U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

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

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

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

24–735 PDF 2005

S. HRG. 108–876

THE TREASURY DEPARTMENT’S REPORT

TO CONGRESS ON INTERNATIONAL

ECONOMIC AND EXCHANGE RATE POLICIES

HEARING

BEFORE THE

COMMITTEE ON

BANKING, HOUSING, AND URBAN AFFAIRS

UNITED STATES SENATE

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

THE TREASURY DEPARTMENT’S REPORT TO CONGRESS ON

INTERNATIONAL ECONOMIC AND EXCHANGE RATE POLICY

OCTOBER 30, 2003

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah

WAYNE ALLARD, Colorado

MICHAEL B. ENZI, Wyoming

CHUCK HAGEL, Nebraska

RICK SANTORUM, Pennsylvania

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

JOHN E. SUNUNU, New Hampshire

ELIZABETH DOLE, North Carolina

LINCOLN D. CHAFEE, Rhode Island

PAUL S. SARBANES, Maryland

CHRISTOPHER J. DODD, Connecticut

TIM JOHNSON, South Dakota

JACK REED, Rhode Island

CHARLES E. SCHUMER, New York

EVAN BAYH, Indiana

ZELL MILLER, Georgia

THOMAS R. CARPER, Delaware

DEBBIE STABENOW, Michigan

JON S. CORZINE, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel

PEGGY R. KUHN, Senior Financial Economist

MARTIN J. GRUENBERG, Democratic Senior Counsel

AARON D. KLEIN, Democratic Economist

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator

GEORGE E. WHITTLE, Editor

(II)

CONTENTS

THURSDAY, OCTOBER 30, 2003

Page

Opening statement of Chairman Shelby ................................................................ 1

Opening statements, comments, or prepared statements of:

Senator Sarbanes .............................................................................................. 2

Senator Allard ................................................................................................... 5

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

Senator Dodd .................................................................................................... 5

Senator Bunning ............................................................................................... 6

Senator Schumer .............................................................................................. 7

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

Senator Dole ...................................................................................................... 8

Senator Bayh .................................................................................................... 9

Senator Carper ................................................................................................. 10

Senator Miller ................................................................................................... 11

Senator Stabenow ............................................................................................. 12

Prepared statement ................................................................................... 40

Senator Corzine ................................................................................................ 13

Senator Reed ..................................................................................................... 14

WITNESS

John W. Snow, Secretary, U.S. Department of the Treasury .............................. 15

Prepared statement .......................................................................................... 41

Response to written questions of:

Senator Carper .......................................................................................... 46

Senator Miller ............................................................................................ 47

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

Charts submitted to Committee Members by Senator Paul S. Sarbanes ........... 50

Washington Post article dated September 13, 2003, entitled, ‘‘U.S. Debt to

Asia Swelling, Japan, China Lead Buyers of Treasurys’’ written by Peter

S. Goodman, submitted by Senator Paul S. Sarbanes ...................................... 58

Various letters submitted for the record by Senator Evan Bayh ........................ 61

Letter by Joyce Williams, Trion, GA, dated September 15, 2003 submitted

for the record by Senator Zell Miller .................................................................. 85

Report to Congress on International Economic and Exchange Rate Policies

submitted by the U.S. Department of the Treasury ......................................... 87

(III)

(1)

THE TREASURY DEPARTMENT’S REPORT

TO CONGRESS ON INTERNATIONAL

ECONOMIC AND EXCHANGE RATE POLICIES

THURSDAY, OCTOBER 30, 2003

U.S. SENATE,

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS,

Washington, DC.

The Committee met at 10:17 a.m., in room SD–106, Dirksen Senate Office Building, Senator Richard C. Shelby (Chairman of the

Committee) presiding.

OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY

Chairman SHELBY. The hearing will come to order.

Mr. Secretary, we welcome you to the Committee. I am pleased

that you are here to testify on the Treasury Department’s Report

to the Congress on International Economic and Exchange Rate

Policies.

Secretary Snow, your report this morning is of great interest not

only to us but also to the American people. The continued softness

in labor markets and the loss of manufacturing jobs make the trade

and exchange rate policies in China and Japan, in particular, a

tangible issue to U.S. businesses and taxpayers.

Signs of an economic recovery in the United States are emerging,

which is good news. Even today, we have heard that the GDP grew

at a 7.2-percent annual rate. In the third quarter, the strongest

since 1984, business spending rose 11.1 percent, we were told. On

the labor front, new weekly claims were below 400,000 people for

the fourth straight week. I hope this news is sustainable.

In today’s global economy, it is important that we also look at

trade and exchange rate policies of other countries. The news is

more mixed in this area. The current account deficit was a record

$480.9 billion last year and is currently running at 5 percent of

gross domestic product. Employment in the manufacturing sector

has fallen by 2.7 million jobs, 15.6 percent, since July 2000.

These trends are certainly cause for great concern to us in the

Congress as well as you at the Treasury. I believe that we need to

have a serious discussion, Mr. Secretary, about what can be done

to reverse these trends. The G–7 nations issued a statement calling

for more flexible currency policies, but it is unclear how China and

Japan will proceed and on what timetable.

China’s trade deficit with the United States hit a record $105 billion last year. The Chinese capital account is expected to become

increasingly open to short-term flows. Greater exchange rate flexiVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 24735.TXT SBANK4 PsN: SBANK4
2

bility would allow China to maintain a low-inflation, pro-growth

monetary policy. I believe we need to continue the dialogue to ensure that China moves forward on a flexible rate path. However,

we also need to encourage them to strengthen their entire financial

and banking system. This will be critical to the success of a more

open economy.

Mr. Secretary, I continue to be concerned, as you are, about the

Japanese economy. Japan’s banking sector is still struggling to recover from the effects of the stock and real estate bubbles of the

late 1980’s. Even with the recent actions on nonperforming loans,

Japan’s financial sector’s troubles are far from over. Japan’s focus

on using exports to drive an economic recovery have not been totally successful. In continuing its active intervention in the currency markets, Japan holds the largest foreign exchange rate reserves in the world. We need to encourage, I believe, the Japanese

to place more emphasis on domestic growth and demand.

Mr. Secretary, I know that there are no easy answers to the

issues that I have raised here. At the same time, I believe we need

to be careful about the message we send to the world community.

Over the long-term, both the United States and the global economy

will benefit most, I believe, from the continued pursuit of free trade

and flexible exchange rate policies. The most desirable way to reduce our current account deficit would be through stronger growth

abroad and more open trading markets and policies.

Mr. Secretary, I know that you and President Bush are working

diligently on this issue. We look forward to hearing your testimony

this morning and the discussion which will follow. Hopefully, we

can all leave this hearing with a broadened awareness of the situation and the direction ahead to do something about it.

Senator Sarbanes.

STATEMENT OF SENATOR PAUL S. SARBANES

Senator SARBANES. Thank you very much, Mr. Chairman. I join

with you in welcoming the Treasury Secretary this morning to

present the Department’s Report on International Economic and

Exchange Rate Policies.

Section 3005 of the 1988 Omnibus Trade and Competitiveness

Act requires the Secretary of the Treasury to submit to the Congress on or before October 15 of each year a written report on

international economic policy, including exchange rate policy, and

then to update that with a written update 6 months after the annual report and testify before the Congress if requested.

I want to commend Chairman Shelby for requesting the Secretary to appear on this year’s report. It was originally scheduled

for October 16, and then put off until today. The legislation sought

to provide Congress with a means to oversee the conduct of a critical area of economic policy. Given the current international economic position of the United States, and the attention that has

been given to the value of the dollar relative to other currencies,

this report and testimony could not be more timely.

Under Section 3004 of the Trade Act of 1988, the Treasury Secretary is required to analyze on an annual basis the exchange rate

policies of foreign countries and consider whether countries manipulate the rate of exchange between their currency and the dollar

3

for purposes of preventing effective balance-of-payments adjustments or gaining unfair competitive advantage in international

trade. If the Secretary considers that such manipulation is occurring with respect to countries that have material global account

surpluses and significant bilateral trade surpluses with the United

States, the Secretary is required to initiate negotiations with such

countries on an expedited basis for the purpose of ensuring that

such countries regularly and promptly adjust the rate of exchange

between their currencies and the dollar to permit effective balanceof-payments adjustments and eliminate the unfair advantage.

The report submitted by the Treasury this morning raises concerns about the conduct of exchange rate policy by China, but does

not make an actual determination of currency manipulation. In my

view, there is compelling evidence that China and Japan, as well

as Taiwan and South Korea, are engaging in currency manipulation to prevent effective balance-of-payments adjustments and to

gain unfair competitive advantage in international trade within the

terms of the 1988 Trade Act.

Mr. Chairman, I want to take just a moment or two to present

some evidence to support this view.

First, China, Japan, Taiwan, and South Korea are all running

material global current account surpluses and significant bilateral

trade surpluses with the United States within the terms of the

1988 Trade Act. I want to present a few charts, and I think Committee Members have a set of those charts. The first chart shows

the global current account surpluses and bilateral trade surpluses

each of these countries is running with the United States. The size

of China’s bilateral trade surplus with the United States, $117 billion, relative to the size of trade between the two countries is particularly striking.

In addition, each of these countries has been engaging in sharply

increasing accumulation of foreign currency reserves, principally

dollars. The following charts will illustrate this clearly. The first of

the following charts shows the growth in China’s stock of foreign

reserves, $111 billion over the past 12 months. This line is going

up almost at a vertical climb. The second chart shows the growth

in Japan’s stock of foreign reserves, $103 billion over the past 12

months. And the next two charts show the sharp increase in the

stock of foreign reserves by South Korea and Taiwan, respectively.

Now, by way of useful contrast, the next chart provides important

perspective on this issue because it shows the stock of foreign reserves held by the European Union, which, of course, participates

in the regime of flexible exchange rates and is abiding by both

WTO and IMF requirements. And, of course, what this shows is

that its stock of foreign reserves has actually declined over the past

12 months.

The next chart shows the consequences of these reserve accumulation actions by these respective countries and by the EU for the

value of the currencies relative to the dollar. The euro has experienced a substantial appreciation against the dollar over the past

year, and that is indicated by the top upward-trending line. The

currencies of Japan, South Korea, and Taiwan have experienced a

significantly smaller appreciation, although there has been some

appreciation, as Members will note as they look at the chart. The

4

value of the Chinese currency, since it is pegged to the dollar, is

represented by the horizontal axis of the chart and has not appreciated at all against the dollar. You have this incredible trade deficit, this huge accumulation of reserves, and no adjustments in the

value of the currency.

In my view, there is no ambiguity as to what is taking place.

Each of these countries is intervening actively in the market to

purchase dollars in order to depress the value of the currency. Each

is manipulating its currency within the terms of the Trade Act to

prevent effective balance-of-payments adjustments to gain an unfair, competitive advantage in international trade.

The United States this year is running trade and current account deficits of more than $550 billion. The four countries, I have discussed here, collectively account for nearly 40 percent of the U.S.

trade deficit, and 60 percent of the U.S. manufacturing trade deficit, a sector in which the United States has lost 2.5 million jobs

since 2001.

The United States has accumulated an external debt in excess of

$2 trillion, about 25 percent of GDP. Chairman Greenspan has told

this Committee that the rate at which the United States is running

current account deficits and accumulating external debt is

unsustainable. He said, ‘‘Countries that have gone down this path

invariably have run into trouble, and so would we. Eventually, the

current account deficit will have to be restrained.’’ The IMF’s latest

World Economic Outlook reaches the same conclusion. As Warren

Buffett recently warned, ‘‘Our trade deficit has greatly worsened,

to the point that our country’s ‘net worth,’ so to speak, is now being

transferred abroad at an alarming rate. A perpetuation of this

transfer will lead to major trouble.’’

If any progress is to be made addressing this problem, currency

manipulation being engaged in by these countries must be curtailed. Each of these countries is a member of the WTO, and all

but Taiwan are members of the IMF. A condition of membership

in both of those organizations is not to engage in currency manipulation for competitive trade advantage.

Mr. Secretary, I have difficulty in the seriousness of the Administration on this issue if it fails to make the elementary determination, for which I believe there is compelling evidence, that these

countries are engaged in currency manipulation and, therefore,

fails to initiate formal negotiations as required by the Act. Furthermore, the Administration may also want to seek remedies within

the WTO and the IMF.

Among the countries—and I close with these observations—China’s intervention has been the most egregious. There is reason to

believe that the other countries in the region, for competitive trade

reasons, are hesitant to allow their currencies to appreciate unless

China appreciates first.

In addition, as some observers have pointed out, it may be more

realistic in the short-run for China to undertake a substantial upward revaluation of its currency rather than to simply allow its

currency to float. Many observers think there is little expectation

that China would be willing in the near-term to allow its currency

to float freely, which is the goal being articulated by the Administration.

5

Their very weak banking system and the concern about a flight

of capital if they were to move immediately to flexible exchange

rates, is certainly a desirable objective. But if they were to go there

immediately, may well inhibit their ability to move on this issue.

I would urge the Administration to add to its approach prompt—

well, to have the flexible rates as the ultimate objective, but to seek

immediately in the short-run the revaluation of the Chinese currency as against dollar; in other words, the peg rate.

We do not want to deal with peg rates in the long-run, but we

have to get moving. We are hemorrhaging on this trade deficit situation. Going to flexible rates right away with a very weak banking

system and the potential significant outflow of capital obviously

raises a problem for the Chinese.

But they could revalue the peg rate. That would, of course, enable these other countries that I have mentioned in the region to

allow their currencies to appreciate as well and begin to deal with

this issue.

And this is a matter I will revisit when we get to the question

period.

Thank you very much, Mr. Chairman.

Chairman SHELBY. Thank you.

Senator Allard.

STATEMENT OF SENATOR WAYNE ALLARD

Senator ALLARD. Mr. Chairman, I would encourage you and

other Members of the Committee to maybe just submit our statements for the record so we can go on and hear the testimony from

Secretary Snow. I think both you and the Ranking Member have

given pretty good introductory remarks, and so I am just going to

ask that my statement be made a part of the record.

Chairman SHELBY. Without objection, so ordered.

Chairman SHELBY. Senator Dodd.

STATEMENT OF SENATOR CHRISTOPHER J. DODD

Senator DODD. Thank you very much, Mr. Chairman for holding

this hearing, and thank you, Mr. Secretary, for being here this

morning.

Mr. Chairman, I want to address and look at this from the net

effect of what this policy may be creating. I want to look at this

from a jobs standpoint. I represent a State whose economy historically has been tremendously dependent on foreign trade. Connecticut is one of the most dependent States on a per capita basis

on foreign trade. We generate $13.2 billion in 200 foreign markets

of trade coming out of the State of Connecticut. We take a back

seat to no one in the importance of having a strong trade policy in

the United States.

What concerns many of my constituents, Mr. Secretary, and others across the country is the net effect of not recognizing what is

quite clear to many of us with currency manipulation is the job

loss. I have lost 26,000 jobs in the last 24 months in my State in

the manufacturing sector. That pales by comparison to the almost

2.5 million jobs that have been lost over the last 2 years across the

country in this area. You are going to announce today that we saw

GDP growth of over 7 percent in the third quarter of this year.

6

That is great news, except you failed to note that we lost 41,000

jobs in that very same period of time.

So while it is going to be important to discuss the subject matter

of currency manipulation in this hearing, to disregard the effect

this is having on jobs in this country I think is a significant mistake. I am hopeful that we can focus on that.

In February 2003, the President’s economic advisers estimated

that the economy alone would grow by 4.1 million new jobs by the

end of 2004. In addition, the Administration claims that recently

enacted tax cuts signed by the President would create 1.4 million

new jobs by the end of 2004. However, a recent New York Times

op-ed piece October 24 related an interview you gave last week to

the London Times. The interview cites that you expected roughly

2 million jobs to be created by the end of 2004.

The question I have to ask you here is what has happened to 3.5

million jobs here. Something is going on here other than just the

status quo. And so for this Senator’s interest, while I am curious

to hear what you have to say about currency manipulation, particularly as it appears, at least in testimony that Alan Greenspan gave

before this Committee in July, where he seems to indicate that this

is a serious problem. The Fed apparently is taking a different viewpoint than Treasury is on this. I would be curious how you justify

this apparent contradiction that exists here. I will ask that the article be included in the record, but Alan Greenspan, Chairman of

the Federal Reserve, yesterday warned that Chinese authorities

could not continue to peg their currency without posing a danger

to China’s economy and obviously one to ours. That is the Chairman of the Federal Reserve in July.

So, I am very interested to know what the Treasury’s response

is to really millions of Americans and their families who are losing

their jobs despite the claims the economy is growing. And so my

emphasis will focus on that.

Mr. Chairman, I thank you.

Chairman SHELBY. Senator Bunning.

STATEMENT OF SENATOR JIM BUNNING

Senator BUNNING. Thank you, Mr. Chairman, for holding this

very important hearing, and I would like to thank Secretary Snow

for testifying today. Don’t worry, Mr. Secretary, I won’t ask you

any questions about TVA today.

I believe our economy, though still growing rapidly, is still lagging behind in the creation of new jobs. We have great news today

with the GDP growth at 7.2 percent for the third quarter, and I

was heartened by the new job increase last month. But I am still

very concerned about new job creation, especially in the manufacturing sector.

One of my biggest concerns is the countries keeping their currency artificially low. We all know that the People’s Republic of

China has continued to keep the yuan at an artificially low level

versus the dollar. It is about a 27.5-percent premium by pegging

it to the dollar that we are penalized in trading with the Chinese.

It has hurt our manufacturing base by making their products,

while inferior, so much cheaper. This makes it very difficult for

U.S. manufacturers to compete.

7

When I played baseball, we called that kind of behavior ‘‘cheating.’’ And when I see someone cheating against my team, I always

tried to help my team, and I sent a message. Usually it was in the

form of a high inside fast ball.

The Chinese are cheating. That is why I am an original cosponsor of the Chinese currency bill with Senator Schumer. It sends the

right message. And like a fast ball hard and inside, I think it will

get their attention. Given the reports yesterday that the Chinese

will start increasing their purchasing of U.S. goods, it may already

have done so.

I look forward to hearing your report and your testimony, Mr.

Secretary, and I look forward to engaging you more in the question

and answer period.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Schumer.

STATEMENT OF SENATOR CHARLES E. SCHUMER

Senator SCHUMER. Thank you, Mr. Chairman. And I want to

thank you, Mr. Secretary, for being here. Again, many of us who

feel strongly about this issue—nothing personal. We know you are

working the best you can on this. But I have to tell you, I read the

report this morning with deep disappointment. Simply put, the report lets China off the hook, and it will do serious damage to the

United States economy. This report is a whitewash. It treats China

with kid gloves when it should be taking off the gloves and confronting Beijing about the fact that it is manipulating the yuan.

Pegging the currency to any set level flies in the face of free trade.

The time for diplomatic niceties is past. The Administration

needs to grow some backbone and take a firm line with the Chinese

on the currency issue, or American jobs will continue to go overseas

faster than children leaving the classroom on the last day of school.

The Chinese want all the advantages of being part of the world of

nations. Well, how about some of the responsibilities? No one says

they have to let their currency float tomorrow, but they should be

making some progress instead of telling you not to bother to even

bring it up before you set foot in China when you negotiate.

The bottom line is I would like to know what the Administration

thinks we should do if we do not toe a hard line. I am glad that

my colleague from Kentucky talked about the high inside pitch because we are all exasperated here. We see China thumbing its nose

at what is fair. We see thousands of jobs lost. Some of it, of course,

is related to just the way capitalism and free enterprise work. But

some of them are lost unfairly because of the pegging of the currency.

The evidence is very clear, Mr. Secretary. China is playing

around with the yuan. This view has been backed by economists,

including the bipartisan United States-China Trade Commission. It

is truly baffling that this report would reach its audacious conclusion. Something has to change here.

I would ask that my entire statement, Mr. Chairman, be put in

the record.

Chairman SHELBY. Without objection, your entire statement will

be made part of the record.

Chairman SHELBY. Senator Dole.

8

STATEMENT OF SENATOR ELIZABETH DOLE

Senator DOLE. Thank you, Mr. Chairman, and thank you, Secretary Snow, for joining us here today. It is no surprise to anyone

here that I and some of my colleagues on this Committee are focused on the currency policies of the Chinese Government.

The loss of American manufacturing jobs in recent years has

decimated communities across the country, many of which I represent in North Carolina. The loss of one in six factory jobs cannot

occur without great stress to individuals, families, neighborhoods,

and States. Nearly 3 million manufacturing jobs have been lost

since 1998. According to the Bureau of Labor Statistics, in September 1995, there were approximately 818,400 manufacturing jobs

in North Carolina. According to last month’s figures, we have lost

more than 200,000 of these jobs. It is clear that this is a trend that

many overlooked when economic times were good. But since the recovery is slow and times are still hard, this trend has lately been

given greater emphasis.

One of the factors that has led to this job loss, in my view, is

the manipulation of the Chinese currency by the Chinese leadership. I am disappointed that this Treasury report fails to acknowledge the seriousness of the China currency peg.

At the same time, I am glad that the President, having recognized the problems with the Chinese currency peg, has been willing

to confront the issue with his Chinese counterparts. I also want to

thank you, Secretary Snow, for your attention to this issue and for

making it a major focus of your trip to China last month. I was

pleased to receive your call from China reporting on your efforts.

In addition, Commerce Secretary Evans should be thanked for his

remarks in China on Monday, when he stated, ‘‘China is moving

far too slowly in its transition to an open, market-based economy.

Time is running out. We need to see results.’’ And he continued,

‘‘The U.S. Government may take action against China under the

WTO rules.’’ And I am interested in whether that is a policy that

Treasury supports.

While the Administration continues to examine possible solutions, we must recognize that the Chinese will not be easily convinced to remove their exchange rate controls. Nevertheless, this is

no reason to curtail our efforts. We must demonstrate the depth of

our convictions. To this end, six Members of this Committee and

I support legislation to impose a 27.5-percent tariff on Chinese imports if further negotiations with the Chinese fail. Admittedly, this

is an extreme measure that could not be imposed without some

mutual difficulty. Nevertheless, it appears that this may be the

only way to get the attention of the Chinese leaders. We are the

largest export market for Chinese goods, and this may be the only

way to convince the Chinese of our seriousness on this issue. They

must realize the importance of playing by the rules or risk the potential loss of American consumers.

The best result would be for the Chinese to take steps to allow

their currency to freely float, hopefully then without our having to

resort to this legislation. I will continue to work with the Administration and with my colleagues to achieve this goal, and I want to

thank you, Chairman Shelby, for arranging today’s hearing, and

9

Ranking Member Sarbanes, for your strong interest. This is a critical issue to the people of North Carolina and the United States.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Bayh.

STATEMENT OF SENATOR EVAN BAYH

Senator BAYH. Thank you, Mr. Chairman.

The Department of Commerce held some Midwest field hearings,

Mr. Chairman, some time ago and took testimony from a variety

of individuals, including some prominent business leaders in our

State. And I would respectfully request that their statements be included in the record here today.

Chairman SHELBY. Without objection, so ordered.

Senator BAYH. Including the head of the Indiana Manufacturers

Association, Pat Kiley, who is the former head of the Ways and

Means Committee in the Indiana House of Representatives. He is

a good card-carrying member of the Republican Party, demonstrating that concern over this issue is not partisan. It is substantive and is of great importance to people across the country.

Mr. Secretary, thank you for coming today and being with us. I

want to personally thank you for your courtesy in calling me from

China when you were over there discussing this issue. I am grateful for your efforts in this regard. As you know, I have a longstanding interest in this.

Echoing the comments of my colleagues, our State has lost one

out of every six manufacturing jobs during the last 3 years. That

is a total of 143,000. So we do have a crisis in the manufacturing

sector that you are aware of, and I think it is undeniable that these

currency issues have played a significant role in that.

It is always best, I think you would agree, Mr. Secretary, to be

candid. Some of my colleagues have been candid. You know, what

is going on here is the integration of China into the global trading

system. This is going to involve dislocations for them and dislocations for us.

The subject of these hearings today is how we manage this transition, whether it is fair, and how the costs are distributed amongst

the countries that are involved. And exchange rates are going to be

a big part of determining the outcome of that.

There are several important questions that we need to confront

here, all relating to how much leeway China should be given to

manage some of the challenges that they face. For example, how

much leeway should we give them to absorb the more than 100

million excess workers in the agricultural sector into other parts of

their economy? How much leeway should they be given to strengthen their financial system, which would possibly suffer adverse consequences through abrupt change? How much weight should be

given to other noneconomic issues, such as security issues on the

Korean peninsula? Most importantly of all, what burdens should

American workers and businesses be expected to bear as we make

this transition, as we seek to accommodate these other interests?

Mr. Secretary, I would echo the comments of my colleagues in

saying that it is undeniable that China and several of our other

trading partners, as Senator Sarbanes’ chart illustrates so clearly,

are manipulating their currencies. And I use the word ‘‘manipuVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 24735.TXT SBANK4 PsN: SBANK4
10

late’’ advisedly. I know that is a technical term, but we damage our

credibility when we deny the obvious because of semantic or definitional disputes.

The report that has been issued today raises the question: What

would it take to reach a finding of currency manipulation if not the

current state of facts as we all know them to exist today?

We seriously erode the support for free trade policies in the U.S.

Congress and across our country, Mr. Secretary, when we willfully

choose to turn a blind eye to other countries’ efforts to subvert a

system of free and open trade and markets. I know of many of my

colleagues, indeed many business people in my own State, who are

seriously revisiting their own previous commitments to free trade

agreements because of the manipulation that is allowed to exist.

Mr. Secretary, again, let me conclude by saying it is undeniable

that there is a crisis in the manufacturing sector today. We could

afford to be more accommodating when times are good. But now is

the time to insist upon tangible steps and a long-term commitment

on the part of China to a currency policy that accurately reflects

economic reality. And now is also the time, Mr. Secretary, to send

a loud and clear signal that there will be tangible steps on our part

if such steps are not forthcoming on the Chinese part.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Carper.

STATEMENT OF SENATOR THOMAS R. CARPER

Senator CARPER. Secretary Snow, in your last job, you ran a big

railroad company, CSX. Today, when I rode the train down from

Wilmington, we rode by the Daimler-Chrysler plant in Newark,

Delaware, where the University of Delaware is located. A lot of

CSX cars were there bringing in parts, engines, metal parts, and

transmission systems to help assemble cars. And there were a lot

of CSX cars there to take finished vehicles to other parts of the

country to be sold.

That plant was built in 1957—actually, it was built before that,

in 1951. They built tanks there for 6 years and got out of the tank

business, and now they build cars. All the Dodge Durangos in the

world are built in that plant.

When that plant opened in 1957, over 90 percent of the autos

sold in the United States—cars, trucks, vans—were made by the

big four, which included, I think, at the time American or Rambler.

Today, American car manufacturers are struggling to keep a 60-

percent market share and continue to see their market share erode.

CSX can carry Japanese-made vehicles on their trains as well as

cars that are made at the Daimler-Chrysler plant. But the erosion

of a job market for GM, for Daimler-Chrysler, and Ford has implications for other sectors of our employment with which you and I

think we are all familiar. It is not just the people who work in the

assembly plants. There used to be 4,500 people who worked at that

plant. Today, there are 2,500. There is a GM plant not far away

where they make Saturns that used to have 4,000 people that

worked there. Today, they have about 1,500. Suppliers who build

the components for those cars do not have the kind of employment

they had in Delaware or other places. The plants are still alive. We

11

are grateful for that. But the economic hit is, as you know, significant.

A number of us wrote to you—and I know you get a lot of letters.

A number of us wrote to you earlier this summer. We did not write

about the Chinese currency. We wrote about the Japanese currency. And we wrote about the encroachment that we see occurring

with respect to automotive sales. Obviously, I am preaching to the

choir here with Senator Stabenow sitting next to me. It is one

thing for us to be concerned about the Japanese manipulating their

currency. It is one thing for us to worry about the Chinese. We

know the Japanese are doing it, and their interventions in markets

this year just in the space of the first 9 months of this year. What

they have done before pales by comparison to what they have done

previously to try to keep the value of the yuan low.

So as we focus on our concerns about China and what is happening, whether it is the loss of manufacturing jobs or other jobs

to China, I would just ask us to keep in mind our friends in Japan,

our allies in Japan, and what they are doing and the implications

that the manipulation of their currency has for whether it is the

Daimler-Chrysler plant in Newark, Delaware, or plants in New

Jersey, Georgia, Indiana, Kentucky, North Carolina, or Michigan.

They are real and they are severe.

Thank you.

Chairman SHELBY. Senator Miller.

STATEMENT OF SENATOR ZELL MILLER

Senator MILLER. Thank you, Mr. Chairman, and thank you, Mr.

Secretary, for being with us. I will only take a couple of minutes.

I want to read a handwritten letter that I recently received from

Joyce Williams of Trion, Georgia. I will only read part of it, but I

would like the entire letter to be included in the record.

Chairman SHELBY. The entire letter will be made part of the

record.

Senator MILLER. Joyce Williams writes,

I am an employee of Mount Vernon Mills in Trion, GA. My employment stretches

over 30-plus years. Our textile plants consist of 5,500 employees and we have been

in operation since the 1840’s. We have seen tough times in the past, but this is different. We need your help!

Cheap imports from China and other countries are killing us. Factories are closing

their doors every day. Free trade with China has flooded the market with low-priced

textile and apparel goods and we cannot compete.

We value our textile jobs and it hurts each time we hear of another plant having

to close . . . permanently. We wonder if our plant will be next. We are desperate.

You are our Senator . . . We are asking you to do the right thing and help save

our jobs.

Mr. Secretary, I am getting many letters like this from different

manufacturing industries in my State. It is not just textiles. I am

hearing from the automotive industry, I am hearing from the paper

industries. I am also hearing from the agricultural sector. These industries have complained that the dollar is making it difficult for

them to export profitably and easier for imports to take market

share here in the United States. Paper company executives tell me

of all they have done to improve efficiency and that there just is

not much left to be done. There have been huge consolidations in

the industry already, so they do not think that they will get there

on efficiency gains alone.

12

Furthermore, they are often competing with products from countries that subsidize their industry, either through currency policies

or direct government support. For example, in the paper industry,

more than 90 percent of the growth in U.S. markets has been captured by imports.

Mr. Secretary, I know you have a tough job, and I admire and

respect you greatly, and I am looking forward to your remarks, because I want to know what to tell my constituents. I want to know

how to respond to Joyce Williams. I want to know if you think any

foreign countries are engaging in currency manipulation with the

U.S. dollar for purposes of preventing effective balance-of-payments

adjustments or gaining an unfair competitive advantage in international trade.

Thank you for helping me come up with some answers.

Chairman SHELBY. Senator Stabenow.

STATEMENT OF SENATOR DEBBIE STABENOW

Senator STABENOW. Thank you, Mr. Chairman and Ranking

Member. I would ask that my full statement be placed in the

record.

Chairman SHELBY. Without objection, your full statement will be

made part of the record.

Senator STABENOW. Secretary Snow, thank you for being here. I

hope that more than anything else what you will take away from

this hearing today is a sense of urgency that we all feel about the

issues of currency manipulation, whether it is China, Japan, or any

other countries involved in manipulating currencies.

In Michigan, we are feeling it. We have lost 18 percent of our

manufacturing base, more jobs than any other State. It is not just

auto suppliers. Our manufacturing sector in terms of automobiles,

which, of course, is critical to us, but furniture makers and a wide

variety of those involved in manufacturing are feeling this in very

serious ways.

I would join with my colleagues in indicating that Senator Schumer’s legislation, which a number of us are cosponsoring, is an effort to indicate how seriously we feel about this and the fact that

something needs to be done.

What we are really talking about here is a tax being placed on

American goods. It is a tax being placed on American businesses,

and American employees. When we look at just—there are so many

different numbers to look at, but the Automotive Trade Policy

Council, in speaking about Japan, gave us some information that

indicated—and I will just read a portion of it: ‘‘Nowhere is this

trade advantage more damaging to the U.S. economy than the U.S.

automotive sector. In fact, the windfall cost advantage to Japanese

automakers from the weak yen has been between $2,500 and

$12,000 per vehicle.’’ That is a tax. I cannot imagine if someone

was proposing such a tax on our manufacturers in this country

that the Administration would be supportive of that.

I would urge you to think of it in those terms because that is exactly what is happening to our manufacturers and to our employees. And from my perspective, it is not a question of time running

out. Time has run out. And if not now, when will we act on this?

I would urge your leadership.

13

Chairman SHELBY. Senator Corzine.

STATEMENT OF SENATOR JON S. CORZINE

Senator CORZINE. Thank you, Mr. Chairman and Ranking Member, and I welcome the Secretary. I, too, can relate stories about

the decline of manufacturing in my home State. We are actually in

the process of closing the last two auto plants. We no longer have

any textile manufacturing in the State of New Jersey, and the loss

of these most important middle-class jobs is a very, very dangerous

concept and I think is reflected at a really troubled regime with regard to our international economic relationships and certainly our

exchange rate policy. And to that extent, I am joining some of my

other colleagues with my concern that the sense of urgency and the

depth of understanding of that problem is not reflected at least in

some of the written testimony I have seen.

I also think, aside from the loss of jobs—and, by the way, manufacturing has gone from, I do not know, 25 years ago about 30 percent of the economy down to about 12 percent, some of that due

to comparative advantage and free trade and all those good things

that maybe lift the standard of living, but sometimes a good thing

goes too far, and I think we have certainly found that.

I think we also have a terrifically unsustainable reality having

to borrow $2 billion a day, business day, to balance out our current

accounts, the analysis that the Ranking Member said I think is

unsustainable and will lead to a deterioration of America’s ownership of its own assets, and I do not think this is something that

can be ignored unless we are willing to take the risk that we are

going to have a shock one day, a one-time adjustment that we have

seen happen periodically through economic history.

And I think one of the greatest problems in not dealing with this

is something that you hear even in the intonation of my colleagues

around the table: Protectionism is going to gain root in this country. The risks of that being called for as a result of what we are

seeing and what I think is a limited response on the part of the

Administration is a very real risk and one that will undermine everyone’s long-run economic security. And we know from history

that protectionism can lead to strategic risks as well.

I believe it is time for a clear and full, comprehensive review of

both international economic policies and exchange policies among

nations. I remember a period in time, another Republican Administration did an extraordinary job of pulling together the international community in September 1985—what was it called? The

Plaza Accord—to set right, to find a new way that was done on a

multilateral approach to these issues. And I think it is time for

those efforts to go forward today.

I have serious problems with the valuation of the RMB, but it

is not just China. It is all the other currencies that are tied to it

and lead to a multiplicity of deficits in East Asia. And the problems

that we face are also faced by other trading partners in Europe and

other places.

I think the urgency is real and needs to be addressed. I have

much sympathy for the program that I think the Ranking Member

was outlining that a number of academics and others are talking

about refixing the Chinese peg, acknowledging that their system is

14

not mature enough to take the shock of freely floating exchange

rates at this point. But I think it is time for a coordinated international approach to resolving some of these international economic issues and exchange rate issues, which I believe really run

long term into risks that we have in the strategic level.

I have a full statement that I would put in the record.

Chairman SHELBY. Your full statement will be made part of the

record.

[The prepared statement of Senator Corzine follows:]

Senator CORZINE. I also would, for the benefit of the Committee,

recommend that they read the announcement the Ministers of Finance and Central Bank Governors of France, Germany, Japan,

United Kingdom, and United States—‘‘Plaza Accord’’—released on

September 22, 1985. I think people will find that if you just substitute ‘‘Japan’’ with the name ‘‘China,’’ you will find that much of

the analysis and the conclusions are very much the same.

Chairman SHELBY. Senator Corzine, could you make a copy of

that, have it made for the record?

Senator CORZINE. Yes, and I will make sure that—if you would

put it in the record, I would appreciate it.

Chairman SHELBY. Without objection.

[The announcement follows:]

Senator SARBANES. Could I add to what Senator Corzine said?

When they read the Plaza Accord statement, they should read it

and contrast it with the recent statement in Dubai. It is nowhere

near the same thing. And I think there is a very sharp difference

in the strength of what the international community had been

brought together to do in terms of what then-Secretary Baker did

with the Plaza Accord.

Chairman SHELBY. Thank you.

Secretary Snow, we appreciate your patience this morning. This

is a very important hearing. We do have a vote on the floor. We

are going to recess the Committee, and we will come back and

hopefully get into your testimony.

We will stand in recess.

[Recess.]

Chairman SHELBY. The hearing Committee will come back to

order.

Senator Reed.

STATEMENT OF SENATOR JACK REED

Senator REED. Thank you, Mr. Chairman, and thank you, Mr.

Secretary, and I think you have already realized this is a hearing

not about currency but about jobs, particularly manufacturing jobs.

And like every one of my colleagues, I have seen a tremendous deterioration in the manufacturing employment sector in my State of

Rhode Island, and, frankly, Rhode Island many, many years ago

was the beginning of the industrial revolution and manufacturing

revolution in this country.

One of the reasons—not the only reason but a very significant

reason—is the behavior of China. When China was admitted to the

World Trade Organization, it made commitments that it would

eliminate trade barriers, open its market to U.S. exporters, but,

frankly, they have not lived up entirely to these promises. And one

15

of the major issues, of course, is their continuing policy of pegging

the yuan to the dollar, but also in terms of enforcement of intellectual property rights, industrial quotas, export performance conditions, requirements that businesses use local content. All of these

are inimicable to a free trade regime, which all of us would like to

see, but we cannot close our eyes to the reality in the relationship.

We should not scapegoat China, but we should not give them a

pass, either. And I think we have to take steps, and, unfortunately,

the report today does little to point in the direction of a policy. It

might be a diagnosis, but it is certainly not a prescription for what

we should do.

We have lost these jobs, and these jobs go right to the heart of

our communities, not just economically but socially. Although the

Chinese have announced that they are going to buy billions of dollars in anticipation of the visit of their leadership, a one-time shopping spree cannot take the place of a systematic, continuous policy

that recognizes the reality on both sides of the relationship.

So, I hope that as we go forward the Administration will craft

a policy and not simply give us a diagnosis.

Thank you.

Chairman SHELBY. Mr. Secretary, thank you for your patience.

As I said, this is deemed a very important hearing. Your written

testimony will be made part of the record in its entire. You proceed

as you wish.

STATEMENT OF JOHN W. SNOW

SECRETARY, U.S. DEPARTMENT OF THE TREASURY

Secretary SNOW. Thank you very much, Mr. Chairman and Members of the Senate Banking Committee, for this opportunity to appear before you and present the report as required by the Omnibus

Trade Act of 1988.

The report reviews economic developments in the United States

and examines, in documents, the wide variety of exchange rate

policies that are employed throughout the world, and they vary

quite a bit. A notable trend has been the move by many countries

to adopt flexible exchange rates, and I was pleased to hear so many

of the Members of the panel voice their support, including you, Mr.

Chairman, for flexible exchange rates, which really do stand in

marked contrast to the accords that were mentioned earlier.

The report concludes that no major trading partners of the

United States meet the requirements set forth in the statute. But

let me be clear, the Bush Administration believes strongly that an

international trading system works best that relies on free trade,

the free flow of capital, and market-based exchange rates. That is

a message we have taken around the world, to Japan, to China, to

Taiwan, to Korea, to all the Nations of the world, and a statement

that is reflected in the G–7 communique ́ that was released from

Dubai recently. We believe that an efficient system of trade and finance, with fair rules and enforced rules, is essential for the

United States and all nations to maximize the benefits of trade and

to do what needs most importantly to be done, generate the highest

levels of economic growth and jobs. And I heard all of you loud and

clear on the jobs point. Senator Reed, you made that point very

clearly. Other have, the Chairman has. And jobs are the ultimate

16

objective of good economic activity, and well-paying jobs, jobs that

reward people for their efforts.

The report finds that a number of countries continue to use

pegged rates, fixed rates, and/or intervene in the foreign exchange

markets. But it is important to note that a currency peg or an

intervention in and of itself does not satisfy the statutory test.

After all, for many, many years, the United States was part of a

pegged system following the Bretton Woods agreements. So the peg

in and of itself does not satisfy the statute.

In rendering our decision here, as required by the statute—and

this is important—Treasury has consulted with the IMF, the expert

international agency on currency matters. And I, myself, spoke

with both the Managing Director of the IMF and the Deputy Managing Director of the IMF, and I am pleased that the IMF management offered us their thoughts, offered us their consultation, and

concurred in the findings of this report.

But let me make it clear that the Bush Administration is aggressively encouraging our major trading partners to adopt policies that

promote flexible market-based exchange rates combined with clear

price stability goals and a transparent system for adjusting their

policy instruments. In my testimony today, I would like to discuss

this with you in some more detail.

There was talk earlier, and, Mr. Chairman, you focused on it in

your opening statement about the need for domestic-led growth.

One of the problems with the world economy—and it is reflected

in the U.S. economy—is the absence of more domestic-led growth,

in Europe, Germany, France and Japan. I would like to take a moment to discuss the Administration’s international economic strategy as it relates particularly to the issue of growth.

A stronger world economy is vital to sustaining U.S. economic

growth and job creation. It is the absence of more growth in Japan,

Germany, China, and in the EU which has hurt our manufacturing

sector. So we have made domestic-led growth in those countries a

priority.

We depend on Europe and Japan just as they depend on us. It

starts, though, this issue of jobs and how to create jobs, with a

strong domestic economy, and that is why the Administration came

forward with the President’s jobs and growth bill.

I am glad to see the really very good numbers that were reported

at 8:30 this morning, numbers that show that the American economy is really getting back on path, numbers that show growth at

7.2, but in some ways even more importantly, that we are finally

seeing some very sizable capital expenditures in this economy, expansion of plants and investment in manufacturing equipment,

software, and PC’s. As that happens, of course, jobs follow because

somebody has to be there to operate that machinery and that software and those PC’s.

Mr. Chairman, the other encouraging thing about today’s numbers is the fact that we did not rob Peter to pay Paul. Inventories

came down very significantly during the quarter. We now need to

go through an inventory replenishment period in the United States,

and that is going to lead to continuing strong economic activity,

and with it, we should see a nice pick-up in jobs, which is what,

Senator Reed, you said ultimately this is all about. We should see

17

a nice increase in jobs, and particularly in manufacturing jobs,

which, as we all know painfully, have lagged so far behind.

At the core of our strategy for jobs and growth is having good

economic policies in place. But it is also important here to encourage pro-growth and pro-stability policies in other countries. I want

to underline that: Good economic policies in the rest of the world

help the United States, and we have a stake in seeing those countries adopt good policies.

An important issue that has been mentioned by many of the

Members and by the Chairman is the U.S. international accounts.

There is a great appreciation worldwide that the United States is

a force for strong growth. In fact, many people now talk about the

United States, regrettably, as the only engine of growth in the

world economy, and that is not adequate. That is not sustainable.

We need more engines of growth. As somebody said, you may be

able to take off on one engine, but it is hard to land on one wheel.

We need more engines of growth in this world economy.

This strong performance is also reflected in the pattern of our external trade and current account balances, and if you will let me

for a minute just talk about the essence of the current account.

The current account is best understood in terms of the relationship between investment and savings. As a matter of accounting,

the current account deficit is equal to the gap between a country’s

savings and its investments. Thus, in a country like the United

States where investment is considerably higher than domestic savings, we turn to foreign investors to make up the difference. And

that difference is what is called the current account deficit.

Now, in Japan, they are on the other side of that. In Japan, by

contrast, savings rates exceed investment, and, therefore, they

have a sizable current account surplus.

Our current account surplus largely reflects the attractive investment environment and high productivity growth in the United

States which attracts capital here. Increased savings, though, in

the United States, along with stronger growth abroad—both, the

combination of more growth abroad and higher savings rates in the

United States—offer the long-term answer to this large current account deficit that many of you called attention to.

Let me talk for a minute about exchange rate policies, which is

really the subject of the report.

Our report shows that countries around the world continue to follow a wide variety, really, of exchange rate policies, ranging, on the

one hand, from flexible exchange rate regimes—this would be the

EU—with no or little intervention, to currency unions and full

dollarization. While the choice of what kind of a currency regime

you employ is clearly a sovereign decision, it is up to each country,

we have been pretty vocal in encouraging countries to use flexible

exchange rates. And why? Well, basically because flexible exchange

rates ease the adjustment to changing economic conditions in the

international financial system. They lead to the best international

allocation of resources, and, thus, they have an inherent element

of fairness to them.

Of course, while flexible exchange rates have a lot to recommend

them, they won’t work unless a country also follows good economic

policies. A good flexible exchange regime requires monetary policy

18

that focuses on the goal of price stability and has transparent procedures for setting the policy instruments.

And while we strongly recommend the use of flexible exchange

rates with our major trading partners, a message I have taken

around the world, we recognize that for smaller country there are

benefits from hard exchange, pegs, dollarization, joining a currency

union or a currency board, particularly, as I say, for small open

economies.

These ideas were reflected in the G–7 statement that was adopted in Dubai. We think that statement was real progress. I called

it a milestone because it focused on domestic-led growth, focused

on the need for economies of the world to take the steps with their

own economies to make them more flexible and resilient and deal

with the problems that slowed growth and hurt domestic growth.

And the statement also reflected broad-based support among the

G–7 for flexible exchange rates, for letting markets set currency

values.

Everything that came out of Dubai and everything that I have

said today is entirely consistent in every way with our strong dollar

policy, which I have reiterated consistently. As I have said often,

a country cannot devalue its way to prosperity, and a strong dollar

is very much in the U.S. national interest.

I think we are making progress with the world community in

pushing this idea of greater flexibility. We have engaged China on

it. We have engaged Japan on it. I will talk to you later about clear

progress I think we are making, Mr. Chairman, on China. And let

me conclude simply by saying that strengthening the economic recovery in the United States, jobs in the United States, is our key

objective. High disposable income levels in the United States is our

key objective.

The way the rest of the world manages their economic conditions,

the currency regimes they have affects us, and where we see other

countries throughout the world not adopting policies that make

good economic sense, that allow jobs and growth in the United

States, we will be vigilant and we will intervene. And as I say, I

am in discussions with any number of countries on that subject

today.

I thank you very much and look forward to your questions.

Chairman SHELBY. Mr. Secretary, you stated that a peg or intervention does not meet the definition of what we call currency manipulation and that the IMF concurs in this assessment.

Secretary SNOW. Yes.

Chairman SHELBY. If what the Japanese are doing and what others are doing in Asia, especially the Chinese, if they are not manipulating their currency, what are they doing? In other words, could

you tell us what conditions, in your opinion, would meet the technical definition of manipulation, at least your definition?

Secretary SNOW. Well, yes, Mr. Chairman.

Chairman SHELBY. That is troubling. You know, I think most

people and a lot of economists are saying, Mr. Secretary, the opposite of what you are saying.

Secretary SNOW. Let me try and address that. That is an issue

that I am sure is on the minds of many of the Members of the

panel.

19

The end product of this statute, that is, the objective of this statute is negotiations, is discussions. It is engagement with countries

with whom we want to advance some currency objective. That end

product, that engagement is going on. I can assure you of that. We

are fully engaged with the Chinese.

Chairman SHELBY. We know that, but are they listening?

Secretary SNOW. I think they are, Mr. Chairman. I think we

have really got their attention. I think the President got their attention. I think I helped to get their attention. They have now committed to going to market-based flexible rates. They have indicated

that they will be and are taking a number of steps to get ready for

it, because, as was mentioned by various Members, they are probably not ready right now to go to it.

Chairman SHELBY. What kind of timetable did they tell you?

Secretary SNOW. They said as soon as possible.

Chairman SHELBY. What does that mean?

Secretary SNOW. Mr. Chairman, that means as soon as they get

these interim steps put in place, and they are moving on the interim steps.

Chairman SHELBY. Could that take years?

Secretary SNOW. I hope it is sooner——

Chairman SHELBY. Not weeks or months?

Secretary SNOW. No, not weeks or months. But hopefully weeks

or months to see concrete steps. Weeks or months to see concrete

steps that allow for some of these balance-of-payments adjustments

that we so much want to see.

I think we are on a good course. I believe financial diplomacy

here of the sort that we are engaged in is the surest course to get

the result we want.

Chairman SHELBY. Mr. Secretary, do you believe that a timetable

by the end of which the currency peg must be lifted or China becomes ineligible for continued IMF assistance and WTO membership benefits would make sense? And if not, why not?

Secretary SNOW. Senator, I think we should move them, encourage them to move as fast as possible. I would be reluctant to set

up a fixed timetable because of concern as to how currency markets

would respond to that timetable. That is, you would set up one-way

bets for or against the yuan, which would not be helpful. But gradual easing, maybe widening the band over time, maybe going to a

basket of currencies with expansion of the capital—liberalization of

the capital controls, all of that will move in the right direction and

help with these larger adjustments in their current account.

Chairman SHELBY. Mr. Secretary, I was not satisfied with your

answer, and maybe you did not answer it, of what you thought

would be currency manipulation.

Secretary SNOW. The past circumstances it has been found.

China was designated, I think in the early 1990’s. There they had

a discriminatory dual rate system that precluded the adjustments

that you would expect and looked manipulative and was found to

be manipulative. I am not saying there are not circumstances

where it would be appropriate to find manipulation.

Chairman SHELBY. Mr. Secretary, a flexible exchange rate is

clearly an indicator of a more developed economy. Some observers

have expressed concerns about the ability of China’s financial secVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 24735.TXT SBANK4 PsN: SBANK4
20

tor to handle an immediate move on their currency. How would you

assess the ability of the Chinese banking system at the moment to

make such a transition?

Secretary SNOW. This has been a matter of discussion, Mr. Chairman, with the Chinese authorities, their very able chairman of

their central bank, Chairman Zhou, and other leaders there, including Premier Wen.

I think it takes some time. I think it will take some time for the

Chinese to put in place the financial architecture to sustain a wellfunctioning system of floating rates or flexible rates. Their banking

system has a very heavy ratio of bad loans, and the asset side is

weak. And I would be worried that if they moved precipitously to

relax capital controls as part of movement to freely fluctuating

rates, you would see the asset side of the banks weakened enormously as yuan left the banking system.

Chairman SHELBY. Is this mainly state-owned banks making

loans to state-owned industries?

Secretary SNOW. Precisely.

Chairman SHELBY. And it is a never-ending cycle, is it not?

Secretary SNOW. It is something they recognize needs to be addressed. It was very much the subject of my discussions with their

economic and political leadership. And they are addressing it. They

are moving on it. They know they have to move on it, and that is

the precondition that has to be dealt with before you can really go

to liberalized capital controls and a floating rate.

Chairman SHELBY. I know my time is up, but, last, do you agree

that basically a continued imbalance in our current account is a

ticking time bomb?

Secretary SNOW. Senator, we have the best access to capital and

credit in the world now, and I think, as I said earlier, the issue

here really is one of getting more growth in the world economy so

more of our goods get purchased. I think we are on a course for

that. World growth rates, the numbers I have seen, are going to be

higher next year, but we should get savings rates up in the next

year.

Chairman SHELBY. Secretary, but how do we sell more goods if

people are keeping their currency down in price and ours up in

price? In other words, manipulating the currency.

Secretary SNOW. That is part of the whole story, and that is precisely why I have gone to China and engaged on that issue.

Chairman SHELBY. Thank you.

Senator Sarbanes.

Senator SARBANES. Thank you very much, Chairman Shelby.

I actually want to start off by following up on a couple of points

that Chairman Shelby made which I thought were right on target.

The first was his reference to a ticking time bomb. Mr. Secretary,

this is the U.S. trade deficit. Look at that beauty. Look at this.

This is over a $500 billion trade deficit. Current account, well, over

$500 billion. Look at the way this thing is going.

I think we have a disaster waiting to happen. The accumulation

of these negative figures over these years, beginning in about

1980—actually we were in plus figures right at the beginning of

the 1980’s in the current account. This is the U.S. net international

investment position, $2.5 trillion negative. Negative. Claims others

21

have on us. It is no wonder Warren Buffett was talking about losing our assets. It is like that Blanche DuBois statement in the Tennessee Williams’ play, you know, ‘‘depending on the kindness of

strangers.’’ That is what has happened to the U.S. economy.

Now, Senator Shelby asked you about finding currency manipulation, what is your definition of it, how do you get there, and you

said, well, we have in the past found that China manipulated its

currency. That is quite true. Let me show you this chart.

In 1992, the Treasury under Bush I found that China had engaged in currency manipulation. The trade surplus with the United

States at an annual rate, China-United States, when Treasury

found that, May 1992, $12.7 billion; December 1992, $16.7 billion.

Today, October 2003, when you do not find currency manipulation,

the trade surplus, $116.8 billion. Back in 1992, when Treasury

found currency manipulation, as a percent of GDP, 3.1 percent and

3.5 percent, now, 8.7 percent.

It is just dramatic. Global current accounts, same performance.

And then accumulation of reserves, back in 1992, $14 billion, $6

billion over the course of 1992. Now, it is $111 billion. I mean, it

boggles the mind to explain how we could find currency manipulation on the basis of these figures in 1992, when you can come in

this morning and say it is not happening.

Now, I want to quote a statement made recently by Fred

Bergsten, Director of the Institute of International Economics, before the U.S.-China Economic and Security Review Commission. He

said in terms of criticizing the approach that was being taken by

the Administration.

They are proposing that China float the renminbi, and that is a worthy long-term

goal. But if we put our efforts in that direction, it will not happen for 5 years or

more. The Chinese are correct not to float their currency because to do so, in a

meaningful way, they would have to eliminate their capital controls, and Secretary

Snow was consistent in asking them to eliminate their capital controls as they go

to a floating rate.

The problem of course is that China has a bankrupt banking system, that the vagaries of international capital flows are such that no country wants to expose itself

to those uncertainties when its internal financial system is not sound. To put it

pragmatically, if China actually floated the currency and freed up its capital controls, the renminbi would probably go down in value not up.

And then he discusses why that would happen.

He says,

Their comparative position would improve. The situation would get worse. So, on

both conceptual and pragmatic grounds, our Government was asking for the wrong

thing. What they should be asking for, and what I believe is eminently doable, is

for the Chinese to keep their fixed exchange rate system, but to change the price,

revalue the currency by 20 to 25 percent on a one-shot basis, tell the Chinese we

respect their desire to maintain a fixed exchange rate and maintain some restrictions on the capital account as long as they have a bankrupt banking system, move

toward correction and reform of that over the long-run.

But in the short-run, to deal with the problem, we want a one-shot revaluation

of a substantial amount which would give a substantial improvement to our international position and convert them into a sustainable position.

What is your response to that analysis?

Secretary SNOW. Senator, my response to Mr. Bergsten’s analysis

is that it is better to work on the banking system now, it is better

to fix the problems now, it is better to continue to press the Chinese to do that, and I think we will get a better result long term

proceeding that way.

22

With respect to two of your other observations, if I could respond,

we are not really in the position of Ms. DuBois in A Street Car

Named Desire. We really are not dependent on the kindness of

strangers—hardly. These are international financial markets, and

people invest in the United States, as you know, Senator, because

of the good returns. The risk-based returns in the United States

are higher than in other parts of the world, and that is because we

have a productive economy, lower inflation, and we honor capital.

Senator SARBANES. Do you think the Japanese are buying in the

currency market, as heavily as they are doing, unrelated to trying

to affect the valuation of currency and their trade position?

Secretary SNOW. Senator, I was dealing with your concern that

we depend on the kindness, as you said, of strangers. We do not

depend on the kindness of strangers to attract capital.

Finally, I would say that, with respect to your chart, there are

a lot of differences between today and 1992, 1993, and 1994, back

in that time frame, when China was cited. China had a dual exchange rate system, as you know, with very heavy capital controls

that interfered with the play of market forces and the balance-ofpayments adjustments process. It had significant restrictions at

that time on payments for current account transactions that very

much limited their ability to import. They have relaxed those a lot

now.

The system that was in place in the period when the designation

was made has disappeared. We have a new system now. It has

lasted for some 10 years, and I am the fourth Secretary in a row

who has looked at the question and concluded that no designation

was called for.

We are not happy with the way the Chinese deal with their currency. We are committed to changing it. We are engaged in changing it, and I think we are making real progress.

Senator SARBANES. Mr. Secretary, God save us from the new system. In the old system in 1992, they were showing about 3.5-percent trade surplus with the United States as a percent of GDP.

Now, they are up to 8.7 percent. In 1992, they were accumulating

reserves at about $10 billion over a 12-month period, and now it

is $111 billion. The statute actually requires that they show a

trade surplus with the United States and a global current account

surplus.

Secretary SNOW. Right.

Senator SARBANES. They have both of those, but in dramatic

numbers.

Secretary SNOW. It says ‘‘material,’’ and by most economists’ estimates, 2.8 is not material on the global current account basis. But

however we parse that, the fact is we are engaged in the very actions that the statute contemplates. We are fully engaged with the

Chinese, and I think the way we are engaged is going to produce

results.

Senator SARBANES. Well, I will close out and do it in the next

round, but let me just point out, while the long-run objective of

flexible rates I think is desirable, and that is where we need to go,

I do not think you are going to get the Chinese there in the short

run because they have this concern about capital controls and the

weakness of their banking structure. And for the life of me, I do

23

not understand why the Administration is not pressing, does not

have another arrow in their quiver, that they should revalue, in

the short-run, which would make a significant difference and, of

course, the Chinese currency is a linchpin for Asian currency appreciation.

Frank Vargo, of the NAM, said the other day:

The Chinese currency is the key not just because of the huge bilateral imbalance,

but also because other Asian countries are all looking over their shoulders at Chinese competition and are reluctant to allow their currencies to move up against China’s. Once China’s currency appreciates, though, they will be less reluctant to allow

theirs to move upward as well.

And we mentioned earlier the figures of Japan, Korea, and Taiwan. I think your short-run strategy is to get a revaluation of the

peg—in the context of a long-run strategy, to go to flexible rates.

Thank you, Mr. Chairman.

Chairman SHELBY. Senator Allard.

Senator ALLARD. Thank you, Mr. Chairman.

I would like to start out with a few comments to let you know,

Mr. Secretary, where I am coming from. I may be the only free

trader sitting on this panel today. I do not know. But when you

talk about manufacturing jobs, those jobs have been decreasing for

the last 2 decades. Now, it has been a combination of things, in my

view. Number one, part of it has been due to the fact that we are

modernizing our factories so workers can get more done. We have

increased efficiency. We have increased production, and I think this

has all served our country very well.

Also, you know, our manufacturing sector is being plagued more

and more with rules and regulations that have a real cost to the

value of the goods that they are kicking out, and this has also had

an impact. To be competitive in a world market, sometimes we lose

jobs to other countries because of the regulatory burden in this

country.

I want to pull up this chart here that my colleague had pointed

out where it talked about the trade deficit. If you will notice the

lower parts on those charts, do you know what was happening at

those times? You take this little part right here. This is when we

had the misery index. Remember double-digit inflation, double-digit

interest rates, double-digit unemployment. We go down here to the

1980’s, and the economy was not doing particularly good there. We

go clear back to the Depression. Our trade deficits were more favorable, but certainly I do not think that is what we want for this

country.

I would hope that we not go too far in criticizing the trade deficit.

Because when our economy is doing well, consumers are doing well,

they are purchasing goods, and that is a reflection on a prosperous

economy that is doing well.

I would hope that you would counsel the President to let us not

have any more trade tariffs like we put on lumber and steel. There

are lumber companies in Colorado who are reporting to me today

that since those lumber tariffs were imposed, the cost of lumber in

Colorado has gone up dramatically. That impacts the home-building industry. It is a fundamental industry, and eventually, if we

continue impose tariffs, it is going to have, in my opinion, an adverse impact on the economy, as well as steel.

24

And we have had some Members on this panel say, what they

want is tariffs, but I hope that we will avoid that. If you look at

the poorest countries in the world, they are the ones that have the

most trade restrictions, and they are doing the poorest, as far as

their economy is concerned.

Milton Friedman, a Nobel Prize winner is a free-market economist, and he was an advocate of free markets, and I happen to

agree with that. He said that the dollars are pretty much like a

commodity. He said that if you will treat them like that and not

overreact, they will adjust.

Looking at some of these charts put out by the IMF, they show that Japan and China both have horded—it looks like $800 million

if you look at these charts here. They are not getting any interest

on that money. They are not producing. They are not doing anything. South Korea and Taiwan, you pull them in, and it is over

$1.1 million.

Now, would you agree that there is a point of no return where

the countries that are trying to hold onto these American dollars

to help with the exchange rate are going to have to release some

of these dollars; where they are going to have to deal with the market at some point in time? Would you agree with that?

Secretary SNOW. Well, there is always an adjustment process

going on, Senator. I certainly agree with that and with your broader statement on the power of free trade. Free trade benefits all parties of free trade. It creates jobs, and it creates more wealth, and

it is critical to the success of the world economy to continue to push

for free trade. And we think, going hand in hand with free trade,

as Milton Friedman argued years ago, are fluctuating exchange

rates. He is one of the fathers of the idea of freely fluctuating exchange rates.

I agree with your views on the need and the importance of trade,

and the importance of keeping the avenues of trade open, that

trade benefits us, and that there is a continuing adjustment process going on in the world economy.

Senator ALLARD. Now, much of today’s discussion has centered

on the effect on the manufacturing center. We have seen a depreciation in this particular sector, but the question that I wanted to

bring up has to do with the parameters in which you evaluate

whether there is manipulation of the market by the country.

What do you look at to know whether that is happening? Do you

look at their total dollar reserves that they hold, or is it much more

complicated than that. I wonder if you would share with this Committee what parameters illustrate that a country is not complying

with our agreements in 1988, and that they are not complying with

our exchange policies?

Secretary SNOW. Senator, you would look at the things you mentioned. Is the country involved in some set of practices, currency

practices, which frustrate normal balance of payments adjustments

processes? Are they engaged in a set of practices which are motivated, are motivated by a desire to disadvantage U.S. exporters

and competitors? Those are the sorts of things you look at.

And then you look at the question what is happening to their bilateral balance of trade and their multilateral balance of trade over

time? You try and come to a common-sense conclusion on it. And

25

you consult with the IMF, as required by the statute. Those are the

general factors that we used and took into account.

Senator ALLARD. Mr. Chairman, I would just raise a word of caution. Mr. Secretary, as you know, I am a veterinarian, and sometimes you have to look at the disease, and you have got to decide

is the treatment worse than the cure or is the treatment worse

than not doing anything?

I am not saying that we should not do anything in this particular

case, but I think we have to be awfully careful about the treatment

that we might apply. We might dig a big hole for ourselves, and

our economy will not continue to do as well as it has been doing.

I am surprised today to see the gross domestic product figures.

They are better I think than most economists were predicting, and

I think this is a sign of recovery that is being stimulated by the

Bush economic stimulus package. The tax cuts played a large part

in getting that part of the economy going that needed to go in order

to create more jobs.

And if we look at the overall job picture, at least in my State,

we are beginning to see some things happen there that make us

think we are very solvent and on the way to growth. So, I hope we

are very careful about the way we analyze this issue and how

much importance we put on these exchange rates.

Secretary SNOW. Thank you.

Thank you, Senator.

Chairman SHELBY. Senator Stabenow.

Senator STABENOW. Thank you, Mr. Chairman.

I feel compelled, as someone representing a State with great

manufacturers, both businesses and employees, to say that, given

a level playing field, our businesses and our employees can compete

anywhere, any time. This is really about giving them a level playing field.

I am extremely concerned that they are being placed at a disadvantage through currency manipulation as well as a number of

other factors.

Mr. Secretary, as I said in my opening comments, this is about

jobs. This is about real people and real jobs. This is about my opening up the paper every morning and seeing another auto supplier,

tool and dye maker, small furniture maker finding themselves in

a situation where they may have to go out of business or, in fact,

are going out of business, not because they are not smart, they are

not effective or competitive or do not work hard, but because of the

situations that they face.

I cannot think of a more important issue for us as a country than

the question of losing jobs. We have to make things and grow

things in this country. That is what we do in Michigan. We cannot

all be in the service business. We have to have a manufacturing

base on which to build in this country, I believe.

My concern is that, in listening to your comments about how you

come to a conclusion about manipulation, you have indicated you

look at whether or not the country was motivated by a desire to

disadvantage foreign competitors. How could we look at that and

not say yes? How could we look at this situation and not say that

is exactly what is happening?

26

So one question—I actually have two questions, but the first is

your report concludes that no major trading partners of the United

States meet the technical requirements set forth in the Omnibus

Trade and Competitive Act of 1988—it could be 1888, I think.

Secretary SNOW. 1988.

Senator STABENOW. Yes, I know it is 1988, but given the way it

is being used, I would like to know is it time to change that Act?

Are the technical requirements of this Act so out of touch with

what is happening, as it relates to these situations, that we need

to create different definitions?

Secretary SNOW. Senator, I have to think about that to offer you

a thoughtful and informed opinion on it. But whether that is the

case or not, the end objective of this statute, which is discussions,

engagement, involvement with other countries, has occurred. We

are deeply engaged, and we are engaged for the reason that you

raise. We want to make sure that other countries are using regimes

that are fair and do not prejudice opportunities for American jobs

and American manufacturers.

I could not believe more strongly, support more strongly, your

statement about American workers and American manufacturers.

They can compete with anybody. All they really need is a fair set

of rules that are fairly and fully enforced. That is why Don Evans

right now is over in China, and I have had any number of discussions with constituents of yours from the auto companies and auto

supply industry on these subjects.

If you will just let me offer a personal note on this, I take these

responsibilities as Treasury Secretary very seriously, and I am

deeply honored to be here, but I know it is heavy responsibilities

and none more important than jobs, none more important than

waking up every morning and saying what you have really got to

be concerned about here is American workers, and jobs for Americans, and rising standard of living for Americans.

I know what it means to not have a job. I have been in that position, and I know what it means to have a job and the dignity that

goes with having a job. I could not agree with you more, and we

have to make sure that national economic policy at home is designed to create job opportunities, with higher standards of living,

and we have to make sure that the international trading and currency arrangements are consistent with doing that as well.

Senator STABENOW. I would just indicate again that time is of

the essence on this question. Our businesses and workers are looking to all of us for action. One other point, we have been talking

a lot about China, and I agree with the concerns that have been

raised by my colleagues regarding China, but I do also want to

speak about Japan for a moment, equally concerning.

For 3 years, Japan has used massive currency interventions to

intentionally manipulate the value of the yen against the dollar

and keep it artificially weak. In fact, Japan has spent over $200

billion since January 2000 on intervention actions, including $120

billion this year alone. They have done this with the stated goal of

gaining competitive advantages for their exports—the standard

that we were just talking about, particularly the United States.

By maintaining this weak yen, Japan has been providing a de

facto subsidy to their automakers. In fact, automotive exports repVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 24735.TXT SBANK4 PsN: SBANK4
27

resent 60 percent of Japan’s exports to the United States, which

means that U.S. automakers have been competing against a substantial export subsidy. In fact, a recent article in Automotive News

cited a figure of $18,000 per vehicle as the level of export subsidy

received by Japanese autos this year alone.

Mr. Secretary, does the Administration acknowledge that this is

having an extremely negative impact on the auto sector and how

will you specifically address Japan’s unfair trade advantage in the

automotive sector, which was one of the largest bilateral trade deficits we have with any nation and any product.

Secretary SNOW. Senator, that was a subject that was on my

agenda for my meeting in September with Mr. Koizumi and his finance and economic team. We raised those issues and indicated, on

the subject of currencies, our strong support for fair currency regimes that reflect market forces and that let rates adjust to the

marketplace.

We did not designate Japan because I did not think they met the

specific criteria of the statute. The yen has moved quite a bit. It

was at 117 or 118 3 months ago. Today, it is at about 107, 108.

Two years ago, it was at about 135, 137, range. Today, it is at 108.

So we have seen some movement of it in response to market forces.

That is what we want to see. We want to see market forces driving

currencies, and that is a position that we have reiterated time and

time again. But I understand your point, and I have talked with

your constituents in the auto and auto supply industry and other

industries very much about that issue.

Senator STABENOW. Again, we can compete anywhere any time,

but $18,000 per vehicle difference, in terms of a subsidy, is not fair

competition.

Thank you.

Secretary SNOW. Thank you.

Chairman SHELBY. Senator Dole.

Senator DOLE. Secretary Snow, Economist John Makin, of the

American Enterprise Institute, suggested at an October 15 conference that the current growth of the Chinese economy is not sustainable and warned of a bubble in the Chinese economy. What

kind of impact would such a bubble have on our economy, especially with the Chinese holding more than $357 billion in exchange

reserves?

Secretary SNOW. We certainly are interested in seeing China

have stable growth. They are growing at a rapid rate, as you

know—7.5 to 9 percent. The numbers are a little hard to pin down

with particularity, but very sizeable growth rates.

And one reason we are pressing the Chinese, as we are, to move

to more flexible exchange rates is that we think—and open capital

controls—that it would deal with pressures that appear to be building up inside their economy, inflationary pressures that seem to be

building up inside their economy, and that was a discussion we had

with their central bank, and with their finance ministers and with

the premier because the peg, and the whole arrangement they have

with the capital controls appears to be generating some internal inflationary pressures that need to be taken into account. I do not see

them as creating precipitous problems, but I do see, over time,

28

those problems being something they need to deal with, and they

have acknowledged that. They have acknowledged that.

Senator DOLE. Have these large exchange reserves held by the

Chinese given us caution in exerting greater pressure for reform?

Secretary SNOW. No, not in the least. As I indicated earlier, the

United States can finance its obligations. We are perfectly capable

of financing our obligations, but we are not happy with the peg. I

want to be just as clear as I can. We do not like it. We see it as

a distortion of the world trading system, and we would like to see

them eliminated. We would like to see them move off of it.

We recognize that moving too quickly, moving precipitously

would create the very problems that Mr. Makin of AEI talked

about. But at the same time we think they are an economy that

is much different today than the one in 1992, 1993, or 1994. They

have matured. They have grown. They are now in a position they

can begin to move in this direction and, in fact, I think, Senator,

the risks for them of not moving in this direction are greater than

the risks of doing so.

It is with that framework in mind that we have urged them to

move forward with and to move quickly, not to wait on this because

these pressures inside their economy are very real, and there needs

to be a safety valve for them.

Senator DOLE. Mr. Secretary, you are doing a fine job looking out

for the interests of the U.S. Treasury and Representative Zoellick,

in looking out for our U.S. trade interests. My responsibility is to

represent 8 million people in North Carolina, and many of them

feeling very concerned about the fact that we have lost more than

200,000 manufacturing jobs since 1995. Of course, I regularly meet

with these people when I am in North Carolina. I see the reports

constantly, day after day, with the plants closing, coming across my

desk. I am committed to looking at every available option to help

remedy this situation.

I recently joined Senator Voinovich in calling on Representative

Zoellick to initiate an investigation under Section 301 of the Trade

Act of 1974, and I would be interested in your views on that. I

would hope that the Administration would not oppose a Section 301

investigation.

Secretary SNOW. Senator, I was not aware of that so I have not

had a chance to examine it. I think that the course we are on is

one that is promising. I want to make sure that the Committee is

aware of my strong view that we are making a lot of progress here.

This is not just talk. This is progress. They have reaffirmed their

commitment to move to exchange rate flexibility. They have taken

a number of very important and specific steps to do so. I won’t take

you through all of them, but they have allowed greater ownership

in their banking and financial system. They have allowed Chinese

Nationals to take more currency out of the country. They have allowed foreigners to take more currency in. They have established

a whole new banking regulatory regime to go at this issue of the

banking system’s problems.

This is working. We are making real progress. We are going to

have a financial attache ́ in Beijing. We have established technical

talks with the Chinese, and to indicate how serious they are about

this, the Chinese have entered into a memorandum of underVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 24735.TXT SBANK4 PsN: SBANK4
29

standing with the Merc, the Mercantile Exchange in Chicago, to develop foreign exchange derivatives in China. Now, you do not have

foreign exchange derivatives unless you have some movement in

your currency.

So, I think we are making really positive progress here. I wish

it could go faster.

Senator DOLE. Let me just ask you very quickly, certainly Canada, Europe, and other trading partners are also feeling the effects

of a loss of their manufacturing base to China, and it seems sometimes like we are just a lone voice on this issue. Shouldn’t our

other trading partners be joining us in putting pressure on the Chinese to make necessary reforms? Shouldn’t we be building a coalition in this area? What are we doing in that respect?

Secretary SNOW. Well, in that regard, Senator, I was extraordinarily pleased by the statement that came out of Dubai from the

G–7 Ministers meeting, which addressed the issue head on and expressed a strong commitment for all the major countries of the

world to embrace freely floating rates with elimination of capital

controls. So we have now the G–7—actually, Russia was part of

those meetings—the G–8 embracing the idea of open competitive

capital markets and open competitive currency markets.

I think there is real movement here. I am encouraged. I wish it

would go faster, but I am encouraged.

Chairman SHELBY. Senator Corzine.

Senator CORZINE. Thank you, Mr. Chairman.

Mr. Secretary, with all due respect, I read the Dubai

communique ́, and while it certainly embraces the concepts you are

talking about, in no way does it, in my view, set metrics, timetables, or an outline, a specific program for moving to the benefits

that one might argue would be the case with flexible exchange

rates and some of the other issues. I believe part of the topic of discussion today is timing. I think that the reasons that I outlined in

my opening statement, both the unsustainability of our current account deficit, the growing embrace of protectionist ideas that are

being both advocated and actually, in some instances, followed by

the Administration, do not seem to me in the context of the job

losses that we have seen in this country. By the way, I am concerned that there may have been some sense that we have grown

jobs from one of my colleagues’ comments earlier, when by latest

calculations I think we have lost 3 million jobs in the last 3 years.

And while all of us are pleased with the GDP growth, there was

a decline in jobs again in the third quarter. I hope that the growth

we see will lead to the pick-up in job growth because that is what

we are interested in. I hope your numbers that you projected last

week actually come to pass.

But it strikes me that there is an urgency with regard to these

trade and exchange rate policies that is not reflected in either the

report or the comments today. I continue to believe that we need

to—and this actually is why I mentioned the Plaza Accord, and I

know that Senator Dole mentioned broadening out the coalition.

We are dealing now with much of the concern in the developing

Asian economy, which is not just China. It is all of those other currencies that are tied very closely to it, and it is the competitive position that each of them have with it. It strikes me that we need

30

to be sitting down and talking about this in a much broader, comprehensive context than we are doing it now.

I happen to be a believer, not unlike the Ranking Member, with

regard to an intermediate step before we get to flexible exchange

rates with China, that there needs to be some adjustment with respect to the peg. That is not an endorsement of the peg concept.

It is just saying that before we take off exchange controls, before

we get all of these revisions in the economic system, we should not

sit here and continue to lose these jobs in manufacturing and other

sectors because we are not willing to take steps in the interim.

And I think it is in the interest of the global economy, not just

in the interest of the United States with regard to these issues.

This is hurting European expansion, Japanese expansion. There

needs to be a fundamental understanding that there is a linchpin

element here to where the RMB works. I think the same institute

that Senator Sarbanes was talking to talks about a 20-, 25-percent

revaluation would create somewhere between 250,000 and 500,000

jobs here, but that has implications around the globe for growth

that then feeds back in everybody’s domestic economy that you are

talking about.

I do not understand why we would not want to try to take some

interim steps, understanding that China has to move on a paced

basis to change with regard to where they are with regard to the

peg. And it would be something that I think we as a Nation should

be the leaders of bringing about. It is good for China in the same

way that you responded to Senator Dole’s question. They have huge

buildups of inflationary pressures and bubbles in certain parts of

their economy because they are growing their reserve base. Money

supply is exploding with this increase in reserve holdings.

I am concerned that I do not hear the urgency that is represented by the current account position in the country relative to

the jobs, relative to growing protectionism, and growing weakness

that we see in other parts of the globe, or at least sustained weakness in other parts of the globe that are being held back because

we are not doing something now.

Senator SARBANES. Jon, would you yield for just a moment?

Senator CORZINE. Sure.

Senator SARBANES. I just wanted to add, this revaluation of the

Chinese currency many see as a linchpin for Asian currency appreciation. It is not plausible that other Asian currencies will appreciate without a revaluation of the Chinese currency. As the NAM

Vice President said, they are all looking over their shoulders at

Chinese competition and are reluctant to allow their currency—so

the point that Senator Corzine is making is right on target in

terms of this wider context in addressing this question.

Senator CORZINE. I think that is actually true with the Japanese

as well, and you know, I can ask for your response to the tirade,

but I would recommend that the Treasury give very serious consideration in their bilateral conversations with the Chinese. But I

think this is actually a multilateral issue, much broader, and I actually think the Dubai communique ́ is too general and does not

deal with the real specific issue, which is, I think, undermining

this exchange and currency problem.

Chairman SHELBY. Senator Schumer.

31

Senator SCHUMER. Thank you, Mr. Chairman. I appreciate the

hearing. I am sorry we had many things going on, so I apologize

for being a little late.

As you know, Mr. Secretary, it is not a surprise to you that I am

very disappointed in the report today, and hearing my colleagues—

well, I was not here to hear, but it was reported to me, just about

everybody else seems to be, too, on a bipartisan basis. And it leads

to a question. We cannot quite figure this out. You have said let

diplomacy work, but the Chinese seem to say do not even bring this

up. We do not see any progress whatsoever, any progress in this

area. The Chinese just seem to feel they can get away with whatever they want.

The question I have is this: Is there some kind of deal? Do we

tell the Chinese you help us in foreign policy and we won’t bother

you on this issue? Because certainly this report lets the Chinese off

the hook. Now the Chinese can say to any U.S. official, from the

President on down, you found we are not violating any laws, we are

not doing anything wrong.

All the pressure that you have been trying to build up on them,

you have pulled the rug out from under yourself with this report.

And I do not get it.

So can I ask you this: Before you issue these reports or go to

China, do you talk to the State Department people? They traditionally put economic issues second and diplomatic issues first. Many

of us are incredulous here about what is going on because we, in

a different position than you, have to live with the exodus of the

jobs. And, you know, I am well aware of the fact that not every job

is going to be saved by a fair valuation of the Chinese currency.

But it sure means some of them would, and it also means that everyone who loses a job thinks that this is related. The good economic news today is growth. The bad news is jobs. And what we

are talking about here, is directly related to jobs.

I guess my question to you is: Has some kind of deal been struck

either about North Korea, about some other foreign policy area,

something not related to economics, or even related to economics,

well, we will leave you alone if you buy some planes from us or you

do this or you do that? I mean, tell me what is going on here.

Secretary SNOW. Senator, we are, in your words, not ‘‘leaving the

Chinese alone.’’ We are engaged on a number of points with them

to get them to open up their economy, to get them to relax capital

controls, and to get them to move to a freely floating rate.

I have been over there. I have been to Beijing. I have talked to

the leadership of the country, from the Premier on down. I have

talked to the Finance Minister and the central banker in a meeting

of the World Bank, IMF in Phuket, Thailand. I just came back

from Oralia, Mexico.

Senator SCHUMER. Have we made any progress? I know you are

trying hard.

Secretary SNOW. We are. I heard you say we are not making

progress. We, I think, are making genuine progress. You were not

here a few minutes ago when I commented on some of this

progress. I will not repeat it all.

Senator SCHUMER. Okay. I will look at the record.

32

Secretary SNOW. But one important element of progress that is

really pretty startling is the interest which the Chinese are taking

in talking to the Chicago Merc, about derivatives on their currency

and options on their currency. And I confirmed that in a discussion

I had with Governor Zhou, the counterpart to Alan Greenspan, and

Governor Zhou has endorsed this project with the Merc in which

they have asked the Merc to help develop a currency futures market in China.

Now, Senator, there is no point in having a currency futures

market unless you let your currency——

Senator SCHUMER. Right, but they have not done anything. They

are talking.

Secretary SNOW. Well, I understand they are entering into or

have a memorandum of understanding to retain the Merc to do this

for them.

Senator SCHUMER. But they could wait 2 years before they did

it. They could say we need time, we need time, we need time. No

one is saying all of this has to be done in 6 months, but we do not

see one inch of progress other than talking. And talking is not

going to get us anything done if the basic situation is unfair.

Secretary SNOW. Senator, since I started this discussion with

them, U.S. financial institutions can now own a larger share of

Japanese financial institutions than had been the case before.

Senator SCHUMER. Right.

Secretary SNOW. And insurance companies. Non-Chinese, your

constituents, can take more hard cash into the country. It is not

as much as we want. They are not moving as fast, you know. But

we are pressing them, and we will not relent here. We will not

stop. We are going to keep the pressure on.

Senator SCHUMER. Let me ask you just one other thing. I know

my time has expired. Just one more question with the Chair’s indulgence, and that is, what is the Administration’s position on the

legislation that the group of us have put in about the tariff? And

let me ask you this: Even if you do not have a position yet, which

I do not think you do, isn’t it fair to say that if this were to pass

the Senate, it would increase your leverage and your ability to negotiate with China?

Secretary SNOW. Senator, I think we are making good progress,

and I would rather continue down the path we are going.

Senator SCHUMER. You do not think it will help you, it will help

your leverage?

Secretary SNOW. As I say, I think we are really on a good path

and are making progress, will continue to make progress. If I

thought otherwise, I would respond differently to your question.

Senator SCHUMER. Okay.

Thank you, Mr. Chairman.

Chairman SHELBY. Mr. Secretary, we have seen such an acceleration, it seems to me, in the loss of manufacturing jobs in the

United States, more so than any time in economic history that I

am aware of. We understand trade and we understand people

doing this and doing that better than we are. But if the currency

is manipulated to help them reach their goal of a better economic

condition for their people and so forth, stable growth, but at whose

expense, ultimately? I think on both sides up here today you heard

33

concern about the loss of manufacturing jobs, not in just my State

of Alabama but all over America. And you are the Secretary of the

Treasury. We know you have a tough job to do. But these are real

concerns to us as Senators, as legislators. And I think that is the

message we are sending out today.

I believe that although it is delicate dealing with China, Japan,

and the other countries in Southeast Asia, they are going to have

to be dealt with because people, if they are not going to play by

the rules—and I know the rules are different. But if we are going

to play by a set of rules and they are not, we are going to lose the

ball game and we are going to lose it in our current account, in the

loss of jobs. I wonder where we are going to be in 20 years if we

continue to hemorrhage manufacturing jobs.

Mr. Secretary, I think there has been a lot of concern here about

the need for the Chinese to move to a flexible rate exchange policy.

How you get them to do that is very difficult for a lot of reasons.

But as an interim measure, would we see a measurable effect, a

real effect if the Chinese allowed their currency to trade in a wider

band than it does at present as part of a transition to a flexible

rate regime? In other words, you loosen it up a little bit with a

band or a basket or anything like that.

Secretary SNOW. Senator, I raised precisely that question with

the economic and political leadership of the country, and I think it

is something that they are looking at, the market basket idea, widening the band. No commitments were made, but I think that is

clearly one of the things that is being looked at. I urged them to

look at that hard and see if they could not embrace movements in

that direction. It would be in their interest as well as our interest

to do so. And I agree with you 100 percent. We have to make sure

that our workers, our firms, and our companies are not being prejudiced because of policies and practices of other countries. We can

compete anywhere, but it has to be a fair, level playing field where

the rules are really enforced.

Chairman SHELBY. Well, I think Senator Dole raised the question in a very articulate way, and so did Senator Miller when he

read you part of the letter from the worker there. What do we tell

our workers at home who have been displaced in manufacturing—

textiles, steel, automotive-related? Do we say, gosh, we are going

to stabilize somebody else but at their expense? You know, that is

a tough thing to say.

Secretary SNOW. I would not say that, Senator.

Chairman SHELBY. I have not said it.

[Laughter.]

Secretary SNOW. I would not say that. I would say, look, we are

working hard on this economy. We are committed to seeing the

economy grow. We are committed to creating more growth and income for Americans, and as more growth in income, after-tax income, is available, it will play out in a way—and it always has—

that creates more jobs.

This recession is different. It really is, by the gap that developed

in the recovery between the normal recovery and the manufacturing sector.

Chairman SHELBY. Why?

34

Secretary SNOW. In part because of astonishing productivity in

our manufacturing sector.

Chairman SHELBY. You are talking domestically now. You are

talking about the gains in our computer manufacturing, design,

and everything.

Secretary SNOW. The whole manufacturing sector has shown tremendous productivity growth over the last 3 or 4 years, and what

that productivity growth has translated into is the ability to do

more work, more output, with fewer workers.

I am encouraged by the number——

Chairman SHELBY. You are not saying that this is going to be a

recovery without jobs?

Secretary SNOW. No. I am confident we are going to see jobs. I

think we have already begun to see it.

Chairman SHELBY. Yes, sir.

Secretary SNOW. The 57,000 in the last report.

Chairman SHELBY. The news today.

Secretary SNOW. The news today, and 5 of the last 6 months reduction in initial claims, the fact that aggregate hours worked are

rising. There are some good, positive signs, and all the economists

I talk to say that the linkage between growth and job creation has

not been severed. It has been delayed, but not severed, and with

the growth rates we are seeing, they are all projecting a very sizable pick-up in employment next year.

Chairman SHELBY. There is always lag time, but this recovery,

we have seen more lag time, have we not?

Secretary SNOW. Yes, and the reason I think, Mr. Chairman, is

the fact that we have had this astonishing productivity growth.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Thank you very much, Mr. Chairman.

Secretary Snow, I am going to read a series of quotes that appeared in major publications between March and October of this

year, the period about which the Treasury report is concerned.

Financial Times, May 31, 2003.

The Bank of Japan conducted its largest ever intervention in the foreign exchange

markets in May, using ¥3.9 billion to weaken the yen against the dollar.

Japan’s foreign exchange reserves soared, providing further evidence that the government has stepped up efforts to weaken the yen.

And this shows what is happening to Japan’s stock of foreign reserves, a very sharp rise. Of course, this is happening in all of

those Asian countries. That is China. This is South Korea. And this

is Taiwan.

New York Times, August 27.

Japan is spending heavily to pursue a weak yen policy. The Japanese Government

is defying the logic of the foreign exchange market by keeping the yen from rising

sharply in value against the dollar.

New York Times, October 1.

Yen declines after Japan moves to stem its rise. The yen fell against the dollar

in New York trading yesterday after Japan’s Ministry of Finance sold yen to stem

a gain that had pushed the currency to its highest since December 2000.

How do you justify the conclusion in your report that Japan is

not manipulating its currency?

Secretary SNOW. Senator, as I tried to respond earlier, the yen

has fluctuated in both directions. The yen has appreciated about 10

35

percent or so from the beginning of the year. More than that, actually. I think the yen is now about 22 percent stronger than it was

at the beginning of 2002. Over the last couple of years, it has fluctuated I think a low of 135 or so to yesterday 108-something.

Three-year fluctuation, about the same, 137 to 108.

There has been considerable movement of the yen. The current

account surplus has fluctuated between, 2 and 3 percent, and as I

said earlier, that basically reflects the excess of Japanese savings,

their high savings rates, versus their investment rate. And their

investment rate is low because they do not have their domestic

economy growing faster.

Senator SARBANES. But you have no problem with their intervention in the markets in order to affect the currency?

Secretary SNOW. I do not want to comment on their interventions

as such. I will reiterate our policy, which is we prefer fluctuating

exchange rates, we prefer use of the market.

Now, when asked about those interventions, their response is

they intervene to avoid undue fluctuations which take the currency

away from fundamental values. We prefer a world of fluctuating

rates, and we continue to reiterate that, and that was the statement that came out of Dubai. It is not just us. It is all the G–7,

including Japan as a signatory to that.

Senator SARBANES. Well, Mr. Secretary, I want to address the

Dubai thing. I am glad you brought that up. In September 1985,

when the U.S. trade and current account deficits reached the worrisome level of 3 percent of GDP, the major industrial countries’ Finance Ministers met at the Plaza Hotel in New York to make an

explicit commitment to raise the value of foreign currencies. The

Ministers agreed, and I quote—this is from the Plaza Accord,

‘‘Some further orderly appreciation of the main non-dollar currencies against the dollar is desirable. They stand ready to cooperate more closely to encourage this when to do so would be helpful.’’

So they came out of there committed to some further orderly appreciation of the main non-dollar currencies against the dollar.

Now, 18 years later, our deficits have surpassed 5 percent of

GDP, even more troubling. The G–7 Finance Ministers met in

Dubai last month and issued a statement, ‘‘We emphasize that

more flexibility in exchange rates is desirable for major countries

or economic areas to promote smooth and widespread adjustments

in the international financial system based on market mechanisms.’’

Afterwards, the U.S. sought to claim that this ambiguous language signaled a major change. Other Finance Ministers claimed

otherwise. Since Dubai, the Japanese have continued to intervene

to prevent appreciation of the yen. Should we not be seeking a

Plaza Accord type of the statement rather than this Dubai type of

statement?

Secretary SNOW. Senator Sarbanes, the circumstances today and

then I think are quite different. There was an effort to weaken the

dollar, consciously weaken the dollar, as I recall the Plaza Accord.

I think we have made the better commitment, and that is the commitment to let market forces rather than central banks and ministers of finance set currency values.

36

Senator SARBANES. If you sit and say, we are going to let market

forces work and others are intervening in the market forces in

order to gain advantage, apparently with considerable success,

then are we not a patsy in all of this? It is one thing to say that

the rules should apply, we have these international trading rules

and people should abide by them. But if you have major actors who

do not abide by them and depart from them in a calculated way

in order to gain substantial advantage, if we just sit there and tolerate that, we are a patsy in this situation or so it seems to me.

Secretary SNOW. Senator, as you know we are continuously engaging the world on this issue and pressing forward our view that

true flexibility reflecting market forces works best for the world

trading system, for the country in question, and for the United

States. You cannot devalue yourself to prosperity.

Senator SARBANES. Do you think it is fair to American manufacturers and workers to be competing against products produced in

other countries where they have anywhere from a 25 to a 40 percent trade advantage because of currency manipulation?

Secretary SNOW. Senator, we oppose currency manipulation. We

think that would be unfair, and we assert as strongly as we can

the need for a world trading community based on open capital

flows and fluctuating exchange rates.

Senator SARBANES. One final. Is a general appreciation of Asian

currencies plausible without a revaluation of the Chinese currency?

Secretary SNOW. Senator, one of the things that I have learned

the Treasury Secretary should not do is comment on the specifics

of relative exchange rates, so I had better avoid making a comment

there, if you will permit me.

Senator SARBANES. Thank you.

Chairman SHELBY. Mr. Secretary, I know you do not want to

move a market in any direction and you are wise to do this.

With reference to Japan here, is there not a lot of difference, Mr.

Secretary, between a country intervening in the market, that is

buying or selling our currency in order to keep theirs at a desired

exchange rate, as opposed to a nation that lets the market actually

work and they do not try to intervene or manipulate, or as Senator

Bunning used the term, cheat in the market? What we are trying

to do is promote a situation in the world, as far as monetary policy,

where the market sets the rate of exchange, short of nations trying

to manipulate or actually manipulating the rate.

Secretary SNOW. Absolutely. That is our view entirely.

Chairman SHELBY. Now how do we get there?

Secretary SNOW. We get there by engaging in the dialogue we

had in Dubai and getting the finance ministers of the world and

the central bankers of the world to embrace this idea. That is what

came out of Dubai was a strong statement embracing a point of

view, a philosophy, one that we are in the forefront of.

Chairman SHELBY. But Mr. Secretary, how do we really get countries to change their ways when it is to their economic advantage

at home to intervene in the currency market, to peg the market,

peg the currency, or to intervene in the market buying and selling

like the Japanese do?

37

Secretary SNOW. We have the types of discussions and engagement that we are having right now, and we bring the full force of

our arguments to bear on them.

Chairman SHELBY. But will not these countries continue, by nature, to do what is in their best interest as they see it for their own

economy and their own people even at our expense?

Secretary SNOW. Mr. Chairman, as Alan Greenspan I think testified before your Committee sometime recently, it is not in China’s

interest to pursue this policy. It is not in their interest because it

is creating these adjustment processes within their own economy.

That was not the main message I took to them.

Chairman SHELBY. But it is creating some distortions elsewhere,

is it not?

Secretary SNOW. Yes, exactly.

Chairman SHELBY. Senator Sarbanes.

Senator SARBANES. Mr. Chairman, I would like to include in the

record an article from the Washington Post, ‘‘U.S. Debt to Asia

Swelling. Japan, China Lead Buyers of Treasuries,’’ in the course

of which it is commented, this has caused some analysts to even

envision the day when China could use threats of selling Treasuries to try to influence U.S. economic or foreign policy. ‘‘ ‘The U.S.

dollar is now at the mercy of Asian governments ’ said Joan Zheng,

a former official at the People’s Bank of China, the country’s central bank and now an economist at J.P. Morgan Chase & Co. in

Hong Kong. ‘If China wants to influence the market it can. Its financial power is just so strong.’ ’’ They go on and on with a detailed

statement of holdings.

The Japanese Government also has massive amounts of dollars because of its efforts to hold down the value of its currency, the yen, against the dollar, to boost

exports to the United States. To do so, Japan’s central bank used yen to buy billions

of dollars this summer but then it had to invest the dollars in U.S. assets.

China has pegged its currency . . . to the dollar for nearly a decade. Manufacturers and labor groups in the United States have complained bitterly about what they

say are undervalued currencies in Japan and China that effectively make those

countries’ goods unfairly cheap overseas. Some economists estimate the yuan is undervalued by as much as 40 percent, causing some U.S. business groups to blame

China for the loss of millions of manufacturing jobs at home.

I think this is right on the mark. There are lots of tensions that

come from a free trading environment. There are also benefits that

come from it. But there is no way, at least that I know of, under

any free trade regime, that justifies currency manipulation to the

extent that some estimate the yuan is undervalued by as much as

40 percent. Even if it is 20, 25, or 30 percent, what do we say to

our people? It is one thing to say to them, you have to compete on

a level playing field, and we get pluses and minuses out of that.

What do you say to them when they are losing their jobs, the manufacturers are going under, the workers are getting laid off and

they come and—by general agreement I think these currencies are

not where the market value ‘‘would put them’’ and people are losing jobs. It is happening every day.

Secretary SNOW. Senator, what we are doing is I think what you

as one of the authors of this statute wanted done. We are engaging

the Chinese in a very direct and forceful way. We are letting them

know that we think a manipulated currency is unfair. We want a

currency that reflects the realities of the marketplace, not one that

38

is manipulated. The only way to test that though is to get to the

market. That is why we are pushing the marketplace.

Senator SARBANES. Mr. Secretary, under the statute there is a 6-

month follow-up to this report. We look forward to receiving that.

Presumably we will have a future hearing. But in the meantime,

I am sure you are going to continue to hear more about this and

you are going to have to deal with these various legislative proposals that are now coming forward which are a reaction or a response to this situation.

Secretary SNOW. Senator, let me assure you that in this interim

6 months I am going to be deeply engaged in pressing forward on

this agenda that I have talked to you about today to make sure we

have fair currency regimes across the world.

Chairman SHELBY. Mr. Secretary, we appreciate your appearance

and your ability to go through the tortuous process.

The hearing is adjourned.

[Whereupon, at 1 p.m., the hearing was adjourned.]

[Prepared statements, response to written questions, and additional material supplied for the record follow:]

39

PREPARED STATEMENT OF SENATOR WAYNE ALLARD

I would like to thank Secretary Snow for appearing before the Committee today

to discuss international economic and exchange rate policy and its impact on our

economy. The issue of exchange rates and, in particular, the use of anticompetitive

tools, has become an issue of increasing concern in recent years. While promoting

fair and free trade, it is important that the United States be firm against certain

practices that occur in the global marketplace that can ultimately hurt our industries.

The United States is committed to promoting and encouraging free and open markets, providing the ability for capital to find its most productive home. This flexibility implies that markets in goods and services will see growth beyond national

boundaries. However, commitment to encouraging free markets means a commitment to eliminating unfair practices, such as the use of market restrictions and capital controls, that inhibit the free exchange of capital and goods through economies

of the world. Tight control of either goods or capital can create imbalances in the

economy and inhibit fair competition in the marketplace.

I look forward to hearing about the interactions of national economies and the impact of those interactions on the U.S. economy. The health of Colorado’s economy

depends a good amount on the success of its agriculture industry, so I am particularly interested to hear about how it might be impacted by international economic

and exchange rate policies. I also anticipate hearing ways in which the United

States can both promote free markets, and ensure that those markets provide the

appropriate forum for free and fair trade. Secretary Snow, thank you again for appearing before the Committee. I look forward to your testimony.

—————

PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER

Thank you Mr. Chairman and Ranking Member Sarbanes. This is an extraordinarily important hearing. As you know, I have more than a passing interest in

Treasury’s views on China’s currency, as well as the policies of other Asian nations.

My concern about China’s policies is not simply about jobs, or our manufacturing

sector, or even, currency. Those are critical issues—we hear about them every day

in our States. But even more is at stake.

This is now about the strength of our international systems and U.S. laws. It is

about whether we stand up for the rules or turn a blind eye. It is about whether

the trade agreements we spend so much time negotiating are worth the paper they

are written on. And it is about whether our Government will have the courage to

stand by its convictions.

Some try to frame this debate as ‘‘free trade vs. protectionism’’ that those who

think China should change its currency practices risk a global trade war. In fact,

the reverse is true.

As we know, free trade is a delicate balance. It rests on certain conditions—multiple nations both weak and strong abiding by a common set of rules and responsibilities. When those conditions are violated, the system must respond or else the

actions of one nation will upset the whole global balance. So it is in the interests

of free trade—in defense of free trade—that I am urging action. We cannot turn our

backs and allow one major nation to engage in mercantilist policies.

It is the view of many economists, and many here, that the Chinese Government,

as well as other nations, manipulates its currency to gain an illegal and unfair trade

advantage. Let me briefly review that case. I think it is one that has been amply

covered in hearings and testimony before Congress.

IMF Article IV, Section 1, states that members of the IMF should ‘‘avoid manipulating exchange rates . . . in order . . . to gain an unfair competitive advantage

over other members.’’

The IMF definition of currency manipulation is very explicitly defined in Article

IV. It refers to currency manipulation as ‘‘protracted large-scale intervention in one

direction in the exchange market.’’ That is the standard. Let us look at the data.

The monthly foreign exchange purchases by the Chinese Government have been

huge. They have gone from an average of $3.8 billion a month in 2001 to over $10

billion a month in 2003. A sharp upward trend. During that period of time, total

Chinese foreign exchange holdings have more than doubled from $166 billion to now

$357 billion. These are staggering levels of intervention. In fact, this amount of

intervention, according to some economists, is far beyond the levels ever seen by the

IMF.

40

Putting it all together, let me read a statement that came out 2 weeks ago from

the United States-China Security Review Commission, a bipartisan group established by Congress to look into these very matters. They state:

China, in violation of both its IMF and WTO obligations, is in fact manipulating its currency for trade advantage, and we recommend that the Treasury Department immediately enter into formal negotiations with the Chinese Government over its undervalued currency.

That is an unequivocal statement.

But, frankly, none of this really matters. The Treasury Department is the key

voice on these issues. Treasury has the responsibility under our laws.

Under Section 3004 of the United States’ Omnibus Trade and Competitiveness

Act of 1988, the Treasury Department is obligated to consider whether any countries manipulate the rate of exchange between their currency and the dollar for the

purpose of preventing effective balance of payments adjustments or gaining unfair

advantage in international trade. If such violations are found, the Secretary of the

Treasury is required to undertake negotiations with the manipulating countries that

are running significant trade surpluses.

The Nation looks to Treasury for leadership on these issues. And that is why we

are here today.

Many of us have supported the Administration’s efforts in using diplomatic channels to encourage China to freely float its currency. Secretary Snow has gone over

to China. The President has gone over to China. Secretary Evans is in China right

now. The G–7 even endorsed a policy of market based exchange rates.

Well, I think it is clear that diplomacy is not working. China is not listening or

they do not care. The Chinese Government has made it crystal clear that they have

no intention of allowing the yuan to trade at market levels anytime soon.

China is now a major player in the global economy. If China enjoys the benefits

of membership in the international community, as they clearly have, shouldn’t they

abide by the community’s rules and responsibilities?

The Chinese Government wants stability and continued growth—don’t we all. But

China’s interests do not trump those of its neighbors or its international partners.

Their desire for the status quo cannot put the long-term health of the international

economy at risk.

I hear from some very smart people in the financial community that the real risk

with China is in doing nothing. China’s continued and massive government intervention is helping drive enormous export lead growth which is overheating their

economy which will eventually cause a global economic train wreck. Unfortunately,

the Chinese Government’s intransigence on this issue leaves us no choice but to consider more forceful measures.

The lack of real action undermines support for free trade in this country. When

we do not hold a country accountable for violating the rules of free trade, and good

U.S. jobs are lost, people start to question whether the free trade system itself

works.

The Administration has taken made bold moves in the interests of our economy

in other areas. I hope we will see some boldness again. If we really care about jobs

and U.S. businesses—if it is not just rhetoric—and if we are really concerned about

the problems in this country—not all the problems over in China—there can be few

other actions that would have a more immediate and beneficial economic impact

than eliminating China’s and other nations’ unfair currency advantages and currency manipulation.

And, I can tell you this, if the Administration does not act, we, the Congress, will.

—————

PREPARED STATEMENT OF SENATOR DEBBIE STABENOW

Thank you, Mr. Chairman. I appreciate your calling this hearing today. While the

purpose of today’s hearing is to look at the Treasury Department’s Report to Congress on International Economic and Exchange Rate Policy, what this hearing really

boils down to is a discussion of the future of American jobs and the crisis we are

facing in our domestic manufacturing sector. Whether it is furniture makers in West

Michigan or auto suppliers throughout Michigan, it is a challenging time.

Indeed, our economy has lost 3.3 million private sector jobs since January 2001—

2.5 million or 75 percent of those jobs in manufacturing. More specifically, 162,300

Michiganians have lost their jobs in the manufacturing sector. That is a mind-boggling 18 percent of the State’s manufacturing base. One out of six jobs.

41

This loss of U.S. jobs, in large part due to illegal trade practices, should be the

number one priority of the Congress and the Bush Administration. We must demand that foreign countries play by the rules of international trade agreements.

In particular, I am concerned about foreign currency manipulation and the lack

of action from the Administration on this front. I hope that Secretary Snow, in his

testimony today will be able to tell us what new steps the Administration is going

to take, given its current inability to get China, Japan, and other countries to stop

manipulating their currencies.

Mr. Chairman, there is no question that China and Japan, in particular are actively and aggressively intervening in the currency markets to—illegally—protect

their domestic businesses.

By manipulating the markets, they artificially depress the prices of their exports

and raise the prices of their imports. And what does this mean in simple terms?

It is the functional equivalent of a tax on American goods.

A ‘‘currency manipulation tax’’ imposed on our American companies by China and

Japan. And, a tax that is forcing our U.S. companies to lay off good hardworking

employees.

These employees are now struggling to find new jobs, to provide for their families,

to ensure that their loved ones have health care and that their basic needs are covered. We need the President and his Administration speaking out forcefully.

The Administration has said that the United States has a strong dollar policy, but

I want to see them using all of their resources to put it into effect.

I want Administration officials to be able to tell laid-off workers in Michigan and

around the country that China is finally going to allow its currency to rise the 15

to 50 percent it is undervalued relative to the dollar. And, that the 12 percent

undervaluation of the Japanese yen will stop right away. Not at some vague point

down the road. But, right away.

These percentages are really startling when we think about them, Mr. Chairman.

Let me put them into more concrete terms. I will use the example of a car which

is a product that we in Michigan certainly know a lot about. We are very proud of

our Michigan-made cars.

A 2003 Ford Taurus SEL has a manufactured suggested retail price of $23,965.

This car, when exported to Japan, faces an estimated tax of $2,876 solely due to

currency manipulation.

Conversely, a similar car made in Japan by Nissan would have the same estimated artificial price advantage over U.S. cars. Should we give a Japanese car a

$2,876 price advantage over the exact same car made in America?

Who is paying for these special advantages that the Chinese and Japanese governments are creating for their people? U.S. companies are paying for this tax. Our

workers are paying for it. And, it has to stop.

I wonder if my colleagues can imagine what the response would be if the Administration proposed raising taxes on all of our goods an additional 12 percent or more

and gave all the revenue away to people in other countries? By failing to end this

currency manipulation tax, this is the practical effect.

Mr. Chairman, there is a lot of interest in the Senate and in this Committee in

putting a halt to these illegal trade practices. Recently, as Senator Schumer has

mentioned, I teamed up with him and others on a bipartisan bill to stop Chinese

currency manipulation. Cosponsors on this Committee include Senators Bayh,

Bunning, Dodd, Dole, and Enzi.

China’s policies violate the IMF and WTO agreements, and it is within our rights

to take action. In fact, we are creating a bad precedent if we do not demand that

our rights within these agreements are fully respected. America should not allow

other countries to cheat us out of our full international rights.

I hope that all of my other colleagues will work with me, Senator Schumer, and

other advocates to resolve this problem. We should be doing everything within our

power to protect our American manufacturing jobs.

Thank you again, Mr. Chairman for calling this hearing. Thank you Mr. Secretary

for agreeing to appear before us. I look forward to your testimony.

—————

PREPARED STATEMENT OF JOHN W. SNOW

SECRETARY, U.S. DEPARTMENT OF THE TREASURY

OCTOBER 30, 2003

Chairman Shelby, Ranking Member Sarbanes, Members of the Banking Committee, thank you for the opportunity to appear before you this morning to discuss

42

Treasury’s Report on International Economic and Exchange Rate Policies as well as

related economic issues. The Report reviews developments in the United States and

examines exchange rate policies in major countries across five regions—the Americas, Europe and Eurasia, Africa, the Middle East and South Asia, and East Asia.

The Report documents the wide variety of exchange rate policies that are used

around the world. A notable trend has been the move by many countries to adopt

flexible exchange rates.

The Report concludes that no major trading partners of the United States meet

the technical requirements set forth in the Omnibus Trade and Competitiveness Act

of 1988. But let me be clear, the Bush Administration believes that the international trading system works best with free trade, the free flow of capital, and with

market-based exchange rates. An efficient system of trade and finance, with fair and

enforced rules, is essential for the United States and all nations to maximize the

benefits of trade and generate the highest levels of economic growth.

The Report finds that a number of countries continue to use pegged exchange

rates and/or intervene in the foreign exchange market. It should be noted that a

currency peg or intervention does not in and of itself satisfy the statutory test.

Treasury has consulted with the IMF management and staff as required by the statute, and they concur with the findings of the Report.

The Bush Administration is aggressively encouraging our major trading partners

to adopt policies that promote flexible market-based exchange rates combined with

a clear price stability goal and a transparent system for adjusting the policy instruments. In my testimony today, I would like to discuss this work with you and the

progress we are achieving.

Policies to Raise Economic Growth in the United States and the World

The Administration’s international economic strategy aims for higher economic

growth throughout the world. A stronger world economy is vital to sustaining U.S.

economic growth and job creation. This is a reality of our increasingly interdependent world.

At the core of this strategy are the good economic policies we are implementing

in the United States. But also at the core is our diplomatic work to encourage progrowth and pro-stability policies in other countries. Good economic policies in other

countries benefit the United States and the whole world. It is widely recognized

throughout the world that free markets and market-determined prices are best able

to allocate scarce resources to their most productive use. This is as true for domestic

markets as it is for international markets. We strongly believe that the goals of raising growth and increasing stability can best be accomplished in an international financial system that relies on the principles of free trade, free capital flows, and

market-based exchange rates among the major economies.

Free trade, in particular, improves the standard of living across countries. Thus,

the Administration will continue to promote free trade through bilateral, regional,

and global trade agreements. In this respect, the outcome at Cancun was a missed

opportunity. The United States stands ready to work with others who seek liberalization. Our free trade initiatives, including the U.S. proposal to cut tariffs to zero

for manufactures, will continue.

Implementing this broad international strategy is an ambitious endeavor, but it

is an agenda that the Bush Administration is determined to pursue. Convincing others to contribute to further improvement in global growth prospects is a top priority

for the President. In furtherance of this agenda I traveled to Europe, China, and

Japan this summer to deliver this very message. Growth was also the key focus of

my discussions with Asian financial leaders in Thailand. Change has already begun

among several major economies. For example, Germany is pursuing critical labor

market, tax and pension reforms under its Agenda 2010, and France is also moving

forward through its Agenda 2006.

With President Bush’s leadership, the Administration has made reform and economic growth a priority goal throughout the world. In addition to my own travel,

Commerce Secretary Don Evans, U.S. Trade Representative Robert Zoellick and

other senior Administration officials all continue to press nations to put in place

pro-growth policies that will result in higher rates of productivity and growth both

here and abroad

The Administration has urged Japan to implement comprehensive reforms to

bring about lasting recovery. These reforms involve ending deflation, strengthening

the banking system, and undertaking structural reforms that promote flexibility. Indeed, the Bank of Japan has aggressively increased the money supply to counter

deflation, and the Koizumi Government has made important headway on improving

the health of the banking system.

43

Treasury is actively engaged with the Japanese on monetary, fiscal, and exchange

rate policies both bilaterally and through meetings of the G–7 finance ministers and

central bank governors.

At the recent G–7 meeting in Dubai, we made progress, gaining agreement on a

new ‘‘G–7 Agenda for Growth.’’ Under this milestone agreement, G–7 countries have

committed to concrete structural reform actions to increase productivity, spur

growth, and create jobs. And for the first time they have agreed to a process for

benchmarking and reporting on their performance.

Each country will identify its own policy plan under the Agenda. For example, the

United States will work to lower health care costs, reduce frivolous lawsuits, and

streamline regulations and needless paperwork through the President’s Six Point

Plan to promote economic growth. Other G–7 countries will implement policies appropriate to their situations. Countries in the European Union will be looking at

further ways to revitalize investment and create jobs. Japan has reiterated its commitment to reform.

The Agenda for Growth must be about action and results, not just plans and platitudes. When we met in Dubai, my G–7 colleagues agreed to be ambitious in embarking on reforms and pursuing growth. In coming months, we will be working to

evaluate proposals and assess the results of our efforts. As the United States assumes chairmanship of the G–7 in 2004 that focus will be maintained.

The Administration is also engaging in other initiatives, both bilateral and multilateral, to advance growth and stability in emerging markets and developing countries. For example, Treasury is working with Brazil through a new ‘‘Group for

Growth’’ to identify steps to expand economic potential; the Millennium Challenge

Account targets assistance to countries that perform on pro-growth policies and delivering results for people; and in the international financial institutions, Treasury

is advocating a sharper focus on measurable results, economic policy performance,

and promoting private sector development.

Recent Economic Developments

The world economy has strengthened during the course of this year, and the

United States is leading the way. Thanks to timely fiscal and monetary policy responses, economic growth in the United States is picking up now after the severe

shocks of the terrorist attacks, corporate accounting scandals, and stock market decline of 2000. Growth accelerated to 3.3 percent in the second quarter, with fixed

investment as well as personal consumption posting large gains. The President’s

Jobs and Growth plan, along with low interest rates, put the U.S. economy in an

excellent position to achieve sustained, robust growth. The President’s Six Point

plan to enhance growth and job creation will further boost our performance. We will

not be satisfied until we see strong and sustained job growth.

Looking beyond the United States, global growth is also improving. There are

signs of stronger growth in Japan, as well as in the United Kingdom, Canada, and

several emerging market countries. Much of Europe, however, is still falling short

of a strong economic recovery. While we can be pleased with the progress made,

growth in the major economies around the world, as a whole, has been too slow for

too long.

The U.S. International Accounts

From my discussions with my counterparts in other countries, there is a great appreciation worldwide that the United States is a force for strong growth. This strong

performance is also reflected in the pattern of our external trade and current account balances.

Developments in the current account are best understood in terms of developments in investment and saving. As a matter of accounting, the current account deficit is equal to the gap between national investment and national saving. Thus,

when investment in the United States is higher than domestic saving, foreign investors make up the difference, and the United States has a current account deficit.

Our current account deficit in large part reflects the attractive investment environment and high growth of productivity in the United States. Increased saving in

the United States along with stronger growth abroad will reduce the deficit in the

current account.

Exchange Rate Policies

The Report shows that countries around the world continue to follow a variety of

exchange rate policies ranging from a flexible exchange rate regime with no or little

intervention to currency unions and full dollarization. While the choice of an exchange rate regime is up to each country, we have been encouraging countries to

use flexible exchange rates. Flexible exchange rates ease the adjustment to changing

economic conditions in the international financial system. Of course, a flexible exVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 24735.TXT SBANK4 PsN: SBANK4
44

change rate will not prevent the economic damage that is caused by a bad economic

policy. For example, even with a flexible exchange rate, an inflationary monetary

policy would lead to a weak, constantly depreciating currency with negative effects

on economic growth. A good flexible exchange rate regime requires a monetary policy with a focus on the goal of price stability, and has a transparent procedure for

setting the policy instruments.

We are encouraging the use of flexible exchange rates with our major trading

partners, we recognize that, especially in the case of small open economies, there

are benefits from a ‘‘hard’’ exchange rate peg, such as dollarization, joining a currency union, or using a credible currency board. Of course, just as in the case of

flexible exchange rates, a ‘‘hard’’ peg will not prevent the economic damage caused

by a bad economic policy.

The G–7 statement from Dubai, which I mentioned earlier in the context of the

‘‘G–7 Agenda for Growth,’’ also addresses exchange rate policy. Here is what that

statement said:

We reaffirm that exchange rates should reflect economic fundamentals. We

continue to monitor exchange markets closely and cooperate as appropriate.

In this context, we emphasize that more flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the international financial system based on market

mechanisms.

All G–7 Ministers and Central Bank Governors—including Alan Greenspan and

myself—agreed with that statement. And let me be clear: the G–7 message is consistent with our strong dollar policy which I have consistently reiterated since my

confirmation hearing. As I have said often, a country can not devalue itself into

prosperity. A strong dollar is in the U.S. national interest. The G–7 message is also

consistent with the Agenda for Growth, which is about a stronger world economy

and flexibility.

Among the many currencies discussed in the Report, China’s received special attention. China does not meet the technical requirements of the 1988 Trade Act—

the same finding for nearly 10 years of past reports. China’s global current account

surplus has declined, and China has had a peg over a long time period during both

upward and downward pressures on the currency. But it is clear that a flexible,

market-based, exchange rate is appropriate for China. Given China’s strong growth

and substantial foreign exchange reserves, following on a series of economic reforms,

China now has an opportunity to show leadership on the important global issue of

exchange rate flexibility.

Greater exchange rate flexibility would allow China greater scope to maintain a

low-inflation, pro-growth monetary policy. It would also enable China to enjoy the

benefits, while helping mitigate the risks, of a more open capital account. And it

would help improve the allocation of resources and the quality of financial intermediation in the Chinese economy. More broadly, a more flexible rate would help

reduce macroeconomic imbalances.

A rules-based system of trade and finance is essential for all nations to maximize

the benefits of trade and generate the highest levels of economic growth. A pegged

exchange rate is not appropriate for a major economy like China and should be

changed.

For all these reasons, we are continuing our efforts to urge the Chinese to adopt

a flexible exchange rate. I took this case to Beijing last month, emphasizing the

need for exchange rate flexibility, along with reductions in barriers to trade and capital flows. And last weekend, following immediately on the heels of the President’s

meeting with President Hu, I met with the Chinese Finance Minister and Central

Bank Governor in Mexico.

China’s response to this engagement is encouraging:

• Earlier this month China’s Central Bank Governor said: ‘‘With the role of the

market becoming increasingly important, the exchange rate of the RMB will be

finally determined decisively by the market forces and have great flexibility.’’

• China’s central bank is undertaking a number of capital market liberalization

measures. In addition, Governor Zhou has endorsed a project in which the Chicago Mercantile Exchange and the Foreign Exchange Trade System & National

Interbank Funding Center of China will develop a currency futures market in

China.

• Vice Premier Huang Ju has accepted my invitation to come to Washington for an

in-depth, high-level discussion of these issues.

• A new technical cooperation agreement on financial issues related to exchange

rates was announced by President Bush and President Hu. China’s Central Bank

Governor and I will be responsible for implementing this program.

45

• The G–7 finance ministries and the Chinese finance ministry and central bank

have begun talks on economic and financial market issues for the first time ever.

Their first meeting was last month in Dubai.

We are encouraged by the steps the Chinese are taking, but we urge continued

and speedy progress toward the goal of exchange rate flexibility. The Chinese are

discussing exchange rate policy in international fora, and at home. China’s leadership recently called for active advance of the reform in the financials system and

exchange rate policy. The leadership also recognized that opening up of its capital

market is seen by Beijing as an important step in moving to a flexible exchange

rate. Further, the establishment of a strong regulator will help China’s banking system see much needed improvement. Success will require daily engagement with the

Chinese. For this reason, the Treasury Department is establishing an attache ́ presence in China.

As this example of China indicates, I recognize the need to address exchange rates

as part of our overall international economic strategy. But, as the example of China

also indicates, I believe that the course we are on of financial diplomacy is the right

course and the most effective way to bring about change.

Conclusion

Strengthening the economic recovery in the United States is our key economic objective. I am very concerned about job creation in the United States. The President’s

Six Point Plan is designed to remove impediments to growth and job creation. We

have undertaken an ambitious drive to remove rigidities and barriers wherever they

exist and to thereby create a level playing field that promotes increased international trade. The G–7 Agenda for Growth is an important step forward. So, too,

are the bilateral discussions we have had with many countries on economic and financial issues. We will continue to work hard to accomplish our objectives.

46

RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER

FROM JOHN W. SNOW

Q.1. The Treasury report concludes that ‘‘no major trading partners

of the United States manipulated exchange rates.’’ However, according to Japan’s Ministry of, Finance, the Japanese Government

has intervened more than 60 times since January 2000 in currency

markets, spending over $220 billion on such actions. How do Japan’s repeated and massive interventions square with your findings of no manipulation to gain trade advantages, particularly

given the fact that high-ranking Japanese officials, including Prime

Minister Koizumi, have indicated they are intervening in part to

provide their exports with a competitive advantage?

A.1. The Omnibus Trade and Competitiveness Act of 1988 (the Act)

directs the Treasury to analyze the exchange rate policies of other

countries and consider whether these countries manipulate the rate

of exchange between their currency and the dollar for purposes of

preventing effective balance-of-payments adjustments or gaining

unfair competitive advantage in international trade. We concluded,

on careful examination, that Japan did not meet the technical requirements to be designated under terms of the Act. In carrying

out the most recent analyses of exchange rate policies we consulted

with the International Monetary Fund, as required under the Act.

IMF management and staff concur with our assessment regarding

Japan.

This year, Japan has increased its money supply sharply to overcome deflation. Japan has also taken more vigorous steps to

address its banking sector problems in an effort to provide a foundation for domestic, demand-led growth.

In these circumstances, Japanese authorities have expressed concern that a strong and rapid appreciation of the yen would be inconsistent with Japan’s underlying economic fundamentals and

would jeopardize a fragile recovery.

Even though we concluded that Japan did not meet the technical

requirements under the Act, we have made clear to Japanese authorities that they should allow market forces to play a greater role

in exchange rate determination.

Q.2. Japanese automakers have received substantial benefits of a

direct export subsidy over the last several years from a weak yen,

which is kept weak by the massive interventions by Japan. The

weak yen has allowed Japanese automakers to reap a roughly 20

percent windfall cost advantage over the past 3 years, which they

have used in a variety of ways to gain market share here in the

United States, as well as make record profits. Given that 60 percent of the U.S. trade deficit with Japan is in the automotive sector, is it U.S. Treasury policy to allow a foreign government to continue to provide such a substantial direct export subsidy when it

makes up so much of our bilateral trade deficit with Japan?

A.2. The market for yen financial assets is very large and deep and

Japan has no restrictions on capital flows that would limit pressure

on its currency. Although Japan’s intervention may have slowed

the pace of yen appreciation, the yen has still strengthened materially over the last year. The yen has risen close to 10 percent

against the dollar since the beginning of this year and over 20 perVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00050 Fmt 6633 Sfmt 6601 24735.TXT SBANK4 PsN: SBANK4
47

cent since the beginning of 2002. Over the last 3 years the yen has

fluctuated in a range of 135 to 108 yen per dollar. The yen’s value,

in terms of the dollar, is currently roughly the same as it was 3

years ago.

Q.3. Mr. Secretary, I have auto plants in my State, which provide

good jobs for good people. If this trend continues—if the yen is allowed to continue in its overly weak state—those auto plants and

the good jobs they provide are going to be in danger. Over the past

3 years, Japan’s auto exports to the United States are edging back

up to near-historic levels, despite increased production facilities in

the United States. How do you expect the U.S. auto industry to

compete with Japanese automakers when Japanese automakers

have a 20 percent cost advantage?

A.3. Japan’s intervention has not resulted in growing exports to

our market. Our bilateral trade deficit with Japan currently stands

at $64 billion (average through September at an annual rate),

down from a record high of $81.6 billion in 2002.

In particular, merchandise imports from Japan have been on a

downward trend since peaking in 2000 and so far this year are

running about 21 percent below their 2000 level. As a result, goods

imports from Japan as a share of nominal U.S. GDP have fallen

to 1.1 percent—the lowest since 1980—from the 1.5 percent share

that prevailed in the latter half of the 1990’s.

Although imports of Japanese automotive products (cars, trucks,

and parts) reached record levels in 2002, they have since moderated and through September were roughly 3 percent below their

year-earlier level.

RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER

FROM JOHN W. SNOW

Q.1. Mr. Secretary, Paul O’Neill, your predecessor, came before this

Committee on May 1, 2002. I told him then, as I am telling you

now, that as a Senator from Georgia, I have to be a little bit parochial. I have to look out for those 8 million people in Georgia. There

are some industries in our State—forestry, textiles, automotive, agriculture, who have been complaining to me for over a year, pretty

loudly, that the dollar is making it difficult for them to export profitably, and easier for imports to take their market share here in

the United States. The paper industry has seen more than 90 percent of the growth in their U.S. markets captured by imports.

How would you respond to my constituent industries that are so

very concerned about this matter? How would you respond to Joyce

Williams?

Are you seeing any foreign countries engaging in currency manipulation with the U.S. dollar, for purposes of preventing effective

balance of payments adjustments or gaining an unfair competitive

advantage in international trade?

What actions have you taken to date to encourage other governments to seek to strengthen their currency vis-a ́-vis the dollar? Is

there anything further that you think should be done?

A.1. We are concerned about the difficulties that a number of U.S.

industries have experienced. Soft domestic demand and weak

growth abroad (which has hindered export growth) have been prinVerDate 11-MAY-2000 16:36 Dec 07, 2005 Jkt 000000 PO 00000 Frm 00051 Fmt 6633 Sfmt 6601 24735.TXT SBANK4 PsN: SBANK4
48

cipal reasons for sluggish recovery in many industries. The U.S.

economy is now showing healthier growth. The early and timely fiscal response of the Administration, working with Congress, and the

Jobs and Growth Tax Relief Reconciliation Act enacted in May,

have spurred an acceleration of real growth in GDP. Private analysts forecast this growth to continue at above 4 percent, or around

1 percentage point above the growth in potential output, over the

next year. We are now seeing the beginning of a turnaround in the

labor market and sustained growth above potential should trigger

stronger job gains, with several private sector estimates predicting

the creation of about 2 million new jobs by the third quarter of

2004.

The Administration’s international economic strategy aims for

higher economic growth throughout the world. For example, at the

recent meeting of the G–7 Governors and Finance Ministers in

Dubai, we gained agreement on a new ‘‘Agenda for Growth.’’ Under

this milestone agreement, G–7 countries have committed to concrete structural reform actions to increase productivity, spur

growth, and create jobs. They have agreed, for the first time, to a

process for benchmarking and reporting on their performance.

The Department of the Treasury, in carrying out its responsibilities under the Omnibus Trade and Competitiveness Act of 1988

(the Act), analyzes the foreign exchange policies of foreign countries, in consultation with the International Monetary Fund, and

considers whether countries manipulate the rate of exchange

between their currency and the dollar for purposes of preventing effective balance-of-payments adjustments or gaining unfair competitive advantage in international trade. In the October 2003 ‘‘Report

to Congress on International Economic and Exchange Rate Policies,’’ Treasury concluded that no major trading partner of the

United States met the technical requirements to be designated

under terms of the Act. But in submitting the report, Secretary

Snow explained that the Bush Administration believes that the

international trading system works best with free trade, the free

flow of capital and market-based exchange rates among the major

economies. An efficient system of trade and finance, with fair and

enforced rules, is essential for all nations, including the United

States, to realize the greatest benefits from trade and to generate

the highest levels of economic growth.

This view was affirmed, in the context of the G–7 ‘‘Agenda for

Growth,’’ in the Dubai communique ́ statement on exchange rates:

‘‘We reaffirm that exchange rates should reflect economic fundamentals. We continue to monitor exchange markets closely and

cooperate as appropriate. In this context, we emphasize that more

flexibility in exchange rates is desirable for major countries or economic areas to promote smooth and widespread adjustments in the

international financial system based on market mechanisms.’’

Q.2. In Fortune, from Sunday October 26, 2003, Warren Buffett

said, ‘‘But as head of Berkshire Hathaway, I am in charge of investing its money in ways tha t make sense. And my reason for

finally putting my money where my mouth has been so long (investments in foreign currencies) is that our trade deficit has greatly worsened, to the point that our country’s ‘‘net worth,’’ so to

speak, is now being transferred abroad at an alarming rate.’’

49

Mr. Secretary if Warren Buffett is worried, why aren’t you?

A.2. The October 2003 Report to Congress on International Economic and Exchange Rate Policies described how developments in

the overall trade or current account balance reflect developments

in national investment and saving. The current account deficit is

conceptually equal to the gap between investment and saving.

When investment in the United States is higher than domestic saving, then foreigners make up the difference, and the United States

has a current account deficit. In contrast, if saving were to exceed

investment, then the United States would have a current account

surplus.

In recent years, foreign interest in investing in the United States

has permitted the United States to invest more than it otherwise

would have been possible. Investment in the United States creates

‘‘net worth.’’ This additional U.S. investment allows business to pay

better wages, and earn higher profits even after paying foreigners

an appropriate return on their investment.

Q.3. The U.S. automotive sector believes Japan is manipulating its

currency to maintain an unfair trade advantage. The industry believes the Japanese may be violating Article IV of the IMF Charter

and Section 3 of the 1988 Omnibus Trade Act.

Do you agree with them?

A.3. The Department of the Treasury, in carrying out its responsibilities under the Omnibus Trade and Competitiveness Act of

1988 (the Act), analyzes the foreign exchange policies of foreign

countries, in consultation with the International Monetary Fund,

and considers whether countries manipulate the rate of exchange

between their currency and the dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade. In its most recent report,

Treasury concluded, on careful examination, that Japan did not

meet the technical requirements to be designated under terms of

the Act. IMF management and staff concur with our assessment regarding Japan.

Over the last 3 years, the yen has fluctuated in a range of 135

to 108 yen per dollar. The market for yen financial assets is very

large and deep and Japan has no restrictions on capital flows that

would limit pressure on its currency. Although Japan’s intervention

may have slowed the pace of yen appreciation, the yen has still

strengthened materially over the last year. The yen has risen close

to 10 percent against the dollar since the beginning of this year

and over 20 percent since the beginning of 2002.

This year, Japan has increased its money supply sharply to overcome deflation. Japan has also taken more vigorous steps to

address its banking sector problems in an effort to provide a foundation for domestic, demand-led growth. In these circumstances,

Japanese authorities were concerned that a strong and rapid appreciation of the yen would be inconsistent with Japan’s underlying

economic fundamentals and would jeopardize a fragile recovery.

Even though we concluded that Japan did technical requirements

to be designated Act, we have made clear to the Japanese they

should allow market forces to play exchange rate determination.

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97