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S. HRG. 112–707 

REVIEWING THE U.S.–CHINA STRATEGIC AND 

ECONOMIC DIALOGUE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITY AND INTERNATIONAL TRADE AND 

FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

ON 

REVIEWING THE U.S.–CHINA STRATEGIC AND ECONOMIC DIALOGUE 

MAY 23, 2012 

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

( 

Available at: http://www.fdsys.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

TIM JOHNSON, South Dakota, Chairman 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

JON TESTER, Montana 

HERB KOHL, Wisconsin 

MARK R. WARNER, Virginia 

JEFF MERKLEY, Oregon 

MICHAEL F. BENNET, Colorado 

KAY HAGAN, North Carolina 

RICHARD C. SHELBY, Alabama 

MIKE CRAPO, Idaho 

BOB CORKER, Tennessee 

JIM DEMINT, South Carolina 

DAVID VITTER, Louisiana 

MIKE JOHANNS, Nebraska 

PATRICK J. TOOMEY, Pennsylvania 

MARK KIRK, Illinois 

JERRY MORAN, Kansas 

ROGER F. WICKER, Mississippi 

DWIGHT FETTIG, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director 

DAWN RATLIFF, Chief Clerk 

RIKER VERMILYE, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE AND FINANCE

MARK R. WARNER, Virginia, Chairman 

MIKE JOHANNS, Nebraska, Ranking Republican Member 

SHERROD BROWN, Ohio 

MICHAEL F. BENNET, Colorado 

TIM JOHNSON, South Dakota 

MARK KIRK, Illinois 

NATHAN STEINWALD, Subcommittee Staff Director 

BRIAN WERSTLER, Republican Subcommittee Staff Director 

(II)

C O N T E N T S 

WEDNESDAY, MAY 23, 2012 

Page 

Opening statement of Chairman Warner .............................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Johanns ............................................................................................... 2 

Prepared statement ................................................................................... 27 

Senator Brown .................................................................................................. 3 

WITNESSES 

Stephen S. Roach, Senior Fellow, Jackson Institute of Global Affairs, Yale 

University ............................................................................................................. 4 

Prepared statement .......................................................................................... 27 

C. Fred Bergsten, Director, Peterson Institute for International Economics ..... 6 

Prepared statement .......................................................................................... 35 

John R. Dearie, Executive Vice President for Policy, Financial Services 

Forum .................................................................................................................... 9 

Prepared statement .......................................................................................... 50 

Dean C. Garfield, President and Chief Executive Officer, Information Technology Industry Council ....................................................................................... 10 

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

(III)

(1) 

REVIEWING THE U.S.–CHINA STRATEGIC AND 

ECONOMIC DIALOGUE 

WEDNESDAY, MAY 23, 2012 

U.S. SENATE, SUBCOMMITTEE ON SECURITY AND INTERNATIONAL

TRADE AND FINANCE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. 

The Subcommittee met at 2:03 p.m., in room SD–538, Dirksen 

Senate Office Building, Hon. Mark Warner, Chairman of the Subcommittee, presiding. 

OPENING STATEMENT OF CHAIRMAN MARK R. WARNER 

Chairman WARNER. I would like to call to order this hearing of 

the Senate Banking Subcommittee on Security and International 

Trade and Finance entitled ‘‘Reviewing the U.S.–China Strategic 

and Economic Dialogue’’. I would like to thank our four witnesses, 

who I will introduce in a moment, for joining us, and my good 

friend, Senator Johanns, and his staff for assisting in organizing 

this hearing. 

A few weeks ago, as Secretary of State Clinton and Secretary of 

the Treasury Geithner were heading to Beijing for the latest Strategic and Economic Dialogue, a diplomatic crisis emerged when the 

civil rights activist Chen Guangcheng escaped house arrest and 

made his way to the U.S. Embassy. We have all followed that story 

and his eventual departure for America. But one of the important 

outcomes of this episode was that both Nations were able to work 

with one another even though there was this diplomatic incident 

going on and to continue their economic dialogue. 

The U.S. relationship with China is complicated, as we all know, 

and there are many complex strategic economic and political differences that exist between our countries. However, I believe there 

is some evidence of progress on this issue and something I hope we 

are going to hear from our panelists today on, and that is what we 

are here to discuss. 

Obviously, many Americans, and I am glad to see Senator Brown 

and Senator Merkley joining us, are concerned about Chinese use 

of trade policy, including controlling the value of its currency, and 

the impact it has on American firms and workers. Americans look 

at the large Chinese holdings of American Treasuries and worry. 

They look at a trade deficit that has seemed to only grow for years 

and also they worry. I know we also want to hear today from your 

comments on the recent announcements in terms of China’s ability 

to buy those Treasuries without any intermediary. 

2 

I believe these are all important issues and all raise legitimate 

concerns, but I think that China’s continued growth and deepening 

ties to the U.S. economy mean that there must be ways we can 

work to identify and work through the real issues that exist between our countries. 

We have seen recently China downgrade its growth projections to 

8.2 percent—what we would do for 8.2 percent in this country at 

this point, but as we all know, with that emerging population, they 

may need that 9 to 10 percent just to stay even. So, again, we hope 

our panelists will talk about that. 

Reforming China’s economic policies, modernizing its financial 

systems, and rebalancing its economy toward greater consumption 

present real opportunities for U.S. and China’s economic relationship. Also, obviously, that would affect most American families, as 

well. 

I am going to turn to my colleague, Senator Johanns, for his 

opening comment, and then if—do you have openings? We will try 

to do those, if we could make them relatively short, because I know 

we have got a bunch of votes this afternoon. Senator Johanns. 

STATEMENT OF SENATOR MIKE JOHANNS 

Senator JOHANNS. Well, thank you, Mr. Chairman. I appreciate 

the fact that you have decided to hold this hearing, and we have 

also appreciated the opportunity to cooperate with you on that. 

With the close earlier this month of the fourth Strategic and Economic Dialogue, I value the chance to review the progress that has 

been made with China over many years, what we must do to make 

sure that that progress continues and how that progress will eventually help American companies access the world’s largest emerging market. 

China presents not only extraordinary opportunity, but, I believe, 

we would all acknowledge it also presents extraordinary challenges. I had the great fortune as Secretary of Agriculture to actually participate in the Strategic and Economic Dialogue process and 

engaged in bilateral trade negotiations with the Chinese. Our work 

in developing agricultural trade in goods like soybeans and corn 

and cotton, that would be one of the success stories of our relationship with China. And, of course, as a Senator from Nebraska, I am 

eager to figure out ways to expand the opportunities for trade in 

agricultural products. 

As we all know, more Chinese consumers equals more American 

exports which directly equals more American jobs. Last year, the 

U.S. exported about $130 billion in goods and services to China, 

supporting more than 600,000 jobs domestically. There is no reason 

why, working closely with Chinese to implement some much-needed reforms, last year’s level of exports could not be doubled, maybe 

even tripled. 

I am very encouraged by recent news coming out of China that 

the leadership is beginning to understand the importance of a transition to a consumption-based society and the scope of the efforts 

necessary to achieve that kind of transition. But we all know that 

none of this is easy. It is probably not going to happen overnight. 

But there remain a few issues of major importance that must be 

worked out. 

3 

Currency issues, of course, are always a subject of conversation 

with the Chinese. Great strides must be taken in even-handed and 

predictable enforcement of the law, specifically intellectual property 

rights. The regulatory system must become more transparent and 

treat entities fairly without regard to nationality. 

For example, an issue of great importance to Nebraska, China 

must stop discriminating against American-grown beef. And to 

touch on the focus of the hearing today, financial markets must be 

opened further to allow institutions with innovative new products 

that will greatly benefit the Chinese to have access to that market. 

So again, Mr. Chairman, I thank you. I look forward to hearing 

from the witnesses. 

Chairman WARNER. Thank you, Senator Johanns. 

If any other Senator would like to make an opening statement. 

Senator Brown. 

STATEMENT OF SENATOR SHERROD BROWN 

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

hearing, and thank you very much to the witnesses, especially Mr. 

Bergsten. Thank you for your insight and your wisdom and your 

guidance over the years, especially on currency issues, but on so 

much more, and I will be brief, Mr. Chairman. 

The latest round, as said, concluded earlier this month. It is important this Committee note how these talks are actually addressing or not addressing the imbalances in our trade relations with 

the People’s Republic of China. The Administration and editorial 

pages argue over and over that China has to alter its economic approach to build domestic consumption, and we know what that 

would mean for us if they begin to do that better. That is good 

news in terms of the potential for them to focus on domestic growth 

rather than sort of a simple ongoing export-led approach. But if we 

do not get access in terms of our exports for their markets, this 

may undermine our recovery and undermine job creation here. 

For U.S. companies to get access to the Chinese market and to 

its consumers, they have had to set up operations there, as we 

know, the way China has done it. And all too often, they do so with 

joint ventures and technology transfer requirements, which I know 

mean a lot to Mr. Garfield. Now the Administration has announced 

a model bilateral investment treaty that in many ways will actually pave the way for more U.S. investment in China. But will that 

investment treaty actually promote exports from the United States 

to China and ensure new barriers that do not discriminate—that 

they do not discriminate against U.S. goods and services, including 

banking services? Those are some of the questions we need to ask. 

I think this is probably the first time in history, I believe, where 

a business, where a number of companies’ business plans have included shutting down production in our country, moving it to another country, producing there, and selling back into our country. 

I do not think that is a business plan that works long-term for our 

companies and for our jobs and for our communities in this country 

and I think it is time we—we clearly are beginning to reexamine 

that. I think we need to continue that. 

Thank you, Mr. Chairman. 

Chairman WARNER. Senator Bennet or Senator Merkley? 

4 

All right. Let me go ahead. I have got a series of questions, as 

well, on that same subject that Senator Brown has raised. Let me 

get to the witness introductions, though, so that we can get to what 

I hope will be a good conversation. 

First, we have Mr. Stephen Roach, who is a Senior Lecturer and 

Senior Fellow of the Jackson Institute at Yale University. For over 

30 years, he has been a highly regarded economist on Wall Street 

and globally. Just in February, he transitioned to academia—congratulations, I think—and full-time at Yale, following a distinguished career at Morgan Stanley Asia as Executive Chairman and 

Chief Economist. 

As Senator Brown said, a familiar face to many of us, Dr. Fred 

Bergsten has been Director of the Peterson Institute for International Economics since its creation in 1981. He has advised multiple Presidents on trade, international affairs, and economics since 

serving under Henry Kissinger at the National Security Council. 

Again, we thank you for joining us again, Dr. Bergsten. 

Mr. John Dearie has been Executive Vice President for Policy at 

the Financial Services Forum since 2001. He previously spent 9 

years at the Federal Reserve Bank of New York and was appointed 

an officer of the Bank in 1996. Before joining the Federal Reserve, 

Mr. Dearie was Managing Director of the Financial Services Volunteer Corps, which helped build banking and financial service systems in developing countries. 

And then someone who I have had the opportunity to work with 

on a series of occasions, Mr. Dean Garfield was elected President 

and CEO of the Information Technology Industry Council in October 2008. Before joining ITI, Dean served as Executive Vice President and Chief Strategic Officer for the Motion Picture Association 

as well as Vice President of Legal Affairs at the Recording Industry 

Association. He has helped both industries manage global strategy, 

intellectual property, policy, and litigation. 

Good panel, so let us get to their testimony. Mr. Roach. 

STATEMENT OF STEPHEN S. ROACH, SENIOR FELLOW, 

JACKSON INSTITUTE OF GLOBAL AFFAIRS, YALE UNIVERSITY 

Mr. ROACH. Thank you very much, Mr. Chairman. It is a pleasure and an honor to participate in this timely hearing this afternoon. There is no international economic issue that is of greater 

importance to you in the Senate and to your colleagues elsewhere 

in Washington than our economic relationship with China. 

I have participated in hearings like this for a number of years, 

as has my friend and colleague, Dr. Bergsten. Yet I have come to 

a somewhat different conclusion than he has, so we are going to 

thoroughly confuse you this afternoon, which is always the risk 

when you invite two economists to comment on anything. 

My conclusion is that over the past 7 years, there has been far 

too much emphasis in this great body on the currency issue as the 

principal way in which China needs to be addressed in the international economic policy arena. In particular, by focusing on the 

U.S.–China foreign exchange rate, you are implicitly presuming 

that there is a bilateral solution to what is really a much broader 

problem facing the United States. I think this approach has outlived its usefulness, and I think it is incumbent upon you to think 

5 

of a new framework to address China. So what I would like to do 

in the next 3 or 4 minutes is simply to demonstrate to you why this 

approach is the wrong approach and what might be a more productive approach in the years ahead. 

First of all, there are four flaws in the Renminbi currency fixation syndrome which many suffer from today. Number one, our 

trade deficit is multilateral. We have trade deficits with 88 countries. Yes, China is the biggest, 34 percent of the total U.S. multilateral imbalance since 2005. But by higher math, that means 

there are another 87 countries we that have deficits with. It is a 

multilateral imbalance in large part because we do not save as a 

Nation—reflecting our massive budget deficits and a sub-par 

household savings rate. So if we do not address the sources of our 

multilateral imbalance and focus solely on the Chinese piece, it is 

like stepping on a water balloon. The water just goes somewhere 

else, most likely to a higher cost producer. That would be the functional equivalent of a tax hike on middle-class American workers, 

which I know none of you would like to see. The bottom line here 

is you cannot fix a multilateral imbalance with a bilateral exchange rate. 

Number two, the currency constituency in the U.S. Senate, led 

initially by Senators Schumer and Graham in 2005, has been very 

focused on this ever since they initially demanded a 27.5 percent 

revaluation of the Renminbi versus the dollar. The last time I 

checked, the Renminbi is up 31.4 percent against the dollar, so 

they should go home and declare victory. And, yes, China has done 

it gradually. Your colleague in the Senate have always wanted it 

to occur overnight. But it is not clear that the economics suggests 

that you get to a different place if you do a gradual or a large oneoff revaluation. In any case, China is mindful of the horrible mistake that Japan made in listening to similar advice that we offered 

them in the mid-1980s when they actually did a one-off sharp revaluation of the Yen, Japan has been on its back ever since. 

Third, we hear repeatedly that a sharp revaluation of the 

Renminbi is the answer for global imbalances—that it will address 

China’s trade surplus, America’s current account deficit, and global 

imbalances. I think that view is just wrong. China’s current account surplus is diminishing very sharply, from 10 percent in 2007 

down to two-and-a-quarter percent this year by the IMF. So you 

need to update that view. 

Similarly, I think the Washington view on China’s international 

imbalance, led by Fed Chairman Bernanke, has been to blame China’s surplus savings glut as the source of many problems that the 

U.S. faces. This year, America’s current account deficit of about 

$510 billion will end up being 2.8 times the size of China’s sharply 

reduced surplus. So the U.S. is actually a much more serious 

source of global instability today than the so-called savings glut in 

China. 

And then, finally, the idea that China is the world’s factory needs 

to be updated. It is much more the world’s assembly line. About 20 

to 30 percent of all Chinese exports represents value added is made 

in China. The balance reflects value added made elsewhere in Asia. 

Sixty percent of Chinese exports come from Chinese subsidiaries of 

6 

global multinationals. This is not a currency issue. This is just a 

manifestation of globalization. Think Apple, for example. 

I apologize I have gone over. Let me try to wrap it up in about 

two more minutes. 

I promised you not just to trash the currency constituency but 

also to stress—and this is my punch line—that you need to come 

up with a new framework in viewing China—not as a threat but 

as an opportunity. Several of you did correctly allude to the market 

access issue in that regard. 

I would just make four simple points here. Number one, the jobs 

in America are not being necessarily squeezed because of currency 

misalignments in the world. The U.S. dollar, broadly measured by 

the Federal Reserve Board, is down 25 percent since 2002, and yet 

our job situation is terrible, as you know. I think that reflects less 

the currency misalignments and mainly the fact that our major 

source of aggregate demand, the American consumer, is on ice. 

Consumer spending, 71 percent of the economy, has grown sixtenths of a percentage point at an annual rate over the last 17 

quarters. Without consumption, without demand growth, companies will not hire and they have not. 

So that brings me to my second point, which is we obviously need 

a new source of growth. I would agree with Senator Johanns that 

exports are at the top of the list. Goods exports are now 10 percent 

of our GDP, which is a record. But I also agree with you, Senator— 

we can go a lot higher. China is our third largest and most rapidly 

growing export market, and with anemic growth of U.S. exports in 

Mexico and Canada, and, needless to say, a horrible outlook for Europe, we have got to look to China. 

And then, third, take a careful look at the ‘‘Next China.’’ It is not 

that they are just talking about changing the model. They have to 

change the model because an export-led demand growth model in 

China does not work in a treacherous and weak global environment. So when you think about China, you have got to think of a 

consumer-led growth model with great opportunity for manufactured goods producers in the U.S., but also for service companies— 

not just finance but a whole broad array of nonfinancial services 

in the distribution and transactions processing areas. 

So my conclusion is, you are right. Market access is the new 

issue. Currencies are the old issue. Get off that one. Do not waste 

your time on that. Do not keep fixating on China’s need to revalue 

the Renminbi. They have done it and they are still doing it. But 

the next China is what you should be focusing on, not the last 

China. Take the high road, not the low road. 

Thank you very much. 

Chairman WARNER. Thank you. 

Mr. Bergsten. 

STATEMENT OF C. FRED BERGSTEN, DIRECTOR, PETERSON 

INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. BERGSTEN. Mr. Chairman, it is a great pleasure to be back 

before the Committee. Congratulations on holding the hearing. For 

the reasons I will indicate, I think this is very important stuff. 

I just want to make three main points. First, the critical need for 

the Strategic and Economic Dialogue. Second, tangible results to 

7 

date—has it been worth it, has it been a success. And third, what 

is the future agenda. I will resist the temptation to get into an extensive dialogue with Mr. Roach about exchange rates. I think he 

is flogging a little bit of a dead horse for reasons that I will indicate. 

First point. I have been proposing for a number of years that the 

United States and China create an informal G2 to help steer the 

world economy. The reason is very simple. Progress is impossible 

on most important global economic issues today without agreement 

by these two global economic superpowers. Examples include exchange rates in the international monetary system, the world trade 

regime, climate change. There are many others. 

The G2 should be completely informal and even unannounced or 

even acknowledged by the two countries. As the Nike ad says, 

‘‘Just do it.’’ But they should seek to forge close working cooperation on the whole range of global issues, which is essential for 

achieving progress on bilateral problems or in implementing their 

global leadership responsibilities as the world’s two largest economies. 

Now, the most overt and visible step toward creating a G2 is the 

very frequent meetings between President Obama and the top leaders of China. Ever since President Obama has been in office, he has 

met every quarter with either President Hu or Premier Wen, and 

that is a movement toward a G2 by any name. But the Strategic 

and Economic Dialogue that we talk about today is by far the most 

extensive institutionalization of the concept. It brings cabinet officers together once a year. It has launched ongoing dialogue among 

many groups of officials on many topics. 

I, therefore, believe that the S&ED is a crucial component of U.S. 

foreign policy, national security policy, as well as economic policy. 

It must be continued and, indeed, strengthened. Its ever expanding 

agenda of topics and discussion forcing, if not yet action forcing nature, are extremely important. The Administration should be congratulated for the priority it has attached to the dialogue. It should 

continue and accelerate that focus in the future. 

Point two, abstract pursuit of a G2 or a cooperative relationship 

is unlikely to win widespread support now that it has been operating for 3 years. So the question is, have there been tangible results that suggest beneficial practical payoffs from the exercise? 

Now, the dominant issue of this period, though Steve Roach did 

not like it, has been the extensive currency manipulation for China. 

For at least 5 years, the Chinese blatantly intervened in the foreign exchange market by buying $1 to $2 billion worth of dollars 

every single day to keep the price of our currency high and their 

currency low. That, of course, produced an enormous competitive 

advantage for China in world trade. It produced a global current 

account surplus for the Chinese that exceeded 10 percent of its 

whole economy at its peak 5 years ago and an unprecedented buildup of $3.3 trillion of foreign exchange reserves. So the U.S. has 

rightly focused on this issue at every meeting of the S&ED as well 

as in many other contacts with the Chinese. 

In recent years, and here I agree with Steve, it has embedded 

the currency issue in the broader rebalancing question, the need 

8 

for China to alter its development strategy away from export-led 

growth in the direction of relying on domestic demand. 

My key point, however, is that it is now apparent, as Roach also 

said, that the U.S. strategy has succeeded to a substantial degree. 

China’s global current accounts surplus has now declined to less 

than 3 percent of its economy. That is primarily due to the rise of 

more than 30 percent in the trade-weighted average of the exchange rate since 2005, a rise of more than 40 percent against the 

dollar. I have attached to my statement an analysis by one of my 

colleagues, Bill Cline, that shows that if the Chinese continue to 

permit the currency to rise at the rate of the last 2 years, China’s 

current accounts surplus could actually disappear over the next 2 

or 3 years. 

So we should, indeed, declare at least an important degree of victory. Now, we have got to remain on the case because we cannot 

be assured China will let the rate continue rising. In fact, it should 

rise more to completely eliminate their current account surplus. 

That would be a desirable thing. But I do believe that the progress 

on this very difficult and highly contentious issue marks both a 

major step forward in the U.S.–China economic relationship and a 

signal achievement for the S&ED itself. 

Finally, and very briefly, there are, of course, as Steve said, lots 

of other very important issues in this relationship. I talk about a 

couple of global economic issues. No time to discuss them now, the 

euro crisis and such. I am happy to come back to that later. 

But there are many bilateral, including trade, issues that have 

to be addressed. The S&ED did cover an impressive array of them. 

It is particularly important that China has agreed to negotiate new 

international rules on export finance over the next couple of years. 

This is a major area of international competition and contention. 

It is a big area of export subsidization. China is not part of the current rules because it is not in the OECD. The commitment to do 

a new arrangement in this area is very, very important. 

But my punch line here is that I think it is going to remain difficult to successfully resolve the large number of our bilateral trade 

conflicts as long as they continue to be addressed in a purely ad 

hoc manner. We can take some cases to the WTO, but that is minor 

stuff. In most cases, we do not have any agreed rules of the road. 

Therefore, I will make the breathtaking proposal that the U.S. 

and China should consider launching negotiations for a bilateral 

trade agreement to provide a comprehensive framework to deal 

with the daunting array of economic problems between them, a list 

that is likely to continue growing as the economic relationship 

deepens further. Such an effort could even aim to develop a U.S.– 

China Free Trade Agreement over a period of a decade or so, as 

has been proposed by some leading U.S. businessmen who have 

lots of experience in China. Another alternative would be to look 

for an early occasion to bring China into the negotiations on the 

Trans-Pacific partnership, which aims to create a Free Trade Area 

of the Asia Pacific. 

Any effort of that type would represent an extension of the G2 

concept into the trade policy area, as I believe inevitably must 

occur at some point. The S&ED could productively begin that conversation, which, of course, carries major foreign policy as well as 

9 

economic dimensions. So building on its considerable progress to 

date, I think the S&ED has a rich potential agenda for the years 

ahead and can be enormously valuable. 

Chairman WARNER. Thank you. 

Mr. Dearie. 

STATEMENT OF JOHN R. DEARIE, EXECUTIVE VICE 

PRESIDENT FOR POLICY, FINANCIAL SERVICES FORUM 

Mr. DEARIE. Senators Warner and Johanns, thanks very much 

for holding this important hearing. It is vitally important. I very 

much appreciate the opportunity to be here. 

As you have heard already, the rate of China’s economic emergence and the impact of its integration into the global economy are 

unprecedented in the history of the world’s economy with profound 

implications for U.S. economic growth and job creation. But harnessing China’s growth and job creation potential requires a number of important structural reforms in China, including financial 

reform and modernization. In my time with you today, I am going 

to try to help connect the dots between faster financial reform in 

China and jobs in the United States. 

Since China joined the WTO in December of 2001, U.S. exports 

to China have increased more than six-fold, growing at seven times 

the pace of U.S. exports to the rest of the world. China, as you 

heard earlier, is now America’s third largest export market, the 

largest market for our products and services outside of North 

America. 

For your reference, I have provided in Exhibit A of my written 

testimony figures that show the growth in exports to China from 

each of the States represented by Members on this Subcommittee. 

As an example, Chairman Warner, exports from Virginia to China 

have increased nearly 800 percent since the year 2000, as compared with growth of just 42 percent in Virginia’s exports to the 

rest of the world. Each of the other States represented on this Subcommittee have posted similarly impressive growth rates in exports 

to China. 

At the Financial Services Forum, we have estimated that if China’s citizens were to eventually consume American-made goods and 

services at the same rate as their neighbors in Japan currently do, 

U.S. exports to China could grow to as much as $700 billion a year, 

nearly twice what we imported from China last year, potentially 

turning a $300 billion trade deficit into a $300 billion trade surplus 

and creating nearly three million new American jobs. That will not 

happen overnight, to be sure, but we believe that with the right reforms in place, it will happen over time. 

The good news is, as you have heard, is that after three decades 

of pursuing a manufacturing for export economic model, China’s 

leadership now wisely seeks a more balanced economic model that 

relies less on exports and fixed investment and more on internal 

demand, primarily a more active Chinese consumer. But accelerating the shift to a more consumption-based Chinese economy requires a more modern and sophisticated financial sector. Chinese 

households, as you know, currently depend on their families and 

private savings to pay for retirement, health care, and the ecoVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
10 

nomic consequences of accidents or disasters, with the effect that 

they save anywhere from a third to even half of their incomes. 

Activating the Chinese consumer requires the broad availability 

of financial products and services, things that we take for granted, 

personal loans, credit cards, mortgages, pensions, insurance products and services, and retirement security products that will eliminate the need for this precautionary savings on the part of the Chinese and facilitate greater consumption. A recent report by the 

World Bank called ‘‘China 2030,’’ among other findings, confirmed 

this observation. 

The S&ED was created in 2006 in large part to accelerate financial reform in China. Since then, as you just heard from Mr. 

Bergsten, incremental but meaningful progress has been accomplished. Still, China continues to impose substantial obstacles on 

U.S. financial institutions operating in China, including caps on investment by U.S. firms in Chinese financial institutions, nonprudential restrictions on licensing and corporate form, arbitrary 

restrictions on permitted products and services, and arbitrary and 

discriminatory regulatory treatment. 

The fastest way for China to get the modern financial system it 

needs, and as Mr. Roach indicated, they have already initiated this 

transition toward a more consumption-based economy, but the fastest way for them to get the financial sector that that shift requires 

is to open its financial sector to greater foreign participation by foreign financial services firms. 

By providing the financial products and services that China’s 

citizens and businesses need to save, invest, insure against risk, 

raise standards of living, and, therefore, consume at higher levels, 

foreign financial institutions, including U.S. providers, will help 

China develop an economy that is less dependent on exports, more 

consumption-driven, and, therefore, an enormously important and 

expanding market for American-made products and services. 

Thank you very much. 

Chairman WARNER. Thank you, Mr. Dearie. 

Senator Johanns pointed out that at least for Virginia and Nebraska, while those tremendous export growths were taking place, 

a certain two Senators were Governors there. 

[Laughter.] 

Chairman WARNER. Mr. Garfield. 

STATEMENT OF DEAN C. GARFIELD, PRESIDENT AND CHIEF 

EXECUTIVE OFFICER, INFORMATION TECHNOLOGY INDUSTRY COUNCIL 

Mr. GARFIELD. Thank you, Chairman Warner, Ranking Member 

Johanns. Thank you for hosting this hearing on this important 

issue. It is critically important not only to our companies, but also 

to the country. 

Before I jump into talking about China, I do want to compliment 

the Committee on the work that it has done on fostering entrepreneurship and innovation. The passage of the Jobs Act is something 

that we commend, as well as the introduction of the Start Up Act, 

Start Up 2.0, yesterday, is something that we strongly endorse. I 

hope those 30 seconds will not count against my time in talking 

about China. 

11 

I would like to focus my testimony on two specific areas: One, 

our experience in China as it transitioned from a consumer exportdriven economy to a more consumer demand-driven economy; and 

two, solutions for addressing the challenges that we are encountering on the ground in China. 

I am very pleased to be here representing the information and 

communications technology sector, a sector that is transforming the 

lives of millions of people around the world and that is a real driver for economic growth in the United States. When we saw the first 

touch screen portable electronic notebook 40 years ago in the movies, most people thought it was simply fanciful. Today, that is a reality that is integrated in all of our lives. 

China has been an important part of that innovation story. The 

large growth in China’s GDP has led to a demand for the most innovative products around the world, many of those products that 

are developed, distributed by our companies. In addition, China, as 

a number of the panelists have noted, is an important part of the 

global supply chain, which has resulted in hundreds of thousands 

of jobs being created here in the United States. 

Unfortunately, it has not been a story of straight-line success. As 

China has transitioned into, or is beginning to transition into more 

of a consumer-driven economy, they have decided to put their 

thumb on the scale, particularly as it relates to innovation policy. 

There have been previous hearings here before on China’s indigenous innovation policy, in particular. Through the work of the 

S&ED, there have been some successes against some of the most 

blatant offenses, including foreclosing important aspects of the 

economy related to State-owned enterprises and Government agencies from competition from U.S. and foreign-based companies. 

In spite of the success on some elements of indigenous innovation, it continues apace. New movie or same movie with a new title. 

China has adopted some more sophisticated strategies for its indigenous innovation policies, but it continues apace. 

For example, in the fifth—I am sorry, the twelfth 5-Year Plan, 

China outlined an initiative to focus on advancing strategic emerging enterprises or industries, strategic emerging industries, and intends to do so through a number of means that are completely inconsistent with global norms, for example, advancing China-specific 

standards or putting in place local testing and regulatory requirements, or simply pumping resources into those strategic and 

emerging industries. In fact, China has announced a plan to spend 

$1.6 trillion directed at the industries that it has identified. 

And so the question—the challenge is not only what is happening 

within the borders of China, but the fact that many other major 

markets that are export opportunities for the United States are 

now mirroring the model that has been adopted within China. We 

see in India, Indonesia, Brazil, and all over the—all around the 

world, other countries adopting similar indigenous innovation policies which are quite problematic and will result in a stalling of job 

creation here in the United States. 

And so the question is, what do we do about it? We have three 

things to offer. 

One is building on what has been successful. As all of the panelists have noted, the Strategic and Economic Dialogues have been 

12 

quite successful in our advocacy. I also recall in 2010, when the 

Senate held hearings on these issues, it had a significant impact. 

And so a unified U.S. position and a forceful position on trade and 

pushing back around these indigenous innovation policies, not only 

in China but around the globe, is critically important. 

Second is identifying people and agencies within China, and companies, who have a shared interest with the United States. There 

are a number of players in that market who share our interest, and 

taking steps to bolster those players is critically important. 

Third and final, I think it is important that we take the opportunities that exist, whether it is the G2, as Mr. Bergsten has suggested, or the G20, which is coming up very soon, to highlight these 

onerous mercantilist policies as it relates to China but more broadly. 

Thank you for the time. 

Chairman WARNER. Thank you, Mr. Garfield, and I appreciate 

everybody’s testimony. 

We will do 5-minute rounds because I want to make sure everybody gets a chance, at least one or two rounds. 

I want to actually—I am going to move from some of the macro 

questions I have, because I am sure some of my colleagues may 

raise some of them, but I want to actually start where you left off, 

Mr. Garfield, which is this question of China creating its own 

standards, I think, in some of the telecom areas they are looking 

at, such as, a separate Chinese WIFI standard—— 

Mr. GARFIELD. Yes, WAPI. 

Chairman WARNER. ——different from the international standards, which, in effect, almost becomes a competitive barrier for 

American and other international firms entering into the marketplace. How do we slow that? How do we get them not to use their 

own national standards as really a trade tool? 

And something that has been suggested to me, and I would like 

your and anybody else on the panel’s comments on this, is it has 

always scratched my head why it seems that China’s ability to play 

off all of the rest of our countries, our EU partners, Japan and others, one against each other, particularly on the private sector side, 

where we do not seem to have as much unity of purpose. And one 

thing that was brought up to me is that there are antitrust and 

other international preconditions that do not allow some of our 

major partners to actually talk in a coordinated fashion about how 

they might take on a China that is dealing with not only individual 

standards, but in certain places State-owned enterprises which are 

simply clones for their Government policy or State-operated policy. 

Comments on that? Ideas on that? 

Mr. GARFIELD. Yes, I think you have alluded to some of the answers. The issue you identified around standards and the potential 

that it holds for closing the market to competitors, including competitors that I represent, is a significant problem. I think there are 

two strategies that immediately jump to mind. 

One is doing what we did with the S&ED, which is though we 

were consistent as a U.S. Government in our opposition with 

China, we also worked really hard to build a multinational commitment around the problem with indigenous innovation. And so I 

think it is important that we are consistent in our own advocacy 

13 

and unified in our position and forceful in our position, but also we 

have got to work with our multinational partners to make clear 

that it is problematic. 

The second part of it is to realize that China is playing a game 

of chess, not checkers, and so we may see these standards like 

WAPI developing within China, but China is using international 

bodies to advance their same goals. For example, there is a whole 

discussion going on at the U.N. at the ITU around standards and 

what is the proper approach for establishing standards. It is important that the United States take a firm position there, but it is one 

person, one vote, and so we, again, have to collaborate with our 

international partners to push back against that kind of an effort. 

Chairman WARNER. I want to make sure we get to everybody else 

weighing in on the panel on this. I also think your point—right before we were coming over here, we were hearing from the IT industry about India trying, not with standards but with other tools, to 

try to basically emulate China’s restrictions. Does anybody else 

want to add in on this, particularly are there antitrust provisions? 

Somebody has raised this with me. I do not know if it is a valid 

concern or not. 

Mr. BERGSTEN. I do not know about that. I want to make two 

quick observations, though. You are absolutely right. The use of national standards to affect competitive positions is the protectionist 

device de jour. It is no longer tariffs, quotas. That is the kind of 

thing. That is why I am arguing we need to get China into some 

kind of trade agreement with us. Those things are not covered by 

the multilateral rules effectively. 

They will be included, to an important extent, in the TransPacific 

Partnership. That is one of the U.S. goals in that 21st century 

agreement. And I think it would be strongly in our interest to find 

a way to bring China into a trade agreement where we could debate explicitly those kinds of rules of the road. It would be tough. 

There are lots of aspects to it. But that is one of the main reasons 

I propose that. 

On your question about the Chinese playing off the other countries, exactly right. It is our own stupidity. We talk all the time 

about intensifying trans-Atlantic relations. The U.S. and Europe 

should be getting together. If the U.S. and Europe should be getting together on anything, it is this, a common threat toward Europe. But what happens? When the European leaders go to Beijing, 

they want to sell Airbuses. When our leaders go, they want to sell 

Boeings. It is a competition rather than a cooperation. Now, with 

a little subtlety, you can do both, but we certainly should be coordinating with our allies. 

I think it is right. One of the reasons that at least the first 

version of the National Indigenous Innovation Policy was rolled 

back a bit was because it was a pretty coordinated approach from 

main trading partners of China coming in to harangue them on the 

issue. It can be done and we are simply short-sighted not to do it. 

Chairman WARNER. I want to be sensitive to my colleagues’ time, 

so maybe in a second round I will get Mr. Dearie’s and Mr. Roach’s 

comments on that. 

Senator Johanns. 

14 

Senator JOHANNS. Well, let me thank each of you for being here, 

some excellent testimony. 

I am going to start with you, Mr. Bergsten. I find your proposal 

on a trade agreement sort of approach an interesting approach, but 

let me, if I might, offer a dimension to that and then maybe another approach that I would like your thoughts on. 

The dimension I would offer is that, as you know, trade agreement negotiations are painstakingly slow. They typically extend 

over many, many years. The world is changing so fast. This is an 

economy we want to access now as aggressively as we can. And 

then at the end of the day, they are hard to get passed. There are 

strong differences of opinion about the value of any trade agreement, and then you have individual interests that weigh in. So this 

gets to be a complicated process. 

It should not dissuade you. I support trade. I think I have supported every trade agreement in the last 20 years. But let me offer 

another thought, another approach, maybe, and again, I would like 

each panel Member’s kind of quick comment on this. 

I thought the Strategic and Economic Dialogue actually worked 

quite well. I happened to be there at the meeting with the President when Secretary Paulson proposed it. It kind of caught my attention. I saw it come to fruition, participated in some of that. It 

actually worked well. 

If I had one concern about it, there was a tremendous amount 

of time and effort and preparation put into that on both sides, Chinese and the United States. You would have this 2-day meeting effort. Everybody would get their item on the list. We would talk 

through those items, work through it. But then you would not get 

back together again for a while. 

I often wondered if it was—as an addition to it, do an approach 

that basically said, look, there are certain areas—it might be 

telecom, it might be agriculture, it might be financial services—and 

literally have subsets of that that kind of filled in that interim period of time, where you could literally work through these issues 

like Mark has raised and then bring that back to the economic dialogue so you did not lose track as the months passed of these very, 

very significant items that could be make or break items for a 

given industry. 

Let me start with you. What is your reaction to that? And then 

if I could just go around the panel quickly. 

Mr. BERGSTEN. I think you are absolutely right, and that has, in 

fact, been the evolution of lots of international institutions over the 

years, as you know. G20 was preceded by G7, preceded by G5. They 

originally started with a single annual meeting, but then created 

sherpas to implement the process over the course of the year, set 

up subgroups of the type that you suggest. 

So I think that would be a natural evolution, would be highly desirable. It would go very much in the direction of my G2 because 

it would then foster habits of cooperation, channels of communication in which an official in Beijing could pick up the phone, call 

here when she or he had a concern and vice-versa, and you develop 

that thick network of collaboration. 

We have that to a large extent with the European countries from 

having worked with them for so many decades. We need now to fosVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
15 

ter it with China, and your route, I think, would be a very promising one to pursue. 

Senator JOHANNS. Mr. Roach, what are your thoughts? 

Mr. ROACH. I think that the collaborative network between U.S. 

and Chinese officials, of which I have actually been privileged to 

speak to senior officials on both sides for a number of years, is really gaining momentum. Under the auspices of what was initially the 

Strategic Economic Dialogue, now the Strategic and Economic Dialogue, the momentum is continuing. 

I think one of the most important things that has occurred over 

the last, now, 11 years with respect to China and the world has 

been China’s accession to the rules-based WTO framework which 

is a means of accountability that we can now rely on. The Chinese 

will protest from time to time, as will we, if charges are brought 

against them or us. But the rules-based framework that Fred has 

alluded to is a powerful one. 

I think, however, the politics and many of the reasons that you 

raise, Senator Johanns, on the pragmatic aspects of going for an 

FTA would really rule that option out. It is just not a realistic goal 

for the foreseeable future. Maybe someday we will get there, and 

I would be very much in support of that. But formalizing more of 

a secretariat type of arrangement where there is constant and formalized accountability of agreements that have been reached at 

various bilateral meetings would be a more productive avenue to 

pursue. I think it would be a very important and positive contribution. 

Mr. DEARIE. Senator, I agree. As a general matter, I am in favor. 

As a general matter, I am very supportive of the ambitious ideas 

that Fred put on the table. I recognize some of the political practical issues that Mr. Roach is talking about. But any kind of highlevel consistent engagement with China, I think, works entirely in 

our favor. 

I think that you make a very, very good point that that engagement also needs to be coordinated with Europe. There is very little 

doubt, based on my observation, that China does, or has in the 

past, played a, or pursued something of a divide and conquer strategy. And to the extent that we and the Europeans can coordinate 

our pressure and our demands on China, not only does that make 

more sense logically, but it has worked in the past, as Mr. Bergsten 

just described, in terms of some of the other problems in the past. 

So as a general matter, more areas of high-level engagement 

with China, coordinated with the Europeans, work very much in 

our favor. 

Your specific comment on the S&ED, I think, is also well taken, 

and I would point out—I am sure you know this—the original SED, 

Strategic Economic Dialogue, Number One was very focused on economics and finance, financial reform and economic reform in 

China, and it was twice a year. When the Obama administration 

came into office, they expanded the dialogue to be the Strategic and 

Economic Dialogue and included into the dialogue a lot of other 

issues, strategic issues, military issues, environmental issues, 

human rights issues. I am not quibbling with that. This bilateral 

relationship is very complex, to be sure. And then they reduced the 

number of meetings to once a year. And so the practical effect of 

16 

expanding the range of issues on the table and limiting or cutting 

in half the number of times that you meet every year just has the 

practical effect of limiting, I think, or slowing down some of the 

progress that can be made. 

Clay Lowery, who served in the Treasury Department when the 

dialogue was the Strategic Economic Dialogue, happened to testify 

last week before the House Financial Services Committee and he 

spoke to this in very eloquent terms, and he spoke specifically 

about having a twice-a-year high-level engagement creates a much 

more of a momentum and puts firm markers out there on a more 

frequent basis in terms of when deliverables have to be accomplished. And then, just as importantly, you see the people on the 

other side of the table more often. And this element of trust, personal trust and personal engagement and getting to know your 

counterpart on the other side of the table, particularly in the context of our engagement with the Chinese, is very important. 

Mr. GARFIELD. Can I—— 

Chairman WARNER. I am going to have to call on Senator 

Merkley. 

Senator MERKLEY. Thank you, Mr. Chair. I have to go preside, 

so I am just—I had wanted to explore an issue. Unfortunately, I 

am just going to be able to raise it. Maybe my colleagues will explore it. 

After the group of 10 Senators, bipartisan delegation, went to 

China last year, and we heard a lot of insights from our foreign 

diplomatic personnel, economic analysts, our companies doing business there, it gave me a more comprehensive picture of the tilted 

playing field, and I would categorize that in really four components: The weak enforcement of labor and environmental laws; currency manipulation; direct subsidies; and nontariff barriers. 

And many of those pieces have been mentioned here. We have 

talked about technical standards that Senator Warner raised, nontariff barriers, indigenous innovation, which fits into that category. 

Not a lot of discussion of the direct subsidies. We did in the course 

of last year around the trade treaty debate raise the issue of the 

direct subsidy that China is supposed to report under the WTO. It 

has only done so only once in 10 years. 

Shortly after we raised that and raised the concept of a bill that 

would require our Trade Representative to do counternotification 

as authorized under the treaty, our Trade Representative went 

ahead and did counternotification, raised a list of 200 subsidies 

that China does directly to its companies, items for export, and it 

was a fascinating list. If I could stay, I would get your insights on 

that list. But the fact that it revealed a huge energy strategy, a 

paper strategy, a famous brands strategy, all of which have not 

been raised or discussed in this conversation and really merits exploration. Take these four areas together and all the subcomponents and China has a comprehensive approach. 

And as we look out across America, we see a loss of millions of 

jobs over the last 10 years, and if we do not make things in America, you really do not have a middle class. And so we have to wrestle with this in a comprehensive fashion. Unfortunately, my Committee Members are going to continue pondering that along with 

all of you, and thank you very much. 

17 

Chairman WARNER. Thank you, Senator Merkley. 

Senator Bennet. 

Senator BENNET. Thank you, Mr. Chairman, and thank you for 

holding the hearing, and thank you for your excellent testimony. It 

really has been a fascinating discussion. 

Mr. Garfield, I wanted to start with you on your second proposed 

solution, as I recall, which was the notion that we should be finding companies in China that have, as I understood it, aligned selfinterests with some of the things that we want. I wonder if you 

could say a little more about that. I guess that might be actors that 

want a strong IP regime or—is that what you have in mind? 

Mr. GARFIELD. Exactly. It actually connects with the point that 

the Ranking Member was making earlier about doing a side dialogue. As it turns out, in the innovation hearing that is occurring, 

and the way that it is happening is with expert to expert around 

innovation, the challenge we have is when you only have China at 

the table, it is hard to bring international pressure or additional 

pressure beyond the United States. 

One of the things that I have identified and we have found generally as a sector in operating in China is that it is a huge country 

and a huge bureaucracy, if you will, and there are agencies and 

provinces that have ambition of driving innovation and driving 

growth, but doing it in a way that is consistent with global norms. 

And so identifying those emergent companies as well as those 

emergent players within the country, I think, is important, an important part of our strategy. 

Senator BENNET. Are there—putting the geography aside for a 

second, although that is a very interesting insight—are there particular industries that you think we could go farthest fastest with 

in terms of creating a regime that actually would work better? 

Mr. GARFIELD. I think one is certainly our sector because of the 

opportunities globally. The other thing about our sector is it 

evolves so quickly—— 

Senator BENNET. Right. 

Mr. GARFIELD. ——and so players in China see the global opportunity and they are also adversely impacted, not on a grand scale, 

but there are some companies within China that are impacted by 

the policies that are put in place that are intended to promote and 

advance those sectors. And so I would say that our sector is one 

to look at as an opportunity for finding aligned interests. 

Senator BENNET. I wanted to follow up on one of the implications 

of Jeff Merkley’s question, since he had to leave, and I wanted to 

do it in the context of solar panels. There are two interesting sides 

to this argument. The Commerce Department, I think, recently announced that it was raising tariffs on solar panels because it found 

the Chinese were dumping them into the global market. I have observed over the last couple years that our largest single export 

from the United States is the aircraft, $30 billion a year. I think 

the solar panel exports from China is about $15 billion a year. That 

is not trivial. It is half of our largest single export. 

And you have people that look at this and say, well, this is good 

because this is going to mean that our manufacturing sector is now 

going to be able to manufacture solar panels again, which some of 

us believe were actually invented not just in the United States but 

18 

in the great State of Colorado. But then there are other people that 

say, you know, if the Chinese are willing to subsidize this to this 

degree and our interest really is in trying to move into alternative 

sources of energy and be able to do better conservation and be able 

to do the sorts of retrofits in our buildings, that is where the jobs 

really are and that is where the wage growth really is. 

I wonder if you have a perspective, just as a—not necessarily on 

that case or solar panels, even, but how we as policy makers should 

think about this relationship with China in the context of wanting 

to create jobs here in the United States, wanting rising wages here 

in the United States, and wanting to recouple our own economic 

growth with job growth and wage growth. 

Mr. ROACH. Can I just tackle that, because it is a critical issue. 

I will comment briefly, and I will do it at the macro level. I am 

sure my fellow witnesses can bore in on a little bit more specifically. 

You are talking here really about two totally different systems of 

economic organization. We protest a lot about, as Senator Merkley 

said, about the subsidies, the plan, the energy plan. China is in the 

midst, as several of us have said, of their twelfth 5-Year Plan. This 

is a Soviet-style structure that was first developed in the early 

1950s. The first four or five of these 5-Year Plans were total unmitigated disasters. It was not until the late 1970s with, I believe, 

the fifth 5-Year Plan that was formulated by Deng Xiaoping in the 

aftermath of the Cultural Revolution, when China was on the brink 

of total failure as an economic system, that they got their act together. 

In the subsequent six or seven 5-Year Plans, they have moved 

their model forward to what they call a socialist market-based system, and the twelfth 5-Year Plan is far more market-based, far 

more consumer-based, and, therefore, far more in our interest as 

an exporter than China has ever been. 

They have done an extraordinary job of taking an economy that 

was on the brink of failure 32 years ago to what is today the 

world’s second-largest economy, but they have got miles to go. 

Their per capita income is 10 percent of ours. They still have got 

600 million people living in relatively impoverished levels in the 

rural countryside. 

So is their system wrong for them? It is not our system. It is not 

right for us. But the question that Senator Merkley seemed to be 

alluding to is that we should take tremendous exception at the system that they have put in place to drive economic development. 

With all due respect to the Senator, I think that system has 

worked extremely well for them in getting to this point, but it will 

not work that well in the future. The Chinese have said that. They 

know that. They are changing. 

And that goes back to the comments that I made at the outset. 

We have got to look at where China is going and gear our own 

strategy, whatever that is, to thinking strategically about how we 

can really take advantage of the growth opportunities and the job 

opportunities that we can derive from where China is headed—not 

from where it has been. 

Mr. BERGSTEN. I would like to give a simpler but complementary 

answer to your question. Economists agree on very few things. You 

19 

can see it here today. But practically all economists agree on the 

virtues of free trade. And the answer to your question, the tradeoff 

between getting cheaper goods for our consumers versus avoiding 

an unlevel playing field, really goes to that fundamental truth. 

Free trade is good for our economy, but when the other country 

cheats, you want to counter it because that violates the very principles of free trade, and that is the need, then, for international 

rules of the game, the WTO, but it does not cover a variety of these 

subsidies we are talking about today. 

So I think the presumption, in answer to your question about 

solar panels or anything else, is that we want to have maximum 

openness of trade, but if the other country is cheating, through manipulating the currency or subsidized credit or any of a variety of 

practices which are an inherent part of the Chinese system, as 

Steve outlines, then you have got to counter that, and over time, 

try to get to systemic changes to rectify it. 

Mr. GARFIELD. I also think when the other country is cheating, 

we cannot do things to shoot ourselves in the foot. And so there are 

a number of initiatives that are on the docket for this Congress 

that could help to make the U.S. more competitive, whether it is 

tax reform, immigration reform where we educate our best and 

brightest and then ask them to leave the country or make it very 

difficult for them to do, cyber security and making our systems 

more secure. And so we do not have to look very far to see a list 

of policy priorities that can make the U.S. a lot more competitive. 

Mr. BERGSTEN. If I could just add one more sentence, there is a 

well known theorem in economics called the Theory of the Second 

Best. If the other guy is subsidizing and you cannot get him to 

stop, there is a very strong case for your subsidizing to match him. 

That is the issue of export credits. We do not really love, I think, 

having an Export-Import Bank or other procedures that subsidize 

our export finance, but since the other guys do it, you have to 

match. And, in fact, if you do not match, then there is no way of 

getting them to desist. So you want to have a two-track strategy. 

You want to match, but then you want to use that leverage to try 

to get them to roll back, and that is the case across the board and 

you have to implement it item by item. But those are the basic 

principles, I think, that need to apply. Thank you. 

Mr. ROACH. And just for the record, I strongly object to the word 

‘‘cheat’’ to characterize China’s behavior as a developing economy. 

Mr. BERGSTEN. I want to reiterate it. 

Chairman WARNER. That would be where I want to start the second round, and again, the witnesses have all got great information. 

I would ask you to please—we have got—— 

Mr. DEARIE. I will be brief. 

Chairman WARNER. We are interested questioners and we would 

really appreciate if you could try to keep your answers a little 

briefer. 

I do think it is curious that some of what Senator Bennet and 

others were talking about kind of falls under the rubric of industrial policy, and some of our colleagues who abhor any notion of 

America having an industrial policy then say, and look how we are 

getting beat by China. An interesting contradiction. 

20 

I want to come back, because I probably more fall closer to Dr. 

Bergsten than Mr. Roach on some of these issues, because I do 

have concerns and I would like to give Mr. Dearie and Mr. Roach 

an opportunity to answer the last question. Are we missing opportunities for American enterprises to collaborate with Europe, 

Japan, others, in having an organized approach vis-a-vis China? 

I would like, as well, then, as others answer in on this, I will try 

to get all my questions into one, because I know you all even with 

that admonition are going to go longer on your answers. The whole 

notion—and one of the things that Treasury recently announced 

that State-owned enterprises in China are about to increase their 

dividends. What does that mean for Chinese consumers? Will that 

move, again, a good sign toward consumption, or does it mean that 

this is again playing on an unlevel playing field because the Stateowned enterprises are getting additional support systems? 

And one thing that has been touched on by Dean briefly but not 

really hit on, and this is where, Mr. Roach, I will take exception 

to your characterization, because whether it is State sanctioned or 

quasi-State sanctioned, the amount of intellectual property theft 

and cyber attacks that are being generated by China, I think, are 

outrageous and in direct opposition to any kind of ascension to 

world standards. 

So let us start with Mr. Dearie and Mr. Roach, and with the admonition that I have only got 3 minutes before Senator Johanns is 

up. 

And I also want to add, I think Senator Johanns’s comments, 

and we are talking already about seeing how we might formalize 

some of those efforts to make sure the S&ED becomes this ongoing 

process. I think you raised an excellent point. 

Mr. Dearie and Mr. Roach first. 

Mr. DEARIE. I will be as brief as I can be because I understand 

the time constraint. I think that your point about greater international cooperation vis-a-vis the Chinese is an excellent one. I 

would note very specifically with regard to the U.S. Strategic and 

Economic Dialogue with China, Europe has its own similar Strategic Economic Dialogue. I think they call it the High Level Dialogue or something to that effect. I am not sure if I have the words 

correct, but still, it is modeled after our S&ED and so they have 

an independent line and format of negotiation. 

There certainly must be opportunities for greater coordination 

between we and the Europeans and potentially even the Japanese, 

as you suggest. I do not have any specific ideas about how we 

might accomplish that. I will give that some thought and get back 

to you—— 

Chairman WARNER. Are there any things that are precluding 

that cooperation at this point? 

Mr. DEARIE. I do not—— 

Chairman WARNER. Anything that is formalized? 

Mr. DEARIE. I am not aware of anything that would preclude it, 

no, except for the inherent complexity associated with doing a multilateral approach, but we have done that before. So I will give that 

some thought, and if we come up with ways that we can accomplish 

that, we will certainly share those with you. 

21 

In terms of your specific question with regard to the higher dividends being paid by State-owned enterprises, we actually think 

that that is a good thing. There is a tremendous amount of money 

that is locked up in the State-owned enterprises in China. This is 

part of what has been called a financial repression of the Chinese 

consumer. Interest rate regulations are part of that, as well. But 

certainly as the State-owned enterprises begin to increase their 

dividends, begin to pay out a lot of this money out to Chinese consumers who might be shareholders in State-owned enterprises, it 

will certainly be a step in the right direction in terms of increasing 

consumer consumption. 

Chairman WARNER. Mr. Roach. 

Mr. ROACH. Just a couple of quick things: One, rightly or wrongly, the Chinese feel that over the last 150 to 200 years, they have 

been maligned severely by the West. This goes back to the Opium 

Wars of the mid-19th century. I think the idea that we should forge 

a grand coalition between ourselves and Europe and gang up on 

the Chinese probably would not go over very well in that respect. 

There are international forums like the WTO that are very appropriate for addressing the Chinese. 

Second, the Chinese are doing this pro-consumption transformation. They need enormous help, and that help is our opportunity. If there is one thing that we know how to do in the United 

States, it is how to take a consumption model to excess. We are the 

world’s greatest consumers, unfortunately, to a fault. We have gone 

well beyond what economic fundamentals suggest we should have 

done. But we have built up industries and systems in goods and 

services that could be of enormous benefit to the Chinese. 

And I would stress here services in particular—retail trade, 

wholesale trade, domestic transportation, supply chain logistics. 

The infrastructure in those areas in China is tiny compared to the 

scale of their economy. These are opportunities of enormous scope 

and scale that could be hugely beneficial to us in taking advantage 

of this transformation. 

Chairman WARNER. Thirty seconds, only, Dr. Bergsten and Mr. 

Garfield, on State-owned enterprise, dividend policy as well as any 

brief comment on IP or some of the cyber issues. 

Mr. BERGSTEN. Yes. I think the dividend policy is a big step forward. The State-owned enterprises are still largely retrograde dinosaurs. To the extent that they keep their own profits and keep reinvesting them in things they should not be investing them in, it 

makes it harder to rebalance the economy. 

Conversely, when those very large amounts of money do get 

transferred to the central Government, it gives them more resources to do the kind of rebalancing, building of safety nets, that 

will help reduce the reliance on heavy investment, export-led 

growth. So I think that is something we at my Institute have called 

for for quite a long time. We are very pleased that it is now moving 

that way. 

Mr. GARFIELD. I will simply comment on the multinational coalitions and say that no one is really focused on ganging up on China. 

It is more working with multinational partners much in the way 

that we did in 2010 around indigenous innovation to get China or 

22 

convince China that acting consistent with global norms is completely consistent with its overall goals domestically. 

Chairman WARNER. Senator Johanns. 

Senator JOHANNS. Again, thanks to each and every one of you for 

being here. I am starting to pay attention to the clock because I, 

myself, have a meeting that I have to get to here pretty quickly. 

So let me, if I might, end my participation in the hearing with just 

a thought or two. 

I am fascinated, Mr. Roach, by your description of a new China, 

a China that is based upon a consumer approach. The more China 

ties itself and its future to an export market, the more you have 

to realize that that market is going to be fickle at times. It is going 

to ebb and flow and that is going to have an impact on your economy. Their movement in that direction, I think, does provide great 

opportunities for us to try to meet some of the needs. We are already seeing in some areas, like food, they are very happy to buy 

our food and we are happy to sell it. 

The second point I wanted to make today is that as that relationship continues to expand and grow, it does occur to me that there 

is a need for yet another step. We started with the Economic Dialogue. Then it became the Strategic and Economic Dialogue. I had 

no problem with that. I think that makes sense. But I think there 

is a next step out here, and here is why. 

You know, if you think about China, it was not all that long ago 

in human history that this was a closed society. We did not do 

business with China. We did not go to China. There was not really 

a relationship with China until Nixon took a bold step and said, 

we need to create this relationship. 

What has happened since then is that the Chinese are especially 

entrepreneurial and that economy has taken off, and my impression has been that it has grown faster than the ability of the Government to manage that. So you do run into these kinds of irritating trade issues, like why are you not buying Nebraska beef, 

and there are so many of those kinds of things that you run into. 

But part of the challenge they have is growing their infrastructure 

fast enough to manage good trade policy. 

The final point I will make about that, though, is that that in 

itself creates a remarkable opportunity for cooperation with the 

United States, I believe. It seems to me that we have the ability 

to partner with them, and I am not talking about foreign aid or 

anything like that, but I am talking about technical expertise from 

the United States and from China sitting down and working 

through these issues in a way that is positive in terms of opening 

up markets and hopefully avoiding those problems before they develop, because there is—it just seems there is always a long list of 

irritants that—and they really are. They are irritants that we need 

to work our way through. 

Now, again, because of time, I cannot go around to each person, 

but if you would, call us on the phone or write us a letter. I would 

love to hear your thoughts on that. 

And I will end by just saying how much I appreciate really, really provocative testimony, very thought provoking information that 

you have provided. Thank you very much. 

Mr. ROACH. Thank you. 

23 

Mr. BERGSTEN. Thank you. 

Mr. DEARIE. Thank you. 

Mr. GARFIELD. Thank you. 

Chairman WARNER. Thank you, Senator Johanns. Let me also— 

I am getting close on the time constraint, too, so I want to make 

a couple of final comments, as well, echoing a lot of what you said, 

Mike, and agree that we have got to figure out a way to get this 

right, this relationship right. The notion of formal or informal— 

probably better informal, Dr. Bergsten—of a G2 idea, I think, 

makes enormous sense. 

I want to again thank the panel, as well. It has been a really provocative hearing. I particularly appreciate, Mr. Roach, some of the 

comments you made at the outset in terms of, I think, outlaying 

where we have gone on this currency discussion. It is a helpful 

point that needs to be made, and I did not even see Fred kind of— 

I even think I heard him agree with you on parts of that. 

[Laughter.] 

Chairman WARNER. You know, what I am concerned about is 

some of these efforts, and again, I may be a little too industry-specific, but that China—we have a potential, still, to blow this relationship, and China, as they try to move toward, I think we all 

agree, toward this consumption-based approach. My sense is, and 

this is—I may actually ask a quick response on this—I have a 

sense that a number of not just American-based companies but 

other companies, international large brand companies, went into 

China with stars in their eyes in terms of access to a huge, huge 

market, in certain times may have made sacrifices on their own 

standards and procedures as the price of entry of getting into that 

market. They have now been there for, most of them, a decadeplus, continue to sink in enormous amounts of resources, and have 

not seen the ability to necessarily either take back profits made or 

have found real challenges on some of the joint ventures, but rather see the Chinese regime and Government being less than a level 

playing field, kind of sucking sometimes out the intellectual content of property and then setting up either State-owned or other 

competitors that do not allow, again, a level playing field. I think 

we are seeing it on standards. I think we have seen it on intellectual property. I think we are starting to see it on an enormous up 

ramp on cyber. 

And as someone—and I will take Mr. Roach’s view of this is an 

extraordinarily important relationship. How do we make sure we 

do not get it wrong? How do we make sure that we continue to 

press the Chinese to be full active partners? They are an emerging 

Nation, but at some point, it seems like they are playing as an 

emerging Nation when the circumstances fit or a first-tier Nation 

with the economic clout that they bring to bear, and I just would 

like, again, with the request for some level of brevity, if anybody 

has got a response to either Senator Johanns’s or my—and since 

he left, I am more interested in a response to my point—you know, 

that this is still a relationship in transition and that, we could get 

it wrong, but the Chinese could get it wrong, too. What if these enterprises that continue to invest in China do not feel they are playing on a level playing field? I think Mr. Dearie’s numbers were revealing to me. I know they had gone up, but I did not appreciate 

24 

how much that export opportunity had risen. So how do we get it 

right? And again, we will just go down the panel. 

Mr. ROACH. Yes, just briefly. I think, Senator Warner, your concern about the fact that this relationship could still be blown is, I 

think, a very important and a very legitimate concern. We have 

one of the candidates for Presidency who has made a solemn promise to the American public that on the day that he is sworn in, he 

will declare China guilty of currency manipulation. That underscores your risk. 

I would just like to second, and I believe it was Mr. Dearie’s comment, that one of the risks here is that we have gone from holding 

the Strategic Dialogue with China twice a year to once a year. As 

such, it has become an exercise in event planning. Both sides 

breathe a great sigh of relief when each meeting ends, and they do 

not have to do it again for another year. I actually think the more 

frequent the meetings are, the greater the degree of engagement 

and the less the risk that we will blow it. So I would be very much 

in favor of going back to the former frequency of at least twice a 

year—and possibly even more. 

Mr. BERGSTEN. Just two quick points. Just to underline your fear 

that we could still blow it is the fact that China is a sui generis, 

unique global economic superpower. It is the first global economic 

superpower in history that is at the same time a poor country, does 

not have a market economy, and is not a democracy. And so on the 

one hand, we have to treat it and act with it like a more or less 

equal global economic power. On the other hand, it has got these 

profound differences. And so finding a way to relate to it, very different from the Europeans in the past or the Japanese now. 

That is why I think two things that have been discussed today 

are of uppermost importance. One is to use the multilateral system. I mean, the Chinese are responsive to external advice and 

even pressure. But if it looks like they are responding to external 

pressure, then they get their backs up and, in fact, it is counterproductive. So the way in which you do it is critical. Using the multilateral institutions, as Steve said, where they are a full member, 

full participant, is absolutely crucial to the strategy. Now, that, of 

course, raises the weakness of the multilateral institutions, the 

IMF on currency, the WTO does not cover a lot of things, but you 

have to use them as much as possible. 

But then my second point, you have got to go beyond that, and 

particularly the U.S. as the other big superpower has to go beyond 

it, and that is why I am calling for a G2. Informal, yes, not intended to substitute for the G20 let alone the IMF or WTO, indeed, 

to make them work better, but by developing really thick networks 

of cooperation between us and the Chinese. Not easy. Not easy for 

them. Not easy for us. But I really think if we are going to meet 

the main challenge of this century, that has got to be a central part 

of it. 

Chairman WARNER. Mr. Dearie. 

Mr. DEARIE. Very quickly, to your point about the possibility of 

blowing it, I think the possibility exists on both sides. There is absolutely no question that certainly within the financial space that 

there is profound frustration at not being able to operate on a level 

playing field. We have already seen a couple of large financial instiVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
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tutions either reduce substantially or, in fact, unwind their operations in China. There is still tremendous interest in being there. 

I mean, it is the second-largest economy in the world, the fastest 

growing economy in the world. But they want to be there on a national treatment basis. 

On the Chinese side, I think that there are still large elements 

of—certainly at the senior political level in China and even at the 

senior commercial level in China, there is still—and I think this 

gets to what Mr. Roach was talking about, about China not wanting—culturally and historically, very sensitive to being seen as 

being pushed around and being influenced by foreigners. John 

Huntsman, our recent Ambassador to China, had an op-ed in the 

Wall Street Journal just recently in which he described China as 

being profoundly insecure in a sense, and there are elements in 

China that I think still see the U.S. and China relationship as 

something as a zero-sum game, that what is in our interest is not 

in their interest and vice-versa. 

So there is a lot of work to be done on the trust front, explaining 

and getting to know and learning more about each other, and that 

is why more frequent—more and more frequent high-level engagement with China is so important. 

The good news here, though, is that engagement works. If you 

look back over the last, you know, since 1979 and how we have engaged with China, sometimes it seems like it is not working because progress is always, you know, it is terribly incremental, the 

Chinese move at a pace that seems very unsatisfying. But if you 

look back in retrospect and look at what the United States and 

China have accomplished together since 1979, it is incredible. It is 

very important to understand, and I think this sort of threads 

through a number of our testimonies today, there is a happy alignment right now between U.S. interests and Chinese interests in 

terms of the economic space. They want to go where we want them 

to go, and so there is an enormous opportunity here. 

Last, Congress has an enormously important role to play. China 

cares about Congressional sentiment. They monitor Congressional 

sentiment very, very closely in terms of statements, in terms of 

hearings like this, and I would encourage this Committee, this Subcommittee, and Congress in general to bring the same kind of intensity and pressure that they have brought in recent years on the 

currency to these issues of engagement and expanded market access. Thanks. 

Chairman WARNER. Mr. Garfield. 

Mr. GARFIELD. Two quick points. One, the relationship thus far, 

I think, both for the tech sector as well as the country, has been 

a net positive, but we are always recalibrating and a number of the 

issues we have talked about today moves it closer to being a close 

call on whether it continues to be a positive. 

Two, I think we have to continue to be consistent and clear in 

our opposition to the types of policies that we have been discussing, 

and the point that Mr. Dearie made about the role that Congress 

and the U.S. Government can play generally in spotlighting these 

issues and being clear about our opposition to policies that are inconsistent with global norms is critically important. 

26 

Chairman WARNER. Great. Well, thank you all very much. A very 

fascinating hearing. And with that, the hearing is adjourned. 

[Whereupon, at 3:30 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

27 

PREPARED STATEMENT OF SENATOR MIKE JOHANNS 

Thank you, Mr. Chairman, I appreciate you holding this hearing today. With the 

close earlier this month of the fourth Strategic and Economic Dialogue, I value the 

chance to review progress that has been made with China, what progress must continue, and how that progress will eventually help American companies access the 

world’s largest emerging market. To be sure, China presents not only extraordinary 

opportunity, but also extraordinary challenges. 

I had the great fortune, as Secretary of Agriculture, to participate in the Strategic 

Economic Dialogue process and engage in bilateral and multilateral trade negotiations with the Chinese. Our work in developing agricultural trade in goods like soybeans, corn, and cotton is one of the great success stories of our relationship with 

China, and I am eager to see our successes expand. 

As we all know, more Chinese consumers equals more American exports, which directly equals more American jobs. Last year, the U.S. exported nearly $130 billion 

in goods and services to China, supporting more than 600,000 jobs here domestically. There is no reason that, working closely with the Chinese to implement some 

much needed market reforms, last year’s level of exports could not be doubled or 

tripled. 

I am very encouraged by recent news coming out of China that the leadership is 

beginning to understand the importance of a transition to a consumption-based society, and the scope of the efforts necessary to achieve such a transition. None of this 

is to say that reforms will be easy, or will come quickly. 

There remain issues of major importance that must be worked out. Great strides 

must be taken in even-handed and predictable enforcement of law, specifically intellectual property rights. The regulatory system must become much more transparent, 

and treat entities fairly, without regard to their nationality. For example, an issue 

of great importance to Nebraska, China must stop discriminating against Americangrown beef. And, to touch on the focus of the hearing today, financial markets must 

be opened to allow institutions with innovative new products to access an ever-growing consumer base. 

I look forward to hearing from the witnesses, and to discussing their thoughts on 

the future of the U.S.–China relationship. 

PREPARED STATEMENT OF STEPHEN S. ROACH 

SENIOR FELLOW, JACKSON INSTITUTE OF GLOBAL AFFAIRS, YALE UNIVERSITY

MAY 23, 2012 

Mr. Chairman and Members of this important Subcommittee, I am delighted to 

weigh in on an international economic policy issue of enormous importance to the 

United States. Since its inception 6 years ago, the Strategic and Economic Dialogue 

between the U.S. and China has served the very useful purpose of elevating one of 

the world’s most important economic relationships to the high level it deserves. Unfortunately, this dialogue has been misdirected by the combination of bad economic 

advice, a tough macroclimate bearing down on American workers, and a politically 

motivated blame game. It is high time to rethink the focus and role of this important framework of engagement. 

The United States has long allowed its fixation on China’s foreign exchange rate 

to dominate the debate surrounding its economic relationship with China. Over the 

past 7 years, the U.S. Congress has repeatedly flirted with legislation purportedly 

aimed at defending hard-pressed American workers from the presumed threat of a 

cheap Chinese currency. Bipartisan support for such a measure initially surfaced 

when Senators Charles Schumer (a liberal Democrat from New York) and Lindsey 

Graham (a conservative Republican from South Carolina) reached across the ideological and party divide to cosponsor the first Chinese currency bill in 2005. Over 

the years, the drumbeat has only grown louder in seeking such remedies. By overwhelming bipartisan majorities, the House of Representatives passed a modified 

version of this bill in September 2010 and you in the Senate followed suit in October 

2011. Fortunately, neither bill became law. 

Unfortunately, the argument for legislative action against China has become tantalizingly simple. It rests mainly on America’s gaping trade deficit, widely thought 

to be a principal source of the acute pressures bearing down on U.S. jobs and real 

wages. At one level, that’s certainly understandable: A loss of production and market share to foreign competition squeezes America’s companies and their workers. 

The U.S. merchandise trade deficit has, in fact, averaged 4.4 percent of GDP since 

2005—the largest and most protracted external gap in modern U.S. history. Moreover, China has accounted for fully 35 percent of the shortfall over this 7-year interVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00031 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
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val, by far, the largest portion of the overall U.S. trade deficit. The critics claim 

foul—maintaining that Chinese inroads into American markets are built on a blatant strategy of currency manipulation that is restraining the renminbi, or yuan, 

from rising to its ‘‘fair’’ market-determined value. The Chinese, insists a broad coalition of politicians, business leaders, and academic economists, must revalue immediately or face punitive compensatory sanctions to level the competitive playing 

field. 

This reasoning resonates with the American public. Opinion polls conducted in 

2011 found that fully 61 percent of the citizens sampled believe that China represents a serious economic threat. Politicians have been quick to respond—and, unfortunately, stoke these fears. Indeed, the currency debate could well loom as a 

major issue in the upcoming U.S. presidential campaign. President Obama has 

drawn a line in the sand when he replied, ‘‘Enough is enough,’’ upon being queried 

on the contentious currency issue in the aftermath of his last meeting with Chinese 

President Hu Jintao. Governor Romney has gone even further—promising to declare 

China guilty of ‘‘currency manipulation’’ the day he takes office as America’s next 

president. Nor should this be dismissed as normal election-year politics. As long as 

conditions remain tough for American workers—more likely than not in the years 

ahead—pressures for a Chinese fix to our problems will only intensify. 

However appealing this logic may appear to be on the surface, it is wrong. Currency adjustments—in effect, altering the relative price structures between Nations—are simply not the panacea that most economists used to think they were. 

According to Federal Reserve statistics, the broadest measure of the U.S. dollar is, 

in fact down about 25 percent in real effective terms from its February 2002 peak. 

Yet over the past decade, the angst of the American worker has only intensified. 

Contrary to conventional wisdom, shifts in currencies are not the answer for all that 

ails us. That is particularly true of the foreign exchange rate between the U.S. dollar and the Chinese renminbi. Several reasons come to mind: 

First, America’s trade deficit is multilateral: the United States ran deficits with 

88 Nations in 2010. A multilateral imbalance cannot be fixed by putting pressure 

on a bilateral exchange rate. It’s like putting pressure on one end of a water balloon. 

Without addressing the sources of this multilateral imbalance, squeezing one of its 

bilateral pieces will merely redirect the trade imbalance elsewhere—quite conceivably to a higher cost foreign producer. In other words, this strategy would probably 

backfire—it would be the functional equivalent of imposing a tax hike on hardpressed middle-class U.S. families. 

It’s no dark secret as to the primary sources of our multilateral trade imbalance— 

an unprecedented shortfall of national saving. America’s so-called net national saving rate—the combined depreciation-adjusted saving of individuals, businesses, and 

the Government sector—fell into negative territory in late 2008 and has remained 

near or below zero ever since. This is unprecedented in the annals of modern global 

history. Never before has the world’s leading economic power run a negative net national saving rate. Lacking in saving and wanting to grow, the U.S. must then import surplus saving from abroad—and run massive current account and multilateral 

trade deficits in order to attract the foreign capital. That’s where China and our 

other 87 trade deficits enter the U.S. macro equation. 

Yet you in the political arena choose to blame others for our sins—specifically, 

sins arising from outsize budget deficits and sharply reduced personal saving that 

have forced the United States to turn to foreign saving as a source of domestic 

growth. Pointing the finger at China merely deflects attention away from the heavy 

lifting that must be done at home. Scapegoating may be politically expedient but 

it won’t work in addressing the fundamental problems of a saving-short U.S. economy. In this vein, America’s major threat is from within. If we don’t want trade deficits—with China or with anyone else—we must face up to our chronic shortfall of 

saving. If we don’t want to save—and many believe (myself excluded) that’s the last 

thing postcrisis America needs—then we have to accept trade deficits as a steep 

price to pay for our profligacy. 

Second, the renminbi has now appreciated 31.4 percent against the dollar since 

mid-2005, when China started to reform its foreign exchange regime. That’s well in 

excess of the 27.5 percent increase called for by the original Schumer-Graham bill. 

In other words, the currency hawks have pretty much gotten what they wanted all 

along. But, as underscored above, the problems bearing down on American workers 

have only become worse. You would think that might provide pause for thought in 

continuing to agitate for further Renminbi appreciation. But the periodic attempts 

of you in the Congress to enact anti-China currency legislation say otherwise. 

The advice from many leading academics—advice, I might disappointingly add, 

that has been well received in Congress—is that China should have moved quickly 

with a large one-off adjustment to bring its currency to fair value. While it is debatVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00032 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
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1See, the March 10, 2005 speech by then Fed governor, Ben Bernanke, ‘‘The Global Saving 

Glut and the U.S. Current Account Deficit’’. 

able as to whether the time path of any currency shifts makes much of a difference 

in the long run, the Chinese have long viewed a large one-off revaluation with understandable trepidation. 

And with good reason. Mindful of the painful lessons of Japan—especially its disastrous concession on sharp yen appreciation that was the centerpiece of the socalled Plaza Accord of 1985—the Chinese have opted, instead, for a gradual revaluation. Significantly, the endgame is not in doubt. Recent moves toward the offshore 

internationalization of the renminbi, a more open capital account, and significantly 

wider currency trading bands leave little doubt that China is committed to establishing a market-based, fully convertible renminbi. 

Third, the currency hawks have long maintained that it is in the world’s best interest for China to reduce its outside current account imbalance and use the currency lever to accomplish that critical task. They also believe that global imbalances—an ever-present threat to the world economy for the past couple of decades— 

have been largely made in China. The Washington consensus has been especially 

adamant in making this case, stressing that China’s saving glut has been a major 

source of global instability. 1 Without a sharp renminbi revaluation, they argue, the 

world will never come to grips with its dangerous imbalances. 

Here as well, the political expedience of the blame game has hijacked this important element of the debate. First of all, the good news is that there has now been 

significant improvement in China’s external imbalance. The International Monetary 

Fund estimates that China’s current-account surplus will narrow to just 2.3 percent 

of GDP in 2012, after peaking at 10.1 percent in 2007. Unfortunately, it’s hard to 

say the same for any meaningful improvement in America’s gaping external imbalance. By the IMF’s reckoning, the U.S. current-account deficit is likely to be about 

$510 billion this year—fully 2.8 times greater than China’s surplus (see, Figure 1 

on page 13, ‘‘A Tale of Two Deficits’’). Far from blaming China as a major source 

of global instability, you in the Congress should take a long and hard look in the 

mirror as to the role that America’s persistent and outsize external imbalance is 

playing as a major source of global instability. Far from being a responsible steward 

of global economic prosperity, an unbalanced U.S. economy has been a major source 

of instability in a crisis-prone world. 

Finally, China’s role in the global economy has changed considerably over the past 

30 years. Specifically, it has evolved from the so-called world’s factory to more of 

an assembly line. Research shows that no more than 20 percent to 30 percent of 

Chinese exports to the U.S. reflect value added inside China. Moreover, roughly 60 

percent of Chinese exports represent shipments of ‘‘foreign invested enterprises’’— 

in effect, Chinese subsidiaries of global multinationals. This raises important questions about the intrinsic identity of the fabled Chinese export machine: Is it them, 

or us? Think Apple. The supply-chain logistics of globalized production platforms 

distort bilateral trade data between the U.S. and China, and have little to do with 

the exchange rate. 

In short, the Chinese currency is not the corrosive problem that you in the Congress have been led to believe over the past 7 years. By having the wool pulled over 

your eyes, you have missed a far more important story. Rather than vilifying China 

as the principal economic threat to America, the relationship needs to be recast as 

an opportunity. That’s especially the case in a weak U.S. growth environment, 

plagued by unacceptably high levels of unemployment and underemployment. We 

need to spend far more time in trying to come up with new and creative solutions 

to this daunting growth problem. Related to that is the need to think of how China 

can become an important part of this solution. 

For starters, this requires an honest assessment of our own problems. Due to the 

recent crisis—and the years of excess that preceded it—America’s growth calculus 

has been turned inside out. Over most of our modern history, we have relied on internal demand as the sustenance of economic growth and prosperity. That approach 

is now in tatters. The largest component of U.S. aggregate demand—the consumer— 

is on ice. With households focused on the postcrisis repair of severely damaged balance sheets, inflation-adjusted private consumption has expanded at an anemic 0.6 

percent average annual rate over the past 17 quarters. Moreover, consumer 

deleveraging has only just begun, suggesting these headwinds are not about to subside. The U.S. is in desperate need of new sources of economic growth and job creation. 

Exports top the list of possibilities—a view underscored by Nobel Prize winning 

economist, Michael Spence, in a recent comprehensive study of America’s job chalVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00033 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
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2See, Michael Spence and Sandile Hlatshwayo, ‘‘The Evolving Structure of the American 

Economy and the Employment Challenge’’, a Council on Foreign Relations working paper, 

March 2011. 

lenge. 2 There are grounds for encouragement that an adaptable U.S. economy may 

already be rising to the challenge. Merchandise exports have now risen to a record 

of nearly 10 percent of our GDP—up dramatically from the 6.5 percent share prevailing a decade ago (see, Figure 2 on page 14, ‘‘America’s Opportunity: The Export 

Revival’’). The Obama administration has set the ambitious goal to double U.S. exports in 5 years. But with trend export growth to our largest external markets— 

Canada and Mexico—hovering at close to 3 percent over the past 5 years and stagnation long evident in Japan and now likely in crisis-torn Europe, America’s exportled growth agenda will need to turn to new markets. 

China could well hold the key in meeting this challenge. It is now America’s third 

largest and most rapidly growing export market. There can be no mistaking its potential to fill a growing portion of the void left by U.S. consumers. As such, Chinese 

domestic demand—not its currency—should be featured as a prominent element of 

America’s new growth agenda. Yet congressional enactment of anti-China currency 

legislation could backfire in this regard—undoubtedly triggering retaliatory moves 

by China that would immediately choke off shipments to America’s third largest export market. You in the Congress must be vigilant in guarding against this risk. 

The key to realizing the opportunities of America’s new export-led growth agenda 

lies in market access—specifically, access to China’s future sources of economic 

growth. This is precisely the time to focus on this issue—as China’s own growth imperatives shift away from exporting into weakened U.S. and European consumer 

markets toward sourcing the demand for its own pro-consumption rebalancing. Unlike Japan, modern Asia’s first growth miracle, China is far more likely to satisfy 

this incremental consumption growth from foreign production. Chinese imports have 

been running at 28 percent of GDP since 2002—nearly three times Japan’s 10 percent import ratio during its high-growth era (1960–1989). As a result, for a given 

increment of domestic demand, China is far more predisposed to draw on foreign 

production. 

As the Chinese consumer emerges, demand for a wide variety of U.S.-made 

goods—ranging from new-generation information technology and biotech to automotive components and aircraft—could surge. And this plays very much to America’s competitive strengths: Capital goods and motor vehicles products currently account for 42 percent of total U.S. goods exports—the largest category of overseas demand for American-made products. The key for U.S. trade negotiators is to make 

certain that American exporters in our leading industries have fair and open access 

to these new and potentially enormous Chinese markets. 

A similar opportunity is available in services. At just 43 percent of GDP, China’s 

services sector is relatively tiny when compared with other major economies in the 

world (see, Figure 3 on page 15, ‘‘The Potential in Chinese Services’’). Services are, 

in many respects, the infrastructure of consumer demand, and the Chinese services 

share of its economy will only grow in the years ahead. By contrast, the United 

States is the world’s quintessential services-based economy, with much in the way 

of process design, scale, and managerial expertise to offer China. There is enormous 

scope for America’s global services companies to expand and partner in China, especially in transactions-intensive distribution sectors—wholesale and retail trade, domestic transportation, and supply-chain logistics, as well as in the processing segments of finance, health care, and data warehousing. The recent Strategic and Economic Dialogue made significant progress in opening up Chinese financial services 

to increased foreign investment. Attention now needs to be turned to nonfinancial 

services, as well. 

The U.S.–China trade agenda must be refocused toward expanded market access 

in these and other areas—pushing back when necessary against Chinese policies 

and Government procurement practices that favor domestic production and indigenous innovation. Some movement has occurred, but more is needed—for example, 

getting China to sign the World Trade Organization’s Government Procurement 

Agreement. At the same time, the U.S. should reconsider antiquated Cold War restrictions on Chinese purchases of high technology-intensive items. 

The good news is that important progress was made on both of these counts at 

the just completed May 2012 Strategic and Economic Dialogue with China. As such, 

the focus must now shift to follow-through, implementation, and enforcement. Both 

of these breakthroughs have potentially important implications for the Chinese 

piece of America’s export-led growth and employment agenda. 

The bottom line for a growth-starved United States: Insofar as America’s economic 

relationship with China is concerned, the opportunities of market access far outVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00034 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
31 

weigh the misperceived perils of the currency threat. The time has come to deemphasize the latter and focus on the former. The long-dormant Chinese consumer is 

about to be unleashed, providing new markets for all the world’s major exporters. 

This plays to one of America’s greatest strengths—our zeal to compete and win 

share in new markets. Shame on us if we squander this extraordinary chance. This 

is not the time to dig in our heels and cling to the same timeworn approach in our 

trade relationships with China. We need to return to the high road of economic engagement and avoid the low road of the blame game. 

Accordingly, it is also time to rethink the basic thrust of our Economic and Strategic Dialogue with China—the subject of this important hearing today. Specifically, 

we need to recast this exchange as an integral piece of America’s new growth agenda. The emphasis should be placed on opportunities—not on hollow threats. With 

respect to China, my recommendations are simple: End the currency fixation. Focus 

on market access as the key to U.S. growth and jobs. 

Thank you very much. 


e d 

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1995 1997 1999 2001 2003 2005 2007 2009 2011 1995 1997 1999 2001 2003 2005 2007 2009 2

So ... "", Int" m"tlOn,,1 Mon",..,y Fund. 2012 i5IMF !O,...,.5I 

Yale JACKSON INSTITUTE FOR GLOBAL AFFAIRS 

2 . M e xico 197 .6 ' .7 3 . China 103.9 15.6 

4. Japan •• 2 0 .4 

6. U.K. 66.0 ' .0 6. Germany 49.1 7.' 7 . Korea 43.' , .. 

8. Brazil 42.9 16.3 

9 . Nelherlands 42.8 •

•• 10. Singapore 31 .4 "'a 

Average a n nual export grOWlh : 

2005-09 

Yale JACKSON INSTITUTE FOR GLOBAL AFFAIRS 

-

--

Kore .. 1""1 .. T ......... " J " p"n 

Yale JACKSON INSTITUTE FOR GLOBAL AFFAIRS 
35 

PREPARED STATEMENT OF C. FRED BERGSTEN 

DIRECTOR, PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS

MAY 23, 2012 

Toward a G2 

I have proposed since 2004 that the United States and China create an informal 

G2 to help steer the world economy. The reason is simple: progress is impossible 

on most important global economic issues without agreement by these two global 

economic superpowers. Examples including exchange rates and the international 

monetary system, the world trade regime and climate change. (The one notable exception is financial regulatory reform, where China is not yet an important player 

so most decisions remain with a subset of the membership of the Financial Stability 

Board.) 

There are now three global economic superpowers, the European Union along 

with China and the United States. But Europe, or even the more integrated 

eurozone, speaks with a single voice on very few issues. Moreover, its current economic weakness limits its influence on most topics. So a G2 is the only practical 

possibility for achieving effective global economic leadership. 

A number of other countries, including a growing number of emerging markets, 

are of course important as well. The G2 is not intended to replace the G7, G20 or 

the formal multilateral institutions like the International Monetary Fund and World 

Trade Organization. Its goal is in fact to make all of them work better. But even 

the G20 is too large to function effectively so a smaller steering committee is needed. 

The G2 should be completely informal and indeed unannounced, or even acknowledged, by the two countries. As the Nike ad says: ‘‘Just do it!’’ They should forge 

close working cooperation on the whole range of global economic issues, which is essential for achieving progress either on bilateral problems or in implementing their 

global leadership responsibilities as the world’s two largest economies. 

The most overt and visible step toward creation of a G2 is the very frequent meetings between President Obama and the top leaders of China, President Hu Jintao 

and Premier Wen Jiabao, who have gotten together on average every quarter since 

President Obama took office. But the Strategic and Economic Dialogue (S&ED), following its predecessors, the Strategic Economic Dialogue and Senior Dialogue of the 

Bush administration, is by far the most extensive institutionalization of the concept. 

The S&ED brings cabinet officers together once a year and has launched ongoing 

dialogue among many groups of officials on many topics. They are learning who to 

call in each other’s capital to address key problems, and how to deal with those officials, a central ingredient in international economic cooperation that has long ago 

been accomplished across the Atlantic and to a degree across the northern Pacific 

to Tokyo. 

I thus believe the S&ED is a crucial component of U.S. (foreign and national security as well as economic) policy and must be continued and indeed strengthened. Its 

ever-expanding agenda of topics and discussion forcing, if not yet action forcing, nature are extremely important. The Administration should be congratulated for the 

serious attention and priority it has attached to the Dialogue, and it should continue 

and accelerate that focus in the future. Any successor Administration should do so 

as well. 

The Currency Issue 

Abstract pursuit of a G2, however important, is unlikely to win widespread support, however, now that the S&ED has been operating for 3 years. Have there been 

tangible results that suggest beneficial practical payoffs from the exercise and from 

the associated U.S. policy initiatives toward China? 

The dominant economic issue of this period has been the extensive currency manipulation by China. For at least 5 years, the Chinese authorities blatantly intervened in the foreign exchange market by buying $1–2 billion every day to keep the 

price of the dollar high and the price of their renminbi (RMB) low. This produced 

an enormous competitive advantage for China in international trade, a current account surplus that exceeded 10 percent of its GDP in 2007 and an unprecedented 

buildup of almost $3.3 trillion of foreign currency (largely dollar) reserves. 

The United States has thus rightly focused on this issue at every meeting of the 

S&ED as well as in many other contacts with the Chinese, both bilaterally and in 

multilateral forums. In recent years, it has correctly imbedded the currency manipulation per se in the broader context of the need for China to rebalance its development strategy away from export-led growth, featuring unprecedented investment 

36 

levels (almost 50 percent of GDP) and repressed domestic financial markets, in the 

direction of relying on domestic demand (especially consumption and services). 

It is now apparent that the U.S. strategy has succeeded to a substantial degree. 

China’s global current account surplus has declined to less than 3 percent of its 

GDP. This is primarily due to the rise of about 30 percent in the trade-weighted 

value of the RMB since 2005, including its climb of more than 40 percent against 

the dollar. My colleague William Cline’s new analysis (attached) suggests that China’s current account surplus could even disappear over the next few years if it permits the RMB to continue strengthening at the pace of the last 2 years since upward appreciation recommenced in June 2010 after a hiatus during the global recession. 

I believe that the S&ED has played a very useful role, and added an important 

pressure point, in persuading the Chinese authorities to gradually reduce their beggar-thy-neighbor currency policy. China of course had to come to believe that such 

a change was in its national interest but the S&ED, and related U.S.–China discussions, have been extremely important in at least two respects: convincing the Chinese of the (very powerful) case that a stronger exchange rate was in their own economic interest, and emphasizing constantly that China’s (exceedingly important) relationship with the United States would be significantly affected by their behavior 

on this issue. 

The S&ED thus passes the critical test from the U.S. standpoint of having 

achieved, at least to a substantial degree, major progress on a clearly articulated 

central goal of the exercise. They will have to remain on the case because we cannot 

be assured that China will let the RMB continue rising, which is required to avoid 

recrudescence of the problem, and the rate has in fact remained essentially flat for 

the last 6 months. Moreover, it would be desirable for the currency to rise enough 

(and China to rebalance more broadly enough) to fully eliminate the current account 

surplus and indeed convert it into a modest deficit. There remains the vexatious, 

if economically irrelevant, issue of China’s continuing large bilateral surplus with 

the United States—which (on our numbers) exceeds their total global surplus (on 

their numbers) but is particularly misleading because only a small fraction of the 

value of exports recorded as coming to the United States from China is actually 

added in China itself. But I believe that the progress on this very difficult and highly contentious issue marks both a major step forward in U.S.–China economic relations and a signal achievement for the S&ED. 

Other Issues 

There are of course a number of other important economic issues that the S&ED 

should help resolve. A true G2, for example, would play a central role in addressing 

two of the key macroeconomic issues now facing the world economy: 

• resolution of the euro crisis and, specifically; 

• creation of additional lending capacity at the International Monetary Fund to 

reinforce the efforts of the Europeans themselves in financing adjustment programs in the eurozone and to help other countries that are sideswiped by the 

euro crisis. 

China, as the world’s largest holder of foreign exchange reserves and a major surplus country, should be a large (probably the largest) contributor to such enhanced 

lending capability at the IMF. I believe the United States, as the world’s largest deficit and debtor country, is correct not to contribute to that facility itself. But the 

United States should be pushing hard for the creation of a maximum ‘‘firewall,’’ in 

light of its own huge interest in a stable resolution of the crisis, so should be urging 

China to lend at least $500 billion to the Fund (and offering support for a corresponding increase in China’s role in that institution). 

There are fleeting references to these issues in the fact sheet on the S&ED distributed by the Treasury Department. However, there is no indication that they received major attention and Under Secretary Brainard did not mention them in her 

report of May 16 to the House Financial Services Subcommittee on International 

Monetary Policy and Trade. Surely the world’s two major economies should seriously 

address these pivotal global issues in their economic dialogue. 

Many bilateral, including trade, issues must be addressed as well. The S&ED apparently covered an impressive array of such topics. It is particularly important that 

China has agreed to negotiate new international rules on export finance by 2014. 

This is an important aspect of global competition that is often distorted by national 

subsidies and China is not a party to the current international agreement that is 

centered on the OECD because it is not a member of that organization. 

It will remain difficult to successfully resolve the large number of bilateral trade 

conflicts between the United States and China, however, as long as they continue 

37 

to be addressed in a purely ad hoc manner. There are some cases that can be taken 

to the dispute settlement mechanism of the WTO, as both countries have done, but 

most of the trade issues cited in the S&ED fact sheet are not subject to agreed rules 

of the road. Disagreements are thus likely to fester, eroding both the bilateral relationship and, in light of the leading global position of the two countries, the international trading system as a whole. 

I thus believe that the United States and China should consider launching negotiations for a bilateral trade agreement to provide a comprehensive framework to 

deal with the daunting array of economic problems between them—a list that is 

likely to continue growing as the economic relationship deepens further. Maurice R. 

Greenberg, the long-time CEO of AIG (long before its collapse in 2008) and one of 

this country’s keenest and most experienced observers of China, has proposed that 

such an effort could aim to develop a U.S.–China free trade agreement over a period 

of a decade or so. Another alternative would be to look for an early occasion to bring 

China into the TransPacific Partnership, with its high standards for governing trade 

and investment in the Asia–Pacific region. 

Any such effort would represent an extension of the G2 concept into the trade policy area, as inevitably must occur at some point. The S&ED could productively begin 

that conversation, which of course carries major foreign policy as well as economic 

dimensions. It is already addressing possible components of a broader trade agreement such as a Bilateral Investment Treaty, Government procurement and reform 

of State-owned enterprises in China. Building on its considerable progress to date, 

the S&ED has a rich potential agenda for the years ahead. 

38 


HUIII!l PlIH 

Projecting China's Current 

Accou nt Surplus 

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"".1, ..... .,o";r>«! ... h<n ""ly world growrh;' inclu<kd. 1h< 

""im.r<d "'lu";"n io: 

I) II"Ofl'KCA • .j6,81 -0,410 R'L. 0.269 P .0,621 T: 

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MUMlEt'lIH 

T.blt' {ompo.llion 01 tIN ",",u<;!lon I" If" "'~"I 

."oum ""plus f,om 1001-11 (p<>r<.m 01 

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a.-,..,~. -IJI 

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lO'Ip><IoI .... _.....,.- _MI 

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...... _1.11 

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_I> fro", m.- ",,,,,,,,;.,n.J bnQ .. ,.... .f z007 '" Ut< ...".-

~<i''''1Y y<" of 1011 For;1> 1"". the n ..... ''''''d ,,~ ,10< 

w.rpI .. t,..., .. " ... .-.1 !.OS J'<'''''' ~fGor.,.., ..... fnur-

)'<"'o,io""",1. In the moio ""ou,.., ,),0, "" ,nR_of,,,,,," 

I'm: ia~um<<> 1IlIOILDU to -6,2-1 F"""'" of COP. I """'" 

non ,ft" .. ..,..JIn- ,bm III< ",tal oil.",,,,!! R"dlKtion br '" 

"""plain<J I 13 f""'<'"'" of COP Thl> ..... rloiood 'h""" 

.,..... the 1.10>010"'1 ,om of ,b< 4i~", 1>1 ........ the 

j>1<&!<d .. d ",<WI ,",tal...., U\ ~OO7 ( .. dt<pt«li<....tJ >lid 

10) I ("""pmbctN) .............. ~~"'" j . 

ToIIlr ...... ,n<I..dt., .... of .I,mu" ... """",,", r... "'" 

,mp"" of "'" n;ch.ni;<" , ... . 0<1 fomp~, .h.>-o'o in 

"""''"'''- In rb~ c.oc. ,I>< =h"V .... imp"" p">mnr, ~ 

..... -OJ J"'fUU' .IGOr fo.r. I pn<m' rnl <ll"tctiIT ",pn--

"u, ... ,I>< p""""""" od in ct""..,.j WOlli ...... IMI h), 

Th< IS ...... «T" ,iI< 'n "" I~ ... 1 .... ", .. ,>1< ......... 

f,om 2007 '" 2011 ,b .. ,.....,_. ml",""" "f5..4 P<"""" 

.fCOrin .... ,"""'" 000>""' ...",1"" .bo., tII ..... lou"''' .. 

lust .. ,n II>< m';n ,..,; ...... 

\V~b ""'f'«' '" i","'P , ,b< ml..,od-f<rml 'P"". 

f.o"ioo of duo inll","",~ ,n "'l...ooo I may fail '" ap' .... 

.... ,W!\ ...... ~ ,I&c, of ~li 1"" of >low "UtlJ gr<lMb, 

h«.o ... ""'r "" IOrrif" V"~'" uti' fo, ,10< l"'>' in qLJr>' 

"". iI i!!cluolN. RnI ~ of "",IJ proJ"" ., .. ..1:« 

oo"'V '''''' ....... ......,.- of ;':<4 ptm'fl, =....u,. i" 

21JOO.411 boto.ly 154 f""'"n' .. "" ~Ir ,n 100II-\\ UMF 

201 n. C","",-" ,"1 ........ tuI rd",rio" '" I 1 I""'<i", .... 

NU,,.,,... wt>I1d '""pu''''' 7 p<>Crn1 I""" ,n Zf)11 ,.'" 

;, " • ..Jd fl.", Iomt If """", b.J ,,,,,"n....!" i<> 2llOIl4I7 

AlW 1~11 

... !c, Af'PI!,n~' pl=h~ '""",," <"l.o.rioi,)· oll.~ 10. ",,110 

",,"wi ,.,OU"'· ... """'. '" 1011 rll<l<v<lof .. p"", .... "w 

h .... """" IO, ~ 1,,",«"1t ~'~'" do .. """"..10"«<1""" 

on<f<lll<Olt dtJ,...-u '0 .Ill9 bi ll"," ("""" wI....-i«ol 

0' ll""«<n' 0( 1011 GD~ "Ill< .I,,,,,,,,,," <>rim..., .. Ib .. 

"""b l.rqorI rh,. ,hi" "'l"""" ""'""'" io ,I>< ~ of"", 

i .. p-"" 0' "" ~",,-rIo,," '. p.b.Il ~_"'. -n.. ' .. 0 .. , of Ih< 

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"'""m ..... 

o..-r.U, ,.!:ok ~ inr!;<o\In ,h .. ,he- loT" "","",.,r tIr< 

dt.."iiAt 10 Chi.,', <,,,"',,' 000>"", "''f'" h .. Iottn ,Io<"f'prt' <i.""" ofi. oc~ ,,'" Slugido ""rid ,rowth .... pl.ytJ 

• ..... ...u....J III lot ""If ......Iut in ,lot "Um.teI bokd 0. 

"l"'""" 1 b", , hit ..... iwlf .. lug< .. rht ~h"'F ,lit 

imf"'" ;" ,1o<.!1mIaOW ."im ..... Tn , m"'" ......rltr ~ ..... 

• """S o;1 ""ron b;U boo .... fl.or«f. "'I. ..... ;n ~Oll . .. 

did ,lor ""illU~1y Iotor ft,...,. on FoMgI....,,,. TIl< loft .. "", of,,", «clung< "" >4<> "'pl ... cl,", ,Iotrt 

.. ","'" ..II"' ...... ' io """ pip<li1lL 1bt fi"li ttdwog< ..... 

";gn.al "",,"Iyin; tht f""'ll<,.,l O"«\l", .. to fig ... 3. boc, .... 

O~tq ll l U_lt ~ hl111WtS l h llb. 

I.:u,tl\ ItllJfJ 0' I .. . uUU '" Ohl.·1 

illmnl 'HIIIIBt 19 PI~\ hu tun I~' 

'~~f'rhlltft of (tr "fh~!rt' rI' •. 

..r .... I¥. ~ 1b< .... ''I:'" futl((loj-IO, <lit iod ... (IIU, 

Th< .. O' .. ", ronrl><t .. 11I9i11l\111 ,.d. ""'...., .... in rM 

uhk.1O 111>.1 in .... Iir""", .... rI,.ofZ<lIl.s., ...... ... 

.. ","", 1.7 p"""'.' ,""""" mI 'l'F"~'''''" '" .... p,!""l i",, 

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...." d-...d.loo.., ,lit ""'''''I~ ... .u.J'' ,ht '"n .... n,,,,, .. i., of m. '"rfO'" .., ""'" 2 .. 3 p<T<m' .rCOP. Th' 

Iwd tn/lurn<r "",,10 1>o ... .-I:in' 'Pinlt ,ht 0 ... '><nd ,ii., 

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Nminp "" r ... 'P ....,.. b'" wmJd h< "'0'''''''' h)' >It)" 

tr",d -..d Iu,h« oil Unf">'" 

Cl-. •• \ <ormo' """~"' b.1.r.r.«- "" .. f"'r«O<d """! "'l~" 

""" 1 f", ,b< "n"," "".""'1'.001."",,,,,, co""'., """'''''' 

(NONKCA) ..-.d ,hm ..to;"" i. "1''''"''' p""","'" of "il 

node- ,ouI "" ('1'".01 ..... "", b.I>nrn, 
44 


HRIl 1~11 

Tlb!.5 P",joo<tlon 01 1M non-oM non-upltol-_ 'ri<n 

<:urrenlu(ounl!NONkCAI 

_. ~ ...... 

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---

__ ""'_ ... _1<>00_ .... ' ... )01'1 

T.b106 P",joo<ttd net Import. 01 011. 101 1 -17 

- ~...,"'pt<m,I - - ." " ." .. .. " ." " " .. . "" .. .. .. , 

.. " " .. U 

"" " .. .. 

''''I~~ 1I. U~U~I • .t ~.'O'\IO 

T .... d .."oru <1< ......... ,,( , rtoj<'C'''''' 'h"'"," 2017 ,,[ Iht 

tJO.'<KCA 111"""'" fi ... , .... '" rk,," ILo, ,011"" uf 0" .... 

COP. o-:! 0J1\ .... ..,,0.01 , .. ...., .... 'It .:011 (~6.SC 1011) 

""d .h<n ..,plY'"J W P'"I"'''"'''''' glll_.11 p.uh r.~ doll", 

COP '" Iht Sop ... ",I"" !Oll In'<tn"'uIUl Mo",,,!)' Fuod 

(lMf) 't'.,u Et_" o.W (.a1J .. mplr ='l"'lur.~ .. 

1017 ~"'" 1016: IMF ~ll) 

no.,. ~ ",ill <",h'ng< "" ,.,;01> ... ,,,11,,,., .h" ohnt 

.. no f"" h .. :h"g<" ,t.. r..l..r",,,,, .... Ii"'" .......... "" 

,. , .. fin, ...., """"hi M !Ou. World V".,h " "';Irk< 

""'."'V"''' ~ ~ ... IMF (11111)....", Ih" ,t.. .. '''n .... 

' .... 1(6 ~ .... - -.. - -~ '01,' '. W 

"" '" ~ ,~ .. ,. 11M ~ ill 

1115 m ~ 

"" ., ,~ ~ m '" 

>t' "J..:.J" 0] pm'.' io lOll.lllO 0.6 P"""" I" lOU 

h»<'d "" m.mo"""",,,WEO up.bt«I\lnOl,bj} 

'Th.:1< , .. did"" I""" NONKc;. hy """u, 1.61"'1«1" 

of l:or frort, tho .lII11 ,..jd.t...l "" ;m ...... 1014. b.r.,... 

,1" >..,,101 ri ... bo<\ ,~ghdy obo,.,. tho: lO ll !"",,,,, ...reO? 

bj 1(117 Th< .. "",,~f 'hi>,..m .,e Iht f."hn,ppnd"""" on 

"., 1wd,.,1 ""'~ nr< ,.'" (,lI< p;p<!in< <If.~, n....J obo,<), 

(Oft Iht_ h",d. '<nUl 'h< nrM """J. on ""00""'. fo,,~ 

pnit>d .. . "hoAr "" ...... 'PI''''~ m'!dy 0"",' "",h ot/ ... 

1.:<00. .., ..... _ ,_100_' ...... "1:"'1011 ... _ " h.lllH 
45 


~""II "11·/ 

lW US £.onsI 1""'-_ ~ lElA 101I~1 .... 

f""'itU«I rio< oil ,..-I ..... .-I impor .. f« 1M> ...... 

.. ubi< 5, !.nl"""" If< "'p«oni .. _ r.- 6 ...... NmIo 

f"" "", .. lOll ... &.9 .. .n;....t-d& I""'darhrll'll7 11>< 

• ....,. .... proj<'<" thr " ... pri«JioIIpon«! oi l f<It .... 

u.,,1'11 s. ..... , _Men b .",,1-..1 """ .. ",.liar,,', or,~ "MOl 

prK.- (EIA IUIlI Thoo p<lC<" iI "p«....J .. """"" .",h.nc<i 

• 51011"' ........ ,)tI11 .. d .......... '" itl1by:!!l11 

Moki,r"",...,.~ ""' ..... p<i« bj' ......... "'Iunrio 

1""',.,.)"ot\oII .............. """"" .. ~tupn~ .... ..aI .................. !Illlnn~ ..... rdn_ 

mJt.iIIioooo) Tbt .... _~ ••• t.-...., ......... 

...,..wa of....,.., ,'*--. pn;< ~ by duI.-

OHIl2.) lID ..... " .... ..om. ... fChi",', "" 001, .. ,... 

• .&10< tllru"'" 1017 

1lon. ~ • llriki"ll ""'''UOCY '" ,t.- ,,,.I,,,'lI .. 110"" 

..r ,b. <0"" ,I "" o~ import nb ... GOP. II >lIP..,. .... 

15 ram>' "t>DP !bloop.... .... pniod &n ...... 001 

...,.... ...1 __ ....... ~ p<t<QI ...... rt.. pmo<I, .001 

.... ..-..... J.4,........ .......... ofOwu·. GOP ... ... 

npIdIr ... dint ......... 1" iI tbr ..... of tbr .. ...... 

........ GOP n.. ,"" _ ... don. ... "" J CD~ non 

........ 11(11'''': .. ,,_ 1011 .. .lllllllo1ok-S) 

tAl'll.lS-rv,,. 

rn.,oo:_ of 01 .. do.ma 01 nl>1r 1 ........ ,... ..... Nwo 

f,n """"''"1 .... w...a .. ap;t>I InY"",lW .... al,... 

r-p UOIi_ ..-I .t.. pn." ,... nIIr .. ~ r... 

u.4-. pi. ok ......... f ..... __ ",.1 ...... 

• ,... ....... .".... f"'«",,".ouIlo.A..;o. .. "'" ""'" 01 

"IU''I'ld..a ... , ...... ,.".f .... k) .. " ..... 11 ~oI>iI'li<I. 

wt.i<~ "",J\ ., 711""""" F<!< t':I ...... aI ........ ,lor ,0.:1. 

)~ .... "", .. "Iu,J, ,lit p .... _ T<".' l<-..l .<Ii""..! for inll>-

,jo. lo1u. ""'" wi'" ",,1)0 • , f"'In'" >II ... ). pi .. ,lit , .. "''' 

_., .. pi.. """ .I.! ...... of .. _d CI ... , I ............. 

_ .... .dd, ... ,.-· 

W"~~ ....... "' .... ...d!oIlomp_ ....... _ 

"1LwI ",*"..... ,... ... <Iot ...... ..1 """'" Ii>. .. _ 

... A! ..... "'."I. ............ _.it)lIIoa..Il, .. _"'_",_._llII'-'''''''' __ UJ; _a...I'I~ __ IJI"-'''','''"", __ 

_"'J_,"""'~""'_~"_tJ_IIIII.':.l 

7.~ .. "'''''_~_._..,j ........ ~_r ..... 

.. _._ .... _u. __ ", 

-

_1ooIiIop_mt_~""~""'_" .... --" .. _.--..-__ .. 4 

.. _----

HIli 1011 

Y"" .... ~'--' by _ukJpI)1 ...... _k> by do.._ 01 

........ hil......,..f .... ~!OI .................. "'"-cI 

..... .. 4 rn<nl~...!'" Fotl>llilic... ....... of ........ 

_ '" dorl«n! ko.I 016.1 f"""""-

lruluU)'. (l\Iu', u~' ~1 HI¥I(U 

.muM fUullll la lIul1lh fiCit 

lhtfll,h JOU, tluI'11t tht ,,,wi., UI 

1.1~ ~.UuAlluul~tll l ,'lllIn 

""-'.If 0 ..... , ' ..... ..,..... ..... ""' ........ .. 

... delia! .......... 1017. *'Pit do<..-... ..... ........ • .-1 .... _,....... (NUn ThtNT1r""" r...... SLt'f 

".1 ..... ... "' ..... "lUll .. U.!V.n_ ...... mJoi~11 

How,,'"'' .... ""' ...... d,fI' .... ,l .. "" of M"" \00.'" ... '"' •. 

info I"""'""dy "'Pnot. >I,ho"i" 1I"".n &rno>II." 

T,w, ................. "",,...,.._,, .... _ ....... , 

ft .... ,....,.., oICO~ 10< z<lll duwp 1017 Fipr<4 

diIpUyo .......... ,.."..._ ....... dw o<t\J.II .............. . 

For lOll o.mII ,ht ........ , """.". ""ph" ....... '" In • 

'lIIS''' l., 4 f"r«ft,ofGOr 

Tho ""''''' .... ''' ""'''' • P""UI<"nrlj' ~ .... , ewmH ... 0..,' ....,.. """ .. ,1\0 p<nOd 0I100HO born III ... ~ ... 0.. 

WI! ,--, .. , b. OIl .... bop ..... ~ duo oItr 

....... ,.... .. tlr.z<lII·""_br""""'06,."..... 

of GOP ~ J.... ,.... .... ,.....m-. ..... 1 """" of 

GDP .. lOl)..IS ........... ~Jtbr\v<l .... 

~"' .... n<Iunt< .... .orr"""-' 110< io><r<D< to """'" 4 

1'<"'<'" ofCOPior lOl7 ..r..c" .......... p .... of,ht ..... , 

n_< of ,he umd In'" 

)HVltf II~~ nl,,(l~ 

10 Mlt ........... '._ """ .. <DIIId II. ~uII)o ...... .-tbrlrod,....;.c...!io ~7.io ..... of._pJ. 

'_, ... " aIaoIo_ ""~ ...- ...... for 

tbr....,,......,. MIU ODd lOlH, np<><l> of"..... * ......xo """ 11 1 rn<"',.how d.. hd.,.. .. <...I ..... wt. .... 

""I"""..r ,oew!>....J ><I"i<n .... BS f"'K""" If""'"' .... 

,,""..., "I'pli«l., dtr full.,.. .. lOIlluo< ..... ($10') oilt.... nl""'>. 51.9<, "'II .... i~,pt>I'II1. ,)" • .....n~ '" upwnl 

III!pb "" ....... ...d .... "n _""I b> SIM ...... , 

Fo< l OOJ.l1. rIor _.,.. ..... f rt.. -rI- l1li pi> 
46 


HUml/lll-! Hi ll ?Dll 

T&blol ProJe<,td tIOplul .. ,vk .. lbiIioo<oI US do4m) 0«.<, __ 

- .- ~ 

- - - - - ~ ." '" '" .~ '.,\1 ." " " m, ., ." ,. on ·11; ~, ~911 " " ,~ •• ." ". .. -n' "" ~, " " .. ~ 

... '" '" ·u .~ 1.';17 .. " ~, "' .o. m .. ~ ,on ~I! .. .. ~ •• .. "' M .~ ... IJ .. " - ,., ." '" "' - ' .. ',1IK' .. " "u ,., ..,...-~--,-,- , ... ~-.-... ,,"" 

--- T.bl .. p'op.:, .... ,un",,' .«ouM bo I.",~ ,- ~ 

... 

~ 

_ .. -GIJ>I •• ,,-. -, - ~llA .. ., . ~, ~ ." l<IllM ~ -1.0$ ." ~ .,. .. , , . ~. ~" ~ ... .. , '" .,. . ".. l1G) 

... '" -1.'1 ~. '" 1".1 

• o. •• · m 

- ,. 11U 

• OO •• ., . ~" ,m ,., ." "' -Ul .o. ." ~. 

1OOIfCO,._oI ____ '._M._ 

.."J "",i«> .. tho """I '"1ft"' ""'''''fit 1\U'pIuo .... 8511 

I"'<'''!- Appl)'i"z Ihi> .. rio. ,ho """""""",,," .,"""" for 

,ho lQI2 <\OIT',\I """'''' '"'I'lul ",,"1<1 t.. ~191 ~illN" '" 1.3~ 1""«11, of CDr. """" ,hAIl .... ,.bl. ~ p..,j«o"" I') 

l.} J><'f=I' "rGDP Con"""" P""I< 10.>_ ... '" """"dy 

p~ ,It.- 2011 '"'"'"'.0« ... ,,,, ,urpJu", i256 hill .... '" 

19 r=<'" uIGDP." ....... ,~ ,100 ,.oJ. 8 f,ni«tiou> 

..,r 166 f'<"-"'" "fGDP (SI ... Onp .!OIl). On .... ru,.,. of 

"'"'''' , .... ~ 'bm. to. P"""'" ",,,,I .. r'-'h '. <>bit 8 .. d 

~" ... 4 i. 01'''' ~k<I)' '" , ..... (t.. dj,<'<!iu!,"[ ...,,,,,,,"""'" 

,tun ,,00''''' .... ' (n bot .. ,100 ..... "'01) 

Al'lflll"" V' rIIfA~I'I' , 

h " """"I It' """"'" "'" l1J'<' of .01"""""",, '" tho on"" 

f""i«'I(111~ Th< .'" " '" k"",,,,~ b»<rl on "'" mo" 

COII><'''';'' 1"ranK'!<r for .... a<h ... ..- , .... '"'!"'" ""'" U. 

COo< .. J WIlli ......... ClOII»' 'TL.- ... uod i...., aIr ...... ,;." 

r"""""! "n • «>0Ih.u<J "''''''''''''''''' in o.inoo· nclu.r: 

.. !<! .. li<t.,.u"...~,..j ... r<OI,pr"";,,.,n f_J.",20IO 

wh. .. th. Z'''<Tn''''·.' ~""" "1:'" .11 .. "'«1 th< rnhlnl;t ,,,,,,~ 

"""" . .. 01 D«cmt>n- WI!. d .. 1<>1 <ff«u," <l<Jw.gt- ", ... 

..,PR'<) • ..J bj- 4_~ p=nI,IIMf' 10(20)_ Tbi> J'<l'< =,><",!> 

.... 'O.d "'''' .,f 31""""" 

T.bI<· ~ In<! Ii; .... 'i "1"'" Ih<- ..... I""! '0'''''' .. ,,'''"' 

jvoi«tiom ... 1"""""' of CDP fu.- Lh<>< 0.1""""''''''''''';00. 

Wb._ "'" b..d ... ", ... '" ...... ~ ,,......,. 1 )'fI'P'''' • 

1<'111", "'. IWpl ... hl",,,,,.j ,.,,"'. ofGDP\,y 101i rn-" 

irt .... fiJuo<). "PriM rf,< ...... ""'''''''."..-~ "'''' 

""!",,, p.Vam<I<Y .... 1" ,n • hi£h<'r ''''F1u> II Hi P'=",.f 

lllo __ -43_<JGDP ........ __ 

r.,~0<>1 ........ ,.. ____ ., ...... "tllt~ 

... _ .. _' .... ~~ ........ .....,. .. ,IIt._ ...... j~I1."' ... _."h"":OI'~~o( .. 'fNM 
47 


NUIUII PlIH Hil i lW 

Figu,. 4 CUlNIlt I«.~.' bllo.,,", I. percenlof GDP: ol~ 

",pltal JkVi<ts, """".illIOn ",p~II .... u. 

I.d '0,"1 20011--11 Ictllll l .d 2012-1 1 projKttd 

.. ""'" " -a 

.. ~ 

" - . 

• 

-:~~ :: ;::;;:::;::;~~~~:] . , .-

UlillliliiWHH 

«.--- ------""'--"' .. -~(g .. --- -. .....,' ........ IMIIIOOlj,"-C1Om 

GDP '" 101; ('Al,I,. !o '""" en'''' .... Of ,f><""hmv"or 

,ooff>ci<o, in rq"";'" ~ orpI;..;t b .. i, ;, ... "",«1 rio ............ 

dItc, .... oo"'v ,"'" , •• ,"".,., ,II J""IIJI'}'r.:b.u.tryk",j fur 

,he ror oI2tl12 .. d ,,",,, "PP'"'''''''' .. ..... n .. lp.t:<" of 3 

pn«1II P'" iT"'. ,hm , ... ",,, ... , """'",,. ,"';.p '0'. dt&., 

hr U1)6 .• nd It.. .!rDc., «><lIn .t...r, 1 ,.....", of CDr hr 

1017 ("i\it.l1.' f....Jly,..t.rn bo,h .. ";\/III..,,,,,,,IMncd t.-< 

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50 

1 ‘‘U.S. Exports to China Boom, Despite Trade Tensions’’, Keith B. Richburg, The Washington 

Post, March 11, 2012. 2 Export statistics provided by the U.S.–China Business Council. 

PREPARED STATEMENT OF JOHN R. DEARIE 

EXECUTIVE VICE PRESIDENT FOR POLICY, FINANCIAL SERVICES FORUM

MAY 23, 2012 

Introduction 

Chairman Warner, and Ranking Member Johanns, thank you for the opportunity 

to participate in this important hearing regarding the recent round of the U.S.– 

China Strategic & Economic Dialogue (S&ED) and the need to expand foreign access 

to China’s financial sector. 

My name is John Dearie and I currently serve as Executive Vice President at the 

Financial Services Forum, a financial and economic policy group comprised of the 

chief executive officers of 20 of the largest financial institutions with business operations in the United States. The Forum works to promote policies that enhance savings and investment and that ensure an open, competitive, and sound global financial services marketplace. 

The Forum also leads Engage China—a coalition of 12 financial services trade associations united in support of high-level engagement between the United States 

and China, with a particular emphasis on accelerated financial reform and modernization in China. 

Today’s hearing is both timely, given the recent round of the S&ED in Beijing— 

and enormously important. The rate of China’s economic emergence and the impact 

of its integration into the global economy are unprecedented in the history of the 

world’s economy—with profound implications for U.S. economic growth and job creation. 

Importance of Growing China to U.S. Growth and Job Creation 

As you will recall, China’s economy has grown at an annual rate of nearly 10 percent for more than two decades. The world’s 7th largest economy in 1999, China recently surpassed Japan to become the world’s 2nd largest economy. 

Since China’s joined the World Trade Organization (WTO) in December of 2001, 

U.S. exports to China have increased more than six-fold-growing at seven times the 

pace of U.S. exports to the rest of the world. China is now America’s third largest 

export market, and the largest market for U.S. products outside of North America. 

According to a recent Washington Post article, exports to China from almost every 

U.S. State and Congressional district have grown dramatically in recent years. 1

For your reference, I have provided in Appendix A figures showing the growth in 

exports to China from each of the States represented by Members of this Subcommittee. 2 As an example, Chairman Warner, exports from Virginia to China have 

increased 787 percent since 2000, as compared to growth of just 42 percent in Virginia’s exports to the rest of the world. Each of the other states has posted similarly 

impressive growth. Clearly, fair and competitive access to China’s fast-growing middle class and business sector represents an enormous commercial opportunity for 

American manufacturers, services providers, and farmers. 

Let me give you a quick sense of what an expanding China can mean for U.S. 

economic growth and job creation. Last year, U.S. exports to Japan totaled $66 billion, while U.S. exports to China totaled $104 billion. But China’s population is 10 

times that of Japan. If China’s citizens were to eventually consume American-made 

goods and services at the same rate as the Japanese do, U.S. exports to China would 

grow to about $700 billion annually. 

That’s seven times what America exported to China last year, an amount equivalent to nearly 5 percent of U.S. GDP, and nearly twice what we imported from 

China last year—potentially turning a $300 billion trade deficit into a $300 billion 

surplus. 

Perhaps more importantly, if we apply the Commerce Department’s metric of 

5,000 new American jobs for every $1 billion in additional exports, increasing exports to China to $700 billion a year would create some 3 million new American 

jobs. Now, that won’t happen overnight. But we believe that with the right reforms 

in place, it will happen over time. 

Critical Importance of Financial Sector Reform in China 

In our view, one of the most fundamental and important reforms necessary for 

the United States to harness the job-creation power of a rapidly growing China is 

modernization of China’s underdeveloped financial system. 

51 

3See, ‘‘Why Financial Reform Is Crucial for China’s Growth’’, Arthur R. Kroeber, The Brookings Institution, March 19, 2012. 

Capital is the lifeblood of any economy’s strength and well-being, enabling the investment, research, and risk-taking that fuels competition, innovation, productivity, 

and prosperity. As the institutional and technological infrastructure for the mobilization and allocation of investment capital, an effective and efficient financial system is essential to the health and productive vitality of any economy. 

As a financial sector becomes more developed and sophisticated, capital formation 

becomes more effective, efficient, and diverse, broadening the availability of investment capital and lowering costs. A more developed and sophisticated financial sector 

also increases the means and expertise for mitigating risk—from derivatives instruments used by businesses to avoid price and interest rate risks, to insurance products that help mitigate the risk of accidents and natural disasters. Finally, the 

depth and flexibility of the financial sector is critical to the broader economy’s resilience—its ability to weather, absorb, and move beyond the inevitable difficulties and 

adjustments experienced by any dynamic economy. For all these reasons, an effective, efficient, and sophisticated financial sector is the essential basis upon which 

the growth and vitality of all other sectors of the economy depend. 

Unfortunately, the world’s second largest and fastest growing economy is currently supported by one of the world’s least developed and inefficient financial systems. Like a world-class athlete with cardiovascular disease, China runs an evermounting risk of catastrophic breakdown even as it continues to turn in robust economic growth performances.China’s financial sector challenges are many. For example: 

• China’s financial system is very bank-centric, with banks intermediating more 

than three-quarters of the economy’s total capital, compared to about half in 

other emerging economies and less than 20 percent in developed economies. 

• Meanwhile, China’s equity and bond markets remain comparatively small and 

underdeveloped. More fully developed capital markets would provide healthy 

competition to Chinese banks and facilitate the development and growth of alternative retail savings products such as mutual funds, pensions, and life insurance products. And by broadening the range of funding alternatives for emerging companies, more developed capital markets would greatly enhance the flexibility and, therefore, the stability of the Chinese economy. 

• Noncommercial lending—or ‘‘policy lending’’—to State-owned enterprises continues. 

• As a result, the stock of nonperforming loans on banks’ balance sheets remains 

high. 

• China’s banks are undercapitalized and lending practices, risk management 

techniques, new product development, internal controls, and corporate governance practices remain inadequate. 

• Prudential supervision and regulation of the financial sector remains opaque, 

is applied inconsistently, and lags behind international best practices. 

Simply stated, China’s underdeveloped financial sector presents substantial risk 

to the continued growth and diversification of the Chinese economy—and, therefore, 

to the U.S. and global economies as well. 3

China’s Commitment to Financial Reform 

In its twelfth 5-Year Plan, approved by the National People’s Congress last 

March, China’s leadership acknowledged that its manufacturing-for-export economic 

model of the past three decades has left it vulnerable to slow-downs in external demand. China’s leadership now wisely seeks a more balanced economic model that 

relies less on exports and more on internal demand—primarily, a more active Chinese consumer. 

A more consumption-based Chinese economy is very much in the interest of the 

United States. As I noted earlier, a more active Chinese consumer will dramatically 

expand demand for U.S.-made products and services. 

But accelerating the shift to a more consumption-based Chinese economy requires 

a more modern and sophisticated financial sector. Chinese households currently 

save as much as half of their income, as compared to single-digit savings rates in 

the United States and Europe. This pronounced propensity to save is related to the 

declining role of the State, and the fact that most Chinese depend on their families 

and private savings to pay for retirement, health care, and the economic consequences of accidents or disasters. 

52 

4 ‘‘New Push for Reform in China’’, Bob Davis, The Wall Street Journal, February 23, 2012. 5 ‘‘China Premier Backs Blueprint for Financial Reform’’, Dinny McMahon, The Wall Street 

Journal, March 5, 2012. 6 ‘‘Conditions Ripe for China Interest Rate Reform—Central bank Chief Zhou’’, Kevin Yao, 

Reuters, March 21, 2012. 

Activating the Chinese consumer requires the availability of financial products 

and services—personal loans, credit cards, mortgages, pensions, insurance products 

and services, and retirement security products—that will eliminate the need for 

such ‘‘precautionary savings’’ and facilitate consumption. 

This observation was recently confirmed by an important report entitled ‘‘China 

2030,’’ jointly issued on February 27th by the World Bank and China’s Development 

Research Center. The report emphasized that achieving China’s macroeconomic goal 

requires a number of urgent reforms, including ‘‘commercializing the banking system, gradually allowing interest rates to be set by market forces, deepening the capital market, and developing the legal and supervisory infrastructure to ensure financial stability and build the credible foundations for the internationalization of China’s financial sector.’’ 4

Given the unique and critical role an effective and efficient financial sector plays 

in any economy, reform of China’s financial sector is a prerequisite to China achieving its own economic goals. 

Fortunately, China’s leadership recognizes the connection between faster financial 

reform and a more consumption-based economy. In a March 5th speech opening the 

National People’s Congress, Premier Wen Jiabao confirmed that China seeks more 

balanced and sustainable development, stating ‘‘we will move faster to set up a permanent mechanism for boosting consumption.’’ Importantly, as part of the restructuring strategy, Wen also appeared to endorse further reform of China’s financial 

system, stating: ‘‘We will improve both initial public offerings . . . and ensure better 

protection of return on investors’ money and their rights and interests.’’ 5

The same day, Guo Shuqing, Chairman of the China Securities Regulatory Commission commented to reporters: ‘‘Market risk is concentrated in the banking system. Developing equity financing . . . can reduce the burden on the Government, 

and open new investment channels to funds and wealthy citizens.’’ 

On March 21st, Zhou Xiaochuan, Governor of the People’s Bank of China, wrote 

in China Finance magazine: ‘‘Currently conditions for market-oriented interest rate 

liberalization are basically ripe. The People’s Bank of China will actively push forward [with such reforms].’’ 6

The fastest way for any developing economy to acquire the modern financial sector 

it needs is to import it—that is, to allow foreign financial institutions to establish 

in-country operations though the establishment of branches and subsidiaries, joint 

ventures with domestic institutions, and cross-border mergers and acquisitions. Foreign institutions—including U.S. institutions—bring to China world-class expertise 

and best practices with regard to products and services, credit analysis, risk management, internal controls, and corporate governance. 

The U.S.–China Strategic and Economic Dialogue 

To enhance the management of the growing bilateral relationship, President 

George W. Bush and President Hu Jintao established the U.S.–China Strategic Economic Dialogue (SED) in September of 2006. The SED—led by then-Treasury Secretary Hank Paulson and Chinese Vice Premier Wang Qishan—created an unprecedented channel of communication between Cabinet-level U.S. and Chinese policy 

makers, and provided an overarching framework for the examination of long-term 

strategic issues, as well as coordination of ongoing bilateral policy discussions (e.g., 

the Joint Commission on Commerce and Trade, the Joint Economic Committee). A 

central focus of the SED was accelerating financial reform in China. 

Upon taking office, the Obama administration renamed the Dialogue as the ‘‘Strategic & Economic Dialogue,’’ broadening the talks to include other issues such as 

human rights, environmental issues, and diplomatic cooperation. 

Limited but significant progress has been made by way of the Dialogue: 

• China has agreed to allow qualified foreign companies to list on its stock exchanges by issuing shares or depository receipts; 

• China has expanded its Qualified Foreign Institutional Investor (QFII) program 

and reduced the initial ‘‘lock-up period’’ for certain investors, creating new opportunities for foreign mutual funds and money managers to invest in China; 

• China has agreed to allow nondeposit taking foreign financial institutions to 

provide consumer financing; 

53 

7 ‘‘The Outlook for China’s Currency’’, Laura D’Andrea Tyson, The New York Times, May 6, 

2011. Also see ‘‘China Bashing Is Popular But Could Do More Harm Than Good’’, Editorial, 

Bloomberg, April 25, 2012. 

• China has agreed to ease qualifications for foreign banks to issue yuan-denominated subordinated bonds, which will allow foreign banks to raise capital in 

China; 

• China has issued regulations specifying requirements to allow insurance companies—including foreign-owned companies—to invest assets overseas; and, 

• Since July of 2005, the yuan has appreciated against the U.S. dollar by more 

than 25 percent in nominal terms and almost 40 percent in real terms. China 

also recently announced that it would widen its trading band to allow market 

forces to play a greater role in setting the exchange rate. 7

Additional progress was achieved at the most recent S&ED meetings in May: 

• China now has amended its regulations to implement last year’s S&ED commitment to allow U.S. and other foreign insurance companies to sell mandatory 

auto liability insurance in what is the world’s largest market for automobiles. 

• China committed that foreign and domestic auto financing companies—currently dependent on China’s State-owned banks for funding—will be able to 

issue bonds regularly, including issuing securitized bonds. This will help boost 

the competitive edge in China of U.S. auto firms, which are global leaders in 

auto financing. 

• China committed to increase the total dollar amount that foreigners can invest 

in China’s stock and bond markets under its Qualified Foreign Institutional Investor (QFII) program from $30 to $80 billion. This will reduce restrictions on 

the free flow of capital and increase opportunities for U.S. pension and mutual 

funds and other investment management firms. 

• China committed to allow foreign investors to take up to 49 percent equity 

stakes in domestic securities joint ventures, going beyond China’s WTO commitment of 33 percent. China also agreed to shorten the waiting period (seasoning 

period) for securities joint ventures to apply to expand into brokerage, fund 

management, and trading activities that are essential to building competitive 

securities businesses. 

• China agreed to allow investors from the U.S. and other economies to establish 

joint venture brokerages to trade commodity and financial futures and hold up 

to 49 percent of the equity in those joint ventures; and, 

• China reaffirmed its intention to promote more market-based interest rates, 

which will allow Chinese households to earn a higher return on their savings, 

supporting greater household consumption. 

U.S. Institutions Still Confront Major Restrictions 

Despite such important progress, U.S. financial institutions continue to face a 

number of substantial obstacles in China: 

• Investment by U.S. firms in Chinese financial institutions is limited to minority 

interests and is capped. For example, foreign investment in Chinese banks remains limited to 20 percent ownership stakes, with total foreign investment 

limited to 25 percent. Foreign ownership currently amounts to less than 2 percent of the Chinese banking system. According to Department of Treasury data, 

as of December 2011, only eight U.S. banks were operating in China with a 

total of just 76 branches. 

Foreign-owned securities and asset management firms are limited to joint-ventures in which foreign ownership is capped at 49 percent. Meanwhile, foreign 

life insurance companies remain limited to 50-percent ownership in joint ventures and to 25-percent equity ownership of existing domestic companies. 

While these caps were agreed to in the course of WTO accession negotiations, 

the limitations are among the most restrictive of any large emerging market 

Nation and stand in the way of a level playing field for financial service providers. More importantly, they limit access to the products, services, know-how, 

and expertise that China needs to sustain high rates of economic growth, and 

that China’s businesses and citizens need to save, invest, and create and protect 

wealth. 

Such investment caps also stand in stark contrast to the Federal Reserve’s recent decision to approve Industrial & Commercial Bank of China’s acquisition 

54 

8The subsidiary has assets of $780 million and 13 branches in New York and California. 

ICBC, China’s largest bank, already operates in the United States through a New York branch. 

Under the terms of the approval, ICBC, China Investment Corp. and Central Huijin Investment 

Ltd. will become bank holding companies. The Chinese Government owns 70.7 percent of ICBC’s 

shares. See, ‘‘Fed Allows Three Chinese Banks To Expand in U.S.’’, Greg Robb, MarketWatch, 

May 9, 2012. 9The Bank of China, China’s third largest bank, currently operates two branches in New 

York City and a limited branch in Los Angeles. 10 Agbank, China’s fourth largest bank, currently operates a representative office in New York 

City. 

of the Bank of East Asia’s U.S. banking subsidiary, 8 the Bank of China’s application to expand its U.S. operations to Chicago, 9 and the application by Agricultural Bank of China Ltd. to establish a branch in New York. 10

As strong proponents of cross-border trade and investment, the U.S. financial 

services industry applauds the Fed’s decision—but also calls on China to lift remaining restrictions to U.S. investment in China’s financial system. 

Other remaining barriers to U.S. activity in China include: 

• Nonprudential restrictions on licensing and corporate form; 

• Arbitrary imitations of permitted products and services; and, 

• Arbitrary and discriminatory regulatory treatment. 

While China may be compliant with the letter of its WTO obligations, such restrictions and regulations—and the manner in which they are enforced—violate the 

spirit of China’s WTO obligations by creating artificial and arbitrary barriers to 

greater foreign participation. 

With these problems in mind, U.S. effort within the S&ED and other bilateral exchanges should focus on: 

• the critical importance of open commercial banking, securities, insurance, pension, and asset management markets to promoting the services- and consumption-led economic growth that China’s leaders seek; 

• the clear benefits to China of increased market access for foreign financial services firms—namely the introduction of world-class expertise, technology, and 

best practices—and the importance of removing remaining obstacles to greater 

access; 

• nondiscriminatory national treatment with regard to licensing, corporate form, 

and permitted products and services; 

• nondiscriminatory national treatment with regard to regulation and supervision; 

• regulatory and procedural transparency; and, 

• increasing institutional investors’ participation in China’s capital markets by 

further expanding the Qualified Foreign Institutional Investor (QFII) and 

Qualified Domestic Institutional Investor (QDII) programs. 

For a more detailed discussion of the U.S. financial services industry’s priorities 

in China, please see Appendix B. 

Conclusion 

Mr. Chairman, the fastest way for China to develop the modern financial system 

it needs to achieve more sustainable economic growth, allow for a more flexible currency, and increase consumer consumption is to open its financial sector to greater 

participation by foreign financial services firms. 

By providing the financial products and services that China’s citizens and businesses need to save, invest, insure against risk, raise standards of living, and consume at higher levels, foreign financial institutions—including U.S. providers— 

would help China develop an economy that is less dependent on exports, more consumption-driven and, therefore, an enormously important and expanding market for 

American-made products and services. In doing so, U.S. financial services firms can 

help China become a more stable and responsible stakeholder in the global economy 

and trading system. 

It is importance to emphasize that Congress has an important contribution to 

make toward expanding market access generally, and encouraging faster financial 

reform in China specifically, by bringing the same kind of attention and pressure 

to these issues as it has to the relative value of China’s currency. Chinese policy 

makers care what members of Congress think and carefully monitor the content of 

statements, speeches, and hearings as they gauge the state of the bilateral relationVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00058 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
55 

ship. Senator Warner and Senator Johanns, the letter that you sent to Secretary 

Geithner on April 24th urging him to ensure that accelerated financial reform be 

a central aspect of the recent S&ED is a perfect example of the kind of pressure 

that makes a real difference. So thank you very much for send the letter. 

And thank you again for the opportunity to appear at this important hearing. 

56 


THE US·CHINA BUSINESS COUNCIL 

~ ~ W ~ ~ 00 ~ W ~ 

Virginia Exports to China ($ million) 

2000 2001 2002 2003 2004 2005 2006 2007 2008 200!! 2010 2011 

Growth in Virginia ExporU, 2000-2011 

Exports to China: 787" 

Exports to Rest of World: 42" 

ViIJln/e's Top Export Markeb, 2011 VIr; ... la'! Top Exports to China, 2011 

I.Ciloaon 

2. China 

3. Unj d Kingdom 

4.MO!)C\CO 

S.GHmiinv 

$2,9 billion 

$1.3 blnicn 

$1.1 binian 

$901 milUon 

$868 million 

I. ChtmiCllls 

2. W •• I. & Scrap 

3. Computers & EIe<:tfOl'iC$ 

•. Ma.c:niMry (9<ept EIe<:trIQll 

S. Papoer Producu 

$466 mi llion 

$208 mill ion 

$191 mi ~i on 

$152 ml~ion 

$1.0 mi~ion 

China is Virginia's 2nd-largest export market 

02012, Thr US·a. ... 8"~ ...... COIIocA SoIJrc.: us D<",rtmtnt al Commerce 
57 


THE US-CHINA BUSINESS COUNCIL 

Nebraska Exports to China ($ million) 

$380 

2000 2001 2002 2003 lOO4 200S 2006 2007 2008 2009 2010 2011 

Growth in Nebraska Exports, 2000-2011 

E.port~ 10 China: 632"-

Exports to RHt of World: 193" 

Nebraska's Top hport ~rllet~, 2011 Nebr;l$ka's Top ElpOrts 10 China, 2011 

1. canada $2.0 billion 

2. Mmco $l.9 blHlon 

J~p~n $S37 milr.on 

4. China 

S. South ore ~ 

$380 million 

$332 million 

1. Procesltd Foods 

2. Machinery (except E~ct.ical) 

3. Chemicals 

4. Waste & Sc.ip 

$. leatho, & Rel.u.d ProduC!$ 

$239 minion 

$29 million 

$26 million 

$20 mlUion 

$20mlUion 

China is Nebraska's 4th-largest export market 

s.oUfU' us o. nrr,.", of Commerte 
58 


THE US-CHINA BUSIN ESS COUNCIL 

~ t • ~ ~ 00 ~ m * 

Ohio Exports to Chin. ($ million) 

2000 2001 2002 2003 2004 200S 2006 2007 Z008 200') 2010 2011 

Growth In Ohio Exports, 2000-2011 

Exports to China: &38% 

Exports to Rest of WOl1d: 68% 

Ohio's Top Export Markets, 2011 Ohio's Top Exports 10 China, 2011 

1. Con.d. $18.7 billion I. MiChinery (except [Jedfiulj $543 mi ll ion 

2. Me,ko $4.0 billion 2. Compute .. & El«tronia $339mIH~n 

3. Chin .. $2.7 billion l. Tran'portilion Equipment $33.8milHon 

(, Fr;mce $2.4 billion '.Chemluls $301 mlH;on 

5.8,.zil $1.7 billion S. W"I~ & Scrap $265 mlHKln 

Chino is Ohio's 3rd-largest export market 

So"" .: us OojI>rtmtl1t 01 Commerte 
59 


THE US-CHINA BUSINESS COUNCIL * t W ~ ~ 00 ~ ~ * 

Colorado Exports to China ($ million) 

2000 2001 1002 2003 2004 2005 2006 2007 2008 2009 2010 2011 

Growth In Colorado Exports, 2000-2011 

Exports to China: 286% 

ExportS to Rest ofWorld: 4" 

COlorado's Top Exports to China, 2011 

2.M~i<o 

3. Ch1n~ 

4.J~"an 

5. The Netrn.r\.;Ind. 

$755 m " illion 

$635 million 

$393 million 

$317 million 

1. Compute" «< tl«trooics 

2. Wlste & Scrip 

3. Proct'ltd foods 

4. MKhloery (tltept [Ied/ieill 

5. Chemicals 

China is Colorado's 3rd-largest export market 

0 2012. The lIS-Chino au ...... C<>oJtd 

$1S4 million 

5124 million 

$110 million 

S86 mi llion 

$51 million 
60 


THE US-CHINA BUSINESS COUNCIL * ~ w ; ~ ro ~ w * 

South Dakota Exports to China ($ million) 

2000 2001 2002 2003 2004 200S 2006 2007 1008 2009 2010 2011 

Growth in Souttl Dakota Exports, 2000-2011 

bports to China: 975% 

Exports to ReS! of World: 106% 

South Dikota'S Top Export MiIIr1tets, 2011 SouttI Dakota Top EJports to Chinil, 2011 

1. Canad. SS17 million 1. Processed Foods S44 million 

2. Mexico $395 mlltion 2. Miner~I. & Ore. S1 million 

3. ct.in. $70 million 3. Chernial. $Eimillion 

4. JlOplOn $5S million 4. Maa.lnery(except E~fital) 5s million 

5. Germany $43 million 5. Computers & E!KIronia $3 million 

China is South Dakota's 3rd fa,gest export market 

5oIJf«: us o..parlmom 01 c~ 
61 


THE US-CHINA BUSINESS COUNCIL 

~ t W h ~ 00 ~ ~ * 

Illinois Exports to China ($ million) 

2000 2001 2002 2001 2004 2005 2006 2007 2008 2009 2010 lOll 

Growth in Illinois E~ports, 2000-2011 

illinois' Top Export Marltets, 2011 

Exports 10 China: 631% 

Exports to Rest of World: 96" 

lIIinois'Top Exports 10 China, 2011 

1. canid~ S19.2 bliRon I. MKhir.ery(ua.pt Electrical) $.8n minion 

2. Me>i1co 

3. China 

4. Austr'lI~ 

S. B •• ,il 

$5.7 billion 

$3.9 biUion 

$3.7 billion 

$2.6 biHion 

2. W.'t~ & Scrap $670 minion 

3. Crop Productl"" $62<1 million 

4. Comput~" & ElectroniCI' $394 million 

5. Chemlnls $328 million 

China ;s Illinois' 3rd-largest export market 

0 201l, Tho US-Ol"" 6">1 ..... Coundl Sour«: US Orpaftmenl of cammer« 
62 

PREPARED STATEMENT OF DEAN C. GARFIELD 

PRESIDENT AND CHIEF EXECUTIVE OFFICER, INFORMATION TECHNOLOGY INDUSTRY

COUNCIL

MAY 23, 2012 

The Information Technology Industry Council (ITI) appreciates the opportunity to 

provide testimony on developments regarding China’s indigenous innovation and intellectual property (IP) policies at the latest Strategic & Economic Dialogue (S&ED), 

including the Third U.S.–China High-Level Innovation Dialogue, which was held 

earlier this month in Beijing. ITI represents global leaders in innovation, from all 

corners of the information, communications, and technology sector, including hardware, software, and services. China, along with other emerging markets, is a critical 

market for ITI member companies. Hundreds of thousands of American high-tech 

jobs are directly tied to robust trade and business with China. In fact, some of the 

largest beneficiaries of that trade are American workers and businesses, many of 

them small businesses which manufacture electrical machinery and equipment or 

develop software that feeds into the tech industry’s global supply chain. 

The ability to freely access foreign markets such as China and compete on equal 

terms has been critical to the health of the tech sector, and has underpinned the 

United States as an innovative economy. As our economy recovers from a severe recession, it is critical our companies be able to access the 95 percent of the world’s 

consumers who live beyond our shores. More than 75 percent of the global growth 

in the tech market during the next 5 years is projected to take place overseas. Maintaining free and open global markets will support our economic recovery and help 

achieve a shared goal of promoting U.S. exports. Indeed, U.S. exports to China are 

on the rise. Last year, our exports to China were nearly $104 billion, up four-fold 

from a decade ago. Yet, U.S. tech companies operating in the China market continue 

to face increasingly challenging and complex market access barriers. 

To be clear, our industry welcomes efforts of China and other Nations to promote 

innovation. Where we have difficulties is when policies under the guise of innovation 

policy are developed and implemented in a manner that favors domestic companies 

at the expense of foreign players. Moreover, we are beginning to see some of this 

new, creeping protectionism being replicated in other parts of the world. 

Today, I would like to highlight that, despite some rollbacks of China’s problematic policies, many challenges remain that continue to create market access barriers 

for U.S. technology firms. I would also like to underscore our concerns over how 

these policies are being mirrored by developing countries in such markets as India, 

Brazil, Russia, and other major markets our companies rely on for growth. Finally, 

I will provide thoughts on how our industry can work with the U.S. Government 

to address these challenges in both China and around the world. 

China Continues To Champion Indigenous Innovation 

China’s indigenous innovation policies have been around for some time, dating 

back to the 2006 Medium- and Long-Term National Plan for Science and Technology 

(MLP). The chief aim of this plan was to foster the development, commercialization, 

and procurement of Chinese products and technologies. More precisely, it was developed to give a leg up to domestic producers by compelling Chinese Government 

agencies and State-Owned Enterprises (SOEs) to adopt rules and regulations favoring products and services that use Chinese-developed ideas and technologies. One 

of the most notable of China’s policies to advance indigenous innovation was its effort to establish a national catalog of products to receive significant preferences for 

Government procurement. Among the many problematic criteria for eligibility were 

stipulations that products contain intellectual property (IP) developed and owned in 

China and that associated trademarks be originally registered in China. This was 

an unprecedented use of domestic IP as a condition of market access that no other 

country in the world requires, and one that made it nearly impossible for American 

companies to qualify. IP is developed all over the world, not just in one country. 

China has since backed away from this policy, and at the 2011 S&ED agreed to 

revise policies that link innovation and procurement. The rollback of this policy was 

due to the combined efforts of industry and like-minded Governments around the 

world, including our own. But the indigenous innovation policy drive extends well 

beyond the catalogs and is morphing into other similar policies under different nomenclature. 

Indeed, the Chinese Government has transitioned to support indigenous innovation approaches within a new policy under the twelfth 5-Year Plan called ‘‘the decision to develop Strategic Emerging Industries,’’ (referred to as SEIs). In short, the 

SEI initiative can be seen as an important and sweeping program to develop indigenous technology at the expense of foreign industry. These developments come deVerDate Nov 24 2008 12:40 Apr 25, 2013 Jkt 048080 PO 00000 Frm 00066 Fmt 6621 Sfmt 6621 L:\HEARINGS 2012\05-23 REVIEWING THE U.S. CHINA STRATEGIC AND ECONOMIC D
63 

spite high-level commitments made by the Chinese Government to treat foreign-invested enterprises equally under the indigenous innovation program. Despite efforts 

to claim ‘‘indigenous innovation’’ is nondiscriminatory, China’s leadership, as recently as December 2011, has referred to this initiative as ‘‘one of self-reliance.’’ 

Some would say SEI is now the new code word for indigenous innovation. 

In October 2010, shortly before the Chinese Government began to walk back from 

its indigenous product catalogs, it began to promote the concept of SEI’s. In a highlevel State Council decision, the Government selected seven strategic sectors including ‘‘next-generation IT’’ for renewed Government support. China also announced it 

will spend $1.5 trillion on the development of these seven sectors, through 2015. 

Should Beijing distribute the funds evenly among the seven industries over 5 years, 

this would mean China’s tech industry would receive annual Government funding 

of roughly $42 billion each year through 2015. To put a point to it, this support 

would all go to Chinese companies. 

More Than Just Government Procurement Policy 

Our concern is that despite U.S. ‘‘success’’ in rolling back some of China’s IP requirements and procurement catalogs, the Chinese Government continues on its 

path of discriminatory innovation policies in an increasingly sophisticated way. This 

includes a new web of indigenous innovation policies under the SEI banner, continuing lack of IP protection and enforcement, mandating local standards, and an 

alarming trend of using vague national security concerns related to information security to discriminate against foreign tech companies. 

In particular, the trend to promote and favor indigenous IP is a core aspect of 

the twelfth 5-Year Plan and Strategic Emerging Industries policies. The policies 

below are a sampling of those and other kinds of specific troubling policies China 

is now promoting under the SEI program: 

• A new SEI ‘‘core products and services catalogues’’ being drafted by the Chinese 

Government that will likely end up guiding Government and SOE procurement 

decisions; 

• A stated policy goal to satisfy 30 percent of domestic semiconductor market demand with indigenously designed semiconductors by 2015; 

• Reaching an 80 percent self-sufficiency rate for flat panel displays by 2015; 

• Creating a ‘‘Chinese Domestic Cloud’’ based on indigenous technologies and IP; 

• Providing preferential public procurement incentives for domestic information 

security technology manufactured in China; and 

• Providing $1.2 billion in subsidies in 2012 alone to develop indigenous networking technology IP. 

Ironically, while China seeks to foster the development of its own IP, it also remains a persistent outlier when it comes to IPR infringement. Some progress was 

made in 2011 with the launch of a State Council Special Campaign and a related 

State Council level office to increase IP rights protection efforts, specifically targeting the usage of pirated software by Government agencies. There were also positive statements made at this month’s S&ED that indicate China will extend this 

campaign to commercial enterprises. Despite these commitments, the trend lines 

still appear markedly negative. In addition, the United States Trade Representative 

(USTR) in its recent 2011 Special 301 Report alluded to an ‘‘alarming increase’’ in 

trade-secrets theft of U.S. IP-intensive industries originating from China. 

Of equal concern to the global tech industry is China’s drive to develop its own 

unique national standards outside the norms to which the industry has adhered 

during the last few decades. This includes not only mandating standards for the 

commercial market, but also doing so in ways that make it difficult to address problems through trade remedies. For example, while the Chinese Government agreed 

to ‘‘suspend indefinitely’’ at the 2005 U.S.–China Joint Committee on Commerce and 

Trade (JCCT) China’s homegrown WIFI standard WAPI, it is now a de facto mandatory standard. China has managed to do this despite previous commitments by compelling its State-owned telecommunication carriers to include WAPI in commercial 

bidding documents for WIFI equipment. 

Since WAPI, our industry has seen China issue a plethora of problematic tech 

standards. UHT/EUHT is a good example, which is yet again another Chinese attempt at developing unique standards to compete with WIFI. Despite widespread 

opposition from both foreign Governments and industry, and compatibility issues 

with existing WIFI standards, the Chinese Government earlier this year approved 

the standard. UHT/EUHT advanced as ‘‘voluntary,’’ but we have concerns that, like 

WAPI, it will become a de facto mandatory standard once the Government communicates its ‘‘guidance’’ to State-owned industry. Other examples include China’s new 

64 

standards for wireless 4G encryption, or various competing national standards for 

cable TV video-encoding, both of which we fear will likely end up as de facto mandates. 

We face myriad discriminatory opaque market access barriers for global companies looking to do business in China from these technical unique national standards. 

This is in stark contrast to the voluntary, industry-led and global standards which 

have helped to drive innovation and growth for our industry. 

Beyond standards, China continues to increase burdensome testing and certification regulations on tech products sold in both Government procurement and commercial markets that are inconsistent with global norms. We often see overlapping, 

unnecessary or onerous testing requirements related to safety and other product 

testing, most of which is conducted in Government-affiliated laboratories. The farreaching Multi-Level Protection Scheme (MLPS), for example, places huge barriers 

on many high-tech products going into critical infrastructure systems in China. This 

includes unworkable testing mandates and domestic IP requirements. China’s 

encryption rules are perhaps the most onerous. They bar foreign companies from 

selling key security technology that is now the bedrock to ensuring consumer and 

business trust in the Internet. 

In sum, while we have now have more official Government-to-Government dialogues that cover these issues with China than with any other country, our success 

in rolling back problematic policies remains limited. China continues to mandate 

problematic standards, force the disclosure of sensitive IP, and enact preferences for 

local products in an increasingly sophisticated way. It is incredibly important to address this now, especially since such protectionist models are being replicated in 

other markets. 

Mirroring China 

In recent years, the Chinese economic model of growth has become increasingly 

attractive to developing countries around the world. More troubling, a significant 

number of Governments have begun implementing new trade-restrictive policies 

similar to those of China. These policies continue to undermine the ability of American tech companies to compete fairly in critical markets. The spread of these policies has become particularly acute over the past couple of years as Governments 

wrestle with economic and political challenges at home. 

Specifically, these Governments, which now include the likes of India, Brazil, Argentina, and Russia, have begun implementing a number of policies designed to 

boost their domestic manufacturing, high-technology and R&D capabilities, and 

services—often at the expense of foreign companies. We have seen India follow in 

the footsteps of Beijing through a recent national policy that mandates onerous local 

content requirements for electronic procurements. Or, take for example Argentina, 

which has put in place an import-licensing scheme that discriminates against foreign technology goods. Then there is Brazil, which has mandated the local sourcing 

of telecom equipment to be used to build out infrastructure to support new spectrum. 

These types of policies will reverse decades of global growth and innovation. The 

U.S. Government has been successful in reversing some discriminatory policies in 

several important markets. But these reversals appear more tactical than permanent, and discriminatory policies are continuing to proliferate. If left unchecked, 

these policies will lead to a crippling loss of competitiveness and global market 

share for our companies, undermining economic growth and job creation here in the 

United States. 

The Solution: Let’s Get China Right 

The first step in setting things on the right course is to ensure we get China right. 

China is obviously too big to ignore, and as we have seen, has created a new model 

for development which some call the ‘‘Beijing Consensus.’’ The U.S. Government 

should continue concerted efforts to address specific trade barriers, as well as strategically address the broader, underlying trends of protectionism and promotion of 

Chinese national champions. We commend past efforts by our Government to address China’s indigenous innovation policies, and we urge continued support of bilateral dialogues such as the S&ED, JCCT, and Innovation Dialogue. The Administration’s role in pushing back numerous policies, including the indigenous innovation 

catalogs, has been instrumental. The United States should continue working closely 

with the private sector and with other Governments to develop a clear, coordinated 

strategy for encouraging China to adopt global norms. When we have been most successful in dealing with China, it has been the result of close cooperation among Governments and between our Government and the private sector. And this needs to 

be an ongoing, results-based effort. 

65 

At the same time, we need to recognize that China does not speak with a single 

voice, and there are a growing number of actors that have begun to see the world 

as we view it. This includes increasingly global Chinese enterprises that are embracing global standards to help lower their costs to sell their products in overseas 

markets. Or sophisticated consumers that want the same products sold in developed 

markets, not the out-of-date and bland technology mandated by a Government bureaucrats. While it is not always easy to find these actors, and even challenging to 

get them to speak out, it must be done. Real change in China will only come when 

its own citizens realize the negative effects of its industrial policies. 

Towards a Global Solution 

The time has finally come to develop a more comprehensive strategy to defeat 

these policies at a global level, promote the global benefits of effective policies that 

support open markets and nondiscriminatory innovation, and defend growth, innovation, and job creation. This strategy should focus on those countries where retrograde policies are most acute and serious, and are increasingly being recognized by 

developing Governments such as India and Brazil. While this effort needs to include 

a high-level, comprehensive tier of work, it must also be tailored for individual markets. Recent successful efforts by a broad array of private-sector coalitions to roll 

back discriminatory industrial policies in China and India can serve as effective 

models for these efforts. 

This means the U.S. Government, in collaboration with the private sector, must 

communicate to these Governments a clear vision for viable alternatives to which 

they can turn to achieve the results they want in fostering innovation and development. This includes understanding that Governments can and will continue an important role in fostering innovation, such as through promoting STEM education or 

creating tax incentive for R&D. At the same time, Governments must clearly recognize that most innovation comes from the private sector. In the short term, we suggest that the U.S. Government begin to address these concerns at the G20 to be 

held next month in Mexico City. 

Our industry is already working with the U.S. Government to identify and analyze the most pertinent challenges, and to provide other Governments possible solutions. More is needed, however, to raise the level of attention—both within the 

United States and with our trading partners—regarding the existence of these challenging problems and how to combat them creatively. These steps are necessary to 

ensure that American technological competitiveness remains strong. 

Thank you.