```

[Senate Hearing 106-1108]
[From the U.S. Government Publishing Office]

                                                       S. Hrg. 106-1108

  PERMANENT NORMALIZED TRADE RELATIONS WITH THE PEOPLE'S REPUBLIC OF 
                                 CHINA

=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON COMMERCE,
                      SCIENCE, AND TRANSPORTATION
                          UNITED STATES SENATE

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                             APRIL 11, 2000

                               __________

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

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                            WASHINGTON : 2003
____________________________________________________________________________
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       SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                     JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska                  ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana                DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington             JOHN D. ROCKEFELLER IV, West 
TRENT LOTT, Mississippi                  Virginia
KAY BAILEY HUTCHISON, Texas          JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine              JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri              RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee                BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan            RON WYDEN, Oregon
SAM BROWNBACK, Kansas                MAX CLELAND, Georgia
                  Mark Buse, Republican Staff Director
            Martha P. Allbright, Republican General Counsel
               Kevin D. Kayes, Democratic Staff Director
                  Moses Boyd, Democratic Chief Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held April 11, 2000......................................     1
Statement of Senator Ashcroft....................................     8
    Letter sent to Hon. William M. Daley.........................    10
Statement of Senator Bryan.......................................    10
Statement of Senator Cleland.....................................    30
Statement of Senator Dorgan......................................    27
Statement of Senator Hollings....................................     4
    Prepared statement...........................................     5
Statement of Senator Hutchison...................................     7
    Prepared statement...........................................     7
Statement of Senator McCain......................................     1
    Prepared statement...........................................     3
Statement of Senator Snowe.......................................    33

                               Witnesses

Daley, Hon. William M., Secretary of Commerce....................    11
    Prepared statement with Summary of U.S.-China Bilateral WTO 
      Agreement..................................................    13
Kahler, H. Richard, President, Caterpillar, Inc., China, on 
  behalf of the Business Roundtable and the American Chamber of 
  Commerce in Hong Kong..........................................    62
    Prepared statement...........................................    65
Scowcroft, Brent, Lieutenant General, USAF (RET.), President, 
  Scowcroft Group................................................    36
Wu, Harry, Executive Director, Laogai Research Foundation........    39
    Prepared statement...........................................    41
Wallach, Lori, Director, Public Citizen's Global Trade Watch.....    43
    Material for the record and prepared statement............... 44,46
Valenti, Jack, President and Chief Executive Officer, Motion 
  Picture Association of America.................................    56
    Prepared statement and Appendix to testimony................. 58,61

                                Appendix

American Forest & Paper Association, prepared statement..........    85
Gorton, Hon. Slade, U.S. Senator from Washington.................    81
Lowenstein, Douglas, President, Interactive Digital Software 
  Association, prepared statement................................    81
Wallach, Lori, Director, Global Trade Watch, Public Citizen 
  Global Trade Watch News Release................................    86
    Article from Inside U.S. Trade, placed for the record........    87

 
  PERMANENT NORMALIZED TRADE RELATIONS WITH THE PEOPLE'S REPUBLIC OF 
                                 CHINA

                              ----------                              

                        TUESDAY, APRIL 11, 2000

                                       U.S. Senate,
        Committee on Commerce, Science, and Transportation,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 9:30 a.m. in room 
SR-253, Russell Senate Office Building, Hon. John McCain, 
Chairman of the Committee, presiding.

            OPENING STATEMENT OF HON. JOHN McCAIN, 
                   U.S. SENATOR FROM ARIZONA

    The Chairman. Good morning. I understand Senator Hollings 
is on his way, and I would make an opening statement and then 
we will wait a minute for him, because he wants to make some 
opening comments, then we will move to our witnesses.
    There is no question that China represents one of this 
country's central foreign policy challenges in the 21st 
Century. An important trade partner with aspirations of 
increasing influence throughout the Asia-Pacific region, China 
will remain at the forefront of U.S. foreign policy discussions 
for the foreseeable future.
    The subject of this morning's hearing, China's entry into 
the World Trade Organization (WTO); and the question of 
granting permanent normal trade relations to that country, is 
rarely discussed in a vacuum. With China's entry into the WTO 
and implementation of the terms of the November 1999 trade 
agreement, the United States stands to benefit substantially, 
benefits that will be felt by industry and American labor 
alike.
    As a member of the WTO, China will be required to take 
steps it has been historically reluctant to adopt, and at the 
risk of a level of social turbulence completely anathema to the 
ruling Communist Party regime. These steps include major 
reductions in industrial tariffs from an average of 24 percent 
to an average of 9.4 percent, reductions in tariffs on 
agricultural goods from an average of 31 percent to 14 percent, 
as well as elimination of nontariff barriers on agricultural 
imports, major openings in industry where China has been 
extremely reluctant to permit foreign investment, including 
telecommunications and financial services, and unprecedented 
levels of protections for intellectual property rights.
    As a result of WTO membership, the pillars of one-party 
domination, especially the corruption endemic to the current 
system, could begin to crumble under the weight of transparency 
and reforms that are the price of China's entry into the global 
trading system. One need look no further than recent reports of 
rioting this past February by more than 20,000 miners and their 
families, stemming from the pervasive inefficiency and 
corruption in the state-owned enterprises that are at risk of 
extinction under the economic reforms China will be required to 
carry out.
    How China will deal with this social turbulence is one of 
the most important questions facing not just Beijing but all 
people who care about economic advancement and human rights. 
There is no question that increased and better-regulated trade 
with China will benefit the United States. What many following 
the debate are concerned about, however, is whether and how 
increased trade between the two countries will benefit the 
population of China beyond the ruling elite.
    One of the witnesses testifying here this morning is Mr. 
Harry Wu, whose story imbues him with a level of moral 
authority that all Americans should respect. Mr. Wu's personal 
experience with the forced labor system in China, as well as 
his continuing efforts to shine a light on those abhorrent 
practices, weigh heavily in the consideration of all who 
believe human rights should be a priority of U.S. foreign 
policy.
    There is also an argument that the quality of life of 
hundreds of millions of Chinese citizens is immeasurably 
improved as a result of the economic reforms implemented by the 
late Deng Xiaoping and continued under his successors, most 
prominently Premier Zhu Rongji.
    Since the introduction of economic reforms in 1979, China's 
economy has emerged as one of the fastest-growing in the world. 
World Bank figures show that as many as 200 million Chinese 
have been lifted out of poverty as a result of the government's 
decision to liberalize the economy. While it is estimated as 
many as 30 percent of the population continue to subsist below 
the poverty level, the size of the middle class has expanded 
dramatically.
    A recent Congressional Research Service study noted that by 
the year 2005, China will have more than 230 million middle 
income consumers. Clearly, economic reform, fueled in large 
part by trade, is benefiting the average Chinese citizen. It 
has not, however, liberated them from the dictatorial powers of 
the state. Moreover, Zhu's threatening statements toward Taiwan 
prior to the latter's recent election, as well as his 
admonition that a failure by the United States to pass 
permanent normal trade relations will be regretted by us for 
1,000 years, is heavily illustrative of the Communist Party's 
adherence to obsolete and discredited policies.
    That said, membership in the WTO carries with it 
responsibilities that are at variance with Communist Party 
practice. That is why Martin Lee, chairman of the Democratic 
Party of Hong Kong, noted that China's participation in the WTO 
would bolster those in China who understand that the country 
must embrace the rule of law.
    Similarly, Wang Shan, a liberal political scientist, state 
that, ``Undoubtedly the China WTO agreement will push political 
reform.'' And the former editor of the democratic journal, 
Fangfa, has written that, ``if economic monopolies can be 
broken, controls in other areas can have break-throughs as 
well. . . In the minds of ordinary people, it will show that 
break-throughs that were impossible in the past are, indeed, 
possible.''
    [The prepared statement of Senator McCain follows:]

                Prepared Statement of Hon. John McCain, 
                       U.S. Senator from Arizona

    There is no question that China represents one of this country's 
central foreign policy challenges in the 21st Century. An important 
trade partner with aspirations of increasing influence throughout the 
Asia Pacific region, China will remain at the forefront of U.S. foreign 
policy discussions for the foreseeable future.
    The subject of this morning's hearing, China's entry into the World 
Trade Organization and the question of granting permanent Normal Trade 
Relations to that country, is rarely discussed in a vacuum. With 
China's entry into the WTO and implementation of the terms of the 
November 1999 trade agreement, the United States stands to benefit 
substantially--benefits that will be felt by industry and American 
labor alike.
    As a member of the WTO, China will be required to take steps it has 
been historically reluctant to adopt, and at the risk of a level of 
social turbulence completely anathema to the ruling Communist Party 
regime. These steps include major reductions in industrial tariffs, 
from an average of 24 percent to an average of 9.4 percent; reductions 
in tariffs on agricultural goods from an average of 31 percent to 14 
percent, as well as elimination of non-tariff barriers on agricultural 
imports; major openings in industries where China has been extremely 
reluctant to permit foreign investment, including telecommunications 
and financial services; and unprecedented levels of protections for 
intellectual property rights.
    As a result of WTO membership, the pillars of one-party domination, 
especially the corruption endemic to the current system, could begin to 
crumble under the weight of transparency and reforms that are the price 
of China's entry into the global trading system.
    One need look no further than recent reports of rioting this past 
February by more than 20,000 miners and their families stemming from 
the pervasive inefficiency and corruption in the state-owned 
enterprises that are at risk of extinction under the economic reforms 
China will be required to carry out. How China will deal with this 
social turbulence is one of the most important questions facing not 
just Beijing, but all people who care about economic advancement and 
human rights.
    There is no question that increased and better regulated trade with 
China will benefit the United States. What many following the debate 
are concerned about, however, is whether and how increased trade 
between the two countries will benefit the population of China beyond 
the ruling elite. One of the witnesses testifying here this morning is 
Mr. Harry Wu, whose story imbues him with a level of moral authority 
that all Americans should respect. Mr. Wu's personal experience with 
the forced labor system in China, as well as his continuing efforts to 
shine a light on those abhorrent practices, weigh heavily in the 
considerations of all those who believe human rights should be a 
priority of U.S. foreign policy.
    There is also an argument that the quality of life of hundreds of 
millions of Chinese citizens is immeasurably improved as a result of 
the economic reforms implemented by the late Deng Xiaoping and 
continued under his successors, most prominently Premier Zhu Rongji. 
Since the introduction of economic reforms in 1979, China's economy has 
emerged as one of the fastest growing in the world. World Bank figures 
show that as many as 200 million Chinese have been lifted out of 
poverty as a result of the government's decision to liberalize the 
economy. While it is estimated that as many as 30 percent of the 
population continue to subsist below the poverty level, the size of the 
middle class has expanded dramatically. A recent Congressional Research 
Service study noted that, by the year 2005, China will have more than 
230 million middle-income consumers. Clearly, economic reform, fueled 
in large part by trade, is benefitting the average Chinese citizen. It 
has not, however, liberated them from the dictatorial powers of the 
state.
    Moreover, Zhu's threatening statements toward Taiwan prior to the 
latter's recent elections, as well as his admonition that a failure by 
the United States to pass permanent Normal Trade Relations will be 
regretted by us for 1,000 years are sadly illustrative of the Communist 
Party's adherence to obsolete and discredited policies.
    That said, membership in the WTO carries with it responsibilities 
that are at variance with Communist Party practice. That is why Martin 
Lee, chairman of the Democratic Party of Hong Kong, noted that China's 
participation in the WTO would ``bolster those in China who understand 
that the country must embrace the rule of law.'' Similarly, Wang Shan, 
a liberal political scientist, stated that ``Undoubtedly [the China WTO 
agreement] will push political reform.'' And the former editor of the 
democratic journal Fangfa has written that ``if economic monopolies can 
be broken, controls in other areas can have breakthroughs as well . . . 
In the minds of ordinary people, it will show that breakthroughs that 
were impossible in the past are indeed possible.''

    The Chairman. We have before us today witnesses who will 
shed light on both sides of the debate over Chinese accession 
to the WTO and the granting of permanent normal trade 
relations. First, we will hear from the Honorable William 
Daley, who is the Secretary of Commerce.
    In a subsequent panel, we will hear from General Brent 
Scowcroft, former National Security Advisor and president of 
the Scowcroft Group; Mr. Jack Valenti, president of the Motion 
Picture Association of America, who will shed light on the 
impact of the 1979 trade agreement on intellectual property 
right protection, and will also, I am sure, illuminate us with 
some more interesting rhetoric; Mr. H. Richard Kahler, 
president of Caterpillar Corporation, representing the Business 
Roundtable; Ms. Lori Wallach, director of Global Trade Watch; 
and Mr. Harry Wu, to whom I referred earlier in my remarks, who 
has spoken eloquently of the brutal system of forced labor that 
endures inside China.
    Before we hear from Secretary Daley, I would like to first 
apologize for the length of my opening remarks, but I do 
believe that this is one of the most important issues that this 
or recent Congresses have undertaken as far as its impact on 
the United States, not only financially and trade-wise, but on 
our relations with the emerging superpower in the world.
    I would also like to note that the major reason why we are 
having this hearing is because our Ranking Member, our 
respected Senator Hollings, felt that it would be very 
important this hearing be held before this Committee.
    Senator Hollings.

             STATEMENT OF HON. ERNEST F. HOLLINGS, 
                U.S. SENATOR FROM SOUTH CAROLINA

    Senator Hollings. Thank you, Mr. Chairman, for holding the 
hearing. The town is alert and alarmed with respect to the so-
called demonstrations against the International Monetary Fund 
and the World Bank meeting. Most of the writers have missed the 
point with respect to Seattle because the overwhelming majority 
of the demonstrators, led by the AFL-CIO, were very, very 
peaceful.
    The truth is that the Eugene, Oregon crowd of anarchists 
came down and started breaking up the peaceful demonstration 
near Main Street but the truth is, and the main point is that 
the AFL-CIO demonstration in March was led by the United States 
of America's premium export industry, Boeing. I know this 
keenly, felt it keenly because the Washington Boeing crowd was 
always looking for my opinion on the demonstration.
    When I stood up for textiles Boeing was hollering free 
trade, free trade all the time, drooling Government subsidies 
through the Pentagon Department by way of technology and 
research, while drooling financial support and subsidies 
through the Ex-Im Bank. None of that was ever provided for the 
textile industry, but they said they had to do it for exports, 
exports, and yet the major export industry of the country and 
the continent was leading the march.
    Now, why? Because they cannot sell that plane in downtown 
China unless as Bill Greider wrote in his book, ``One World 
Ready or Not,'' Much of Boeing's product is now produced 
abroad. So what it comes down to is the reality that we have 
been losing jobs intentionally for 50 years. At the end of 
World War II we had the only industry, we instituted the 
Marshall Plan, we sent over the money, the technology, the 
expertise, and it has worked. Communism has been defeated by 
capitalism.
    But after 50 years of giving up the shoes and the textiles, 
and I mention that because as a young Governor they would look 
at me and they would say, ``Come on, Governor, what do you 
expect.'' Let them make the shoes and the textiles, we will 
make the airplanes and computers.
    Point: they are making the shoes, the textiles, the 
airplanes and the computers, and we continue on this particular 
subject of the People's Republic with soaring trade deficits. 
The reality should be clearly stated, the global economy, and 
global competition is not one of free trade. It is one of 
controlled trade.
    Japan has been--a member of GATT for more than 50 years and 
in WTO--a member since 1994. We are hearing now that, oh, WTO 
will open up trade relations and provide greater transparency. 
We cannot get Japan to open up yet, after 50 years. However, if 
I operated Japan, I would have the same policy because it 
works. They get market shares. They nearly out-produce America, 
120 million Japanese workers to 270 million Americans. Mark it 
down and watch it happen.
    So the Peoples Republic of China knows what they are doing. 
They know how to build up economic strength, which in turn--
General Scowcroft will submit testimony in agreement--gives you 
political, foreign policy strength. Money talks. Nobody worries 
about the Sixth Fleet and the atom bomb. You are not going to 
use the hydrogen bomb, and the Sixth Fleet's huffing and 
blowing up and down the Straits out there by Macao means 
absolutely nothing to 1 billion 300 million people.
    What we need to do is build up our economic strength, so 
the purpose for the hearing for this particular Senator is an 
opportunity to say no. Not to China. We're not saying ``no'' to 
China. We are saying ``no'' to the United States. You have got 
to sober up, and you have got to institute what Cordell Hull 
called reciprocal free trade, competitive free trade.
    I will ask that the remainder of my statement be included 
in the record. Thank you.
    The Chairman. Without objection
    [The prepared statement of Senator Hollings follows:]

            Prepared Statement of Hon. Ernest F. Hollings, 
                    U.S. Senator from South Carolina

    Thank you Mr. Chairman. First, I want to commend the Chairman for 
convening this hearing and to thank all of the witnesses for agreeing 
to testify. China MFN is perhaps the most important international trade 
issue since NAFTA, and it is crucial that we maintain an open dialogue 
on the subject. I look forward to hearing from Secretary Daley, the 
Administration's point person on the issue. Moreover, the remainder of 
the witness list offers a rich and diverse presentation. It should be a 
lively discussion.
    It would be foolish for the United States to extend Permanent MFN 
to China at this time. Currently, China profits much more from our 
trade relationship than we do, and granting Permanent MFN will only 
serve to worsen an already unfair situation.
    Our trade deficit with China has reached appalling levels--some 
might even say unacceptable. And it continues to grow every year. The 
value of U.S. imports from China almost doubled between 1994 and 1998, 
jumping from $38 billion to over $71 billion. Of course, exports also 
rose during that time, but only from $9 billion to $14 billion. The 
result is trade deficit that has exploded by almost $30 billion in four 
years!
    The Administration and its supporters hold that trade with China is 
beneficial because it gives the U.S. a market for exports--this 
argument is a classic example of missing the forest through the trees. 
Despite highly-touted increases in exports to China in the past few 
years, China receives a mere 5% of total U.S. exports. This is roughly 
the same percentage of exports that we send to Belgium and Luxembourg! 
Meanwhile, China maintains a $68 billion trade surplus with the United 
States while running a $26 billion deficit with the rest of the world 
combined. As we listen to the Administration pat itself on the back 
over a paltry increase in exports, American imports continue to finance 
China's economic boom!
    To know the whole story, we have to look at what products comprise 
the export increase. What we find is that many of the goods that the 
U.S. ships to China are in fact inputs that will be assembled by low-
cost Chinese labor and re-imported by the U.S. as finished products. 
The numbers are clear. From 1997 to 1998, the value of American exports 
to China of products designated for assembly and reimportation grew by 
a dramatic 979%. Over the past ten years, the percentage of China's 
exports generated by foreign-affiliated firms has risen from 15% to 
almost 50%. Essentially, China, continuing in the great tradition of 
Mexico with NAFTA, is a gigantic export platform.
    China not only exports billions of dollars worth of merchandise to 
the U.S., it also exports its unemployment. More and more U.S. 
companies are relocating their production facilities to China to take 
advantage of the cheap labor and minimal labor and environmental 
standards. Meanwhile, American workers continue to lose their jobs at 
an alarming rate. It is estimated that 600,000 Americans were laid off 
in 1996 alone due to trade with China--a year when our trade deficit 
with China was a mere $40 billion. For the sake of our workers, the 
U.S. cannot afford to continue to let the trade deficit with China 
spiral out of control, yet that is exactly what will happen if Congress 
votes for MFN.
    Though the exploding trade deficit is reason enough not to grant 
China MFN, there are other compelling reasons as well. Most 
importantly, despite continued admonishment by the U.S., China's 
government has not made a good faith effort to improve its human rights 
record. On the contrary, repression has increased in China throughout 
the 1990's, and particularly since the Clinton Administration ended the 
link between trade status and human rights record. Currently, every 
known political dissident in China has been either exiled or jailed. In 
addition, the Chinese government continues to maintain forced labor 
camps, and even to export goods produced in these camps to the United 
States, despite a specific promise to end this practice. Withholding 
preferential trade status is perhaps the most effective leverage our 
government has over the Chinese, and it would be foolhardy to terminate 
it by granting MFN.
    Extending permanent trade status to China does not make economic or 
political sense. The last thing the United States needs is a higher 
trade deficit with China and the resulting job losses. Encouraging 
trade is important, but not when it is accomplished at the expense of 
American workers. Also, considering China's unwillingness to improve 
its human rights practices, now is not the time to end our major source 
of leverage in this area.
    Again, I thank the witnesses for coming, and I look forward to 
hearing their testimony.

    The Chairman.Senator Hutchison.

            STATEMENT OF HON. KAY BAILEY HUTCHISON, 
                    U.S. SENATOR FROM TEXAS

    Senator Hutchison. Thank you, Mr. Chairman. I will be brief 
and just say that I do favor permanent trade relations with 
China because I do think it is good for the United States to 
have China inside the tent, to have China accountable, just as 
every other nation should be in a free and fair trade 
situation.
    I think we have not had true free trade, as the Senator 
from South Carolina has said. It has not been a level playing 
field. I have heard Mr. Valenti talk about copyrights and I 
think that we must have a way to bring them into the tent so 
that there can be free and fair trade.
    But what I am going to be most interested in hearing from 
you and the second panel today is, how do we link our support 
for Taiwan and our support for a free and fair trade 
relationship with China, if we do, and should we in any way 
link the Taiwan Security Act with permanent free trade with 
China?
    So with that, Mr. Chairman, I thank you for calling the 
hearing.
    [The prepared statement of Senator Hutchison follows:]

           Prepared Statement of Hon. Kay Bailey Hutchison, 
                        U.S. Senator from Texas

    Thank you Mr. Chairman. And thank you for calling this hearing on 
perhaps the most significant trade issue facing the United States 
today.
    I will come right to the point. I support trade with China and I 
support the establishment of permanent normal trade relations with the 
most populous nation on earth. I do not do so because I believe it will 
make China more democratic, although I hope and expect that will be the 
case. I am for permanent normal trade relations with China because it 
is good for the United States. It will make us more competitive, keep 
prices lower for American consumers, and keep our job-creation engine 
running at high speed.
    It is true that our current relationship with China is flawed, and 
it is also true that PNTR is not a panacea for this relationship. 
China, the U.S., and the international community have years of work 
ahead before we can achieve real trust and cooperation among these 
nations. I cannot, and will not try, to defend China's domestic human 
rights record.
    However, that does not mean we should give up now. Surrendering at 
this time would sever any hope of engaging China in a real dialogue. 
How are human rights and U.S. security issues served by restricting 
trade with China? Such a move may allow us to feel morally superior in 
the short run, but I believe it would also galvanize the Chinese nation 
as an adversary of the U.S.
    For those who see trade as a weapon in the battle for freedom: 
Democracy tends to follow capitalism, and there is no question that 
capitalism is on the rise. An authoritarian government cannot stand 
forever in the face of people yearning for freedom. This has been true 
on both ends of the political spectrum: East Germany and the rest of 
the Soviet bloc on the left, South Korea, Taiwan, Chile, and the 
Philippines on the right. Free enterprise and investment tends to erode 
the strength of one party dictatorships such as we have in China today.
    Finally, the question of Taiwan. The extension of permanent normal 
trade relations with China has almost nothing to do with our commitment 
to Taiwan. Taiwan will not be any more secure were we to deny trade 
with China. Taiwan itself is rapidly becoming one of China's largest 
trading partners and foreign investors.
    We remain committed to defending Taiwan, and I fault the 
administration for so neglecting our relations with both China and 
Taiwan that this false dichotomy of trade with China versus security of 
Taiwan has emerged. When it comes to Taiwan, this administration has 
allowed doubt to develop about our commitment because it has wavered 
between ignoring Chinese belligerence and sending in aircraft carriers.
    What is needed is a firm, regular commitment to providing the 
island the defensive support it needs. This can be done without 
sticking our thumb in China's eye, but it must be done, and our 
leadership in Asia depends upon it.
    Thank you again, Mr. Chairman for calling this hearing, and for 
your willingness to discuss this critical trade issue. If we fail to 
take on the Chinese problem, we cannot possibly hope to solve it.

    The Chairman. Senator Ashcroft.

               STATEMENT OF HON. JOHN ASHCROFT, 
                   U.S. SENATOR FROM MISSOURI

    Senator Ashcroft. Thank you, Mr. Chairman. I am delighted 
to have the opportunity to comment on this very important 
responsibility we have to try and expand the opportunity for 
American workers.
    Mr. Secretary, just let me thank you in advance for coming. 
You have a tremendous record of working for export 
opportunities and I am grateful for that. You came to Missouri 
last year, and I hope to work together with you on several 
trade issues that are important to my home state.
    My goal for a balanced U.S.-China trade relationship is to 
ensure that Missourians, Missouri farmers, ranchers, and 
workers, and businesses will benefit. I have talked with a lot 
of Missourians about China's bid to join the WTO and, frankly, 
they are very quick to praise the administration for its 
negotiation of the November 1999 bilateral agreement in 
virtually every area, everything from manufactured parts to 
automobiles and agriculture. Missourians want to embrace the 
opportunities that the agreement could afford.
    This last Saturday, I went to a plant in Ava, Missouri. It 
is a Copeland plant. Copeland makes high tech compressors, and 
technology of compressors has changed. This is one of the 
compressors here. It is called a scroll compressor. It used to 
be that compressors were all piston-type, and compressed in by 
pistons, but this scroll squeezes the air by turning these 
scrolls together.
    The industrial tariff, they said, for manufactured products 
such as this--and obviously Copeland is the world's leader in 
compressors by a long shot--would be reduced from 25 percent to 
10 percent. Trading and distribution rights would be phased in 
over 3 years so that the company could distribute its scroll 
sets and compressors broadly, not just to its own plant in 
China, and the company would be given the opportunity to 
service their products and to establish service networks.
    This is an expanding industry. Because of the superior 
capacity of Copeland's superior American technology, this is a 
product in very high demand for air conditioning and 
refrigeration.
    Right now that plant down in Ava, Missouri is sending 40 
percent of its manufactured equipment to Asia, and the manager 
is expecting to expand the production substantially. As a 
matter of fact, I visited the new facility and they expect to 
double the 350 workers to over 700 shortly and then close to 
800 workers in the next couple of years. Right now, 40 percent 
of all these items go to Asia. Production is expected to expand 
greatly, with almost all of the new production scheduled to go 
to Asia. It would be about 85 percent of all production in the 
year 2003 that would go to Asia to be installed in air 
conditioning and refrigeration equipment there. This is just 
one example that I have talked to Missourians about, of how 
open markets to a quarter of the world's population can create 
jobs and impact substantially local communities.
    The Missouri economy as a whole, would benefit from the 
Chinese market opening, because agriculture is also on the list 
and is the largest employer in my home state. For instance, 
Missouri ranks close to the top in beef and pork, and is a 
major producer of corn and soybeans. We rely on free trade. We 
do want China's tariffs in beef to drop from 45 percent to 12 
percent. That is a far better number. We do want Chinese to 
accept USDA-approved meat, and we do want Missouri ranchers to 
have direct access to grocery stores and Chinese customers and 
not be limited to selling to restaurants and commercial 
establishments.
    So this agreement, I think, that has been negotiated by the 
administration is an agreement that has terms and conditions 
which are very attractive, not only industrially in terms of 
manufacturing, but in terms of the agricultural industry as 
well.
    I think the key questions that Missourians have is, will 
they really get results? Will there be more than promises? Will 
these be enforceable things? Right now, Missouri's agricultural 
community is pretty upset about Europe, a WTO member which 
simply refuses to accept the rule of the WTO regarding American 
beef. They have been in noncompliance in a rather contumacious 
sense and is expected to stay in noncompliance and pay the 
penalties which are rather meager.
    So what I am going to be interested in is primarily a 
couple of things. The first is that China in my opinion has a 
rather dismal record in complying with its bilateral agreements 
with the United States. Under the 1992 bilateral Market Access 
Agreement, the Chinese took licensing requirements off about 
177 products, and within a couple of years they had reimposed 
licensing agreements on about 400 different additional 
products.
    If they give you something with one hand and take it away 
with the other, what assurance do we have of compliance? And if 
China joins the WTO without our being able to address the issue 
of enforcement in any significant way, I want to be assured 
that we will not be left with a lot of litigation, a lot of 
resolutions that come down in our favor at the WTO without 
compliance. I want to ensure that when it comes to our ability 
to get compliance, we simply do not have anything but an empty 
piece of paper, much like what we have with the Europeans over 
beef, which basically is authority for the Europeans to 
continue in conduct which is very, very prejudicial against 
American ranchers.
    So let me sum it up. Mr. Secretary, I am very pleased that 
you are here. The broad outlines of this agreement at least 
specify terms and conditions which, if they can be enforced, 
are very beneficial. But as a result of our experience with the 
WTO in Europe and as a result of our prior history of 
agreements with the Chinese, I want to be looking for and 
developing ways to make sure we get solid compliance and do not 
give up in the process an ability to enforce agreements that 
are very important to the United States.
    Thank you, Mr. Chairman.
    [Letter sent to the Honorable William M. Daley by Senator 
John Ashcroft for the record follows:]
                                                  February 24, 2000
The Honorable William M. Daley
Secretary of Commerce
U.S. Department of Commerce
14th Street and Constitution Avenue, N.W.
Washington, DC 20230

Dear Mr. Secretary:

    This year as Congress begins to consider China's permanent normal 
trade relations status, I am listening carefully to what my 
constituents are telling me about the current and potential benefits of 
the U.S.-China trade relationship. In Missouri, there are many workers, 
farmers, and businesses that have been promised expanded markets for 
their exports as well as sufficient protection from imports that flood 
U.S. markets unfairly.
    Clearly, we all want to know that the recently made promises 
between the U.S. and Chinese governments will be enforceable and 
enforced. More immediate, however, is my concern that current laws 
designed to protect U.S. entities are being faithfully executed. 
Specifically, a Missouri company recently brought a case involving the 
enforcement of anti-dumping laws against China.
    Rhodia Inc., which operates in St. Louis and is the only remaining 
U.S. producer of bulk aspirin, brought an action May 28, 1999, to 
contest dumping of Chinese aspirin in the U.S. market. While the 
preliminary determination by the Department of Commerce on January 3, 
2000, was favorable to Rhodia, the Department's methodology resulted in 
a finding of no dumping by at least one significant Chinese producer. I 
have been advised that most of the discretionary issues that the 
Department had to decide were all resolved in favor of the Chinese 
companies, as opposed to the U.S. company. This has been of substantial 
concern to Rhodia, its employees, and the International Chemical 
Workers Union (UFCW).
    Mr. Secretary, this concerns me. It is my understanding that the 
Department is now in the process of investigating and then establishing 
a final dumping margin in this case. The Department is expected to 
announce its final margin sometime in May 2000.
    It is my desire that companies in Missouri receive the protection 
and benefits of U.S. agreements and trade laws. The Administration must 
demonstrate now that it is a strong advocate on behalf of U.S. workers 
and that it will execute faithfully these laws. Such decisive action 
now will help dispel concern among Missourians that their jobs will be 
threatened by dumping if Congress approves PNTR for China.
    I am watching this matter with keen interest. While I am 
particularly interested in the effect of this decision on the St. Louis 
manufacturing facility because it provides good jobs for Missourians, I 
am also tracking this matter for its broader implications on American 
policy in regarding expansion of trade with the Chinese. I would 
appreciate your keeping me informed of the Department's activities on 
this important matter.
            Sincerely,

                                                      John Ashcroft

    The Chairman. Senator Bryan.

              STATEMENT OF HON. RICHARD H. BRYAN, 
                    U.S. SENATOR FROM NEVADA

    Senator Bryan. Mr. Chairman, I thank you very much for 
convening this hearing and thank our distinguished witnesses 
for joining us here today.
    You know, it strikes me that the United States of America 
constitutes about four percent of the world's population, about 
20 percent of the wealth in the world. If we are going to 
expand our economy, if we all hope to do so, it seems to me we 
cannot ignore a potential market of 1.250 billion.
    We can disagree, as I do, certainly, with the politics, the 
human rights abuses and some of the other difficulties that we 
encounter, but it strikes me that to ignore a country of this 
size, this magnitude, with the potential that it has to expand 
America's economy and generate new jobs, would be a tragic 
mistake.
    The Chairman. Thank you very much, Secretary Daley, for 
your Herculean efforts in this very difficult challenge that we 
face, and I thank you for your great work.

              STATEMENT OF HON. WILLIAM M. DALEY, 
                     SECRETARY OF COMMERCE

    Secretary Daley. Thank you, Mr. Chairman, Senator Hollings, 
members of the Committee. Thank you for inviting me back up to 
the Committee. It has been a while, and I appreciate the 
opportunity to speak on what is one of the most important 
economic and political issues that I think the Nation will face 
in not only this year but over the next couple of years.
    Let me first, Mr. Chairman, put a caveat on this testimony. 
I am not a trade lawyer. I did not negotiate the agreement. I 
have to praise first of all Ambassador Barshefsky for the 
tremendous work which she did on behalf of our Government in 
bringing to conclusion an agreement that I firmly believe is a 
win, a strong win for the United States, and will present 
tremendous opportunities for American businesses and American 
working men and women over the next number of years.
    I would like to highlight some of the terms of the 
agreement, which in my opinion is a one-way deal in favor of 
the United States. Attached to my testimony is a much more 
detailed summary of the terms. In addition, there are 45 
industry-specific fact sheets, 50 State reports, and other 
detailed information available on our Web site, which is 
www.ChinaPNTR.gov.
    This week, President Clinton will be releasing much more 
detailed information on opportunities that this agreement will 
provide for workers in all 50 States. For industrial goods, 
China agreed to cut tariffs from an average of 25 to 9 percent 
overall, and 7 percent in those priority products of ours. 
China will make substantial cuts immediately, with further cuts 
phased in, most within 5 years. These will benefit our 
automobiles, chemicals, wood products, and many other 
industries. China will eliminate tariffs and quotas on 
semiconductors, telecom equipment, computers, and computer 
equipment by 2003 in most cases.
    Last week, nearly 200 high tech CEO's wrote to Members 
urging their support. They indicated this is ``the most 
critical vote you will make in support of our high tech 
industries this year.'' The agreement does more than lower 
tariffs. It lets firms engage in wholesale and retailing, 
repairing and transporting their products in China.
    In services, China has made significant commitments to 
phaseout most restrictions in banking, insurance, and telecom, 
and they will open up to professional services such as 
accounting, legal, consulting, business and computer-related 
services, motion picture, video and sound recording services.
    In agriculture, the agreement provides increased access for 
a broad range of commodities and eliminates nontariff barriers 
that have kept U.S. farmers out of this enormously large 
market.
    On our priority products, tariffs will drop from an average 
of 31 to 14 percent by 2004, with even sharper drops for beef, 
poultry, pork, and cheese. China also will create tariff rate 
quotas that will expand opportunities for wheat, corn, and 
rice.
    Right now, the average man, woman, and child in China 
consumes less than one dollar's worth of American agricultural 
goods a year, but in the future Secretary Glickman tells us 
that China will account for nearly 40 percent of the growth of 
our agricultural exports. We also negotiated terms to ensure 
China lives up to its commitments.
    China has agreed to a number of provisions that address 
issues raised by the high degree of government involvement in 
their economy. They agreed to guard against import surges. This 
is in the form of a 12-year product-specific safeguard 
provision that lets us take action when exports from China 
cause market disruptions. The deal protects American firms and 
workers from unfair trade practices, including dumping. China 
agreed to guarantee our right to continue using our current 
methodology in antidumping cases for 15 years.
    The agreement makes it easier to export to China from home 
rather than forcing companies to set up in China to sell their 
products there, and forced technology transfers will be 
eliminated, better enabling U.S. firms to protect their R&D 
investments.
    The agreement contains effective enforcement tools to 
ensure China meets its obligations. For the first time, China's 
trade commitments will be enforceable through binding WTO 
dispute settlements, subjecting its actions to impartial review 
and sanctions if necessary.
    Our agreement is very specific, with clear timetables for 
implementation and firm end dates for full compliance. When 
copies of this agreement were handed out to Members, some 
thought that the text looked more like a detailed spreadsheet. 
It does, and this was intentional. It reflects past experiences 
with trying to enforce trade agreements with China.
    As I said, we would be kidding ourselves if we think 
everybody in China is all for this, and will not find clever 
ways to try to get around this agreement, so we will vigorously 
monitor and enforce the terms of this deal.
    The President has requested a $22 million increase in new 
compliance and enforcement resources for Commerce, USTR, USDA, 
and the State Department. This would triple resources dedicated 
to China trade compliance at our Department alone. For the 
first time, Commerce and State will have compliance officers on 
the ground in China, and last week we agreed to provide the 
Chinese with legal and technical assistance in their efforts at 
making their laws compliant with WTO obligations.
    Let me say a few things beyond the economic, because this 
debate will obviously go well beyond the economic and 
commercial aspects of this agreement. The President has made it 
very clear supporting this does not mean an endorsement of 
China's human rights policies. We will continue to denounce 
China's persecution of citizens for their political or 
religious beliefs.
    A few weeks ago, Secretary of State Albright personally 
presented a resolution to the U.N. in Geneva condemning China's 
human rights record. It is also clear to me that entering the 
WTO has not been an easy choice for China's leaders to make. 
They understand opening their borders to foreign goods also 
opens the door wide to new ideas that are uncontrollable. They 
made the decision to take this risk, and in my opinion we 
should encourage it.
    The possibility of positive change is illustrated by the 
great potential of the high tech market in China. China will 
become the world's second largest personal computer market by 
the end of this year, and by then, 20 million Chinese will be 
connected to the Internet. Not only will this technology 
explosion benefit our companies, but it will give the Chinese 
people unfettered access to outside influences and ideas. Based 
on what I heard last week as I was in China from academics, the 
entrepreneurs, and the NGO's, I feel that this has to help 
promote a greater political reform process.
    Finally, when the President asked me to lead the 
administration's effort, to be frank with you I saw some 
misunderstanding of what this vote may actually mean. Normal 
trade relations is the same trading status we extend to the 
rest of the world, with very, very, very few exceptions.
    This legislation would make it permanent, and would remove 
China from the annual process which we have had since 1980. 
Permanent status is required to meet our obligations to treat 
all WTO members the same. Not surprisingly, China seeks 
identical treatment, and WTO rules require that it be provided.
    This will not be a vote on whether China joins the WTO. 
Once China completes its negotiations with other countries, its 
application will move forward with or without us. This vote 
will determine whether we enjoy the economic benefits created 
by China's WTO membership. The vote will not affect whether the 
Chinese will have access to our market. They already do. A yes 
vote gives us access to their market and the opportunity to 
attempt to level the playing field after so many years or 
having an unlevel playing field.
    Some say vote no on permanent status but then turn around 
and vote yes on the annual review. They believe we should not 
give up the leverage of annual review. I do not believe there 
is much leverage in that annual review. For 20 years, we have 
never voted it down and to me the cost of keeping this leverage 
is losing the opportunity to open China's market for U.S. 
companies, U.S. products, even as our European and Asian 
competitors will take advantage of that opportunity.
    I was most encouraged by Speaker Hastert's announcement 
that the vote in the House will be the week of May 22 and, as 
you know, Majority Leader Lott has promised a vote in the 
Senate immediately after the Memorial Day recess. These are 
very positive developments.
    And with that, Mr. Chairman, I conclude my statement and I 
ask that it be included in the record. I would be happy to 
answer any of your questions and, again, I thank you for the 
privilege of being back before the Committee.
    [The prepared statement of Secretary Daley follows:]

     Prepared Statement of William M. Daley, Secretary of Commerce

    Mr. Chairman, Senator Hollings, members of the Committee, thank you 
for the opportunity to testify today on the benefits to America of 
China's accession to the World Trade Organization (WTO). On Saturday, I 
returned from a trip to Beijing where I co-chaired the 13th Session of 
the U.S.-China Joint Commission on Commerce and Trade (JCCT). The JCCT 
is a government-to-government forum developed to promote U.S.-China 
commercial cooperation. Last week we met to discuss China's ongoing 
reform efforts and ways to enhance China's transition to a rules-based 
global trading system. Obviously a lot of the discussion centered on 
China's pending application to join the WTO and on our process for 
deciding whether to grant Permanent Normal Trade Relations (PNTR).
    This was my third visit to China during my tenure as Secretary of 
Commerce. Much has changed even in the few years that I have been 
traveling there. The signs of a nascent transition to a market-based 
economy are evident everywhere in increased private ownership of 
businesses, more freedom for the Chinese to choose their own places of 
employment, and the return of privately owned farms. Over twenty years 
of domestic reforms have enabled China to lift more than 200 million 
people out of absolute poverty. Wireless communications has put cell 
phones in the hands of 40 million Chinese (only a fraction of the 
potential market) and given them access to a world of ideas and 
influences.
     But many problems exist. High unemployment, inefficient state-run 
enterprises and corruption continue to plague the Chinese economy. As a 
result, economic growth has slowed.
    The Chinese leadership has recognized the need to open its market 
to global competition in order to be able to build a modern, successful 
economy. One of the best indicators of the commitment of the Chinese 
leadership to a more open economy is its desire to take on the 
challenges and obligations of WTO membership. I am here today to 
discuss with you how supporting PNTR status for China can move China 
toward a more open economy.
    Last November, after 13 years of negotiations, the United States 
and China reached a bilateral agreement on the terms and conditions of 
China's entry into the WTO. China made significant and far-reaching 
market access and trade concessions that will benefit American 
exporters and import sensitive industries across a broad range of 
industrial goods, services and agriculture. It contains strong 
enforcement mechanisms and strong protections against unfair trade. 
American exporters stand to benefit immediately. China has agreed to 
begin opening its markets in virtually every sector immediately upon 
accession. The phase-in of further concessions will be limited to five 
years in almost all cases, and in many cases only one-to-three years.
    In contrast to China's historic set of commitments, we have only 
one obligation, and that is to maintain the market access policies we 
already apply to China by granting it Permanent Normal Trade Relations 
status.
    There is no doubt that this agreement is a great opportunity for 
American businesses, workers and farmers. It will provide unprecedented 
access to a largely untapped market of over one billion consumers. The 
benefits for the U.S. are widespread, including significant 
opportunities for small and medium size businesses. SMEs are 
responsible for a growing share of U.S. exports to China.
    Last week, 47 Governors sent a letter to Senators and Members of 
the House expressing how important they believe passage of China PNTR 
is to maintaining the economic growth and prosperity of families in 
their states and territories. These Governors know this is a good 
economic deal for America. They do not want America to be left behind.
    Yet this agreement goes beyond economics. As President Clinton has 
said, this represents the most significant opportunity that the United 
States has had to create positive change in China since President 
Nixon's visit there in the early 1970s. As a world leader we have an 
obligation to foster further reform in China. Encouraging China to join 
the rules-based world trading system gives it a greater stake in the 
stability and prosperity of its regional neighbors and the rest of the 
world. It will create a better, more stable, safer world.
    Now, let me highlight some of the terms of our bilateral agreement 
on China's accession to the WTO. Attached to my testimony is a more 
detailed summary of the terms of the agreement. In addition, over 45 
industry specific fact sheets, 50 state-specific reports, and other 
detailed information are available on our Web site at 
www.chinapntr.gov.

    Industrial Goods

    China has agreed to cut tariffs from an average of 24.6 percent to 
an average of 9.4 percent overall and 7.1 percent on U.S. priority 
products. China will make substantial cuts immediately with further 
cuts phased in, most within five years. These cuts will benefit a wide 
range of U.S. products from automobiles, to chemicals to wood products. 
China will also eliminate all import quotas and non-automatic licensing 
requirements for industrial goods. For example, China will participate 
in the Information Technology Agreement, eliminating tariffs and quotas 
on information technology products such as semiconductors, 
telecommunications equipment, computers and computer equipment and 
other items by 2003, in most cases, and 2005 in a few others. Last 
week, nearly 200 high tech industry CEOs wrote to Members of Congress 
urging support for PNTR for China and identifying it as ``an absolute 
priority for high-tech companies . . .'' and the ``. . . most critical 
vote you will make in support of our high technology industries this 
year.''

    Services

    This agreement does more than lower tariffs substantially. Equally 
important to U.S. industry is the agreement by China to allow U.S. 
firms to engage in trade (importing and exporting) and the full range 
of distribution services including wholesale, retail, repair and 
transport, for their products in China. At present, China prohibits 
foreign firms from distributing imported products or providing after-
sale services such as repair and maintenance, unless they have invested 
in China.
    China has made significant commitments to phase out most 
restrictions in a broad range of service sectors in addition to 
distribution, including banking, insurance and telecommunications. Also 
liberalized are professional services such as accountancy and legal 
consulting, business and computer-related services, motion pictures and 
video and sound recording services. China will also take on the 
obligations contained in the Basic Telecommunications and Financial 
Services Agreements.

    Agriculture

    The WTO accession bilateral agreement provides increased access for 
U.S. agricultural exports across a broad range of commodities and 
eliminates non-tariff barriers that have kept U.S. farmers out of this 
huge market. On U.S. priority agricultural products, tariffs will drop 
from an average of 31 percent to 14 percent by January 2004, with even 
sharper drops for beef, poultry, pork, cheese and other commodities. 
China will also create new tariff rate quotas that will significantly 
expand export opportunities for U.S. wheat, corn, rice and other bulk 
commodities farmers. U.S. exporters will also gain the right to sell 
virtually all products freely inside China without going through state 
trading enterprises or other middlemen. Right now, the average man, 
woman, and child in China consumes less than a dollar's worth of 
American agricultural goods a year. Looking to the future, China will 
account for nearly 40 percent of the growth of U.S. agricultural 
exports.
    In addition to the benefits of WTO accession, we will have 
substantial export opportunities through the 1999 U.S.-China Agreement 
on Agricultural Cooperation. This Agreement provides the terms for the 
removal of scientifically unjustified restrictions on importation of 
U.S. wheat and other grains, citrus, and meat. Already, we have seen 
China make historic purchases of all three commodities in the last few 
months as a result of this Cooperation Agreement. Complementing this 
Agreement are Chinese WTO commitments to permit trading and 
distribution rights.

    Safeguards and Enforcement

    In addition to unprecedented access to the vast Chinese market, we 
negotiated additional terms to ensure that we gain the full benefits of 
our agreement and that China lives up to its commitments. China has 
agreed to a number of provisions that go to the core of the closed 
Chinese economy and will result in real and effective market access. 
These special provisions address issues raised by the high degree of 
government involvement in the Chinese economy and by industrial policy 
measures, such as local content, offsets, export performance, and 
forced technology transfer requirements. These provisions were sought 
to address the legitimate concerns raised by Members of Congress, 
Democratic and Republican alike.
    The agreed provisions include special protections to guard against 
import surges from China. China has agreed to a 12-year product-
specific safeguard provision which ensures that the United States can 
take effective action in case of increased exports from China which 
cause market disruption in the United States. This applies to all 
industries, permits us to act on a lower showing of injury to domestic 
industry than under existing safeguard law and allows us to act 
specifically against imports from China. This safeguard provision is in 
addition to existing safeguard actions authorized under Section 201.
    We have also ensured that American firms and workers will have 
strong protection against unfair trade practices, including dumping. 
China has agreed to guarantee our right to continue using our current 
methodology (treating China as a non-market economy) in antidumping 
cases for fifteen years after China's accession to the WTO.
    The agreement will also require China to reform a number of 
internal policies which force foreign companies to locate operations in 
China and give up valuable intellectual property rights as conditions 
of doing business. The agreement will eliminate unfair practices such 
as mandated offsets, local content and various investment performance 
requirements. China will take on the obligations of the WTO Agreement 
on Trade-Related Investment Measures. This will make it easier for U.S. 
companies to export to China from home rather than forcing companies to 
set up in China in order to sell their products there. Forced 
technology transfers will also be eliminated as a condition of 
investment, better enabling U.S. companies to protect their investment 
in R&D. China has agreed to stop enforcement of such practices in 
existing contracts immediately upon accession.
    The agreement contains effective enforcement tools to ensure China 
meets its obligations. For the first time, China's trade commitments 
will be enforceable through a binding WTO dispute settlement, 
subjecting its actions to impartial review, and ultimately sanctions, 
if necessary. The multilateral nature of the WTO also strengthens our 
enforcement capabilities. And the significance for China is great--its 
economic decisions will be subject to multilateral trade review, which 
will provide us additional leverage in resolving future trade 
disagreements with China.
     Our bilateral agreement with China is highly specific with clear 
timetables for implementation and firm end-dates for full compliance. 
When copies of the agreement were handed out to Members of Congress, 
some members commented that the text looked more like a spread sheet 
with its defined tariff rates, dates certain and concrete obligations. 
This was intentional and reflects past experience with trying to 
enforce trade agreements with China. The specificity of China's 
commitments in this bilateral agreement will strengthen our ability to 
monitor and demand compliance.
    The Administration intends to vigorously monitor and aggressively 
enforce the terms of this agreement. Our commitment to do so is 
reflected in the President's budget request for a $22 million increase 
in new compliance and enforcement resources for Commerce, USTR, USDA 
and the State Department. For example, the President's new initiative 
would triple resources dedicated to China trade compliance here at the 
Department of Commerce--including administration of our unfair trade 
laws. For the first time, Commerce and State will have compliance 
officers on the ground in China devoted exclusively to trade law 
enforcement and trade compliance.
    We also have retained the right to use the full range of existing 
United States trade laws, including Special 301 (intellectual property 
rights protection), Section 301 (unfair trade practices), and, of 
course, our antidumping laws. It also is important to emphasize that 
nothing in this agreement undermines our ability to continue to block 
imports of goods made with prison labor, to maintain our export control 
policies, or to withdraw trade benefits, including NTR itself, in case 
of a national security emergency.

    A More Open China

    The President has made clear that supporting China's accession into 
the WTO does not mean a tacit endorsement of China's human rights 
policies. We will continue to denounce China's persecution of its 
citizens for their political or religious beliefs. Two weeks ago, 
Secretary of State Albright personally presented a resolution 
condemning China's human rights record to the United Nations' Human 
Rights Commission in Geneva. We will not hesitate to use our authority 
to sanction China under the International Religious Freedom Act as we 
did last year. We will also continue to pursue our foreign policy goals 
with China in a number of important areas such as non-proliferation and 
global climate change. Our stance on a peaceful resolution of issues 
between China and Taiwan will not change.
    It is significant that many of those most supportive of a more 
open, democratic China support its membership in the WTO. The newly 
elected leader of Taiwan, Chen Shui-bian, supports normalizing trade 
relations between the United States and China. Martin Lee, the leader 
of Hong Kong's Democracy Party, recently said ``The participation of 
China in the WTO would not only have economic and political benefits, 
but it would serve to bolster those in China who understand that the 
country must embrace the rule of law.'' A longtime Chinese dissident 
leader, Ren Wanding, declared in support of the China's WTO membership 
``Before the sky was black, now it is light. This can be a new 
beginning.''
    By seeking to join the WTO, China has undertaken to deepen its 
market reforms and open its economy to the rest of the world. It has 
agreed to adhere to international trade rules and subject its actions 
to WTO dispute settlement. It's clear that this has not been an easy 
choice for its leaders. They understand that opening their borders to 
foreign goods, services and investors opens the door wide to new ideas 
and ideals they can not control. They have made the decision to take 
this risk. We should encourage China to choose the path of reform and 
involvement with the rest of the world. Bringing China into the WTO 
will make a significant difference.
    The possibility of positive change is illustrated by the great 
potential of the telecommunications market in China. Some analysts 
predict that China will become the world's second largest personal 
computer market by the end of this year and the third largest 
semiconductor market by 2001. It is already the world's fastest growing 
telecommunications market. In 1999 alone, the number of Chinese 
Internet users quadrupled, jumping from 2 million at the beginning of 
the year to 9 million. Growth predictions put Internet users at over 20 
million by the end of 2000. Not only will this technology explosion 
benefit the U.S. information technology industry, which is the best and 
most competitive in the world, but it will also give the Chinese people 
unfettered access to outside influences and ideas through satellites 
and the Internet. This cannot help but promote greater economic and 
political reform in China.
    Of course, the trade agreement with China will not, by itself, 
resolve serious human rights issues in China. At the same time, I 
believe that WTO membership will bring fundamental changes to China 
that will advance our goals in this area.

    The Vote on PNTR

    This Friday, I will head back to China with a group of your 
Congressional colleagues. Secretary Glickman will follow with another 
Congressional delegation during the last week in April. We will be 
meeting with Chinese officials and will visit new privately owned 
businesses and older state-run enterprises. We hope that this visit 
will give undecided Members the opportunity to observe the changes in 
China first hand and enable them to make an informed decision on PNTR.
    A few months ago when the President asked me to lead the 
Administration's efforts to seek Congressional approval of PNTR, I 
discovered that there was a lot of misunderstanding about what the vote 
on PNTR means. Let me explain. Normal trade relations, formerly called 
most-favored-nation or MFN treatment, is the same trading status we 
extend to the rest of the world, with very few exceptions. The 
legislation would remove China from the annual NTR renewal process 
under Jackson-Vanik, under which we have extended NTR to China since 
1980.
    PNTR is required to meet our obligation to treat all WTO members 
the same. WTO members are required to grant each other ``any advantage, 
favor, privilege or immunity'' provided to other countries 
``immediately and unconditionally.'' The United States currently 
extends PNTR to all countries with whom we share and enjoy the benefits 
of the WTO, without the condition of annual review. Not surprisingly, 
China seeks identical treatment upon its accession--and WTO rules 
require it to be provided.
    It is worth emphasizing that this will not be a vote on whether 
China will join the WTO. Once China completes its accession 
negotiations with other countries, its application to join the WTO will 
move forward, with or without United States participation. However, 
Congress' upcoming vote on PNTR will determine whether the United 
States will enjoy the economic benefits created by China's WTO 
membership. A vote against PNTR will mean ceding our share of this 
newly opened market to our economic competitors in Europe, Asia and 
elsewhere. As President Clinton has stated, ``We must understand the 
consequences of saying no. If we don't sell our products to China, 
someone else will step into the breach, and we will spend the next 20 
years wondering why in the wide world we handed over the benefits we 
negotiated to other people.''
    The vote on PNTR also will not affect whether the Chinese will have 
access to the American market and consumers. They already do. The 
United States has the most open market in the world. A vote for PNTR 
will give us access to the previously closed Chinese market and level 
the playing field in a dramatic way.
    I appreciate the thoughtfulness and consideration Members have 
brought to the debate. I am optimistic that once all the pros and cons 
have been weighed the Congress will vote its support for PNTR. I was 
very encouraged by last week's announcement by Speaker Hastert that the 
PNTR vote in the House of Representatives will be held the week of May 
22. Senate Majority Leader Lott has promised a vote in the Senate 
immediately after the Memorial Day recess. These are positive 
developments.
    When President Nixon first went to China, more people saw the 
pictures and heard his words than on any occasion in the history of the 
world. During that visit he paraphrased Abraham Lincoln, saying ``what 
we say here would not be long remembered. What we do here can change 
the world.'' Thirty years later, we now face another history-making 
foreign policy choice, identified by President Clinton as his top 
remaining foreign policy goal. After all the speeches, after all the 
arguments, after all the voices on both sides of the debate, what we 
say is not as important as what we do. And on this occasion we should 
act to promote further reform and the rule of law in China and to 
integrate China into the world economy. It is in our economic, 
strategic and national security interests to do so.
    Thank you, Mr. Chairman, that concludes my statement. I will now be 
happy to answer any questions you may have.
                                 ______
                                 
                  China Trade Relations Working Group
             summary of u.s.-china bilateral wto agreement
                            February 2, 2000
AGRICULTURE

    The Agreement would eliminate barriers and increase access for U.S. 
exports across a broad range of commodities. Commitments include:

         Significant cuts in tariffs that will be completed by 
        January 2004. Overall average for agricultural products will be 
        17.5 percent and for U.S. priority products 14 percent (down 
        from 31 percent).
         Establishment of a tariff-rate quota (TRQ) system for 
        imports of bulk commodities, e.g., wheat, corn, cotton, barley, 
        and rice, that provides a share of the TRQ for private traders. 
        Specific rules on how the TRQ will operate and increased 
        transparency in the process will help ensure that imports 
        occur. Significant and growing quota quantities subject to 
        tariffs that average between 1-3 percent.
         Immediate elimination of the tariff-rate quota system 
        for barley, peanut oil, sunflower-seed oil, cottonseed oil, and 
        a phase-out for soybean oil.
         The right to import and distribute products without 
        going through a state-trading enterprise or middleman.
         Elimination of export subsidies on agricultural 
        products.

    China has also agreed to the elimination of SPS barriers that are 
not based on scientific evidence.

INDUSTRIAL PRODUCTS

    China would lower tariffs and eliminate broad systemic barriers to 
U.S. exports, such as limits on who can import goods and distribute 
them in China, as well as barriers such as quotas and licenses on U.S. 
products.

TARIFFS

         Tariffs cut from an average of 24.6 percent to an 
        average of 9.4 percent overall and 7.1 percent on U.S. priority 
        products.
         China will participate in the Information Technology 
        Agreement (ITA) and eliminate all tariffs on products such as 
        computers, telecommunications equipment, semiconductors, 
        computer equipment, and other high-technology products.
         In the auto sector, China will cut tariffs from the 
        current 80-100% level to 25% by mid-2006, with the largest cuts 
        in the first years after accession.
         Auto parts tariffs will be cut to an average of 10% by 
        mid-2006.
         In the wood and paper sectors, tariffs will drop from 
        present levels of 12-18% on wood and 15-25% on paper down to 
        levels generally between 5% and 7.5%.
         China will also be implementing the vast majority of 
        the chemical harmonization initiative. Under that initiative, 
        tariffs will be at 0, 5.5 and 6.5 percent for products in each 
        category.

ELIMINATION OF QUOTAS AND LICENSES

    WTO rules bar quotas and other quantitative restrictions. China has 
agreed to eliminate these restrictions with phase-ins limited to five 
years.

         Quotas: China will eliminate existing quotas upon 
        accession for the top U.S. priorities (e.g. optic fiber cable). 
        It will phase out remaining quotas, generally by 2002, but no 
        later than 2005.
         Quotas will grow from current trade levels at a 15% 
        annual rate in order to ensure that market access increases 
        progressively.
         Auto quotas will be phased out by 2005. In the 
        interim, the base-level quota will be $6 billion (the level 
        prior to China's auto industrial policy), and this will grow by 
        15% annually until elimination.

RIGHT TO IMPORT AND DISTRIBUTE

    Trading rights and distribution are among the top concerns for U.S. 
manufacturers and agricultural exporters. At present, China severely 
restricts trading rights (the right to import and export) and the 
ability to own and operate distribution networks. Under the Agreement, 
trading rights and distribution services will be progressively phased 
in over three years. China will also open up sectors related to 
distribution services, such as repair and maintenance, warehousing, 
trucking and air courier services.

SERVICES

    China has made commitments to phase out most restrictions in a 
broad range of services sectors, including distribution, banking, 
insurance, telecommunications, professional services such as 
accountancy and legal consulting, business and computer related 
services, motion pictures and video and sound recording services. China 
will also participate in the Basic Telecommunications and Financial 
Services Agreements.

GRANDFATHERING

    China will grandfather the existing level of market access already 
in effect at the time of China's accession for U.S. services companies 
currently operating in China. This will protect existing American 
businesses operating under contractual or shareholder agreements or a 
license from new restrictions as China phases in their commitments.

DISTRIBUTION AND RELATED SERVICES

    China generally prohibits foreign firms from distributing products 
other than those they make in China, or from controlling their own 
distribution networks. Under the Agreement, China has agreed to 
liberalize wholesaling and retailing services for most products, 
including imported goods, throughout China in three years. In addition, 
China has agreed to open up the logistical chain of related services 
such as maintenance and repair, storage and warehousing, packaging, 
advertising, trucking and air express services, marketing, and customer 
support in three to four years.

TELECOMMUNICATIONS

    China now prohibits foreign investment in telecommunications 
services. For the first time, China has agreed to permit direct 
investment in telecommunications businesses. China will also 
participate in the Basic Telecommunications Agreement. Specific 
commitments include:

         Regulatory Principles--China has agreed to implement 
        the pro-competitive regulatory principles embodied in the Basic 
        Telecommunications Agreement (including interconnection rights 
        and independent regulatory authority) and will allow foreign 
        suppliers to use any technology they choose to provide 
        telecommunications services.
         China will gradually phase out all geographic 
        restrictions for paging and value-added services in two years, 
        mobile voice and data services in five years, and domestic and 
        international services in six years.
         China will permit 50 percent foreign equity share for 
        value-added and paging services two years after accession, 49 
        percent foreign equity share for mobile voice and data services 
        five years after accession, and for domestic and international 
        services six years after accession.

INSURANCE

    Currently, only two U.S. insurers have access to China's market. 
Under the agreement:

         China agreed to award licenses solely on the basis of 
        prudential criteria, with no economic-needs test or 
        quantitative limits on the number of licenses issued.
         China will progressively eliminate all geographic 
        limitations within 3 years. Internal branching will be 
        permitted consistent with the elimination of these 
        restrictions.
         China will expand the scope of activities for foreign 
        insurers to include group, health and pension lines of 
        insurance, phased in over 5 years. Foreign property and 
        casualty firms will be able to insure large-scale commercial 
        risks nationwide immediately upon accession.
         China agreed to allow 50 percent ownership for life 
        insurance. Life insurers may also choose their own joint 
        venture partners. For non-life, China will allow branching or 
        51 percent ownership on accession and wholly owned subsidiaries 
        in 2 years. Reinsurance is completely open upon accession (100 
        percent, no restrictions).

BANKING

    Currently foreign banks are not permitted to do local currency 
business with Chinese clients (a few can engage in local currency 
business with their foreign clients). China imposes severe geographic 
restrictions on the establishment of foreign banks.

         China has committed to full market access in five 
        years for U.S. banks.
         Foreign banks will be able to conduct local currency 
        business with Chinese enterprises starting 2 years after 
        accession.
         Foreign banks will be able to conduct local currency 
        business with Chinese individuals from 5 years after accession.
         Foreign banks will have the same rights (national 
        treatment) as Chinese banks within designated geographic areas.
         Both geographic and customer restrictions will be 
        removed in five years.
         Non-bank financial companies can offer auto financing 
        upon accession.

SECURITIES

    China will permit minority foreign-owned joint ventures to engage 
in fund management on the same terms as Chinese firms. By three years 
after accession, foreign ownership of these joint ventures will be 
allowed to rise to 49 percent. As the scope of business expands for 
Chinese firms, foreign joint venture securities companies will enjoy 
the same expansion in scope of business. In addition, 33 percent 
foreign-owned joint ventures will be allowed to underwrite domestic 
equity issues and underwrite and trade in international equity and all 
corporate and government debt issues.

PROFESSIONAL SERVICES

    China has made strong commitments regarding professional services, 
including the areas of law, accounting, management consulting, tax 
consulting, architecture, engineering, urban planning, medical and 
dental services, and computer and related services. China's commitments 
will lead to greater market access opportunities and increased 
certainty for American companies doing business in China.

MOTION PICTURES, VIDEOS, SOUND RECORDINGS

    China will allow the 20 films to be imported on a revenue-sharing 
basis in each of the 3 years after accession. U.S. firms can form joint 
ventures to distribute videos, software entertainment, and sound 
recordings and to own and operate cinemas.

PROTOCOL PROVISIONS

    Commitments in China's WTO Protocol and Working Party Report 
establish rights and obligations enforceable through WTO dispute 
settlement procedures. We have agreed on key provisions relating to 
antidumping and subsidies, protection against import surges, technology 
transfer requirements, and offsets, as well as practices of state-owned 
and state-invested enterprises. These rules are of special importance 
to U.S. workers and business.
    China has agreed to implement the TRIMs Agreement upon accession, 
eliminate and cease enforcing trade and foreign exchange balancing 
requirements, as well as local content requirements, refuse to enforce 
contracts imposing these requirements, and only impose or enforce laws 
or other provisions relating to the transfer of technology or other 
know-how, if they are in accordance with the WTO agreements on 
protection of intellectual property rights and trade-related investment 
measures.
    These provisions will also help protect American firms against 
forced technology transfers. China has agreed that, upon accession, it 
will not condition investment approvals, import licenses, or any other 
import approval process on performance requirements of any kind, 
including: local content requirements, offsets, transfer of technology, 
or requirements to conduct research and development in China.

ANTIDUMPING AND SUBSIDIES METHODOLOGY

    The agreed protocol provisions ensure that American firms and 
workers will have strong protection against unfair trade practices 
including dumping and subsidies. The U.S. and China have agreed that we 
will be able to maintain our current antidumping methodology (treating 
China as a non-market economy) in future anti-dumping cases. This 
provision will remain in force for 15 years after China's accession to 
the WTO. Moreover, when we apply our countervailing duty law to China 
we will be able to take the special characteristics of China's economy 
into account when we identify and measure any subsidy benefit that may 
exist.

PRODUCT-SPECIFIC SAFEGUARD

    The agreed-to provisions for the protocol package also ensure that 
American domestic firms and workers will have strong protection against 
rapid increases of imports.
    To do this, the Product-Specific Safeguard provision sets up a 
special mechanism to address increased imports that cause or threaten 
to cause market disruption to a U.S. industry. This mechanism, which is 
in addition to other WTO Safeguards provisions, differs from 
traditional safeguard measures. It permits the United States to address 
imports solely from China, rather than from the whole world, that are a 
significant cause of material injury through measures such as import 
restrictions. Moreover, the United States will be able to apply 
restraints unilaterally based on legal standards that differ from those 
in the WTO Safeguards Agreement. This could permit action in more 
cases. The Product-Specific Safeguard will remain in force for 12 years 
after China accedes to the WTO.

STATE-OWNED AND STATE-INVESTED ENTERPRISES

    The Protocol addresses important issues related to the Chinese 
government's involvement in the economy. China has agreed that it will 
ensure that state-owned and state-invested enterprises will make 
purchases and sales based solely on commercial considerations, such as 
price, quality, availability and marketability, and that it will 
provide U.S. firms with the opportunity to compete for sales and 
purchases on non-discriminatory terms and conditions.
    China has also agreed that it will not influence these commercial 
decisions (either directly or indirectly) except in a WTO consistent 
manner. With respect to applying WTO rules to state-owned and state-
invested enterprises, we have clarified in several ways that these 
firms are subject to WTO disciplines:

         Purchases of goods or services by these state-owned 
        and state-invested enterprises do not constitute ``government 
        procurement'' and thus are subject to WTO rules.
         We have clarified the status of state-owned and state-
        invested enterprises under the WTO Agreement on Subsidies and 
        Countervailing Measures. This will help ensure that we can 
        effectively apply our trade law to these enterprises when it is 
        appropriate to do so.

TEXTILES

    China's protocol package will include a provision drawn from our 
1997 bilateral textiles agreement, which permits U.S. companies and 
workers to respond to increased imports of textile and apparel 
products. This textile safeguard will remain in effect until December 
31, 2008, which is four years after the WTO agreement on Textile and 
Clothing expires.

    The Chairman. Thank you, Mr. Secretary. I hope you have the 
same success that you had in your outstanding efforts on behalf 
of the North American Free Trade Agreement. I thank you for 
being here today.
    Senator Hollings.
    Senator Hollings. Thank you, Mr. Chairman. I hope you do 
not have the success that you had with the North American Free 
Trade Agreement.
    Secretary Daley, you said NAFTA was going to create 200,000 
new jobs. When in fact we have lost over 420,000. To be exact, 
in the State of South Carolina. We have lost 37,200 
manufacturing or textile industry jobs.
    You said it was going to improve the standard of living for 
our neighbor Mexico. On the contrary, they have take-home pay 
less today than what they had in 1994, prior to NAFTA.
    You said it was going to solve the immigration problem. It 
has worsened.
    You said it was going to solve the drug problem. They have 
got a narco-country down there. They killed a Monsignor, they 
killed a candidate for president, and they killed a police 
chief in Tijuana, so let us not have your success that you have 
had with NAFTA.
    Now, after you have been up here for a few years you listen 
to a lot of Secretaries--in 1992, Secretary Franklin said that 
the agreements made could result in the elimination of the 
trade deficit by the turn of the century. We have now hit the 
turn of the century, and the Special Trade Representative, Mr. 
Kantor, said during his visit that it would help reduce the 
deficit a lot.
    Secretary Daley it is just unacceptable to have these sorts 
of trends continuing. Daley told the American business 
executives, quote, ``what these figures say is that the Chinese 
market has yet to open.'' The trends have just got to change. 
And then, of course, in the Great Hall in 1998, at the signing 
ceremony, Mr. Daley held the agreements as a boon to relations 
and said that they would reduce the trade deficit and, quote, 
``significantly encourage China's other efforts in economic 
reform.''
    Mr. Chairman, let's include in the record please, the 1990 
trade deficit with the People's Republic of China was $10 
billion, in 1991 $12 billion, in 1992 $18 billion, 1993, $22 
billion, 1994, $29 billion, 1995, $33 billion, 1996, $39 
billion, 1997, $49 billion, 1998, $56 billion, 1999, $68 
billion, up, up, and away.
    You know, after you hear this going on for years on end, 
how can we believe that this is in the best interest of the 
United States? What is going to change? What is going to 
happen?
    Secretary Daley. I believe, Senator, that the opportunity 
that this agreement creates will not be there if Congress does 
not pass this.
    Can one guarantee that American products will be sold 
anywhere? No. This is a very competitive world. This is a very 
competitive market, as our market proves, and even though our 
deficit is at a record pace, or at a record level, our economy 
in many ways is viewed in a rather envious way by most of the 
world today.
    They see our economy as strong. They see our employment 
levels, and they are rather jealous of them. They see 
opportunities with our dynamic economy for entrepreneurs and 
for creation of not only jobs but creating these new 
technologies that are helping to drive the world, and they are 
desirous of that.
    We are committed and trying to work to lower the deficit. 
How do you do that? You do it either by opening other markets 
or trying to close your market. We believe attempting to open 
the market of China is the way to go, and this agreement goes a 
long way, after 13\1/2\ or 14 years of Republican and 
Democratic administrations attempting to negotiate a deal and 
get commitments from China, and I think it goes a long way.
    Am I going to sit here and guarantee anything to you? No, I 
am not, Senator. I believe that the opportunity, if this is 
passed, for U.S. companies will be greater than it is today, 
and surely greater than it has been in the past. And with no 
reflection on the comments of my predecessors. I did not say 
that NAFTA would solve the drug problem or the immigration 
problem. I did not say that, but I do believe----
    Senator Hollings. Come on, you all had them under the white 
tent. That is all I heard. You have got all of those Republican 
business leaders under the white tent, and you said they were 
going to solve all these problems.
    But in any event, Mr. Secretary, how can we believe that 
when you say it is trade it opens the opportunity for 
production in China? They have got to produce the movies now in 
China. They have to produce the airplanes in China. That is why 
the Boeing workers demonstrated and led the march out there in 
Seattle.
    Wherever it is, in technology and communications and 
everything else, the American business community has pell-mell 
gone to invest in China for their production, downsizing back 
home, and the jobs are all lost here in manufacturing, and 
invested over there. They have not increased our trade. The 
proof of the pudding is otherwise. The deficit has gone up, up 
and away.
    Secretary Daley. I think there are a lot of reasons that 
companies produce products around the world. They can be 
producing today in China. What this agreement does--and I agree 
with you, Senator, historically they have all been forced to 
produce there if you want to do business there.
    This agreement states so that those sort of requirements 
and restrictions will not prevail, and that a freer flow of 
reasonable investment and decisionmaking will be made not only 
by U.S. companies but companies in other parts of the world.
    Senator Hollings. Well, with the labor conditions there, it 
is quite obvious they can produce more economically, let us 
say, in cold rolled steel. You took up the issue. You launched 
an inquiry into cold rolled steel being dumped into the United 
States. That is last year in June, and then they found out in 
January that the Commerce Department determined that cold 
rolled steel products produced by Nippon, Kobe, Kowalski and 
Nissan were being sold 53.0 percent below fair market value 
over--they are dumping the steel.
    So you go over to the International Trade Commission and 
they said, ``Oh, there is no injury, and that is a fix by the 
Finance Committee that we set up years ago.'' The business 
crowd knows how to do that, so you get nothing done.
    And that is why I am saying--I ask for this hearing to say 
`No' to the United States. We do not know how to maintain our 
economic security, and our jobs in manufacturing, unless we 
just hold up a while and start using--that is where you have 
got to come in. Administration, the executive branch, not this 
free trade, free trade. We have got to use this rich market to 
have bilaterals, one on one, as to their interests, as to our 
interests, and we can maintain our economic strength.
    But to throw it into the WTO, where Cuba can cancel me 
out--come on. I mean, and you all think this is in the 
interests of the working men and women of America.
    Thank you, Mr. Chairman.
    The Chairman. Thank you very much, Senator Hollings.
    Senator Ashcroft.
    Senator Ashcroft. Again, I want to thank you for coming, 
Mr. Secretary, and I commend the negotiation of the terms of 
the agreement. I want to move quickly to the enforcement, 
because I am troubled about our ability to enforce these 
agreements.
    I have a letter in my hand from a Missourian James Brown, 
the district business representative of the International 
Association of Machinists. In part he says, and I quote, 
``China has a history of failing to live up to every other 
trade agreement it has signed with the United States, the 1992 
memorandum of prison labor, the 1996 bilateral agreement on 
unilateral property rights, the 1994 bilateral agreement on 
textiles, and the 1992 memorandum of understanding on market 
access, and this is a matter of concern to me.''
    Do you think that he outlined China's record accurately?
    Secretary Daley. I think there has been a serious question 
of their compliance. At the same time, that is the reason, as I 
mentioned in my testimony, and if you have the opportunity to 
see this actual agreement, why this agreement was so specific, 
and why Ambassador Barshefsky made sure that this was not like 
some of the previous agreements back to the 1979 agreement, 
which was a three-page kind of memorandum of understanding.
    This is very specific. And, in addition to the specificity 
of this agreement, and the WTO dispute settlement process, 
which we can argue about, and I do not disagree with you, 
Senator, we have been frustrated at a number of points along 
the way regarding beef and bananas and other fights, we have 
gotten relief. Most of the cases that we have brought, the 
majority of cases that either we have brought or have been 
filed against us, we have been successful in settlement or in 
final resolution of them on behalf of our interests.
    But in addition to the process, we maintain the full use of 
our trade laws, whether they are dumping laws or 301 actions or 
201 actions, and Ambassador Barshefsky negotiated specific 
provisions in this agreement on product-specific safeguards, so 
that for 12 years we would be able to bring a safeguard action 
solely against China, not through the WTO, solely against 
China, with an injury standard that is lower than the 201 
standard.
    We can also use--as I mentioned before--continue to use our 
nonmarket methodology under the dumping laws administered by 
the Commerce Department. In addition, China has agreed to 
eliminate the forced technology transfers which have been so 
important to American businesses.
    So I think in addition to the WTO process, which we will 
continue in the next administration, I would assume we would 
continue to be aggressive. We have additional safeguards 
specific to China, which were specifically negotiated in this 
agreement, which have never been there in other agreements that 
have been negotiated since the 1979----
    Senator Ashcroft. Well, after the 1992 agreement China 
eliminated 176 licensing requirements in 1995, but then imposed 
400 new de facto licensing requirements, according to the USTR 
in the 1997 report. Also, the 1999 USTR report said that China 
has removed over 1,000 quotas and licenses on a wide range of 
key exports, but despite the removal of these license 
requirements required under the 1992 memorandum of 
understanding, there are indications that China is erecting new 
barriers.
    Also, the 1999 USTR report recited the fact that China had 
agreed earlier not to impose import substitution limitations 
for all sectors specifically mentioning autos in a footnote. 
And within the last 2 years China went ahead, then, and imposed 
import substitution limitations on autos, and in the last 2 
years, according to the 1999 report, China has imposed similar 
restrictions on telecom utilities and pharmaceutical 
industries.
    Now, it seems to me that we have made some substantial 
progress in the area of intellectual property and that is an 
area where we have had the ability, and used that ability, 
under 301 to threatened such retaliation. We threatened about 
$4.6 billion in retaliation in 5 years. Everytime we threatened 
such retaliation, the Chinese responded, and we have made some 
real progress in intellectual property.
    We do not have that right in the WTO vis-a-vis the European 
Community with the beef dispute. Under the WTO, we gave up your 
Section 301 rights in a significant way, because the WTO 
determines the level of retaliation.
    You have talked about how the Administration has retained, 
for a 15-year interval, U.S. rights in dumping cases, which 
will allow the U.S. to protect its market from imports. Are you 
willing to negotiate and find a way to have a retention of our 
Section 301 rights in those settings for market access, which 
would allow us to export, and other areas of this agreement 
with China?
    Secretary Daley. We have maintained, Senator, the ability 
to use our existing laws, including 301 and 201, in addition 
to, as I mentioned, the antidumping methodology and the sector-
specific safeguards that would only relate to China, so if we 
had an incredible surge in a certain sector of imports from 
China, we would be able to unilaterally take action against 
them.
    Senator Ashcroft. But that is to guard against a flood of 
unfair imports from China to the United States, and I commend 
you for retaining that kind of authority. What kind of similar 
stick in addition to the normal WTO procedures are you willing 
to have in order to preserve and protect the negotiated right 
to market access?
    It seems to me that you have conceded that you need extra 
authority when you are dealing with China as a result of its 
history, and you have got it as it relates to them sending 
goods to us. What kind of extra enforcement authority are you 
going to have that ensures our right to send goods to them, 
because that is where we have come up short when it has related 
to things like beef and the Europeans?
    Secretary Daley. There are no special market access sticks 
we would have in addition to the normal WTO process. Let me 
just say, Senator, one of the advantages of this situation will 
be others, Europeans, other Asian countries, will be supportive 
of our attempts, because if we are running into problems in 
China the odds are so will their companies that are trying to 
do business in China. So one of the major advantages of being 
in a multilateral system would be that we do not stand alone in 
our attempt to open the market.
    Senator Ashcroft. Well, I guess it is because of the 
disenchantment I have with the way we have been shoved aside, 
the Europeans totally willing to pay the penalty rather than to 
open their markets to certain of our agricultural exports. I 
think we need to guard our ability to export with the same kind 
of intensity and integrity that you have sought to guard our 
ability to protect against the wrong kind of imports.
    Article 22 of the WTO's Dispute Settlement Understanding is 
that the level of retaliation must be agreed to or approved by 
the WTO, and if the WTO does not want us to have very strong 
retaliation, we find ourselves, in my judgment, at the mercy of 
a trading partner, such as Europe, that is willing just to take 
the penalties and deny rights under the agreement.
    I guess what I would like to encourage the Administration 
to do is to find some way to give the same kind of authority 
and rights, which you have given against improper imports, to 
secure market access for those in this country who are focused 
primarily on exports. Exports are just as related to the 
vitality of our jobs and opportunity as our guarding against 
the dumping and other things that would erode the job base in 
our country.
    Mr. Chairman, thank you.
    The Chairman. Senator Dorgan.

              STATEMENT OF HON. BYRON L. DORGAN, 
                 U.S. SENATOR FROM NORTH DAKOTA

    Senator Dorgan. Mr. Chairman, thank you very much.
    Mr. Secretary, thank you for being here, and let me say 
that I appreciate your stewardship at the Department of 
Commerce, and I have worked with you on many issues and have 
great regard for your talents and your record.
    Let me ask a number of questions about this China issue, 
and I might say that for me it is a difficult issue. I had 
voted on previous occasions for normal trade relations, but I 
think China is going to be a significant influence in our 
future, in our lives. The question is, what kind of influence, 
and how do we alter that influence in a manner that we think is 
important to us and to the world.
    You have concluded a bilateral trade agreement with the 
Chinese and, frankly, I think less of it than some do. I mean, 
it is advertized as a significant market opening in China and 
so on, but my colleague from Missouri raises an important 
question about compliance.
    We have had other agreements with China that did not mean a 
thing. They did not comply with them. They talk about, in 
agriculture, TRQ's. We have had tariff rate quotas. I think in 
1994 and 1995 they announced tariff rate quotas in China. It 
did not mean a thing. In fact, during the intervening period 
our goods deficit with China has run up to nearly $70 billion, 
and we have been displaced as the major wheat supplier to China 
by other countries and in fact, of course, China is involved in 
a self-sufficiency program for grain, so they are buying very 
little wheat in the first place.
    But I think it is important to raise these questions: 
number 1, is there any reasonable expectation of compliance, 
and number 2, I would go back again to the agreement. Even if 
you had compliance, I do not think we do a good service to this 
country, its producers, its workers, and others, when we 
negotiate agreements with such low expectations.
    Let me give you an example. We do not produce automobiles 
in North Dakota, but my colleague, Senator Levin, raised the 
point the other day--and it is an appropriate point, and I 
could raise it about agriculture as well--after we negotiate 
for a long period of time, we finally get to a point where the 
Chinese will have a 25-percent tariff on automobiles, and we 
will have 2\1/2\ percent, so after a long phase-in period we 
will allow them to have a 10 times greater tariff on 
automobiles than we will have.
    Now, why would we expect that? Why would we allow that of a 
trade competitor, especially one that has a $70-billion surplus 
with us, and in agriculture I can make the same point on a 
range of circumstances.
    Now, when I raised the question the other day with Charlene 
Barshefsky and Dan Glickman they said, well, but look at the 
progress we have made. You are looking at the 14 percent, or 
the 25 or the 48. You know, we came down from 100 percent to 
30, or from 50 to 14 percent in agriculture.
    And I said, yes, but with a country that has a $70-billion 
surplus with us, or we a deficit with them, why would you not 
in negotiations start with reciprocal policies, and say, ``Let 
us talk about autos, we want reciprocal policies on autos and 
same with agriculture?'' Why would you not start in that 
circumstance?
    So I just mention that to say I am not nearly as impressed 
with this bilateral. I think it reflects what was done in 
NAFTA. I think it reflects what has been done in most recent 
trade negotiations, and we short-change our producers, short-
change our country by trade agreements that I think are not 
sound agreements, and expect far too little of our trading 
partners.
    Having said all that, which is therapeutic for me to say, 
at least occasionally, let me ask you a little more in some 
detail about compliance.
    Again, the WTO negotiator for China, following the 
bilateral, went to South China and, as reported in the South--I 
believe it is the South China Asia Post said, you know, the TRQ 
on grain, he said, that is just theory. That does not mean we 
are going to import any more grain from America. He said, the 
notion that we will allow more meat in from the several 
thousand meat plants in America, you should understand, that is 
just theory. That does not mean more American meat will be 
coming into China.
    And I have written letters asking, what do you really mean? 
Do you mean what is in the agreement, or do you mean what you 
are talking about in South China to your constituents? I have 
not gotten any answers on that.
    But give me your impression of all of that, compliance, the 
statements that have been made and so on.
    Secretary Daley. There is no question in my mind that the 
changes that are going on in China are enormous, that you are 
very familiar with, and are putting enormous strains on their 
economy, and there are many people who are fighting these 
changes. They do not want to see any change. They want the old 
system, which I think the Chinese leadership has made the 
decision cannot sustain what they need to accomplish in this 
century.
    They are undergoing an enormous change. There is no 
question in my mind there are plenty of people in the 
political, and in the economic structure which has been very 
closed, totally closed over the years, that do not want to see 
these changes implemented, that do not want to see the 
commitments made implemented.
    On the other hand, in order to see the economic growth and 
see the benefits that China wants, they are going to have to 
implement those changes. I think it will be difficult for them. 
I think it will be difficult for us. I do not pretend to think 
that the implementation of this agreement by the Chinese will 
be easy for them, and I would assume that we will have to, in 
the next administration, be very aggressive in their 
enforcement of the commitments that have been made.
    As to the specific commitments in agriculture, of which you 
know much better than I, the industries, the agricultural 
interests in sectors that were priorities to us where there 
have been reductions, substantial reductions, are, according to 
our information, pleased with the levels at which we were able 
to get the commitments by the Chinese.
    There are many areas of no priority to us, or to certain 
agriculture interests, but in those areas of priority to us my 
understanding is, from the indications of the agriculture 
community, that they are pleased with those levels. We would 
like them lower. Will we get them lower at some date? We hope 
to. But at this point, compliance will be difficult, no 
question about it, Senator. And as I said earlier in my 
testimony, we have requested a substantial increase in our 
ability to fund additional personnel for compliance efforts.
    Senator Dorgan. Secretary Daley, there is no question that 
some are pleased with these reductions, but I must say I recall 
some while ago, or nearly a decade ago, I guess, when we 
reached a beef agreement with Japan, you would have thought we 
had won the Olympics. I mean, my Lord, the negotiators were 
celebrating; it was on the front page of the Washington Post 
headlines.
    You know what the agreement was? It was that 12 years 
later, which is now, every pound of American beef going into 
Japan has a 40-percent tariff on it. What a wonderful thing. So 
we get more beef into Japan, but we still have such low 
expectations of our trading partners, and I am just wondering 
when we can, in bilateral negotiations, start on behalf of 
American producers demanding reciprocal trade treatment.
    I understand we are not talking about Japan here, but it is 
the same principle with respect to the bilateral with China.
    Now, let me ask you one additional question, and I should 
say, again I find this issue difficult. I do not find it 
difficult to evaluate the bilateral trade agreements, which I 
think we come up short on, and did again, but I find it 
difficult for a range of reasons, because, as I said, I think 
China is going to be a significant influence in our lives, and 
I want it to be a positive influence.
    I would like you, if you would, to respond to the testimony 
of Harry Wu. He has not given it yet, but I have read it. Mr. 
Wu, as you know, spent many, many years in Chinese prisons for 
advocating for democracy. I have not met him, but have read his 
testimony. He feels very strongly that essentially it is a kind 
of an appeasement to the Chinese leaders to move in this 
direction.
    Now, I have been to China a couple of times. I am not a 
Chinese expert, but my evaluation is that some things have 
changed in China for the better. I am not someone in China who 
is standing on a street corner trying to speak out, and there 
are those who have who are in prison, and so while we talk 
about progress, Mr. Wu, who has spent a fair amount of time in 
Chinese prisons, says that he thinks that moving in this 
direction without forcing some significant political changes in 
China is appeasement. Can you respond to his testimony?
    Secretary Daley. Well, I obviously have not had the 
pleasure of reading Mr. Wu's testimony. As Chairman McCain 
stated, we all have enormous respect for him and for those 
others who have fought to see a different China and a different 
country. As we stated very clearly, and stood alone in Geneva 
as we issued our statement regarding the violations of China on 
human rights, we do not take a back seat to any country in the 
world in condemnation of China on human rights. As a matter of 
fact, as of last year we basically stood alone in that 
condemnation, and we will continue to do that if necessary.
    I do believe that there are others also who have a feeling 
that encouraging China and getting China into multilateral 
organizations encourages them to continue on the path of 
reform. We obviously, as the President said in his State of the 
Union address, cannot guarantee which way China will go. We can 
hope that they continue, and that there are steps that continue 
to see a different China than obviously we have known in the 
past.
    Twenty five years ago it was a country that was basically 
closed to the rest of the world. It is changing. It is changing 
dramatically in some people's opinions, not fast enough in most 
people's opinions, but as they continue to change we need to--
as the President stated, take the steps so that if by chance 
they decide to go another path, a path which we are not 
encouraging of, we can at least say we did everything we could 
to encourage those in China that want to continue to see reform 
and change, and opening.
    And that is what we believe part of this, in addition to 
the commercial aspects of this agreement is about trying to get 
China into multilateral organizations where the pressure would 
not be just by the United States but along with Europe and 
other parts of the world who have the same, similar economic 
interests as us, and hopefully a similar interest in seeing 
China change politically.
    Obviously, we have a disagreement with Mr. Wu and the way 
to do that, but do not question, obviously, his motives or his 
position.
    Senator Dorgan. One additional brief question. Ten years 
ago in the Ways & Means Committee, when I served on that 
Committee in the House, there was a big debate about where we 
were headed with China with respect to the trade balance, 
because at that point we had an $8 or $9 billion deficit. Many 
suggested this is going to improve, and I insisted it was not 
going to. In fact, now it is nearly $70 billion in goods 
deficits. Can you tell me what is going to happen with the 
trade balance with China? Is our deficit going to improve and, 
if so, when?
    Secretary Daley. I would not sit here and tell you that it 
is going to improve, or when it will change. I believe this 
agreement and a continuing growth in China will give American 
companies the ability to sell more in China, and if our economy 
stays strong and American consumers continue to purchase at the 
sort of levels they have, I would imagine our imports from most 
of the world will continue to stay strong.
    At the same time, we are the world's number one exporter, 
and need to continue in that role, but I would not sit here, 
Senator, and predict to you that this agreement alone is going 
to bring down the trade deficit, or on any schedule. I think 
the goal is to try to keep our overall economy strong and take 
steps that give us the opportunity to open markets that have 
been historically closed, as China has been.
    Senator Dorgan. Thank you, Mr. Secretary.
    The Chairman. Senator Cleland.

                STATEMENT OF HON. MAX CLELAND, 
                   U.S. SENATOR FROM GEORGIA

    Senator Cleland. Thank you, Mr. Chairman.
    Thank you very much, Mr. Secretary, and thank you for your 
service to our country.
    Less than 2 weeks ago, according to the Labor Department, 
my State, the State of Georgia, recorded the second highest 
number of initial joblessness claims in the country, about 
1,300. The reason given for this high number was due to layoffs 
in the textile industry.
    While overall unemployment in the country is at record lows 
and some industries clearly will experience growth because of 
permanent normal trade relations with China, do you have any 
idea how many U.S. jobs you expect will be lost, particularly 
in the textile industry, as a result of permanent normal trade 
relations with China?
    Secretary Daley. I do not have any estimate. There have 
been private estimates made, Senator, by different 
organizations. No question about it, the textile industry, as 
you and Senator Hollings know much better than most, has been 
under great pressure for 20-plus years, and from all parts of 
the world, and at the same time there have been some successes 
seen in the textile industry and the apparel industry as they 
have taken advantage of new technologies in some specific 
markets.
    We would hope that that trend would change. In many of the 
areas of the country where there were predominant textile or 
apparel industries other industries have opened and new jobs 
have been brought in. These other sectors have created low 
unemployment in parts of the country that a few years ago had 
rather high unemployment.
    It is a dynamic, but as I say, there have been private 
estimates. We have no government sort of estimates as to what 
impact this agreement would have on potential growth of China. 
What we have seen in textiles and some other sectors is a shift 
within Asia to China for export. The overall percent of imports 
into the United States from Asia has not changed over the last 
couple of years, but the shift within Asia has occurred.
    Senator Cleland. Actually, a couple of agricultural 
products in my State actually stand to benefit from the 
bilateral agreement signed last November in Beijing--poultry 
and cotton. Mr. Secretary, what assurances do you have that 
China will actually live up to these agreements when they 
repeatedly failed from time to time to fully honor similar 
agreements in the past?
    Secretary Daley. We will have the dispute settlement 
process of the WTO and be able to take advantage of that, and 
we do have a very clear agreement that is not just a broad sort 
of statement. It is clear as to what tariffs come down when, 
and so it would make a case easier to prosecute, and at the 
same time we retain, as I mentioned, different safeguards and 
protections under our existing trade laws.
    Senator Cleland. I am fascinated by the question by Senator 
Dorgan from North Dakota about the trade imbalance or the trade 
deficit. We have a $70 billion trade imbalance now, trade 
deficit with China.
    Actually, there are some who feel that the entrance of 
China into the WTO would set off an even larger expansion of 
our exports into China. I understand the Institute for 
International Economics concludes that accession would lead to 
an immediate U.S. export jump of at least $3 billion to China. 
Goldman Sachs reports that number could rise to about $14 
billion in the next five years. The International Trade 
Commission report concludes that as a result of the agreement 
the nearly $70 billion U.S. trade deficit with China will drop.
    Is that a sense that you have, or do you think it will stay 
the same, or do you think it will rise?
    Secretary Daley. Well, I believe that if China opens their 
market and this agreement helps to open that market, U.S. 
companies, as they have proven in many other parts of the 
world, can be as competitive as anyone else doing business 
there.
    As China's economy improves, they will have greater need 
for products from the U.S., and from other parts of the world 
in those areas that we have expertise. Therefore, if we have an 
ability, as you will hear, I believe, from some business people 
in the next panel, to distribute the goods and to have a clear 
distribution system, there will be a greater opportunity to 
sell those goods and not have the barriers, nontariff barriers, 
that have been put up in China historically. I believe that 
will occur.
    Am I going to predict how much and when? I will not do 
that. Obviously, as Senator Hollings has stated, previous 
Secretaries have made the mistake of doing that, and I would 
like him in 10 years not to be able to quote me again sitting 
here at this hearing not being as accurate as he would like.
    Senator Cleland. Most of us would like never to be quoted 
by Senator Hollings. [Laughter.]
    Do you believe it is absolutely necessary for Congress to 
pass a permanent normal trade relations agreement with China in 
order to fulfill our obligation with respect to the bilateral 
agreement just signed, a permanent NTR?
    Secretary Daley. We do, Senator, and I believe most legal 
authorities who have commented on the WTO and commented on the 
rules of the WTO believe very strongly that we must grant China 
the unconditional NTR that we have given every other member of 
the WTO, save, I think, one, who is in the process right now of 
being granted that by Congress.
    Senator Cleland. Do you have any idea just off the cuff of 
how many countries we do have normalized trade relations with? 
It must be in the scores of nations.
    Secretary Daley. I believe we have normal trade relations 
with 134.
    Senator Cleland. 134 nations we have normal trade relations 
with?
    Secretary Daley. And Congress has, on an annual basis, for 
20 years given China that normal trade relation status.
    Senator Cleland. So we have had these relations for 20 
years. It is just that it has to pass the Congress every year.
    Secretary Daley. Right.
    Senator Cleland. What you are suggesting is that we obviate 
that process and go with an agreement and support China's 
entrance into the WTO and that that would be ultimately the 
best for us in the long run economically and politically for 
our country, is that correct?
    Secretary Daley. Yes, Senator. It is not about China 
entering the WTO. When they complete the final agreements they 
will enter the WTO. It is: ``what conditions will China enter 
under, and what impact that will have with us.''
    If we are the only Nation not to give them what everyone 
else has given, they have stated that they will not give us the 
benefits of the agreement and they would not be subject to the 
terms and conditions of the bilateral agreement, and we would 
therefore not be the beneficiaries of it, and American 
businesses would be at a serious disadvantage to the European 
and Asian and other competitors in doing business in China.
    Senator Cleland. That was my next point exactly: that some 
feel if we do not take this action, that the Japanese and the 
members of the European Union and others will, in effect, go 
ahead and be part of normal trade relations with China and put 
our own businesses at a disadvantage. Is that your 
understanding?
    Secretary Daley. That is clearly our understanding and the 
Chinese, as I say, have stated that if we were to not give them 
what we have given everyone else, that would be their position, 
and we would be at a serious disadvantage.
    We have negotiated this for 14 years. I would also believe 
strongly that if PNTR does not pass Congress, you would see the 
Europeans come to the conclusion with their negotiations with 
China rather rapidly so that they would be in a different 
position than we would.
    Senator Cleland. Thank you very much, Mr. Secretary. Thank 
you very much, Mr. Chairman.
    The Chairman. Senator Snowe.

              STATEMENT OF HON. OLYMPIA J. SNOWE, 
                    U.S. SENATOR FROM MAINE

    Senator Snowe. Thank you, Mr. Chairman, and thank you, Mr. 
Secretary. I did want to drop by, because I did obviously think 
this is very important for our Nation, and I also want to state 
over the years--I served in both the House and in the Senate--I 
have had serious concerns about our ability to enforce 
agreements, and as I look at this agreement that has been 
negotiated with China, obviously textiles have certainly been 
adversely affected. In fact, the industry released a study that 
indicated that 154,000 jobs could be lost.
    I know the agreement includes a protection against surges, 
but that is little comfort for the number of jobs that 
certainly could be lost within the overall industry, but also 
within my State. You know, under the NAFTA we lost more than 
26,000 textile and apparel jobs in the State of Maine, and it 
has had a tremendous impact, because those jobs are not 
replaced by equally good jobs in terms of pay.
    I would like to have you address the issue of compliance. I 
know it has been explored with other members of this Committee, 
but it has been of little comfort to me in terms of whether or 
not these agreements over the long haul would be complied with. 
So, could you address the compliance issue within the WTO? I 
mean, they may or may not live by the rules. What is it going 
to take? We have had experience, under the NAFTA mechanism, 
that it has shown us the difficulties enforcing these 
agreements in particular disputes.
    Secretary Daley. One of the major differences between this 
agreement and other agreements, especially the agreements that 
have been referred to this morning that we have negotiated in 
the past with China, is the specificity in which this agreement 
deals with tariff reductions. I just returned from China last 
week. There is no question the implementation is of great 
concern to us and to the Europeans.
    The changes that are necessary, both legal and regulatory, 
the changes within ministries at the federal, state, 
provincial, and local level are enormous in order to accomplish 
much of what has been agreed to. We are working with the 
Chinese, in addition to having the WTO dispute settlement 
process, having the import surge protection, continuing our 
dumping methodology for 15 years, and keeping our section 201 
and 301 trade law remedies.
    The fact of the matter is, we are working with the Chinese 
to try to help them implement this agreement, help them as they 
change their regulations and their laws to make sure they are 
in compliance with our agreement.
    No question about it, as stated to the Committee a few 
minutes ago, this will be difficult for them to accomplish, and 
for many years we are going to have to be--this Government is 
going to have to be very aggressive in pushing them for 
compliance with this agreement, as I believe the other members 
of the WTO, who will have similar interests in pushing them, 
will do also.
    Senator Snowe. But is it not true in the past that it has 
required extensive negotiations, or renegotiations with the 
Chinese with respect to enforcement and compliance? I mean, 
what is it going to take? What satisfies you within the WTO 
that we will be able to ensure that there will be compliance 
with this agreement?
    Secretary Daley. I think the changes that are going on in 
China are enormous, and the compliance with this agreement, our 
condemnation of their human rights, and their efforts to 
change, are very difficult; but I believe they are on the road 
to changing, and that it is necessary if they want to see the 
economic growth that they need for their country. I believe the 
leaders have made a basic choice to change, to improve, and to 
open their economy in order to accomplish that.
    The commitments they have made in this agreement, and 
commitments they have made to other countries in the WTO, are a 
major part of that economic success that they want to see in 
their country, which still to this day lags behind the vast 
majority of the world.
    Senator Snowe. So what are the specific mechanisms within 
WTO that satisfy you?
    Secretary Daley. Well, we have a dispute settlement process 
we have taken advantage of, and we have won most cases, 
including most cases that have been filed against us, and we 
have gotten relief.
    Are there difficulties with that? Is it too long? Yes. We 
need to have a reform of the dispute settlement process, and we 
hope to see that occur within the WTO not just for our sake, 
but for the other party's sake. Other countries have disputes 
with us that they feel the WTO has not been efficient in their 
response. We would like to see improvement in the WTO process 
itself, but when we have taken action we have usually been 
successful, and we have gotten either a change or a 
compensation.
    In addition to that, as I mentioned, this agreement 
specifically allows us to continue our antidumping methodology, 
which we in the Commerce Department aggressively take action 
under, and the import surge provision and other areas.
    Senator Snowe. Could you tell me what you think the impact 
will be on the textile and apparel industry as a result of this 
agreement?
    Secretary Daley. I was saying to Senator Hollings, I 
believe, earlier, that there are plenty of estimates, private 
sector estimates as to the job impact. The textile industry has 
been under siege from the rest of the world for 20-plus years 
now. This agreement will probably not change that.
    I do not believe it will increase the pressure that is on 
that industry and will remain on that industry over the next 
number of years, but at the same time, as I said, there is 
nothing unique in this agreement, in my opinion, that would 
create additional pressure on the textile industry.
    Senator Snowe. You do not believe that that will be the 
case, that there will be a major shift within China towards the 
textile industry?
    Secretary Daley. The textile industry in China has been 
pretty aggressive. There may be a shift from parts of the world 
to China. Many parts of the world that have been producing 
textiles and selling not just in the United States but to 
Europe and other developing nations are greatly concerned that 
China may replace them. You may see a shift in some of that 
production from other countries to China, but as far as an 
increase by virtue of this agreement, no, we do not.
    Senator Snowe. Finally, I know it has been referred to, but 
in terms of a potential increase in the trade deficit as a 
result of this agreement, the International Trade Commission 
did a report last fall regarding the fact that that is 
potentially likely. Is that true?
    Secretary Daley. I think if our economy stays strong, as it 
has done--there are probably three reasons that our trade 
deficit has been as substantial as it has, is (1) the strength 
of our economy and the very aggressive buying patterns of 
American consumers and businesses, (2) the openness of our 
market, and (3) many markets around the world being closed, or 
not doing as well as they had done earlier in the nineties than 
they had.
    So the strength of our economy is still the main reason why 
the trade deficit continues to grow as much as it does.
    Senator Snowe. But with China.
    Secretary Daley. Specifically with China, I would not 
predict what would happen.
    Senator Snowe. Could it go up?
    Secretary Daley. It could go up, it could go down, 
depending on the strength of our economy and the strength of 
the Chinese economy.
    Obviously, if the Chinese economy does not grow, they are 
not going to be able to purchase goods, not just from the 
United States but from other parts of the world, which will 
diminish our capacity to export to them. If their economy 
collapses, it is not going to be a market where U.S. companies 
are going to be selling a heck of a lot. If they grow, and they 
open, which this agreement helps them do, then I believe 
American companies have an opportunity to sell there, which 
will increase our exports.
    Senator Snowe. Thank you, Mr. Secretary. Thank you, Mr. 
Chairman.
    The Chairman. Senator Hollings.
    Senator Hollings. I did not understand your answer. Did you 
say that your testimony is that with this agreement the trade 
deficit will go down or go up?
    Secretary Daley. I said I would not--I am not predicting 
which way it would go.
    Senator Hollings. So you do not say either way.
    Secretary Daley. What I am saying is, our economy stays 
strong and the rest of the world's stays not as strong as ours 
is----
    Senator Hollings. I am wondering about the effect of WTO, 
in other words.
    Right to the point, the International Trade Commission took 
a model entitled, ``The Assessment of Economic Effects on the 
United States of China's Accession to the WTO.'' This is a 
hearing not on whether our economy stays up or down, but the 
impact of China's accession to the WTO, and I read:
    ``A most significant impact was found on U.S.-China trade 
flows. Imports into China would be stimulated by its tariff 
reductions. As a result, U.S. exports to China would likely be 
approximately 10 percent higher. U.S. imports from China are 
also estimated to be almost 7 percent higher as trade 
liberalization helps make China's export sectors more 
competitive. As a result of this increase, the model estimates 
an increase in the U.S. trade deficit with China.''
    Do you agree with that?
    Secretary Daley. I assume one of their assumptions is that 
our economy stays very strong. The second thing is, that study 
only considered tariffs, and did not consider any other sort of 
market-opening activities that occur in this agreement that was 
reached with the Chinese. That study only dealt with tariffs.
    I do not pretend to be an economist, Senator, but that 
study by the ITC only dealt with tariffs, and I assume their 
main assumption was our economy would stay strong and American 
consumers would continue at the pattern that they have had the 
last couple of years.
    The Chairman. I thank you again, Mr Secretary.
    Secretary Daley. Thank you, Mr. Chairman.
    The Chairman. Our next panel is Lieutenant General Brent 
Scowcroft, Mr. Richard Kahler, president of Caterpillar, Inc., 
Mr. Jack Valenti, Ms. Lori Wallach, who is director of Global 
Trade Watch, and Mr. Harry Wu.
    We thank all the panelists for their patience. Obviously, 
this is a very serious issue. I would like to welcome all of 
our panelists here today. General Scowcroft, we would like to 
begin with you, in deference to your age.
    [Laughter.]

       STATEMENT OF LIEUTENANT GENERAL BRENT SCOWCROFT, 
            USAF (RET.), PRESIDENT, SCOWCROFT GROUP

    General Scowcroft. Thank you, Mr. Chairman, Senator 
Hollings, members of the Committee. It is a great privilege to 
be here with you today, especially to discuss an issue of such 
importance to U.S. national interest. I do not have a formally 
prepared statement to submit, but I do have a few opening 
observations I would like to make.
    Let me state at the outset I am strongly in favor of 
granting permanent normal trade relations to China, not as a 
favor to China, but because doing so would be very much in the 
U.S. national interest. This, in my judgment, goes far beyond 
American business and economic interests, important as these 
are, to key U.S. political and security interests.
    China is certainly no democracy, but instead of judging 
where China is now in political development compared to the 
United States, let us compare where it currently is with where 
it was in 1972, when President Nixon made his historic visit. 
On that scale, the degree of change, most of it for the better, 
is astonishing, and must also be seen so for the average 
Chinese.
    I do not want to make too much of this general point, but 
it is a fact that the China of 1972, the Cultural Revolution 
and so on, is fast disappearing. It still has a long way to go, 
but, after all, we waited patiently for 40 years while Taiwan 
developed into a democracy.
    We face two fundamental questions. The first is, where is 
China heading? The second is, how and how much does what we do 
affect the answer to the first question?
    We cannot know China's vision of its long-term future, nor 
how the forces of change now at work will mold that future. 
Indeed, it is not at all certain that the Chinese leaders 
themselves have a clear vision of where that vast country is 
heading, or that a similar vision is held by each Chinese 
leader, and even less that the leaders will be able to 
accomplish whatever their vision may be.
    A few things do seem reasonably clear to me. The Chinese 
leaders deeply resent what they consider the humiliation of the 
past 150 years at the hands of the, quote, West, unquote, and 
they are determined not to submit to western dictation. 
Psychologically that affects a lot of what they do.
    The Chinese leaders have a deep fear, maybe even paranoia, 
of internal political instability, and there is near consensus 
within the Chinese leadership on giving top priority to the 
continued modernization of the Chinese economy. That now means, 
above all, the privatization or marketization, whatever word 
you use, of state-owned enterprises and the creation of a 
modern banking and financial system.
    While it is not easy to project the direction of China's 
political evolution, I am basically optimistic on several 
counts. One important factor is the tens of thousands of 
Chinese students, including sons and daughters of most of the 
top Chinese leaders, studying in the United States each year. 
Not all return to China, but most do, and they carry with them 
a sense of the principles which have motivated this country and 
made it such a success.
    Another factor is the explosion of information technology. 
The Chinese Government is now trying to figure out a way to 
control the Internet, for example, but it is almost certainly a 
losing proposition. As a case in point, there are already 
Internet cafes in most of the large Chinese cities, where one 
can rent a computer or rent computer time along with one's cup 
of tea.
    But arguably the most important factor of all is the 
privatization of the state-owned industries. Premier Zhu Rongji 
has repeatedly shown his determination to pursue this program, 
regardless of its complicating factors for the China social 
scene. The WTO is Premier Zhu's ally in abolishing this system, 
because there is no way most of these state-owned dinosaurs 
will survive the competition which will come with admission 
into the WTO and adherence to WTO rules. This program of 
privatization is profoundly in the interest of the United 
States.
    At present, the managers of these state-owned industries 
owe and retain their jobs at the political whim of the leaders 
in Beijing, and they receive the loans essential to the 
survival of their uneconomic enterprises on the same basis. 
When an enterprise manager's job and his access to capital 
becomes based, not on the goodwill of the political bosses in 
Beijing but, rather, on his or her ability to make a profit, 
their relationship to the Central Government will undergo a 
fundamental transformation as will, I believe, the political 
system itself.
    It is frequently charged, as we have heard this morning, by 
opponents of permanent normal trade relations (PNTR), that it 
forces us to give up our leverage to compel political change in 
China, and that it will result in us being flooded with goods 
made by cheap Chinese labor. To me, it is difficult to find 
substance to either of these arguments.
    The annual renewal of normal trade relations has not, in 
fact, provided much political leverage, as opponents tacitly 
admit by claiming that Chinese Government repression has 
actually increased in recent years. Annual normal trade 
relations to China have not been cut-off, as Secretary Daley 
stated, in any year since the Jackson-Vanik legislation was 
applied to China. Not exactly great leverage.
    And our denial of permanent normal trade relations now 
would not deny China WTO membership, but only mean that U.S. 
firms would not enjoy the market-opening steps which would then 
be available to our industrial competitors. But above all, 
Congress will retain the ability to terminate permanent normal 
trade relations by the same legislative procedure through which 
it can now terminate the present annual renewal.
    Additionally, permanent normal trade relations is one of 
the few tools we have to provide incentives to those people and 
institutions within the Chinese system whose interests are 
similar to ours, and who want to make progress similar to the 
U.S. model.
    And as a last point, China's WTO membership is supported by 
the Taiwanese Government and by the duly elected President 
Chen. Taiwan's leadership realizes that the WTO will influence 
China's behavior for the better, as well as open the door for 
Taiwan's own participation in the WTO.
    As for being flooded with Chinese goods, U.S. markets are 
already open. The important thing to remember here is that the 
WTO process is directed at opening China markets. The U.S. 
needs to do nothing further. Our tariff system will not change.
    In conclusion, Mr. Chairman, this may be one of those rare 
occasions on an important issue where there is virtually no 
downside to taking affirmative action. We cannot ourselves 
determine the ultimate course China will take, and denying 
permanent normal trade relations will remove none of the 
blemishes that China's opponents have identified. But we can 
take steps which will encourage China to evolve in directions 
compatible with U.S. interests. To me, granting permanent 
normal trade relations is one of the most important such steps 
that Congress could take.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, General Scowcroft. You are always 
welcome here before this Committee, and we appreciate your 
insight.
    Mr. Wu, we are very honored by your presence today before 
the Committee. All of us who have followed your service and 
sacrifice are very honored by your presence. We thank you for 
being here before the Committee today to give us your very 
unique and valuable insight into this issue. Thank you, Mr. Wu.

          STATEMENT OF HARRY WU, EXECUTIVE DIRECTOR, 
                   LAOGAI RESEARCH FOUNDATION

    Mr. Wu. Thank you, Mr. Chairman. It has long been 
fashionable to think what is good for Wall Street is good for 
the United States, and it is true that PNTR and WTO entry for 
China will further help these companies economically, but the 
other major beneficiary of China's entry into the WTO will be 
the Chinese Communist Party.
    The Chinese Communist Party maintains political and 
economic control in China, and WTO entry will not change that. 
In recent years, many people have argued that money really can 
transform a tyrannical government. You heard that engagement 
with the Chinese Communist government by trade, investment, and 
technology exchange is the best way to foster democracy and 
improve human rights in China. Of course, these arguments would 
not apply to the former Soviet Union, today's North Korea, 
Cuba, and Vietnam.
    It is true that living conditions for many Chinese have 
improved, thanks to millions of dollars of foreign investment, 
but it is the Chinese Government that benefits most from the 
foreign trade and investment. This Government needs foreign 
money and technology to maintain and increase its power, and to 
modernize its system of tyranny.
    Do you remember this picture? 10 years ago, the People's 
Liberation Army tank almost rolled over the student at 
Tiananmen Square in Beijing, and in 1997 Chinese President 
Jiang Zemin came here and he said, ``the Tiananmen massacre was 
necessary for stability. And, the stability is good for the 
foreign investment.''
    Have you seen this picture? This is Cardinal Joseph Kung. 
He just passed away last month. He was in the Chinese prison 
camp for 30 years. He was a champion of religious freedom in 
China and today, you know, the Roman Catholic Church is still 
illegal in China.
    Tibetans are tortured for being loyal to the Dalai Lama. 
Members of underground Protestant Churches are imprisoned, and 
thousands of followers of the Falun Gong are in the labor camps 
today.
    Here is another picture of the labor camps of the Chinese 
Laogai systems. The Laogai is the Chinese Gulag. Why do you 
only condemn the Gulag from Soviet Union and ignore the Laogai 
in China? We estimate as many as 4 to 6 million today are in 
these Laogai camps. They live in horrible conditions, and they 
must undergo thought reform, and they also are forced to labor, 
and some of the products continue to come to our markets.
    Here is another picture of the execution of a young man, 
who participated in a pro-democracy protest in China. China 
executes more people every year than every other country in the 
world combined, and there is a national policy to harvest these 
death row prisoners' organs to make a profit.
    The Administration says that we negotiated the WTO 
agreement with the Chinese. No, that is wrong. We do not 
negotiate with the Chinese Communist government. We negotiated 
with the Chinese Communist government, and this government does 
not represent the Chinese people. It is not normal. It is not a 
normal country, and we do not think it will be permanent, just 
like the former Soviet Union and Eastern Bloc.
    We must also consider the effects of Chinese entry into the 
WTO on national security. The People's Liberation Army, which 
the United States fought against in Korea and Vietnam, still 
serves as a major component of the tyrannical regime. When we 
talk about China slowly achieving superpower status, we must be 
aware that this is a communist power.
    Last summer, I was in Vladivostok, headquarters of the 
Russian Pacific Fleet. I saw many battleships lined up in the 
port because the Russian Government does not have the money to 
keep them running. But you know that there are two new missile 
destroyers in the PLA Navy recently, but the Chinese government 
is using hard currency, and it has come from foreign 
investment, to strengthen their security force. Today, there 
are 2,000 former Soviet Union military experts working in China 
for the PLA. They are not pro-democracy in China at all, and 
the Chinese government supports terrorist countries like North 
Korea, Iran, and Iraq, and they are becoming more and more 
capable of posing a serious threat to the security of Taiwan.
    Facing this bankruptcy of the socialist economy, what the 
Chinese government wants most is increased foreign investments 
and guaranteed access to foreign markets with no threat of 
bilateral sanctions. The WTO and PNTR will give a timely boost 
to this Chinese communist leadership. This blood transfusion to 
an obsolete and dying regime is both unwise and unnecessary.
    Why do the western capitalists want to rush into China? 
China has a population of 1.25 billion. This is a lucrative 
market. Nobody can turn away from it, but even more 
importantly, China has a huge, cheap, and obedient labor force. 
In that country, there are no free trade unions, and all the 
men and women are controlled by one hand, the Chinese 
government. Chinese officials will maintain order in your 
business.
    As the Chinese Communist Party grows richer and stronger 
from this deal, parts of its new wealth will go to upgrading 
its instruments of authority, the police and the military. 
Foreign investment will help them crack down on the Falun Gong 
efficiently, and it will help them harvest organs from 
prisoners with better technology.
    In 1994, the Clinton administration delinked human rights 
and trade. This fulfilled the basic desires of the Chinese 
Communist government. Last month the State Department human 
rights report admitted that the human rights situation in China 
is worsening, and the Administration intends to introduce a 
resolution at the Human Rights Commission in Geneva this year, 
but I am asking, why not take a stand in Washington, D.C., 
using our economic leverage?
    The Administration says the WTO deal is not an endorsement 
of Chinese human rights policy, but it is an endorsement, 
because it adds to the legitimacy and hard currency of the 
oppressive regime. It is that simple.
    If a foreign policy does not contain a moral basis, it is a 
typical appeasement policy, and I am asking you, policymakers, 
to rethink the United States China policy that currently puts 
profit over principle, otherwise we will be traveling down a 
road to larger and more difficult problems. We should not give 
the Chinese Communist Party in China a blank check.
    Thank you.
    [The prepared statement of Mr. Wu follows:]

          Prepared Statement of Harry Wu, Executive Director, 
                       Laogai Research Foundation

    It has long been fashionable to think, ``What is good for Wall 
Street is good for the United States.'' Globalization has greatly 
benefited multinational corporations, and it is true that PNTR and WTO 
entry for China will further help these companies economically. But the 
other major beneficiary of China's entry into the World Trade 
Organization will be the Chinese Communist Party. The CCP maintains 
political and economic control in China, and WTO entry will not change 
that.
    So we must first consider the effects of China's entry into the WTO 
on national security. Congress should, when it considers permanent NTR 
status for China, put this agreement under a national security 
microscope. The relationship between a lack of democracy, economic 
growth, and China's military expansion is a serious one and must be 
closely examined. The People's Liberation Army, which the United States 
fought against in Korea and Vietnam, still serves as a major component 
of this tyrannical regime. When we talk about China slowly achieving 
superpower status, we must be aware that this is a Communist power.
    In recent years, many people have argued that money really can 
transform a tyrannical government. You heard that engagement with 
Chinese Communist government by trade, investment and technology 
exchange is the best way to foster democracy and improve human rights 
in China. Of course these arguments were not applied to the former 
Soviet Union, today's North Korea or Cuba. It is true that living 
conditions for many Chinese have improved thanks to millions of dollars 
of foreign investment. But it is the Chinese government that benefits 
most from foreign trade and investment. The government needs foreign 
money and technology to maintain and increase its power and to 
modernize their system of tyranny. The Chinese government is using hard 
currency from foreign investment to rebuild its security force: to hire 
2,000 former Soviet Union military experts to work for PLA; purchase 
missile destroys and SU-27 jets from Russia; and support terrorist 
countries like North Korea, Iran and Iraq.
    Faced with the bankruptcy of socialist economy, what the Chinese 
government wants most is increased foreign investments and guaranteed 
access to foreign markets, with no threat of bilateral sanctions. This 
trading status gives just that to the Chinese Communist dictators, 
increasing their authority and claims to legitimacy. The WTO and PNTR 
deal will give a timely boost to the Chinese Communist leadership. This 
blood transfusion to an obsolete and dying regime is both unwise and 
unnecessary.
    Unfortunately, investing in China is putting your money into the 
pockets of the Communist government, and of corrupt officials. The 
Chinese government is the ultimate decision maker, and all companies 
have to obey its political choices. These investments involve high 
risk.
    American business partners in China are not free capitalists. Most 
of these big companies in China are owned completely by the Chinese 
government. That's why you saw many Communist businessmen driving 
Mercedes Benzes to come to Wall Street, even to the White House.
    It is a serious mistake when some try to tell you that China is 
becoming a market economy. The Communist Party cannot institute a true 
market economy. The Chinese economic miracle is based on bad loans, a 
transfer of wealth from the state to Party cadres, and bad accounting--
not on true production of wealth. The so-called ``market economy'' in 
China's mainland is actually a ``socialist market economy,'' controlled 
by the government.
    The Chinese Communist leadership has not proven to be a reliable 
partner in its international dealings. Its human rights abuses violate 
the United Nations treaties it has signed, and it continues to violate 
other trade treaties by dumping and exporting forced labor products.
    Why do the Western capitalists want to rush into China? China has a 
population of 1.25 billion. This is a lucrative market. Nobody can turn 
away from it. But even more importantly, China has a huge, cheap, and 
obedient labor force. In this country there are no free trade unions, 
all the men and women are controlled by one hand--the Communist 
government. Chinese officials will maintain order in your business.
    We've heard many politicians and business people say that doing 
business in China helps spread American values and business practices. 
It is true, that Chinese businessmen are willing to learn how to be 
more efficient, but U.S. businesses in China will never be allowed to 
take steps to improve human rights that go against the fundamental 
policies of the Communist Party. The Chinese communist government is 
one of the worst human rights violators in the world today. In China, 
there is a national ``population control'' policy. Every woman and 
family is subject to this policy. If a woman in an American company 
gives birth to a child without a permit, Chinese law says that she will 
be fired. There is nothing the American bosses can do. If Chinese 
workers want to organize an independent trade union in an American 
company in China, these people would be fired or even arrested. Again, 
there is nothing the American bosses can do.
    We have seen the ``dollars to democracy'' theory fail over the past 
twenty years. The Chinese people may have more brands to choose from at 
the store, but they still risk arrest, torture and imprisonment because 
of their political beliefs or their faith. China continues to imprison 
political dissenters and labor activists, to repress religious freedom, 
to execute more of its citizens than any nation in the world, to 
violate the rights of women in its population control policy.
    The current crackdown on the Falun Gong is a sad but perfect 
example of the how the Chinese government treats common citizens. We 
have all seen the people of the members of Falun Gong practicing their 
beliefs. What are these people doing? Are they throwing bombs? Are they 
gathering secretly to discuss the overthrow of the government? No, they 
are practicing traditional breathing exercises. But the government is 
so paranoid, as all totalitarian regimes are, so it considers these 
people a threat. And will treat them as it does any threat, by cracking 
down quickly and completely. The members of Falun Gong are dragged into 
waiting vans to be detained and imprisoned. Lawyers in China have been 
instructed not to represent these people, showing that the Chinese 
government will easily break its own laws when it decides to.
    As the Chinese Communist Party grows richer and stronger from this 
deal, part of its new wealth will go to upgrading its instruments of 
authority: the police and the military. Foreign investment will help 
them crackdown on the Falun Gong more efficiently, it will help them 
harvest organs from prisoners with better technology.
    In 1994, the Clinton administration de-linked human rights and 
trade. This fulfilled the basic desires of the Chinese Communist 
government. Last month the State Department Human Rights Report 
admitted that the human rights situation in China is worsening. The 
administration intends to introduce a resolution at the Human Rights 
Commission in Geneva this year. But why not take a stand in Washington 
DC, using our economic leverage? If foreign policy does not contain a 
moral basis, it is a typical appeasement policy.
    From a human rights standpoint, one can only hope this focus on 
trade agreements will not completely overshadow the long road that must 
be traveled towards democracy in China. Perhaps one day, the U.S. 
government will try to promote human rights in China with the same zeal 
that it runs after market access.
    I am asking you--policymakers--to re-think the United States' China 
policy that currently puts profit over principle, otherwise we will be 
traveling down a road to larger and more difficult problems. We should 
not give the Communist Party in China a blank check.

    The Chairman. Thank you very much, Mr. Wu.
    Ms. Wallach.

             STATEMENT OF LORI WALLACH, DIRECTOR, 
              PUBLIC CITIZEN'S GLOBAL TRADE WATCH

    Ms. Wallach. Thank you, Mr. Chairman and members of the 
Committee.
    The question before Congress is: Given China will go into 
the WTO, what then is in the U.S. interest in the area that 
Congress controls, which is the issue of U.S.-China bilateral 
trade status? You have been given two options. You can maintain 
the current approach of annual Normal Trade Relations (NTR). 
You can preserve the use of assorted enforcement instruments, 
such as Section 301, that are banned under WTO. You can 
preserve Congress' role by maintaining the status quo and the 
leverage, though not now often used, to review and annually 
determine U.S.-China trade relations. By maintaining the status 
quo, you are clearly not ignoring or cutting off China, 
because, absent an act of Congress, Normal Trade Relations with 
China will continue year after year.
    Alternatively, you can shift to permanent NTR. And you can 
shift U.S.-China relations to the World Trade Organization. You 
will cede the use of Section 301 and other effective U.S. 
unilateral enforcement mechanisms and you will remove Congress' 
role from the U.S.-China trade relationship.
    Now, here is the hitch. It is not necessary to do the shift 
to PNTR, which clearly has some downsides, for the U.S. to 
obtain whatever potential benefits could accrue when China 
enters the WTO, if China actually complies with the terms of 
the WTO. Footnote: As many Senators have noted, China's 
compliance is uncertain. And footnote 2: The GAO recently 
reported that many of the provisions of China's WTO accession, 
including all of those dealing with the state sector and with 
subsidies actually have yet to be negotiated. So Congress 
cannot even know exactly what it is that the U.S. is getting 
prior to the PNTR vote.
    That having been said, assume China goes in and they follow 
WTO rules. And let us say even that the terms of the full 
package are good. Thanks to the agreement on trade relations 
between the U.S. and China, known in shorthand around 
Washington as the 1979 Agreement, the U.S. gets the goodies if 
China complies with WTO rules because that 1979 Agreement 
requires reciprocal Most Favored Nation between the U.S. and 
China.
    The 1979 Agreement explicitly covers tariffs; i.e., all of 
the tariff cuts you just heard touted by Secretary Daley if 
China enters the WTO, (which Senator Dorgan notes are not good 
enough but are something) we get those tariff cuts anyway. You 
do not have to give China PNTR. We get those tariff cuts 
without PNTR under the bilateral agreement. And I would submit 
for the record, the transcript of USTR Barshefsky saying so to 
the House Ways and Means Committee as regards to the 1979 
bilateral and the tariff cuts.
    [The following material presented by Ms. Wallach for the 
record.]

                 House Ways and Means Committee Hearing
                           february 16, 2000
  U.S. Trade Representative Barshefsky Admits China Would Give Tariff 
                     Reductions without China PMFN

    REP. KLECZKA. And, using autos as an example, if, in fact, this 
Congress would not grant permanent trading status to China, they, in 
fact, could continue their tariff of 100 percent on automobiles that we 
ship there; however, they would give the current negotiated tariff of 
25 percent to all other trading partners.

    AMB. BARSHEFSKY. We may have an argument under a pre-existing 1979 
agreement with China that China would have to give us the advantage of 
tariff reductions, but we would have no such claim in the case of 
trading rights, distribution, the ability to service in China, setting 
up dealerships in China. We would have no such claims.

    REP. KLECZKA. Okay. Now, I have some feel for those who say we 
still must keep a short leash on this agreement, know full well that 
we've seen China and some of their practices in the past years. What 
can we do, either in the permanent trade legislation that we'll have 
before us or in existing WTO legislation, to provide for a more 
frequent review than that as what's called for today under the trade 
policy review mechanism?

    AMB. BARSHEFSKY. I think that Congressman Levin had some very, very 
good suggestions in that regard. In other words, certainly we are going 
to want to be able to have a very strict monitoring regime on China's 
adherence to its commitments. I think this is essential and China needs 
to know we are watching that closely.

    But there is more. That 1979 treaty requires that the U.S. 
be given Most Favored Nation treatment--i.e., the best--any 
third country gets on all laws, regulations and requirements 
``affecting all aspects of internal sale, purchase, 
transportation, distribution, or use of imported goods.'' So 
not only do you get the tariff cuts without having to do PNTR, 
you get distribution rights for the imported goods.
    That treaty also requires China to ``accord firms, 
companies and corporations treatment no less favorable than it 
affords any third country,'' MFN for services and investment. 
The benefits of China's accession, if it follows the WTO rules, 
accrue to the U.S. under the 1979 bilateral. And I submit, the 
1979 Agreement and a memo describing it by Columbia University 
Law Professor Barenberg, also for the record.*
---------------------------------------------------------------------------
    * The information referred to has been retained in the Committee's 
files.
---------------------------------------------------------------------------
    Now, let me clarify one thing: the U.S./China November 1999 
deal, that is not a freestanding agreement, the benefits of 
which go away if Congress does not do PNTR. As USTR stated to 
the press, and I submit this for the record also: there is no 
quid pro quo. As you can see in looking now at the text of the 
November 1999 deal, the U.S. does not agree to give PNTR in 
order for the U.S. to get benefits. Rather, the U.S. bilateral 
and all the other countries' bilaterals will get 
multilateralized. And the best that everyone gets bilaterally 
becomes what everyone gets multilaterally. It will become the 
terms of China's accession to the WTO.
    And under the 1979 Agreement, the U.S. gets whatever is the 
best China gives to any other country, which becomes the WTO 
accession terms China agrees to--all those tariff cuts and all 
the other goodies. The whole basis of MFN is a fluid, changing 
notion of countries giving each other the best, as it changes 
over time, to each other.
    Now, the administration has derided the 1979 Agreement. 
Commerce Secretary Daley called it a three-page MOU. It happens 
to be 10 pages. But, more importantly, it is the basis for the 
billions of dollars of U.S.-China trade. So it is a little 
difficult to now say it is inconsequential, to say nothing of 
all the other bilaterals that Senator Hollings mentioned, which 
stand to cover intellectual property issues and all of these 
sectoral issues covered in the memorandum of understanding.
    The issue, though, always is enforcement. And many Senators 
have raised that. The reason to not go for permanent NTR but to 
maintain the annual standard is because we need to maintain our 
effective enforcement tools. The U.S. could have the best of 
both worlds. We could get the concessions that China has to 
make to enter WTO--China's new best treatment--while keeping 
tools to deal with China's abysmal record on enforcement.
    It is an open question exactly what the WTO requires WTO 
Members to give each other, as noted by Georgetown Law 
Professor John Jackson. However, the U.S. is going to avoid 
ever testing the question. USTR has announced they will apply 
for non-application in the WTO between the U.S. and China. The 
one thing everyone agrees that means is the U.S. and China will 
not have WTO dispute resolution assurances between them. And to 
that we say, thank God.
    There are many who would argue that it is actually a much 
better idea to get the goodies of China's WTO accession, the 
trade benefits, and keep our non-WTO enforcement. As a matter 
of politikreal, in the WTO, the U.S. is one of 136 countries 
versus with U.S.-China bilateral enforcement, the U.S. takes 42 
percent--yes, 42 percent--of China's total exports--a bit of 
leverage.
    Also under Article 23 of the WTO Dispute Resolution 
Understanding, which allows that WTO Members only use WTO 
dispute resolution to resolve disputes between each other. It 
takes at least 2 years; and, as several Senators noted, it 
relies on something totally missing in China: the rule of law. 
If countries decide not to follow a WTO ruling as with the 
E.U., they simply do not.
    Now, as we have seen in recent rulings, while the 
Administration talks about maintaining Section 301, in fact the 
WTO has ruled that the U.S. may not use Section 301 except 
within the WTO's 2-year time line, making it Section 301-not. 
The U.S. has just lost the first ruling on its anti-dumping 
laws last week in the Japan case regarding steel.
    I would conclude by saying that as regards the potential 
trade concessions of China's WTO entry, the way to proceed is 
to maintain the annual review and find out what happens with 
China's accession to the WTO. This is a trust-but-verify stance 
that allows the U.S. to have the best of both worlds.
    Now, before I totally conclude, I would just note that not 
only is PNTR not necessary, the arguments for why it is not 
merited are equally compelling, as Mr. Wu has pointed out. And 
I submit my full written testimony for the record, which also 
lays out these issues.
    I would just make two final points. One is that de-linkage 
in 1994 was a bad idea. The U.S. should reverse that decision. 
The Congress needs to have a role to ensure that the enormous 
leverage of our market, the U.S. market that everyone wants 
access to, is used both to get trade benefits that are 
reciprocal and to suit other U.S. goals.
    But the one upside to de-linkage was that we tested the 
touted policy that more free trade and more liberalization 
equals more freedom and democracy. For 6 years we have had more 
free trade with China and we have had more trade liberalization 
in China, and we have had the U.S. State Department say, under 
that little experiment, freedom and democracy have deteriorated 
every single year. With that kind of data, it is not the kind 
of experiment you want to lock in permanently.
    And finally, on the issue of the potential benefits of 
China's WTO entry, there are so many issues of injustice that 
the U.S. has leverage to deal with, if it would only exercise 
it. But on the issue of the Internet, this notion of the great 
new China market--here in the Commerce Committee's area, the 
Internet--in fact, in China right now, there are many people in 
jail simply for using the Internet. It is a crime to send 
information disfavorable to the Chinese Government over the 
Internet to another country. So in my testimony I list the 
names of journalists who are in jail for e-mailing friends in 
the U.S. information on Falun Gong. What kind of business 
opportunity is it if the customers go to jail for using your 
service?
    Thank you very much.
    [The prepared statement of Ms. Wallach follows:]

             Prepared Statement of Lori Wallach, Director, 
                  Public Citizen's Global Trade Watch
         Permanent NTR for China: Neither Merited nor Necessary

    Mr. Chairman and members of the Committee, on behalf of Public 
Citizen and its members nationwide, thank you for the opportunity to 
testify on the issue of China's admission to the World Trade 
Organization (WTO) and related matters regarding Normal Trade Relations 
(NTR) status for China.
     My name is Lori Wallach. I am the director of Public Citizen's 
Global Trade Watch. Public Citizen is a consumer advocacy group founded 
in 1971 by Ralph Nader. My testimony today is also endorsed by the 
Citizens Trade Campaign of which Public Citizen is a member group along 
with hundreds of other consumer, labor, religious, environmental, 
family farm and other citizens' groups across the country. The combined 
membership of the Citizens Trade Campaign member organizations is over 
7 million nationwide.
    Most simply, Permanent NTR for China is neither merited nor 
necessary.
    PNTR is not merited on the basis of the Chinese government's dismal 
and steadily decaying record on an array of issues from human rights 
and weapons proliferation to meeting its international obligations or 
conducting fair trade. At issue with Congress' PNTR decision is really 
one thing: eliminating Congress' annual review of the U.S.-China 
relationship under the Jackson-Vanik Amendment, which sets procedures 
for annual grants of NTR to non-market economies. Whether or not NTR is 
permanent, the U.S. and China will continue to trade. Indeed, absent an 
act of Congress to change the status quo, the U.S. would continue to 
provide the same basket of trade privileges to China annually that it 
grants its most favored trade partners. The only real question is 
whether Congress should give up its annual review and the related 
ability to determine the U.S. trade treatment China should be granted.
    The Chinese regime and U.S. corporations seeking to relocate 
production to China and guarantee unconditional access for their 
products back into the U.S. market seek termination of the annual 
review because it shines a spotlight of scrutiny on an otherwise 
totally unaccountable Chinese regime. The Clinton Administration 
severely undercut the effectiveness of the annual review by formally 
delinking it from human rights and other concerns. However, before the 
current Administration put this tool up on the shelf, it was used 
effectively. The leverage created by the review combined with the 
specter of access to the U.S. market being reconnected to China's human 
rights, non-proliferation or trade violations, is a powerful tool for 
change that must not be denied to future Congresses and 
Administrations. Yet, a core principle of the WTO is that countries may 
not consider other countries' human rights conduct or the conditions, 
such as with forced labor, under which their goods are produced in 
determining those countries' market access rights.
    The one useful outcome of the Administration's move to delink 
China's trade status and human rights is that it has allowed the 
theory--that greater trade links with the U.S. and greater economic 
freedom will improve human rights and democracy--to be proved to be 
false. Greater trade links and economic liberalization with China have 
not resulted in improvement in China's human rights conduct nor 
promoted the growth of democracy in China. In fact, the opposite has 
occurred. The U.S. State Department's 2000 annual human rights report 
documents the worst human rights, democracy, religious freedom, and 
free press violations in China of any past year. Meanwhile, during this 
same period the U.S. trade deficit with China exploded and now tops $70 
billion.
    PNTR is also not necessary: even if Congress opposes China PNTR, 
U.S. exporters still would obtain the potential trade benefits of 
China's WTO accession under the 1979 U.S.-China Agreement. Because 
proponents of PNTR have an extremely difficult time making the human 
rights case, given the data, they typically fall back on the argument 
that PNTR is necessary to avoid putting U.S. businesses at a 
competitive disadvantage relative to other WTO countries if China joins 
the WTO.
    Yet, the Agreement on Trade Relations Between the United States and 
China (``1979 Agreement''), which automatically renews every three 
years and which is the basis for billions of dollars of current U.S.-
China trade, provides U.S. farmers and manufacturers with the identical 
benefits China must give all WTO nations if it joins the WTO. The 1979 
Agreement unequivocally requires that the U.S. and China ``shall'' 
grant each other ``any advantage, favor, privilege or immunity'' they 
grant to any other nation.\1\ Thus, the major tariff cuts required if 
China enters the WTO apply to U.S. goods regardless of the fate of 
PNTR.
---------------------------------------------------------------------------
    \1\ 1979 Agreement, Article II.
---------------------------------------------------------------------------
    The 1979 Agreement means that U.S. exporters will obtain the same 
trade benefits from China's WTO entry as would businesses in other 
nations, including regarding distribution and other matters related to 
internal sales of imported goods. The broad Most Favored Nation (MFN) 
requirement in the 1979 Agreement means that China must give the U.S. 
the same best treatment it gives any other nation. If China enters the 
WTO, that ``best treatment'' will be the WTO terms China gives other 
nations. Thus, claims by the Administration that U.S. goods alone would 
miss out on the significant tariff cuts that the Administration is 
touting as a key result of China's WTO entry or that U.S. businesses 
would still face domestic content or performance requirements are 
false.
    The plain language of the 1979 Agreement invalidates the USTR's 
claim that distribution and other sales-related aspects of importing 
goods are not covered. The actual language of the 1979 Agreement 
requires China to grant the U.S. ``any advantage, favor, privilege . . 
.'' in ``all matters regarding:''\2\ ``all laws, regulations and 
requirements affecting all aspects of internal sale, purchase, 
transportation, distribution or use of imported goods.'' \3\
---------------------------------------------------------------------------
    \2\ 1979 Agreement, Article II.
    \3\ Id. at Article II (D)
---------------------------------------------------------------------------
    The U.S. could have the best of both worlds: tariff cuts and other 
trade benefits required if China enters the WTO and effective 
enforcement via U.S. measures such as speedier domestic surge-
protection, anti-dumping laws, and Section 301 which WTO forbids.
    The Clinton Administration says that if Congress does not grant 
PNTR, it will file at the WTO for ``non-application'' with China--
meaning the U.S. and China won't have a full WTO relationship. PNTR 
advocates and opponents agree if this occurs, WTO dispute resolution 
will not apply between the U.S. and China. However, opponents see the 
ability to use speedy and effective U.S. unilateral trade enforcement 
tools as a benefit of maintaining annual MFN. If the U.S. does grant 
PNTR it will be bound to only using WTO dispute resolution to enforce 
China's trade commitments. As we have seen with assorted U.S.-EU WTO 
fights, WTO dispute resolution takes at least two years and ultimately 
relies on something entirely missing in China: commitment to the rule 
of law.
    The U.S. has nothing to lose by taking a ``trust but verify'' 
approach to China trade by maintaining U.S. enforcement tools forbidden 
by the WTO regarding China while reviewing whether China follows its 
WTO commitments. The November 1999 U.S.-China WTO deal is not a 
separate trade agreement, but rather the U.S. contribution to what will 
be the WTO terms China gives to all 136 WTO Members. U.S. negotiators 
built on what the previous countries negotiating with China had 
obtained, and countries still negotiating, such as he European Union, 
will build on what the U.S. obtained. The best commitments that are 
obtained in all of these bilateral talks will be multilateralized and 
become the terms of China's WTO accession, along with some issues to be 
negotiated in Geneva. (This includes how the state-owned sector will be 
treated and rules on subsidies unfinished issues noted in a recent 
General Accounting Office report\4\ on China-WTO, begging the question 
of how Congress would rush to approve PNTR without knowing the terms of 
China's WTO accession.) All of these ``concessions'' will be equally 
available to all WTO countries. The U.S. will obtain these same 
concessions under the 1979 U.S.-China Bilateral Agreement whether or 
not the U.S. Congress grants China PNTR.
---------------------------------------------------------------------------
    \4\ GAO Report GAO/NSIAD-00-94 ``China's WTO Membership''
---------------------------------------------------------------------------
    The U.S. has plenty to lose by granting PNTR, including effective 
trade enforcement tools, the leverage of annual congressional review of 
China's record and WTO attacks on U.S. laws by China. In the 21 years 
of U.S.-China trade, different Administrations have declared each and 
every U.S.-China trade agreement as the ``First,'' the ``Last,'' and 
the ``Most Important.'' Yet, China has systematically broken trade 
commitments to the U.S. and other countries. China has only halted 
violations of trade--and other international commitments--when 
threatened with dire economic implications in the form of large and 
speedy trade sanctions. By not granting PNTR, the U.S. can take a 
``trust but verify'' approach on China trade under the WTO, obtaining 
the WTO benefits via the 1979 Agreement and maintaining our annual 
review until we have evidence that China will follow WTO terms. 
Meanwhile, by not granting PNTR and avoiding a full WTO relationship 
with China, the U.S. can also avoid challenges by China to U.S. human 
rights, environmental, and other laws using WTO dispute resolution. As 
the past five years of WTO jurisprudence have shown, plaintiffs 
generally win cases at the WTO and each and every domestic 
environmental, health, or other public interest measure brought to the 
WTO has been ruled an illegal trade barrier.\5\ Thus, in addition to 
requiring the U.S. to give up effective U.S. enforcement tools, a full 
U.S.-China WTO relationship would mean U.S. laws newly would be exposed 
to WTO attack by China whose government has been very vocal in 
challenging the legitimacy of U.S. laws and policies.
---------------------------------------------------------------------------
    \5\ See Wallach and Sforza, Whose Trade Organization?: Corporate 
Globalization and the Erosion of Democracy, (1999) at chapter 8.
---------------------------------------------------------------------------
A. PNTR for China Is Not Merited
    In 1994, the Clinton Administration launched a major experiment by 
delinking U.S. trade treatment for China from our human rights concerns 
regarding China. During each year of this experiment on whether free 
markets lead to freedom, the U.S. State Department has reported that 
human rights have deteriorated. It is time to reverse that policy and 
to use the enormous, if unexercised, U.S. leverage on China. The U.S. 
receives over 40% of China's exports and it is these exports that fuel 
the economic growth that is the only basis for legitimacy for the 
current Chinese regime.
    The complete absence of democracy and freedom in China should give 
pause to what ``free'' trade might mean to the Chinese government. In 
1989, China repressed thousands of peaceful demonstrators at Tiananmen 
Square. Hundreds were killed or ``disappeared,'' thousands more served 
lengthy prison terms, and even now, nearly 250 still languish in 
Chinese prisons.
    How will Members of Congress justify to voters back home ending 
review and scrutiny over a regime that has brutally repressed the most 
basic freedoms Congress pledges to defend while sticking its proverbial 
thumb into the eye of Congress time and again with its bellicose 
statements. The conduct of the Chinese regime during the years it has 
been free of effective congressional scrutiny (thanks to the delinkage 
policy) has resulted in tens of thousands of stories of abuse, any one 
of which shows how shameful it would be for Congress to give up its 
only tool for change.
    There is no free flow of information or open press in China. China 
says it will permit foreign investment in Internet services in the 
future. Yet, in China people who use the Internet freely risk long 
prison sentences. Given China's free trade in Internet services 
commitments did not include free speech on the Internet commitments, it 
is very important to understand the enormous obstacles for both 
investors and individuals to free use of this information service and 
the enormous obstacles to the free flow of information in and out of 
China. For instance, journalist Zhang Ji was convicted and jailed for 
``disseminating reactionary documents.'' His ``crime''? Emailing 
information on the Chinese crackdown on Falun Gong practitioners over 
the Internet to the U.S..6,7 The international Committee to 
Protect Journalists reported this year that China had more reporters 
behind bars than any other country.
---------------------------------------------------------------------------
    \6\ ``Report: China Arrests Archbishop,'' Associated Press, 
February 14, 2000
    \7\ ``Attacks on the Press in 1999,'' Committee to Protect 
Journalists, March 22, 2000.
---------------------------------------------------------------------------
    Attacks on democracy activists and journalists have escalated, with 
leaders and members of the Chinese Democracy party either jailed or 
exiled. For instance, Gao Hongming a prominent member of the Beijing 
Chinese Democracy Party (CDP), was under police surveillance for eight 
years, including monitoring and videotaping his contacts with 
foreigners. The CDP is a banned opposition party because its platform 
includes open and free elections in China. Mr. Gao was picked up and 
detained in June 1999 when the Chinese government swept the country 
free of democracy activists to prevent any demonstrations to 
memorialize the ten year anniversary of Tiananmen. Weeks later he was 
released, only to be arrested again in August for ``subversion'' and 
sentenced to eight years in prison.
    The Chinese government controls all religious activity within China 
and those who seek religious freedom are imprisoned. There are only 
five officially recognized religions in China, and each official faith 
is tightly controlled by the Chinese government. For instance, China 
recognizes only the Catholic Patriotic Movement as its ``Catholic 
Church.'' However, the Catholic Patriotic Movement is not recognized by 
the Vatican as a Catholic Church. Though China counts as many as 4 
million official Catholics, the Vatican believes there are as many as 
10 million ``underground'' Catholics. In the past year several Bishops 
ordained and recognized by the Vatican have been detained and a long 
list of priests and nuns have been imprisoned. Recently, the 80-year-
old Archbishop ordained by the Pope but not recognized by China 
disappeared in Fuzhou in the Province of Fujian. Many people believe he 
has been arrested again. Archbishop John Yang Shudao has already spent 
nearly three decades in Chinese prisons; thus his health is fragile. 
His exact whereabouts remain unknown despite demands for information 
from numerous governments and the Vatican.
    The official Protestant ``Three Self Patriotic Movement'' has 
between 10 and 15 million members, but the growing Protestant 
evangelical and home church movement has as many as 30 million 
followers. In the past year the Chinese government has conducted severe 
crackdowns on these Protestant groups. Protestant churches have been 
raided with their followers and Bibles swept up by police, and Xu 
Yongze, a prominent evangelical leader was publicly labeled a cultist. 
When police in Xinyang arrested 16 Christians on March 2, 2000, they 
also confiscated their Bibles, a typical practice. No one is certain 
what has happened to Mr. Xu and the others who were interred during 
these church raids.
    The highest holy person in the Buddhist religion is the Dalai Lama, 
yet no picture of the Lama is allowed to be displayed anywhere in his 
Tibetan homeland. Indeed, many Tibetans are serving long prison terms 
for the crime of posting his likeness.\8\ Amnesty International reports 
that the hundreds of teenage girl and boy Buddhist monks jailed in 
Tibet face horrible abuse, from systematic rape to starvation. 
Meanwhile, the child that the Dalai Lama chose to be the Panchen Lama, 
the second holiest figure in the Buddhist religion, has not been seen 
in three years since the young child and his family were detained by 
the Chinese government. The Chinese government named its own Panchen 
Lama and installed that child shortly after disappearing the Dalai 
Lama's choice.
---------------------------------------------------------------------------
    \8\ U.S. Department of State, 1999 Human Rights Report, China, 
February 25, 2000
---------------------------------------------------------------------------
    The Chinese government only allows the existence of the official 
Chinese government-sponsored union, a notoriously corrupt wing of the 
communist party known for ignoring the demands of Chinese workers. 
Workers for decades have tried to organize independent unions who will 
actually fight to clean up horrifically unsafe work places and demand 
living wages. Labor leaders have long been on the front lines of the 
fight for democracy in China. Many languished in prison or in forced 
labor camps after Tiananmen.
    A major Chinese mining operation, Sichuan Xinkang Asbestos, is part 
of the ``Laogai'' prison labor camp system.\9\ Americans view the 
Laogai system as forced labor camps, but China calls them ``education 
camps.'' At Xinkang Asbestos Mine, hundreds toil under the gun; working 
and living conditions contribute to the high death rate. The Guangzhou 
#1 Reeducation Through Labor Camp also is part of the ``Laogai'' prison 
forced-labor system. Prisoners at this facility work in a stone quarry 
and also assemble artificial flowers for export to the U.S., among 
other nations. The Chinese Ministry of Justice has refused U.S. Customs 
officials' requests to visit this facility even though in 1992 China 
signed an agreement with the U.S. on prison labor requiring such 
access.
---------------------------------------------------------------------------
    \9\ ``A Rare Insight into China's Laogai Economy: Dun & Bradstreet 
Directory Lists Forced Labor Camps,'' Laogai Research Foundation, 1998.
---------------------------------------------------------------------------
    Last year according to the Committee to Protect Journalists, three 
people who have struggled for years to establish independent unions 
were arrested when they created and published the China Workers 
Monitor, a journal which campaigned for workers rights. Two of these 
leaders are sentenced to decade-long terms. Yue Tianxiang, Guo Xinmin, 
and Wang Fengshan represent the best of the labor movement worldwide by 
putting their lives on the line fighting for workers rights and 
publicizing the conditions for Chinese workers. China's footwear 
industry produces 6 billion shoes a year--enough for every person on 
earth. Many name brand sneakers are produced in plants such as the Tung 
Tat Garment Factory in Shilong, Dongguan province where workers toil 80 
hours a week for 24 cents an hour making Adidas.\10\ Until real unions 
are permitted in China, Chinese workers will not be paid a living wage, 
much less enough to afford U.S. products
---------------------------------------------------------------------------
    \10\ ``Behind the Label `Made in China','' National Labor 
Committee, 1998.
---------------------------------------------------------------------------
    Retaining the ability to effectively pressure against such abuses 
would be sufficient grounds for Congress to reject PNTR and the 
termination of the annual review. However, to make matters even 
clearer, there is little to be lost and much to be gained economically 
if Congress rejects PNTR.
B. PNTR for China Is Not Necessary
    There have been numerous misconceptions--as well as a certain 
amount of outright mendacity--regarding China WTO accession and 
Congress' role. Given I am joined on this panel by Harry Wu, a person 
better qualified than I to explain why granting China permanent MFN is 
a terrible idea, I will now shift my focus onto clarifying what 
Congress' role really is on this matter--and Congress' options. I will 
start by clearing up some myths and misconceptions:
    Proponents of granting China permanent NTR suggest that China could 
not enter the WTO unless the U.S. Congress granted it permanent NTR 
status. Contradicting their first point, proponents of permanent China 
NTR also claim that if China entered the WTO and the U.S. Congress does 
not pass permanent NTR for China, U.S. businesses would be excluded 
from whatever trade benefits China grants other countries when it 
joins. Both claims are entirely false. However, given that numerous 
pro-PNTR experts and the Chinese government have both dispelled the 
first notion--that China's WTO admission has anything to do with 
Congress' P vote--I will not focus on it.
    Recently, the Clinton Administration has intensified its campaign 
of misinformation about the second myth, the implications for U.S. 
business if China does enter the WTO and Congress refuses to grant 
China PNTR. For instance, in late March the Administration widely 
released to Congress, the press and public a USTR memo that arbitrarily 
reinterprets our existing array of commercial bilateral agreements with 
China. In the name of arguing why Congress must approve PNTR, this new 
USTR analysis reinterprets existing U.S.-China agreements to be 
meaningless while arguing that all U.S.-China trade problems would be 
solved by passage of PNTR. The new position contrasts sharply with past 
Clinton Administration characterizations, on the front pages of the 
U.S. national press, touting the very same U.S.-China bilaterals as 
providing unprecedented U.S. market access to China and as tremendous 
breakthroughs in U.S.-China relations.
    In addition to conflicting with past Administration pronouncements, 
these highly restrictive reinterpretations of existing U.S.-China 
commercial commitments have no basis in law.
    As well, this ``analysis'' puts the short term political goal of 
convincing Congress there is urgent need to grant China Permanent NTR 
ahead of U.S. economic interests. When Congress rejects PNTR, it is the 
1979 Agreement and the other bilaterals on which USTR will need to rely 
to obtain trade benefits for U.S. business. Indeed, Chinese trade 
officials could employ the USTR memo to try to undercut the clear 
language of the 1979 Agreement.
    The 1979 Agreement, as was revealed in a March 1, 2000 legal 
memorandum by Columbia Law School Professor Mark Barenberg, would 
provide U.S. businesses with the trade benefits China must provide WTO 
countries if it accedes to that body. Thus, even if Congress opposes 
China PNTR, U.S. exporters would obtain the potential benefits China 
must provide other nations if it enters the WTO while retaining the 
effective U.S. trade enforcement mechanisms forbidden under the WTO, 
such as Section 301.
    Clarifying this information is vital because it shows that Congress 
has an array of options regarding China's trade status that can provide 
U.S. economic interests with any potential benefits of China's WTO 
admission while maintaining a meaningful Congressional oversight role 
in U.S.-China commercial relations.

1. The 1979 Agreement Provides U.S. Farmers and Manufacturers Seeking 
to Export to China with the Tariff Cuts and Distribution and Marketing 
Rights for Their Products Which WTO Members Obtain if China Enters the 
WTO Regardless of What Congress Decides on PNTR.

    The 1979 U.S.-China bilateral agreement is unequivocal in requiring 
that the U.S. and China ``shall'' grant each other ``any advantage, 
favor, privilege or immunity they grant like products originating in or 
destined for any other country or region\11\.'' This language describes 
a broad reciprocal grant of Most Favored Nation (MFN)\12\ treatment 
between the U.S. and China.
---------------------------------------------------------------------------
    \11\ 1979 Agreement, Article II, chapeau.
    \12\ The term Most Favored Nation comes from the text of the GATT, 
is used throughout the WTO and appears repeatedly in the 1979 
Agreement. MFN refers to a concept under which a country commits to 
give the best trade treatment it provides to any trade partner to all 
trade partners with whom it has a MFN commitment. In the U.S., the 
statue providing annual grants of MFN treatment to non-market economies 
was amended to replace the term MFN with ``Normal Trade Relations.''
---------------------------------------------------------------------------
    If this broad coverage were not clear on its face, the general 
Article II language in the 1979 Agreement is followed by explicit 
extension of such MFN coverage to ``all matters regarding:''\13\
---------------------------------------------------------------------------
    \13\ 1979 Agreement, Article II, chapeau.

         tariffs, duties and charges of any kind; (Article 
        II(A))
         ``all laws, regulations and requirements affecting all 
        aspects of internal sale, purchase, transportation, 
        distribution or use of imported goods;'' (Article II (D))
         customs clearance, transit, warehousing; (Article II 
        (B))
         taxes and other internal charges levied directly or 
        indirectly; (Article II(C))
         administrative formalities for import and export 
        licenses.
        (Article II(E))

    Most simply, the terms of the 1979 Agreement mean that China must 
give to U.S. goods the best treatment it provides to any other nation's 
goods--including in ``all matters regarding . . .'' the above list of 
sales and distribution-related aspects. The plain language of the 1979 
Agreement proves false the Administration and business claims that 
distribution and other sales-related aspects of importing goods to 
China are not covered by the 1979 Agreement.
    As well, the Administration continues to be ambivalent when asked 
whether all WTO-required tariff cuts would be available to U.S. 
exporters regardless of passage of PNTR. The answer to that inquiry is 
yes, unequivocally U.S. goods would obtain those steep tariff cuts 
which the USTR has touted and which China would be required to make if 
it enters the WTO. Article II(A) of the 1979 Agreement explicitly 
guarantees these tariff cuts for U.S. goods regardless of what Congress 
decides about PNTR for China.

2. The November 1999 U.S.-China Deal on Terms for China's WTO Accession 
Is Not a Free-Standing Trade Agreement, and the Potential Benefits of 
that Deal Will Not be Lost if Congress Rejects PNTR

    Many in Congress have been confused by the Administration's focus 
on the November 1999 U.S.-China deal about the terms for China's WTO 
accession. That deal is not a free-standing U.S.-China trade agreement, 
the benefits of which will be lost if the U.S. Congress does not take 
action.
    Rather, the process by which any new country enters the WTO 
includes a series of bilateral negotiations with key WTO countries, the 
results of which are then combined to form one multilateral protocol 
which sets the terms for the new country's accession to the WTO.\14\ 
U.S. negotiators built on the commitments obtained by countries which 
had previously completed bilateral talks on WTO terms with China. 
Countries still negotiating with China will build off of what the U.S. 
obtained. For instance, one major sticking point in the on-going 
European Union (EU)-China talks about China's WTO terms is that the EU 
seeks even better access for automobiles into the Chinese market than 
the U.S. deal achieved. If the EU obtains the improved commitments from 
China, the U.S. will also obtain those benefits as they will be 
multilateralized into China's overall WTO terms along with the best of 
the commitments that the U.S. and other countries obtained in their 
bilaterals.
---------------------------------------------------------------------------
    \14\ See GAO Report GAO/NSIAD-00-94 ``China's WTO Membership'' at 
8-11 for a description of the WTO accession process.
---------------------------------------------------------------------------
    The 1979 Agreement's MFN requirements mean that China must give 
U.S. goods the best treatment it provides to any other nation's goods--
this treatment will be the totality of the WTO package once all of the 
bilaterals, including the U.S.-China November 1999 deal, are 
multilateralized.
    Currently, China's most favored treatment (now provided to the U.S. 
and China's other trade partners) includes higher tariffs than the WTO 
permits and assorted distribution and regulatory restrictions forbidden 
by WTO rules. When China enters the WTO, China must cut its tariffs and 
regulatory restrictions to meet the WTO's rules and to conform with the 
assorted additional commitments it has made in its bilateral talks. 
Whether or not the U.S. passes PNTR, and whether or not the U.S. and 
China have full WTO relations, China must grant its new most favored 
treatment to the U.S. under the 1979 Agreement.
    Indeed, the very notion of reciprocal MFN that is the basis of the 
1979 Agreement requires that whatever and all benefits given to any 
other nation must also be granted to all MFN partners. Fluidity of 
coverage is inherent in the MFN concept: the benefits available to any 
MFN partner changes as does the granting country's treatment of other 
nations. Thus, if China gives other countries additional freedom from 
internal Chinese regulations regarding distribution and marketing of 
imported goods whether or not this is connected to China's WTO 
accession U.S. goods obtain the same treatment under the 1979 Agreement 
generally and explicitly under the 1979 Agreement's Article II(D) 
covering regulatory and issues regarding internal sale.
    The notion that the U.S. would not obtain explicit WTO benefits 
China grants to other countries regarding imported goods--like those 
removing conditions for importing goods such as local content 
requirements--is incorrect. The specific example presented in the USTR 
March 2000 memo is that U.S. agricultural goods could be banned from 
China based on food safety or pest control rules that would be 
forbidden under WTO rules. Yet, under the 1979 Agreement, China must 
provide the U.S. the same treatment it provides any other country. The 
1979 Agreement has a specific provision--Article II(D)--explicitly 
extending this requirement to regulatory matters related to internal 
sale of imported goods. Thus, if China applies the WTO's Sanitary and 
Phytosanitary rules, as required, to any WTO member, it must provide 
the same treatment to U.S. goods. The USTR, the Administration and PNTR 
business boosters are relying on Congress' lack of understanding of 
this core aspect of MFN as a fluid state of equal treatment versus any 
one set specific trade benefits.
    Moreover, contrary to USTR suggestions, China could not ``make up'' 
the major tariff cuts by charging U.S. goods higher internal taxes than 
are charged other imported goods thanks to Article II(C) of the 1979 
Agreement. As well, Article II(C) prohibits taxing U.S. goods at a 
higher rate than Chinese domestic goods. This specific example is only 
one element of another general point on which the USTR aspect of a 
larger point about which PNTR boosters have not been honest: national 
treatment for U.S. goods in China.
    NATIONAL TREATMENT: The March 2000 USTR memo declares that unless 
Congress approves PNTR, U.S. goods would not receive ``national 
treatment,'' which means that China could discriminate against U.S. 
goods relative to domestic Chinese goods regarding regulatory matters. 
This is false. It is irrelevant if the 1979 Agreement does not contain 
specific language on National Treatment, as USTR knows.
    Under WTO rules, China will be required to treat all of its WTO 
trade partners in a non-discriminatory fashion (meaning treating 
domestic and imported goods the same for internal taxation and 
regulation). As a practical matter, this means that China must apply 
the same set of domestic regulations to imported goods that it does to 
domestic goods. And, once China provides that treatment for one of its 
trading partners' goods, the U.S. and its imported goods must receive 
the same treatment, thanks to the requirements of MFN generally and the 
specific application of MFN to matters such as domestic regulations in 
Article II(D) of the 1979 Agreement. While the concept of National 
Treatment is not present in the 1979 Agreement, the results and 
benefits of that principle--as translated into the actual treatment 
U.S. goods must be given--are guaranteed for U.S. goods because of the 
1979 Agreement's broad MFN obligations.

3. The 1979 Agreement Provides U.S. Companies Seeking to Export 
Investment and Jobs to China Investment and Service Sector Rights, but 
These Rights Are Being Undercut by USTR's New Declarations that these 
Sectors Are Excluded from the 1979 Agreement

    The 1979 Agreement also contains explicit language on services and 
a requirement to ``accord firms, companies, corporation, and trading 
organizations of the other party MFN treatment.''\15\ These provisions 
and the benefits they provide to U.S. businesses are explained in a 
March 1, 2000 memorandum by Columbia Law School Professor Mark 
Barenberg. As Professor Barenberg describes, several provisions of the 
1979 Agreement require that U.S. investors and service sector firms 
also be provided with MFN treatment. Many benefits in the service 
sectors which are part of China's WTO accession--including those 
negotiated by the Administration in its November deal--would be 
covered, thus requiring China to provide equal treatment in these areas 
to U.S. ``firms, companies, corporations and trading 
organizations.''\16\
---------------------------------------------------------------------------
    \15\ Article III, 1979 Agreement.
    \16\ Article III, 1979 Agreement.
---------------------------------------------------------------------------
    Those trying to minimize the impact of the 1979 Agreement note that 
the language in these areas is less detailed than other elements of the 
1979 Agreement. Of course, these are same sources who claim the 1979 
Agreement does not cover distribution rights, even though there is 
explicit coverage by name of distribution and other internal sales 
matters. However, more generally, any commercial agreement--and 
certainly any commercial agreement with China--will involve disputes 
about what is covered and what rules apply. As the U.S. has found in a 
series of WTO cases against the EU, having rules in the WTO about an 
issue is no guarantee of compliance with those rules.
    As well, the U.S. has other bilateral agreements with China that 
cover these sectors: two comprehensive 1992 and 1995 Memoranda of 
Understanding with China which were touted in the national press as 
guaranteeing massive market access for U.S. farmers and manufacturers, 
the 1995 intellectual property agreement which was similarly lauded and 
other sectoral bilaterals. Members of Congress will recall that these 
agreements were lauded as providing incredible market access for U.S. 
services and new rights for investors when they were signed and the 
results of these agreements have been touted heavily by USTR since. The 
specific contents of these additional, specific bilateral agreements 
are outside the scope of this testimony, but go to revealing the 
fallacy in the Administration's claims that absent PNTR, U.S. firms 
would be cut out of all service sector, intellectual property, and 
investor rights

4. The Administration Has Pronounced an Array of New Interpretations of 
the 1979 U.S.-China Agreement Which Have No Legal Basis and Which Are 
Contrary to U.S. Economic Interests

    In the name of passing PNTR, the Clinton Administration has gone on 
a mission to undercut the scope and coverage of existing U.S.-China 
trade agreements. For instance, a March 9, 2000 USTR memo includes an 
array of limiting interpretations of the 1979 Agreement which simply 
have no basis in law. For instance, the USTR memo cites a highly 
politicized Ways and Means Committee report as its ``legal authority'' 
for newly declaring that the treaty, which has been the basis for 
billions of dollars of U.S.-China trade, is nothing more than a concept 
paper.
    The USTR employs two arguments in its attempt to undercut the 1979 
Agreement's coverage.
    First, the USTR memo concocts an array of limitations to the clear 
language of the 1979 Agreement by referring to U.S. statues under which 
the 1979 Agreement was negotiated. For instance, in trying to minimize 
the language in Article II of the 1979 Agreement covering 
``reciprocating'' satisfactory concessions with regard to trade and 
services (emphasis added), the USTR memo argues that this provision was 
negotiated to comply with a section of the U.S. trade law with a more 
limited scope, and thus, despite the clear language in the 1979 
Agreement, service sectors would not be covered after all.
    Yet, even if the 1979 Agreement language was negotiated under such 
a provision of U.S. law, U.S. law does not cover China. The actual 
international commitment between the U.S. and China in the 1979 
Agreement is contained in the actual terms of the 1979 agreement. U.S. 
law--whether it includes provisions that expand or limit the actual 
language of an international agreement--has no legal effect whatsoever 
on China.
    The actual legal commitment created by the 1979 Agreement is that 
which is contained in the actual document which binds both parties in 
international law. The USTR argument to the contrary would mean, for 
instance, that if China has a domestic law under which it negotiated 
its WTO accession agreement which includes provisions contradicting 
China's WTO commitments, the Chinese domestic law binds all other WTO 
Member countries. Under the USTR's bizarre argument, such a domestic 
Chinese law would control and limit any contrary terms of China's 
international WTO accession agreement. Obviously, this is not how 
international law operates.
    Second, the USTR memo stretches credulity one step further in 
arguing that despite an absence of language in the 1979 Agreement so 
requiring, the 1979 Agreement's application is limited to only what is 
covered by the General Agreement on Tariffs and Trade (GATT). GATT was 
the precursor institution to the WTO, and now its provisions and 
jurisprudence are incorporated under the WTO. USTR employs this device 
argument once again to claim that the 1979 Agreement denies U.S. 
exporters distribution rights and excludes services sectors, despite 
language in the 1979 Agreement to the contrary, because these issues 
were not covered by the language of the GATT.
    In fact, the 1979 Agreement contains no reference to GATT or any 
other agreement which limits the application of its provisions. The 
language of the 1979 Agreement focuses on, for instance, all 
``products'' originating in or destined for the U.S. or China and 
requires the same standard of treatment ``in all matters regarding'' 
the comprehensive list of activities regarding distribution and sale of 
such imported goods. As noted above, the notion of MFN treatment is 
inherently fluid with the best treatment granted to one country flowing 
to all other nations with which the granting country has MFN 
commitments.

5. WTO Dispute Resolution Is Less Effective for the Enforcement of 
China Trade Commitments than the Powerful U.S. Enforcement Tools, such 
as Section 301, Which Are Banned By the WTO

    The USTR has stated that if Congress does not grant PNTR, it will 
file at the WTO for ``non-application'' with China. The WTO rules 
permit an existing WTO Member to declare, in advance of the admission 
of a new Member, that full WTO terms will not apply as between those 
countries.\17\
---------------------------------------------------------------------------
    \17\ The nonapplication provisions are contained in Article XIII of 
the Agreement Establishing the WTO which updates GATT Article XXXV. The 
WTO requires ``unconditional'' Most Favored Nation status be granted 
between WTO Members, but is silent as to the duration of such grants. 
USTR chooses to interpret this provision to require PNTR and invoke 
non-application if Congress does not provide PNTR, however, what is 
actually required is an open legal question. Thus, if the 
Administration did not invoke nonapplication and Congress chose to 
remove the free emigration conditions of the Jackson-Vanik Amendment 
and grant China one year of unconditional MFN, only a WTO tribunal 
could judge whether or not that satisfied WTO requirements. Such a WTO 
ruling would require China to bring a case against the U.S. arguing 
that its WTO rights were violated. However, because USTR has announced 
that it will file for nonapplication absent PNTR, this question does 
not arise.
---------------------------------------------------------------------------
    PNTR advocates and opponents agree that if the U.S. files for 
nonapplication regarding China, and thus the U.S. and China do not have 
full WTO relations, then WTO dispute resolution will not apply between 
the U.S. and China. PNTR boosters lament this outcome as a major 
limitation of relying on the 1979 Agreement.
    However, many others view the ability to use speedy and effective 
U.S. unilateral trade enforcement tools as a benefit of rejecting PNTR 
and avoiding a full WTO relationship with China. If the U.S. does grant 
PNTR it will be bound only to use WTO dispute resolution to enforce 
China's trade commitments.\18\ WTO rules require: ``When Members seek 
the redress of a violation of obligations or other nullification or 
impairment of benefits under the covered agreements or an impediment to 
the attainment of any objectives of the covered agreements, they shall 
have recourse to, and abide by, the rules and procedures of this 
Understanding. In such cases, Members shall: not make a determination 
to the effect that a violation has occurred . . . except through 
recourse to dispute settlement in accordance to the rules and 
procedures of this Understanding . . .''\19\ The same constraints to 
use only WTO dispute resolution apply to the timing of sanctions even 
when the WTO finds a violation\20\ and the amount of sanctions 
permitted.\21\
---------------------------------------------------------------------------
    \18\ WTO Dispute Settlement Understanding Article 23.
    \19\ Id.
    \20\ Id. at Article 23.2(b).
    \21\ Id. at Article 23.2(c).
---------------------------------------------------------------------------
    As we have seen with assorted U.S.-EU WTO fights, WTO dispute 
resolution takes at least two years before an initial ruling is 
enforceable and ultimately relies on something entirely missing in 
China: commitment to the rule of law. The WTO enforcement system relies 
on countries' investment in the well-being of the multilateral trade 
system so that changing a domestic policy against which the WTO has 
ruled is given priority over the specific national interest in that 
policy.
    Thus, if Congress rejects PNTR, all U.S. trade laws would still be 
applicable to China, including U.S. anti-dumping and surge protection 
measures. These laws provide for much quicker adjudication of claims. 
They also provide for much speedier application of trade sanctions 
against trade barriers.
    Moreover, many of China's practices which create barriers to U.S. 
trade and investment are not covered by WTO rules. Yet, even in these 
areas the U.S. could not apply sanctions under U.S. trade law if it has 
a full WTO relationship with China. Under WTO, Members cannot increase 
tariff levels above the WTO bound tariff levels as against other WTO 
Members except when authorized by the WTO's Dispute Resolution Body. 
Thus, even if the U.S. has the right to unilaterally determine that a 
country has trade barriers that are outside WTO coverage, effective 
sanctions to pressure for their removal are not available.
    The U.S. has been trapped by the WTO's dispute resolution system 
before. A high profile example was the Kodak fight with Japan. When the 
U.S. threatened Japan with Section 301 action for an array of private 
marketing pacts and informal regulations which kept U.S. film off 
Japan's retail shelves, Japan accurately charged that use of a 
unilateral trade law such as Section 301 would violate WTO rules.\22\ 
The U.S. backed down\23\ and instead filed a WTO case on the matter. 
The U.S. lost on every point it raised, with the WTO panel concluding 
that the conduct alleged by the U.S. was outside the coverage of WTO 
rules.\24\
---------------------------------------------------------------------------
    \22\ Martin Crutsinger, ``U.S. Sends Film Dispute to Global Trade 
Panel,'' AP, 6/14/96.
    \23\ Id
    \24\ WTO, Japan-Measures Affecting Consumer Photographic Film and 
Paper (WT/DS44/R), Report of the Panel, March 31, 1998.
---------------------------------------------------------------------------
    PNTR boosters also argue that there is a benefit to the 
multilateral nature of WTO dispute resolution. Yet, it is hard to argue 
that a multilateral system in which the U.S. is one of 136 countries 
provides greater leverage than the lopsided nature of the U.S.-China 
bilateral relations, wherein the U.S. accepts a lion's share--40%--of 
China's exports. Moreover, either China will or will not comply with 
WTO rules. If China fails to do so, the injured country, for instance 
the U.S., takes a case to WTO dispute resolution and awaits the outcome 
of that process. If that process drags out, under WTO rules, the U.S. 
could no longer take action on its own to threaten or put in place 
sanctions limiting those 40% of China's exports' access to the U.S. 
market to force lifting of barriers. Indeed, the WTO recently ruled 
that the U.S. violated WTO rules and faces sanction in the banana case 
against the EU because the U.S. imposed sanctions prior to receiving 
WTO permission to do so.\25\
---------------------------------------------------------------------------
    \25\ The WTO issued a preliminary ruling in early March 2000 that 
the U.S. sanctions against the EU on the WTO banana case put in place 
on March 3, 1999, violated WTO rules which only permitted sanctions 
starting on April 19, 1999. U.S. liability for this violation will be 
assessed in the final WTO ruling. (``WTO Rules Against U.S. on Timing 
of Banana Retaliation Against EU,'' Inside U.S. Trade, March 17, 2000, 
p 3.

6. Given the U.S. Accepts 40% of China's Exports, China Would Not 
Terminate the 1979 Agreement if Congress Rejects PNTR Because the 1979 
---------------------------------------------------------------------------
Agreement Becomes China's Only Means to U.S. Market Access

    Finally, PNTR boosters note that Article X of the 1979 Agreement 
allows countries to terminate the pact at the end of its automatically 
renewing three-year terms. This argument is of little merit given two 
facts: First, WTO rules also allow any country to withdraw at any time 
on six months written notice.\26\ Second, the U.S. is China's largest 
export market taking more than 40% of total Chinese exports which fuel 
the growth which is the sole basis for the current regime's domestic 
legitimacy. The U.S. sends less than 1% of its exports to China. If 
China refused to renew the current 1979 Agreement's term, which runs 
into 2001, it would lose the basis for its entry into the U.S. market. 
As the annual U.S.-China trade deficit tops $70 billion, clearly China 
has the least interest in terminating NTR access to the U.S. market.
---------------------------------------------------------------------------
    \26\ Article XV, Agreement Establishing the WTO.

C. WTO Rules Would Empower China to Challenge U.S. Human Rights, Labor, 
---------------------------------------------------------------------------
and Non-Proliferation Policies

    One final technical, legal consideration about China and the WTO is 
the new powers and rights China would obtain as a WTO Member as against 
the U.S. While it is clear that the U.S. would be forbidden from using 
enforcement tools such as Section 301 if Congress grants PNTR and the 
U.S. and China have full WTO relations, it is also true that China 
could use WTO dispute resolution against an array of U.S. laws.
    Most simply, WTO rules forbid countries from banning goods made 
with child or forced labor and also forbid countries from treating 
other WTO members differently according to their human rights, weapons 
proliferation or other non-commercial behavior.
    If the U.S. sought to use trade sanctions against China--or for 
that matter to grant preferential trade benefits to other countries to 
reward progress on non-commercial issues--China as a WTO member would 
have standing to bring the U.S. to WTO dispute resolution wherein three 
trade officials would decide if the U.S. action violated China's WTO 
rights. If not, the panel--which includes private trade attorneys and 
has no conflict of interest rules for judges and no outside appeal--
could order the U.S. to either change the law or face trade sanctions.
    The WTO rules that China could use to challenge an array of 
existing U.S. human rights and other laws include:

         GATT Article III which requires national treatment 
        meaning ``like products'' must be treated equally whether made 
        by domestic manufacturers or foreign made. The past decade of 
        GATT and WTO jurisprudence has interpreted the ban on 
        discriminating on the basis of where a product is made to also 
        forbid treating goods differently on the basis of how they are 
        made. Thus, a shoe is a shoe regardless if it is coming from 
        forced labor in a People's Liberation Army factory in China or 
        from a union shoe craftsman cooperative in Maine.

         The Agreement on Government Procurement (AGP) which is 
        one of the 18 underlying agreements enforced by the WTO, 
        requires that no non-commercial considerations are used in 
        choosing bids for goods and services to be purchased by 
        governments. Obviously, directing the use of one's own tax 
        dollars has been a significant tool of human rights activism, 
        for instance regarding preferential procurement policies 
        concerning South Africa's apartheid regime.

                               Conclusion

    I will end where I began: Most simply, permanent NTR for China is 
neither merited nor necessary. There is little to lose by maintaining 
the status quo of annual NTR grants but much to be lost by granting 
China PNTR.

    The Chairman. Thank you very much, Ms. Wallach.
    Mr. Valenti, welcome back.

        STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF 
       EXECUTIVE OFFICER, MOTION PICTURE ASSOCIATION OF 
                            AMERICA

    Mr. Valenti. Thank you, Mr. Chairman.
    I think that General Scowcroft gave some revelatory 
political arguments, and I am going to take just a slightly 
different view. I think this transcendent issue can be defined 
by a single question. And the question is: How does the United 
States benefit from a ``No'' vote on granting permanent normal 
trade relations with China? The answer is it does not. And I 
think a ``No'' vote would equal tragedy on a grand scale. And 
the losers would be the American consumer and the American 
working man and woman.
    Now, like you, I was deeply moved by Mr. Wu's passionate 
description of the landscape in his native land. But I pose 
this question: Would a ``No'' vote suddenly and cheerfully 
reshape favorably whatever infects the issue of human rights in 
China? That is a question I think that ought to be asked. And 
the answer, I think, is it would not.
    To reject China as a normal trading partner would hardly 
entice the Chinese government to leap for joy and gratitude at 
this gratuitous slight. The power of the United States to 
influence any issue in China would be nonexistent. Every 
professional who casts a confiding eye on Sino-U.S. 
relationships understands that aspect of the human condition 
very clearly. We would have repudiated the largest nation on 
earth and we would have done it deliberately.
    Now, why would China react in any other manner except 
fierce dismay at this humiliating loss of face? I put it to you 
this way, in homely terms: If you slapped your neighbor's face 
in a public forum, would that neighbor thereafter treat 
congenially and satisfactorily your suggestions and your 
comments about how he ought to change his behavior toward his 
wife and his children? Would you? Put yourself in their shoes.
    Would a ``No'' vote increase job formation in this country? 
And I recognize very much what Senator Hollings was saying. The 
loss of any one job is a great calamity and a malady that we 
should cure. But, what I am saying to you is the answer to the 
question of would it increase job formation is no. And the 
reasons are simple: It can produce an opposite effect. China 
would find it far more agreeable to do more business with 
nations in Europe and in Asia and in Latin America, those 
nations which embrace them, and not the United States, which 
snubbed them.
    I think every American company now doing business in 
China--and, by the way, it is not capitalism, Mr. Wu; 
capitalism is defined as jobs. That is how people make their 
living. That is how they feed their family. That is how they 
educate their children--jobs. Every American company doing 
business in China and every American company wanting to do more 
business in China would suddenly find the gates closed, the 
drawbridge up, the moat filled to the brim. And if that is so, 
then those American companies now exporting to China--and we 
are doing about $13 billion to $15 billion there, and we will 
do a lot more, I pray--would suddenly find their revenues 
reduced. And then they come to face this fatal affliction, 
which is reducing their own labor force of American working men 
and women in this country.
    There are those, and Ms. Wallach is one of them, who say, 
well, let us just grant annual NTR to China, and then we will 
watch. And if the trade deficit balloons, we have got them in 
the vice, we will squeeze them and we will raise tariffs or we 
will exile their products from America. Well, all I can say is 
that, with all due respect, Ms. Wallach, I think anybody that 
is endorsing that kind of a program is endorsing a defunct 
mythology. That is the kind of thinking that led to Smoot-
Hawley and the Great Depression.
    I think Ms. Wallach also said we have to worry about 
whether or not China will keep up to their agreements. Well, I 
do not know anything about tractors or aircraft or women's 
sweaters, but I can testify from personal experience in my 
five-plus trips to China over the last several years that when 
China made pledges and promises to me in our long negotiations 
about protecting American intellectual property from being 
pirated in China, they redeemed their pledges and they kept 
their promises.
    In the written testimony that I have presented to you, I 
documented some vivid detail of how China worked very 
intimately and closely with me and my colleagues in battling 
thieves who were stealing our property. And they ran the virus 
out of China. It has taken up residence in Macao and other 
Asian countries. These pages of my written testimony document, 
I think, the integrity, as far as my own personal experience is 
concerned, the integrity of China's commitment to the Motion 
Picture Association.
    I ask these hard questions. I am not one who believes that 
America is always right and everybody else is always wrong. I 
might add that, in the WTO disputes, we have won 2 to 1 more 
disputes than we have lost. But, again, we are not paragons of 
virtue. And it may be we are on the losing side sometimes. But 
we are doing just fine in these WTO disputes. I ask these hard 
questions because I think it is in the long-term interest of 
this free and loving land not to commit a bewildering blunder 
that is bound to haunt us and grieve us in the years ahead.
    That is why I say I do not know any other way to describe 
what a ``No'' vote would mean in the future journey of this 
country.
    I am quite enchanted with what I am saying up here, Mr. 
Chairman, but I will stop now and hope that I have an 
opportunity to answer some questions at the proper moment.
    Thank you.
    [The prepared statement of Mr. Valenti follows:]

   Prepared Statement of Jack Valenti, President and Chief Executive 
             Officer, Motion Picture Association of America

  HOW DOES THE UNITED STATES BENEFIT FROM A ``NO'' VOTE FOR PERMANENT 
                   NORMAL TRADE RELATIONS WITH CHINA?

    The answer is it doesn't and the losers are the American consumer 
and the American working man and woman

                      A Defining Moment In History

    Each member of the United States Senate faces important, even 
critical issues, every single day. But at the end of a career only a 
handful of votes prove, with hindsight's clarity, to have changed the 
movement of history. I believe that the upcoming vote on Permanent 
Normal Trade Relations with China is one of those historical 
confrontations.
    This transcendent issue can be defined by a single question that 
every Member of the Senate must ask. The answer will guide the final 
vote of this Chamber.
    The Question: How does the United States benefit from a ``NO'' 
vote?
    The Answer: It doesn't. ``NO'' equals tragedy on a grand scale.
    Will a ``NO'' vote suddenly and cheerfully reshape whatever infects 
the issue of human rights in China? It would not. To reject China as a 
normal and permanent trading partner would hardly incite the Chinese 
government to gratitude for this slight. The power of the U.S. to 
influence anything in China would be non-existent and every 
professional who casts a confiding eye on the Sino-USA relationship 
understands that aspect of the human condition. We would have 
repudiated the largest nation on earth. Why would China react in any 
other manner except fierce dismay at this humiliating loss of national 
`face?' If you slap your neighbor's face in a public place, would that 
neighbor thereafter find it congenial to listen to, much less follow, 
your suggestions about how to improve his behavior toward his family or 
his children?
    Will a ``NO'' vote increase job formation in the U.S.? Not only 
would this NOT be the case, it would produce the opposite effect. Does 
not every expert confirm that in the event of a ``NO'' vote, China 
would find it far more agreeable to do business with European 
countries, its neighbors in Asia, and its new friends in Latin America 
than with the U.S.? It would immediately revise its purchasing plans, 
so that every American enterprise now doing business in China and those 
who hope to export to China would find the gates closed to them, but 
wide open to all other nations. And if that is so, then American 
companies residing in this country would feel the pain of reduced 
revenues, developing into lost American jobs. Moreover, there would be 
no reduction in the appeal of Chinese goods here, nor is it likely that 
our government would suddenly ban or restrict the importation of 
Chinese products. Those who argue that we need to continue to grant NTR 
on an annual basis so that if the trade deficit gets even worse we 
could withdraw NTR, raise tariffs, and slam the door on imports from 
China are endorsing a defunct mythology. That's the kind of thinking 
that led to Smoot/Hawley and the Great Depression in an earlier era. 
Raising the cost of Chinese imports, or denying them entry would 
severely harm American consumers through higher prices on a wide range 
of goods ordinary folks buy.
    So, how does a ``NO'' vote help the individual working man and 
woman in America? It doesn't. It hurts them.
    Does a ``NO'' vote increase our national security? No one who is a 
student of security affairs and an observer of the antagonisms which 
run through the global arteries anticipates that China would more 
readily listen to our counsel in their relationship with, say, Taiwan 
after we rejected them in our Congress. When we deliberately exile a 
nation from our national community or force them to believe they are 
exiled, why should that nation feel any confidence in our counsel in 
other areas?
    The bilateral WTO accession package that Ambassador Charlene 
Barshefsky and her band of first class associates negotiated with China 
offers an admirable opportunity to increase exports to China, products 
made by American working men and women in America, enlarging job-
creation in America. But in the event of a ``NO'' vote, China will give 
the benefits of the Barshefsky agreement to all our trading partners, 
but the U.S. industry will be denied those benefits. We are the losers. 
Does any one believe differently? Most of us would find any such 
opposite view barren of reality.
    I can testify from first hand experience that when China made 
pledges and promises to the MPAA, they redeemed their pledges and kept 
their promises, particularly in the area of piracy of intellectual 
property. In the pages that follow I outline for you in detail how 
China has worked intimately with MPAA representatives in battling 
thieves in China who were relentlessly stealing so much of our valuable 
property. These latter pages document the integrity of Chinese 
commitments to MPAA.
    I pose all these questions on behalf of a creative industry which 
produces America's most wanted export, an industry that has a SURPLUS 
balance of trade with every one of the more than 150 countries whose 
audiences hospitably welcome our visual story telling. But in the 
interest of full disclosure, the MPAA member companies are not going to 
wax rich and prosperous from our current China trade or in the near 
term. We hope that the Chinese market for our films, TV programs, and 
home entertainment will grow persistently in the future. But for us now 
it is a small market. But the Chinese people love American movies. The 
agreement struck by Ambassador Barshefsky opens up new opportunities in 
the Chinese market for American visual entertainment. We believe that 
over time it will become a most alluring and expanded marketplace.
    So it is that MPAA asks these questions because it is in the long 
range best interests of this nation not to commit a bewildering blunder 
in rejecting permanent NTR for China. There is no other way to describe 
the gloomy results of a ``NO'' vote in the Congress.

 The Economic Importance Of The American Filmed Entertainment Industry

    The filmed entertainment industry is an economic engine, driving 
hundreds of thousands of well-paying jobs in the United States. The 
copyright industries, including the film industry, provided employment 
for 6.9 million U.S. workers in 1997, or 5.3% of the U.S. workforce. 
The copyright industries are a bigger employer than any single 
manufacturing sector. The number of U.S. citizens employed in the 
copyright industries has grown by 24% over the past five years, and has 
more than doubled over the past 20 years. The rate of new job creation 
in the copyright industries is twice the rate of the U.S. economy as a 
whole.
    The copyright industries are also big exporters. In 1997 the 
copyright industries' foreign sales and exports were approximately $67 
billion--larger than agriculture, larger than autos and auto parts, 
larger than aircraft. For the filmed entertainment industry, foreign 
revenues topped $12.3 billion in 1997. Foreign markets accounted for 
almost half the total revenues earned by the U.S. film industry.

PNTR would benefit the American film industry

    If Congress approves PNTR for China, the U.S. film industry and its 
workers would benefit in the following ways:

 China will double access for export of films by the U.S. film 
studios. The quota for foreign ``revenue-sharing'' films will increase 
from the current level of 10 films per year to 20 films per year. 
(`Revenue-sharing' means that China splits box office receipts at 
Chinese theaters on a 50-50 basis). Of significance to U.S. independent 
film producers is China's pledge to permit access for an additional 20 
foreign films per year on flat fee licensing terms. The combined film 
quota will grow from 40 to 50 total films per year by the third year.
    China's decision to double access for revenue-sharing films is 
significant. It shatters the old 10 revenue-sharing films per year 
limit that had held firm since 1995. The growth in the quota is also 
challenging China to make its film distribution system more efficient 
and to introduce some competition into its domestic film distribution 
system. These structural reforms will create the conditions to allow 
future growth in access for America films.
    So far this year, ``Matrix,'' ``Stuart Little,'' ``Double 
Jeopardy,'' and ``General's Daughter'' have been released in China. 
``Mickey Blue Eyes", ``Mission to Mars,'' and ``Bone Collector'' will 
be opening soon. (A complete list of MPA member companies films 
released in China since 1994 is attached.)
    If PNTR fails, film industries in other nations throughout the 
world will harvest the results of the successful negotiations of the 
USTR team.

 China will, for the first time, permit foreign investment in 
joint ventures engaged in the distribution of videos. By participating 
in the video distribution businesses, U.S. companies can help build 
markets in China for U.S. home video entertainment.

 China has lifted its investment ban on cinema ownership. U.S. 
investors will be allowed to own up to 49% in companies that build, own 
and operate cinemas.
    The need for more cinemas in China is acute. The ratio of screens 
per person in China is approximately 1 screen per 122,000 persons, if 
one generously counts not only theaters dedicated solely to exhibition 
of motion pictures, but also general-use theaters that can exhibit 
movies as well as live performances. In contrast, the United States has 
1 screen per 8,600 people.
    Foreign capital to build new cinemas will help modernize China's 
aging cinema infrastructure, attract Chinese consumers back into 
cinemas, and increase demand for U.S. films. It will also open a new 
export market for U.S. companies that manufacture sound and projection 
equipment and other furnishings for new cinemas.

 Tariffs on films and home videos will fall. Tariffs on films 
will decline from the current level of 9% of the value of the film to 
5%. Tariffs on home videos will drop from 15% to 10%. Significantly, 
China agreed to change the method they use to calculate those duties. 
Instead of calculating a percentage of the value of the films and 
videos, China will assess a specific duty that is not tied to the value 
of the product, substantially reducing the effective tariff rate.

 China will assume full obligations to protect intellectual 
property, as required by the WTO's Agreement on Trade Related 
Intellectual Property. China is one of the few countries in the world 
that took effective measures to halt large-scale pirate production and 
export of optical media piracy (Video CDs, DVDs, music CDs, and CD 
Roms.) While China continues to have a significant piracy problem in 
its domestic market, China is not the source of the pirate product. 
China suffers from illegal import of pirate products made in places 
like Taiwan, Macau, Hong Kong and Burma. TRIPS provides a new tool to 
help encourage China to address its remaining domestic piracy problems.
       The History of Intellectual Property Enforcement in China
    The recounting of history is instructive. I was personally 
involved, along with my MPAA colleagues, in all the negotiations with 
China, and can confirm its realities. I pay tribute to the United 
States Trade Representative, Ambassador Charlene Barshefsky and her 
superbly qualified and energetic staff, for their successful labors, 
for which the U.S. film/TV/home video industry is grateful.
    In January 1992, China and the U.S. entered into a Memorandum of 
Understanding that committed China to adopt Berne-compatible 
regulations to this copyright law and to join the Berne Convention and 
the Geneva Phonograms Convention. China complied promptly, making U.S. 
works fully eligible for protection in April 1991, amending its 
copyright regulations to in September 1992, joining the Berne 
Convention in October 1992 and adhering to the Geneva Phonograms 
Convention in June 1993.
    A bilateral agreement signed in February 1995 addressed specific 
enforcement concerns. In response to the commitments contained therein, 
China established task forces to better respond to the pirate threat, 
promulgated Customs regulations to help control the import of optical 
media production equipment, instituted controls over the output of 
pirate CD plants, and conducted raids against retail pirate operations. 
A number of temporary plant closures and sanctions failed to stem the 
rising tide of pirate production in the initial year of the agreement, 
but USTR's continued close monitoring of the 1995 agreement led to 
permanent plant closures in late 1996.
    To date, a total of 79 pirate plants, including 86 VCD production 
lines, have been closed down. Since that time, Chinese authorities have 
continued to monitor the production of optical media works closely. 
Last year, six new underground plants, which were bold enough to test 
the continued resolve of the Chinese government, were shut down by 
Chinese authorities.

                 China's Recent Actions Against Piracy

    Although China has succeeded in halting the illegal export of 
pirated optical media products that had flooded worldwide markets in 
the mid-1990s, domestic markets in China continue to suffer from high 
levels of retail piracy. Much of the illegal import of pirate products 
is smuggled into China from Taiwan, Macau, Hong Kong and Burma.
    Chinese policy makers officially recognize the problem, as 
demonstrated by a policy statement by Cultural Minister Sun Jiazheng at 
the National People's Congress Standing Committee meeting on February 
28. Serious efforts are underway to try to bring the domestic problems 
under control.
    Four Chinese authorities joined forces in March 2000 to hit DVD 
pirates in China. On March 2, 2000, the State Press and Publication 
Administration, the National Copyright Administration of China, the 
Ministry of Public Security and the State Administration of Industry 
and Commerce issued an urgent joint circular to urge every provincial, 
regional and municipal government authority to launch a special 
campaign against DVD piracy in China. During the special campaign, more 
than 200,000 pirated DVDs of MPA titles were seized, and 24 persons 
were arrested. Highlights of this recent action included (but were not 
limited to) the following:

         On March 15, 2000, Chinese authorities in Shanghai 
        arrested a DVD pirate and seized 24,000 pirated DVDs of MPA 
        titles.
         On March 16-18, 2000, Chinese authorities smashed 
        three main audio-video markets in Guangzhou, Panyu and Zhuhai 
        and seized 80,000 pirated DVDs. Seven people were arrested.
         On March 17, 2000, Chinese authorities smashed an 
        illegal warehouse in Fengtai and seized 4,000 pirated DVDs of 
        MPA titles. Two people were arrested.

    This recent action against the Digital Video Disc format follows a 
similar action last fall against the older Video CD format. In 
September 1999, Chinese conducted a nationwide anti-piracy campaign 
against the VCD copying of two different pirated series of blockbuster 
movies owned by MPA's member companies. More than 3 million pirated 
VCDs of MPA titles were seized.
    On January 18, 2000, Chinese authorities put in place a National 
Anti-Piracy Reward Scheme in which monetary rewards will be issued to 
the informant for successful seizure of pirated products, including 
optical discs, publications and optical disc production line and 
machinery. The maximum reward is RMB Yuan 300,000 (U.S.$37,083) per 
optical disc production line or 2% of the total seizure value. Similar 
reward programs in Guandong and in Hong Kong have proven extremely 
useful in developing leads into the hidden operations of the criminals 
who produce and distribute pirated materials.

Appendix to testimony of Jack Valenti:

                      MPA FILMS RELEASED IN CHINA
1994

1. The Fugitive

1995

1. True Lies
2. Forest Gump
2. The Lion King
3. Speed
4. Bad Boy
5. Die Hard III

1996

1. Outbreak
2. A Walk in the Clouds
3. Bridges of Madison County
4. Broken Arrow
5. Toy Story
6. Water World
7. Jumanji
8. Twister
9. The Rock

1997

1. Mission Impossible
2. Sabrina
2. Eraser
3. Courage Under Fire
4. Dante's Peak
5. Space Jam
6. The Lost World
7. Speed II
8. Batman & Robin

1998

1. Volcano
2. Daylight
3. Titanic
4. Home Alone III
5. Deep Impact
6. Saving Private Ryan

1999

1. Mulan
2. Enemy of the State
3. Star Wars
4. Tarzan
5. Entrapment

2000

1. Matrix
2. Stuart Little
3. Double Jeopardy
4. General's Daughter
5. Mickey Blue Eyes
6. Mission to Mars
7. Bone Collector

    The Chairman. Thank you very much, Mr. Valenti. And I 
appreciate always your very interesting and very entertaining 
rhetoric. Yet I understand also the passion behind your 
statements. And I appreciate it very much.
    Mr. Kahler.

          STATEMENT OF H. RICHARD KAHLER, PRESIDENT, 
      CATERPILLAR, INC., CHINA, ON BEHALF OF THE BUSINESS
 ROUNDTABLE, AND THE AMERICAN CHAMBER OF COMMERCE IN HONG KONG

    Mr. Kahler. Thank you, Senator and members of the 
Committee.
    While I appear here today on behalf of a couple of very 
large organizations, the Business Roundtable and the American 
Chamber of Commerce in Hong Kong, I think that perhaps the 
perspective that I can bring today, in addition to 
complementing that of my fellow panelists, is that of someone 
at the micro-level, someone who is living in China, working on 
the ground, day to day, in China, trying to make things happen 
on behalf of American business and in support of the values 
that are important to us.
    I represent Caterpillar China. I head Caterpillar China. 
And for the last 6 years, we have been trying very hard to 
increase our distribution, increase our manufacturing 
investments in China, and undertake the people development that 
is necessary to accomplish those things, obviously with the 
goal of trying to improve our presence in China and our success 
there. We would be viewed, I think, as a mid-range company in 
that market.
    Our sales in China this year will be somewhere in the range 
of $300 million. That is not small, but neither is it large by 
the scale of some. And that growth, our presence there has 
tripled in the last 6 years. So we are headed in the direction 
that is very appropriate and very positive for us.
    The key point that I want to make here today is that for us 
to continue that trend in the direction that we and many others 
like us are headed, we need the advantages, the benefits, the 
openness of the WTO deal that has been recently negotiated. And 
to get there, we need the prerequisite approval by Congress of 
permanent normal trading relations with China.
    I would like to cite a couple of areas that are 
particularly important to my company and I think to many others 
that are like us. The first is that the regulatory environment 
for the distribution of goods in China is going to change 
dramatically.
    Using my industry as an example, in China's heavily 
regulated and restricted environment today, our independent 
dealers, our distributors through which we do business all over 
the world, simply are not able to gain the natural advantage 
that they can gain in other marketplaces. They must operate 
through a complex and very often convoluted series of 
regulatory work-arounds to be able to serve our customers.
    But people ask for specifics: What happens under WTO?
    Under WTO, in the package agreed by the United States and 
China, in 3 years, our dealers will be able to operate in China 
as they do everywhere else in the world. And based on that, I 
can offer you very strong assurance that companies like ours 
will prosper, and that will be to the benefit of our sales from 
U.S. sources, and other sources around the world, into China.
    The second point that I would like to stress in terms of 
implications for us in the WTO deal is to build on something 
that General Scowcroft said just a few minutes ago. And that is 
that we can support the Chinese initiative to change the state-
owned enterprises. Again, using my industry as an example, 
China's domestic earth-moving construction industry sector is a 
jumbled array of highly inefficient state-owned enterprises, 
many of which are surviving and dominating the local markets 
only because companies like ours are not able to be there. We 
are not able to offer our goods and services.
    Clearly, one of the things that China must do is to 
rationalize these bloated industries. China's accession to the 
WTO, and the concurrent opening of the Chinese market, is, in 
my view, going to do more for rationalization of the state-
owned enterprises than any domestic policies that China can 
bring to bear in that direction.
    I do not mean to suggest that any of this--that the 
benefits of tariff reduction and non-tariff barrier 
elimination, is going to happen quickly. As several others have 
said here today, this is going to take some patience. It is 
going to take some time. And I know that even after PNTR and 
China's accession to the WTO, we and companies like us are 
going to face extreme price competition.
    We are still going to face a domestic sourcing bias. And I 
regret, frankly, that we are probably still going to face 
business channel difficulties. But China's entry into the WTO 
is going to create a platform for us to improve those 
situations.
    I would like to move for just a minute to a question that 
Senator McCain pondered in his opening comments. And that is, 
what does all of this mean for the average Chinese, the man 
that works for a Caterpillar, Incorporated, or another one of 
our American companies in China? And critics of my position 
would suggest that we can exert more pressure on China by 
isolating it than engaging it. I simply do not believe that is 
the case. And I will pat ourselves on the back a little bit for 
some of the things that we are doing as evidence of trying to 
improve the standard of living and the human condition in 
China.
    Every Caterpillar-related employee in China, which is 
gaining on 2,000 now, operates under the standards of the 
principles of our worldwide code of business conduct, something 
that has been part of Caterpillar's heritage for decades and 
which is far more stringent than U.S. laws and regulations 
regarding the business conduct that we impose on ourselves. We 
are proud to bring our values to our Chinese employees.
    A lot of critics of positions like mine say that the 
Chinese do not care about the environment. And you know what? 
There is some validity to their concern. But companies like 
Caterpillar and others are bringing international technology to 
environmental control in China.
    I would like to cite as another example the fact that if 
you look throughout the whole Caterpillar organization in 1999, 
the factory with the best safety record in all of the 
Caterpillar world was a CAT China factory. We stress safety in 
human development in our facilities. We do things in the 
community. We are 100 percent sponsoring a school, called the 
Chinese-English Language Training Center. In a small, remote, 
difficult community we are bringing some Western knowledge to 
that.
    And in a fascinating area, way out in the most desolate 
parts of Central China, the parts of Central China that China 
wants today to see companies like ours focusing on, we are 
developing a new foundry, where, gentlemen, people come from 
their cave houses to work in our clean, well-lit foundry. They 
have good jobs. And they come because they find there an 
environment that emphasizes training, which gives them hope 
about the future for themselves, their families and their 
communities.
    My point is only that, by our presence there, we are 
bringing American values. We are bringing international 
standards to the workplace. And through that, I believe we are 
contributing to the well-being of the Chinese society and to 
its people. And we want to continue that role in a very 
positive way.
    I would like to conclude with an anecdote. Just about 3 or 
4 weeks ago, I was in the office of one of your colleagues, a 
U.S. Senator, who was pondering his decision on whether or not 
to support China's PNTR. And he asked me, what would he see if 
he walked into a Caterpillar facility in China? And would it be 
similar to what he saw in other American initiatives in China? 
I said yes, it would be similar to what you saw in other 
American factories in China.
    I said, you would see a world-class manufacturing facility, 
managed by employees trained in Caterpillar values and 
operating under our code of worldwide business conduct. You 
would find a commitment to employee training that is equal to 
any Caterpillar facility in the world. You would find 
environmental control that matches our worldwide standards, and 
far exceeds the Chinese norm. You would find CAT-funded 
education, arts and social programs in the community. And you 
would find an atmosphere of cooperation and optimism about the 
future.
    My goal is that the U.S. Congress share my personal 
optimism, my passion for China, about the future of U.S. 
business there, and about our ability to help bring U.S. values 
to that country, to bring U.S. disciplines and expectations to 
the forefront in that country. If you share that optimism, I 
hope you will support PNTR for China. Because, by doing so, you 
will help create an environment in which we, American business, 
can do our job. Let's get on with it.
    [The prepared statement of Mr. Kahler follows:]

Prepared Statement of H. Richard Kahler, President, Caterpillar, Inc., 
China, on behalf of the Business Roundtable and the American Chamber of 
                         Commerce in Hong Kong

    Good morning Chairman McCain and members of the Committee. It is my 
privilege to testify this morning regarding the benefits of China's 
accession to the World Trade Organization (WTO) and the necessity of 
granting Permanent Normal Trade Relations (PNTR) status to China.
    My name is Dick Kahler, and I am President of Caterpillar China. 
Caterpillar is a long-active member of The Business Roundtable and of 
the American Chamber of Commerce in Hong Kong, which I chair this year. 
Caterpillar is a $20 billion company; our overseas sales account for 50 
percent of our revenue; and we consistently rank among America's top 
exporters. Caterpillar sells and operates in most countries of the 
world and has been active in China since the early 1970s.
    Today I also represent The Business Roundtable, an association of 
chief executive officers of leading corporations with a combined 
workforce of more than 10 million employees in the United States. The 
chief executives are committed to advocating public policies that 
foster vigorous economic growth; a dynamic global economy; and a well-
trained and productive U.S. workforce essential for future 
competitiveness. They also strongly support China's accession to the 
WTO and PNTR.
    Finally, I also represent the American Chamber of Commerce in Hong 
Kong, one of the largest (with some 2500 members) in the world. 
AmCham's top policy priority for 2000 is Congressional approval of PNTR 
for China.

I. The Commercial Benefits of the WTO Deal Are Comprehensive 

    This year Caterpillar's business in China will approach a third of 
a billion dollars in revenue--a substantial portion of which is direct 
exports from the United States. Those exports include diesel engines 
manufactured in Indiana, turbine generators produced in California, 
large mining trucks manufactured in Illinois, and components and parts 
sourced from approximately 11,000 direct and indirect suppliers from 
all over the United States.
    Caterpillar companies operate six manufacturing ventures in China, 
primarily to serve the Chinese market. And we sell our product through 
a combination of Cat-owned and independently-owned dealers in China.
    Let me give you one example of our growth trend: in 1996 and 1997 
combined, we sold about 85 hydraulic excavators in China. Last month 
alone, we sold almost 150 hydraulic excavators there, and this month we 
should deliver more than 200! Our dollar sales this year for 
Caterpillar and its affiliated companies will be roughly three times 
what they were in 1994. We are deeply committed to the customers we 
serve in China and to the local communities in which we operate.
    Our investments in China have made us better known and respected 
there. And because of that we have created an opportunity for an 
increase in goods exported from the United States to China. We will 
have a record year this year, I project. We are not losing U.S. jobs--
we are gaining U.S. jobs. And the market opening promised in the U.S.-
China WTO deal will move that further forward.
    You know the details of the WTO deal, based on input from Secretary 
Daley, Ambassador Barshefsky, and others. But let me bring them down to 
the micro-economic level, where most of us can understand them best.

        A. The regulatory environment for the distribution of goods 
        will change dramatically based on China's commitments in the 
        U.S.-China trade package. In countries with open trading 
        climates, Caterpillar's dealer-driven sales and product 
        support-driven approach to the market are almost universally 
        acknowledged to be the best in our industry. But in China's 
        heavily regulated and restricted environment today, our dealers 
        cannot gain their natural advantage. They must operate through 
        a complex and often convoluted series of regulatory 
        ``workarounds'' to be able to serve our customers.

            By contrast, under the U.S.-China WTO deal, within three 
        years, our dealers will be able to operate in China as they do 
        elsewhere in the world. I can offer very strong assurance that 
        in that more open environment, Caterpillar, and companies like 
        us, will prosper. Give us the chance--let us show you what we 
        can do!

        B. China's domestic earthmoving and construction industry 
        sector is a jumbled array of highly inefficient stated-owned 
        enterprises, many of which are surviving and dominating the 
        local market place only because companies like Caterpillar and 
        our major worldwide competitors are kept out by tariff and non-
        tariff barriers for goods and services. Chinese leaders know 
        these bloated industries must be rationalized; and companies 
        like mine know we cannot gain full advantage of the Chinese 
        market opportunity until that rationalization is complete.

            China's accession to the WTO and the concurrent opening of 
        the Chinese market will do more than any of China's domestic 
        policies and the annual NTR debate to drive the rationalization 
        of Chinese industry. When that happens, American companies that 
        offer world-class products at competitive prices will have a 
        great opportunity for growth in China. Give us the chance!

        C. The most obvious advantage of the WTO deal is reduction of 
        tariffs and removal of other barriers to imports. These changes 
        will make us more price competitive and provide greater market 
        access potential. We will sell more products and services in 
        this more open environment--give us a chance!

    I do not mean to suggest that all this will happen quickly or 
easily. Six-plus years of working in China have taught me better. I 
predict that, even after PNTR and China's WTO accession, we will still 
face a domestic sourcing bias, I know we will still face extreme price 
competition, and I regret that we will still face business practice and 
business channel difficulties. But China's WTO entry provides a new and 
more effective process for breaking down these barriers.
    If Congress grants PNTR to China, American businesses and their 
workers will benefit from the concessions discussed above and from the 
corresponding break down of trade barriers. If Congress rejects PNTR, 
however, American businesses and their workers will lose almost all of 
those concessions and our foreign competitors will gain an unearned 
advantage in the Chinese market.

II. Enforcement Is Essential

    I understand that there is some concern regarding China's 
fulfillment of the obligations it accepts under the WTO. I accept that 
concern as valid. But I also accept as valid the assurances by such 
people as Secretary Daley and Ambassador Barshefsky that the monitoring 
and compliance programs used by our government will be very useful and 
that the WTO dispute settlement mechanisms will effectively protect our 
interests.
    In my view, China has no alternative but to fulfill its 
commitments. It simply cannot accomplish its stated economic 
development goals unless it opens its economy to international 
competition. The breadth of commitments China has made in the WTO 
package is impressive. They reflect a vision of the future China that 
is more in sync with our Western economic thinking. They need to comply 
with their WTO obligations to get there.
    It will not be easy! Providing U.S. and other foreign companies 
``national treatment'' goes against decades of past policies. So does 
opening up distribution and the service sectors. But with the Chinese 
leadership committed to progress, I believe that they will take 
enforcement seriously.

III. Engagement Is Critical

    Critics of the position I present in favor of China's accession to 
the WTO believe that we can exert more pressure by isolating the 
country than by engaging it. I contend they have not seen the good that 
we are doing by our presence there. Let me share some examples with 
you:

         All of Caterpillar's operations in China operate in 
        accord with Caterpillar's worldwide Code of Business Conduct. 
        That key presentation of Caterpillar's value structure is 
        translated into the Mandarin language and all employees know 
        that it is a foundation document for us.
         In our manufacturing operations in China, we are 
        applying world-class environmental-control technology to assure 
        that we deal effectively with air, water, and waste treatment. 
        We are following the highest standards, and by doing so, we are 
        showing the Chinese people and other Chinese-based industry our 
        respect for the environment.
         In 1999, Caterpillar's factory in the city of Xuzhou 
        in Jiangsu Province had the best safety record of any plant in 
        the entire Caterpillar family worldwide. We teach and stress 
        safety in a country whose business culture is less committed to 
        safety than we are.
         In the same city, Xuzhou, Caterpillar fully funds and 
        arranges U.S. teachers for the ``Caterpillar English Language 
        Training Center.'' This is a program directed at community 
        support, not corporate development. Through this center, we are 
        bringing an important new skill-set to some of the people in 
        this Chinese city.
         In the town of Er Li Ban in southern Shanxi Province, 
        one of the most isolated and economically depressed areas of 
        China, our employees come to work in a newly developing foundry 
        where they are attracted, more than anything else, by good jobs 
        in an environment that emphasizes training, which gives them 
        hope about the future--for them, their families, and their 
        communities.

    I am not simply ``bragging'' about Caterpillar's commitments in 
China. I am telling you that by our presence we (and many other U.S. 
companies like us) are bringing U.S. values to China. We are not 
imposing those values; rather, we are showing our Chinese partners, 
employees, and government officials the benefits of our values-oriented 
business culture.
    Caterpillar is not alone in making these kinds of commitments. A 
number of my colleagues in Hong Kong are involved in programs to 
improve the human condition in China. Many orphanages, for example, see 
the generosity of Americans living and working in China. By this 
presence, we gain their respect and they gain a greater appreciation of 
American leadership, values, and goodwill.
    A report recently released by The Business Roundtable, entitled 
``Corporate Social Responsibility in China: Practices by U.S. 
Companies,'' effectively documents that U.S. companies do more than 
sell goods in China. It shows that U.S. business is a catalyst for 
positive change. We want to continue that role at the same time that we 
build our businesses to participate in the longer-term growth of the 
Chinese market.
    ``Engagement'' with China is an objective that has been part of 
U.S. foreign policy for some time, through both Republican and 
Democratic administrations. The reason: it works.
    Engagement does not mean that we endorse all of China's policies or 
that we give China any special treatment. And my endorsement of 
stronger economic ties does not mean that I am an apologist for the 
things that are wrong with the Chinese system. I simply believe we will 
do more good working with China as part of the world economic system 
than we could by isolating and lecturing it as an outsider.
    The WTO deal, which would bring China into the international 
trading system, would require it to follow the international ``rules,'' 
rather than setting its own. Opponents of PNTR would hold us back from 
realizing the potential benefits of engagement.

Conclusion

    I would like to end my discussion with an anecdote. A few weeks 
ago, one U.S. Senator asked me what he would see if he walked into a 
Caterpillar facility in China, with special reference to labor and 
environmental conditions. I told him: you would see a world-class 
manufacturing facility, managed by employees trained in Caterpillar 
values, and operating under our worldwide Code of Business Conduct; you 
would find a commitment to employee training that is equal to any 
Caterpillar facility in the world; you would find environmental control 
that matches Caterpillar's worldwide standards and far exceeds the 
Chinese norm; you would find Cat-funded education, arts, and social 
programs in the community; and you would find an atmosphere of 
cooperation and optimism about the future.
    My goal is to see the U.S. Congress share my optimism about the 
future of China, about the future for U.S. business there, and about 
our ability to help bring some U.S. values, disciplines, and 
expectations to the forefront. If you share that optimism, you will 
support PNTR for China, because by doing so you will create the 
environment in which we can do that job. Let us get on with it!

Thank you.

    The Chairman. Thank you very much, Mr. Kahler.
    Mr. Wu, you wanted to respond, and we certainly would like 
to hear it.
    Mr. Wu. Thank you for giving me this opportunity. I really 
want to respond to Mr. Kahler, when he is talking about 
American business in China. I would just say business is 
business. Your business in China is to make money. It is not a 
charity. Do not try to tell me that you are really helping the 
Chinese promote democracy, freedom, whatever.
    It is true that American values and business practices are 
spreading in China. Two years ago, I was in RIT, the Rochester 
Institute of Technology. I met a former CEO from Eastman Kodak, 
and we had a conversation. And I said Eastman Kodak is very 
well-known in the United States. One of the reasons is they 
have a very good welfare policy for their employees. And I 
said, do you apply the same standard to your Chinese employees? 
He said ``Yes, we do.''
    And I said, in China, there is a national population 
control policy. Every woman and family is subject to this 
policy. If a woman in this American company gives birth to a 
child without a permit, Chinese laws says she will be fired. Do 
you know about that? He said that he did not know. But the 
American worker in America, he would not be fired.
    There is nothing that American bosses can do. If Chinese 
workers want to organize an independent trade union at an 
American company in China, these people also will be fired and 
even arrested. And there is nothing the American boss is going 
to do.
    Today there is a very interesting phenomenon. The 
capitalist capital flows into a communist regime. And they 
tried to create a kind of a concept that is the best way to 
turn down the Communist system and benefit the Chinese people. 
I am confused that this idea never applied to some country like 
Cuba, North Korea, Vietnam, and even today in Moscow. I am 
confused. I cannot answer that.
    I really want to emphasize one more thing. I cannot 
convince the businessmen's thinking about human rights. They 
are concerned with business rights. They are concerned about 
copyrights. But as the policymaker, please think about our 
national security.
    I heard Warren Christopher, in December 1996. He ended his 
diplomatic life in China. He said, we have to deal with this 
country, because China will become a superpower. How many 
Americans realize China has now become a superpower? Normally 
we heard superpower as being the Soviet Union and the United 
States. Now, we will have to go in, facing a new superpower. 
This time, not in Berlin. Not in Europe. And it is happening in 
Asia. And we still have 100,000 soldiers in this area.
    Thank you.
    The Chairman. Ms. Wallach, I also noted that you were 
somewhat stimulated by Mr. Valenti's remarks. Would you like to 
respond?
    Ms. Wallach. Well, in Mr. Valenti's suggestion that 
demanding reciprocal, enforced trade agreements would lead to a 
return of Smoot-Hawley and the Depression, I was wondering if 
he intended to leave Nazism out. His argument is obviously 
ridiculous.
    The real point is: are we going to have a commercial policy 
or a broader relationship that looks at the national interest 
or only one that looks at special interests--that special issue 
of interest to the Senator. I would say that there is a high 
relationship between campaign finance cash at this moment and 
the zeal to do a policy with China that suits companies that 
want to relocate investment to China and guarantee permanent, 
unconditional access back into the U.S.
    But given that U.S. goods--agricultural and manufactured--
those made or grown here and sent there, get the benefits that 
China will give the rest of the world under its WTO accession 
by merit of the 1979 bilateral, it is not in the U.S. economic 
interest and, as we have heard in our broader human rights, 
national security or other interests to concede Congress' role 
and to give China a blank check.
    And it is interesting rhetoric to claim that the end of the 
world will occur if we fail to dispense this blank check. But, 
in fact, the great loss is if we do so. There is nothing to be 
gained if Congress makes this change, and great loss to be 
suffered if Congress gives up its leverage over China. Thank 
you.
    The Chairman. General Scowcroft, Mr. Wu just raised the 
point that he is, ``somewhat confused over how we can 
differentiate China from Cuba, North Korea and other nations 
and our policies toward them, and yet obviously our approach to 
China is somewhat different.'' Can you respond to what Mr. Wu 
just said?
    General Scowcroft. Yes, I think so. Although, may I say, I 
think Cuba is a very special case. Cuba is basically no longer 
a foreign policy issue. It is a domestic U.S. political issue.
    But on countries like North Korea, Iran, the so-called 
rogue states, we are trying to do things with most all of them. 
And maybe, after 60 years or so, the North Koreans may be 
coming around. But there has been no opening to do anything. 
And I think the issue with China is, does this help a little? 
Does it hurt a little?
    We cannot remake China in our image. I am very sympathetic 
with Mr. Wu's approach to the problem. But I think it is wholly 
unrealistic. China is not going to become another United 
States. But can our actions help in some way to steer China 
toward becoming a more respectable country in the world? China 
is not going to go away. And how can we best do things which, 
at the margin, help and do not hurt?
    What I am suggesting is, basically, since 1972, what we 
have done has helped. The China of today is not the China of 
1972. And I think Mr. Wu would agree to that. It has a long way 
to go. But one of the things that will help is to cut the 
umbilical between Chinese industry and the government, so that 
the industrialists do not owe their jobs to political whims in 
Beijing; they owe their jobs to their ability to make a profit. 
That, if you believe in the American dream, is a fundamental 
change in their system.
    The Chairman. One additional question. This is not exactly 
on that subject. How should American policymakers react to the 
remarks that can most charitably be described as incredibly 
immature by Zhu Rongji before the elections in Taiwan?
    General Scowcroft. I think we should react boldly. And to 
me, as I tried to indicate in my remarks, this is a country 
carrying a lot of psychological burdens. It is run by a 
Communist Party which is discredited, is no longer a motivating 
force. And I think they do not understand what works and what 
does not. And for them, their instinct is still to bludgeon. It 
did not work with Taiwan. It did not work in 1996. It did not 
work in 2000. And having them open more to the world will teach 
them how they have to behave. I think they are gradually 
learning, but shutting them off is not the answer.
    I think Ms. Wallach's idea is cute, but wholly ridiculous. 
The United States cannot behave this way. And if we have our 
set of rules alongside the WTO rules, the Chinese of course 
will follow the WTO rules and will not grant us the 1975 
understandings. And they will have 135 of our trading partners 
on their side.
    The Chairman. Mr. Valenti, you wanted to speak.
    Mr. Valenti. I just want to make three brief points, Mr. 
Chairman. No. 1, as General Scowcroft said, what we are 
overlooking is if we repudiate China, the rest of the world 
will be in the WTO, along with China, and they will be China's 
trading partners. They will be their soul mates or whatever. We 
will be the odd man out.
    And, No. 2, I want to follow on to General Scowcroft's 
idea. We cannot remake China in our own image or any other 
country, nor should we try. A little story:
    When I was a schoolboy, I read about Nero, the mad Emperor 
of Rome. And he had a trusted advisor named Seneca. And one day 
he woke up and called Seneca in and he said, ``Last night I 
realized in a dream that I am without sin and I am without 
flaw;'' therefore, said Nero, ``I am a god.'' And Seneca 
responded this way. He said, ``Sire, no man is without flaw. 
And the man who claims to be without sin does so with relation 
to a witness and not his own conscience.''
    Now, I might add that advisors to presidents and prime 
ministers and kings have taken into account Seneca's bold 
remarks, because some months later he was poisoned. And 
therefore it did affect how one talked to a president or a 
king.
    The only point I am making is--and I say this as someone 
who loves this country more than life itself--we are not 
perfect. There are lots of things wrong in this country. I am 
proud to say that when I was in government, we tried, in a 
modest way, to reshape that. But we have got a long way to go. 
Therefore, I do not understand why it is that we want to 
inflict upon others all over the world an imposition of so-
called American values. Maybe somebody in Southern Italy or in 
Saudi Arabia or maybe in the Cornwall country of Great Britain 
would say, ``Wait a minute, I have got my own values here.'' We 
ought not try that.
    What I think is happening in China today, though, is the 
irresistibility of change. I will promise you, no matter what 
the Communist government does--and I do not know how long they 
will be in power--they cannot stop this change any more than 
Canute could hold back the tides. The binary number world is 
upon them. And it will have a profound and shattering effect on 
what people learn and what they see and feel.
    Frankly, I am hopeful that if we can get more American 
movies into China, then they will see the American values. I 
think Tom Hanks and Julia Roberts will have more persuasive 
effect on the Chinese people than the whole Sixth Fleet moving 
off the China Sea. So we ought to keep that in mind. On a cost/
benefit ratio, there is nothing to be gained with repudiating 
China. Nothing. Zero.
    The Chairman. Ms. Wallach, you wanted to respond again. 
And, Mr. Wu, you did, too. Could you both be fairly brief, 
because both Senator Dorgan and Senator Cleland would like to 
ask questions, as well.
    Mr. Wu. First of all, we have to make clear one thing. 
Today there is no one, including myself, who suggests to 
isolate China. There is no way. It is impossible. But when we 
are talking about PNTR, the WTO, whatever, it does not mean we 
will try to put the Chinese in a corner, to fight against us.
    The other thing is, why not just be a little bit patient? 
In China, we have a slogan. It comes from the Communist 
authorities in the last 30-some years: The Soviet Union today 
is our tomorrow. They would not want to repeat that today, but 
they will. The Soviets yesterday will become our today. The 
thing happening in Moscow soon will happen in China.
    That is why I am thinking why not just be a little bit 
patient. To rush into China, to grab this market, to earn 
money--I am not talking about the moral basis, I am talking 
about security. It is just like a blood transfusion, this 
assistance.
    Let me give you two incidents. It really makes me kind of 
nervous. One is 1998, when President Clinton came back from 
China. He said, well, we finally have an agreement. We are not 
going to target each other by intercontinental missiles. Wait a 
minute. Why did we need this agreement? There are a couple of 
countries, including India, who have the intercontinental 
missiles. We are never seeking that kind of agreement. Now we 
are looking for it from China.
    For 2 years now, the number of intercontinental missiles in 
China is decreasing or increasing? Why this backward country 
today has the ability to become a new superpower and has such 
intercontinental missiles? Our money is just fuel in the tank, 
running this Communist vehicle.
    The second thing is recently I heard Mr. Sandy Berger 
talking about WTO. If you carefully read his statement, I want 
to be straight--it is just like a salesman talking about 
benefit, talking about it is good for the United States. He is 
not talking about American security.
    And if this thing is still going on this way, we are facing 
a Communist giant. This time not in Moscow. This time in 
Beijing. And we will have a more difficult time negotiating the 
Korean Peninsula issue.
    Thank you.
    The Chairman. Ms. Wallach.
    Ms. Wallach. I wanted to clarify the China WTO process, 
because it seems unclear from some of my colleagues' comments. 
The theoretical umbilical cord gets cut with the state sector 
when China goes into the WTO. And that is unrelated to whether 
or not Congress does PNTR. China will have to concede to WTO 
compliance and make the domestic policy changes.
    Once China is in, then what the 1979 Agreement gets us is 
merely that basket of concessions that were required to enter 
WTO, which becomes China's most favored treatment, which we 
then get reciprocally. So we are not left out alone from the 
136 WTO member nations; we are getting the same thing. The 1979 
Agreement merely requires, in different sectors, that we get 
the best of any third country.
    And then, finally, there is nothing cute, General 
Scowcroft, about getting U.S. business all of China's WTO 
concessions while maintaining effective enforcement. That would 
seem to me to be a good policy. And it certainly is doable, 
because it is what all the other countries do to us in their 
trade policies. It is what is in their interest.
    And as far as the leverage to do it, the legitimacy of 
China's ruling regime is limited. It maintains itself on growth 
and creating jobs. And its export-led growth. And 42 percent of 
those exports come into our market. So it is hard to imagine 
what more leverage to make this doable policy there could be.
    Thank you.
    The Chairman. Well, I would like to have this panel exposed 
to all Americans, because I think it represents the most 
articulate points of view on this issue, so that Americans 
could be far better informed as the Congress of the United 
States makes this decision. And that is why I want to thank all 
of the witnesses for their very eloquent, passionate and 
forceful presentation of your points of view. It has been very 
helpful to me, and I am sure to the other members of the 
Committee. And I thank you for being here today.
    Senator Dorgan.
    Senator Dorgan. Mr. Chairman, let me echo that. This has 
been a most interesting panel, with very different points of 
view, but expressed with great passion.
    Mr. Valenti, you are always one of my favorite witnesses 
before congressional committees. I have long enjoyed your 
presentations. But let me describe, if I can, why I think the 
export of American values is in fact part of what we need to do 
on trade issues. We have had people die on the streets in 
America for the right to organize. Workers' rights to organize 
are critical.
    We have had great strife for almost 100 years over the 
question of preventing people from exploiting kids in the job 
market, providing for a safe work place, preventing people from 
throwing chemicals into the water and the air when they 
produce. So we have had very large battles for over a century 
on these issues. And as I said, people have died in the streets 
for the principle of the right of workers to be able to 
organize.
    So when we say now, let us set up international competition 
under global arrangements, the question is, what is fair 
competition? Is it fair competition for us, when we have 
established these basic values, to compete against someone that 
wants to hire 12-year-old kids and put them in an unsafe plant 
and pay them 12 cents an hour and work them 12 hours a day and 
pollute the air and the water?
    The answer is absolutely not. That is not what competition 
is about. Values that we have fought for and worked on for a 
century, does that matter in terms of what we are trying to do 
in creating fair competition? You are darn right it does. The 
part of the march toward globalization has moved much faster 
than the issue of fair rules in determination of what is fair 
trade. I just wanted to make that point, because you raised it, 
and I think it is very important.
    Let me just ask two very quick questions, because I know we 
are late. But, again, all of you I think are excellent 
witnesses and express yourselves with great clarity.
    Mr. Kahler, you produce in China. Your company is one I 
have great respect for. Let me ask you, who do you produce in 
China for? The products that you produce in China move to what 
market?
    Mr. Kahler. Senator, I am glad you asked that question. We 
produce in China primarily for the China market. We do some 
very limited exporting of components to other Asian markets and 
a very, very small amount of components sold back to the United 
States.
    But I mentioned before in my comments that our sales, our 
revenues in China have gone from about $100 million 6 years ago 
to $300 million this year. An interesting and important point I 
think that relates to the jobs issue, which may be part of what 
you are asking about, is that that $200 million increase over 
the last 6 years, only half of that is domestically produced in 
China. And so our sales in China that are imported into China 
today are double what they were 5 or 6 years ago, when we 
started the process of investing in China to give us access to 
certain sectors there.
    Senator Dorgan. Just briefly, what are the arrangements of 
the ownership of your facilities in China?
    Mr. Kahler. Well, we have six different facilities. About 
three of them are 60/40, 70/30 kinds of joint ventures, with us 
the majority owner, with a state-owned enterprise as the 
minority owner. And a couple of them are wholly foreign-owned 
enterprises, where we have 100 percent ownership and complete 
control. And the reason there is a difference in them is a 
reflection of the industry in China and what, frankly, made 
most sense for us in terms of getting into an investment 
position there.
    Senator Dorgan. Now, the restriction on ownership in 
cinemas is going to be 49 percent. At the briefing I was at the 
other day, most of the industrial facilities are going to be 50 
percent, not 51. And the bilateral agreement made progress in 
improving ownership positions, but not to a majority position. 
And I am curious about your 70/30.
    Mr. Kahler. Well, in fact, we have one venture that is 85/
15, sir, and then several wholly foreign-owned enterprises. And 
I cannot speak to the cinema. Mr. Valenti obviously can. But 
one of the situations in investing in China is that they have 
set aside certain sectors of the economy for special attention. 
The automobile sector is one that is close to us that is 
relevant.
    In the auto sector, you can only have a 50 percent 
investment in a Chinese organization. In our industry, we do 
not have that kind of restriction. The Chinese state-owned 
enterprises that have any strength on their own will fight very 
hard to sustain a majority or at least a 50/50 ownership 
position. But absent regulations that require it, we have 
simply not been prepared to go into a minority owned situation.
    Mr. Valenti. Senator, I would just point out to you that 
one of the reasons why is because the three areas where the 
Chinese Government has fear that borders on paranoia is 
television, the Internet and the cinema. The Chinese love 
American movies. The American movies that have been over there 
play to packed houses.
    I have made it clear to the Chinese with whom I have 
developed some good relationships that 49 percent is not going 
to cut it. The only way we are going to invest millions of 
dollars in cinemas is if we can operate them. But, most of all, 
unless we can bring more American pictures into China--because, 
at this moment, the local Chinese films and the few amount of 
American pictures will not sustain the building of state-of-
the-art cinemas in China today, but they understand this--and 
in my judgment, I know in the original agreement--and, frankly, 
I am not sure if it stayed in the final one --was that after 3 
years we could go into majority control.
    Senator Dorgan. Two final points. For example, and 
concerning the purchase of American grain, under the new 
agreement, 90 percent will be purchased by the state, by the 
government, 10 percent privatized, and we say Hosanna. Is that 
not wonderful? Look at the progress we have made. We have a 
trade arrangement now, under global trade and free trade, that 
only 90 percent will be purchased by a government purchasing 
agent. So you just shake your head and you say, who negotiated 
that?
    Mr. Valenti. That is grain?
    Senator Dorgan. Yes. And I would say, Mr. Valenti, in some 
ways, while I almost always agree with you, in your testimony, 
you kind of do what has happened to us in agriculture in trade 
agreements. You say the current level of 10 films per year will 
be increased to 20 films. And you actually use the words, ``it 
shatters the old 10 revenue.'' That is like if we send them one 
hog and we get to send them a second hog, we have a doubling of 
our hogs.
    Well, 20 films? We ought to expect much, much more from a 
country with whom we are negotiating and with whom we have a 
$70 billion goods deficit. Twenty films is miserable. What a 
miserable arrangement.
    Now, I understand that you are excited about it. But I 
would say, on behalf of your industry, we ought to expect so 
much more. We are a cash cow for Chinese hard currency needs. 
There is nowhere else in the world they will sell their shirts 
and their shoes and their trousers and their trinkets--nowhere 
else. There is no market like ours. We have significant 
leverage. And every time we enter a trade negotiation, we come 
up far too short.
    Mr. Kahler, we came up short for you. And I know you are 
satisfied. And, Mr. Scowcroft, you are satisfied. I am not 
satisfied. Now that does not respond to how I am going to vote 
on NTR or PNTR. I would just make one final point and then you 
can respond.
    This is not a vote about whether or not we repudiate the 
Chinese. This vote is not about repudiation. It is about normal 
trade relations we are going to accord them this year or 
permanent normal trade relations, NTR or permanent NTR, not 
repudiation. That is a very important thing for us to 
understand. And I have not decided how I am going to vote on 
this. I do not like the bilateral, but that is nothing new. We 
have never negotiated a trade agreement with our trading 
partners in which we exhibited any strength or common sense at 
all. So that is not new for me. But this is not a question of 
repudiation, yes or no.
    You frame an important question, Mr. Valenti. What occurs 
if we vote against PNTR? That is a fair and important question. 
That is the one you started with. But this is not, in my 
judgment, a question of whether we repudiate. So I wanted to 
make those comments. Again, let me say that all of you have 
presented, I think, some of the most interesting testimony I 
have heard from a panel in Congress for some long while. 
Because they are very difficult points of view, but expressed 
with great clarity from different perspectives. And I think 
that is very helpful.
    Mr. Valenti. Let me just say one thing, Mr. Chairman. I 
used the word ``repudiation'' because is there any other 
country in the world that we would so treat if we voted ``No''? 
As I understand it, and I may be wrong, we have permanent 
normal trade relations with just about everybody in the world, 
do we not?
    Senator Dorgan. Not Cuba and not North Korea.
    Mr. Valenti. Well, not Cuba and not North Korea, but all 
Middle Eastern countries and all of Africa.
    Senator Dorgan. You asked a very important question.
    Mr. Valenti. I am just saying that here we are voting 
against that; 134, I think Secretary Daley said, have permanent 
normal trading relations with America, and then we single out 
China. I understand the logic of what you say. But if you were 
the Chinese government, I think you would count it as a 
repudiation if you were in their shoes.
    Mr. Kahler. May I add just a quick point, Senator?
    I do not think anybody would say we got everything we 
wanted or we are 100 percent satisfied with the deal. But we 
are very, very satisfied with the deal. We got a lot of what we 
wanted. And one of the most under-represented, important parts 
of that deal is the distribution rights. For Caterpillar and 
for many companies like us, it is the single most important 
evolution in the Chinese thinking about how they are going to 
allow business to be done in their country.
    It is going to take us 3 years to get our distribution 
system in China good enough to take advantage of what they are 
going to allow us to do in 3 years. And that, in and of itself, 
is an absolutely critical and positive move forward for us.
    Senator Dorgan. Mr. Wu.
    Mr. Wu. Yes, we do give 134 countries normal trading 
status. Yes, we do single out China. But the basic problem is 
China themselves single out themselves, because this is a 
Communist country. Very few countries today exist in the world 
as a Communist regime. The problem is China is so different 
from the other 134.
    And I want to say, why do we all the time care about the 
Chinese government's face? Do you really give our face? During 
the Cold War, we never cared about Moscow's face. Why do we 
today all the time care about Zhu Rongji and Jiang Zemin's face 
and face and face?
    Yes, Cuba has become a domestic issue. Let me say it this 
way. If Cuba had 600 million in population, our policy would be 
different.
    Senator Dorgan. Thank you.
    Senator Cleland. Thank you very much.
    I agree with the members of the Senate here who have 
spoken. And that is that this is the most enlightening panel I 
have seen in 4 years here. I wonder in my own mind if we are 
not talking about what is the title of a popular book out there 
that tries to describe what is going on in the world, ``The 
Clash of Civilizations.'' And I wonder if increasing this clash 
by normal permanent trade relations with China, what impact 
that really has.
    I think it is fascinating. If you read ``The Lexus and the 
Olive Tree,'' by Tom Friedman, he buys the Jack Valenti 
argument that the more information, whether through movies or 
television or the Internet--particularly the Internet--the more 
democratization occurs--democratization of finance, 
democratization of consumption, and ultimately democratization 
of politics.
    And then Mr. Wu seems to indicate that if we do increase 
trade, that strengthens the government, not weakens it. Mr. Wu, 
you threw in right at the end of one of your answers a 
fascinating point that I have been operating on, and I wanted 
to ask General Scowcroft the question and then I will ask you, 
Mr. Wu, too.
    General Scowcroft, I have been traveling under the 
assumption that if we went ahead with normal trade relations 
with China, acceded to their entrance into the WTO, that, in 
effect, we were enhancing our national security by giving the 
administration of their regime something that they wanted, so 
that when we wanted something from them, like subtle pressure 
on the North Koreans or the Pakistanis, in terms of real issues 
that we face, the buildup of missiles, the buildup of nuclear 
capabilities that threaten our hemisphere, then that regime 
would be more amenable to our interests, as well.
    Yet Mr. Wu seems to indicate that if we trade, then we 
strengthen the regime and it hardens our ability to get them to 
be sympathetic to our concerns about North Korea or Pakistan. 
General Scowcroft, do you see increased trade with China as 
strengthening our ability to get some of the things from them 
that we want in terms of national security, particularly on the 
Korean Peninsula?
    General Scowcroft. Well, I am not sure, Senator, whether we 
can translate increased trade to help on the Korean Peninsula. 
But I think what can help on the Korean Peninsula is if we have 
a cooperative attitude on the part of China, that they think 
they are being treated, from their perspective, in a reasonable 
way. If we now, after having negotiated bilateral arrangements, 
which were all one-sided--we did not give up anything--we then 
turn around and say no, we are really not going to follow 
through and we are going to do something else, it is not likely 
to enhance the Chinese interest in helping us on the Korean 
Peninsula.
    On the other hand, they are going to follow their interests 
in Korea anyway. I do not think those are too far from ours in 
fundamental areas.
    But I think what happens with the increase in trade is what 
Mr. Kahler was saying. At least we, as Americans, believe that 
a modern economy helps preserve and enhance individual freedom, 
individual rights. And it seems to me that it is quite clear 
that as China--it definitely wants to improve its economy, 
because that is the one thing, that is their only claim for 
legitimacy with the Chinese people, that they are improving the 
economic lot of the Chinese people--that in the process of 
doing that, they will set loose these forces, by the Internet, 
by people focusing on their business prosperity, not doing what 
they need to please the leaders in Beijing. That will in fact 
make a more normal country out of China. And I think that is 
what this is all about.
    Senator Cleland. Yes, sir, Mr. Wu.
    Mr. Wu. I just want to indicate one thing. The question is: 
Who is our business partner today in China? Are these people 
free capitalists? No. They are Communist bureaucratic 
capitalists. They are not free capitalists. They have no 
interest in promoting democracy or promoting freedom in China.
    Yes, they will cooperate with you and do business. They 
control these men and women working for you and make profit. 
And they share the profit with you. But that does not mean they 
are going to give up their Communist Revolution.
    Senator Cleland. Yes, sir, Mr. Kahler.
    Mr. Kahler. If I may just add. I guess, as a businessman 
operating in China, it is not my role to stop the Communist 
Revolution. That is bigger than I can undertake. But I would 
like to say, in response to what Mr. Wu said, I am a newcomer. 
I have only been there 6 years. But I have seen dramatic change 
in 6 years in the amount of responsibility and authority and 
decisionmaking activity that is taken by executives in Chinese 
companies. And I suspect, to somebody who had been there 20 
years ago, if they could take a snapshot today and compare it 
to 20 years ago, the change would be even more dramatic.
    The centralization of power in China clearly, clearly, 
clearly is dissipating from a political and from an economic 
situation. And I will stick with the point that I have made, 
and others have as well, that having people like Caterpillar 
and other world-class American companies in China is 
contributing to the education and the understanding of the 
Chinese people about the international world in which they live 
and is contributing to the pressure that they put on their 
local communities and on their national government for change 
that is in fact in the direction that I think most of us at 
this table want to see.
    Senator Cleland. Yes, Mr. Valenti, I cannot help but think 
that the silver screen has been a powerful influence in the 
lives of Americans and other people around the world, and it 
would be an increasingly powerful influence in China, as well.
    Yes, Ms. Wallach.
    Ms. Wallach. On the question that you posed of what way, 
which approach, as you characterized it, Mr. Wu's or Mr. 
Valenti's China will take. To quote General Scowcroft: ``China 
is going to follow its own interests.'' And the history of 
relations with China shows that the one thing that has caused 
changes in conduct is taking away access to this U.S. market on 
which so much of China's growth relies. And before the de-
linkage in 1994 of human rights and trade, there had been 
uses--for instance, right after Tiananmen Square, where it 
looked like China would be denied the annual MFN--of that 
leverage in that instance to spring thousands of kids out of 
jail. And then Congress voted afterwards.
    And in the commercial context, despite lots of huffing and 
puffing, bilaterals, and threats, the only time there has 
actually been changed conduct is at midnight plus one minute of 
the day the trade sanctions are going to kick in. And the 
intellectual property rights fight was a pretty dramatic case 
in 1996. That has been the actual record.
    So where it may be the case that voting down PNTR would not 
earn China's ``joy and gratitude''--as Mr. Vanlenti put it--it 
seems to me that is an approach we should use for our mothers. 
But for business competitors with different goals and different 
philosophies, who are also armed to the teeth and regularly 
threaten our allies and our West Coast cities, a more 
leveraged, tougher position might be an appropriate one.
    Senator Cleland. Mr. Wu.
    Mr. Wu. Well, I am not interested about the entertainment 
business, but I want to point out one thing. Remember the 
Hollywood-produced movie ``Kundun.'' And the Chinese foreign 
spokesperson right away said, ``stop it.'' And ``Kundun'' 
disappeared in the American cinema in about one week. They 
crossed over the Pacific Ocean, come to the United States, and 
tell the American media ``No freedom of speech. We do not like 
this movie.''
    So maybe some movie like ``Mulan'' is right now getting to 
China. Twenty movies, well, for the Chinese, yes, we like 
American movies very much. But we have to know that the thing 
is, until this moment, it is still controlled by one hand.
    Mr. Valenti. Let me just respond to Mr. Wu. He is now in an 
area where I think I am a little more of an expert than he is--
the only area, I might add. And that is that every country in 
the world, Mr. Wu, except Germany, Japan and the United States, 
have government censorship. The United Kingdom, the cradle of 
all of our liberty and Common Law, has banned several American 
movies.
    Kirk Douglas' picture, ``Paths of Glory'', was banned for 
25 years in France. Every country has the sovereign right to 
say, ``I do not want this movie in my country.'' And they all 
do it. And they did not like ``Kundun.'' But that did not keep 
Martin Scorcese from making it. And the Chinese had zero 
influence on whether or not we make a movie.
    Our total income, total income today, to the movie industry 
and the television industry is maybe between $20 million and 
$30 million. Even capitalists do not sell their birthright for 
that kind of money.
    The point is that we know censorship. We fight it every day 
all over the world, government censorship in democratic 
countries. So China is no different than anybody else on that 
score.
    Senator Cleland. Well, this is a fascinating discussion. I 
wish we could continue for hours. But you all have been very 
patient and this has been among the most fascinating issues 
with which I have dealt since I have been in the Senate, and it 
will continue to be.
    Thank you very much. The hearing is adjourned.
    [Whereupon, at 12:20 p.m., the hearing was adjourned.]

                            A P P E N D I X

               Prepared Statement of Hon. Slade Gorton, 
                      U.S. Senator from Washington

    To begin, I would like to extend a thank you and congratulations to 
Secretary Daley for the recent Department of Commerce decision 
regarding the apple juice concentrate anti-dumping case against China. 
As some of my colleagues here today know, the Department of Commerce 
recently ruled in favor of American apple producers in this significant 
trade case; a case that could set the stage for anti-dumping actions in 
the future.
    Essentially, American apple juice concentrate producers charged 
that the price paid for Chinese imports was far below market value and 
that dumping had occurred. Since initially pursing their case 
approximately one year ago, the industry has won a favorable decision 
by the International Trade Commission and two subsequent determinations 
by the Department of Commerce. Commerce's most recent determination 
solidified the fact that U.S. apple producers and concentrate 
processors were harmed by the influx of cheap imports. As a matter of 
fact, due to Commerce's decision to levy duties of more than 50% on 
Chinese concentrate, the price paid for juice apples has increased from 
a very low $10 per ton back to the normal level of $120 per ton.
    While the specifics of this case might not be of great significance 
to my colleagues, what this scenario has provided is a window into the 
future and possibility of anti-dumping cases against China. Many 
arguments against China's entry into the World Trade Organization or 
extension of Permanent Normal Trade Relations hinge on the concern that 
free market trade will result in an over-abundance of Chinese product 
imported into the United States. I believe these valid concerns can now 
be addressed with a concrete response. This particular case exemplifies 
that the United States does have an avenue for retribution and recoil 
should trade with China result in any dumping scenarios.
    While I am still somewhat skeptical about whether or not the trade 
agreement between the United States and the People's Republic of China 
will be executed to the level at which it is written, I do recognize 
that this nation and my own State of Washington have more to lose by 
bypassing trade with one-fifth of the world's population. In 
conjunction, China has more to gain by embracing our free market 
principles.
    I will reserve my definitive remarks about trade with China until 
the full Senate is prepared to debate and discuss this subject matter, 
and thank Chairman McCain for holding this hearing.

         Prepared Statement of Douglas Lowenstein, President, 
                Interactive Digital Software Association

    Mr. Chairman, thank you for inviting the Interactive Digital 
Software Association to appear before you this morning to discuss 
legislation granting Permanent Normal Trade Relations status to China. 
My name is Douglas Lowenstein and I am President of the IDSA, the trade 
body representing U.S. video and computer game software companies. IDSA 
supports granting PNTR to China and its eventual full admission into 
the World Trade Organization.
    In 1999, our industry generated $6.1 billion in retail software 
sales in the U.S. alone. IDSA's 32 members account for 90% of the 
edutainment and entertainment software sold in the U.S.. Worldwide, our 
industry generates in excess of $17 billion in software sales alone, 
and many of our members generate 40% or more of their revenue from 
foreign markets. Between 1991-99, the industry has grown more than 
145%, far outstripping the growth rate of any other entertainment 
sector in the world. In 1999, 215 million electronic entertainment 
games were sold in America alone, or two per household. It is estimated 
that our industry now employs more than 50,000 people in the United 
States, many in highly skilled positions. Video and computer game 
software developers and publishers are in dozens of states across 
America.

Background on Computer and Video Game Industry

    While video games were once thought to be mainly the province of 
children, today's industry appeals to people of different ages, 
genders, and tastes. In fact, the average age of computer and video 
game players in America is now 28 years old, and 43% are women or 
girls. Overall, it is estimated that 145 million Americans regularly 
play computer and video games.
    Increasingly, the interactive entertainment industry is seen as 
both a content provider and also a high tech industry driving major 
advances in artificial intelligence, computer hardware, 3D graphics, 
and silicon chip design. The next generation of video game console 
hardware, some available now and some available over the next few 
months, will offer consumers a set top box unit which can play video 
games, DVD movies, audio CDs, connect to the Internet, download 
content, handle e-mail, and more, all for a reasonable price. Perhaps 
this is why a recent story in Newsweek said, ``In the century to come, 
the medium producing the most dynamic, vital, and exciting new art will 
be video games.''
    I offer this background to dramatize just how important our 
industry is to the U.S. economy, particularly the high tech economy of 
the new millennium. Our industry relies totally on intellectual 
property to fuel its growth. Demand for video and computer games is 
huge. It's clear that wherever our industry can sell legitimate 
product, sales explode. Without strong IPR protection in the United 
States and around the world, including the Internet, we cannot sell our 
products. Indeed, piracy is our biggest trade barrier. Without strong 
copyright protection and enforcement, the kind of growth we've 
experienced over the last decade will be jeopardized. The plain fact is 
that large and small countries around the globe are riddled with 
counterfeit and pirate products, making it virtually impossible to 
create legitimate markets and build strong businesses.

Computer and Video Game Piracy in China

    Which brings us to China. We estimate that our industry loses $1.38 
billion annually due to piracy in China, and that the piracy rate there 
hovers around 95%. In other words, all but 5% of the products sold in 
China are pirate or counterfeit. While we experience similar piracy 
rates in other countries, the financial losses we sustain in China far 
outstrips that of any other country in the world.
    The obvious question is, given these problems, why on earth would 
we support PNTR and China's entry into the World Trade Organization 
(WTO)? There are three major reasons: First, notwithstanding the 
continuing domestic piracy problems in China, we believe China has 
taken some important strides under the 1992 and 1995 Sino-U.S. 
bilateral trade agreements to improve the IPR environment.
    Second, we believe that membership in WTO offers the best way to 
sustain and build on even the limited progress made to date.
    Third, we believe that membership in the WTO will hasten China's 
ratification of the World Intellectual Property Organization (WIPO) 
treaties with respect to copyright protection on the Internet. Given 
the central role the Internet will play for our industry as a vehicle 
for distributing content, this is a fundamental and critical business 
issue for us.

The 1992 and 1995 Memoranda of Understanding (MOUs)

    In 1992, and again in 1995, the U.S. and China signed Memoranda of 
Understanding (MOU) regarding intellectual property rights in China. 
The 1995 MOU was further supplemented by a 1996 Action Plan for 
implementation of its key provisions. These are relevant in the current 
debate since one of the issues is whether China can be trusted to carry 
out its obligations under international trade accords. Indeed, there 
are some critics who point to the IPR agreements as an example of why 
China cannot be trusted.
    In fact, China has complied with many of the key provisions of both 
MOUs. This is not to say it's been easy, or that all is well. In fact, 
neither is the case. But it is also indisputable that progress was 
achieved under both the 1992 and 1995 agreements.
    The 1992 plan dealt mostly with steps China needed to take to enact 
laws to meet various relevant international copyright conventions, such 
as the Berne Convention. And, in fact, China did everything it was 
asked to do under that agreement within the prescribed deadlines. 
However, China did fall well short of meeting the agreement's general 
commitment to improve enforcement of the new laws it enacted, and it 
was this failure that gave rise to the negotiation of a new, much more 
specific agreement in 1995.
    The 1995 agreement and the 1996 Action Plan thus zeroed in on 
enforcement generally and particularly on the increasingly grave 
problem of uncontrolled production in China of counterfeit optical 
media products of all kinds. The main focus of the 1995 agreement was 
to pressure the Chinese Government to shut down these illegal CD 
replication plants that were churning out massive quantities of illegal 
video game software, movies, and sound recordings and exporting them 
around the world. Indeed, in the mid-nineties, the illegal CD plants in 
China were supplying pirate goods to numerous global markets, from 
Southeast Asia to South America, thus disrupting many of our legitimate 
and growing markets.
    Candidly, our industry was not entirely satisfied with the 1995 
agreement since it did not cover all forms of entertainment software 
(our members now publish games in three formats: cartridges, CD-ROMs, 
and DVD-ROMs, and the 1995 pact only covered optical media, not 
cartridge product). Nonetheless, the agreement was an important effort 
to reduce the global supply of pirate CD software emanating from China 
and was a net plus for our industry.
    The fact is that the Chinese, over a two year period, have mostly 
lived up to their obligations under the 1995 agreement and the 1996 
action plan to close down this pirate optical media production and halt 
exports. China closed down 86 production lines producing pirated 
optical media product since 1996. In addition, China established strict 
licensing controls over 50 plants that produce legitimate products. The 
volume of pirate CDs being exported out of China is significantly lower 
than it was in 1995 and 1996. We believe these gains stem directly from 
the determination of the Office of the U.S. Trade Representative, led 
by Ambassador Barshefsky and her staff, to enforce the 1995 agreement.

The Current Environment in China

    What remains to be done under the 1995 agreement is to complete the 
job of cleaning up the domestic market now that the export problem has 
diminished. It is in the domestic market where we still face massive 
piracy problems in China.
    As noted above, the piracy rate for our products is 95% and the 
estimated losses are $1.38 billion. According to the International 
Intellectual Property Alliance Special 301 Report submitted to USTR in 
February, ``the levels of optical media piracy in China across all 
lines of copyright business continue to remain high despite reports of 
active raiding at all levels in the production and distribution 
chain.''
    Entertainment software companies have noted that there is now 
massive illegal importation of pirate and counterfeit copyright product 
into China from Hong Kong, Macau, Malaysia, and Taiwan. This flood of 
illegal imports has kept piracy rates unacceptably high even though the 
Chinese have achieved some success in shutting down indigenous pirate 
manufacturing capacity. For example, we believe that 100% of the pirate 
games for use on the Sony PlayStation console are imported, and 70% of 
the pirate games for the PC are imported. Many of these pirate products 
are titles published by U.S. software companies.
    Beyond problems with illegal imports, weak domestic enforcement 
remains a major problem in China. The good news is that the Office of 
National Antipiracy and Pornography (NAPP) has taken charge of all 
copyright enforcement activities throughout the country. But IIPA 
noted, ``enforcement remains the principal weak point within the 
Chinese IPR system. All industries continue to believe that the system 
lacks significant deterrence to further piracy due to nondeterrent 
administrative penalties and the woeful lack of resort to the criminal 
enforcement system.''
    Examples of enforcement impediments abound. For example, the 
central copyright office in Beijing must clear local copyright bureau 
enforcement actions that involve foreign rights holders, a clear 
violation of the Agreement on Trade Related Aspects of International 
Property Rights (TRIPS) which slows down or even stops enforcement. In 
addition, fines are too low, both in the law and as imposed, and retail 
shops that sell pirate goods often remain open even after convictions 
for copyright piracy. The list goes on. In short, the requisite 
deterrence is lacking.
    We also remain extremely concerned that China continues to reserve 
the right to keep product out of the country using vague cultural 
standards. China requires our members to submit software for content 
screening to a Software Approval Board. Only foreign companies are 
required to go through this screening process. The Board can reject 
sale of this product, and it can take months to do so. Meanwhile, 
pirate versions of the same product freely circulate! We were 
disappointed that the agreement governing entry into the WTO did not 
address this issue.
    However, the fact that enormous piracy and market access problems 
in China persist does not mean that China is not taking the problem 
more seriously, or that no progress has been made, or that there is not 
an improved attitude in China toward addressing the issue. To the 
contrary, we believe there has been progress and there are signs China 
recognizes additional steps are required. Indeed, recent speeches by 
top Chinese officials have been noteworthy for their open 
acknowledgement that domestic piracy is rampant and much more needs to 
be done to attack it. I am not sure these statements would have been 
made absent the prospect of PNTR and WTO membership.

WTO: Best Road to Reform

    WTO membership is a linchpin in the long term effort to advance the 
cause of U.S. copyright interests in China. It offers the following 
benefits to our industry:

         As a member of WTO, China will be obligated to meet 
        the requirements of TRIPS immediately upon accession. This is a 
        significant step forward and will bring China into line with 
        dozens of other countries that accept TRIPS standards. Most 
        notably, a major TRIPS obligation relates to enforcement and 
        will require China to take more effective action to deter 
        further infringements. This imposes a critical international 
        obligation on China which we believe China will want to abide 
        by, and holds out the promise of a vast improvement in the 
        piracy landscape in China.
         We believe the WTO dispute settlement procedures offer the 
        most powerful leverage to exact progress in the IP area. If, 
        for example, China does not move to becomes TRIPS-compliant, 
        the WTO affords a multilateral channel to enforce these 
        obligations, with real teeth. As the Committee knows, under WTO 
        rules, if the U.S. were to bring a successful action against 
        China in the IPR area, it would be free to retaliate in any 
        sector, even the most vulnerable domestic Chinese industry. 
        This threat is a powerful weapon to induce responsible 
        behavior.
         The alternative is continued reliance on the bilateral Special 
        301 Process. While we have generated some results through this 
        route, it has inevitably involved repeated brinksmanship, 
        threats, and counter-threats that have unavoidably polarized 
        dialogue. Moreover, it is not clear to us that any future 
        Administration, Democratic or Republican, given the tremendous 
        geo-political issues involving China, will be prepared to risk 
        the relationship over IPR issues. Thus, bringing China into the 
        world body established to address IPR and trade related issues 
        is likely to offer future governments a less confrontational 
        way to push for continued progress in the IPR area.
         The agreement negotiated between the U.S. and China 
        governing its accession to WTO included a range of market 
        access provisions which will be helpful to our industry, 
        including tariff reductions and according ``entertainment 
        software'' status as an audio-visual work, enhancing 
        distribution options. These market access gains will be lost if 
        PNTR status is not granted. Moreover, WTO becomes a forum in 
        which our industry can pursue these and other market access 
        relief reforms, such as the content review issue I mentioned 
        earlier.
         The Internet is growing rapidly in China. There are 
        now an estimated 8.9 million Internet users, double the level 
        in 1998. IDSA knows from our experience in the U.S. and around 
        the world that Internet piracy is costing our industry untold 
        millions, perhaps even billions of dollars. China is currently 
        amending its copyright law, giving it the opportunity to add 
        provisions implementing the WIPO Internet treaties which would 
        increase protection of digital works and provide critical 
        protection against hacking and the use of circumvention devices 
        to defeat copy protection. While compliance with TRIPS itself 
        as a condition of WTO ascension will heighten copyright 
        protection for digital works (since TRIPS covers both analog 
        and digital works), we believe membership in WTO will create a 
        more positive environment for full implementation of the WIPO 
        treaties by China. As an industry widely regarded as providing 
        some of the core content which will drive the Internet's 
        continued emergence, copyright protection of Internet 
        distributed works is a critical business goal.

Conclusion

    As the fastest growing entertainment industry in the world over the 
last five years, we see tremendous opportunity for American 
entertainment software companies to continue to expand sales in foreign 
markets. China is a huge opportunity in this regard. If one looks at 
sales figures for our industry in the U.S. and Europe alone of $6.1 
billion and $6.6 billion respectively, it's easy to see the potential 
for American entertainment software companies to significantly grow 
market share in China. On balance, we believe that PNTR, coupled with 
membership in the WTO, offers the best hope for building a viable, 
legitimate software market in China and realizing that potential. And 
that, in turn, means more jobs in the U.S. entertainment software 
industry as we continue our sustained growth and expansion.

    Thank you.
                                 ______
                                 
     Prepared Statement of the American Forest & Paper Association
    The U.S. forest products industry strongly supports China's 
accession to the World Trade Organization (WTO), and urges timely 
Congressional approval of Permanent Normal Trade Relations (PNTR) for 
China.
    China holds great promise as a major export market for U.S. wood 
and paper products. However, Chinese tariffs in our sector are among 
the highest in the world. Those high tariffs--coupled with a broad 
range of nontariff barriers--currently inhibit our industry's ability 
to take advantage of the potential that is inherent in China's huge 
population, relatively low per capita consumption of wood and paper 
products, shortage of quality housing, economic growth and burgeoning 
middle class.
    Bringing China into the WTO rules-based trading system, under the 
market access conditions that were agreed bilaterally in November 1999, 
should significantly enhance export prospects for U.S. producers of 
wood and paper products. At the same time, China's integration into the 
global trading system will strengthen the economic and political forces 
which are changing Chinese society, and thereby advance important 
American security, social and human rights interests.

U.S.-China Bilateral Market Access Agreement

         The bilateral WTO accession agreement concluded last 
        November between the U.S. and China will reduce most Chinese 
        paper and wood tariffs to the 5-7.5% level, with some tariffs 
        as low as 1-2%. Most of these rates will be achieved by 2003. 
        This is well below current levels of 12-18% on wood and 15-25% 
        on paper products.
         China agreed that if an Accelerated Tariff 
        Liberalization (ATL) agreement is reached in the WTO, China 
        will join the forest products initiative upon accession. While 
        an ATL agreement was not reached in Seattle, this suggests that 
        China is not opposed to elimination of wood and paper tariffs 
        not later than 2005. It is therefore critical that this 
        opportunity for tariff elimination in a huge market not be 
        lost.
         U.S. companies' ability to do business in China is 
        currently limited by restrictions on trading rights (importing 
        and exporting) and distribution of imported products. Within 
        three years, any entity will be able to import forest products 
        into any part of China and engage in the full range of 
        distribution services.
         The agreement requires that China extend to U.S. 
        forest products suppliers any preferential treatment it 
        provides to other countries.

Permanent Normal Trade Relations for China

         The U.S. forest products industry has long supported 
        the normalization of U.S. commercial relations with China. As 
        China prepares to join the WTO, it is essential that Congress 
        grant permanent, unconditional trade status to ensure that U.S. 
        exporters and investors get the full benefits of the very 
        favorable bilateral market access agreement and the other 
        commitments China makes as a condition of its accession.

The Importance of China's Paper and Wood Market to U.S. Suppliers

         China's membership in the WTO, with its system of 
        rules and obligations, will give U.S. exporters a means for 
        addressing inconsistent, discriminatory and trade-distorting 
        practices that have made doing business in China very 
        difficult.
         China already has access to our market, since U.S. 
        tariffs on forest product imports are at zero or very low. WTO 
        accession on the terms of the U.S.-China bilateral market 
        access agreement will ensure a more level playing field on 
        tariffs.
         The removal of tariff and nontariff barriers to 
        China's market is expected to provide significant export 
        opportunities for U.S. producers of paper and wood products. 
        Because China is deficient in forest resources, with limited 
        potential for extending its own fiber supply, its need to 
        import paper and wood products is expected to increase 
        substantially as it pursues economic and industrial expansion.
         Pulp and Paper Products: U.S. pulp, paper, paperboard 
        and converted products exported to China totaled more than 
        800,000 metric tons in 1998, with a value of $430 million 
        (there is also significant trans-shipment through Hong Kong). 
        In 1998, China was the only Far East market which saw an 
        increase in U.S. exports despite the effects of the Asian 
        financial crisis (U.S. exports to all other markets in the 
        region dropped sharply).
         Over the past decade, China has experienced the 
        world's fastest paper and paperboard consumption growth. 
        However, production capacity has not kept up with this growth. 
        Projections by the Food and Agricultural Organization (FAO) 
        show that China's paper and paperboard consumption will 
        continue to grow strongly over the next decade and that the gap 
        between supply and demand will continue to widen and be filled 
        by imports.
         Wood Products: Exports of solid wood to China will 
        approach $60 million in 1999, up from $41 million in 1998. Most 
        products are imported in the form of logs or lumber and re-
        manufactured in China for use in interior applications such as 
        furniture, flooring, doors and windows. These markets should 
        continue to grow as more Chinese can afford to upgrade their 
        current dwellings or purchase new housing.
         Almost no U.S. wood is used in housing construction, 
        but this could change as the Chinese government has launched an 
        ambitious, market-oriented housing reform plan to privatize and 
        increase the quality of Chinese housing. AF&PA is participating 
        in the revision of the Chinese design standard for timber frame 
        construction with the Chinese Ministry of Construction, and 
        using our membership in the U.S.-China Residential Building 
        Council to increase pressure on China to allow greater use and 
        importation of U.S. wood building products.
         In order for U.S. products to compete in both interior 
        and housing construction areas, high Chinese tariffs must be 
        eliminated. U.S. value-added interior products such as 
        flooring, veneer, molding and millwork, windows and doors 
        cannot compete in local markets when facing an 18% tariff on 
        top of the Chinese VAT tax.
         Price competitiveness in building materials is 
        foremost in Chinese purchasing decisions, and U.S. wood 
        products are competing against locally produced materials such 
        as steel and concrete. Without tariff elimination and major 
        building code changes, it will remain difficult for U.S. 
        manufacturers to compete effectively in this growing and 
        increasingly prosperous market.
                                 ______
                                 
 Submitted for the Record by Lori Wallach, Director, Global Trade Watch
Re: USTR Reveals that U.S. Gets China WTO Tariff Cuts Even if Congress 
        Refuses Permanent MFN Grant for China

    USTR Barshefsky today finally admitted to Congress that the U.S. 
could obtain all of the tariff cuts China would be required to make 
upon entry into the WTO even if the Congress did not grant Permanent 
Most Favored Nation (PMFN) status. Her statement was in stark contrast 
to past insistence by the Clinton Administration and the corporate 
coalition pushing for PMFN that the U.S. would lose out on China's WTO 
tariff cuts unless Congress passed PMFN.
    Barshefsky's revelation came in response to a question raised by a 
Rep. Gerald Kleczka (D-WI) in today's Ways and Means Committee hearing. 
Barshefsky's testimony to the committee focused on an array of specific 
large tariff cuts required of China when it joins WTO. Kleczka asked 
Barshefsky to reaffirm that large tariff cuts for autos she touted 
would not obtain for U.S. manufacturers absent PMFN.
    In a refreshing moment of candor, Barshefsky revealed that an 
existing U.S.-China treaty granting reciprocal, bilateral MFN treatment 
would ensure the U.S. benefitted from China's WTO-related tariff cuts 
whether or not Congress approved PMFN. This is a point opponents of 
PMFN, who argue the new grant is neither necessary nor merited, have 
made for months. Until today, the Administration steadfastly had 
repeated the ``Big Lie'' of the PMFN fight, which is that U.S. farmers 
and manufacturers would be denied all of the potential benefits of 
China's WTO entry and thus be placed at a disadvantage relative to 
other nations' businesses unless Congress passed PMFN.
    The treaty noted by Barshefsky, first signed in 1979, automatically 
renews for three-year terms with the current term running through 2001. 
Article II of the treaty, which is commonly called the `79 Bilateral, 
requires the U.S. and China to provide the other with the best 
treatment offered to any other country--aka MFN. Once China enters the 
WTO, China's best treatment will become the WTO package, meaning the 
U.S. would enjoy the tariff cuts China is required to make upon 
entering WTO.
    Unfortunately, USTR Barshefsky then returned to the old talking 
points, saying that although the tariff cuts would obtain, that the 
U.S. would lose out on distribution and services agreements reached 
with China. Actually, the `79 Bilateral also covers these issues. For 
instance, the Article II Most Favored Nations Grant Barshefsky noted 
also explicitly includes: ``All laws, regulations and requirements 
affecting all aspects of internal sale, purchase, transportation, 
distribution or use of imported products.'' Art. II(1)(D)
                                 ______
                                 
Article from Inside U.S. Trade--Dec.17, 1999, Submitted for the Record 
              by Lori Wallach, Director, Global TradeWatch

CHINA, U.S. DIFFER ON PERMANENT MFN, OPPONENTS SEEK ANNUAL RENEWAL

    A Chinese government spokesman late last week said that the Clinton 
Administration has promised China permanent Most-Favored Nation (MFN) 
status as part of a bilateral deal meant to pave the way for China's 
entry into the World Trade Organization. Therefore, the U.S. cannot 
benefit from the concessions as negotiated unless it offers China 
permanent MFN, Chinese embassy spokesman Yu Shuning said on Dec. 10.
    ``[T]he giving of PNTR (Permanent Normal Trade Relations] is a 
major provision in the China-U.S. agreement on China's accession to the 
WTO,'' he said in a press conference. ``Without the giving of the 
status to China, the agreement between China and the U.S. will not come 
into force.''
    But two U.S. officials disputed this assertion. ``China NTR is not 
expressly mentioned in the China WTO agreement'' a spokeswoman for the 
Office of the U.S. Trade Representative said this week. ``However, the 
President made a commitment to seek permanent NTR.''
    Similarly, a White House spokesman said the Clinton Administration 
made a commitment to the Chinese government on permanent MFN.
    Under the Chinese interpretation of the commitment, the U.S. would 
not be able to get the benefits it has negotiated under the bilateral 
deal even if it decided that it could meet its WTO MFN obligations in a 
different form. Some critics of China have insisted that the U.S. is 
only obligated to offer unconditional MFN to China, which would allow 
an annual renewal of that status outside the current Jackson-Vanik 
procedures.
    Commerce Secretary William M. Daley did not dismiss this argument 
out of hand in a Dec. 16 press conference, but highlighted the fact 
that annual renewal would run counter to the political commitment the 
Clinton Administration has made to give China permanent MFN.
    ``There's a question whether you can move forward on an annual by 
annual basis,'' Daley said. ``There are some lawyers who believe it 
must be permanent, but the President has been emphatic for quite a long 
time that for our overall political and economic relationship, the 
permanency of NTR is needed.''
    If the Clinton Administration had made a permanent MFN commitment 
as part of the bilateral deal with China, it would have overstepped its 
statutory bounds, a congressional source said. Extending permanent MFN 
is the prerogative of the Congress, which leaves the Administration 
free to promise a major lobbying effort to persuade Congress.
    Administration officials along with business supporters of the 
China-U.S. deal have maintained that permanent MFN is necessary for the 
U.S. to reap the benefits of any market access concessions China made 
to enter the WTO to any of its members. Under this argument, failure of 
the U.S. to extend permanent MFN would run counter to U.S. obligations 
under the WTO.
    This would mean the U.S would have to opt not to apply the WTO to 
China, these supporters said. This would preclude the U.S. from the 
dispute settlement rules and the market access benefits, they said. 
These proponents of permanent MFN for China dismiss the notion that 
China would have to extend to the United States the trade benefits it 
extends to other trading partners because of a 1979 bilateral trade 
agreement between China and the United States. This trade agreement 
obligates both sides to extend MFN to each other, which arguably would 
mean the extension of all WTO benefits China negotiated.
    Opponents of granting permanent MFN for China have argued that 
granting annual MFN, if it is unconditional and does not lapse, is 
sufficient to meet U.S. obligations under the WTO. That argument was 
put forward Dec. 8 by Lori Wallach, Director of Public Citizen's Global 
Trade Watch, at the House International Relations Subcommittee on 
International Operations and Human Rights.
    ``There is simply no GATT [General Agreement on Tariffs and Trade] 
or WTO text nor any GATT or WTO case law precedent of requiring that 
MFN be granted for a specific period of time,'' Wallach testified.
    This argument was implicit in a Dec. 2 letter to Clinton signed 
Rep. Dennis Kucinich (D-OH), Rep. Christopher Smith (R-NJ) and Wei 
Jingsheng, a Chinese democracy advocate, opposing permanent MFN for 
China. Opponents of permanent MFN for China said this week that if they 
can persuade swing congressmen on this argument, they have a better 
chance of defeating permanent MFN and substituting an annual renewal of 
MFN.
    A USTR spokeswoman, however, called Wallach's argument a ``creative 
alternative,'' that is not a ``reflection of reality.'' The WTO obliges 
the U.S. to treat all countries equally, and since all other WTO 
members have been granted permanent MFN without a time limit, China 
should get the same arrangement, she argued.
    But a critic of permanent MFN dismissed that argument by pointing 
out that it is theoretically possible that the U.S. would deny MFN to 
any country. ``As long as we are applying MFN on a given day, we're 
fulfilling our obligations under GATT,'' said Scott Nova, director of 
the Citizen's Trade Campaign. ``The possibility of the suspension 
always exists for any country, and that possibility exists for China 
even if they have permanent MFN.''
    But the House Ways & Means Committee issued a background paper on 
Dec. 15 on the procedures it sees as required for U.S. businesses and 
farmers to realize the benefits of China's WTO commitments. If the U.S. 
does not remove China from the annual review under the so-called 
Jackson-Vanik amendment, it will have to invoke non-application of 
China's WTO commitments, according to the paper. ``The one-page paper 
does not address the issue of a stand-alone annual renewal procedure 
that has been advocated by Wallach.''
    The congressional vote on permanent MFN for China will likely come 
in early summer, according to Rep. David Dreier (R-CA) and House Ways & 
Means Trade Subcommittee chairman Phil Crane (R-IL). At that point, 
China will have concluded much of its accession process, Dreier said.
    But Yu expressly rejected any linkage between approval of permanent 
MFN and completing the accession process. ``These things are on 
different tracks,'' he said. ``We are opposed to any linkage between 
these two.''
    He said the U.S. should extend permanent MFN as soon as possible. 
``This is a promise by the U.S. administration,'' he said. ``They said 
they had a plan to work with the Congress to have this passed as soon 
as possible.''
    In further remarks on Dec. 10, Yu said that China would not take 
over Macao's textile quota now that Macao, a former Portuguese colony 
will be reunited with China as a special administrative region, a 
status similar to that of Hong Kong.
    Yu also said that China ``cannot discard the use of force'' in its 
relations with Taiwan, which it considers a part of one country with 
mainland China, because that would ``encourage separatists and foreign 
powers.'' Yu said that military exercises conducted during the last 
presidential elections in Taiwan were meant to send a message to 
``separatists,'' those who advocate independence for Taiwan. He also 
did not rule out again conducting military exercises during next year's 
Taiwanese presidential election.
    ``That all depends on how the separatists in China behave,'' Yu 
said.

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