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63–053 PDF 2010

S. HRG. 111–764 

FINDING COMMON GROUND WITH 

A RISING CHINA 

HEARING 

BEFORE THE

COMMITTEE ON FOREIGN RELATIONS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

SECOND SESSION 

JUNE 23, 2010 

Printed for the use of the Committee on Foreign Relations 

( 

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html 

COMMITTEE ON FOREIGN RELATIONS

JOHN F. KERRY, Massachusetts, Chairman

CHRISTOPHER J. DODD, Connecticut 

RUSSELL D. FEINGOLD, Wisconsin 

BARBARA BOXER, California 

ROBERT MENENDEZ, New Jersey 

BENJAMIN L. CARDIN, Maryland 

ROBERT P. CASEY, JR., Pennsylvania 

JIM WEBB, Virginia 

JEANNE SHAHEEN, New Hampshire 

EDWARD E. KAUFMAN, Delaware 

KIRSTEN E. GILLIBRAND, New York 

RICHARD G. LUGAR, Indiana 

BOB CORKER, Tennessee 

JOHNNY ISAKSON, Georgia 

JAMES E. RISCH, Idaho 

JIM DEMINT, South Carolina 

JOHN BARRASSO, Wyoming 

ROGER F. WICKER, Mississippi 

JAMES M. INHOFE, Oklahoma 

DAVID MCKean, Staff Director

KENNETH A. MYERS, JR., Republican Staff Director

(II)

C O N T E N T S 

Page 

Hills, Hon. Carla A., former U.S. Trade Representative, chairperson, National 

Committee on United States-China Relations, Washington, DC ..................... 23 

Prepared statement .......................................................................................... 25 

Responses to questions submitted for the record by Senators: 

John F. Kerry ............................................................................................ 48 

Richard G. Lugar ....................................................................................... 50 

Russell D. Feingold ................................................................................... 53 

Kerry, Hon. John F., U.S. Senator from Massachusetts, opening statement ..... 1 

Lugar, Hon. Richard G., U.S. Senator from Indiana, opening statement ........... 4 

Tyson, Laura, former chairperson of the President’s National Economic Council (NEC), professor, Berkeley HAAS School of Businesss, Berkeley, CA ....... 6 

Joint prepared statement with Stephen S. Roach ......................................... 10 

Joint responses with Stephen S. Roach to questions submitted for the 

record by Senators: 

John F. Kerry ............................................................................................ 44 

Richard G. Lugar ....................................................................................... 47 

(III)

(1) 

FINDING COMMON GROUND WITH A RISING 

CHINA 

WEDNESDAY, JUNE 23, 2010 

U.S. SENATE, 

COMMITTEE ON FOREIGN RELATIONS, 

Washington, DC. 

The committee met, pursuant to notice, at 2:38 p.m., in room 

SD–419, Dirksen Senate Office Building, Hon. John F. Kerry 

(chairman of the committee) presiding. 

Present: Senators Kerry, Casey, Shaheen, Lugar, and Risch. 

OPENING STATEMENT OF HON. JOHN F. KERRY, 

U.S. SENATOR FROM MASSACHUSETTS 

The CHAIRMAN. So, this very quiet hearing room will already— 

will, I should say, come to disorder so we can come to order. 

[Laughter.] 

Everybody’s so quiet, it’s amazing. 

Anyway, welcome. The hearing is now formally open. And I 

appreciate everybody’s patience. 

I apologize for being late. We thought we had a couple of votes 

coming up at 2:30, and I was going to try and vote, and then come 

and open the hearing. And then, as is probably normal operating 

procedure here, the votes got put off, and we’ll sort of wait to be 

interrupted, so we’ll try to proceed ahead. 

So, thank you all, including my good friend and ranking member, 

Senator Lugar, for your patience and—before we open. 

Let me just say, at the top of this hearing, that President Obama 

has just taken decisive action in accepting the resignation of General McChrystal. And needless to say, I think all of us would have 

been happier if this distraction, interruption in the mission, had 

never occurred. I’m confident that there are a lot of folks in General McChrystal’s immediate circle who would feel similarly. But, 

it has happened, and we are where we are. And I applaud the decisive, crisp, swift action that the President took in making the decision. I think it was appropriate that he did that, and I think he 

made the right decision, to accept the resignation. 

I also believe he made the right decision in selecting General 

Petraeus to take over that command. The President made it clear 

that no one is above the mission, and he’s not going to accept anything less than the unified effort on this mission, within his administration and within the command structure. That’s appropriate. 

So, I know General Petraeus, as we all do. We have great confidence in him. And he’s a proven leader, and I’m confident that the 

2 

skills that he brings as a soldier and as a general—and also as a 

diplomat—will help to make this transition a smooth transition. 

American lives are on the line, and we simply can’t afford a moment of distraction. It’s time for all of us to be strictly focused on 

the mission itself. 

And this committee will be holding a series of hearings in order 

to evaluate that mission and keep the American people apprised of 

where we are, measured against the benchmarks that the committee has previously established. 

Today, we are gathered to discuss another important issue, and 

one that will be with us, in terms of the relationship, throughout 

this century certainly, probably the single most important relationship that will define a lot of global events over the course of this 

century, and that is, how we find common ground with a rising 

China. 

We’re pleased to welcome two very respected experts: Ambassador Carla Hills and Dr. Laura Tyson. And, I might say, Zbig 

Brzezinski, former national security advisor of President Carter, 

was supposed to be here to join us this afternoon, but he had to 

cancel at the last moment, due to a health issue. But, I am told 

that he will be fine, and we look forward to welcoming him back 

here soon. 

How the United States, in concert with our friends and allies, responds to China’s growing economic might, military capabilities, 

and political influence will significantly shape the international 

order of this century. 

Just about every global challenge that we face requires cooperation with China. Nuclear proliferation, global economic stability, 

climate change, just to mention a few. Clearly, building a positive 

and constructive relationship that can benefit both of our countries 

and enhance global prosperity and peace for decades to come is a 

central objective for all of us. That’s why the administration has 

made an energetic effort to manage and to grow the partnership, 

through the Strategic and Economic Dialogue, as well as dozens of 

Cabinet-level visits to China. 

Still, United States-China relations, it is fair to say, remain a 

work in progress. We don’t always see eye to eye. Our interests 

sometimes differ, and so do our approaches to shared concerns. 

What’s more, both countries still mistrust each other’s intentions 

on issues, such as China’s defense modernization, the future of 

Taiwan, and the situation in Tibet. And there is still a great uncertainty about exactly how we will manage our growing economic 

interdependence. 

It’s striking how much of the story of United States-China relations remains yet to be written. Looking forward, as China becomes 

more prosperous and powerful—and it will, absolutely and inevitably—we should not be surprised that it may also become more 

assertive. The question is how China will use that rising influence 

to shape global institutions, whether our cooperation can increase 

as China’s stature does, and whether China will agree, or find it 

necessary and desirable, to take on global responsibilities as its 

own economic and security interests expand. 

This week’s announcement on the renminbi is a case in point. 

China’s decision to allow more flexibility in its currency is a welVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
3 

come step, and many people would argue that it’s a long overdue 

step, toward a rebalancing of the world economy. But, it was the 

subject of a very heated debate in China itself, and we will need 

to watch closely to see how vigorously Beijing implements its new 

policy. 

Of the two most important economies of the 21st century, ours 

is still the largest, China’s is growing and will soon be the largest. 

So, the important question is to see how we can and should compete, but we also need to make certain that that competition takes 

place on a level playing field. 

We need to do more than just talk about difficult issues, such as 

indigenous innovation schemes, government procurement policies, 

and protecting intellectual property. We actually need to find 

meaningful actions between us that make a difference in the leveling of that playing field. 

In recent days, we have seen positive steps by China to stop the 

spread of nuclear weapons. And I think all of us appreciate China’s 

vote for new sanctions against Iran at the United Nations. That’s 

an important cooperative effort and an important measure of 

China’s role in the world today. I hope that China will now join 

with us and other members of the Security Council in aggressively 

implementing these sanctions, and also in condemning North 

Korea’s recent aggression against South Korea. 

Differences remain, however, and it’s impossible to ignore them. 

We need to work to enhance our strategic dialogue, to increase 

trust and reach new understandings. And this engagement should 

include high-level military-to-military talks. And these talks 

shouldn’t be switched off whenever one side perceives some kind of 

slight, the slight of the moment, if you will, to its particular interests. If we want to build our capacity to manage global crises together, those kinds of talks are even more important when tensions 

do arise. 

Even as we seek common ground with China, we will never 

abandon our values. We have to continue to encourage China to adhere to international human norms for rights—human rights, labor 

rights, political rights—and environmental protection. Based on my 

own conversations with China’s top leaders, I believe that our commitment to these values can actually support China’s own longterm efforts to build a harmonious society. 

And finally, while our companies will inevitably compete in many 

areas, there are challenges, such as climate change, where our two 

nations should be collaborating against a shared threat, and where, 

together, we have the ability to offer leadership to the world. 

As today’s largest producer of greenhouse gas emissions, and history’s largest cumulative emitter of greenhouse gases, China and 

America have a special responsibility to lead a global effort to reduce emissions, and, particularly, we can work together to develop 

the clean technologies, the new technologies, the clean and alternative energy sources, of the future. The truth is that no two 

nations have as much opportunity to set the mark for what we all 

should be achieving. And if China and the United States engage in 

this effort, and do so together, it is guaranteed that the rest of the 

world will follow, and be compelled, ultimately, to do so. 

4 

To help us look into the future and navigate the thicket of issues 

facing America and China, we have two longtime China hands here 

with us today. Ambassador Carla Hill served as the U.S. Trade 

Representative under President George H.W. Bush, and she cochaired the influential Council on Foreign Relations Task Force on 

China, and currently chairs the National Committee on U.S.-China 

Relations. 

Dr. Laura Tyson is the former chair of the Council of Economic 

Advisors during the Clinton administration, and the former dean 

of the London Business School. Dr. Tyson currently serves on 

President Obama’s Economic Recovery Advisory Board, and she is 

a professor at Berkeley’s Haas School of Business. 

So, I invite both of our witnesses to feel free to summarize their 

comments, if they would. We will introduce the full text into the 

record as if read in full, and we look forward to your testimony. 

And, again, we’re grateful to both of you for being here today. 

Senator Lugar. 

STATEMENT OF HON. RICHARD G. LUGAR, 

U.S. SENATOR FROM INDIANA 

Senator LUGAR. Mr. Chairman, I join you in welcoming our distinguished witnesses for this important hearing. 

China’s rising financial and strategic power is a crucial factor in 

our approach to global economic, energy, and security problems. 

The United States must come to grips with the incredibly complex 

set of choices and opportunities that China represents. 

China is demanding a greater say in the management of the 

world economy through the G20 and other mechanisms. Its global 

leverage has increased as it has positioned itself as the leading 

creditor nation with more than 20 percent of the world’s current 

account balance surplus. 

According to the most recent data, China is the United States 

Government’s largest foreign creditor, holding approximately 23 

percent of the $4 trillion we owe to other countries. The Chinese 

continue to buy United States bonds at a rapid pace, but we cannot 

count on this continuing indefinitely. Some thought must be given 

to how we work with China to establish a more sensible global balance that depends less on Chinese credit and demand by American 

consumers. 

The Treasury Department decided to delay publication of the 

congressionally mandated report on China’s international economic 

and exchange rate policies until after the May 27th Strategic and 

Economic Dialogue with China and the June 5th G20 meetings. 

Now that these meetings have concluded, Congress is eager to receive Treasury’s assessment. 

I look forward to our witnesses’s comments on China’s recent decision to increase the flexibility of its exchange rate, which the 

Obama administration has welcomed. Is this a significant step, and 

can it have a positive impact on the U.S. economy? 

China remains an extremely important market for United States 

exports. Currently, China is our second-largest goods trading partner with more than $407 billion in two-way trade in 2008. Since 

being admitted to the World Trade Organization in 2001, China 

5 

has become the United States third-largest export market, accounting for 5.4 percent of total U.S. exports. 

But this expansion of trade has not reached its full potential, in 

part because of impediments to American business activity in 

China. American businesses and agricultural exporters report that 

operating in China is becoming more difficult, not less. We are 

hearing increasingly frequent complaints about inconsistent application of rules, requirements for so-called ‘‘indigenous innovation,’’ 

rising nontariff barriers to trade, inconsistent market access, and 

lack of enforcement of intellectual property rights. 

Civil society within China continues to face immense challenges 

in promoting rule of law and human rights reform. While the 

administration and the Congress have been focusing on matters related to currency reform and the China-United States trade imbalance, other issues also warrant concern. 

On the military front, since announcement of the Taiwan arms 

sales, the United States has made attempts to reengage Beijing, 

including a recent overture by Secretary of Defense Gates on a 

reciprocal visit to China this June that was rebuffed by China’s 

military. 

In East Asia, the United States continues economic sanctions 

against Burma, while China increases its economic engagement 

with the military junta. China has been helpful in encouraging 

Pyongyang to participate in the six-party talks. But at the same 

time, Beijing is apparently strengthening its assistance to North 

Korea, even after the sinking of South Korea’s ship and the loss of 

46 sailors. 

China’s global advances to secure energy assets and increase its 

influence are perhaps most intense in its own backyard. China is 

dedicating massive financial and cultural resources to its neighbors 

in the region, with implications for traditional United States relations with Asian countries. 

Energy security is a strategic interest for both China and the 

United States. As the New York Times said on June 18, 2010, ‘‘as 

China counts on more years of global leadership in economic 

growth, global warming remains a secondary concern. Secure 

sources of energy to fuel that growth are what matter most.’’ 

I welcome the Obama administration’s high-level attention to 

energy cooperation with China, which could benefit price stability 

and may enhance Sino-American cooperation on other international 

security issues. 

While all of this is underway, we must not lose sight of our strategic and economic relationship with Japan. As administration officials pursue new avenues to improve the United States-China relationship, we must maintain and strengthen our ties with Tokyo. 

I look forward to the hearing of the testimony of our distinguished witnesses, and our questions and answers. 

And I thank you, Mr. Chairman. 

The CHAIRMAN. Thank you very much, Senator Lugar. 

Dr. Tyson, if you would lead off, and then, obviously, Ambassador 

Hills. 

Thank you very much. 

6 

STATEMENT OF LAURA TYSON, FORMER CHAIRPERSON OF 

THE PRESIDENT’S NATIONAL ECONOMIC COUNCIL (NEC), 

PROFESSOR, BERKELEY HAAS SCHOOL OF BUSINESS, 

BERKELEY, CA 

Dr. TYSON. Certainly. 

The testimony I have submitted was done jointly with Stephen 

Roach, who is the chairman of Morgan Stanley Asia. I’ve worked 

with him for many years on issues of China and Asia. 

We focused on some of the policy priorities that were at the center of the most recent Strategic and Economic Dialogue discussions. 

They were the issues of rebalancing growth in the United States 

and China; related to that, the exchange rate itself and the policies 

and issues around the trade barriers that you have mentioned. Let 

me highlight some of our major recommendations on each of these 

issues. 

First of all, I think it is important to start with the view that 

I’ve heard shared by both of you that the Strategic and Economic 

Dialogue is an important forum in which the United States and 

China can discuss issues on which they can cooperate and also 

issues that divide them to come up with solutions. 

At the most recent meetings, a major focus of the discussion was 

global rebalancing. Now, I realize that rebalancing has become a 

common phrase among economists, but its meaning is not entirely 

obvious. 

At the height of the great credit and export bubble of 2006–07, 

China was running a current account surplus of around 11 percent, 

widely viewed to be unsustainable, and the United States was running a current account deficit of about 7 percent, also widely considered to be unsustainable. So, both countries have to get their 

imbalances down. China has to get its current account surplus 

down and the United States has to get its current account deficit 

down. And that to the first approximation, is what ‘‘rebalancing’’ 

means. 

‘‘Rebalancing’’ also means a change in growth strategies for both 

the United States and China. China has followed, very successfully, 

a very aggressive export-led strategy. The Chinese now talk about, 

and certainly the United States talked with China about, the need 

to shift their growth strategy to depend more on domestic demand 

and less on exports. 

That’s what ‘‘rebalancing’’ means in China; it means bolstering 

domestic demand, particularly consumption, and relying less on 

exports. 

In the U.S. case, it’s actually a bit more unclear what ‘‘rebalancing’’ means. At a macrolevel, the current account deficit reflects 

the fact that for a very long period of time now, the United States 

has been spending more than it has been producing as a nation. 

So to reduce the current account deficit the United States must reduce its spending, particularly its spending on consumption, or increase its production or do some of both. And that’s a different kind 

of challenge than the rebalancing challenge facing China. 

Much of our written testimony focuses on the fact that we think 

China is taking its rebalancing challenge seriously. If you look at 

its stimulus policies—and it cooperated quite actively with the 

United States in the G20 on the need for aggressive stimulus they 

7 

are very much investment-oriented, and, as far as we can tell, the 

investment is directed to building the center and western regions 

of the country to enhance development and consumption at home, 

not to build export capacity for the rest of the world. This is not 

another export-led investment boom in China; this is an infrastructure-led investment boom to encourage urbanization and move people from the countryside to the city. Building infrastructure in the 

countryside and moving people to the cities will encourage consumption by providing the rural population with the electricity 

they need to have sophisticated equipment in their homes and by 

facilitating their movement from place to place, thereby improving 

their access to consumer products and services. 

So, we believe that the stimulus policies reflect a real commitment, on China’s part, to shift away from exports to domestic 

demand. 

We also think that what China is saying about its upcoming 12th 

5-year plan reflect rebalancing. China is introducing new health 

care systems, new social security systems, and new educational 

systems. These form the social safety net that has been absent, and 

without such programs, Chinese households have been encouraged 

to save to cover their own educational, health care, and retirement 

needs. So, if the Chinese, in fact, build out their new social safety 

net systems as they plan, Chinese households will save less and 

consume more, and that will go a long way to rebalancing growth. 

China is also talking a lot about the need to bolster labor-intensive 

services as part of the 12th 5-year plan. The United States tends 

to think of China’s export strategy as an employment strategy. But, 

actually, China’s economy has grown much faster than its employment. China’s development strategy has actually not been particularly labor-intensive. To boost employment growth, China needs to 

encourage the development of labor-intensive services and it looks 

like they’re on course to do that. 

As a result of these rebalancing policies, we believe that in the 

future the current account surplus in China will be significantly 

lower relative to its GDP than it was in 2006 and 2007. It’s already 

significantly down, and we believe it will continue to trend down. 

And we think that will be a very important contribution by China 

to the rebalancing part of the United States-China agenda. 

As far as the exchange rate is concerned, I will say a few things 

about that. 

First of all, we rewrote some of our testimony over the weekend 

based on what the Chinese announced; but, in fact, the first draft 

of our testimony would have suggested that they do, essentially, 

what they did—that they move back to the managed float 

exchange-rate regime that they first adopted in July 2005. The 

regime in place between 2005 to 2008 had a significant effect on 

the renminbi dollar rate and on the renminbi multilateral tradeweighted exchange rate. There was significant progress on RMB 

flexibility during that period of time And this time, it looks like the 

Chinese authorities will allow even more movement of the rate 

within a broader bank. 

We think that China has decided to restore the 2005–08 regime 

now for a number of reasons, many reasons in their own interest. 

Frankly, we think China’s decision is a win-win situation. From the 

8 

United States point of view, this is something we wanted, but it 

also is something good for the Chinese economy—because they 

were having trouble with speculative capital flows, with inflationary pressure and with sterilizing the effects of large purchases 

of dollar assets on China’s money supply. All of these challenges 

become easier to address with an exchange rate which shows some 

movement over time. 

The new currency regime will also support China’s rebalancing 

agenda. The exchange rate is a relative price. And if you adjust the 

relative price so foreign goods are cheaper, you will actually import 

more foreign goods. And if you actually make consumers in China 

wealthier because of the appreciation of the currency, there’ll be 

more demand for domestic production. And that’s essential for 

rebalancing. 

So, we think China’s decision to restore its 2005–08 exchange 

rate regime is a constructive step. We think it’s a win-win step. 

And we can talk about the particulars of how they did it. 

Let me turn, then, to the trade agenda. I know that Ambassador 

Hills is going to talk about this in quite a bit of detail. I suspect 

we agree on all of this. 

I am concerned that China’s trade and industrial policies of late 

seem to be changing in ways that reduce the access of foreign producers to China’s market. And nontariff barriers not traditional 

tariffs are a growing problem. So-called indigenous innovation policies to support the development of China’s high-tech companies do 

not use traditional trade policies. 

China is not a signatory of the WTO’s Government Procurement 

Agreement. The United States is. China is using preferential 

government procurement of high-tech products from Chinese companies to support their development. The fact that the stimulus 

package in the United States contained some controversial ‘‘Buy 

America’’ provisions was interpreted by some observers in China as 

a green light for their own preferential procurement practices. In 

addition to such practices, other nontariff barriers hindering the 

access of United States companies to China’s market include national standards that favor Chinese companies, the lack of inadequate intellectual property protection for foreign producers, and 

explicit or implicit local content rules. Many United States companies say that they have to locate a significant share of their activity 

in China to gain access to its market. 

I think it is very revealing that access to China’s market by 

United States companies was the first issue highlighted in the documents describing the S&ED meetings. Although the United States 

was not able to convince the Chinese to drop some of the most troublesome features of their indigenous innovation agenda, the United 

States did achieve some changes in China’s product accreditation 

procedures that will make it easier for United States companies to 

bid for government contracts in China. This is an important first 

step in easing China’s indigenous innovation policies. And the 

United States and China also agreed to ongoing, high-level discussions about trade concerns in high-technology products. 

During the S&ED discussions, China also committed to proposing a more robust offer to join the Government Procurement Agreement. I believe that China’s participation in this agreement would 

9 

be a major step toward easing United States-China trade tensions, 

especially in techology-intensive products. 

In our written testimony, we suggest that there’s a bargain that 

can be made between the United States and China. China complains a lot about United States security controls on exports to 

China. The facts presented in our testimony indicate that such controls have very little effect on United States exports to China. So 

the United States can cooperate with China on this issue. Moreover, there are several recent studies recommending that the 

United States can and should ease its security controls on exports 

not just to China but to our other trading partners in order to bolster United States exports, without compromising United States 

security interests. 

So, as part of a trade deal with China, the United States could 

ease some of our security restrictions on exports to China. We could 

also offer to advance the recognition of China as a country with 

market-economy status in the WTO. China wants this very much. 

It’s scheduled for automatic approval in 2016. The United States 

can move the date forward. We have been telling the Chinese that 

we will do so when they do something on their exchange rate. They 

have now done something by moving back to the 2005–08 managed 

exchange rate system. Now we can say, ‘‘Yes, let’s work with you 

on getting earlier market-economy status. Let’s work with you to 

reduce security controls on U.S. exports. You, in turn, should make 

a serious proposal to join the Government Procurement Agreement 

and continue to curb the use of preferential procurement policies 

to foster indigenous innovation.’’ I think this is an outline of the 

kind of bargain we might be able to strike in our trade negotiations 

with China. 

Finally, since I’ve run out of time, just let me add two things. 

First, it is very important for the United States to work with our 

other trading partners in trying to influence China. One of the reasons China moved, this week on the exchange rate is not because 

we were pressuring the Chinese authorities but because many 

other G20 nations were doing so well. There is widespread agreement within the G20 that as part of global rebalancing, China 

needs a more flexible exchange rate system that allows its currency 

to appreciate over time in response to market forces. Many of 

China’s other trading partners, particularly in Europe, are also 

concerned about the nontariff barriers that are part of China’s 

indigenous innovation agenda. Whenever we can work with China’s 

trading partners, we need to do that. 

Second, I think we should work on forging a new transpacific 

partnership agreement that can help move the United States back 

into the center of regional trade negotiations in Asia. During the 

last few years, many regional and bilateral trade agreements have 

been signed throughout Asia, and the United States has not been 

at the table. If the United States becomes the champion of a free 

trade area for the Asia Pacific through the transpacific partnership, 

it would give the United States a tremendous opportunity to participate in the benefits of freer trade and investment flows. 

And, by the way, on green trade, that is trade related to environmental products and services; remember that APEC itself was the 

organization that first negotiated a sectoral agreement for free 

10 

trade in information technology and this agreement was later 

adopted by nations around the world. APEC might be able to lead 

again on a sectoral free trade agreement in green goods and services and such an agreement complement our efforts to cooperate 

with China on solving global environment challenges. 

And finally, let me add that our written testimony addresses the 

question of whether China might adjust its holdings of U.S. Government securities in response to growing tensions in United 

States-China relations. For example, if the United States pursues 

a policy the Chinese deem to be an assault on their sovereignty, 

such as imposing large punitive tariffs on Chinese products to force 

China to adjust its exchange rate, would China respond by selling 

a significant amount of these assets, driving the dollar down and 

interest rates up? We conclude that there is reason to think that 

they would, that we tend to exaggerate the costs to them of using 

this form of retaliation and that we tend to underestimate the 

strength of their nationalist sentiment in response to what they 

could consider unfair and unwarranted unilateral U.S. pressure. I 

think we have to keep these conclusions in mind both in military 

affairs and in economic affairs. 

Let me stop there. 

[The prepared statement of Dr. Tyson follows:] 

JOINT PREPARED STATEMENT OF LAURA TYSON, SK AND ANGELA CHAN PROFESSOR

OF GLOBAL MANAGEMENT, HAAS SCHOOL OF BUSINESS, UNIVERSITY OF CALI- FORNIA, BERKELEY, CA, AND STEPHEN ROACH, CHAIRMAN, MORGAN STANLEY ASIA

Chairman Kerry, Ranking Member Lugar and distinguished members of the committee, thank you for the opportunity to testify before your committee on this important relationship. 

The United States-China economic relationship is the most important bilateral 

economic relationship in the world. China is the third-largest and the fastest growing major economy in the world. At current growth rates, it will pass Japan later 

this year and reach the size of the U.S. economy by 2020 or sooner. The United 

States is China’s second-largest export market and China is America’s third-largest 

export market—and has been the fastest growing market for U.S. exports since the 

late 1990s. China accounted for 18 percent of U.S. imports and for 36 percent of 

the U.S. trade deficit over 2008–09. China has emerged as the center of a complex 

global supply chain for manufactured goods in Asia. A significant share of the value 

of U.S. imports from China represents intermediate inputs and components produced throughout Asia and assembled into final products for export to the us. China 

is the largest destination for foreign direct investment, much of it from companies 

headquartered in the us. More than half of all U.S. imports from China come from 

companies that are partially or completed owned by foreigners, including U.S. companies. This share is significantly higher for U.S. imports of high-technology products like computers and smart phones. And China has $2.4 trillion of foreign 

exchange reserves, by far the largest such portfolio in the world. Most of these 

reserves are held in dollars or dollar-denominated assets. China owns about 25 percent of all U.S. Treasury debt held by foreign investors. 

China and the United States both reap substantial returns from the large trade 

and capital flows that link their economies. But these cross-border flows are lopsided: The United States runs a large trade deficit with China and China runs a 

large trade surplus with the United States; the United States is a debtor and China 

is a creditor. The United States relies on its deficit with China as a means to satisfy 

spending of consumers and businesses and China relies on its surplus with the 

United States as a means to sustain its production and export-oriented economy. 

The unbalanced nature of these flows complicates the relations between the United 

States and China and contributes to tensions between them. Despite these tensions, 

however, both countries are major beneficiaries of globalization and both share interests in promoting a strong global recovery and fostering sustainable and better 

balanced global growth. The Strategic and Economic Dialogue (S&ED) is an important forum through which the United States and China can ameliorate the tensions 

in their relationship and cooperate on policies to foster a balanced and prosperous 

11 

world economy. In addition, the United States and China are cooperating within the 

G20 and other multilateral institutions and are committed to strengthening these 

institutions to address shared global challenges. 

In this testimony, we examine some of the U.S. policy priorities that were the 

focus of the most recent S&ED meetings: macroeconomic policies to promote and rebalance global growth; the currency issue—especially in light of recent adjustments 

in China’s exchange rate regime; and policies to reduce barriers to trade. We also 

assess the possibility that China might sell some of its U.S. Government debt or 

slow down its purchases of such debt to influence the outcome of a foreign policy 

dispute with the United States or to retaliate against a U.S. action that China 

deems to be an assault on its sovereignty. We conclude with recommendations for 

U.S. policy. 

I. UNITED STATES-CHINA COOPERATION TO PROMOTE A STRONG GLOBAL RECOVERY AND

SUSTAINABLE BALANCED GROWTH

1. China’s Rebalancing Challenge 

In recent G20 discussions and in the latest S&ED discussions, China has committed to cooperate with the United States to promote a strong global recovery and 

to foster more balanced, sustainable global growth. Chinese authorities have 

adopted ambitious policies that are consistent with this commitment and that have 

already delivered measurable results. As a result of its unprecedented monetary and 

fiscal stimulus measures, China recovered more rapidly than expected from the 

global slowdown in 2009, ending the year with a growth rate of 8.7 percent. China’s 

strong recovery boosted global growth by providing strong demand for exports from 

the United States and from China’s other trading partners. U.S. exports to China 

have rebounded much more rapidly than overall U.S. exports during the last year 

and are now about 20 percent above precrisis levels. U.S. exports to China are still 

growing much more rapidly than U.S. exports to the rest of the world. During the 

first quarter of 2010, U.S. merchandise exports to China grew by almost 50 percent 

from year-earlier levels while U.S. exports to the rest of the world grew by about 

20 percent. China is now the third-largest and most rapidly growing market for U.S. 

exports, with double-digit growth across a wide range of U.S. products from hightech manufactured goods to agricultural goods. Whether China’s recent stimulus actions will also deliver on its commitment to foster more balanced future growth, 

however, is not certain. Faced with a dramatic collapse in China’s export markets 

in the wake of global recession, Chinese authorities had little choice but to reorient 

their growth policies in the short run. The unprecedented 11.9 percent drop of world 

merchandise trade in 2009 choked off China’s long vigorous export sector. In the 

short span of 7 months Chinese exports went from boom to bust—a ∂26 percent 

year over year increase in July 2008 gave way to a ¥27 percent decline by February 

2009. Real GDP growth screeched to a standstill as measured on a sequential quarterly basis, and over 20 million migrant Chinese workers lost their jobs in exportled Guangdong province. For a nation long fixated on labor absorption and social 

stability, this was the functional equivalent of China’s dreaded recession and called 

for a massive stimulus response to bolster domestic demand. 

Within domestic demand, China’s stimulus measures have focused primarily on 

fixed investment. There are concerns among China’s trading partners that this investment is adding excess capacity in manufacturing that will feed another surge 

of exports—and a renewed widening of China’s trade surplus—as the global economy recovers. In fact, most of China’s stimulus investment has been directed to 

massive, multiyear infrastructure projects especially in the western and central regions of the country. (More than 70 percent of China’s stimulus package has been 

devoted to infrastructure projects, Sichuan earthquake reconstruction and public 

housing projects.) The surge in infrastructure spending in turn has sparked a pickup in private-sector investment by augmenting demand for goods and services provided by private firms, especially those in the manufacturing sector. Rapid growth 

in investment spending has augmented household income growth, especially in 

urban areas; moreover, growth in household incomes along with targeted 

proconsumption incentives for selected consumer durables has supported solid consumption growth. 

On the surface, the rebalancing of China’s growth toward domestic demand appears to be confirmed by recent data. In 2009, consumption accounted for 4.6 percentage points or about half of China’s GDP growth, and in the first quarter of 2010, 

consumption contributed a record 6.2 percentage points to China’s GDP growth. In 

2009, China’s current account surplus as a share of GDP fell to 6.1 percent, down 

sharply from its peak of 11 percent in 2007, and dropped further to only about 1 

12 

percent of GDP in the first quarter of 2010. China’s overall trade surplus as a share 

of its economy has fallen sharply by about half during the last 2 years. 

Some observers express concerns that these trends are temporary and that the 

rebalancing of China’s growth strategy will end when the global economy recovers 

and global markets for China’s exports rebound. In fact, the May trade surplus widened to $19.5 billion from a surplus of $1.7 billion in April and a modest deficit in 

March. These results are consistent with these concerns and suggest that it may 

be premature to celebrate the onset of a sustained structural rebalancing of the Chinese economy. But we believe that China’s rebalancing is likely to continue over the 

long term out of both design and necessity. For an externally dependent Chinese 

economy, the latter motive is especially germane in the post-crisis era—an era that 

is likely to face lingering headwinds from sluggish demand in the developed world. 

If there was any doubt about the state of global demand in the aftermath of the 

global recession in 2009, recent problems in Europe should dispel a false sense of 

optimism. First, the United States and now Europe—the growth in global final demand that was the sustenance of China’s export growth is in serious trouble. And 

there are compelling reasons to believe that such trouble will not be fleeting—that 

it will be an enduring feature of the post-crisis environment for several years to 

some. In order to avoid a sustained shortfall of export-led growth and the social instability it would imply, China needs a new source of growth. And it needs one 

quickly. 

A significant rebalancing of the Chinese economy is really the only answer to China’s post-crisis wake-up call. GDP growth needs to shift away from the export- and 

investment-led dynamic that powered the economy so successfully over the past 30 

years toward the sector that has been left behind—internal private consumption. At 

their peak in early 2007, exports and fixed investment totaled 75 percent of Chinese 

GDP—more than double the 35-percent share going to private consumption. To 

some extent, the low share of consumption is the result of high household precautionary saving rates necessitated by the lack of a social safety net—social security, private pensions, medical and unemployment insurance are all lacking for most 

Chinese citizens. But consumption also has been held back by slow income growth, 

with wages increasing much more slowly than productivity and rising profits feeding 

high enterprise saving rates. Enterprises now generate more than half of China’s 

saving. 

There are signs that this situation may be changing. There have been recent significant increases (20 percent or more) in minimum wages in key places like Beijing 

and Guangdong province, and several strikes have ended with sizeable wage increases. The number of young people entering the workforce is slated to decline by 

almost 30 percent over the next 10 years, and survey evidence indicates that increasingly scarce younger workers may expect higher wages and better working conditions before they are willing to migrate to factory jobs far from their homes. Fully 

40 percent of China’s population remains in low-productivity agriculture, so there 

is still a lot of surplus labor. But there are growing signs that the reservation wage 

for surplus labor is increasing, and this may be another factor that helps rebalance 

China’s future growth. 

China’s infrastructure-led stimulus policies are building a foundation for strong 

future growth in domestic consumption through job creation and through projects 

that not only bolster the development potential of the western and central regions 

of the country but also reduce physical bottlenecks to rural consumption and ruralurban migration. These are the regions where most of China’s surplus labor is located. There is good reason to believe that China will use its upcoming 12th FiveYear Plan (2011–16) to lay out a broad framework to continue this proconsumption 

rebalancing. The 5-year planning cycle has long been Beijing’s principal means for 

refocusing and redirecting the economy. That purpose seems all the more meaningful in a post-crisis global climate that challenges one of the critical assumptions that 

has underpinned the export-led growth dynamic for 30 years—the vigor of support 

from external demand. 

China’s proconsumption plan is likely to have three major macro goals—to reduce 

precautionary household saving; to temper widening income disparities; and to uncover new sources of job creation. Each of these goals will require major policy initiatives. On the saving front, it’s all about the social safety net—namely social security, private pensions, medical, and unemployment insurance. China has taken only 

small steps in these areas. It now needs to take big convincing steps in order to 

reduce the excesses of fear-driven precautionary saving. At the same time, income 

inequality can only be addressed if China tackles the serious problem of lagging 

rural incomes—the some 700 to 800 million Chinese who still live at relatively impoverished income levels in the countryside. Several policy initiatives will be required here—especially tax rebates to rural families, rural land and ownership reVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
13 

forms, IT-enabled connectivity of agricultural communities, and ongoing incentives 

to sustain rural-urban migration, which is essential to boosting agricultural productivity. Finally, on-the-job creation front, China needs a blueprint for the development of large-scale, transactions-intensive services industries such as wholesale and 

retail trade, domestic transportation, supply-chain logistics, and leisure and hospitality. China needs to shift its development strategy away from laborsaving manufacturing for export toward labor-intensive services for domestic consumption. 

If the 12th Five-Year Plan contains half of the initiatives outlined above, we believe that China will make important progress in shifting sustained support of its 

macroeconomy from external to internal demand. As a share of GDP China’s current 

account surplus has already shrunk from an 11-percent peak in 2007 to slightly over 

1 percent in the first quarter of 2010. Although a significant portion of this reduction is cyclical as we noted above, there is good reason to believe that China’s external imbalance has peaked and that a consumer-led rebalancing will mean a significantly lower current account surplus in the years ahead. 

Nor do we believe that Chinese families are culturally predisposed toward high 

and rising personal saving—suggesting that this transformation will take decades 

to occur. With the right incentives and job-creation initiatives, we would not be surprised to see the consumption share of the Chinese economy rise from 35 percent 

currently to the 42-percent to 45-percent range by 2016—still low by international 

standards but a major increase from current levels. The key for the 12th Five-Year 

Plan is to move the needle from the old growth model to the new growth model— 

setting in motion a powerful rebalancing momentum that will sustain Chinese 

growth for years to come. 

2. The Role of China’s Exchange Rate Policies in Global Rebalancing 

Exchange rate policy has proved to be a lightening rod in United States-China 

economic relations in recent years. We applaud China’s June 19 announcement to 

end the crisis-induced repegging of the renminbi-dollar cross-rate which has been 

in place since July 2008. By returning to the ‘‘managed float’’ foreign exchange regime which it first adopted in July 2005, China has signaled both flexibility and 

practicality in dealing with a very contentious global issue. Although the full extent 

of the resulting Chinese currency adjustment is unknown, it should be stressed that 

this is the same regime that resulted in a 20-percent appreciation of the renminbi 

versus the dollar in the 3 years ending July 2008. Under the presumption of a sustainable recovery in the global economy, there is good reason to expect that a resumption of gradual RMB appreciation will track a similar trajectory in the years 

ahead. China should be commended for having taken a very important first step in 

the right direction. 

It was actually an auspicious time for China to act—not just because of mounting 

global pressure on the eve of the G20 meeting in Toronto but also because market 

conditions may work in its favor. Recent turbulence in global currency markets 

caused by the flight from the euro to the dollar, combined with China’s reduced 

trade and current account surplus, gives China an opportunity to reform its currency regime at a time when there is less upward market pressure on the RMB. 

China’s shift in currency policy also seems well aligned with the broader strategic 

objectives of the Obama administration. In recent congressional testimony (June 10, 

2010), Treasury Secretary Timothy Geithner argued that over time a more flexible 

market-driven RMB will be good for the global economy because it will facilitate 

more balanced and sustainable global growth. He also argued that it would serve 

China’s interests because it will support China’s rebalancing agenda and because it 

will enable China to pursue a more independent monetary policy. Secretary 

Geithner did not argue that greater flexibility in the RMB exchange rate would reduce the U.S. bilateral trade deficit with China. Nor did he call for an appreciation 

of the RMB. Rather he noted that a stronger RMB as the result of market forces 

within a more flexible exchange rate system would benefit China and promote 

global rebalancing. We agree with the conceptual arguments and recommendations 

made by Secretary Geithner in his written testimony and we applaud his discussion 

of China’s currency policy from a multilateral perspective rather than from a contentious and misleading bilateral one. 

In that vein, it is essential to put the currency issue in the context of the world’s 

broader rebalancing imperatives. An RMB-dollar adjustment is not the only option 

that China has to address its fair share of the global rebalancing agenda. The key 

challenge for all unbalanced economies—including China and the United States— 

is to reduce their global imbalances. That is true whether those imbalances take the 

American form of a saving gap and current account deficit or the Chinese form of 

a saving excess and a current account surplus. 

14 

In the case of China, the structural policies that we suspect are likely to be featured in the upcoming 12th Five-Year Plan could well be far more effective than 

the more circuitous option of a currency adjustment. It is up to China to decide 

which of those options—or which combination of them—works best. The rest of the 

world has a right to insist that China face up to its saving imbalance, but does not 

have the right to insist on the precise mechanism that China employs to accomplish 

this task. The same argument, of course, also applies to the tactics and strategy 

that the United States employs to cut its budget deficit and boost domestic saving. 

While the rest of the world has a right to insist that America take its rebalancing 

imperatives seriously, it is the sovereign right of the United States to decide on the 

best ways to accomplish this objective. 

That’s not to say there isn’t a compelling domestic rationale for China to allow 

a stronger RMB. Indeed, RMB appreciation would certainly complement China’s domestic rebalancing agenda both by boosting the purchasing power of Chinese consumers and by encouraging Chinese producers to shift production away from exports 

toward domestic markets. Moreover, a stronger currency would temper the impacts 

of imported inflation—hardly inconsequential in light of China’s recent cyclical upsurge in inflation to 3.1 percent in May 2010. 

Reforming the exchange rate regime in a way that allows the RMB to appreciate 

gradually in response to market forces also gives China time to liberalize its capital 

markets to prepare for greater exchange rate flexibility. We do not endorse the view 

expressed by many that China should make an immediate large upward adjustment 

in the RMB-dollar exchange rate. China’s June 19 policy pronouncement, which 

stresses a return to precrisis ‘‘floating bands,’’ all but rules out such an action. And 

with good reason: As a developing economy with a still embryonic financial system, 

China must continue to focus on financial stability and potential vulnerability to 

speculative capital flows. For that consideration alone, there is ample justification 

for China to view a tightly managed band on the dollar-RMB relationship as an important stability anchor. 

Bilateral political tensions aside, we agree with Secretary Geithner that it is critical to assess the currency ramifications of global rebalancing from a multilateral 

perspective. In this regard, it bears noting that on a broad trade-weighted basis, the 

RMB is up 7 percent (in real terms) from its late 2009 low and up 19 percent from 

its early 2005 low. In other words, despite the repegging of the RMB to the dollar 

over the past 2 years, it is factually incorrect to maintain that the RMB has not 

moved in a broader global context. It is equally important to stress that there are 

long and uncertain lags associated with the impacts of a shift in relative prices between China and the rest of the world on global imbalances. The example of Japan 

in the late 1980s raises serious questions about whether a sizeable appreciation of 

the RMB against the dollar over the next few years would have a sizeable effect 

on these imbalances. After all, while the yen more than doubled in value relative 

to the dollar from early 1985 to late 1988, Japan’s outsize current account surplus 

barely budged. 

China’s decision to return to its precrisis system and allow the RMB to fluctuate 

against the dollar within a tightly managed band is unlikely to eliminate U.S. concerns about the RMB-dollar exchange rate. A renewed post-crisis rebound of Chinese exports, in conjunction with sluggish U.S. job growth and unacceptably high 

unemployment, has fueled congressional frustrations about the persistence of a 

large bilateral trade deficit with China. As a result, pressures on China for a major 

RMB revaluation—or for the U.S. Treasury to name China as a currency manipulator if that doesn’t occur—have intensified. Many Members of Congress believe that 

a sizeable RMB appreciation relative to the dollar would be an effective way to ease 

the plight of America’s beleaguered middle class. They also believe that if China 

does not act voluntarily to relieve those pressures, the United States should take 

offsetting action. At least, China’s June 19 adjustment of its currency policy sends 

an important signal to U.S. policymakers that the Chinese leadership takes these 

concerns seriously. 

Unfortunately, a significant appreciation of the RMB-dollar exchange rate—or the 

countervailing trade sanctions that might occur in its absence—might well backfire. 

Much of the growth in U.S. imports from China has been the result of production 

moving to lower cost China not from the United States but from other higher cost 

foreign countries especially in Asia. China has become the center of a global supply 

chain that enhances efficiency, keeps production costs down and supplies U.S. consumers with attractively priced products, purchased in large amounts by low- and 

middle-income families. A significant share of the value of U.S. imports from China 

represents the value of components produced in other countries and assembled in 

China for sale in the United States. China’s share of the value-added for some products may be only 20–30 percent of the total value of U.S. imports from China. 

15 

Tariffs imposed on Chinese exports to the United States in an effort to offset the 

so-called RMB currency subsidy would raise the prices of these products for U.S. 

consumers and drive their production not back to the United States but to other 

emerging market countries, reducing the efficiencies of the supply chain and increasing production costs. The increase in prices on U.S. imports that resulted 

would be the functional equivalent of a tax hike on both U.S. companies and American consumers. 

Moreover, there are other equally serious analytical pitfalls to a bilateral assessment of the China problem. Yes, China accounts for the largest piece of America’s 

trade deficit—some 36 percent of the average merchandise trade gap over 2008–09. 

But the key point to stress here is that the United States had trade deficits with 

over 90 countries during the same period—a multilateral imbalance that stems from 

the unprecedented shortfall in U.S. saving discussed below. Lacking its own saving, 

the only way for the United States to keep growing is to import surplus saving from 

abroad and run a large current account and multilateral trade deficit in order to 

attract foreign capital. The Chinese piece may account for the largest share of this 

multilateral imbalance but that is more likely traceable to conscious outsourcing decisions of U.S. multinationals and strong consumer preferences for low-cost, highquality goods made in China than to unfair trading practices. The bottom line is 

that America’s multilateral trade imbalance cannot be addressed by putting pressure on a bilateral foreign exchange rate with China. 

Finally, it is important to emphasize that if the U.S. Congress were to impose 

trade sanctions on imports from China, it is highly likely that China would retaliate. That retaliation could take one of three forms: lodging a WTO complaint; imposing tit-for-tat trade sanctions on U.S. exports to China; or reducing demand for U.S. 

Government securities. The latter two options would hardly be inconsequential for 

the United States. Tariffs on U.S. exports to China would hit America’s third-largest 

export market—a serious problem for the Obama administration’s goal of doubling 

U.S. exports over the next 5 years. Similarly, reduced Chinese buying of U.S. Treasuries would be highly problematic for the funding of the Federal deficit at attractive 

interest rates and could trigger a spike in U.S. interest rates, a sharp drop in the 

dollar’s value and renewed instability in global financial markets. (The possibility 

that China might respond to U.S. pressure on its exchange rate policy by adjusting 

its demand for U.S. Treasuries is discussed below.) 

3. The U.S. Rebalancing Challenge 

Rebalancing growth was a major topic at the recent S&ED meetings and U.S. officials agreed on the need to rebalance growth of the American economy away from 

consumption and large Federal Government deficits toward higher household saving 

rates, greater reliance on exports and investment, and sustained deficit reduction. 

U.S. officials emphasized the Obama administration’s multiyear plan to achieve $1 

trillion in deficit reduction over the next decade. The plan includes freezing nonsecurity discretionary spending for 3 years, reducing defense spending in Iraq and 

Afghanistan, and allowing the 2001–2003 tax cuts for households earning more than 

$250,000 to expire. According to the administration’s latest projections, this plan 

would reduce the deficit from 10.6 percent of GDP in 2010 to 3.9 percent by 2015, 

a record 5-year reduction that would occur despite an average unemployment rate 

of 7.9 percent during the period. If adopted, this plan would be a significant step 

toward rebalancing the U.S. economy, but it would leave the United States with a 

projected average deficit of 3.9 percent of GDP between 2015 and 2020, and it would 

not stabilize the federal debt to GDP ratio, which would continue to rise through 

2020 and beyond. As long as the debt to GDP ratio is rising, U.S. fiscal policy is 

not on a sustainable long-run path. This could prove problematic for global investors, including the Chinese, who are currently willing to purchase U.S. Government 

debt at interest rates that are at or below historical averages. 

During the S&ED discussions, U.S. officials assured their Chinese counterparts 

that the Obama administration is committed to reducing the deficit to 3 percent of 

GDP and stabilizing the debt to GDP ratio by 2015. President Obama has created 

a special bipartisan National Commission on Fiscal Responsibility and Reform 

charged with the task of proposing additional spending cuts and/or revenue increases to bring the primary budget deficit into balance and thereby stabilize the 

debt to GDP ratio in that year. Primary balance requires that total Federal Government spending excluding interest payments on the debt, equal total Federal Government revenues. According to the administration’s latest projections, the primary deficit will be around $174 billion in 2015; by contrast, according to the most recent 

Congressional Budget Office projections, the primary deficit will exceed $250 billion 

in that year, and many private sector projections are even larger. 

16 

A recent study by the Center for American Progress (CAP) found that closing a primary budget gap of $250 billion in 2015 by spending cuts alone would require 

a cut of almost 7 percent in every area of federal spending, except interest payments 

on the debt. If cuts in Social Security spending, additional cuts in Medicare and 

Medicaid spending beyond those in the health care reform, and additional cuts in 

defense spending beyond those in the President’s budget are excluded, balancing the 

primary budget by spending cuts alone would require a 16-percent cut in the rest 

of government spending. CAP estimates that closing the primary budget gap by revenue increases alone would require a 7.3-percent increase in all federal taxes and 

fees. If those making less than $250,000 a year are excluded, taxes and fees collected from those making more than $250,000 a year and from U.S. corporations 

would have to increase by almost 25 percent. These calculations make it very clear 

that balancing the primary budget by 2015 will require some combination of very 

painful spending cuts and revenue increases. 

The Commission is charged with making recommendations in December 2010. 

Given the size of the fiscal problem and the highly charged partisan atmosphere— 

a climate that may well worsen after the November elections—it is unlikely that the 

Commission will be able to agree on major recommendations and that such recommendations will be adopted by Congress. So even though the deficit as a share 

of GDP is likely to decline significantly as the economy recovers and as temporary 

stimulus and recovery measures die out, the United States will face significant challenges to deliver on its commitment of rebalancing the U.S. economy through fiscal 

consolidation. 

Rebalancing U.S. growth also requires more than a sustainable fiscal path. It also 

requires reducing the gap between the growth of spending and the growth of income 

in the United States, and this requires an increase in national saving. America’s net 

national saving rate—the sum total of deprecation-adjusted savings of households, 

businesses, and the government sector—turned negative in 2008 before plunging to 

a record low of ¥2.6 percent of national income in 2009. This is the most serious 

shortfall of domestic saving by a leading nation in modern history. Just as China 

must reduce its saving surplus to deliver on its rebalancing commitments, the 

United States must reduce its saving gap to do the same. Between 2000 and 2008, 

U.S. saving declined both because of increases in the federal budget deficit—a measure of government disserving—and because of a dramatic drop in household saving. 

During the recession, the household saving rate has recovered somewhat, rising 

from essentially zero in 2007 to about 4 percent in 2008–2009 before falling back 

to about 3.6 percent in April 2010. Many economists predict that the household saving rate will rise during the next several years to its historical average of about 7 

percent, but there is considerable uncertainty about this. In the S&ED discussions, 

the United States promised to introduce policies to reinforce rising household saving 

rates but did not offer any specifics, and policies tried in the past have not been 

very effective. 

As part of its rebalancing agenda, the administration has also set a goal to double 

U.S. exports over the next 5 years and has introduced supporting policies and organizational changes. An active U.S. trade policy to reduce access barriers to U.S. exports in rapidly growing emerging markets including China is essential to realizing 

this goal. We discuss trade policy in United States-China relations in the next section of this testimony. Unfortunately, since Europe is a major destination for U.S. 

exports and since European companies are major competitors of U.S. companies in 

China and other rapidly growing export markets, the recent slowdown in Europe 

and the sharp drop in the value of the euro pose serious downside risks to strong 

U.S. export growth over the next few years. 

Nor would such growth ensure a sustained reduction in the U.S. trade deficit and 

current account deficit as the economy recovers. The size of these deficits depends 

on both exports and imports and reflects the size of the U.S. saving gap, or the gap 

between how much the U.S. produces and how much it spends. During the recession, this gap, as measured by the current account deficit as a share of GDP, declined significantly to 2.9 percent in 2009 from its 2007 peak of 6 percent of GDP. 

This drop in the saving gap is primarily the result of a sharp reduction in private 

sector spending relative to private sector income, as U.S. households and businesses 

have curtailed spending to rebuild balance sheets and deleverage their financial positions. Despite the retrenchment in private sector spending relative to income, the 

current account deficit, which is a measure of the national saving gap, has remained 

sizeable because the government deficit has increased as a result of tax cuts and 

spending increases to combat the recession. 

Most forecasters predict that the United States will continue to run a significant 

current account deficit around 3 percent of GDP for the next several years if the 

fiscal deficit is reduced and if the household saving rate increases from its historic 

17 

lows of the 2002–2007 period. A deficit of this size would roughly stabilize foreign 

U.S. debt as a share of GDP. Provided the United States convinces China and other 

global investors of its commitment to a sustainable long-term fiscal path, it is likely 

that the United States can finance a current account deficit of this size with reasonable long-term interest rates on U.S. Government debt in the 4–5-percent range. 

What happens to the U.S. trade and current account deficits and to U.S. borrowing requirements from the rest of the world depends primarily on what the 

United States does to increase private saving and to reduce government dissaving. 

China’s trade and exchange rate policies are of second-order importance. If the 

United States fails to sustain a significant reduction in its saving gap, its trade and 

current account deficits will rise again as a share of GDP as the economy recovers. 

That will be the case even if China succeeds with its own rebalancing agenda and 

reduces its current account surplus as a share of its GDP and even if China moves 

to a pure market-determined exchange rate. The risk in this case would be that of 

an ‘‘asymmetrical global rebalancing’’—a scenario in which China makes more 

progress in transitioning to a consumer-led economy than the United States makes 

in closing its saving gap. 

The odds of an asymmetrical rebalancing scenario should not be minimized. China’s stimulus policies and the likely components of the 12th Five-Year Plan indicate 

that China could well make significant progress in rebalancing its economy over the 

next several years. In contrast, the stimulus policies in the United States, while essential and justifiable to combat the recession, have exacerbated the long-run saving 

gap and have not rebalanced growth away from consumption toward exports and investment. Moreover, given the partisan atmosphere in Congress, passage of a credible multiyear deficit reduction plan to reduce the Nation’s saving gap on a sustained basis once the economy has recovered seems unlikely, at least in the near 

future. 

II. AN ACTIVIST TRADE POLICY TO LEVEL THE PLAYING FIELD IN CHINA AND SUPPORT

U.S. REBALANCING

China is now the largest exporter and the third-largest importer in the world. It 

is the third-largest and fastest growing market for U.S. exports in a wide range of 

products. If the United States is to succeed in rebalancing its growth—shifting from 

credit-driven consumption and housing toward investment and exports—continued 

rapid growth in U.S. exports to China is essential. China also receives a major share 

of the foreign direct investment of U.S. multinational companies, many of which 

have extensive and growing operations there. Offshore Chinese production platforms 

are critical to efficiency solutions for high-cost U.S. manufacturers and support their 

production, employment, profits, R&D and investment in the us. Access to China’s 

large and growing market is a significant factor in the success of many U.S. businesses, both large multinational companies and many small- and medium-sized 

companies as well. Reducing barriers that impede the access of U.S. companies to 

China’s markets is and should be a major objective of U.S. trade policy. The Obama 

administration rightly accorded priority to this goal in the recent S&ED discussions, 

focusing in particular on the effects of China’s innovation policies, government procurement policies, and foreign direct investment policies on American companies exporting to and/or producing in China. 

During the last few years, many American companies (along with European and 

Japanese companies) have raised concerns about China’s so-called ‘‘indigenous innovation’’ policies to promote the development of Chinese owned technology and intellectual property and to reduce China’s dependence on foreign technologies. Initially, 

the call for indigenous innovation was more hortatory than real. But recently the 

call has been given practical effect through policies that include not only strong incentives for innovation by Chinese companies but also policies that discourage the 

participation of foreign companies in technologies or sectors deemed to be strategic 

by the Chinese Government. In a recent survey of 388 U.S. companies conducted 

by the American Chamber of Commerce in China, 28 percent said that they are already losing business as a result of China’s indigenous innovation policies, and 57 

percent of high-tech companies said that they expect to lose more business in the 

future as these policies are fully implemented. 

Seven of the eight top challenges to doing business in China identified by the survey’s respondents relate to obstacles posed by the policies of the Chinese Government in a wide range of areas, including procurement, standard setting, intellectual 

property protection, subsidies and approvals for foreign direct investment. These 

survey results reveal a growing concern among American businesses that China is 

adopting more restrictive promotional policies that favor Chinese companies and 

that pose significant access barriers to foreign companies doing business in China. 

18 

There is mounting evidence that China’s trade and industrial policies are changing 

in ways that are impeding access of foreign producers to China’s market and that 

fall outside of WTO rules and enforcement procedures. 

Preference in government procurement has recently become a key weapon in China’s arsenal of indigenous innovation policies. According to China’s long-term plan 

for scientific and technological development, the government should establish a priority procurement policy for important high-tech products and equipment developed 

‘‘by domestic enterprises with independent intellectual property.’’ Since China is not 

a signatory to the Government Procurement Agreement (GPA) of the WTO, its procurement procedures are not covered by the agreement and not actionable at the 

WTO. But China’s preferential treatment of its domestic producers in government 

procurement is not an isolated development. Indeed, China’s preferential procurement policies were given an implicit green light in 2009 when several nations that 

are GPA signatories framed their stimulus actions to provide support to their own 

companies and workers. (The ‘‘Buy America’’ provisions of the U.S. stimulus package are a case a point. Although these provisions did not have a significant effect 

on procurement and trade in the us, they did send a strong signal to China.) 

In November 2009, several of China’s most powerful ministries issued a joint circular, announcing the intent to create a national catalogue of ‘‘indigenous innovation’’ products for government procurement,‘‘ and proposing accreditation conditions 

to determine whether particular products qualified for inclusion in the catalogue. Although the accreditation conditions do not include explicit restrictions against the 

products of foreign-owned companies, they effectively deny access to such products 

if the technology does not originate in China—even if the products are entirely produced in China, with 100 percent local content. That’s because most of the products 

sold by American companies in China embody many technologies sourced from the 

United States and other locations and also because American companies are reluctant to develop technologies in China as a result of inadequate intellectual property 

protection there. 

We are encouraged that the recent S&ED discussions made some progress on the 

indigenous innovation and related government procurement issues, although China 

did not agree to a U.S. request for full suspension of its indigenous innovation policy. Instead, China confirmed its commitment to innovation policies consistent with 

the principles of nondiscrimination, intellectual property protection and market 

competition and agreed to hold high-level bilateral talks on such policies. China also 

agreed that the terms of technology transfer should be shaped by agreements among 

companies without government interference. In response to U.S. concerns, China removed several troubling conditions from its product accreditation circular, including 

the requirement that products be patented or trademarked in China, and agreed to 

delay final implementation of the national catalogue to assess public comments. 

China also promised to submit a revised offer to join the WTO Government Procurement Agreement by July. Given the importance of the government and of stateowned companies in the Chinese economy, China’s participation in this agreement 

should be a major objective of U.S. trade policy. As part of its WTO accession agreement, China committed that state-owned and state-invested companies would make 

their decisions solely on commercial considerations and that the government would 

not attempt to influence these decisions either directly or indirectly. In principle, 

these commitments are enforceable through the WTO dispute settlement mechanism. But U.S. companies frequently complain that the procurement decisions of 

state-owned companies either follow the decisions of state agencies or are influenced 

by government actors. A convincing bid by China to join the GPA could help assuage 

these concerns. 

In response to Chinese concerns, the United States softened its position on two 

key issues of longstanding interest to China. First, the United States promised to 

ease restrictions on some high-technology exports to China. While this is a priority 

issue for China, U.S. controls on such exports have only a small effect on U.S. trade 

with China. According to recent estimates, only about 0.3 percent of all U.S. exports 

to China and about 0.6 percent of all U.S. advanced technology exports to China 

require an export license. The figures for Europe are comparable: 0.2 percent of all 

U.S. exports and 0.4 percent of all U.S. advanced technology exports to the EU require a license. Moreover, around 80 percent of the exports to China that require 

a license receive a license exemption and the value of all denied licenses is minimal. 

Second, the United States agreed to consult with China on its desire to be accorded 

‘‘market economy status’’ within the WTO and scheduled consultations for the fall 

meeting of the United States-China Joint Commission on Commerce and Trade. In 

its original accession agreement to the WTO, China agreed to be treated as a nonmarket economy in antidumping and countervailing duty cases. As a result, the 

United States or any other WTO member can initiate an antidumping investigation 

19 

against Chinese products using the product prices of a third country as a benchmark. This makes Chinese firms especially vulnerable to antidumping cases and the 

imposition of antidumping tariffs on its products. As part of its WTO accession, 

China also agreed to annual compliances reviews of its implementation of its accession agreement. 

So far, the United States has been reluctant to recognize China’s status as a market economy and has posed several conditions that China must meet including the 

adoption of a market-based exchange rate regime. Now the United States will have 

to decide whether China’s decision to allow the market to determine the RMB-dollar 

rate within a managed band satisfies this condition. We think it should and we 

think it sets the grounds for progress on China’s bid for market access status during 

the upcoming JCCT consultations. The United States will lose its ability to use the 

market access issue as a bargaining chip with China in 2016 when it will be accorded such status automatically. 

Both the United States and China have been major beneficiaries of the growth 

in world trade and foreign direct investment triggered by the WTO and both have 

been active users of WTO enforcement to address trade disputes, including bilateral 

disputes. In recent testimony, Alan Wolff, cochair of Dewey & LeBoeufs International Trade Practice Group, examined the history of United States-China trade 

relations within the WTO and concluded that the United States has enjoyed ‘‘reasonably positive results.’’ The United States has brought WTO cases against China 

when the U.S. Government has the support of the relevant businesses or industries 

and when it believes it can persuade a WTO panel that China is violating its WTO 

obligations. China has often ceased the practices in question without going through 

a formal dispute settlement panel process. 

But the future is likely to be more challenging because many of the practices at 

the center of United States-China trade frictions and many of the promotional policies playing a more prominent role in China’s development strategy are either inadequately covered or are difficult to enforce by the WTO. These practices include indigenous innovation policies, discriminatory procurement behavior by state-owned 

enterprises, national standards that favor national champions, lax enforcement of 

intellectual property protection and implicit or explicit local content rules for participating in major economic sectors like wind and other renewable energies. Such practices are a violation of the spirit and in some instances the law of China’s WTO commitments and harm not just U.S. companies but companies from other developed 

and emerging market nations. That’s why the United States should continue to 

treat market access barriers as a priority issue in the S&ED discussions, should 

continue to lodge WTO cases against such barriers when they violate China’s WTO 

commitments, and should encourage China’s other trading partners to address such 

barriers in regional and multilateral discussions. 

III. CHINA’S HOLDINGS OF UNITED STATES DEBT AND UNITED STATES-CHINA RELATIONS

As of April 2009, China’s held over US$2.4 trillion in foreign exchange reserves, 

by far the largest in the world. Its holdings of U.S. Treasury debt totaled $900 billion, or about 11 percent of total UST debt held by the public and about 25 percent 

of total UST debt held by foreign investors. (China also holds around $405 billion 

or about 6 percent of U.S. agency debt, primarily Fannie Mae and Freddie Mac 

debt). At current trends, even with continued rebalancing in China and smaller current account surpluses as a share of GDP, China’s FX reserves will continue to 

grow, albeit at a slower pace, and are likely to top $3 trillion by 2011. Given the 

lack of attractive nondollar currency alternatives, exacerbated by the uncertainty 

and turbulence in euro-denominated assets, it is likely that a significant share of 

China’s growing reserves will continue to be held in U.S. Government securities. 

And even if there is a sustained increase in U.S. private saving and a significant 

reduction in the federal budget deficit—both of which are far from certain—it is 

highly likely that the United States will continue to run a significant current account deficit in the 3-percent to 4-percent range and will continue to depend on foreign investors, including China, to finance its saving gap. Moreover, given the sheer 

size of China’s holdings of U.S. dollars and government securities, a precipitous action by China to shift out of U.S. dollar assets could cause a sizeable increase in 

long-term interest rates in the United States, and a sharp decline in the prices of 

U.S. Government securities and the dollar’s value. Even cutting the share of China’s 

holdings of U.S. Treasury securities by 5-percentage points would probably be 

enough to rock global financial markets, with damage on both the United States and 

China. China would sustain capital losses on its large dollar holdings as a result 

of falling prices on U.S. Government securities and a drop in the dollar’s value. 

20 

Despite the prospect of such capital losses, would China be willing to sell some 

of its dollar holdings to respond to a foreign policy dispute with the United States 

or to retaliate against what it deemed to be an assault on its sovereignty? For example, if the United States enacted broad-based trade sanctions on China’s exports because China does not succumb to U.S. pressure for a sizeable RMB appreciation, 

would China retaliate by selling some of its stock of U.S. Government assets or reducing its future purchases of such assets? Many observers believe that China 

would not take such actions, at least not on a meaningful scale, because they would 

impose painful capital losses on China. Even if such losses were significant, however, China might be willing to bear them in retaliation for what it perceives to be 

unfair trade or other policy sanctions that infringe on its sovereignty. There is every 

reason to believe that China would view such U.S. actions as an act of economic 

aggression. Nationalist sentiment inside of China is very high—suggesting that Beijing would be under considerable pressure to take retaliatory measures irrespective 

of any potential portfolio losses. There is far more to China’s FX management objectives than simply seeking optimal rates of financial return. 

Moreover, as Professor Eswar Prasad explained in recent testimony before the 

United States-China Economic and Security Review Commission, the potential for 

losses in the value of China’s foreign exchange reserves could prove to be quite modest for three reasons: 

1. A spike in U.S. interest rates in response to a selloff of U.S. assets by China 

would impose a capital loss on the value of China’s U.S. Treasury holdings on a 

mark to market basis. But given its large stock of reserves and the fact that it has 

no obvious liquidity needs, it is likely that China values its assets on a hold to maturity approach rather than a mark to market approach. 

2. A decline in the value of the dollar against other major currencies triggered 

by China’s action would reduce the RMB value of China’s dollar-denominated holdings, if the RMB appreciated relative to the dollar. Otherwise, China would suffer 

capital losses on the value of its euro and yen assets as the dollar declined, but it 

would benefit from enhanced competitiveness if the RMB declined with the dollar 

against the currencies of its other major trading partners. 

3. A sizeable appreciation of the RMB against the dollar would lead to a sizeable 

capital loss on the value of China’s dollar holdings measured in local currency. But 

the loss could be offset over time as China moves forward on exchange rate flexibility, capital market liberalization, and reserve currency status. 

Prasad concludes that a threat by China to move away from U.S. Treasuries is 

a credible threat that should be taken seriously by U.S. policymakers. We agree. 

And under current market conditions, such a threat could trigger investor concern 

about the huge financing needs of the U.S. Government, causing a sharp spike in 

interest rates and a crisis of confidence in U.S. sovereign debt. 

China has repeatedly expressed its desire for FX portfolio diversification—namely, 

to put in place a disciplined program to reduce its existing holdings of U.S. Government securities and to slow down the acquisition of new holdings. It has been attempting to do this in part through the establishment of the China Investment Corporation, a sovereign wealth fund with an initial capital base of $200 billion. But 

this is a small amount relative to China’s overall dollar holdings. The real problem 

for China is that there are no relatively safe investments other than U.S. Government bonds that are deep and liquid enough to absorb a significant share of the 

massive inflow of dollars that enter China each year as a result of its large trade 

surplus, inward foreign direct investment and hot money in anticipation of a significant RMB appreciation. And the dollar-recycling strategy is, of course, heavily dependent on Beijing’s desire to maintain a relatively tight relationship between the 

RMB and the dollar. Overall, that means that China is likely to continue to hold 

large amounts of dollar assets and that these holdings will grow each year by a sizeable amount. 

IV. RECOMMENDATIONS

The S&ED is an important forum through which the United States and China can 

ameliorate the tensions in their relationship and cooperate on policies to foster a 

balanced and prosperous world economy. 

The United States should continue to cooperate with China in the G20 on macroeconomic policies to support a strong global recovery and to foster more balanced 

global growth in the future. 

China’s stimulus policies fostered a strong rebound of the Chinese economy and 

boosted global growth by providing strong demand for exports from the United 

States and China’s other trading partners in 2009 and through the first half of 

2010. China’s stimulus policies helped rebalance China’s growth away from dependVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
21 

ence on exports and toward domestic demand. In 2009, consumption growth accounted for about half of China’s GDP growth and China’s current account surplus 

as a share of its GDP declined by nearly 50 percent. 

We recommend that China continue to rebalance its future growth in order to increase the contribution of consumption and to reduce the contribution of exports, 

and we believe that China will do so out of both necessity and choice. The likelihood 

of slower consumption growth in both Europe and the United States over the next 

several years will mean slower growth in the demand for China’s exports. To preserve social stability, on which the legitimacy of its leadership depends, China must 

boost domestic demand to absorb its growing labor force, to move surplus labor from 

low-productivity agriculture to higher productivity manufacturing and services, and 

to reduce rural-urban income gaps. 

We believe that China’s infrastructure-led stimulus policies are building the foundation for strong future growth in domestic consumption. We also recommend and 

expect that China’s upcoming 12th Five-Year Plan will spur accelerated proconsumption rebalancing through investments in China’s social safety net, through 

policies to promote services industries and through tax and other policies to reduce 

urban-rural income inequality. 

We believe that as a result of its consumption-led rebalancing, China’s multilateral trade and current account surpluses will be significantly lower as a share of 

GDP in the future than they were in the peak years of 2006–2008. 

China’s exchange rate should be assessed from a multilateral perspective rather 

than from a bilateral, dollar-centric perspective. 

We applaud China’s June 19 decision to end its crisis-induced RMB-dollar fixed 

peg and return to the ‘‘managed float’’ foreign exchange regime it first adopted in 

July 2005. A more flexible RMB driven by market forces benefits the global economy 

because it facilitates more balanced, sustainable global growth. It is also in China’s 

interest because it supports China’s rebalancing goals and it allows China to pursue 

a more independent monetary policy. At the same time, a tightly managed band on 

the dollar-RMB exchange rates is an important stability anchor for China’s transition to more open capital markets. China’s decision to return to a more flexible currency regime and allow the RMB-dollar rate to move within a managed band will 

allow the RMB to appreciate gradually in response to market forces. Over time, a 

stronger RMB will contribute to China’s rebalancing by boosting the purchasing 

power of Chinese consumers and by encouraging Chinese producers to shift production toward domestic demand and away from exports. 

We do not endorse the view that China should make a large adjustment in the 

RMB-dollar rate at this time. The RMB has already appreciated significantly in real 

terms on a multilateral trade-weighted basis. The key imperative for China is to reduce its saving surplus and rebalance its macrostructure. Proconsumption policy initiatives will be more important than changes in the RMB’s trade-weighted exchange 

rate in achieving these goals. The United States should refrain from making explicit 

demands about how China should go about implementing its rebalancing agenda. 

In particular, the choice between proconsumption structural adjustments and the 

RMB-dollar exchange rate should be left to China. 

A significant appreciation of the RMB relative to the dollar will not have a significant effect on the U.S. trade deficit or on U.S. employment. Much of the growth in 

U.S. imports from China has been the result of production moving to lower cost 

China not from the United States but from other higher cost countries, especially 

in Asia. And China’s bilateral trade deficit with the United States needs to be seen 

as but one piece of a much broader multilateral problem, reflecting America’s large 

saving gap. 

The United States should not impose tariffs on Chinese exports if there is not a 

significant appreciation of the RMB. Such tariffs would drive production to other 

emerging market economies not to the United States. In addition, China would retaliate in one of three ways all of which would be damaging to U.S. interests: lodging a WTO complaint that would almost certainly prove successful; imposing tit-fortat tariffs on U.S. exports to China; or reducing demand for U.S. securities. 

Section 3004 (b) of the Omnibus Trade and Competitiveness Act of 1988, which 

requires the Treasury to issue a biannual foreign exchange report assessing whether 

U.S. trading partners are ‘‘manipulating’’ their exchange rates vis-a-vis the dollar, 

has become dangerously politicized and should be repealed or revised. Currency values should be assessed on a multilateral basis rather than a bilateral basis, and the 

International Monetary Fund, rather than the U.S. Treasury, is the appropriate 

multilateral organization for evaluating the exchange rate policies of member countries. 

The U.S. current account deficit is the result of the Nation’s saving gap or the 

gap between how much the United States is producing and how much it is spending. 

22 

To reduce this gap, the United States must reduce the federal budget deficit and, 

as the economy recovers, must increase the household saving rate, which fell to 

nearly zero during the 2001–2007 period. A higher household saving rate will require that the United States rebalance growth away from consumption toward reliance on exports and investment. 

During the recession, the U.S. saving gap has declined relative to GDP, primarily 

as a result of a sharp temporary increase in private saving as households and 

businesses deleverage. But the saving gap has remained substantial as a result of 

stimulus policies that have caused a big increase in ‘‘dissaving’’ by the Federal Government. What happens to the U.S. current account deficit in the future as the economy recovers depends on what the United States does to reduce its saving gap. 

China’s trade and exchange rate policies are of second-order significance. If the 

United States fails to reduce this gap, its trade and current accounts deficits will 

rise again as a share of GDP even if China succeeds in rebalancing its economy. 

The possibility of an asymmetrical global rebalancing scenario remains a very real 

risk. China’s stimulus policies and the likely proconsumption thrust of the upcoming 

12th Five-Year Plan indicate that China should make significant progress in rebalancing its economy over the next several years. In contrast, the stimulus policies 

in the United States, although essential and justifiable to offset the 2008–2009 recession, have exacerbated the long-run saving gap and have not rebalanced growth 

from consumption toward exports and investment. And given the partisan atmosphere in Congress, passage of a credible multiyear deficit reduction plan to reduce 

the saving gap on a sustained basis once the economy has recovered seems unlikely—at least in the near future. 

According to projections by the OMB, the CBO, and private forecasters, U.S. fiscal 

policy is not on a sustainable path: in the absence of additional deficit reduction 

policies, the Federal Government’s debt will continue to rise relative to GDP 

through 2020 even if the economy recovers from the 2008–2009 recession. 

At the S&ED discussions, the United States committed to adopting policies to 

achieve fiscal sustainability in the medium to long run and to stabilize the debtto-GDP ratio. Given the size of projected Federal Government deficits, these policies 

will require some combination of painful spending cuts and revenue increases. We 

recommend that the Congress work with the administration to pass a credible 

multiyear deficit reduction plan to stabilize the debt to GDP ratio. This plan should 

take effect gradually as the economy recovers: policies to reduce the deficit too 

quickly will slow the recovery and increase the losses in potential output from high 

unemployment and excess capacity. 

Access to China’s large and growing market is a significant factor in the success 

of many U.S. businesses, both large multinational companies and many small- and 

medium-sized companies as well. Reducing barriers that impede the access of U.S. 

companies to China’s markets is and should continue to be a major objective of U.S. 

trade policy. 

China’s industrial policies appear to be changing in ways that are reducing access 

of foreign producers to China’s market and that fall outside of WTO rules and enforcement procedures. Indigenous innovation policies, discriminatory procurement 

behavior by state agencies and state-owned enterprises, national standards that appear to favor national champions, lax enforcement of intellectual property protection, and implicit or explicit local content rules in strategic activities like renewable 

energy are areas of growing concern to U.S. companies. The United States should 

continue to negotiate with China to reduce these barriers both in the S&ED discussions and in regional and multilateral discussions that include China’s other trading 

partners who are also disadvantaged by such barriers. 

Given the importance of the government and of state-owned companies in the Chinese economy, China’s participation in the Government Procurement Agreement 

(GPA) of the WTO should be a major objective of U.S. trade policy. The United 

States should negotiate with China to ease U.S. security controls on exports to 

China and to advance the timing for the recognition of China’s market economy status in the WTO (currently scheduled for 2016) in return for a strong offer by China 

to join the GPA. A bargain along these lines could also help revitalize the Doha 

talks, something the United States and China committed to do at the recent S&ED 

meeting. 

The United States should take the lead in negotiating a Trans-Pacific Partnership 

agreement as a major step to the creation of a free trade area for the Asia Pacific. 

Several bilateral and regional preferential trading agreements have recently been 

signed in Asia, and the region is heading toward the de facto creation of an economic bloc that would be discriminatory against the United States. The completion 

of a Trans-Pacific Partnership agreement would arrest this disturbing trend and 

could re-ignite APEC’s role in global trade liberalization. In the 1990s, APEC played 

23 

a key role in the negotiation of a global agreement liberalizing trade in information 

technology products. A revitalized APEC could play a similar role in the creation 

of a global agreement on trade in ‘‘green’’ technologies and products. 

A threat by China to shift the allocation of its vast foreign exchange reserve portfolio away from U.S. securities to respond to a foreign policy dispute with the 

United States or to retaliate against a U.S. policy deemed to be an assault on China’s sovereignty is a credible threat that should be taken seriously. Even the suggestion of such a move could trigger concerns among global investors about the huge 

financing needs of the U.S. Government, causing a sharp spike in interest rates, a 

crisis of confidence in U.S. sovereign debt, and a collapse in the dollar. As the 

world’s largest external borrower, the United States must exercise great caution in 

exerting undo pressure on its most important foreign lender. 

References 

Michael Linden and Michael Ettlinger, ‘‘Restoring Fiscal Balance: The new Deficit 

Commission’s 2015 Targets, Center for American Progress,’’ April 26, 2010. 

Eswar Prasad, ‘‘The U.S.-China Economic Relationship: Shifts and Twists in the 

Balance of Power,’’ written testimony, hearing on ‘‘U.S. Debt to China: Implications 

and Repercussions,’’ U.S.-China Economic and Security Review Commission, February 25, 2010. 

Stephen S. Roach, ‘‘Consumer-Led China,’’ a paper presented to the 11th annual 

China Development Forum, sponsored by the Development Research Center of the 

State Council PRC, held in Beijing on March 20–22 2010. 

Stephen S. Roach, ‘‘America’s China Complex,’’ American Review, May 2010. 

Alan W. Wolff, ‘‘China in the WTO,’’ written testimony, hearing on ‘‘Evaluating 

China’s Role in the World Trade Organization over the Past Decade,’’ U.S.-China 

Economic and Security Review Commission, June 9, 2010. 

Alan W. Wolff, ‘‘The Direction of China’s Trade and Industrial Policies,’’ written 

testimony, hearing on China’s Trade Policies, House Ways and Means Committee, 

June 16, 2010. 

The CHAIRMAN. Thank you very much, Dr. Tyson. 

Ambassador Hills. 

STATEMENT OF HON. CARLA A. HILLS, FORMER U.S. TRADE 

REPRESENTATIVE, CHAIRPERSON, NATIONAL COMMITTEE 

ON U.S.-CHINA RELATIONS, WASHINGTON, DC 

Ambassador HILLS. First of all, thank you very much, Mr. Chairman, Senator Lugar, and the other members of the committee. It’s 

a great pleasure to appear again before the Senate Foreign Relations Committee. 

I think your focus on the economic issues is absolutely indispensable today. I have submitted testimony that responded to your 

seven questions, and I just picked out three issues that I thought 

I would summarize, since I was told 5 minutes was the limit. One 

is trade, one is the imbalance, and, last, the Strategic and Economic Dialogue. And I look forward to your questions. 

Our Secretary of State has stated, not once but several times, 

that our relationship with China is the most important bilateral relationship in the world in this century. And in the area of trade, 

I would say that is already evident. 

Between 2000, the year before China entered the World Trade 

Organization, and 2008, just before the great recession, United 

States sales to China increased 340 percent; whereas, during that 

same period, our sales to the rest of the world increased just 29 

percent. And, significantly, every State in the Union has seen near 

triple-digit growth of their sales to China. Even more significantly, 

in my opinion, last year, when global trade plummeted 11 percent, 

pulling global growth into negative territory, our exports to China 

held steady, where our exports to the rest of the world fell by 20 

percent. 

24 

And, as Senator Lugar has pointed out, today China is our fastest growing export market, and has become our second-largest 

export market, behind Canada. And we both benefit from keeping 

our respective markets open and avoiding all forms of protection, 

such as Buy America legislation and Buy China policies. 

And it is in our mutual interest to work further to open global 

markets. As Dr. Gary Hufbauer, of the Peterson Institute for International Economics, has calculated, the United States economy is 

$1 trillion richer per year as a result of our leadership in opening 

global markets since World War II, and, similarly, it’s thanks to 

open markets that China has achieved double-digit growth for the 

past three decades that has lifted hundreds of millions of people 

out of dire poverty. 

So, going forward, we should boost our global trade and with it 

our respective nations’ growth by reaching agreement in the Doha 

Round, and we’re more likely to achieve an agreement in those 

negotiations if the United States and China work together. 

In addition, while both of our economies are recovering from the 

great recession, neither government can ignore the fact that the existing global imbalance risks triggering another serious financial 

crisis. Indeed, the former chairman of the New York Fed has stated 

that, even without the housing crisis here in the United States, the 

global imbalance would have eventually led to the crisis that we 

have suffered. 

Now, China, Germany, Japan, South Korea, and others, have 

built their growth on exports, accumulating substantial surplus, 

whereas the United States, the United Kingdom, and Spain, and 

others, have built their growth on consumption, accumulating substantial debt. Neither growth model is sustainable. And although 

the United States has cut its external Federal debt from its 6-percent peak in 2006 to about 3 percent last year, it still remains the 

world’s largest debtor nation. And although China has cut its current account surplus from its 11-percent peak in 2007 to about 5 

percent in 2009, it still remains the world’s largest creditor nation. 

And most thoughtful economists suggest that these declines, 

while welcome, are driven more by cyclical factors than by structural factors. And it’s the structural factors that both nations and 

their colleagues that find themselves in similar circumstance need 

desperately to address. 

To ensure that we do not suffer again from a financial crisis, the 

global economy simply must be brought into better balance. And 

this is a global problem. But, if the largest debtor nation and the 

largest creditor nation were to lead by example and commit to specific structural reforms within realistic timeframes, with periodic 

updates, that would not only give confidence—great confidence, in 

my view—to the global market, it would also put our respective 

economies on a sustainable growth path and ensure the future 

prosperity of our respective populations. 

For example, the United States could commit to a plan at a G20 

meeting—we’re having a G20 meeting in a couple of days—to bring 

its primary budget deficit into balance within say 5 years, and its 

external deficit into better balance in say 10 years, setting forth 

benchmarks to measure its progress, which it would report at future G20 meetings. 

25 

Similarly, China could commit to a plan at a G20 meeting to 

stimulate its domestic consumption by gradually correcting the 

underpricing of capital, water, land, and energy that favors its 

state-owned enterprises and heavy industry, that export, and permitting interest rates to rise on bank deposits, making credit more 

available to small- and medium-size enterprises, and further loosening the controls over its currency, and providing progress reports 

in these areas in future G20 meetings. 

And the Strategic and Economic Dialogue that was referred to in 

your questions provides, in my view, an extremely valuable forum 

for thinking through the tough issues, like rebalancing and protectionism. It brings together Cabinet-level officials on both sides to 

discuss difficult challenges facing both nations, like the need for 

further opening the global markets, stimulating innovation, addressing environmental issues, and resolving bilateral differences 

over trade and investment. Its value could be enhanced by smaller 

delegations: The last delegation coming from the United States 

numbered 200, and there was an equal number on the Chinese 

side; it’s tough to achieve a real personal relationship in a group 

of 400. And more frequent meetings would facilitate the building 

of the personal relationships, which I deem to be extraordinarily 

important and key to building mutual trust. 

There’s so much more that I could say, but I notice the clock is 

blinking. And so, let me stop. And I am pleased to take your questions. 

[The prepared statement of Ambassador Hills follows:] 

PREPARED STATEMENT OF HON. CARLA A. HILLS, CHAIR AND CEO OF HILLS & 

COMPANY, INTERNATIONAL CONSULTANTS, WASHINGTON, DC 

Mr. Chairman and members of the committee, thank you for inviting me to share 

with you my views regarding opportunities and challenges in the United StatesChina Economic Relationship. You have posed seven questions. 

I. WHAT ARE THE KEY ISSUES FOR THE UNITED STATES AND CHINA POLICYMAKERS TO

CONSIDER REGARDING FAIR AND OPEN ACCESS TO EACH OTHER’S MARKET?

1. Keeping Bilateral and Global Markets Open 

The most important issue for leaders in the United States and in China to keep 

firmly in mind is that their nation’s prosperity requires keeping bilateral and global 

markets open. History shows that no country has done well by sealing itself off from 

the world. 

Economist Dr. Gary Hufbauer in a comprehensive study published by the Peterson Institute for International Economics calculates that the opening of global markets since World War II has increased our nation’s GDP by roughly $1 trillion per 

year, thus raising the average American household yearly income by $9,500. He further calculates that the additional opening of world markets to trade and investment could increase U.S. wealth potentially by another $500 billion per year, making the average American household richer by an added $4,500 per year. It is hard 

to think of another economic policy decision that could have such a positive impact 

on U.S. economic well-being. 

And it is thanks to the opening of global markets that China has averaged double 

digit growth over the past three decades, enabling it to lift hundreds of millions of 

people out of dire poverty. Today, China has become the world’s fastest growing 

major economy. This year it is likely to replace Japan as the world’s second-largest 

economy. 

The benefits of open markets are enormous. The prosperity of the peoples of both 

China and the United States will be enhanced by maintaining a strong and vibrant 

economic relationship. 

Yet economic hardship inevitably stokes economic nationalism. Last year for the 

first time since World War II, global trade plummeted 11 percent and global output 

fell into negative territory. Americans were hit by historic job losses, home foreVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00029 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
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closures, and bankruptcies. China did not escape the crisis. It was forced to shutter 

hundreds of assembly and manufacturing facilities putting millions of people out of 

work. 

Although the International Monetary Fund forecasts world output will grow by 

more than 4 percent this year and global trade will increase by 7 percent, there is 

considerable pain remaining. Policymakers in the United States and in China will 

expedite the economic recovery that is now underway by resisting calls to impose 

market barriers on the trade or investment of the other. 

In spite of our different histories, form of governments, and domestic sensitivities, 

an important fact for both Chinese and American policymakers to keep in mind is 

the enormous potential for extremely positive interaction between the largest and 

the fastest growing economies. 

2. Rebalancing Our Economies 

While both of our economies are recovering, our policymakers cannot ignore the 

fact that the imbalance that exists in our respective economies could trigger another 

crisis. In the last half decade China has become the world’s largest creditor nation, 

and the United States its largest debtor nation. Although China has cut its surplus 

from its peak in 2007 of 11 percent of its GDP to about 5 percent in 2009 and 3.5 

percent in the first quarter of 2010, and the United States external federal deficit 

has come down about from its peak in 2006 of 6 percent of GDP to 2.8 percent in 

2009, thoughtful economists who have studied this issue believe that both declines 

were largely driven by cyclical factors and that structural changes are still required 

if we are to protect against future global financial crises. 

The United States will need to reduce both its primary budget deficit and its external deficit. China will need to reduce its reliance on exports and heavy industry. 

Although the action that each government takes to restructure its economy is independent of the other, it is an issue that both policymakers must address. 

II. WHAT POTENTIAL DOES THE CHINESE MARKET HOLD FOR U.S. COMPANIES?

The actual and potential of the Chinese market is substantial and growing. China 

has become America’s third-largest export market behind Canada and Mexico and 

is our fastest growing export market. Between 2000, the year before China joined 

the World Trade Organization (WTO) and 2008, U.S. sales to China increased 340 

percent whereas U.S. sales over that same period to the rest of the world increased 

just 29 percent. 

Importantly, virtually every state in the union has seen near triple digit increases 

in its sales to China. Last year computers and electronics, crop production, chemicals and transportation equipment comprised our top four exports to China. These 

are all sectors that generate good domestic jobs. 

And in 2009 when for the first time since WWII trade plummeted 11 percent 

dragging world growth into negative territory, U.S. exports to China held steady 

whereas U.S. exports to the rest of the world fell nearly 20 percent. This year 

through April, U.S. exports to China are up 42 percent and are 17 percent higher 

than the comparable period in 2008. 

It is not surprising that U.S. companies continue to seek to do business in and 

with China. In 2009 in spite of the economic crisis that adversely affected both 

China and the United States, the value of U.S. goods exported to China was about 

$70 billion roughly the same amount as before the crisis, and if sales of U.S. goods 

to Hong Kong are added, the total climbs past $90 billion. In addition, U.S. exports 

of services to China topped $15 billion. And sales of U.S. affiliates in China topped 

$84 billion in 2007 before the crisis and the latest year for these statistics. In short, 

the U.S. current market in China exceeds $100 billion and that market is steadily 

growing. 

III. WHAT ARE THE CHIEF OBSTACLES THAT U.S. COMPANIES FACE IN CHINA?

Foreign companies face a number of obstacles in doing business in China. There 

are voices in the Chinese leadership, as there are here in the United States and 

elsewhere, urging the adoption of restrictive measures to protect specific interests 

of domestic businesses. Measures in China that have been particularly nettlesome 

to U.S. companies include: 

1. Government Procurement: ‘‘Indigenous Innovation’’ Policy 

In 2006, China, in an effort to produce ‘‘national champions,’’ adopted an ‘‘Indigenous Innovation’’ policy that sought to encourage government purchases of domestic 

products in specific sectors. Last year the government produced lists of favored products. As a result of bilateral dialogues, the government has moved from mandating 

domestic purchases to encouraging them. However this ‘‘buy China’’ policy is a 

27 

major concern to U.S. entrepreneurs, particularly those in the high technology 

sectors. 

2. Protection of Intellectual Property 

According to a survey conducted by the United States-China Business Council, 

two-thirds of U.S. companies found China’s failure to protect adequately intellectual 

property adversely affected their businesses in China. Getting the legal structure 

right is important. In 2009, the United States brought and won a case in the WTO 

dealing with copyright infringement which resulted in China amending its laws. 

However, enforcement is a major problem at the central, provincial and local levels. 

3. Standards and Testing 

U.S. companies are adversely impacted by standards that are drafted to favor Chinese domestic products. For example, an ingredient that is harmless may be prohibited in a particular product when that ingredient is not used in competing Chinese 

products. 

U.S. companies find China’s testing process challenging. A Chinese certification 

board is responsible for testing most products sold in China. That top-down approach is different from the process used in the United States where industry develops the product standards in the first instance. 

4. Investment Restrictions 

A United States-China Business Council survey of its member companies doing 

business in China indicates that roughly 90 percent of its member companies invest 

in China to reach the market there, not to export back to the United States. Although some sectors are open, others including chemicals, automobiles, telecommunications and express delivery encounter some restrictions. China is in the 

process of revising its 2007 Catalogue Guiding Foreign Investment in Industry. 

IV. HOW CAN THE UNITED STATES BEST STRENGTHEN ITS TRADE AND INVESTMENT TIES

WHILE ENSURING U.S. COMPETITIVENESS IN AN INCREASINGLY COMPETITIVE ENVI- RONMENT?

Our Nation can strengthen its trade and investment ties with the trading nations 

of the world including China in a number of ways including (1) leading the 153 

members of the World Trade Organization (WTO) to a successful conclusion of the 

Doha Round of Multilateral Negotiations; (2) expanding efforts to open markets with 

the 21 economies comprising the Asia Pacific Economic Cooperation forum (APEC) 

starting with completing the Trans-Pacific Partnership; (3) approving the three 

pending free trade agreements that have been signed with South Korea, Colombia, 

and Panama; (4) completing the negotiation of a Bilateral Investment Treaty with 

China; and (5) addressing our restrictions on immigration that reduce our competitiveness. 

1. Doha 

For six decades the United States under both Democratic and Republican administrations led the world in opening global markets to trade and investment with the 

result that economic growth both globally and nationally soared for rich and poor 

nations alike. Our actions in the early multilateral negotiations under the General 

Agreement on Tariffs and Trade (GATT) accelerated the economic rebuilding of nations devastated by World War II. Today we could be equally far sighted by achieving an agreement in the Doha Round of Multilateral Negotiations that would integrate developing nations more solidly into the global trade regime and in so doing 

enlarge trade and investment opportunities that would fuel economic growth at 

home and around the world. Unfortunately, we are no longer leading efforts to open 

global markets. 

Currently in its ranking of 133 trading nations, the World Economic Forum ranks 

the United States behind 43 nations in terms of how open the domestic market is 

to trade. However, the Doha Round offers our Nation an outstanding opportunity 

to do well by doing good. One example stands out. By agreeing to reduce meaningfully our agricultural subsidies, we could persuade other governments with high 

subsidies to do the same. Opening global agricultural markets would not only benefit our farm exporters, but it would show the world that we are serious about taking steps to put our Nation on more a more sustainable fiscal path. 

2. APEC and TPP 

Expanding our trade and investment ties in Asia offers the United States a significant opportunity to stimulate domestic economic growth and job creation. The 21 

members of the Asia Pacific Economic Cooperation forum (APEC) represent approximately 2.5 billion consumers, 58 percent of global trade, and more than half of world 

28 

1 Currently involving Australia, Brunei, Chile, New Zealand, Peru, Singapore, the United 

States and Vietnam. 2Korea currently has five free trade agreements in effect, two that are signed and pending 

ratification, negotiations underway with eight other countries and is considering entering negotiations with six more. 

output. Over the past decade most of the increase in global growth has been generated by the APEC economies. Collectively these economies account for a majority 

of our Nation’s exports. Further opening these markets to U.S. entrepreneurs would 

enhance our Nation’s competitiveness in the world’s most vibrant region where 

other major trading nations including China, Japan, South Korea, the European 

Union and the economies comprising the Association of Southeast Asian Nations 

(ASEAN) have negotiated or are currently negotiating bilateral and plurilateral 

trade agreements that advantage their entrepreneurs over ours. Obtaining equal or 

better access to these markets would enhance our Nation’s competitiveness, create 

jobs, and boost growth. 

Achieving this will require leadership and action on our part. To strengthen our 

trade and investment ties in this high-growth region, we should move forward 

promptly to negotiate the Trans-Pacific Partnership (TPP),1 which could serve as a 

first step toward a broad market opening agreement in the region which over time 

could incorporate additional APEC members, such as Japan, South Korea, Indonesia, Malaysia, and eventually China. Such an agreement would not only enhance 

our Nation’s competitive position, it would also create a visible bond across the Pacific to work against the world splintering into three blocs (Asia, Europe, and the 

Americas) which would both impede global and national economic growth and increase the potential for global instability. The APEC summit in Hawaii in 2011 

gives the United States an excellent opportunity to showcase a completed TPP, 

which would demonstrate its renewed commitment to the region. 

3. Approval of Pending Free Trade Agreements 

A. Korea Free Trade Agreement 

Approval of the Korean Free Trade Agreement would both enhance our competitiveness in Asia and demonstrate our continued interest in the region. Under its 

terms South Korea, currently our seventh-largest trading partner, would open its 

market to U.S. farm products, goods, and services, enhance its protection of intellectual property and substantially open government procurement. Ninety-five percent 

of bilateral trade in consumer and industrial products would become duty free within 3 years. The agreement would cause trade to expand between our two nations 

and stimulate both economic growth and jobs in both markets and put our entrepreneurs on an equal footing with the growing list of major trading nations that 

have already negotiated trade agreements with South Korea.2 Significantly, it has 

indicated an interest in negotiating a trade agreement with China, which if concluded, would put our exporters at a substantial disadvantage in one of our key export markets. 

B. Colombia and Panama Free Trade Agreements 

Approval of the trade agreements that the United States has signed but not ratified with Colombia and Panama would substantially enhance our competitiveness 

in Latin America. Colombia with its $250 billion economy is the second-largest in 

South America. Today in excess of 90 percent of U.S. imports from Colombia enter 

the United States duty free while relatively high tariffs are imposed on most U.S. 

exports. The agreement would eliminate 80 percent of those tariffs and open up 

markets to a broad range of services and investment. That would make exports 

more competitive and remove the additional disadvantage our exporters face not 

only by ‘‘leveling the playing field’’ between the two countries but also by achieving 

equality with Colombia’s other trading partners like Canada that have already entered a free trade agreement with Colombia. 

Similarly opening Panama’s market would make our goods, services, and investment more competitive. It makes no sense for us to be the impediment that enables 

Panama to ship its products duty free and to assess duties on our services and goods 

including our competitive heavy equipment used for canal upgrades when much of 

our competition ships duty free. 

4. Bilateral Investment Treaty With China 

As economist Dr. Hufbauer has ably documented U.S. outward foreign investment 

pulls U.S. exports into the foreign market, while inward foreign investment into the 

United States boosts economic growth and creates domestic jobs. To establish clear 

rules governing inward investment gives certainty to the market and confidence to 

29 

3 Robert W. Fairlie ‘‘Estimating the Contribution of Immigrant Business Owners to the U.S. 

Economy,’’ Small Business Administration Office of Advocacy, November 2008, http:// 

www.sha.gov/advo/research/rs334tot.pdf. 4 ‘‘Workforce & Immigration Overview: Maintaining a High-Skilled U.S. Technology Workforce,’’ 2009, http://www.acanet.org/GovernmentAffairs/gaetl1BlHIBVisa.asp. 

investors, plus it helps to avoid controversy. In June 2008 at the fourth Strategic 

Economic Dialogue, China and the United States agreed to begin negotiations of a 

bilateral investment treaty to protect the interests of their respective investors in 

the other’s economy. Such an agreement would protect our investors against discriminatory measures that today account for a major portion of the obstacles that 

confront our businesses in China. With economic nationalism on the rise in both 

countries, moving ahead to conclude an investment treaty would enhance U.S. competitiveness by insuring that we can capture the growth and jobs that attend cross 

border investment. 

5. Immigration Contributes to U.S. Competitiveness 

We usually talk of trade ties in terms of goods, services, and investment and less 

frequently mention people and ideas. Yet the United States is a nation of immigrants. Talented people from all over the world come to work or study in the United 

States bringing their ideas, starting businesses, creating jobs and contributing to 

our competitiveness. According to a study published in 2008 by the Small Business 

Administration,3 immigrants constitute 12.5 percent of U.S. businessowners and 

start 25 percent of new engineering and technology companies. Another study published in 2009 by the American Electronics Association,4 found that immigrants 

were CEOs or lead technologists in one of four technology and engineering companies started in the United States between 1995 and 2005. These immigrant-founded 

companies employed 450,000 workers and generated $52 billion in revenues in 2006. 

Unfortunately for our economic growth, creation of new jobs, and overall competitiveness the annual number of H–1B visas is sharply restricted. Current law limits 

H–1B visas to 65,000 annually with up to 20,000 available for foreign nationals 

holding advanced degrees from an American university. America could boost its 

growth, job creation, and competitiveness by opening its doors more widely to talent 

from beyond its border. 

V. THE STRATEGIC AND ECONOMIC DIALOGUE IS OUR BILATERAL FORUM FOR ENGAGE- MENT ON MANY OF THESE ISSUES. HOW WOULD YOU RATE THE EFFECTIVENESS ON

THESE ISSUES?

I believe that the Strategic and Economic Dialogue is an important bilateral 

forum that can help our government to build a solid relationship with the world’s 

fastest growing economy. It provides the opportunity for our leaders at the highest 

level to meet their counterparts and discuss critical issues. These discussions can 

enhance our understanding of China’s economic challenges as well as its strategic 

objectives and ensure that China’s leaders understand ours. Mutual understanding 

is indispensable to finding solutions to tough issues. The list of economic issues that 

require collaboration for proper resolution is long and growing including rebalancing 

our national and the global economies, energy security, trade policy, financial reform, and environmental protection. To address effectively these and other issues, 

it is overwhelmingly in our national interest to maintain a close, candid, and collaborative relationship at the highest levels, and the Strategic and Economic Dialogues help to do just that. 

We know that high-level engagement works. In recent years our Deputy Secretary 

of State met frequently to discuss issues of foreign policy. In addition our Secretary 

of the Treasury led the effort called the Strategic Economic Dialogue (SED) whereby 

Cabinet-level officials from both governments met to discuss economic issues for 2 

days twice a year. The purpose of the SED was to discuss complex, longstanding, 

economic challenges and to craft solutions satisfactory to both governments. 

Since both our governments are quite compartmentalized and have different organizational structures, these meetings helped to circumvent the stovepipe structures 

that impede decisions by bringing to the table all the high-level officials on both 

sides required for a decision. 

These face-to-face meetings enabled both sides to understand the concerns of their 

counterparts and led to a number of positive outcomes. For example in 2007 when 

food and safety issues were very much in the news, high-level officials from both 

governments seriously discussed at an SED meeting effective ways to deal with 

these issues. 

At the next meeting of the SED, representatives of our Food and Drug Administration and our Consumer Products Safety Commission and their Chinese counterVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00033 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
30 

parts were able to announce a Memorandum of Understanding covering how they 

would cooperate in food and safety investigations. Representatives of our FDA have 

publicly stated that they had never before enjoyed such a high level of positive interaction with their counterparts in China. They have established offices in Beijing, 

Guangzhou, and Shanghai. 

More recently at the S&ED meeting this past May, after discussion the Chinese 

Government agreed to submit a proposal to join the WTO Government Procurement 

Agreement by the end of July. Such an agreement would protect our entrepreneurs 

against some of the discrimination that they name as the top obstacle they encounter today in penetrating the Chinese market. 

The economic dialogues not only provided an effective forum for raising and solving economic issues of concern to both our governments, but they also created a 

mechanism that avoids having to initiate talks among strangers in the heat of a 

crisis. 

Accordingly I was very pleased when it was announced that our Secretaries of 

State and Treasury would share leadership of a high-level bilateral dialogue, now 

called the Strategic and Economic Dialogue. The S&ED first met in July last year 

and again last month for 2 days on each occasion. The plan is to hold these meetings on an annual basis dedicating one day to a plenary session and the second day 

to separate discussions on economic and strategic issues. 

The one downside that I see in the new structure is its sheer size. In May our 

delegation to Beijing comprised 200 senior officials, the largest U.S. delegation to 

China in the history of our bilateral relationship. The merged strategic and the economic groups bring together such a large number of participants that relationshipbuilding that has been so helpful in the past will be far more difficult. 

Another downside I see is that the stated intention is to meet yearly rather than 

twice each year. Formerly, two full days twice a year, four days total, were devoted 

to economic discussions. Now only one day each year will be devoted exclusively to 

economic issues. Our bilateral economic agenda is long and growing longer which 

suggests to me the need for more rather than fewer meetings. 

There are two other bilateral dialogues that provide valuable means to have sustained focus on critical economic issues, but they are not conducted at the same high 

level. One is the Joint Commission on Commerce and Trade, a senior officials group 

that has formed some 17 working groups to address specific issues including industrial and competition policy, intellectual property, information technology, and trade 

and industry. Most of these plan to meet twice a year. 

The second is the United States-China Investment Forum, a deputies led group 

that is focused on such issues as procurement, standards, and access to markets for 

services. 

VI. CAN WE MAXIMIZE OUR ABILITY TO ADDRESS CONCERNS ABOUT CERTAIN CHINESE

ECONOMIC POLICIES THROUGH MULTILATERAL FORA SUCH AS THE G20?

The G20 group of nations representing the world’s 20 largest economies which has 

replaced the G8 representing the eight large industrialized nations is far better 

equipped to deal with today’s global economic challenges. 

Three issues of key importance to both the United States and China are better 

suited to the G20 forum than bilateral discussion: (1) China’s currency regime; (2) 

the need to rebalance the global economy; and (3) the need to keep global markets 

open in the face of domestic calls for protectionism. 

I. China’s Currency Regime 

China’s currency controls have been an issue of contention not only with the 

United States, but also with the European Union, which is China’s largest trading 

partner, as well as a number of other nations. China’s announcement a few days 

ago that it will permit the yuan to gradually appreciate will help to reduce those 

tensions. Monitoring this issue at future G20 meetings will be helpful in that it will 

maximize pressure on China which wants to be seen as constructive in international 

fora and minimizes bilateral contention. 

2. Rebalancing the Global Economy 

The global recovery that is currently underway, faster for some than for others, 

could be derailed by the serious imbalance of the global economy that has ballooned 

in recent years. China, Germany, Japan, South Korea, and other Asian economies 

have built their growth on exports, whereas the United States, the United Kingdom, 

and Spain among others have relied excessively on domestic consumption, particularly in the housing sector, to fuel economic growth. 

Although investment excesses by the financial sector triggered the fiscal crisis in 

2008, there is general agreement that the global imbalance made the crisis much 

31 

worse. As stated last year by Gerald Corrigan, former President of the New York 

Federal Reserve: ‘‘It is highly likely that these imbalances would create a serious 

macroeconomic problem even if we had not had the fiscal problem.’’ 

If we are to protect against future global financial crises, the global economy must 

be brought into better balance. That will require debtor and creditor nations to alter 

their existing economic models to put their economies on a more sustainable growth 

plan. Debtor nations cannot continue to consume at the excessive levels of the past, 

and creditor nations must look more to their own consumers to fuel their economic 

growth. 

This is a global problem and requires a global solution. However, global balance 

is more likely to be restored if the world’s largest debtor nation and its largest creditor nation were to lead by example with each committing to specific structural reforms, spelling out the steps that each would take within specific timeframes, and 

agreeing to provide periodic updates regarding progress. That would boost confidence in the future health and stability of the global market, which in turn would 

help keep our respective domestic economies on a sustainable growth path. 

The required changes will take time to implement. But a plan of action over a 

period of years could be announced that would give confidence to the market and 

to investors. One could imagine the United States announcing a plan at a G20 meeting to bring its primary budget deficit into balance within a specified period like 

5 years and its external deficit into balance in a specified period like 10 years and 

to report regularly at future G20 meetings on its progress. 

Similarly, one could imagine China announcing at a G20 meeting a plan to stimulate its domestic consumption by correcting its underpricing of capital, water, land, 

and energy to large enterprises, permitting interest rates to rise on bank deposits, 

making credit more available to small- and medium-size businesses, and continuing 

the steady and gradual loosening of controls on the yuan that it announced this past 

weekend with progress reports on these structural changes at future G20 meetings. 

Such a commitment by the United States to undertake structural reform necessary to achieve more balanced growth would not be a favor granted to nor conditioned on action by China, nor would a decision by China to make structural 

changes to stimulate domestic consumption be a favor granted to or conditioned on 

action by the United States. 

The policy corrections that each needs to make are necessary to ensure each nation’s future financial stability and prosperity, for if corrections are not made the 

global imbalance will likely ignite another economic crisis. By their respective actions, they would not only give confidence to the market but also help persuade 

other nations with imbalances to follow their lead. The G20 provides an appropriate 

forum. 

3. Keeping Global Markets Open 

Leaders of the G20 nations which account for 85 percent of world output and 80 

percent of world trade have taken a leadership role with respect to the global economy. They meet biannually to consult and collaborate on critical global economic 

issues. 

The G20 leaders instead of simply pledging support could take action and make 

history by bringing the Doha Round to a successful conclusion. Economic studies 

document that the reductions in trade barriers that could be secured in this round 

of trade talks would boost world output between $300 billion and $700 billion a 

year. We need that growth now. 

VII. WHAT ARE YOUR BROAD VIEWS ON THE IMPORTANCE OF THE ECONOMIC

RELATIONSHIP AS PART OF A LARGER FOREIGN POLICY AGENDA?

There is no question but that a collaborative, constructive economic relationship 

creates a positive environment for discussing tough and contentious foreign policy 

issues. Even where national interests on foreign challenges diverge, a solid economic 

relationship makes serious discussion of and possible narrowing of those differences 

more likely. 

That does not mean that we should forgo pressing our economic interests. From 

time to time we will have economic differences with our large and important trading 

partners, including China. When we believe that China or any trading partner has 

violated recognized rules of the WTO, or the rules of other international agreements, 

we should act and use the dispute settlement mechanisms provided to resolve the 

problem. And where the rules of the system are insufficient, we should negotiate 

to ensure that they reflect market realities. 

Our government has taken China to the WTO eight times. We have settled four 

of the cases, won three and have one pending. China has brought five cases against 

us. We have settled one, won two, and lost two. 

32 

This is how the WTO trade regime should work. It enables us to resolve trade 

issues under mutually agreed transparent rules minimizing friction. 

CONCLUSION

Managing United States-China relations presents challenges but also very substantial opportunities. Many in America ask: Can the world’s largest and fastest 

growing economies constructively work together to enhance our future prosperity 

and stability? Or have the differences between our increasingly competitive economies along with those differences in our histories, forms of government, and domestic sensitivities become too great to enable us to harness our respective strengths 

to deal effectively with today’s bilateral and global challenges? 

My answer is that we can, should, and must work constructively together. Most 

importantly, I believe that by doing so we can build habits of cooperation that will 

help us deal effectively with new challenges as they arise which will not only enhance the well-being of the people of the United States and of China but will contribute meaningfully to global peace and stability. 

The CHAIRMAN. Well, Ambassador Hills, Dr. Tyson, thank you 

very much. You’ve put a lot of food for thought on the table, and 

I want to pick up in a few places right away. 

Ambassador, you just mentioned that China’s open markets have 

resulted in the double-digit growth. A lot of people would argue 

about how open that market really is; sort of a one-way street, in 

some people’s opinion. 

I was over there recently, meeting with a bunch of our companies, all of whom complained about the Chinese Government bidding process and procurement process, and how really impossible 

it was for them. You know, they’d bid, they’d do well, but they 

never got chosen. It was always a domestic company or a majorityowned company. It’s always, you know, China-centric. 

Now, that works very effectively for them, obviously. And with 

the kind of growth that they’ve had and the opportunities they’ve 

had, a lot of people are willing to, you know, put their money down 

and go for it. 

But, it’s not creating the kind of—I mean, the single biggest 

effect on this question of the current accounts deficit—on our current accounts deficit while we’ve gone up the 300 percent as you’ve 

mentioned, it’s nowhere near where it ought to be, nor is their consumption commitment where it ought to be. 

So, I mean given the clear penchant for the Chinese to kind of 

do what they want, when they want, which is what they’ve done 

on the renminbi, the reevaluation—way late, not enough, in some 

people’s view—so, it’s sort of an incremental deal, which won’t have 

the kind of impact it ought to. 

So, help us understand, if you would, is there any leverage? Do 

you have any leverage with your banker—your biggest banker? Do 

we have any ability to do anything except ask and hope? 

Ambassador HILLS. Well, first of all—— 

The CHAIRMAN. It’s not a new topic. We’ve been going through 

this through several administrations, and it’s not getting better, it’s 

getting worse. 

Ambassador HILLS. Mr. Chairman, I would say that our trade 

with China over the last decade has soared. The figures that I gave 

you, of a 340-percent increase and China becoming this year our 

second-largest export market, is really remarkable for a country 

that, in 1978, was a Communist country, sealed off from the rest 

of the world. It’s remarkable progress in three decades. 

33 

And if you look at where our trade deficit has gone, in 1998 the 

composition of our trade deficit—it was 75 percent in East Asia; 

today, it is 49 percent in East Asia and 51 percent with the rest 

of the world. And when I say ‘‘East Asia,’’ of course, I include 

China. 

The CHAIRMAN. Can I just ask you a question, interspersed 

there? Is that because you’re sort of heralding the upside? You can 

look at it and see the glass, you know, in different ways, here. But, 

is the upside of that because China has so successfully brought so 

many people in from the agricultural sector, into an urbanized and 

production role, that they’re able—that it sort of suits their interests, it’s in their interest to have the particular products come in 

that come in, but they’re still highly selective about what that is, 

and how much? Even though it’s gone up significantly, we’re still 

at an enormous deficit, in terms of our overall debt relationship, 

and way behind where we could be, in terms of boosting our own 

economy and kicking the entire global economy into gear. 

Ambassador HILLS. Mr. Chairman, I was trying to answer the 

question you posed regarding the degree of openness in the China 

market. And the fact that our deficit with East Asia has declined 

with China being part of it suggests that it’s been opened. It also 

accounts for the amount of trade that China has invited in. 

One of the reasons why our deficit has shifted from East Asia 

being so large a part, down, is because China has invited in Japan, 

Taiwan, Singapore, South Korea, and they are producing products 

in China. Many of the products produced in China are made in 

China, but not by China. When you buy an iPod, it comes to our 

shore at a cost of about $150, and $4 of that value is Chinese, 

which is based upon snapping together component parts from 

Japan, South Korea, and the United States. 

But having said that, the Chinese market is quite open by Asian 

standards. They’re not as open as the United States. Their average 

tariff is about 9 percent, versus ours, at about 3. And we want to 

continue to work with them to open their market. They’re far more 

open than India, they’re far more open than Indonesia, but they’re 

not as open as the United States, which has been working on this 

since World War II. 

And you’re absolutely right; there are some very tough restrictions. I listed them in my testimony. Industrial policies and restrictions in the form of threatened compulsory licensing, preferences 

for domestic products, subsidies for domestic production are real 

problems. We lump these restrictions together as ‘‘Indigenous Innovation.’’ These policies are of growing concern to our companies. 

Our Buy America is an irritant to the Chinese. We have issues that 

we should sit down and talk about. And I think that, when we do, 

it does help to make progress. 

And we also have the G20, which, as Laura Tyson has suggested, 

is a good forum when others share our concern. For example, on 

the revaluing of the currency, Europe, as well as we, believes that 

the currency is undervalued, to the detriment of their exports. By 

having a wider group of nations object to or encourage change in 

certain of China’s restrictive policies, is helpful, for China wants to 

be on the international stage, and it wants to be respected. And so, 

it has made a number of changes, which are very much in its own 

34 

interest, for example, to control inflation and to increase consumption through expenditures on social programs. 

The CHAIRMAN. Well, let me ask you both, quickly, if I can—my 

time’s up, but I wanted to get this question on the table, quickly. 

And, Dr. Tyson, maybe you begin. 

To what degree is this economic surge by China activating, in 

your judgment—we’ve had a lot of focus on the economic side of 

this—a more assertive foreign policy, perhaps the rapid military 

modernization, and to what end, and mercantilist economic policy, 

to some degree? 

Dr. Tyson. 

Dr. TYSON. OK. I don’t really feel that I’m an expert on their 

military policy. And I do think that, in areas that are trade-related 

and economic-related—and that can include aid policies to the rest 

of the world, the organization structure of multilateral institutions, 

and right down to a particular bilateral trade dispute on indigenous innovation, the Chinese are becoming more assertive. 

It’s not just because they have done so well, but also because, 

frankly, the U.S. economy has stumbled badly, and, I think, around 

the world, the recognition that we have stumbled badly leads our 

trading partners to be more assertive in their relations with us. I 

think we have to look, therefore, to ourselves, of what we are going 

to do to restore our own economy on a very strong growth path, 

sound fiscal policy, going forward. 

On the issue—I just will say one thing where I think maybe Ambassador Hills and I have somewhat of a disagreement—I certainly 

agree, on the import side, looking at our imports from China—it’s 

really important to understand that much of what we import from 

China we would have imported from other places, and it’s moved 

to China to be put together and sold to us. And the Chinese rightly 

point out, all the time, that the value of their exports to us, or our 

imports from them on average, 25 percent of that value is Chinesevalue-added, it’s stuff they’ve imported. And if we were to slap significant tariffs on those products, the production would shift gradually out of China, but it wouldn’t come back here. It wouldn’t come 

back here. So, we—I think we have to be very cognizant of what— 

why that import imbalance looks the way it is. 

On the export side, however, I think the Chinese are moving in 

ways which I think deserve our attention. They are committed to 

becoming a technologically innovative nation. They want to move 

from a labor-intensive, low-value-added industry structure to a 

high-value-added technology structure. And that’s where the indigenous innovation policy comes from, and preferential government 

procurement, and standards. The Chinese want to develop their 

own standard for things where there are global standards already 

that are perfectly acceptable. And when you sort of look at them 

doing this, you say, ‘‘This looks like it could be in violation of their 

agreement on standards at the WTO.’’ You’re not supposed to create standards for the purpose of affecting trade flows. 

So, these are really tough issues, because they’re nontariff barriers. And the protections in the WTO either don’t exist, in some 

case, or they’re inadequate; it’s very hard to bring a case, and win. 

I think the United States, therefore, really has to engage the 

Chinese on these issues directly. And, by the way, I think the conVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00038 Fmt 6633 Sfmt 6602 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
35 

cern of the American business community, which I’ve also picked 

up, has actually been extremely helpful, because the U.S. Government now is taking a much tougher position on these things. The 

Chinese for a very long time, were very open to these companies. 

These major American companies that have become a major part 

of their economy—are now saying, ‘‘We’re not being treated appropriately or fairly.’’ That becomes a very powerful, I think, lever for 

trying to get some negotiating progress on these issues with China. 

So, I think they’ve become more important, and I think we 

should focus on them at the top of our list of priorities. 

The CHAIRMAN. Senator Lugar. 

Senator LUGAR. Ambassador Hills, your written testimony notes 

that, ‘‘Immigrant-founded companies employed 450,000 workers 

and generated $52 billion in revenues in 2006.’’ Now, recently, with 

Senator Kerry, I introduced the Startup Visa Act of 2010, to allow 

an immigrant entrepreneur to receive a 2-year visa if he or she can 

show that a qualified U.S. investor is willing to dedicate a significant sum, a minimum of $250,000, for the immigrant’s startup 

venture. 

What do you expect the impact of such legislation to be? Is it at 

the right levels? And, second, leaving aside the visa aspect, is it 

likely that Chinese companies will simply make much larger 

investments now in our economy? I read that, for example, they’ve 

noted that, as the labor costs have risen in China, it makes more 

sense to produce the goods and services in the United States. 

On these issues, can you give us some additional comment? 

Ambassador HILLS. Let me say that my comment about the immigration and the need to open our nation to bright minds and to 

the development of new technology is in response to the question 

of enhancing our competitiveness. The statistics that we have in 

the Department of Commerce and Small Business Administration 

document the high number of startups created by foreign-born, the 

substantial amount of jobs they create, and the substantial amount 

of growth that they contribute to our economy. So, I support your 

Start Up Visa Act. I believe that 65,000 H1B Visas for a country 

of over 300 million people is extraordinarily limited, plus it is very, 

very difficult and time-consuming to get a H–1B visas for people 

who want to come to the United States. It’s also very difficult for 

a student to come here to study. A student can be accepted at one 

of our major universities, and not be permitted to come to the 

United States, or, after graduating, cannot be permitted to stay. 

We’re just cutting ourselves off from talent and new ideas. 

I was in China last week, and I addressed the issue of indigenous 

innovation, and I said, ‘‘You’re hurting yourself by turning inward. 

When you keep out an idea, an invention, a patent, because you 

prefer to have it made at home, you hurt yourself not only for the 

loss of the idea or invention but also, because you create a monopoly protected from competition has little incentive to innovate. That 

protected company is not going to expend money to become more 

competitive or move up the value chain. But if you were to let all 

the ideas, inventions, patents come in without government interference; it would stimulate ideas in your domestic market. So, 

you’re hurting yourself.’’ 

36 

I think there’s a deal here to be made that benefits both sides. 

In exchange for a relaxation of our export controls, China could set 

aside those domestic industrial policies often grouped under the 

name ‘‘indigenous innovation.’’ And I truly believe that. 

On the investment side, I believe that Chinese companies are 

thinking more and more of investing abroad. We need to take care 

that we do not discriminate. And we see, particularly in the south 

of our country, there are some small investments from the Chinese. 

But, they express concern, having tried to invest in some larger 

segments and not fully understanding CFIUS—Committee on Foreign Investment in the United States—that operates pursuant to 

section 721 of the Defense Production Act of 1950, as amended, and 

the regulations that we have—that it is difficult to invest here. And 

they read our press, and they believe that their investors will be 

discriminated against, that they are not thought well of in our 

country. I think that’s untrue. I think that most Americans think 

very well of the Chinese, applaud their miraculous rise from dire 

poverty to where they are today. And, although China’s GDP on a 

per capita basis is only about one-tenth the size of ours while their 

GDP is roughly one-third of ours, they continue to make rapid 

progress. Still China has a number of challenges—e.g., environmental, demographic, and growing income disparity—but it is making progress. 

Senator LUGAR. So, I gather that your sense is, essentially there 

are a good number of Chinese who are prepared to come to the 

United States and make investments—that is, personally locate 

themselves here—if our visa situation was friendlier. And with regard to investment in the United States, if our investment climate 

was perceived as more friendly, these investments would come. 

Therefore, at least some of us might argue that, in terms of creating more American jobs now and having more capital in the 

country, our diplomacy really needs an uptick so that there is a different set of perceptions. 

Ambassador HILLS. I would agree with you entirely. I think we 

ought to open our market to foreign investment. If someone wants 

to invest a dollar or an RMB in our market, and create jobs and 

good products, that’s to our benefit. 

Senator LUGAR. Let me ask Dr. Tyson this question, that, in your 

written testimony, you note a significant appreciation of the RMB, 

relative to the dollar, will not have a significant effect on U.S. 

trade deficit or on U.S. employment. 

Dr. TYSON. Right. 

Senator LUGAR. But, what measures, if any, vis-a-vis China, 

would have a real impact on the trade deficit or the unemployment 

rate? 

Dr. TYSON. So, what I was trying to say in that observation was 

that, basically, what matters to the overall U.S. trade imbalance is 

not the relationship with any one country. That was the first point. 

The second point is the point that I mentioned earlier. I think 

a significant—a dramatic overnight appreciation of the renminbi, 

versus the dollar, would initially raise prices of a significant number of important imports to middle-class Americans, and a lot of it 

would quickly leave China; it would go to different locations. It 

wouldn’t change our trade imbalance. 

37 

So, I tend to see our trade imbalance as not very sensitive to an 

appreciation. Now, I know that Fred Bergsten’s numbers are if you 

had an appreciation, I think, of 20 percent over a 5-year period, 

you’d get a million U.S. jobs and a reduction of the U.S. trade deficit of $150 billion. The problem with that statement is that we had 

something like a 20-percent appreciation of the RMB between 2005 

and 2008, and this was the period when the U.S. trade deficit was 

going through the roof, and when the U.S. current account imbalance hit a peak as a share of GDP. 

So, I think the link between that currency value and the U.S. 

trade imbalance is a very weak link, and I would prefer us to think 

about the other factors that influence that. 

I just want to add, because I completely agree, and you saw me 

nodding my head, about the importance of inviting, or certainly not 

in any way deterring, Chinese investment in the United States. 

The Chinese have a massive amount—the largest holdings of 

United States-dollar assets in the world—and they are looking for 

ways to diversify those assets. They are worried about what the 

value of those assets will be as the renminbi does climb, relative 

to the dollar. They’re worried about what happens to those assets 

if we get a spike in U.S. interest rates. They’re worried about inflation in the United States over the next 20 years. They would like 

to diversify those assets. 

They don’t have a lot of options. The Euro has kind of disappeared as an option, so they’re not going to, I think, buy a lot 

of gold and, you know, put it in a building. 

I think they would like to diversify into other U.S. assets. And 

we are either the first or the second—depending upon, I suppose, 

the month—largest destination for foreign direct investment in the 

world. China’s the other one. We welcome foreign direct investment 

from the rest of the world. We need to be sure we welcome it from 

China, because it is a better way, frankly, to alleviate our trade imbalance with China because some of the stuff we buy from China, 

imported, we will buy here. 

And if you think about the history of the United States trade imbalance with Japan, when we had significant friction with them in 

certain sectors, the Japanese moved production facilities here. And 

today, they produce significant amounts of product, with significant 

amounts of American-employed labor, using their technology, here. 

So, yes, I think this is very important. 

Senator LUGAR. Well, I thank you very much. I would just underline the thought that we really ought to be thinking in terms of 

how we suggest to the Chinese they invest in our country—— 

Dr. TYSON. Yes. 

Senator LUGAR [continuing]. In addition to simply loaning us 

money. 

Dr. TYSON. Yes. 

Senator LUGAR. It’s a very different—— 

Dr. TYSON. Exactly. 

Senator LUGAR [continuing]. Concept, in terms of our own employment and our own economic growth. 

Dr. TYSON. Yes. 

Senator LUGAR. And I appreciate both of your answers. 

Thank you. 

38 

The CHAIRMAN. Thanks, Senator Lugar. 

Senator Casey. 

Senator CASEY. Dr. Tyson, thank you. 

Dr. TYSON. Thank you. 

Senator CASEY. Ambassador Hills, thank you so much for your 

testimony. 

I wanted to put my first question in the context of our current 

economic climate. When I speak of Pennsylvania, I think it’s emblematic of a lot of places. We are, in our State, at about 9.1 percent unemployment, but that’s 591,000 people, at last count— 

almost 600,000—a big, big number. And although I think we are 

in a recovery, we’ve got a long way to go. 

One of the persistent, nagging, and most difficult challenges we 

face is the problem of trade deficits. And we’ve got States like 

Pennsylvania that are heavily exposed to, or impacted by, the trade 

imbalance between the United States and China. There’s obviously 

been a manufacturing component to that. 

But, I guess recently the Alliance for American Manufacturing 

reported that, contrary to some of the conventional wisdom, it’s not 

simply, or only, manufacturing jobs, but high-technology jobs, as 

well, that industry. 

Another study, by the Economic Policy Institute, over a 7-year 

period, in terms of what happened in Pennsylvania, a net job loss 

of more than 95,000, due to the trade deficits with China. 

So, all of that is predicate to a good deal of what you’ve already 

spoken to. I know that, Dr. Tyson, you have a series of recommendations, starting at page 17 of your testimony. And I know 

that, Ambassador Hills, you’ve got a series beginning on page 3— 

a series of obstacles that you set forth as the obstacles that our 

companies face with regard to China. 

Where’s the—if you had to—if you bumped into a—on the street, 

a constituent of mine in Pennsylvania, or a similarly situated 

State, when they ask you, ‘‘How do we bridge that gap, how do we 

begin to—at least begin to chip away at the problem?’’—what are 

the two or three strategic steps you think we have to take, in the 

near term, to begin to put in place a strategy to get out of that 

hole? 

And I—either one of you want to take a crack at it, or both? 

Ambassador HILLS. When you talk about the imbalance that concerns your constituents, we obviously have to bring, not only our 

bilateral, but our global imbalance into equilibrium. That’s going to 

take both the United States along with other deficit nations and 

China along with other surplus nations to alter their models of 

growth. Those in deficit cannot point their finger at the surplus 

nation and say, ‘‘You are exporting too much.’’ Nor can the surplus 

nations point their finger at deficit nations and say you are consuming too much.’’ Both groups need to change their growth models. It is true that China needs to stimulate its domestic consumption for its own national interests. It is also true that its currency 

is somewhat undervalued, and appreciation would help to stimulate domestic consumption. But appreciation of the currency is not 

a silver bullet. Currency is a factor. But, removing the distortions 

in the factors of production—land, water, fuel, and finance—are undoubtedly far more important factors in stimulating domestic conVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00042 Fmt 6633 Sfmt 6602 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
39 

sumption. China’s growth model for the past three decades has 

been built on growth generated by large state-owned enterprises 

that export. And even the foreign investors that came in from 

Japan and East Asia also were primarily manufacturing and 

assembling goods for export. And those exports go on the account 

of China with the result that China has the largest trade surplus. 

That is not sustainable. This must change. In China it’s creating 

enormous environmental problems and is contributing to a wage 

gap between rural and urban areas. When you take the five largest 

of the heavy industry, they are responsible for most of the pollution. Heavy metal pollution destroys about 1,700 square miles of 

productive farm land each year and contributes to the fact that 

most of China’s urban ground water is polluted. In addition China 

is home to the most polluted cities in the world. In 2007 the World 

Bank reported that 16 of the world’s most polluted cities are in 

China. And so, for domestic reasons, China needs to change its 

model of growth that up to now has been disproportionately based 

on heavy industry and export. China has many challenges, including demographic challenges that they’re going to have to deal with. 

And with 1.3 billion people, they can and need to stimulate domestic consumption to boost growth. That will help develop small and 

medium industries and service providers. Moving to a growth 

model that relies more on consumption will make the Chinese population much more satisfied, and make your constituents much less 

anxious. 

Now, at the same time, I’m sure some anxiety in Pennsylvania 

is connected to the fact that our deficit—our primary budget deficit—has grown to levels that frighten people, and our accumulated 

external debt adds to their anxiety. And so, we also must change 

our growth model. We can no longer rely disproportionately on 

domestic consumption, both public and private, to fuel our economic growth. We must get control of our fiscal deficit and boost 

private savings. And whether we adopt a ‘‘pay-as-you-go’’ program, 

and really mean it, or some other fiscal discipline, we need to get 

our fiscal house in order. That would provide, I think, substantial 

assurance at home and abroad that the United States economy was 

not going to have to go through a great recession in the next 

decade. 

So, there’s a lot that both China and the United States have to 

do. 

Senator CASEY. Dr. Tyson. 

Dr. TYSON. You’ve asked a very hard question, because I don’t 

know, for example, the numbers of workers you announced that 

lost their jobs. I don’t know how many would have been to a movement of a production facility to China or an import from China. I 

do know that. 

Let’s take what’s going on right now. In the last year, we’ve seen, 

particularly the last 6 months, quite strong growth in industrial 

production in the United States. We have seen a quite strong export of manufactured goods in the United States to China and the 

other emerging market economies. This has been associated with 

no growth in employment in manufacturing in the United States. 

That is not, therefore, a trade issue; that is a technology issue. 

That is how the U.S. companies compete, globally, with building 

40 

manufacturing products here, and ramping them up, which they’re 

doing right now, without increases in employment, because the 

technology has displaced the employment. 

And one of our issues in the United States is, we have to be 

clear, when employment numbers like that show up, what is it 

that’s the role of China’s development strategy. It may actually be 

not very important to the employment problem. 

Another thing I would say—— 

Senator CASEY. You mean attribution. 

Dr. TYSON. Yes. But, I would find it very difficult to talk to such 

a person, because, you know, first of all, I would have to understand. I mean, the second thing I would say is—Ambassador Hills 

mentioned that the Chinese encourage their enterprises through 

low interest rate through subsidies. They encourage certain things. 

They want to develop their economy in a certain way so they subsidize certain things. 

What did we subsidize in the United States, heavily, that was 

part of the crisis? Housing. We subsidize. We absolutely subsidize 

residential construction in the United States. And a number of 

workers—25 percent, as far as I know, last count—of the unemployed problem in the United States is construction workers, who 

were very important to the boom that we created with our own 

interest-rate subsidy policy in the United States. 

We don’t have subsidy policies to create industrial employment. 

We don’t believe in them. We don’t do them. China does them. 

China absolutely does them. And they’ve built a very powerful 

employment base in manufacturing. 

So, I think—and then, the last thing I would say—in looking at 

Pennsylvania’s trade imbalance, or any country—or any State 

trade imbalance—at the end of the day, I’m not sure what it would 

look like in Pennsylvania, because there is a huge amount of products being bought in Pennsylvania in retail outlets that are primarily bought in China, and there is service employment in the 

United States that’s supported by those imports. 

Now, this gets me to another problem in the United States. We 

have a polarization of the workforce going on. It’s very dramatic. 

The unemployment rate is not high—it’s high, but not that high— 

for people with a college education or higher. It’s around 5 to 6 percent right now, in that range. The 15-percent unemployment rates 

are for high-school, or less-than-high-school, educated workers. And 

those middle-income manufacturing jobs, that used to be a way 

through, for those people, to the middle class, don’t exist anymore. 

And I would say, not because of trade with China, but because 

technology has displaced those jobs. 

So, we have a huge educational challenge in the country, because 

where the jobs are likely to grow in the future over the next 5 

years are in college-educated and more. And right now we’re making it more difficult, in many respects. In many States the tuitions 

for college education are going through the roof because of State 

budget problems. 

So, the Chinese, I would say, are restructuring their economy. 

They’re building infrastructure in the center and western regions. 

They’re introducing new social security policies that will reduce the 

41 

household savings rate in China. They’re doing real, structural 

things that will change their growth strategy over time. 

I don’t think we’re doing those. And I don’t think a path to credible deficit reduction, which we need—I’m not saying we don’t need 

it—but, that, by itself, is not a structural policy. That’s not a structural policy. 

So, I think we have to worry about investments to make our 

economy more productive and competitive, going forward. Those 

have to be part of our strategy. It’s not just a deficit-reduction 

strategy. 

Senator CASEY. I know we’re out of time. 

Thank you. 

The CHAIRMAN. Thank you. 

Senator Shaheen. 

And I’ve been called to a 4 o’clock meeting, so I apologize. 

If you—Senator Lugar will close it out. I don’t know if he has an 

additional round that he wants to ask. 

But, Senator Shaheen and then Senator Lugar. 

And I apologize. I thank the witnesses again. 

Dr. TYSON. Thank you. 

The CHAIRMAN. There will be questions——— 

Dr. TYSON. Thank you for the—— 

The CHAIRMAN [continuing]. For the record. I had some additional questions I wanted to ask you, and I know some other colleagues may want to submit them, so we’ll leave the record open, 

if you don’t mind, until the end of the week. 

Dr. TYSON. OK, that’s fine. Thank you very much—— 

Ambassador HILLS. Thank you. 

Dr. TYSON [continuing]. For the opportunity. 

The CHAIRMAN. Thanks. 

Senator Shaheen. 

Senator SHAHEEN. Thank you. 

And thank you both for being here this afternoon. 

I would really like to pursue the line of questioning that Senator 

Casey started with. But, before I do that, I want to ask you—you 

talked—Dr. Tyson, you talked about the kinds of structural investments and changes we would need to make in this country in order 

to address some of the challenges that the economy faces. I certainly agree with you, relative to the education and the importance 

of making sure that a whole strata of people, who are not now getting higher education, need to get that, and the challenges that 

that encompasses. But, what else do you have in mind when you 

say that? And I know this is a little off-topic, but you just raised 

my curiosity. 

Dr. TYSON. Well, I personally think we have great innovative 

strengths in the United States. We still have those. But, I think 

we have to worry about the fact that we have not kept up our 

science and engineering talent base. This obviously goes to Senator 

Lugar’s question. This is a very specialized—— 

Senator SHAHEEN. Right. 

Dr. TYSON [continuing]. Talent base that we need to be able to 

take the basic science support, which we have, and continue to convert it into very successful commercial applications. And I look 

down the road, and I worry about the fact that there are actually 

42 

projected shortages of this kind of talent in the near term. We’re 

not talking about 10 years out. We’re talking about 5 years out. So, 

I would put a whole host of things in education. 

I personally think that as a transition strategy, but also as a 

strategy to support competitiveness, going forward we really have 

a major infrastructure agenda at hand. 

And I’m smiling because I just came from a lunch, where a number of people were talking about this. It’s been well documented, 

before the great recession, that the United States was spending significantly less than required to just keep up the infrastructure it 

had, much less get to world quality standards. 

So, if you think about ports and airports and high-speed trains 

as things that promote competitiveness, they’re not just a pleasant 

journey—they’re that, too. I think that’s an area of investment 

which has two characteristics. One, it actually becomes a way to 

create jobs for these kinds of workers who were in another kind of 

construction. 

And, by the way, I would put energy efficiency investments here. 

I’ve been a big supporter of the idea of doing more to promote 

households to take on energy efficient investments, because those 

are, basically, residential improvements that require labor to do, 

but they also achieve another goal. 

So, some of the things I think we should be doing are in the infrastructure, energy efficiency, and broadly defined education area. 

We need to say that we’re going to have a different strategy, too, 

our future is going to look different, too. 

Senator SHAHEEN. Thank you. 

To go back to China, one of the concerns that I hear from New 

Hampshire business folks who are thinking about exporting to 

China is a concern that once their technology—they’re working on 

a new generation of technology, whether it’s in solar panels or, you 

know, Internet, or whatever—Web technology, whatever—that once 

that technology gets to China, that it’s gone, as far as they’re concerned. And so, they get the benefit of the first round of exports 

of whatever that is, but then it’s going to get duplicated in China, 

and they’re going to lose their patented technology. 

So, how do we address that? Is it through more action at the 

WTO, or are there other ways in which we can better address 

China’s stealing proprietary technology? 

Ambassador HILLS. When any nation fails to take measures to 

protect our proprietary technology, we should take them to the 

World Trade Organization. We have an agreement that covers intellectual property. It continues to be a problem in China, although 

it is improving when compared to a decade or so ago. 

China secured a number of patents last year. It moved way up 

the scale. And when you have a domestic stake in having a system 

that protects innovation, generally that causes most governments 

to take a greater interest in developing and enforcing rules to protect intellectual property. 

So, we’re finding that China is taking a greater interest in protecting intellectual property. But, as they say in China, ‘‘the mountains are high and the emperor is far away.’’ And what happens too 

often at the locality or the province level is not what Beijing wants 

to have happen. But, we have to keep pushing on that. And I know 

43 

that some foreign manufacturers are sending their second-tier technology to China because of the very problem that you suggest. So, 

once again, China’s hurting itself. 

With respect to all of these issues, it is so clear that opening 

markets to new ideas is highly beneficial. A government that puts 

restrictions that keep out inventions and new ideas hurts its own 

people. And that has been known for a long, long time. But, it is 

one of the issues that we need to watch carefully and deal with. 

I’d like to underscore what Laura Tyson has stated about the infrastructure. You know, in China they have high-speed trains that 

would take your breath away, literally. And—— 

[Laughter.] 

Ambassador HILLS [continuing]. And that kind of investment 

adds to a nation’s efficiency, cleans up the environment as people 

pile aboard and don’t get into the cars, and creates jobs. 

And when we talk about education, yes, we need science and 

math students to stimulate innovation here at home. So, it’s really 

a great tragedy, in our great Nation that has come so far and once 

led the world in educating its youth, that today roughly one-third 

of our high school students fail to graduate. That is simply not tolerable in today’s world. 

And so, there are a lot of things that we need to do right here 

at home. Maybe we need a commission on education bringing our 

teachers unions together with people who deal with educational reform, for the current situation is simply not tolerable. And if we 

continue down this road, United States tomorrow will not be the 

same United States today. 

Senator SHAHEEN. I couldn’t agree more with both of you. I think 

one of the challenges here has been, How do you reconcile those 

needs with the deficit and the debt that we have? And—because 

what you’re talking about requires investment, and they’re longer 

term, when we look at the returns on those investments. And so, 

how do we address the short-term need to respond to this growing 

debt and deficit that we have? 

So, I will just—I’m out of time—but, perhaps after the hearing, 

could respond to that. 

Senator LUGAR [presiding]. Well, thank you very much. 

In behalf of the chairman and the members of the committee, I 

want to thank both of you for wonderful opening statements, which 

are in the record in full, and for your responses to our questions. 

The title of our hearing was ‘‘Finding Common Ground With a 

Rising China,’’ and you have addressed that, and I think members 

of the committee have, and perhaps increased our understanding, 

and that of those who are following our hearing. 

We will keep the record open, as the chairman suggested, for a 

few days, for additional questions and your responses. 

But, we thank you both very much. 

[Whereupon, at 4 p.m., the hearing was adjourned.] 

44 

ADDITIONAL QUESTIONS AND ANSWERS SUBMITTED FOR THE RECORD

JOINT RESPONSES OF DR. LAURA D. TYSON AND STEPHEN S. ROACH TO QUESTIONS

SUBMITTED BY SENATOR JOHN F. KERRY

Question. Where does the Economic Relationship Fit into a Larger Foreign Policy 

Agenda: What are your views on the importance on the United States—China economic relationship as part of a larger United States-Chinese foreign policy agenda? 

How has the changing economic relationship altered our broader relationship? 

Specifically, are there ways that our economic interdependence constrains U.S. 

foreign policy options on other issues of concern, such as nonproliferation policy, 

human rights, Taiwan? Are China’s foreign policy options similarly constrained—if 

so how? 

Answer. United States-China economic relationships have been a major focus of 

the larger United States-China foreign policy agenda during the last quarter century and that will remain the case for the foreseeable future. U.S. policy toward 

China has been one of engagement rather than containment or competition. The 

United States has welcomed China as an increasingly prosperous and successful 

member of the community of nations and has championed China’s growing role and 

responsibilities in global multilateral institutions. And China has embraced economic globalization and has been a reliable global citizen committed to the goals of 

peace and prosperity. These trends are likely to persist: given the priority of economic growth and development to both its domestic political stability and the legitimacy of its leadership, China has too much to lose to threaten the peace and global 

economic order on which its growing prosperity depends. 

The growing economic links between China and the United States have strengthened the overall relationship between the two nations and have supported their 

cooperation on many shared interests including promoting global development, 

addressing global health and environmental challenges, and containing piracy and 

terrorism. 

Both China and the United States have reaped significant economic returns from 

the large trade and capital flows that link their economies, and both nations have 

to weigh these returns when they consider how to address areas of disagreement 

such as nonproliferation policy, human rights, Taiwan and other territorial concerns. In that sense, the foreign policy options of both nations are constrained by 

their economic interdependence: options that impede the trade and/or capital flows 

between them would reduce the economic welfare of both of them. That’s why both 

nations should seek to address issues of concerns in other foreign policy areas 

through bilateral consultation rather than through unilateral confrontation, avoiding economic sanctions to pursue their foreign policy goals in other areas and using 

multilateral and/or regional institutions and agreements whenever possible. 

Question. National Security and the Chinese Economy: Do China’s leaders think 

in terms of national security when they consider the size, composition, pace of development and protection of China’s economy? If so, how does this impact their foreign 

and commercial engagement with the United States and other nations? What is the 

most appropriate and effective U.S. policy response? What is the best way to pursue 

our national economic interests and national security interest with China—side by 

side? 

Answer. Despite its dramatic economic progress, China is still a poor country, as 

measured by its GDP per capita, and confronts large domestic problems including 

large rural-urban inequalities, a significant pool of underemployed labor in agriculture, and environmental degradation from rapid industrialization. Moreover, the 

legitimacy of China’s authoritarian leadership depends primarily on its ability to 

deliver rising living standards to its population. For these reasons, China’s leaders 

believe that both China’s national security and their political security depend on the 

growth and development of China’s economy: these remain their primary goals and 

these goals are the primary determinants of their decisions and actions both at 

home and abroad. 

When China joined the WTO, it made significant concessions to liberalize its 

traditional trade and investment policies as part of its accession agreement. Since 

that time, China’s trade has soared and it has gained significant shares in many 

global markets. In recent years, China has been relying more on nontraditional barriers such as discriminatory government procurement policies, national standards 

policies, lax enforcement of intellectual property protection, and local content requirements to boost the competitiveness of its domestic companies. Such practices 

impede the access of U.S. and other foreign companies to China’s domestic market 

45 

and they are a violation of the spirit and in some instances the law of China’s WTO 

commitments. 

The United States should continue to treat such market access barriers as a priority issue in the S&ED trade discussions, should lodge WTO cases against such 

barriers, and should encourage China’s other trading partners to address such barriers in regional and multilateral discussions. The United States should rely as 

much as possible on multinational, multilateral forums such as the G20, the WTO, 

the IMF and the U.N. to pursue U.S. economic interests with China and to address 

bilateral economics disagreements. 

Question. China’s Treasury Holdings: China’s large holdings of U.S. Treasury 

securities, which totaled $900 billion as of April 2010, make it the largest foreign 

holder of those securities. 

Some U.S. analysts welcome China’s purchases of U.S. debt, which help enable 

the United States to fund its budget deficit and keep U.S. interest rates relatively 

low. Others have expressed concerns that China’s large holdings of U.S. debt could 

give it significant leverage over the United States. How should we weigh the risks 

against the benefits? 

Answer. China’s large purchases of U.S. debt over the last several years have indeed helped to fund the U.S. Federal budget deficit and have kept U.S. and global 

interest rates lower than they otherwise would have been. These purchases are a 

reflection of the large and ultimately unsustainable imbalances between saving and 

investment in both countries. The United States saves too little and consumes more 

than it produces while China saves too much and produces more than it consumes, 

relying on the United States and other nations to purchase its excess production. 

Both countries need to adjust their growth strategies, with the United States relying 

less on consumption and more on exports and investment to drive growth and China 

relying more on domestic demand and less on exports. The United States must also 

adopt a multiyear deficit reduction plan to stabilize the debt to GDP ratio at a sustainable level since dissaving by the U.S. Government is a major contributor to the 

nation’s saving-investment gap. 

China has not caused the imbalance between saving and investment in the United 

States or the fiscal deficit. These are problems resulting from policy choices made 

at home. To date, the benefits of China’s purchases of U.S. Government debt have 

outweighed the risks. And on economic grounds, China is likely to continue to purchase large amounts of U.S. Government’s. But there are risks associated with China’s large purchases and holdings of U.S. Government securities. In particular, as 

we argue in our testimony, even a relatively small decline in China’s holdings could 

be enough to rock global financial markets, triggering a large increase in interest 

rates and a sharp decline in the dollar’s value. China itself would suffer large capital losses on its holdings of U.S. securities as a result. Many observers believe that 

because of such large potential losses, there is a very low risk that China would use 

its holdings of U.S. securities to try to influence U.S. policy. In our testimony, we 

argue that this risk is higher than commonly perceived. For a variety of reasons 

identified in our testimony, a threat by China to move away from U.S. treasuries 

in order to change U.S. behavior or in retaliation for U.S. behavior should be taken 

seriously by U.S. policymakers. Under current financial market conditions, such a 

threat could trigger investor concerns about the huge financing needs of the U.S. 

Government, causing a sharp spike in interest rates and a crisis of confidence in 

U.S. sovereign debt that could cause serious economic harm to both the United 

States and China. 

Question. Competitiveness and U.S. Infrastructure: You mentioned that support 

for infrastructure investment in the United States was one way to bolster U.S. competitiveness when facing a rising China. Could you please explain to what extent 

infrastructure investment would reinforce U.S. competitiveness and what needs to 

happen to ensure adequate infrastructure investment at the pace and scale to ensure U.S. competitiveness in the future? 

Answer. A significant and sustained increase in infrastructure investment by Federal, State and local governments should be a priority. Unlike most other forms of 

stimulus, spending on infrastructure both increases demand when the spending occurs and increases the supply and growth potential of the economy over time The 

demand-side case for infrastructure investment is well documented. According to the 

Congressional Budget Office, infrastructure spending is a cost-effective demand 

stimulus as measured by the number of jobs created per dollar of budgetary cost. 

Moody’s Economy.com estimates that $1 of infrastructure spending increases demand and the level of GDP by about $1.59. 

46 

The supply-side or growth case for a significant increase in infrastructure investment is also compelling. Real infrastructure spending is about the same today as 

it was in 1968 when the economy was a third smaller. The inadequacies of the country’s current infrastructure are displayed every day in freight bottlenecks, road congestion, and airport delays, all of which reduce business productivity and make the 

United States a less attractive location for business activity. Documenting these inadequacies, the American Society of Civil Engineers gave America’s infrastructure 

a failing grade of D in its 2009 report and has identified more than $2.2 trillion 

in outstanding infrastructure needs. And using a narrower cost-benefit approach, a 

2008 CBO study concluded that a 74 percent increase in annual spending on transportation infrastructure alone is economically justifiable. 

Over the next 5 years, the Federal Government should work with State and local 

governments and the private sector to finance $1 trillion of additional investment 

in infrastructure. The successful Build America Bonds (BAB) program included in 

the current stimulus package should be extended to support this goal. As part of 

its commitment to a multiyear infrastructure plan, the Federal Government should 

also establish and provide the capital for a National Infrastructure Bank. An appropriately designed and governed national infrastructure bank would both address 

gaps and shortcomings in the current system for selecting and funding infrastructure projects and attract private investment funds for such projects. The bank would 

focus on transformative projects of national significance, like the creation of a national high-speed rail system or the modernization of the air traffic control system, 

that require the participation and coordination of many States. Such projects are 

neglected by the formula-driven processes now used to allocate Federal infrastructure funds among States and regions. The bank would provide both coordination 

among diverse actors and certainty about the level of Federal funding for such 

multiyear projects by removing funding decisions from the politically volatile annual 

appropriations process. Moreover, the bank would select projects for funding, not on 

political and earmarking considerations that too often influence project selection in 

the current system, but on independent and transparent cost-benefit analysis by 

objective experts. 

Armed with a flexible set of financing tools, including direct loans, loan guarantees, grants, and interest subsidies for BABs, the bank could provide the most 

appropriate forms of financing for each project. The bank should be granted the 

authority to create partnerships with private investors on individual projects. Public-private partnerships would both increase the total amount of funding for infrastructure investments and foster efficiency in project selection, operation, and maintenance. Such partnerships are becoming common in infrastructure financing 

around the world and many nations are using them to attract private capital, but 

to date they account for a miniscule share of infrastructure financing in the United 

States. A national infrastructure bank could tap into the significant pools of longterm private capital in pension funds and dedicated infrastructure equity funds 

looking for infrastructure investment opportunities. 

The Federal Government can afford a capital commitment of at least $25 billion 

to establish a national infrastructure bank as an additional stimulus measure immediately. Given the significant excess capacity in the economy and the very low 

interest rates at which the U.S. Government can borrow funds, there is no danger 

that an additional stimulus of this size will trigger a crisis of confidence in the U.S. 

Government’s creditworthiness. Nor is there any danger that infrastructure investment financed by the bank will ‘‘crowd-out’’ private investment—in fact, it is likely 

to encourage or ‘‘crowd-in’’ such investment. 

As the economy recovers, however, the Federal Government must embark on a 

multiyear plan to reduce the deficit and stabilize the debt to GDP ratio. To ease 

capital market anxiety about the Government’s future borrowing needs, such a plan 

should be developed and passed by the Congress now. The plan should include permanent funding mechanisms for the national infrastructure bank. These mechanisms could include a small share of funds from a new multiyear transportation bill, 

a small share of revenues from the gasoline tax or from a new carbon tax, and user 

fees. Whenever appropriate and feasible, user fees should be linked to the projects 

financed by the bank. Such fees would not only raise revenues but would also encourage the efficient use of infrastructure assets and provide financing for their 

maintenance. 

The United States needs to invest significantly more in its infrastructure to secure its competitiveness and deliver rising living standards to its citizens. And there 

is no better time to begin that investment than now when millions of Americans 

can be put to work in meaningful jobs to help build the infrastructure we need. 

47 

JOINT RESPONSES OF DR. LAURA D. TYSON AND STEPHEN S. ROACH TO QUESTIONS

SUBMITTED BY SENATOR RICHARD G. LUGAR

Question. At the hearing, you indicated that the United States needed to make 

structural economic changes, increase investments in infrastructure, increase education levels and, over the long run, reduce the deficit. In order to support U.S. economic growth and increase employment, what specific structural changes does the 

United States need to make? 

Answer. To reduce its imbalance between saving and investment and its 

unsustainable current account deficit, the United States must introduce policies to 

increase national saving and to encourage a shift in the composition of demand 

away from consumption and toward exports and investment. The most important 

step is passage of a multiyear deficit reduction policy that stabilizes the debt to 

GDP ratio at a stable level. This plan should include a major reform of both personal and corporate tax policies to encourage personal saving and business investment. But the plan must also increase government investments in infrastructure, 

R&D and education. Such investments are essential to boost the competitiveness of 

the United States as a location for high value-added economic activity and as a 

source of global exports. 

Question. You note in your written testimony that ‘‘reducing barriers that impede 

the access of U.S. companies to China’s markets is and should continue to be a 

major objective of U.S. trade policy.’’ The United States participates in 49 bilateral 

dialogues with China including economics, trade, politics, energy, and health and 

engages with China in multilateral for a including the WTO, G20 and United 

Nations. What more should the United States do to advance our economic objectives 

with China? 

Answer. Reducing nontariff barriers that impede the access of U.S. companies to 

China’s market is and should continue to be a major objective of U.S. trade policy. 

Given the importance of the government and state-owned companies in China’s 

economy, China’s participation in the Government Procurement Agreement (GPA) 

should be a major objective. The United States should negotiate with China to ease 

U.S. security controls on U.S. exports to China and to advance the timing for the 

recognition of China’s market economy statues in the WTO (currently scheduled for 

2016) in return for a strong offer by China to join the GPA. An agreement along 

these lines could also help revitalize the Doha Round talks, something that the 

United States and China committed to do at the last S&ED meetings. 

The United States should also take the lead in negotiating a Trans-Pacific Partnership agreement as a first step toward the creation of a free trade area for the 

Asia Pacific. Several bilateral and regional preferential trading agreements have recently been signed in Asia and the region is heading toward the de facto creation 

of an economic bloc that would discriminate against the United States. The completion of a Trans-Pacific Partnership agreement would arrest this disturbing trend 

and could reignite APEC’s leading role in global trade liberalization. A revitalized 

APEC could lead a regional effort for a free trade agreement on green technologies 

and products. 

Question. Too often around the world, the revenues from natural resources are a 

hindrance to economic and political development. Moreover, conflict over resource 

revenues can drive price instability and harm supply of oil. In my judgment, promoting transparency is a pivotal need for empowering citizens to ask questions of 

their governments and hence be empowered to grow economically and democratically. One measure I have offered with Senator Cardin would enhance U.S. leadership by requiring U.S. and foreign companies listed here to disclose their payments 

to governments as part of Securities and Exchange Commission filings. The importance of U.S. leadership is highlighted with recent mineral discoveries in Afghanistan. China’s growing economy also requires oil, gas, and minerals, and at times the 

government backs their companies’ entry into countries. In your assessment, how 

can we make progress at a governmental and corporate level with China to improve 

Chinese support for good governance of resources? 

Answer. A basic tenet of economics is that market efficiency and competition depend on information, and there is a serious lack of information about the terms of 

the deals about access to natural resources between governments and private companies. Without such information, there is also ample opportunity for corruption in 

the decisions by which natural resource rights are allocated. A compulsory disclosure of payments by governments to private interests in natural resource deals is 

an idea that merits serious consideration. 

48 

China and the United States have a common interest in the gains to efficiency 

and competition and the obstacles to corruption that would result from global or regional agreements that enforce transparency and good governance in natural resource deals between companies and governments. The United States should raise 

this issue in the S&ED meetings with China and should explore the possibility of 

cooperating with China to foster a global agreement on this issue within in a multilateral organization like the U.N. or the OECD. 

Question. China is currently going through a period of labor unrest and wages are 

rising in many areas in response. Some American businessmen believe this wage 

inflation will cascade throughout much of the manufacturing sector. Do you believe 

this is likely to happen and if so, will Chinese officials find it too much to swallow 

to also allow their currency to appreciate? In other words would sharply rising 

wages dampen the pace and size of any currency appreciation? Would the impact 

on the United States-China trade balance of widespread wage inflation be similar 

to, or different from, the impact of currency appreciation? 

Answer. Contrary to Western press reports, China is not going through a period 

of labor unrest. The recent increases in wages are a conscious outgrowth of government regulations introduced in 2004, which stipulated that provincial governments 

increase minimum wages of Chinese workers every other year. During the crisis of 

2008–09, when China’s export businesses were under severe pressure, those increases—like the currency appreciation policy—were suspended. The gains evident 

this year were largely a catchup from that hiatus. Even in the aftermath of this 

latest round of wage inflation, compensation per hour in Chinese manufacturing industries is still only about 4 percent of the comparable pay rate in the United 

States—hardly a signal that the days of low-cost Chinese labor are numbered. Moreover, total personal income in China is currently only about 42 percent of GDP— 

less than half the 85 percent reading the United States. In the upcoming 12h FiveYear Plan, the government will make a determined effort to boost the wage share 

of national income in an effort to raise consumer purchasing power. This policy 

should not be viewed as an offset to a further, albeit gradual, pace of currency appreciation in the years ahead. However, to the extent that it is part of a 

proconsumption policy agenda, that will absorb surplus household saving, it can be 

expected to reduce China’s overall current account and multilateral trade surplus. 

Whether that translates into a smaller bilateral imbalance with the United States, 

it is equally dependent on actions taken by the United States to boost America’s domestic saving rate—necessary to reduce the multilateral trade deficits with China 

(and, by the way, with 89 other nations) that are an important outgrowth of our 

unprecedented saving shortfall. A critical first step is passage of a multiyear deficit 

reduction plan that stabilizes the debt to GDP ratio. 

RESPONSES OF AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED BY

SENATOR JOHN F. KERRY

Question. Where does the Economic Relationship Fit into a Large Foreign Policy 

Agenda? 

• What are your views on the importance of the United States-China economic 

relationship as part of a larger United States-China foreign policy agenda? 

• How has the changing economic relationship altered our broader relationship? 

Specifically, are there ways that our economic interdependence constrains U.S. 

foreign policy options on other issues of concern such as nonproliferation policy, 

human rights, Taiwan? Are China’s foreign policy options similarly constrained—if so how? 

Answer. It is nearly impossible today to separate our Nation’s economic and foreign policy issues. Challenges in one area profoundly affect our ability to be successful in the other, and nowhere is that more apparent than with respect to our relationships with China, the world’s fastest growing large economy. 

Our Nation’s stature as a foreign policy leader requires that we maintain a strong 

economy. Building a strong economic relationship with China contributes significantly to our Nation’s growth and prosperity. Currently China is our third-largest 

and fastest growing export market. The benefits of our trade opportunities with 

China have been experienced across America. Virtually every state in the union experienced triple digit increases in exports to China in the decade to 2008, while 

sales to the rest of the world over the same period grew by just 29 percent. With 

domestic consumption and investment currently quite weak, strong export growth 

gives our economy a welcome economic boost. 

49 

As two of the world’s major players, China and the United States will need to collaborate if we are to deal effectively with a long list of challenges like nuclear proliferation, terrorism, drug and human trafficking, piracy, climate change, and 

pandemics. It is less that we are constrained by our economic interdependence, and 

more that our aggregate economic strength provides a means to mobilize the capacity to deal successfully with a growing list of issues that cannot be solved unilaterally in today’s globalized world. Indeed, in many instances both China and the 

United States must collaborate if solutions are to be found. 

We will continue to have our differences with China on economic and foreign policy issues as we do from time to time with even our close allies. But we will be better able to bridge those differences and to find solutions that advance the interests 

of our respective populations by taking actions calculated to build a closer, more 

candid and constructive bilateral relationship. Taiwan is a case in point. China regards the Taiwan issue as a ‘‘core’’ interest involving its ‘‘sovereignty’’ and believes 

that we deliberately ignore its sensitivity. Since resuming diplomatic relations with 

China in 1979, the United States has sought to avoid debating whether Taiwan is 

part of ‘‘one China’’ but has been clear that Taiwan’s future should be decided without the use of force. Our government pledged in the Taiwan Relations Act, also 

signed in 1979, to provide defensive weapons to ensure that Taiwan could defend 

itself again an attempt at forceful acquisition. At the present time, the Chinese have 

an arsenal of missiles in Fujian pointed at Taiwan, and we continue to supply advanced weaponry to Taiwan. The trust among our two militaries lags far behind the 

trust that exists among our leaders dealing with economic or strategic issues. One 

could imagine that if we were able to convene a high level and regular Strategic 

Military Dialogue that it might be possible to reach an understanding whereby 

China gradually reduced its stock pile of missiles in Fujian and as that positive action occurred the United States delayed sales and downgraded the level of weaponry 

sold to Taiwan. That sort of deal would require building a much closer and collaborative military-to-military relationship that today does not exist. 

Question. National Security and the Chinese Economy 

• Do China’s leaders think in terms of national security when they consider the 

size, composition, pace of development and protection of China’s economy? • If so, how does this impact their foreign and commercial engagement with the 

United States and other nations? • What is the most appropriate and effective U.S. policy response? • What is the best way to pursue our national economic interests and national 

security interest with China—side by side? 

Answer. The primary foreign policy goal of the Chinese leadership is to maintain 

peace at China’s borders shared with 14 nations that suffer from varying degrees 

of instability. China seeks stability in the region and at home so that it can focus 

on its difficult domestic challenges including existing poverty, income disparity between rural and urban populations, serious environmental concerns including extensively polluted water supplies, foul air and loss of arable land, unemployment, inadequate health care, and a rapidly aging population. Domestically the leadership has 

made ‘‘stability preservation’’ its top priority. The leadership believes that in order 

to maintain domestic support it must implement policies that ensure that China’s 

economy continues to grow in ways that will increase prosperity to those who to 

date have been left behind and to deal with the issues that affect quality of life in 

China. Over the past three decades in an effort to spur its economic growth, China 

has opened its markets to foreign investment and reduced its trade barriers, looking 

to exports and heavy industry to provide the engine of economic growth. Although 

significant restrictions remain, they are far fewer than existed a decade ago when 

China joined the World Trade Organization. Overall, the opening of China’s markets 

has both generated domestic economic growth and contributed to global economic 

growth. 

Last year when global growth turned negative and world trade plummeted more 

than 11 percent, China, along with other nations including the United States, experienced a surge of economic nationalism. Politics in China drove ‘‘Buy China’’ policies just as politics here drove ‘‘Buy America’’ policies, notwithstanding objective 

economic analysis showed that such policies are detrimental to growth and serve to 

strain international relations. Bilateral fora like the Strategic and Economic Dialogue and the Joint Commission on Commerce and Trade have been helpful in removing restrictions and building greater understanding. Meetings of leaders and 

ministers that represent the world’s 20 largest economies (the G20), that in total 

comprise 85 percent of world output and 80 percent of world trade, also provide a 

useful forum for seeking to reduce trade and investment restrictions. Of course 

where a particular trade or investment policy is deemed to violate a WTO agreeVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00053 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
50 

ment and negotiation has not resolved the difference, it is appropriate to use the 

WTO dispute settlement mechanism to resolve the difference, something which both 

the United States and China have done, thus minimizing potential friction. 

In many instances the national economic interests and the national security interests of the United States and China overlap. Both nations want a vibrant global 

economy that contributes to domestic growth. Similarly both want stability internationally. In some circumstances where we agree on the ends, we differ with respect to the best means to achieve those ends. For example, China and the United 

States both want to curtail nuclear arms in Iran. China has favored extended diplomacy over sanctions. As a result of our strategic dialogues, China has been willing 

to support the U.N. resolutions providing for sanctions but has not been willing to 

support the tighter measures that the U.S. Congress adopted. 

In other circumstances we disagree on the risk involved. That is the case with 

the nuclear ambitions of North Korea. China assesses the risk of North Korea developing an effective nuclear weapon as lower than does the United States. It fears 

more a collapse of the North Korean Government, worrying it would lead to a flood 

of North Korean refuges crossing China’s north east border causing instability in 

Liaoning and Jilin provinces and violating China’s top domestic policy of ‘‘stability 

preservation.’’ We are more apt to find means to deal with both of our concerns 

through regular and frequent dialogue. What is missing today is a regular and highlevel military dialogue to encourage both sides to better understand the other’s risk 

assessments and to talk about ways to deal with our respective concerns. 

Question. China’s Treasury Holdings. China’s large holdings of U.S. Treasury Securities which totaled $900 billion as of April 2010 make it the largest foreign 

holder of those securities. Some U.S. analysts welcome China’s purchases of U.S. 

debt which helps enable the United States to fund its budget deficit and keep U.S. 

interest rates relatively low. Others have expressed concerns that China’s large 

holdings of U.S. debt could give it significant leverage over the United States. 

• How should we weigh the risks against the benefits? 

Answer. Both those who welcome China’s continued purchase of our growing debt 

and those who express concern over our increasing debt being in foreign hands overlook a critical point. The fact is that there is a serious imbalance in the global economy that has ballooned to unsustainable levels in recent years and puts our future 

economic stability at severe risk. China, Germany, Japan, South Korea, and other 

Asian economies have built their growth primarily on exports, whereas the United 

States, the United Kingdom, and Spain, among others, have relied excessively on 

domestic consumption, particularly in the housing sector, to fuel their economic 

growth. 

Economists agree that neither of these singly focused growth models is sustainable, and being unsustainable they will change either through gradual policy adjustment or as a result of traumatic financial upheaval. 

To protect against future financial crisis will require debtor and creditor nations 

to adopt more balanced growth plans. Debtor nations cannot continue to consume 

at the excessive levels of the past, and creditor nations must look more to their own 

consumers to fuel their economic growth. 

Most economists agree that continuing to rely on the growth models of the past 

decade raises the risk of a crisis to unacceptably high levels. The required changes 

could constructively be led by the United States, the world’s largest debtor nation, 

and by China, the world’s largest surplus nation. 

The necessary changes will take time to implement. But it would provide substantial market assurance if the United States and China would publicly lay out a specific 5-to-10-year rebalancing plan at the next meeting of the G20. Each could set 

forth benchmarks for measuring progress, and provide periodic updates on achievements. 

RESPONSES OF AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED BY

SENATOR RICHARD G. LUGAR

Question. You implied that financial and trade protection would have a negative 

impact on the U.S. economy. Would you please delve into those details on why a 

rise in protectionism would have bad repercussions? How exactly does protectionism 

work itself through our economy? 

Answer. For the six decades following World War II, under both Democratic and 

Republican administrations, the United States has led the world in opening global 

markets. The results have been spectacular. America’s policy of seeking to remove 

barriers to cross border trade and investment has greatly enhanced our Nation’s 

51 

economic growth and the economic well-being of its citizens. As world trade and investment has exploded, standards of living have soared at home and abroad. 

A highly regarded economist, Dr. Gary Hufbauer, in a comprehensive study published in 2005 by the Institute for International Economics, now the Peterson Institute for International Economics, calculated that the opening of markets since 

World War II has increased our Nation’s GDP by roughly $1 trillion per year, thus 

raising the average American household yearly income by $9,500. 

Our trade and investment in every region of the world have contributed to this 

very positive result. Last year when trade plummeted by more than 11 percent, the 

United States economy contracted by about 2 percent. This year with trade up by 

7 percent, the International Monetary Fund is predicting that the U.S. economy will 

grow by more than 3 percent. With domestic demand and job growth still depressed, 

external demand is more important than ever. 

Unfortunately economic hardship inevitably stokes demands for protection. Yet 

policies that restrict trade and investment choke off the growth that is especially 

needed in times of economic adversity. Making matters worse, protectionism is highly contagious. When the United States adopts ‘‘Buy America’’ policies, almost instantaneously our major trading partners, like China, implement a ‘‘Buy China’’ policy. 

Hence it behooves us to make every effort to explain to the public the harm that 

results from protectionism and the benefits that flow from opening markets to our 

products and services. 

Dr. Hufbauer’s study calculates that the additional opening of world markets to 

trade and investment would increase U.S. wealth by an additional $500 billion per 

year, making the average American household richer by an additional $4,500 per 

year. 

It is well documented that jobs connected to international activity earn on average 

13 to 18 percent more than jobs in the overall economy. A majority of our exporters 

are small- and medium-sized businesses that serve as the backbone of America’s job 

creation. The prospects for these businesses and their workers are enhanced by our 

government’s success in the opening of foreign markets. 

By ratifying the three pending trade agreements with Panama, Colombia, and 

South Korea, completing the Trans-Pacific Partnership, and concluding the Doha 

Development Round the United States could generate additional growth opportunities for the United States and global economies and help keep protectionist impulses 

at bay. 

Question. Your written testimony notes that one way to strengthen U.S. investment ties while ensuring U.S. competitiveness is for the United States to approve 

the three pending free trade agreements (FTAs) that have been signed with South 

Korea, Colombia, and Panama. Recently, Senator Kerry and I sent a letter to the 

administration calling for the Korea-United States FTA to be sent to the Congress 

for a vote. Also this year, I introduced a resolution in the Senate calling for the administration to develop a framework for FTA negotiations with the Association of 

Southeast Asian Nations (ASEAN). Over the last 5 years, China has signed nine 

FTAs including ones with Korea, New Zealand, and the nations of ASEAN. Please 

describe how U.S. business interests are disadvantaged when competing against 

China interests in areas where China has an FTA and the United States does not. 

Answer. Bilateral and regional free trade agreements are proliferating around the 

world. The World Trade Organization (WTO) finds there are 262 free trade agreements (FTAs) in force today; the United States is a party to just 17. An additional 

100 are currently being negotiated. The United States is negotiating one, the TransPacific Partnership agreement. As a result our entrepreneurs and their workers are 

disadvantaged vis-a-vis their competitors in countries that have free trade agreements in place which affects our Nation’s capacity to grow and to create jobs. 

That fact is starkly documented in the World Economic Forum’s annual report 

‘‘Global Enabling Trade’’ that ranks 125 countries on a range of factors affecting 

competitiveness. One factor it measures is tariff barriers that impede competitiveness. Chile, as a result of its network of trade agreements, is ranked No. 1, indicating that Chile’s exporters face the lowest tariffs globally. The United States with 

few trade agreements is ranked 114 out of the 125 countries indicating the poor 

competitive position faced by our exporters. Of course there are many other trade 

restrictions beyond tariffs that trade agreements alleviate, but the metric on tariffs 

is illustrative. 

The job gains from our trade agreements are substantial. This past May the U.S. 

Chamber of Commerce released its study ‘‘Opening Markets, Creating Jobs, Estimated U.S. Employment Effects of Trade with FTA Partners.’’ Using a general equilibrium economic model, this study examined the 14 FTAs the United States has 

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plemented. It found that 17.7 million U.S. jobs depend on trade with these 14 countries and 5.4 million of these jobs were attributed to the increase in trade resulting 

from the free trade agreements. 

U.S. exporters can lose their competitiveness rapidly when other governments remove trade barriers for their entrepreneurs and our government does not. A study 

issued on May 10, 2010, undertaken in the House of Representatives by the ranking 

member of the Ways and Means Committee, the ranking member of the Trade Subcommittee of the Ways and Means Committee, and the ranking member of the Agriculture Committee documented that between 2004–08 Colombia’s agriculture market was expanding at 38 percent per year and had become the largest market for 

U.S. agriculture exports in South America totaling over $4 billion. In 2009, after Colombia entered a free trade agreement with Mercosur, U.S. agriculture exporters’ 

market share in Colombia’s agriculture market fell by 31 percent while the market 

share of competitors from Argentina and Brazil climbed 22 percent. In 1 year American saw their combined sales of corn, wheat, soybeans, and soybean oil plunge 62 

percent even as Colombian total imports held steady and to date records show 2010 

sales of those products are down 45 percent. 

China is the world’s largest exporter. It has arranged 14 trade agreements with 

the 31 economies including 10 nations that comprise the Association of Southeast 

Asian Nations (ASEAN), is negotiating 5 additional agreements, and is considering 

negotiations with 2 large economies, India and South Korea. 

U.S. competitiveness in the markets where we do not have trade agreements but 

China does is being adversely affected. It should be noted that the network of agreements that China has and is negotiating in Asia will disadvantage American entrepreneurs in the world’s fastest growing region. Sadly, the harm is self inflicted. 

Question. Too often around the world, the revenues from natural resources are a 

hindrance to economic and political development. Moreover, conflict over resource 

revenues can drive price instability and harm supply of oil. In my judgment, promoting transparency is a pivotal need for empowering citizens to ask questions of 

their governments and hence be empowered to grow economically and democratically. One measure I have offered with Senator Cardin would enhance U.S. leadership by requiring U.S. and foreign companies listed here to disclose their payments 

to governments as part of Securities and Exchange Commission filings. The importance of U.S. leadership is highlighted with recent mineral discoveries in Afghanistan. China’s growing economy also requires oil, gas and minerals, and at times the 

government backs their companies’ entry into countries. In your assessment, how 

can we make progress at a governmental and corporate level with China to improve 

Chinese support for good governance of resources? 

Answer. The vast majority of U.S. companies are good ambassadors overseas. In 

challenging environments they bring American values and demonstrate a positive 

agenda of corporate social responsibility. Expanding their competitive opportunities 

will lead to a spread of U.S. values including corporate social responsibility. 

The G20 summit meetings provide a multilateral forum where this issue so critical to improving global governance can be discussed beneficially. It is clear that 

transparency with respect to resource payments to governments would help to limit 

corruption, enhance global stability, and promote global growth. Leaders of the 

world’s 20 largest economies could agree that they would support transparency with 

respect to payments made to governments for natural resources by requiring their 

companies to make such disclosure. The United States could lead by example by 

adopting the reporting measure that you have suggested. 

The Strategic and Economic Dialogue meetings provide a bilateral forum where 

the United States and China could discuss the benefits that would flow from transparency with respect to resource payments made to governments. An understanding 

followed by action would give tangible proof of the value of the bilateral dialogue. 

Question. China is currently going through a period of labor unrest and wages are 

rising in many areas in response. Some American businessmen believe this wage 

inflation will cascade throughout much of the manufacturing sector. Do you believe 

this is likely to happen and if so, will Chinese officials find it too much to swallow 

to also allow their currency to appreciate? In other words would sharply rising 

wages dampen the pace and size of any currency appreciation? Would the impact 

on the United States-China trade balance of widespread wage inflation be similar 

to, or different from, the impact of currency appreciation? 

Answer. China’s 2010 overall inflation rate between January and May ranged between 1.5 percent and 3.1 percent, higher than in 2009 in the midst of the global 

recession, but considerably lower than in 2008 when the rates between January and 

May ranged between 7.1 percent and 8.5 percent. 

53 

There has been pressure to increase wages in the manufacturing sector. On July 

8, Beijing issued its 2010 wage guidelines indicating an average 11-percent salary 

increase covering both government and enterprise workers. Undoubtedly, Chinese 

officials will watch closely to see how the higher wage rates affect both growth and 

inflation. 

China’s competitiveness will be affected by increases in inflation as well as increases in wages. The benefit of wage increases, if inflation remains under control, 

is that they will encourages domestic consumption which will help to rebalance China’s domestic economy that currently relies too heavily on exports and too little on 

domestic consumption for growth. Inflation driven by increases in the prices of consumer goods such as housing and food is likely to depress consumption. In recent 

months China has taken measures to slow the housing boom. There is increased recognition within China’s leadership of the need to implement policies so as to stimulate domestic consumption and to reduce those that encourage expansion of heavy 

industry and exports in order to achieve a more sustainable model for economic 

growth. 

RESPONSES OF AMBASSADOR CARLA A. HILLS TO QUESTIONS SUBMITTED BY

SENATOR RUSSELL D. FEINGOLD

Question. I have serious concerns regarding past and ongoing human rights 

abuses in China, including oppression of ethnic and religious minorities, notably in 

Tibet, and of political dissidents and restrictions on press and assembly, just to 

name a few. As China continues its economic growth and increases its role on the 

world stage, what should we expect to see with respect to China’s human rights 

record 10 years from now—positive steps and improvements or a continuation of repression and human rights violations? Is the issue of human rights being adequately 

addressed in our bilateral engagement, and how can the United States better influence the Chinese on this issue? 

Answer. Although it is impossible to predict with any precision the domestic political environment that may exist in any country a decade hence, my hope and expectation is that as China gains the confidence that comes with its enhanced economic 

security and increased role on the world stage, its leadership will respect widely 

accepted international norms including those dealing with human rights. China’s 

leadership is increasingly active in international institutions including the United 

Nations Security Council, the International Monetary Fund, the World Trade Organization, the World Bank, and most recently the G20. All are built on a platform 

of transparent rules. Only by becoming a ‘‘responsible stakeholder’’ in these organizations can China establish and maintain a global leadership role that I believe its 

leaders want to achieve. 

China’s domestic political and social reforms have been much slower in developing 

than its economic reforms that have transformed the country with unprecedented 

speed. Still there has been social change since the horrific revolutionary period 

(1960–1970) of Chairman Mao Zedong. Since 1978 when Deng Xiaoping began the 

reforms to open China to the world, China’s Government has steadily reduced the 

social and to a lesser extent the political restrictions that the Chinese people faced 

a generation ago. However I do not see broad support for Western-style democracy 

in China today where according to numerous polls the vast majority of Chinese believe their government is ‘‘on the right track.’’ Nonetheless there is considerable talk 

among the elite and scholars of the need to enhance pluralism, build an independent 

judiciary, respect the rule of law, and increase transparency. 

Over the past several years reformers in the Central Party School, which serves 

as the premier training ground for emerging Communist leaders, as well as university scholars have started to debate openly the merits of expanding grassroots political participation, judicial independence, and elections for top party posts. For example, in 2008 Yu Keping, an adviser to President Hu Jintao and Professor and 

Director of the China Center for Comparative Politics & Economics in Beijing wrote 

a widely quoted book entitled ‘‘Democracy is a Good Thing.’’ Significantly, President 

Hu in his work report presented to the People Congress in March 2008 urged the 

Party ‘‘to adapt to the growing enthusiasm of the people for participation in political 

affairs’’ by expanding grassroots democracy, increasing transparency, and exercising 

power ‘‘under the sunlight to ensure that it is exercised correctly.’’ In ‘‘Global Asia,’’ 

a Journal of the East Asia Foundation, Yu Keping writes in the summer 2010 issue: 

[W]hatever political reforms China carries out, and whatever kind of governance model takes shape in the future, for the country’s far sighted leaders the objectives of the governance reform are already irrefutably clear: 

54 

democracy, rule of law, fairness, responsibility, transparency, integrity, efficiency, and harmony. 

Similarly Zhou Tianyong, senior economist and deputy head of research at the 

Central Party School stated in a 2008 interview published by the Daily Telegraph: 

‘‘We have a 12-year plan to establish a democratic platform.’’ He claimed that the 

government was determined to reform itself, but there had been some infighting between different departments, and he called for the number of ministries to be cut 

in half to form a ‘‘modern government structure’’ adding ‘‘there will be public democratic involvement at all government levels.’’ As support for his positive projection, 

Professor Zhou said: ‘‘There will be many more nongovernmental organizations, 

chambers of commerce, industry associations and other social groups. Religion 

should also be given a wider platform to play a positive role. We should protect religious freedom.’’ Although he did not predict the end of the one-party rule, he did 

state that by 2020 China will basically finish its political and institutional reforms.’’ 

People can argue about whether China will achieve those goals. But the fact that 

Communist Party members within the Party School are publicly talking in these 

terms indicates that there is some basis to believe that a greater liberalization of 

politics is underway. This kind of public debate regarding politics represents change 

for it would not have been permitted a decade ago. 

Public lecturing from the outside in my view is counterproductive. Our government can most effectively deal with human rights concerns where it has engaged 

with China on a broad range of issues of common interest. Working together to solve 

problems of mutual concern helps to build trust and create relationships that permits candid discussion of differing views and encourages the bridging of differences. 

There are instances where that has occurred. For example, China joined in denouncing North Korea’s nuclear test in 2006, voted to impose and then tighten U.N. sanctions against Iran, supported deployment of U.N.-AU forces to Darfur, condemned 

the brutal crackdown in Burma, helped in dealing with kidnapping and piracy off 

the coast of Somalia, and has been constructive in a number of humanitarian efforts. We need to build on our successes. Many of our conflicts occur in areas that 

involve our militaries. Regular and frequent military dialogues at the highest levels 

would be helpful in avoiding and resolving a number of our differences. 

The private sector can also be helpful. NGOs continue to multiply in China. They 

are changing public perceptions. Our corporations doing business in China follow 

high standards that set an example. Also, there are a number of Tract II dialogues 

that talk about how rule of law, transparency and respect for minority rights contribute to domestic stability and counter corruption, which are objectives given high 

priority by the Chinese government. 

Question. In recent years, China has emerged as a significant economic and political player across Africa. Although Beijing continues to be primarily focused on access to oil and other natural resources, its engagement is matched by significant investments in infrastructure development, without regard to political controversies or 

concerns about governance or fiscal integrity. I don’t think American interests on 

the continent are necessarily threatened by China’s activity, but it is definitely in 

our interest to pay attention to this activity and consider its long-term strategic implications. How should we address that activity both in our own policy development 

and in our partnerships with African Governments, particularly given our focus on 

strengthening good governance and the rule of law? 

Answer. China’s investment in and trade with sub-Saharan Africa has contributed 

to a substantial boost in the region’s economic growth. China has given aid to most 

of the countries in the region excepting the few that still recognize Taiwan. Although it began entirely with what some termed ‘‘no strings attached’’ diplomacy 

which caused concern in the West as Chinese investments and aid went to governments that abused their populations, its policies appear to be evolving. China has 

positively responded to international pressure. 

We can applaud the fact that China’s investment both in infrastructure and natural resources have helped to reduce poverty in sub-Saharan Africa. At the same 

time we can encourage China’s active participation in international organizations 

like the International Monetary Fund and the World Bank that endeavor to advance 

rule of law, transparency and respect for minority rights. These issues can also be 

discussed in context of our bilateral dialogues where global stability is an issue of 

concern to both governments. 

Question. For over a decade, China has been Sudan’s closest economic partner and 

its leading trade partner. China purchases about two-thirds of Sudan’s exports, and 

provides one-fifth of its global imports. China is also the leading developer of 

Sudan’s oil industry and a major purchaser of Sudanese oil. While Beijing has reVerDate Nov 24 2008 15:48 Dec 21, 2010 Jkt 000000 PO 00000 Frm 00058 Fmt 6633 Sfmt 6621 S:\HEARING FILES\2010 ISSUE HEARINGS TO PREPARE FOR PRINTING\ISSUE HEARIN
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evaluated its relationship with Khartoum in recent years, it continues to be reluctant to press the Government of Sudan on issues related to peace and security. As 

Sudan moves toward a 2011 referendum on self-determination, constructive engagement from China will be indispensible. What can we expect from the Chinese as we 

get closer to the 2011 vote and how we can help encourage them to play a productive role within multilateral fora? 

Answer. The issues in Sudan are challenging. The April 2010 election resulted in 

Omar Hassan al-Bashir of the National Congress Party being elected President of 

the largely Arab-Muslim North and Salva Kiir of Sudan’s People Liberation Party 

elected President of the largely Christian and animist semiautonomous southern region. In accordance with the Comprehensive Peace Accord which ended 21 years of 

brutal civil war, two referenda will be held on January 9, 2011, to determine 

whether Southern Sudan will secede and form a new nation and whether Abyei, a 

region with vast oil reserves, will choose to stay with the North under special administrative status or to join the South which is expected to secede. Intraregional 

violence has continued in the South amidst allegations that the newly elected government is unable to maintain peace. The head of Sudan’s Referendum Commission 

has warned that Sudan is ‘‘alarmingly unprepared’’ for the referendum. Assuming 

the referendum proceeds, very tough issues of border demarcation and sharing of 

oil revenues remain to be decided. Many outside observers have expressed the view 

that the African Union needs to be more intimately involved. President Thabo 

Mbeki, Chair of the African Union panel on Sudan, has expressed cautious optimism. The African Union held its summit in Kampala the last week of July to discuss the many daunting pre- and post-referendum concerns. 

The United Nations has extended its mission in Sudan. In late July United 

Nations representatives met with representatives of the African Union and expressed a willingness to work with the Sudanese Government and the international 

community to ensure a free and credible referendum. China, a member of the Security Council, has voiced support for the referendum and a strong desire for stability 

in the region where it has substantial investments. Since 2007, it has increased its 

support of international peacekeeping missions and there is no indication that 

China will alter its current policy either before or after the referenda. What actions 

the two governments take after the referenda will depend on the facts on the ground 

and future actions would be an appropriate subject for our bilateral strategic 

dialogue. 

Question. Are we paying enough attention to Chinese attitudes toward the United 

States—both those of Chinese citizens and those of the political and military establishments? There have been some troubling press stories on this issue—for example 

a survey conducted for the Sunday Times of London of Chinese-language media 

found ‘‘army and navy officers predicting a military showdown and political leaders 

calling for China to sell more arms to America’s foes.’’ Similarly, the Washington 

Post reported earlier this year poll results indicating that many in China see the 

United States as ‘‘the No. 1 threat to China’s rise.’’ Should we be doing more in the 

way of public diplomacy to China? 

Answer. There are misperceptions in both China and the United States about the 

other. Many in China, not only in the leadership and media but also ordinary citizens, see the United States as seeking to limit China’s reemergence as a global 

leader. At the same time many Americans including some Members of Congress and 

the media talk about China as ‘‘tomorrow’s enemy,’’ which feeds China’s 

misperceptions regarding the United States and undercuts efforts to build a closer, 

more candid, and collaborative bilateral relationship. That is why engagement at 

high levels, public and private, is critical. Public diplomacy in China can be helpful. 

But we need to take steps here at home. It would be helpful if more of our leaders 

were to state publicly that they want to establish a closer, more candid, and collaborative bilateral relationship and to inform their fellow Americans about why and 

how China is important to U.S. future prosperity and security. Most Americans are 

unaware that China is our fastest growing export market and our third-largest customer behind Canada and Mexico. Many Americans complain that China limits our 

inward investment and take that as a hostile act, but are unaware that recently 

50 Members of Congress have expressed opposition to China’s Anshan Iron & Steel 

Group making a 20-percent investment in U.S. Steel Development Co., a small plant 

56 

in Mississippi, that would bolster a U.S. company and create U.S. jobs. Many Americans see as evidence of protectionism China’s procurement policies that seeks to 

limit government high technology purchases to ‘‘indigenous’’ products, but do not see 

our Buy America’’ restrictions as a rough equivalent. With a better informed public, 

we would be in a better position to build a stronger bilateral relationship that would 

benefit both sides. 

Æ