out of every 5 dollars of revenue

in the U.S. high-tech industry comes from outside the U.S.

China specifically represents a remarkable opportunity. Semiconductors were the second-largest export to China in 2004, with

a healthy trade surplus. In China, 4 of the 10 most successful semiconductor companies are American. This market is worth $35 billion for our industry today, and is expected to be one-third of the

world demand by 2006.

Since 1995, when we opened our first office in Beijing, we have

grown to a workforce of 5,000 people across China, and have invested $1.3 billion in research and development assembly facilities,

as well as sales and marketing operations.

Supply chain economics, brand building, the access, and recognition that comes from being part of the local community mandate

that we must live near our customers. This strategy has paid off.

Today, China is adopting the Intel Pentium 4 processor more

quickly than any other country in the world.

As we celebrated our twentieth anniversary in China, we have

become the world’s largest semiconductor exporter to China. Intel

43

sales to China were nearly $5 billion in 2004, representing over 10

percent of our worldwide sales.

While our industry has grown strongly overseas, we remain committed to the USA. Although 75 percent of our annual revenues

come from outside of the U.S., we employ 60 percent of our workforce here; 50,000 employees in Massachusetts, New Jersey, North

Carolina, Arizona, Texas, Utah, New Mexico, California, Oregon,

Colorado, Washington State, and others.

Since 1999, we have added over 15,000 jobs at our U.S. locations,

and invested over $40 billion in factories, R&D, training and education. Over the last 10 years, we have also paid $20 billion in corporate income taxes.

Our commitment to the United States is manifest and enduring,

in spite of our need to do business globally. China is a critical part

of our global business and critical to our future growth. Considering its importance, it is not surprising that, when problems

occur, they can have significant commercial and political ramifications.

Since China’s accession to the WTO, however, there has been remarkable progress. Tariffs on most high-tech products immediately

went to zero, contributing to the 200 percent increase in U.S. semiconductor exports. Our industry has also benefitted from the Chinese government’s efforts to improve transparency in the promulgation of laws and regulations.

Despite these positive changes, we must continue to work together to address the problems that remain. Strong enforcement of

intellectual property rules, commitment to global standards, as well

as open and transparent government procurement policies must be

the top priorities.

We have provided more details on these policy challenges in our

written submission for the record. Although there has been good

progress, there is still work to be done.

When a specific problem arises that needs immediate government attention, we believe that constructive dialogue and negotiations between both governments are the best path. In some cases,

negotiations can help avoid lengthy litigation and prevent extended

periods of uncertainty. We have seen this strategy succeed.

In July of 2004, the U.S. and Chinese governments announced

that they had successfully negotiated an agreement to resolve disputes over value-added taxes in China. In doing so, both governments avoided a formal and lengthy WTO dispute, and healthy

trade is allowed to continue.

In legal or policy areas where problems may arise in the future,

the U.S. Government, industry, and other stakeholders should

work together to implement capacity-building programs and share

best practices with the Chinese government to avoid escalating disputes.

The U.S. and China must remain committed to resolving issues

at hand without resorting to measures that will negatively impact

workers and industries on either side of the Pacific. Our economic

relationship needs to remain healthy for both countries and the

global high-tech industry to prosper.

The CHAIRMAN. Thank you, Mr. Maloney.

44

[The prepared statement of Mr. Maloney appears in the appendix.]

The CHAIRMAN. Now, Mr. Lubrano?

STATEMENT OF AL LUBRANO, PRESIDENT, TECHNICAL MATERIALS, INCORPORATED, LINCOLN, RI, ON BEHALF OF THE

NATIONAL ASSOCIATION OF MANUFACTURERS

Mr. LUBRANO. Good afternoon, Mr. Chairman and Senator. My

name is Al Lubrano. I am president of Technical Materials, Incorporated, a small manufacturer of engineered material systems primarily used in the electronics industry.

In addition to that market, we are also part of the automobile

industry supply chain and sell to many of the major auto manufacturers’ biggest suppliers. We have approximately 200 employees

and are located in Lincoln, RI. That is a State, by the way.

I am also chairman of the Rhode Island Manufacturers Association, and am pleased to testify today on behalf of the National Association of Manufacturers.

As a member of the NAM’s China Policy Subcommittee, I participated in the development of our 2005 China Trade Agenda that included vigorous participation and resulted in a consensus from both

large and small NAM member companies.

The NAM seeks a positive and balanced trading relationship

with China that reflects market forces as closely as possible. We

want to get government interference out of Chinese exports.

That means an end to interference with currency values, subsidies, and an end to the theft of our intellectual property. China

has emerged as a leading world economy, and this has meant significant opportunities for many NAM members.

My company has participated in these opportunities. Right now,

we are selling high-technology plating material systems to companies in China that are not able to get this high-quality product

they need from any Asian supplier.

In this case, we have overcome China’s low-wage advantage

through innovation and the use of technology. This situation is not

sustainable long-term. As we explore possibilities for manufacturing in China, we have a grave concern for our intellectual property.

Additionally, as a result of fierce Chinese competition, I have

seen many of our customers lose their business because their customers have sought refuge in one of two strategies, either an outright movement of production to China, or forcing purchasing from

lower-cost Chinese manufacturers.

Some of our customers tell us that their customers will pay only

the Chinese price. This has become a favorite ploy of auto industry

purchasing managers.

Competing against low wages is one thing. We can do that with

technology and innovation. But we should not have to put up with

an artificially low exchange rate and subsidized production. It is

particularly important that the Chinese end the significant undervaluation of their currency.

Would a considerably stronger Chinese Yuan have beneficial effects? Absolutely. Attached to my testimony is an analysis done by

NAM staff that refutes a number of the common arguments that

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a revaluation of the Chinese currency would not help American

manufacturing.

I know from my own experience, and from talking to other companies, that currency revaluation is not a silver bullet—there is not

a silver bullet—but it would certainly help. We are not just talking

about the return of jobs to the U.S. Some will, but many will not

because they were in sectors that left a long time ago.

We can, however, stem the loss of future production. Not what

would go as a result of normal market forces, but I am talking

about the production that is leaving because of the artificial advantages China gets from its managed exchange rate and from trade

practices that are not consistent with international commitments.

We are pleased that the Treasury Department says China should

make a significant move now, and that, absent a move by October,

Treasury will cite them for currency manipulation, resulting in formal negotiations with China under the IMF.

This sends an important signal to the Chinese government and

to American business that October is a date-certain for change in

China’s currency practice or Treasury will take firmer action.

The NAM supports the legislation to address this problem that

was introduced by Senators Collins and Bayh. The report just

issued by GAO on this subject states that it would be prudent for

Congress to legislate in this area, and we agree.

China has also become the world’s epicenter of counterfeiting,

costing U.S. companies billions of dollars, thousands of jobs, and

threatening consumer health and safety.

Earlier this year, NAM recommended to the USTR that the administration develop a WTO case to deal with what NAM president

John Engler calls China’s ‘‘grand larceny on a massive scale.’’

The NAM predicts that the trade deficit with China could reach $220 billion this year. At the present rate, it will grow to almost

$500 billion in 5 years, larger than our entire manufactured goods

deficit last year. There is no question that eliminating the severe

Yuan under-valuation is an essential step in creating more balanced and sustainable trade flows.

Mr. Chairman, the issues I have outlined today are having a serious and negative effect on manufacturing in this country. We

have an obligation to see that America’s manufacturing base stays

strong.

We can do that within the rules of the international trading system, but we must not be timid in the insistence that those rules

be enforced, and we must act now.

Thank you very much.

The CHAIRMAN. Thank you, Mr. Lubrano.

[The prepared statement of Mr. Lubrano appears in the appendix.]

The CHAIRMAN. We will have 5-minute rounds.

Mr. Bredehoeft, you have heard reports, I am sure, that U.S.

farmers are becoming increasingly skeptical about the benefits of

trade. But it is clear that our agricultural sector, including even

soybean growers, are heavily dependent upon export markets.

Do you believe that members of your organization are aware of

the importance of foreign markets, including the Chinese market,

for profitability in farming?

46

Mr. BREDEHOEFT. Yes, Mr. Chairman. In our industry alone, we

export close to 50 percent of our crop every year. So, the members

are very aware of the importance of export markets for our own

bottom line.

That is something that we in ASA have spent the last 50 yearsplus on, international marketing into different countries around

the world. So, we are very supportive of markets that we can promote our soybeans into, and sell our soybeans into.

The CHAIRMAN. In your testimony, Mr. Bredehoeft, you note that

the Soybean Association provided specific objectives to U.S. negotiators during talks on China’s accession to the World Trade Organization.

What were some of those objectives? Were they met? If so, have

U.S. soybean farmers benefitted from the fulfillment of those objectives?

Mr. BREDEHOEFT. Well, there were two areas that we were pretty

persistent on. One of them was the quota on soybean imports.

China, of course, wanted a certain quota, and we got that included,

through talks with the trade negotiators, that there would be no

quota on soybean imports.

Number two is what they call a growing tariff rate quota, in

which they wanted to set the level of the tariff very high on imported beans and soybean oil especially.

But we were able to put that in as a growing tariff rate over

years, which means that you can raise the amount of oil or beans

into China starting out at a basis, and increasing on a yearly basis.

Both of those areas were implemented and both of those areas are

still working.

The CHAIRMAN. Mr. Lubrano, why do we need to apply countervailing duties to China? In other words, can you identify any specific cases that cannot be addressed using the Commerce Department’s non-market economy methodology for calculating antidumping duties?

Mr. LUBRANO. Well, I think that the reason for the countervailing duties would come in where specific industries felt that

there was harm being done because of subsidies. These cases would

then be taken up to the administration, and then the countervailing duty rules would apply. I think there are many cases where

that happens.

Some of our customers, in particular, when they have gone to

compete, have actually come and told us that they cannot get the

order if all they include in their pricing is the cost of materials

alone. Clearly, there is some artificial phenomenon taking place

here, and I would see that as a case where you would need these

countervailing duties.

The CHAIRMAN. The Government Accountability Office report

states that it is unclear whether applying countervailing duties to

a non-market economy like China would result in levels of protection for our producers that are higher than those already applied

in the form of antidumping duties. How would you respond to that?

Mr. LUBRANO. Well, the way I would respond to that is that what

happens in the trenches and what happens in theory are two different things. I think there are two separate issues here relative

to antidumping and subsidies.

47

I think the countervailing duty would prevail in the case of what

would be considered subsidies. Antidumping is a different matter,

and I would defer part of the answer to that to the NAM staff, but

that would be my opinion on that. I am in the process of trying to

determine how best to address the China market. I was just over

there 2 weeks ago.

I would say to you that there are cases where firms are actually

getting subsidies and are competing on a basis that is not realistic.

In those cases, I would say the countervailing duties should be

prevalent.

The CHAIRMAN. All right.

Mr. Maloney, what lessons are there to be learned from cases in

which we have successfully resolved disputes with China, such as

respect for China’s wireless encryption standards and China’s tax

refund policy for semiconductor chips?

Mr. MALONEY. Often in China there is not a single point of decision making. So, a broad engagement with a number of people—

it is a continent rather than a country—and detailed technical and

commercial discussions and arguments are necessary.

So, I think a mixture of patience, but determination, and then

broad engagement across the Chinese government and authorities

is necessary.

The CHAIRMAN. All right.

Senator Baucus?

Senator BAUCUS. Just following up, Mr. Maloney, I think it

was—correct me if I am wrong—Andy Grove who said that ‘‘only

the paranoid survive.’’ What is Intel’s current paranoia?

Mr. MALONEY. Well, we have a number of them, for sure.

Senator BAUCUS. I am sure of that. The couple or three that pop

on this general subject.

Mr. MALONEY. In the context of this discussion, the last 10 years,

as was discussed earlier, have seen 3 billion people entering the

global labor market, and 1.2 billion of those are in China. Those

people are both consumers, and obviously, downstream, potentially

competitors. You do not get one without the other.

So I think our paranoia, in the case of China, is we want to be

in there enough so that we take our share of that market and sustain the jobs that are here in the U.S., manufacturing those products to go to China.

Senator BAUCUS. What is another one?

Mr. MALONEY. That will do for now.

Senator BAUCUS. All right.

Mr. MALONEY. The point here today is, there is no other opportunity on the table for the global high-tech industry that is anything as large as China. India is some distance behind that. The

rest of the emerging markets are some distance behind that. So,

constructing the balance of trade so that it carries on in a smooth,

uneventful manner is very important.

The other point here is, the global high-tech industry is now

heavily dependent upon China as a manufacturing base. A large

proportion of the world’s high-tech equipment, whether it is phones

or computers, is manufactured in Guangdong province and the

coastal regions of China. So, continuity of trade, without pushing

the issues under the table, I think, is critical.

48

Senator BAUCUS. What is your sense as to how much value

added is there now, and will there be in China, and how long will

that take? We have autos being produced now in China. It is not

just textiles and so forth, but it is technology, equipment, automobiles. As you look at China, are there any limits or not?

Mr. MALONEY. No. There is no theoretical limit. Looking at

China as a competitor, you would have to take the same view, or

Intel would, that we took of Korea and Japan, that if you stand

still you are going to lose.

We slogged our way through the 1980s to get to the top of the

world’s list of semiconductor companies, overtaking the Japanese

on the way. We have had strong battles with the Korean companies

over the last 10 years.

I daresay, somewhere out there in the future there will be a Chinese equivalent. There is no substitute for staying paranoid and investing in staying ahead. There is no other way.

Senator BAUCUS. Dr. Rogoff, could you just help us understand

a little better the role of other Asian countries and their currencies

in conjunction with China? I think you wrote somewhere, if the

U.S. current account deficit with China were cut in half, there

would be about an 18-percent re-valuation in other Asian countries,

and China would have to be around there, too. What is the role of

other countries? I understand you think it is not just China.

Dr. ROGOFF. Asia, altogether now, is about a third of the global

economy. China, depending on how you measure it, is between a

sixth and a third of Asia. So, China’s role, really, is it has become

the leader in Asia. I think when people are hoping China will have

a more flexible currency, that that will be leadership from China.

But the point about value added: the typical Chinese good exported to the United States only has 20 percent Chinese content.

So, it is a tremendous illusion, the bilateral deficit with the United

States. Several people have used the phrase that China is the

‘‘global assembler,’’ that things get assembled somewhere else.

So just having flexibility in China is not really what this is

about. It is really about Asia and, I might add, increasingly emerging markets in Latin America and elsewhere, because we are running this giant current account deficit and it is a lot of downward

pressure on the dollar.

That is why everybody is desperately buying up reserves to try

to keep their currencies low against the dollar. It is a losing battle,

eventually. But it is a global phenomenon, and China is just representative.

Senator BAUCUS. Tom Friedman wrote this book, The Earth is

Flat, and how, with telecommunications and new technologies, anything can be produced anywhere. Is that relevant to this discussion

at all? I am just trying to understand the degree to which you

agree with that phenomenon that he is talking about in his book.

Second, the degree to which that is relevant to this issue. And

it is an Asian problem, it is a developing country issue as well. I

guess maybe, Mr. Maloney, or any of you if you have any thoughts

about that.

Dr. ROGOFF. Well, certainly the paranoia that China is going to

produce everything that people have is just nonsense. These people

49

are entering the global economy and it is going to take a long, long

time. Their income, per capita, is still only $1,100 per person.

Senator BAUCUS. But all those people on the east coast, though.

Dr. ROGOFF. They have the people on the coast who are at $4,000

per person. They are coming and they are very significant. It is a

great benefit. But right now, it is something of an illusion, the

high-tech goods that we see coming from China. Yes, they are going

to do things in the future, but now it is mostly being imported into

China and assembled in China.

Senator BAUCUS. Mr. Maloney?

Mr. MALONEY. From the context of competitiveness, by far the

biggest issue is the education issue and the necessity of the U.S.

to up the game on scientific and engineering education.

The amount of investment that China is putting into its universities and in the production of increasingly world-class engineering

talent is something we should pay very close attention to, and

there is absolutely no room for complacency there.

Senator BAUCUS. I totally agree. You heard Chairman Greenspan

mention that we do all right in competing worldwide at the fourth

grade level, but up toward twelfth grade, something goes haywire.

First, do you agree with that assessment? If you do, what is to be

done?

Mr. MALONEY. Well, I think it is difficult to argue with the assessment. It is a factual assessment. The encouragement of interest

in U.S. children in engineering and in science is absolutely essential, and it is a task in which industry and government have a

major role to play.

Mr. LUBRANO. If I could add on a more positive note, I think

there are a lot of good things going on to address that. I know the

Rhode Island Manufacturers Association is working in conjunction

with educators to try to get children re-interested in manufacturing, re-interested in math and science.

I think the issue, in my mind, and the manufacturing company

I run and the customers I interface with, is not protectionism, it

is not having trade practices that do not make sense, it is really

having a level playing field. We talked about that and heard about

that a lot this morning.

Senator BAUCUS. Right.

Mr. LUBRANO. I think American manufacturers can still compete.

They can still interest children in math, sciences, and manufacturing. If the playing field is level, we will take technology and innovation, as Intel has done, and other companies have done, and

we will compete successfully on a global basis.

Senator BAUCUS. Do you not think it is 2-fold? One is a level

playing field, that is true. But do you not think also, gleaning from

what Mr. Maloney said, things are going on worldwide, and even

if there is a level playing field, we have got to get our act together?

Mr. LUBRANO. I absolutely agree.

Senator BAUCUS. All right.

Mr. LUBRANO. I absolutely agree with that. But it is not any single thing.

Senator BAUCUS. I agree.

Mr. LUBRANO. Education, without a level playing field, is not

going to work either.

50

Senator BAUCUS. Right. Right. Exactly.

Dr. Rogoff, you were going to say something?

Dr. ROGOFF. Yes. Thank you. Just on a positive note, you compared fourth grade and twelfth grade. I am a university professor.

American universities just dominate the world in virtually every

field. To some extent we do it by skimming the cream off the rest

of the world with foreign students and foreign professors, but we

have this incredibly competitive, vibrant system.

Senator BAUCUS. That is true. But that has been the case for

quite a while now, and a lot of those things are kind of getting a

little shaky, even though that has been the case for decades.

That is great, but I am just a little concerned about, (a) the K

through 12 quality of education, and (b) the numbers are large

numbers. India is a bigger country than the United States. China

is a lot bigger country, has a lot more people, and is graduating a

lot more engineers, and they are hungry. That is my concern.

Do you want to add anything, Mr. Maloney? I see you are nodding. I do not know if that means anything.

Mr. MALONEY. Well, yes. I agree with you. There is no question

that the U.S. universities, in science and education, are still leading the world. There is no question about it. But every U.S. worker

has 3 billion potential new customers and 3 billion potential competitors, so obviously we have to raise our game.

Senator BAUCUS. All right.

So what else do we do about education here in this country? We

agree on the level playing field. We have got to be much more aggressive in leveling the playing field, that is true.

But what else can be done to get more science and engineers,

kids in math? We are going to make the best products, we are

going to be the most creative, software development.

Mr. LUBRANO. We had a discussion about this the other day.

Again, the Rhode Island Manufacturers has Train RI, which is the

educational arm of that organization.

One of the things we decided was that we are missing the boat

in that we are not getting into the middle schools and really talking to children about manufacturing, science, math, engineering careers.

I think that is one of the very positive things that can be done,

the manufacturing community getting back in, the math and

sciences being stressed at the middle school, and these are the

kinds of careers you can have. I think the global economy helps

that.

Senator BAUCUS. One other program I saw—and I will wrap up

here, Mr. Chairman—I do not know what university it is. I have

forgotten the name of which university it is. We will say William

& Mary.

They have a program where they will poll the graduating senior

class and ask those graduating, who was your most inspirational,

the best high school teacher? They worked at that pretty hard.

They would find maybe the 20, 30, 40, 50 best high school teachers

that that college graduating class had.

Then they go back and they bring those teachers, all expenses

paid, back to campus during graduation week and really showcase

51

them and give them a big stipend, and they go back to their community, and so forth.

To me, that is a small thing, but it is important. It puts good

teachers at a higher status. Most teachers go home and say, guess

what happened to me? That kind of inspires other teachers and inspires other kids.

I do not know about you, but I think for most of us, we are really

somewhat motivated by the best teachers we had, either in high

school, college, or whatnot. That has kind of got us going. The more

we can get motivators, it seems to me, that might, in a small way,

be part of the solution here.

Anyway, thank you, Mr. Chairman. It has been a good hearing.

The CHAIRMAN. Thank you. Thank you all very much.

Hearing adjourned.

[Whereupon, at 1:08 p.m., the hearing was concluded.]

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