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50–318 2009

S. HRG. 110–916 

U.S. ECONOMIC RELATIONS WITH CHINA: STRATEGIES AND OPTIONS ON EXCHANGE RATES 

AND MARKET ACCESS 

HEARING 

BEFORE THE

SUBCOMMITTEE ON 

SECURITY AND INTERNATIONAL TRADE AND 

FINANCE 

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED TENTH CONGRESS 

FIRST SESSION 

ON 

INFORMATION ABOUT STRATEGIES AND OPTIONS ON EXCHANGE RATES 

AND MARKET ACCESS 

WEDNESDAY, MAY 23, 2007 

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

( 

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

jlentini on DSKJ8SOYB1PROD with HROC

(II) 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

CHRISTOPHER J. DODD, Connecticut, Chairman 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

ROBERT MENENDEZ, New Jersey 

DANIEL K. AKAKA, Hawaii 

SHERROD BROWN, Ohio 

ROBERT P. CASEY, Pennsylvania 

JON TESTER, Montana 

RICHARD C. SHELBY, Alabama 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

SHAWN MAHER, Staff Director 

WILLIAM D. DUHNKE, Republican Staff Director and Counsel 

ROGER M. HOLLINGSWORTH, Professional Staff 

JULIE Y. CHON, International Economic Policy Adviser 

AARON D. KLEIN, Economist 

PEGGY R. KUHN, Republican Senior Financial Economist 

MARK A. CALABRIA, Republican Senior Professional Staff Member 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE WHITTLE, Editor 

SECURITY AND INTERNATIONAL TRADE AND FINANCE

EVAN BAYH, Indiana, Chairman 

MEL MARTINEZ, Florida, Ranking Member 

SHERROD BROWN, Ohio 

TIM JOHNSON, South Dakota 

ROBERT P. CASEY, Pennsylvania 

CHRISTOPHER J. DODD, Connecticut 

MICHAEL B. ENZI, Wyoming 

ELIZABETH DOLE, North Carolina 

ROBERT F. BENNETT, Utah 

JAYME ROTH, Staff Director 

JENNIFER C. GALLAGHER, Republican Staff Director 

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(III) 

C O N T E N T S 

WEDNESDAY, MAY 23, 2007 

Page 

Opening statement of Chairman Bayh .................................................................. 1 

Opening statements, comments, or prepared statements of: 

Chairman Dodd 

Prepared statement ................................................................................... 33 

Senator Bunning ............................................................................................... 4 

Senator Casey ................................................................................................... 18 

Senator Brown 

Prepared statement ................................................................................... 34 

WITNESSES 

Morris Goldstein, Senior Fellow, Peterson Institute for International 

Economics ............................................................................................................. 7 

Prepared statement of C. Fred Bergsten, Director, Peterson Institute 

for International Economics ......................................................................... 36 

David A. Hartquist, Counsel, China Currency Coalition ..................................... 9 

Prepared statement .......................................................................................... 48 

Robert S. Nichols, President and Chief Operating Officer, Financial Services 

Forum .................................................................................................................... 11 

Prepared statement .......................................................................................... 77 

Patrick A. Mulloy, Adjunct Professor, George Mason School of Law .................. 13 

Prepared statement .......................................................................................... 84 

John W. Nolan, Vice President and General Manager, Steel Dynamics, Inc ..... 15 

Prepared statement .......................................................................................... 102 

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jlentini on DSKJ8SOYB1PROD with HROC

(1) 

U.S. ECONOMIC RELATIONS WITH CHINA: 

STRATEGIES AND OPTIONS ON EXCHANGE 

RATES AND MARKET ACCESS 

WEDNESDAY, MAY 23, 2007 

U.S. SENATE, 

SUBCOMMITTEE ON SECURITY AND INTERNATIONAL TRADE

AND FINANCE, 

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

The subcommittee met at 2:41 p.m., in room SD–538, Dirksen 

Senate Office Building, Senator Evan Bayh, (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF CHAIRMAN EVAN BAYH 

Chairman BAYH. I am pleased to call this meeting of the Subcommittee to order. I would like to welcome all of our guests, including our panelists here today. I appreciate your indulgence. The 

Senate, as you probably are aware, is debating an important immigration measure, and as the Senate is sometimes wont to do, we 

have votes that are not scheduled. So we just had one at—the clock 

has stopped. We had one at 2:25, which ran over a little bit, so I 

appreciate your waiting for us, and I apologize for the delay. It is 

the nature of the beast, as we might say. 

The order of proceedings today, I am going to begin with an 

opening statement, turn to my colleagues in order of appearance— 

Jim, I think that means you are on deck, is that right? 

Senator BUNNING. Thank you. 

Chairman BAYH. You are on deck, to use an expression you are 

familiar with—and then our other colleagues who will be here. I 

want to thank Senator Martinez for his participation putting today’s hearing together. We have had very good bipartisan collaboration over the years, and certainly in terms of the conduct of the 

affairs of this Subcommittee. 

I would also like to thank the Committee Chairman, Senator 

Dodd, who has helped to make this hearing possible. It was at his 

recommendation that the subject matter was expanded to include 

not only currency valuations but also market access to financial 

services industries and others. I think that was a very helpful suggestion. It is an important issue and one is that it is timely that 

we focus on. The Senator could not be with us today, but he does 

intend to submit a full statement for the record, and I appreciate 

his sharing his thoughts with us in that regard. 

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2 

After the opening statements are completed, we will go to witness testimonies. I have had a chance to read some of the prepared 

statements. If possible—and we are going to have some flexibility— 

if we can keep it to 5 to 7 minutes, something like that, that would 

be ideal. We can submit any extra for the record, and then we will 

go to questions and answers, and we will try and have 5-minute 

rounds of questions and answers and, if necessary, a second round 

for questions and answers. So thank you for your patience. I will 

make a few comments, then, Jim, turn to you, and any colleagues 

who arrive, and then, gentlemen, we look forward to hearing from 

you today. 

This is a timely hearing. The Strategic Economic Dialogue, the 

most recent of meeting of that just concluded earlier today. Secretary of the Treasury Paulson called me last week to discuss some 

of his agenda with me, to talk a little bit about the subject of our 

hearing today, and I would like to say that I appreciate his efforts. 

He is a good man. I have known him for a long time. In some ways, 

he is dealing with some legacy problems, and I would characterize 

it as a legacy of neglect with regard to some of these issues. His 

actions and his activities are well intended. We are doing somewhat better than in the past, but the question before us today is 

whether we are making enough progress and whether that 

progress is being made in a timely manner. And my answer to both 

of those questions would be, ‘‘Obviously not.’’ 

Steps by China so far have been largely cosmetic and symbolic 

and of marginal substantive import. And the pace of change is glacial, and I use that term in the pre-global warming context. It has 

been so slow, in fact, that nothing of consequence has been accomplished in any meaningful timeframe. I am reminded of something 

that John Maynard Keynes once said, which was, ‘‘In the long run, 

we are all dead.’’ And at this pace, we will be before the imbalances 

that have been allowed to build in the global trading system, particularly the bilateral trading relationship between our Nation and 

China, are rectified. 

It is becoming increasingly obvious that some form of benchmarks for specific actions and specific consequences for failing to 

meet those benchmarks will be necessary if progress is to be made. 

For years now, literally years, China has said many of the right 

things, and we appreciate that. But they have not followed through 

and done the right things. How long will we accept rhetoric as a 

substitute for action? 

Ultimately, it is a matter of credibility, both ours and theirs. 

When we repeatedly acquiesce to behavior that is harmful to the 

United States, why should China take us seriously? The answer is 

that they really do not. When they repeatedly do not fulfill promises to change their behavior, why should we believe them? And 

the answer is that increasingly we should not. 

The current state of affairs is most unfortunate. I wish we did 

not have this friction in our relationship. No one enjoys tension between two great nations like the United States and China. I want 

good relationships with China. It is probably the most important 

bilateral relationship that we will have over the next 50 years. It 

is a powerful nation with a rich history and culture and bright 

prospects for the future. 

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3 

But as much as I want good relations with China, I know that 

this cannot be achieved by ignoring the interests and the wellbeing of the United States. We all want China integrated into the 

global economic and security structure, but for amicable relations 

to exist, they must be mutually beneficial and sustainable. Growing 

questions about whether either of these is so exist. 

China is concerned about its domestic stability, and this is a real 

and legitimate concern. With the number of excess workers in agriculture who will be moving into the cities and the number of excess 

workers in state-owned enterprises, the risk of dislocation is real, 

and they have a right to focus on that. But in promoting rapid 

growth and stability at home, China cannot expect to export lower 

growth and instability to the United States in ways that are artificial. No nation state will voluntarily accept such a course, nor 

should we. 

For example, China policy benefits U.S. consumers but handicaps 

U.S. producers. That is not a decision for them to make. It is a decision for the United States of America to make. 

Another example. They cannot expect unfettered access to U.S. 

markets while denying open access to their own, particularly in the 

financial services sector and for turning a blind eye to rampant intellectual property theft, which was a previous subject for a hearing by this Subcommittee. 

Currency manipulation, which is an artificial distortion of trade, 

has had very harmful impacts upon our balance of trade. Some experts, including one member of the panel today, estimate that the 

Chinese currency is undervalued by as much as 40 percent, and it 

is getting worse. I think, Dr. Goldstein in previous testimony about 

31⁄2 years ago, you indicated at that time the undervaluation was 

in the area of 15 to 25 percent. Your most recent statement of a 

couple of months ago was 40 percent, and most experts would 

agree that the overvaluation is increasing rather than static or decreasing. 

The proposed expansion of the trading band is a marginal action 

at best—and really meaningless, in fact, given the fact that the 

current band has never been fully implemented. This results in lost 

sales and jobs to Americans due to reasons other than natural competitive market forces or comparative advantage. It has been estimated that the domestic manufacturing sector alone loses $31 billion of sales per year and that we lose $35 billion in exports to 

China every year because of their artificial manipulation of the currency. 

Other credible research suggests that the manipulation costs the 

U.S. economy approximately $500 billion per year and that this 

could translate into 5.3 million jobs. Regardless of the precise nature of these statistics, it is pretty clear that it is having a material 

impact upon our economy, and this is something that should concern all Americans. 

Market access limits exacerbate this imbalance. Not only does 

China artificially promote exports, it artificially restraints access to 

its domestic market. This is contrary to its obligations under the 

WTO. And China continues to discriminate against U.S. firms, particularly in the financial services sector. 

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4 

The global economy will not function very well if, when other 

countries, including China, have a competitive advantage, we buy 

from them, but when we have a competitive or a comparative advantage, they shut us out. But that is the current situation that 

we confront. 

With rights must come responsibilities. I voted for China’s accession to the WTO because I believed it was better to have China 

subject to the rule of law and the discipline of market forces. Too 

often, unfortunately, they have chosen to flout the law and to manipulate market forces to achieve artificial economic advantages. 

This is not what anyone had in mind. 

The current situation poses great and growing risks to the 

United States. Economically, the situation is unsustainable. The 

current account imbalance—I think it is about 6.6 percent as a percentage of our GDP last year—continues to grow and most people 

believe will ultimately correct. The adjustment can either be gradual or abrupt. The longer we let this situation continue, the greater 

the chances of a severe correction, with substantially higher interest rates and correspondingly lower growth for the United States 

economy. 

There are also national security implications for this continuing 

situation. Interdependency is one thing and a positive aspect of 

globalization. But excessive dependency is another matter, and we 

are on the cusp of becoming excessively dependent upon China. 

This raises the possibility, however remote, of coercion. 

For example, look at Russia’s recent behavior with regard to European nations that are excessively dependent upon Russia for energy exports. We are approaching a point where China could possibly threaten the United States with adverse economic consequences if we do not accede to its wishes. No great nation, particularly the United States, can allow itself to be placed in such a 

position. 

We have also, unfortunately, seen the limited utility of dialog. 

Endless conversations are not enough if they do not result in meaningful action. China sees the status quo as in its interests and will 

not change its behavior unless the cost/benefic calculus changes. 

Put another way, if all we do is complain about the situation, why 

should they take us seriously or change their behavior? 

Action in some meaningful timeframe is needed—undertaken cooperatively with China if we can, unilaterally if we must. 

That is the subject of today’s hearing, and, Senator Bunning, I 

will now turn to you and would very much appreciate your 

thoughts. 

STATEMENT OF SENATOR JIM BUNNING 

Senator BUNNING. Thank you, Chairman Bayh. 

I want to thank Senator Bayh for inviting me to participate in 

today’s hearing. I am glad the Banking Committee and this Subcommittee are taking the time to discuss what is self-evident to 

even the most casual observer: China’s manipulation of its currency. 

Congress has long recognized that a nation can subsidize its export industries and establish trade barriers simply by undervaluing 

its currency. In fact, that is why Article XV of the General Agreejlentini on DSKJ8SOYB1PROD with HROC

5 

ment on Tariffs and Trade and Article IV of the IMF Charter clearly prohibit currency manipulation, and China has signed both of 

these agreements. Yet some say that because the IMF and the 

Treasury Department failed to recognize a plain fact, that there is 

no currency problem. 

Chairman Bayh knows how concerned I am that the Administration and the IMF have refused to use the tools available to address 

China’s currency manipulation. In fact, my colleagues on this Committee, including the Chairman, Senator Casey, and Senator 

Brown, have joined with me and Senator Stabenow to introduce a 

bill, the Fair Currency Act of 2007, which would identify exchange 

rate misalignment as a prohibited export subsidy under the U.S. 

trade law, thereby allowing injured companies the right to seek 

trade law remedies. 

American workers and businesses that compete with China are 

impatient for change. Congress is impatient. Yet, we have been told 

for multiple reasons that the United States does not need to act 

against China now. 

Time and time again we have been told that change will take 

time. It is argued that China needs to make numerous changes— 

particularly to OK banking and financial systems—before they can 

allow the value of the yuan to float more freely on the international 

market. 

Or, we are told China is already making changes, cosmetic at 

best. 

Yet, China is doing even more today to manipulate its currency. 

It has dramatically increased its monthly average exchange rate 

buying to $45 billion per month. The chart I have shows where the 

yuan would be, if it were not for China’s action. In other words, the 

yuan is here, and all the way up to where it should be would be 

a 40-percent appreciated value. And despite China’s professed policy of allowing the yuan to float, it is not. China’s extraordinary 

level of intervention is not only a barrier to trade, it is a growing 

danger to the global economy and one that Congress is obliged to 

address. 

I have a number of questions for our witnesses, and I look forward to their responses. 

Thank you. 

Chairman BAYH. Thank you very much, Senator Bunning. And 

it has been a pleasure to work with you on the Fair Currency Act. 

I am grateful for your interest in these issues, and it is great to 

have good neighborly relations between our two States. 

I will now turn to our panelists. Again, thank you for your patience, and I will go from this end of the table to that end of the 

table. 

Dr. Goldstein, thank you for joining us. Dr. Morris Goldstein is 

the Dennis Weatherstone Senior Fellow at the Peterson Institute 

for International Economics. Prior to joining the Institute in 1994, 

Dr. Goldstein spent 25 years at the International Monetary Fund, 

the last 8 as Deputy Director of Research. He consults widely with 

central banks, Ministries of Finance, and private financial institutions. He earned his Ph.D. in economics from New York University. 

Dr. Goldstein is kind enough to stand in today for his colleague, 

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6 

Dr. Fred Bergsten, who unfortunately is under the weather today. 

Please give him our best. 

By the way, you were not at NYU when John Brademas was 

President by any chance, were you? 

Mr. GOLDSTEIN. I was. 

Chairman BAYH. Very good. Some good Indiana influence on that 

fine institution. 

Our next panelist, Mr. David Hartquist, ‘‘Skip’’—I think you go 

by ‘‘Skip’’—is counsel to the China Currency Coalition and Chairman of the International Trade and Customs Practice at the law 

firm of Kelley, Drye & Warren. Mr. Hartquist’s experience has involved industries such as specialty steel, copper and brass, tissue 

paper, oil and gas, electronics, chemicals, tableware, and apparel— 

all of this in connection with international trade litigation and negotiations. He has advised the U.S. Government on trade negotiations with China, the European Community, Japan, Korea, Taiwan, and other nations, as well as the Doha Round of the WTO negotiations. Before joining his present law firm in 1976, Mr. 

Hartquist worked for President Ford as General Counsel of the 

White House Counsel’s Office on international economic policy. He 

earned his law degree from what we like to refer to as the ‘‘Indiana 

University of the East,’’ otherwise known as Harvard in some quarters. 

[Laughter.] 

That is the advantage of being Chairman, Jim. You can take 

some liberties. 

Our next panelist, the Honorable Robert S. Nichols. Thank you 

for joining us. Mr. Nichols is President of the Financial Services 

Forum, an organization of CEOs of the largest financial institutions in the United States. Before joining the Forum, Mr. Nichols 

was Assistant Secretary of the Treasury for Public Affairs. He is 

a recipient of the Alexander Hamilton Award, the Treasury Department’s highest honor. Before joining the Treasury, Mr. Nichols 

served as communications director for the Electronic Industries Alliance. Previously, he was communications director to former Senator Slade Gorton and press secretary to former Congresswoman 

Jennifer Dunn. A native of Seattle, Washington, Nichols is a graduate of the George Washington University. Welcome, Mr. Nichols. 

Next we have the Honorable Patrick A. Mulloy. Thank you, Mr. 

Mulloy. Pat Mulloy served on the bipartisan U.S.-China Economic 

and Security Review Commission from April 2001 to December 

2006 and was Acting Chairman from January of 2002 through May 

2002. The Commission conducted hearings and reports to Congress 

on national security implications of our economic relations with the 

People’s Republic of China. Its work examines trade and investment issues, political relations, technology transfers, and China’s 

WTO compliance. Prior to assuming that role, Mr. Mulloy was Assistant Secretary for Market Access and Compliance in the Department of Commerce’s International Trade Administration from 1998 

to 2001. He also served 15 years on the staff of the Senate Banking 

Committee—welcome home, Mr. Mulloy—including as chief international counsel and general counsel. Mr. Mulloy is currently the 

Washington representative for the Alfred P. Sloan Foundation, 

which funds studies and programs regarding the forces impacting 

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7 

America’s industries and the standard of living of our citizens in 

an increasingly competitive global economy. He is also an adjunct 

professor of international trade at both Catholic University and 

George Mason University. A native of Pennsylvania, he holds a 

J.D. from George Washington University Law School and a master’s from Notre Dame. 

Mr. John Nolan. Thank you for joining us, Mr. Nolan. John 

Nolan is Vice President and General Manager of the Structural 

and Rail Division of Steel Dynamics in Columbia City, Indiana. 

Perhaps you detect a theme here today. During 1998 and 1999, 

John led Steel Dynamics’ e-business strategies as well as the company’s initiatives in East Asia. It was during his tenure in East 

Asia that John became acutely aware of the challenges presented 

to U.S. manufacturers by the mercantile policies and related currency practices of some of our trading partners. Since then, he has 

lobbied the administration and Congress for trade policies that support U.S. manufacturers and comply with existing U.S. trade law. 

He recently served on the U.S. Government’s Industry Trade Advisory Committee on Steel. Mr. Nolan earned his degree in metallurgical engineering from Lafayette College in 1973. 

Thank you all. Dr. Goldstein, we will begin with you. 

STATEMENT OF MORRIS GOLDSTEIN, SENIOR FELLOW, 

PETERSON INSTITUTE FOR INTERNATIONAL ECONOMICS 

Mr. GOLDSTEIN. Mr. Chairman, I appreciate the opportunity to 

testify before this Committee on the important issue of U.S. economic relations with China. 

As you will have noticed, I am not Fred Bergsten. Fred has 

shaved off his moustache and beard. I have not. Fred still plays 

full-court basketball at least once a week. I do not. Fred is the Director of the Peterson Institute. I am not. But on the issue of China’s inappropriate exchange rate policies and what to do about it, 

Fred and I have quite similar views. In my remarks, I want to 

highlight five points that are developed more fully both in Fred’s 

written testimony and in my own recent congressional testimony 

and writings on China’s exchange rate policies. 

First, over the past 5 years, things have gotten much worse, not 

better, on China’s external imbalance and its exchange rate policies. China’s global current account surplus has grown without 

interruption over the past 5 years, mushrooming from about 1 percent of its GDP in 2001 to more than 9 percent of GDP last year. 

China now has the largest global current account surplus in the 

world in absolute dollar terms, and in the first quarter of 2007, 

China’s global trade balance surplus ran about double the pace for 

the first quarter of 2006. 

In short, the Chinese Government has been allowing China’s 

global external imbalance to expand out of control. China’s real effective exchange rate, widely regarded as a much better measure 

of China’s overall competitive position than the nominal exchange 

rate between the dollar and the RMB, is actually weaker now than 

it was in either 2001 or at the dollar peak in February 2002. 

Some would have you believe that because the RMB-dollar rate 

has appreciated by about 7.5 percent since June of 2005 we must 

be making real progress on the exchange rate front. The sad truth 

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is that the RMB is now grossly undervalued, on the order of 30 percent or more against an average of China’s trading partners and 

40 percent or more against the dollar. The appreciation of the RMB 

that has taken place to date against the dollar is completely inadequate to make a real dent in this huge surplus. The recently announced increase in the daily fluctuation band between the RMB 

and the dollar is a very minor change that will in no way alter this 

broader conclusion. Here I could not agree more with the Chairman. 

When it launched its much heralded currency reform in July 

2005, the Chinese authorities said they intended to increase the 

role of market forces in the determination of the RMB. No such 

thing has happened. The Chinese authorities have continued to intervene in the foreign exchange market in massive amounts to 

keep the RMB from rising, and the amount of monthly intervention 

jumped yet further to about $45 billion a month in the first quarter 

of this year. 

Second point, the international community is now operating 

without an enforced international code of conduct on exchange rate 

policies. Although China is a member of the IMF, Chinese authorities continue to assert that they do not accept the concept of currency manipulation. Simultaneously, the Fund’s Managing Director 

has maintained repeatedly that he rejects a role for the Fund as 

global umpire of exchange rate policies. Meanwhile, the U.S. Treasury Department has ruled repeatedly in its reports to Congress 

that it cannot find China guilty of manipulation because it cannot 

prove intent to manipulate. The practical upshot of all of this is 

that we now have a free-for-all on exchange rates. 

Point No. 3, this lack of progress on improving China’s exchange 

rate policies is bad news for China, the United States, and the 

international monetary and trading system. China’s seriously undervalued and manipulated exchange rate makes it much harder 

for China to move to a more balanced and consumption-driven 

growth path and to implement a more independent monetary policy. From the U.S. perspective, the failure of the RMB to appreciate 

significantly has limited the helpful contribution that exchange 

rate changes in Asia could make to bringing about an improvement 

in the U.S. global current account deficit and to reducing the risk 

of a dollar crash and a hard landing for the U.S. economy. 

As Fred puts it in his written testimony, China’s currency policy 

has taken much of Asia out of the adjustment process, and China’s 

currency manipulation could lead to retaliatory trade responses in 

the United States and perhaps in Europe as well, much to the disadvantage of all parties. 

Fourth point, several popular arguments that maintain it is neither feasible nor desirable for China to take faster and bolder action in reducing the undervaluation of the RMB are not persuasive. 

A significant appreciation of the RMB will not be disastrous for 

China’s growth, employment, or social stability. China’s economy 

grew by over 11 percent in the first quarter of this year. A 10-percent appreciation of the RMB would probably reduce that growth 

to 10 percent, hardly a disaster. 

Point No. 5, a new U.S. stance toward China’s currency policy is 

clearly needed. The U.S. Treasury should be pressing China to dejlentini on DSKJ8SOYB1PROD with HROC

9 

liver right away a meaningful downpayment of a 10- to 15-percent 

appreciation of the RMB from its current level. Because China has 

waited so long to take the decisive action, the undervaluation of the 

RMB can no longer be eliminated in one go. A sizable up-front adjustment is needed if China is to escape from being so far behind 

the curve. A modest upward rate of crawl of the RMB relative to 

the dollar, say at 5 percent a year, is not going to get the job done. 

Failure by China to drastically reduce its large-scale, one-way 

intervention in the exchange market should result in a finding of 

currency manipulation in the Treasury’s next report to the Congress. The exchange rate should be placed and should be maintained at the top of the agenda for future meetings of the SED 

until greater progress is made. The United States should also be 

promoting an international effort to obtain an Asian Plaza agreement that would work on the needed appreciation of all major 

Asian currencies that are currently out of line. The U.S. should 

marshall support from industrial and large emerging economies for 

making the IMF the global umpire for exchange rate policies, and 

it should resist any watering down of the IMF’s exchange rate surveillance guidelines. 

Finally, the U.S. administration should quietly notify the Chinese that it will be unable to oppose responsible congressional initiatives in the event that China continues its failure to observe its 

international currency obligations. To ensure that the U.S. approach is evenhanded, the U.S. should indicate it is prepared to 

offer a new, longer-term plan for greater and more durable fiscal 

policy consolidation in the U.S. 

Thank you, and I look forward to answering your questions. 

Chairman BAYH. Thank you, Dr. Goldstein. 

Senator Casey has very graciously agreed to await his comments 

for the end of the panel, so, Mr. Hartquist, we look forward to 

hearing from you. 

STATEMENT OF DAVID A. HARTQUIST, COUNSEL, CHINA 

CURRENCY COALITION 

Mr. HARTQUIST. Thank you, Mr. Chairman. I am David 

Hartquist of the law firm Kelley, Drye, Collier, Shannon, representing the China Currency Coalition, which is a group of basically manufacturing companies, trade associations, and the AFL– 

CIO that joined together to work on this issue about 3 years ago 

now. 

I note, by the way, that in the press statements that came out 

of the SED discussions today, both Secretary Paulson’s statement 

and the fact sheet that was issued by the Treasury Department describing the results of the negotiations, the word ‘‘currency’’ is not 

used one time. 

In discussing the problem of undervalued currencies—— 

Chairman BAYH. Perhaps, Mr. Hartquist, that is because there 

was not much to report. 

Mr. HARTQUIST. I expect that is the case, Mr. Chairman. 

In discussing the problem of undervalued currencies, it is helpful 

to recall the perspective of those who were involved during and immediately after World War II in the creation of the institutions 

they designed for the post-war international monetary and trading 

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10 

systems. Weighing very much on their minds were the ordeal of the 

Great Depression of the 1930’s, the damage done to international 

trade by competitive currency depreciation and exchange controls, 

and the need for orderly exchange arrangements to restore and facilitate international trade. 

The words of Harry Dexter White, who was a primary architect 

of the IMF, along with John Maynard Keynes, whom you mentioned, Mr. Chairman, are particularly thoughtful, and I quote: 

‘‘The difference between stability and rigidity in exchange rates is 

the difference between strength and brittleness. It is the difference 

between an orderly adjustment, if conditions warrant it, and eventual breakdown and painful adjustment.’’ 

And, again, in terms of lowering barriers to international trade, 

Harry Dexter White noted the following: It ‘‘. . . cannot be done 

until there is assurance of orderly exchange rates and freedom in 

exchange transactions for trade purposes. A depreciation in exchange rates is an alternative method of increasing tariff rates; and 

exchange restriction is an alternative method of applying import 

quotas.’’ 

These sentiments were heartfelt convictions born of terrible experience, so what might we take from them today in a time when the 

yuan and the yen and a number of other currencies are undervalued and monetary and trade imbalances triggered by such misalignment are becoming more pronounced at a rapid rate? 

In the China Currency Coalition’s judgment, the measures taken 

to address this situation will have the greatest chance of being effective if based upon a recognition of the hybrid nature of this situation. As White understood, balanced and mutually beneficial flows 

of international trade depend upon assurance of orderly exchange 

rates and freedom in exchange transactions for trade purposes. Article IV of the IMF Agreement and Article XV of the GATT reflect 

this attitude. 

Consistent with their historical roots, therefore, it is to be hoped 

that the IMF and the WTO would work in tandem in these circumstances, especially as the IMF can rely, as Dr. Goldstein indicated, only upon moral suasion to encourage revaluation of the 

yuan and other undervalued currencies. 

Currency manipulation in the IMF’s terms, and exchange rate 

misalignment as a countervailable, prohibited export subsidy from 

the WTO’s vantage point, are two sides of the same coin. In each 

case, there is an undervaluation of a foreign currency as a result 

of protracted, large-scale intervention by or at the direction of a 

governmental authority in the exchange market. Manipulation occurs if the foreign government’s intent by such undervaluation is 

to prevent an effective balance-of-payments adjustment or to gain 

an unfair competitive advantage over other countries. But there is 

no requirement of intent under the WTO’s Agreement on Subsidies 

and Countervailing Measures. 

Treatment in U.S. domestic law of exchange rate misalignment 

as a countervailable, prohibited export subsidy is a reasonable interpretation and implementation of the SCM Agreement. During 

the Uruguay Round that led to the formation of the WTO, the definition of a countervailable, prohibited export subsidy was carefully 

amended and articulates three prerequisites that must be satisfied: 

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a government financial contribution, a benefit, and the subsidy 

must be specific—in this case, contingent upon export performance. 

We believe all these conditions are met. 

The CCC filed a Section 301 case in 2004 urging the U.S. Government to take the China currency issue to the WTO. Members 

of Congress have filed similar 301 cases three times since then, 

most recently last week. The Bush administration turned down the 

first three cases. Ours was turned down only 4 hours after we filed 

a 250-page petition. We will see what they do with the current congressional case filed by 42 Members of the House—22 Democrats 

and 20 Republicans. 

I agree that China’s recent announcement of widening the daily 

trading band to half a percent is grossly insufficient. Since China’s 

announcement in July 2005, nearly 2 years ago, that the yuan 

would be traded within a daily band of 0.3 percent, the Chinese 

Government has never for one single day permitted the yuan to increase by the allowed percentage. That dismal track record does 

not bode well for the future. 

China’s blatant actions also distort other currencies, especially 

those of China’s Asian neighbors. As former Treasury Secretary 

John Snow told the Senate Finance Committee 2 years ago, ‘‘And, 

interestingly, China itself accounts for 43 percent of the non-petroleum trade deficit between our two countries’’—43 percent. Congressional action we believe is needed and warranted. We strongly 

support S. 796, the Fair Currency Act, sponsored by several Members of the Banking Committee, including Senators Bunning and 

Bayh, Senator Casey and Senator Brown. 

Thank you. 

Chairman BAYH. Thank you, Mr. Hartquist. 

Mr. Nichols. 

STATEMENT OF ROBERT S. NICHOLS, PRESIDENT AND CHIEF 

OPERATING OFFICER, FINANCIAL SERVICES FORUM 

Mr. NICHOLS. Mr. Chairman, thank you. 

Chairman Bayh and Ranking—— 

Chairman BAYH. By the way, at least for our first two panels, 

you have been much more observant of the 5- to 7-minute timeframe than most Members of Congress are, so I salute you for that. 

Mr. Nichols. 

Mr. NICHOLS. Thank you, Mr. Chairman, Ranking Member Martinez, Senator Bunning, Senator Casey, thank you for the opportunity to participate in this important hearing on America’s economic relationship with China and strategies regarding exchange 

rates and expanded market access. While not in attendance today, 

I do want to thank Chairman Dodd and Ranking Member Shelby 

for their leadership in this area as well. 

I am here as the President and COO of the Financial Services 

Forum, the chairing organization of the ENGAGE CHINA Coalition, which is a partnership among eight financial services trade 

associations united in our support of continued economic engagement with China, reform of China’s financial sector, and expanded 

market access for U.S. providers of financial services. I would like, 

if I may, to focus my brief opening comments on how increased 

market access for U.S. financial services firms and China’s capital 

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markets will benefit American workers, America, and our manufacturers. 

A more effective and efficient financial sector in China is a prerequisite to successfully addressing the issues that have complicated the U.S.-China economic relationship, chief among them 

further currency reform and meaningfully reducing the trade imbalance. 

Regarding the currency, as Chinese authorities have repeatedly 

argued—reasoning generally acknowledged by most foreign analysts—an immediate shift to a fully market-determined yuan is 

very difficult given the underdeveloped state of their capital markets. More specifically, China’s banks, securities firms, and other 

businesses lack the expertise to develop and trade derivatives and 

other structured instruments used to hedge the risk associated 

with greater currency volatility. Sophisticated derivative products 

and hedging techniques provided by foreign financial services firms 

would clearly diminish such concerns. We would like to do that. 

Turning to the trade deficit, reorienting the financial habits of 

China’s population to achieve a better balance between savings and 

consumption—while progressively bringing more than 1 billion Chinese into the global economy—is in our view the most powerful 

remedy to the U.S.-China trade imbalance. Chinese households historically save from a third to as much as half of their income compared to the single-digit saving rates here in the United States and 

Europe. This pronounced propensity to save is related to a couple 

of things: the declining role of the state and the fact that most Chinese depend on their families and private savings to pay for retirement, health care, and the economic consequences of accidents or 

disasters. Activating the Chinese consumer requires the availability of financial products and services that we here in this room 

take for grants—personal loans, credit cards, mortgages, 401(k)s, 

pensions, and life, property, health insurance products, et cetera, 

that will eliminate the need for such precautionary savings and 

thus facilitate consumption. 

Let me give you an example of how reducing this precautionary 

savings would profoundly help U.S. manufacturers, workers, and 

exporters. 

Last year, the United States exported to Japan goods and services worth approximately $60 billion—the same amount, roughly, 

we exported to China. China’s population of 1.3 billion, of course, 

is 10 times Japan’s population of 127 million. If China’s citizens 

were to eventually consume American-made goods and services at 

the same rate that Japan’s citizens did last year, the U.S. would 

export more than $600 billion worth of goods and services to China, 

11 times what we exported to China last year, an amount equivalent to 5 percent of our GDP, and more than twice what we imported from China last year. 

A fifth of the world’s population is currently not participating in 

the global marketplace and, therefore, not buying American goods 

and services. The integration of more than a billion people into the 

global economy will not only be the economic story of the 21st century, it will be one of the most significant events in the history of 

the world economy, and we must make sure that this profoundly 

important event takes place on terms that work for America. 

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Mr. Chairman, the fastest way for China to develop the modern 

financial system it needs to achieve more sustainable economic 

growth, allow for a more flexible currency, and increase consumer 

consumption is to import it—that is, by opening its financial sector 

to greater participation by foreign financial services firms. If you 

care about the currency issue, as we all do, and you care about the 

trade deficit, as we all do, you care about expanded access for financial services in China. 

By providing the financial products and services that China’s 

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

raise standards of living, and consume at higher levels, foreign financial institutions—including U.S. providers—would help create 

what every manufacturer and service provider here in the United 

States wants, and that is, an unleashed Asian tiger hungry for U.S. 

products. 

Thank you very much for your time. 

Chairman BAYH. Mr. Nichols, thank you very, very much. 

Mr. Mulloy, it is always good to have an alumnus of the Banking 

Committee and of Notre Dame with us. We look forward to hearing 

from you. 

STATEMENT OF PATRICK A. MULLOY, ADJUNCT PROFESSOR, 

GEORGE MASON SCHOOL OF LAW 

Mr. MULLOY. Thank you, Mr. Chairman. 

Chairman Bayh, Senator Bunning, and Senator Casey—being 

from Pennsylvania, I am delighted to see you, Senator—I want to 

thank you for giving me this opportunity to appear before the Committee. 

I am honored, the fact that I am an alumnus of this Committee. 

I served in a bipartisan manner on this Committee for 15 years. 

During the formulation of the 1988 Omnibus Trade Act, this Committee developed the exchange rate provisions of that omnibus bill. 

I as general counsel was charged by Chairman Proxmire to be very 

involved in that whole process, and I was asked to come up here 

and give you a little background on why Congress did that, and 

then how the Treasury initially used that authority given to it by 

the Congress. 

I should note that the views I am giving today are my own and 

not of my present employers. 

The important thing to remember, under Article I, Section 8 of 

the Constitution it is the Congress, not the executive branch, which 

is in charge of foreign commerce and currency valuation. This is 

your authority, which you have delegated some of it to the executive branch in laws that were passed in the past. If they do not 

carry it out in a manner that you feel you want it carried out, take 

it back and do some other things with that authority. 

Now, in 1987 the leadership of the Congress was very concerned 

about the fact that the United States was running these then large 

trade deficits, and it charged each Committee to develop portions 

of what would be an omnibus trade bill. This Committee, under the 

Standing Rules of the Senate, has jurisdiction over exchange rates, 

so this Committee developed the exchange rate provisions. 

We reported that bill to the Senate on May 19, 1987—just about 

20 years—and the Committee report said, ‘‘The cumulative trade 

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deficits of over $500 billion, built up by the United States since 

1982’’—that was about $100 billion a year; right now we are running them about $800 billion a year. Then the Congress was concerned about this situation. 

Each Committee then led its portions of an omnibus bill on the 

floor. We went to conference with the House. In that conference report, which is now law, the Congress found that policy initiatives 

of some of our major trading nations that manipulate the value of 

their currencies in relation to the United States dollar ‘‘continue to 

create serious competitive problems for United States industries.’’ 

Now, that was found 20 years ago. That was a finding of the Congress. 

Congress then told the Treasury in that law that you should go 

and analyze the currency practices of these other nations, and if 

they are manipulating their currencies, the law says you, the 

Treasury, shall undertake negotiations to get them regularly and 

promptly to end the practice. 

Now, the conferees said in their report, ‘‘The success of the legislation hinges on the process of reporting and consultation by the 

Secretary of the Treasury with Congress.’’ In other words, Congress 

was saying if Treasury does not carry this out the way they are 

supposed to, we are going to have a problem. 

Now, then President Bush, this law was passed in—it went into 

effect I think August 1988. President Bush I was the first administration to have this really on the books, and they made good use 

of it. There was an Under Secretary of the Treasury named David 

Mulford, who is now our Ambassador to India. He exercised this 

authority. He identified Taiwan, Korea, and China as currency manipulators. He had no problem saying that, ‘‘The law does not permit me to do that. I have to go into intent.’’ He used it. We got 

them to end the practices, and we got satisfaction. 

Now, the important thing to remember, in those days we still 

had Section 301 on the books. We still have it on the books. Section 

301 is the provision of law that permits the United States to identify unfair trade practices and impose tariffs or something on the 

other country to make them stop the practice. 

When we joined the WTO, we essentially gave away 301 because 

now, even though it is on the books, we can only use that if we first 

win a WTO case. 

Now, what has gone on here? Since 1994 the Treasury has not 

named one country a currency manipulator, when the facts are so 

clear that these other countries, including China, are engaged in 

massive currency intervention in markets to keep their currencies 

underpriced. 

Now, China, I am told—oftentimes with the Chinese they say, 

well, we have a sovereign right. Well, they would have a sovereign 

right if they had not joined the IMF and the WTO. When you join 

these organizations—and the Chinese every day get enormous benefits. Right now if China was not in the WTO, we would not have 

to give them MFN. When we give them MFN, the average tariff on 

their goods coming into the United States is about 3 percent. If 

they did not get MFN, their average tariff would be over 40 percent. So they get an enormous benefit day after day after day. 

Meanwhile, they are acting completely contrary to Article XV of the 

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GATT and Article IV of the IMF. They are blowing off these legal 

obligations that they have in order—and we are sitting here year 

after year letting it happen to us. 

Now, is this just some reason that China has—this is part of China’s economic strategy. I have been on that China Commission for 

almost 6 years. I have really gotten into this. I understand what 

is going on here. 

Once China got into the WTO and locked the U.S. market open 

and took away 301, they carried on this manipulation. What does 

it do? It gives American companies an incentive to move operations 

out of the United States and put them in China and ship back into 

this market. Sixty percent of China’s exports are from foreign-invested companies. 

They also provide subsidies and all other kinds of attractions to 

bring that investment into China, because they know that foreign 

investment and foreign technology transfer is the way to build 

their economic strength. China had a very bad 200 years. Their 

economy fell apart. Their policies fell apart. They are back in a 

major way. They tried a collectivist approach. It did not work. In 

1978, they moved toward this foreign strategy of getting the foreign 

companies and get the foreign investors to come in. 

Now, our companies go along. Why? They are focused on shareholder value. That is what they are supposed to be doing. But the 

Chinese permit them to make bigger shareholder value by moving 

production to China and shipping it back here. So there is a divergence that has come between the interests of the multinational corporations and the larger American entity. 

Now, the reason this is such a serious problem for this country 

is that we are letting our economic base upon which is really our 

defense industrial base, we are letting it deteriorate, and not only 

manufacturing is going to China, but if you look, you will see now 

R&D and high-technology things are going to China as well. 

So this currency manipulation is an enormous problem. This 

Committee has the jurisdiction over it. If the present law is not 

working and Treasury is not doing it properly, rethink that. You 

yourself could make this finding that China is a currency manipulator, and you could order the Treasury to take this case to the 

WTO. 

I thank you very much for this opportunity and will be happy to 

field any questions. 

Chairman BAYH. Thank you, Mr. Mulloy. I appreciate your perspective on this. You bring a rich sense of history to the subject. 

Mr. Nolan, last but by no means least. 

STATEMENT OF JOHN W. NOLAN, VICE PRESIDENT AND 

GENERAL MANAGER, STEEL DYNAMICS, INC. 

Mr. NOLAN. Thank you very much, Mr. Chairman. I have to tell 

you that Mr. Mulloy is a tough act to follow this afternoon. I want 

to compliment you, Pat. Great job. 

Mr. Chairman, Senator Bunning, Senator Casey, I have to say I 

am delighted to be here this afternoon to represent the great State 

of Indiana. I will tell you a little bit about my company. Steel Dynamics began its journey in 1994 as a ‘‘greenfield’’ flat-rolled steel 

producer in Butler, Indiana. Today, we are the fifth largest carbon 

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steel producer in the United States, and we are an American company, with American values and interests. We have 8 production 

facilities in Indiana employing nearly 2,000 Hoosiers. We have 

bought or built 12 more facilities in the United States that, when 

combined with our Indiana operations, produce over 5 million tons 

of carbon steel products annually. And we are home to more than 

3,500 American families. 

The Chinese Government has actively intervened in the currency 

market, as you have heard already this afternoon, to gain export 

advantage for its manufacturers since 1994. The brilliant Chairman of the Federal Reserve, Ben Bernanke, also understands this 

economic reality because he has recognized and emphasized this 

significant point to which most economists agree today—that manipulation of the value of the Chinese yuan by the Chinese Government clearly constitutes an export subsidy for Chinese manufacturers. 

Now, given that the Bush administration has failed during the 

past 6 years to directly confront this unfair trade practice via the 

WTO, I would like to focus my testimony today on the administration’s additional failures to enforce trade laws passed by Congress—trade laws intended specifically to address surging imports 

from China that materially injure U.S. manufacturers. 

Now, in 2001 Congress passed the China Permanent Normal 

Trade Relations Act. The centerpiece of this act was the inclusion 

of a China-specific safeguard that was only allowed in U.S. law for 

a period of no more than 12 years. To everyone’s grave disappointment, the President of the United States has all but nullified this 

congressionally mandated statutory provision. 

Since 2002, there have been four affirmative decisions by the 

International Trade Commission in Section 421 cases. Since the 

President denied relief in 2002 to U.S. producers of steel wire 

hangers, wire hanger imports from China surged by 800 percent, 

from 300 million hangers to 2.4 billion hangers a year. Thirteen of 

the fifteen U.S. plants producing these products have already shut 

down. In a March 5, 2007, article, Fortune Magazine reports that 

the last two steel wire hanger plants—one in Wisconsin and one in 

Alabama—will be shutting down soon. The Chinese will have gone 

from 15 percent of the U.S. market to 90 percent of the U.S. market with the rest supplied by other imports. About 2,500 workers 

lost their jobs in this industry, and the U.S. steel wire rod industry 

has permanently lost several hundred thousand tons of annual consumption due to the loss of this important downstream market. 

Now, in a 2004 case on ductile waterworks fittings, the President 

again denied relief. In the 3 years since that case concluded, imports from China have more than tripled their market share, from 

20 percent to approximately two-thirds of the U.S. market. Major 

foundries have been shut down in Chattanooga, Tennessee, and 

Aniston, Alabama. Partial foundry shutdowns occurred in Birmingham, Alabama. Another major productionsite, Tyler, Texas, 

will shutter its operation dwindle as its parent company ramps up 

a new foundry—guess where? China. In the very near future, our 

entire municipal waterworks infrastructure carrying water from 

every U.S. local water authority to every U.S. home or business 

will be entirely dependent upon imports from China. 

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Now, the last Section 421 case—and I emphasize that it will be 

the last ever 421 case unless Congress changes the law—was near 

and dear to Steel Dynamics. That case involved circular welded 

non-alloy steel pipe. The petitioners were many of the steel industry’s largest customers. At the time the case was brought, imports 

from China had increased from 10,000 tons in 2002 to 290,000 tons 

in 2004. After the President said no to relief in late 2005, these imports soared to 680,000 tons in 2006 and are on pace for nearly a 

million tons in 2007. Now, for every ton of pipe from China that 

replaces a ton of pipe produced in the United States, it also takes 

a ton of steel sales away from SDI and from other U.S. sheet mills. 

Now, as a company trying to create and maintain good jobs in 

the State of Indiana, I am also overwhelmed by the loss of manufacturing jobs in Indiana caused by increased imports from China. 

Most of these job losses are in the steel-using sectors with the 

hardest hit being the automotive parts industry. According to the 

2007 Indiana Manufacturers Directory, in just the last 12 months 

Indiana lost 2.4 percent of our manufacturing jobs, 17,000 jobs. 

Now, remarkably, over 11,000 of those jobs were in the auto parts 

industry alone. Our State lost 12 percent of its auto parts jobs in 

1 year. 

Now, I believe that Indiana is representative of the United 

States job losses in the auto parts industry. More broadly, the Chicago Fed reported that there have been nearly 200,000 job losses 

in the auto parts industry in just the last 4 years. These job losses 

were directly attributed to the dramatic increase in auto parts imports from China, from US$1 billion in 2001 to over US$7 billion 

in 2006. 

The Economic Policy Institute has also reported, Mr. Chairman, 

that Indiana was the hardest hit State in the Midwest in terms of 

job losses by reason of surging imports from China. 

Now, the Commerce Department has refused to even investigate 

whether currency manipulation is an export subsidy. Mr. Chairman, Senator Bunning, Senator Casey, this is beyond the pale. Application of the countervailing duty law to China and mandating 

that the Department of Commerce defines currency manipulation 

as a countervailable subsidy will not result in massive trade disruptions with China. It will merely allow U.S. industries to fight 

for and obtain the elusive ‘‘level playing field’’ we have for so long 

sought. 

Now, a lot of U.S. manufacturers are dying slowly, painfully, unfairly. Help them live to fight another day and not just because it 

is the right thing to do. Do it for our children, our grandchildren, 

their grandchildren, and for the opportunities that U.S. manufacturers represent to each of their futures. I ask this Committee to 

pursue every possible avenue to combat the damage of Chinese currency manipulation, and I urge the Finance Committee to fast 

track to the Senate floor provisions within Senator Rockefeller’s 

trade bill S. 364, that would remove Presidential discretion from 

Section 421 enforcement and require the Department of Commerce 

to apply the countervailing duty law to Chinese currency manipulation. 

With that, Mr. Chairman, thank you very much for this opportunity to appear today. 

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Chairman BAYH. Thank you very much, Mr. Nolan. We are 

grateful for your experience in the private sector and the practical 

perspective that you bring to this important debate. 

Senator Casey, would you like to make any comments now? 

Senator CASEY. Sure, if Senator Bunning already has. 

Senator BUNNING. I have. 

STATEMENT OF SENATOR ROBERT P. CASEY 

Senator CASEY. OK. Thank you. 

Chairman Bayh, thank you and I thank Senator Bunning as well 

for convening this hearing, as well as for both of your leadership 

on this issue, and so many others over many years. I want to thank 

the witnesses for appearing, and we want to get right to questions. 

I just have a couple of comments. 

First of all, we have heard all the data—and there is more to 

talk about—about the currency manipulation and the impact it has 

had. I just want to make a few points about Pennsylvania. 

Similar to the stories that have been related already, for a lot of 

people in our State, as is true, Mr. Nolan, in some of the testimony 

you provided about Indiana and some other States, this is not just 

some esoteric currency or financial data point. This is real life. 

Holes in the ground, literally, where not just job loss and people 

losing opportunity in a way to make a living, but sometimes adding 

insult to injury, so to speak, is the physical infrastructure of a 

plant that is literally lifted off the ground and taken away to make 

it even worse. 

So we have got much to do, and I know that we are all looking 

forward to Secretary Paulson’s report and the specific words in that 

report. Mr. Hartquist, I appreciate you pointing that out that there 

is a word missing, or two. But I think we are all getting pretty 

weary that what we might see in this report, frankly, or what we 

will not see is a lot of action or a lot of results that we can act 

upon, just more talk and more discussion and more pleas for more 

patience. 

So I want to take the time now to listen to the questions by Senator Bayh and Senator Bunning, and I will have a few of my own. 

Thank you. 

Chairman BAYH. Thank you, Senator Casey. 

Mr. Goldstein, I would like to begin with you. Is it your opinion 

that efforts to manipulate the value of a currency constitute an effective subsidy? Chairman of the Federal Reserve Bernanke in 

written remarks I think last December indicated that he felt so. 

What is your opinion? 

Mr. GOLDSTEIN. I think it is an export subsidy and an import 

tax, so it is both those things. More generally, I think it is just 

hard to maintain open trade and investment if you have such problems on the currency end. We have got the WTO as one pillar to 

look at trade policy. We are supposed to have the IMF on the other 

end. 

But the problem is the sheriff at the IMF says he does not want 

to do this. He just does not want to be an umpire for this. And in 

the meantime, the Treasury, as mentioned earlier, is not issuing 

any rulings of manipulation, even when the evidence is obvious. So 

then, you know, what do you do? 

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I do not consider it protectionist to take a response if another 

country is not abiding by its obligations. I just do not buy it. I 

think you need to have both ends, and if we do not get some more 

fairness on the currency end, we are not going to be able to maintain the openness that we all want on trade and investment. They 

are related. And I would like to see an investment in the infrastructure on the currency side that would match what we have on 

the trade policy side. And I wish Secretary Paulson would put the 

same emphasis on that as he has been doing recently on financial 

sector access. 

Chairman BAYH. Thank you. I noted with some interest a commentary piece, I think it was yesterday’s Wall Street Journal, by 

a former member of the Council of Economic Advisers who offered 

the opinion that even if China were to allow its currency to float 

freely and be determined by market forces, this would not really 

have any impact upon the current account imbalance because of 

low wage rates and that sort of thing in China. 

Most other economic observers do not agree with that, and it 

does ignore part of what you mentioned, which is the effective barrier that the current currency peg presents to exports from our 

country into China. 

But I would appreciate your thoughts, Dr. Goldstein, about that 

commentary and whether you think that is correct or not. 

Mr. GOLDSTEIN. I do not think it is correct. I think if China were 

to implement significant revaluation of the RMB, and particularly 

if that were followed by revaluations of other Asian currencies, I 

think it would have a significant impact in reducing the U.S. current account deficit, the global current account deficit. 

For example, if we were to get a 25-percent appreciation of all 

Asian currencies—and as a group they account for 40 percent in 

the dollar index—that would be equivalent to a 10-percent weighted average depreciation of the dollar. And that is worth about 

somewhere between, let’s say, $130 and $180 billion improvement 

in the U.S. global current account deficit. That does not take us all 

the way to where we want to get to, but it would be an important 

contribution. So, no, I do not agree with Mr. Slaughter’s conclusion. 

Chairman BAYH. I have probably time for one more question 

here, but, gentlemen, do not think I am ignoring you. There is 

going to be another round, and I have got some questions for each 

of you. But, Dr. Goldstein, if I could just conclude with one more 

question to you, you ended your testimony by recommending that 

we attempt to persuade the Chinese to undertake a relatively immediate 10- to 15-percent revaluation of their currency. Is my 

memory correct in that regard? I think that is what you testified. 

What would you suggest we do if they do not? Persuasion has not 

worked too well to date, and that is one of the questions I have 

raised at this hearing. I am all for dialog, but dialog without action 

does not really remedy the problem that exists. And so if the dialog 

does not lead to the sort of cooperative outcome that you outlined, 

what do you recommend that we do? 

Mr. GOLDSTEIN. Well, I agree, dialog alone is not going to do the 

job. I would recommend first that we put much more pressure on 

the IMF to start doing its job. I would not approve their budget, 

I would not approve any initiatives that go forward until they start 

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doing what they were established to do—namely, to be the umpire 

on exchange rate policies. So I would exhaust what we can do 

there. 

But if we are not able to get anywhere on that front and the 

Treasury also continues to hide behind the intent to manipulate rationale and says no foul, no currency manipulation by China, after 

we have done that, then I think some congressional measures, including trade policy, if it is WTO compliant, we ought to have to 

consider that. 

I regret to have to say to do that, but at some point we need to 

get something moving here, and it clearly is not moving. 

Chairman BAYH. My time has expired, Dr. Goldstein, and Senator Bunning, I am going to turn to you next. But you have mentioned the IMF a couple of times, and they are supposed to be the 

referee here in this sort of thing. It is a part of their role. Countries 

are not allowed to try and manipulate trade flows through the artificial valuation of their currency. Do you believe that they have an 

effective instrument if they had the will and desire to actually referee this? What tangibly could they do in your opinion that would 

influence China’s behavior other than just to say to them, look, you 

should not be doing what your doing? In other words, if we just replaced dialog with us with dialog with the IMF, what is it actually 

going to accomplish? 

Mr. GOLDSTEIN. Well, I would not underestimate it. A ruling by 

the IMF, which is the international body responsible for that, I 

think would carry a lot of weight. As it is now, it emerges as a difference of opinion with China. We think they should go fast; they 

think they should go slow. Well, if it is a difference of opinion, they 

would prefer to take their own opinion. But if it is a decision by 

the body responsible for that that says, no, it is not just ill-advised, 

what you are doing is illegal, that I think provides a much firmer 

basis for any action that the United States would take subsequently, and I think it will increase pressure on them. We need to 

get them named as not carrying out their IMF obligations. I do not 

think it would just be nothing. I think it would have an effect. 

Chairman BAYH. The last part of your point there was a good 

one, I think. You perhaps place more faith and moral suasion than 

do I, but if by first taking that step it lends greater international 

legitimacy to further steps that might be in order, it would be an 

undertaking well worthwhile. 

Senator Bunning. 

Senator BUNNING. Thank you very much. 

Having been here when Mr. Mulloy and the Senate Committee 

acted, and I happened to be in the House of Representatives at the 

time, my patience has run out. I am tired of listening to Treasury 

tell the Members of this Committee and the Congress of the United 

States that China is not a currency manipulator. When they do not 

act, it is the responsibility of the Congress to act. And I think you 

mentioned that in your testimony, Mr. Mulloy. 

I believe persuasion is part of the overall picture. We had Secretary Paulson before us, and I told him that he cannot negotiate 

with the Chinese because they do not understand that the Congress of the United States writes the laws. Whether they be trade, 

whether they be currency, or whatever we are dealing with now, 

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TPA—all these things are interwound in our relationship with 

China. 

So my question, first to Mr. Hartquist. Some have said that the 

approach of the Fair Currency Act, the one that we are talking 

about, labeling China’s foreign exchange policy as an export subsidy, is inconsistent with our WTO obligations. Can you explain 

why this is not the case? 

Mr. HARTQUIST. I would be happy to, Senator. We have done a 

lot of research on this, and, by the way, I heard a comment recently that a senior member of the administration in the Office of 

the United States Trade Representative indicated that no trade 

lawyer in Washington thought that your legislation was WTO compliant. I have not retired yet, and I know there are a number of 

my colleagues who also share my views about this. 

We think it is clear. It is unprecedented, of course, because a 

case like this has never been brought in the WTO to test the issue, 

but we believe that under Article XV of the GATT, the frustration—— 

Senator BUNNING. Article IV in IMF. 

Mr. HARTQUIST. And Article IV in the IMF, that the manipulation constitutes a violation of those agreements that, as has been 

pointed out, China subscribes to. And we also believe—and Fred 

Bergsten of the Institute where Dr. Goldstein resides gave the 

same testimony a couple of weeks ago before the tripartite hearing 

in the House of the Energy Committee, Ways and Means Committee, and Financial Services Committee. 

We think this practice does constitute a subsidy. Fred testified 

that he wrote that agreement when he was at the Treasury Department about 30 years ago. So he knows what is a subsidy, and 

it is certainly his opinion that this does constitute a subsidy. 

So I think when you put those two elements together, this is an 

issue that, as has been pointed out again and again, is not just an 

IMF issue, as Treasury wants to treat it. It is a trade issue that 

is drastically affecting our relationships between the United States 

and China. And we believe the legal authority is there to enforce 

these agreements. 

Senator BUNNING. Do you believe the Administration understands the consequences of not naming China as a currency manipulator with the Banking Committee and the Finance Committee in 

dealing with trade? Because we are about to do some things and 

they are about to get some problems with their TPA that they are 

not expecting. We have talked and talked and talked with the 

Trade Representative, with the Secretary of the Treasury, with everybody else in the Administration, and they do not get it. And 

they understand the power that the Congress has in trade, in TPA. 

But unless the Chinese understand it, we are not going to make 

any progress. As you heard, there is not one word in the Secretary 

of the Treasury’s statement mentioning currency. Well, if that is 

the case, we are not having a real dialog with the Chinese on this 

major problem that we are dealing with. 

Mr. HARTQUIST. Senator, I think certain elements of the administration do understand this, but the turf has been ceded entirely to 

the Treasury Department. We have made the argument to USTR, 

look, this is a trade issue, you are responsible for trade; it is going 

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to come down on your heads if nothing is done about this problem 

because of the impact on our economy and jobs. 

But they cede authority over currency matters entirely to the 

Treasury Department, and, therefore, the administration has made 

the decision that that is where it is going to end. 

Senator BUNNING. But it will not end there. I just want you to 

know that because there are certain of us that sit on the Banking 

Committee and on Finance, and we are up to ears with the noncompliance. First of all, they passed all the WTO implementation 

laws, China did, and now they are not complying with them, 

whether it be on banking, whether it be on—whatever it is. All you 

have to do is walk down the street of Beijing, and you will know 

that intellectual property laws are not being enforced anywhere in 

the country. Just get to Beijing and walk down the street, and you 

will find anything you want to find; goods that are not complying 

with our intellectual property laws. 

I have gone over my time, Mr. Chairman. I am sorry. But I feel 

so deeply about this, and being a free trader, I want to be a fair 

trader, but I do not want to get, you know, the short end of the 

stick in doing it. And that is what the United States is getting 

right now because of China’s manipulation of their currency. 

Chairman BAYH. Thank you very much, Senator Bunning. I appreciate your passion for this issue. 

Senator Casey. 

Senator CASEY. Thank you, Senator Bayh, and thank you for 

calling this hearing, again. And Senator Bunning once again demonstrates the passion that I think is consistent with and is rooted 

in the frustration that a lot of Americans feel when they almost 

feel powerless to be able to address this kind of issue. 

I wanted to highlight the legislation that all three of us have 

supported, led by Senators Bunning and Bayh, and I am proud to 

cosponsor it. But I just wanted to highlight a couple of the headlines, so to speak, to refresh recollections. 

Part of what the legislation does is provide that exchange rate 

misalignment by any foreign nation is a countervailable export subsidy. It also clarifies the definition of ‘‘manipulation.’’ It expands 

the power of the International Trade Commission to impose countervailing duties on products from a country that has been provided 

a countervailable subsidy. 

So that is a piece of legislation which represents part of, and 

maybe a significant part of, an action plan. And I wanted to probe 

a little deeper—and I hope we can do more on the second round— 

on some of the testimony here today. 

First of all, I will start with Mr. Mulloy, only because you are 

from Pennsylvania. Otherwise, you would be in at the end of the 

alphabet, right? And I have to say you went to Kings College and 

you went to the same law school my father and my brother went 

to, so I will give you the easiest question. 

I was struck by what you said in terms of the history of the Committee and your role in that as counsel, and I am just wondering, 

in light of what you have heard already, in light of what you have 

observed and seen in the news, and in light of the brief, albeit 

headline summary I gave you of Senate bill 796, what else should 

the U.S. Senate and, in particular, this Committee do? Some of it 

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1The article referred to can be found on page 100 of this hearing. 

you addressed, but even by way of reiteration, if you would just tell 

us how you think we should grab hold of this if there is continuing 

reluctance by Treasury and the administration. 

Mr. MULLOY. Senator, thank you for asking me, Senator. I maintain very close ties to my roots in Pennsylvania. In fact, I am going 

up there Memorial Day weekend. I have seen in Pennsylvania 

what happens when an economy begins to fall apart, and it is very 

damaging to families and communities, tax base, and everything 

else. 

My worry is this can be precursor to this happening to the 

United States if we do not begin to have some different approaches 

to the way we do trade. 

In my testimony, I have said this exchange rate is not just a silver bullet. This alone will not solve some of our trade problems. We 

need a more comprehensive, integrated approach to this 

globalization, and I put some comments in my testimony on it. 

But one thing you have to understand—and this fits with Senator Bunning’s question. You know, the National Association of 

Manufacturers, 90 percent of their companies may be small, and 

they were supporting the Bunning-Stabenow approach to this. 

When it got up to the final vote on that within the NAM, the big 

multinationals headed it off, saying it was somehow WTO illegal, 

even though they had two other law firms that said it was WTO 

legal. 

So you have a group of companies in this country—and they are 

not being evil, but they are working to get shareholder profits, and 

they do it by maintaining the system the way it is going now. 

I think it is a very short-term look on their part, but a lot of 

these corporate guys are in it for the short term. I think you have 

got a real problem on this divergence. 

Now, on the currency issue, I am very much in favor of the 

Stabenow-Bunning bill to make this countervailable. But I think 

we should also be bringing a WTO case against China. 

Now, why is the IMF very important in this? Under Article XV 

of the WTO, when you file that case, Senator, what will happen is 

under that rule they will immediately turn to the IMF for its advice on currency issues. So getting the IMF to take a position on 

this is very important. 

Now, I have an article which I would like to put in the record 

of this hearing. This is an article from September 28, 2005, ‘‘IMF 

Chief Opposes United States on China.’’ This article says that the 

IMF—— 

Chairman BAYH. Without objection, Mr. Mulloy, we will include1

that with your testimony. 

Mr. MULLOY. Thank you, Mr. Chairman. 

The IMF is urging China to allow its currency to move upward. 

The IMF understands what is going on here. But listen to what 

they said. The head of the IMF says to Treasury, ‘‘Treasury itself 

has refrained from tagging China for manipulation in its own semiannual report on foreign exchange policy.’’ 

The IMF is hiding behind the fact that Treasury has not done 

its job. If Treasury will do its job, it makes the—and it is reality. 

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They are underpricing their currency. Massive interventions in currency markets to do it. Increasing leverage over U.S. debt. They 

have got $1.2 trillion of foreign reserves now, many of them invested in U.S. Government bonds. This is an enormously building 

problem. So you have got to bring—do Bunning-Stabenow, but also 

bring the case into the IMF. 

Then, third, begin to think about how we bring the divergence 

between the multinational corporations and the American national 

interest back into line. And I am working with a group called the 

Horizon Project, and we made a report to the Congress laying some 

of those issues out in that report that we did in February, Senator. 

Senator CASEY. Thank you. I know I am out of time, but we will 

come back. 

Chairman BAYH. I would like to follow up on Senator Casey’s 

good question and your excellent answer, Mr. Mulloy. As you describe it, you recommend bringing a WTO case, but they will immediately turn to the IMF. 

Mr. MULLOY. Right. 

Chairman BAYH. Which is hiding behind the Secretary of Treasury, which, in your testimony, leads me to ask: You mentioned Mr. 

Mulford and the previous interpretation of the law that the first 

Bush administration had, that he had. Why is this administration 

taking so different an approach where, as you say, they have not 

even identified one currency manipulator in spite of the overwhelming evidence? 

Mr. MULLOY. Well, this requires me to maybe say some things 

that I—I will give you my opinion. 

Chairman BAYH. That is why you are here, Mr. Mulloy. 

Mr. MULLOY. The guys in the Treasury are very close to the Wall 

Street crowd. The Wall Street crowd is making a lot of money running the system the way it is being run. And you will notice that 

Paulson pushed very hard to get more access for financial firms 

into China. 

I was at a meeting a couple weeks ago where Paulson was talking about that, and one of the people in the audience from China, 

former head of—I was in Shanghai a couple years ago, and he was 

running—he was No. 2 in the Shanghai Stock Exchange. And he 

said, ‘‘If we did that, provided more access to your financial firms, 

would that take some of the heat off some of these other issues, including the exchange rate?’’ 

So I think there is a split going on here in our society—— 

Chairman BAYH. They do not seem to have provided that access, 

even if the answer was yes. 

Mr. MULLOY. Yes. There is a split going on between the interest 

of some of the folks on Wall Street and some of the multinational 

corporations who make a lot of money with this system going on. 

I hate to say this, but many people who leave the Treasury go work 

for these financial firms. So I think there is an inordinate influence, and that is why it is so important for the Congress to conduct 

the kind of oversight that Chairman Dodd and Chairman Shelby 

and others have been doing. You have got to put a lot of pressure 

on those guys. 

Now, again, under the Constitution, if Treasury does not do it, 

it is your authority under the Constitution to deal with foreign 

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commerce. And if you do not like what they are doing and they will 

not do it, give it to somebody else or do it yourself. Make that judgment. You can do it under the Constitution. 

Chairman BAYH. Thank you, Mr. Mulloy. You have provided 

some key insights. 

Mr. Hartquist, I would like to now turn to you, and based upon 

what Mr. Mulloy was saying and the advice that was rendered to 

a couple of the multinationals, apparently you are not the only lawyer in Washington who takes a similar view of the steps that Senator Bunning, Senator Casey, and I have proposed are WTO compliant. 

As I understand, there is a three-part test, financial contribution 

benefit, but that the key element that seems to be the sticking 

point here is whether it is specific, company specific. So I would 

like to ask you about that. What in your opinion leads you to believe it is WTO compliant because the test of specificity is met? 

Mr. HARTQUIST. Mr. Chairman, our answer to that is really a 

very simple one. It is because the benefit is contingent upon export 

performance. Essentially what happens is when the Chinese companies export to the United States, they get paid in dollars. If the 

currency were properly valued, they would get about five—the exchange rate would be about one dollar for five yuan. But under the 

current system, it is more like one dollar for eight yuan. So they 

qualify for it by exporting their goods. That is a very specific act 

that they must accomplish. And then they pocket an extra three 

yuan, about a 40-percent differential, because of the undervalued 

currency. 

Chairman BAYH. Why the disconnect, in your opinion, or any of 

the other panelists, between the IMF’s approach to this where they 

have concluded that this has a harmful effect upon global trade 

flows and that kind of thing, and yet the sort of this academic 

three-part test where, you know, Ben Bernanke says, sure, it is— 

I think the words he used—‘‘effective subsidies.’’ Dr. Goldstein says 

the practice effect is a subsidy. The IMF says that is bad and you 

have got, you know, this three-part test that seems academic in the 

extreme and divorced from the reality of the marketplace. Anybody 

hazard a guess as to why they have taken this interpretation? 

Mr. HARTQUIST. I think, Mr. Chairman, that there are several 

things going on here. One is there is real fear that the Chinese 

banking system may simply collapse if this issue is not handled 

properly. The estimates are that there are about $800 billion in bad 

loans in the Chinese system, and a lot of that money has gone to 

setting up industries that are competing with us every day. We are 

supposed to compete with them one on one—— 

Chairman BAYH. Well, I hear that, and I appreciate that. But 

that is a different issue. I mean, we have got to get on the right 

path and then make sure it is sustainable from their standpoint as 

well. Nobody wants their banking system to collapse, but that is 

kind of a different issue, which I hope they have not derived this 

test just to obscure that. But please continue. 

Mr. HARTQUIST. Well, I was going to make two other brief points, 

if I may. I think beyond that, the Chinese are almost frozen in time 

themselves. They are very concerned about their economy collapsing if they handle this wrong. They are concerned about the 

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banking system. They are concerned about having to create tens of 

millions of jobs for their citizens every year. And they are concerned about retaining political power. Very concerned about that. 

The development of a middle class, a more independent class in 

China, is in many ways a threat to the regime in China. And I 

think that the U.S. Government is looking at these issues, too, and 

is saying if we get this wrong, there could be catastrophic consequences. But that is no excuse for not taking the actions that we 

can take under the law to get China to really get in gear here and 

start to make these changes. 

Chairman BAYH. My time has expired here at the beginning of 

the second round, Mr. Hartquist, but I referenced some of that in 

my opening statement about the desire of the Chinese for stability 

in their country and, therefore, the need to maintain very high 

rates of growth. So I agree with what you said. 

Dr. Goldstein, you were nodding your head, and I am going to 

get to Senator Bunning. Is there something you want to add here? 

Mr. GOLDSTEIN. Well, I do want to make a comment, if I could 

have 2 minutes. Some of the language in a number of the currency 

bills I think is of a lot of practical import, and that is, the distinction between manipulation and misalignment. Some people simply 

think that misalignment is a politer word for manipulation, but it 

is not. 

Manipulation means the government is taking a specific prohibited policy action to keep the exchange rate away from where it 

ought to be. Usually that is large-scale, protracted one-way intervention. 

Misalignment just means the exchange rate is away from where 

it ought to be for whatever reason. It could be because of a Government policy action, or it could be because the market has got it 

wrong. 

Now, what happens if you do this? If you do manipulation, there 

are three advantages. One advantage is it tells you who is at fault. 

If you are engaging in large-scale one-way intervention, you are at 

fault. So China is at fault. The U.S. is not doing that; we are not 

at fault. 

The remedy is also clear. Stop doing the prohibited action. Stop 

intervening, and you get a relative limited list of offenders—in this 

case, probably China, Malaysia, Taiwan. You probably will not get 

Japan under that. 

The disadvantage is you miss some cases where the exchange 

rate is out of line, but the country is not obviously doing something. But if you do misalignment, then you have got a real problem. It is misaligned, but why? The yen is misaligned because Japanese interest rates are too low or the U.S. interest rates are too 

high? You do not know who is at fault. You also do not know what 

the remedy is because it can be due to many things, and you get 

a very different list. In particular, the same people who are going 

to tell you the RMB is seriously misaligned are also going to tell 

you the dollar is misaligned, the dollar is overvalued. 

So if the purpose of the legislation is to put the U.S. in the 

dock—which I did not think it was—misalignment will do that for 

you. Manipulation is different. If you do not like the word, call it 

something else. Call it destabilizing intervention. But you need to 

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be careful about this because otherwise you get some unintended 

consequences and you get a recipe for inaction rather than, I think, 

what you want. 

Chairman BAYH. Thank you, Dr. Goldstein. 

Senator Bunning. 

Senator BUNNING. Thank you. 

Mr. Mulloy, I would like to follow up on some things. China recently announced plans to invest $3 billion in the Blackstone 

Group—the same company that recently attempted to buy Chrysler 

Corporation. Do you believe China has begun using its $1.2 trillion 

in foreign exchange reserves to buy United States companies using 

the Blackstone Group as a platform? 

Mr. MULLOY. Thank you, Senator, for that. I was very fortunate 

to have been invited before this Committee to testify on CFIUS legislation about a year and a half ago. And, again, I was very involved when we wrote that legislation. That was part of the 1988 

trade bill, again, Senator. 

Senator BUNNING. We are trying to do it again, as you know. 

Mr. MULLOY. And my concern then was when you are running 

massive trade deficits like the United States is, you are sending 

dollars out of the country. The other country, if they are not buying 

your goods, has those dollars. 

Now, so far China has been investing those dollars in U.S. Treasuries, Fannie and Freddie. But in that testimony at that time, I 

said there will be a time when the Chinese are going to start buying major assets in the United States economy. And that is why it 

is very important for this Committee to have a good CFIUS process 

in place to understand the national security significance of what is 

going to happen. The cake is already baked. They have the money. 

The purchases are going to be coming. 

Now, I have read speculation—and I have not analyzed it myself—that one way—and remember when they tried to buy Unical. 

Senator BUNNING. Oh, yes, I sure do. 

Mr. MULLOY. You know, that company, that was not a private 

sector Chinese company. That is a government-directed company, 

and that is the important thing to understand. Many of these Chinese companies, they are not private sector people. They are organized and controlled by the party and the Chinese Government. 

So I have read speculation—and I do not know, and this Committee might want to do a hearing on it—to understand that they 

are going to use some other way because Congress reacted against 

the purchase of Unical. They may try these other back-door ways 

of getting major assets in the United States economy, which will 

be important, what we call ‘‘national security jewels’’ for the United 

States, which will end up being owned by the government of another country. 

So I think it is very important that you have a good CFIUS process in place and do the kind of intelligence that needs to be done 

in looking at those kinds of purchases. 

Senator BUNNING. Then you do believe, as most of the panel 

here, that the manipulation of the currency and the misuse or illfated use of their assets in bonds and/or government dollars, our 

dollars, could be used to undermine our own economy? 

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Mr. MULLOY. Well, let me say this: First, I went to China for the 

first time in 1981. I like the Chinese people. They are a wonderful 

people. I am not out to demonize China. And I always tell my Chinese friend, this imbalance in this economic relationship, if you let 

it go on, you are going to poison the political relationship. And we 

do not want to poison the political relationship with China because 

we have so much to work with them on—global warming, ocean 

pollution, energy, a lot of things. 

But here, by permitting this situation—I think I would call it 

‘‘metastasize.’’ By permitting this to go on year after year, we are 

permitting the Chinese to gain enormous leverage over our economy and now have the assets to come in here and buy important 

parts of our economy. 

Now, what will that do? It will give them even more political influence on our political system, because if they own major assets 

in the United States, those assets and those people are going to become more favorable toward China. 

So this is very important that we begin to get this under control 

soon, and not let it just go on year after year. 

Senator BUNNING. Well, then, do you believe that is one of the 

reasons Treasury and the current Administration is sitting there 

with their hands folded? 

Mr. MULLOY. I do not know why the Treasury and the administration—I personally think they have gotten themselves preoccupied with another area of the world, and they are not understanding the significance of the global trends which are presently 

in place and which I saw as a member of that China Commission 

for 6 years. And the last 2 years of it, we had Senator Fred Thompson on that Commission, and he signed on to that last report. 

These are big problems, and we are letting them build and get bigger and bigger and more difficult to unwind. And that is why I am 

speaking so forcefully that these are important matters. And it 

does not mean you demonize the Chinese if you say to them no—— 

Senator BUNNING. None of us are trying to demonize the Chinese. We are trying to get at a problem that we will probably overcome us eventually if we do not overcome it. So I have no fight 

with the Chinese, except that we did take six members of the 

Trade Subcommittee to China to talk trade with the Chinese, and 

they would not meet with us. I find that, you know, astounding 

that the Trade Minister would not meet with six members of the 

Finance Committee. In other words, they do not understand the 

give and take that goes on in the United States. They dictate to 

their Congress what they want done. The administration cannot 

dictate to our Congress what they want done. 

Mr. MULLOY. Let me just give you one last thing on this. A year 

ago, just about June of a year ago, 2006, I was in China with a 

group from the China Commission, and we had a meeting. The 

Consul General in Shanghai had a dinner for us, and he had a 

number of the American corporations doing business in China at 

the dinner. And there were two things that struck me about that 

dinner: one, how many of these corporations say these historical 

things, these historical flows are going to happen, in other words, 

the power and the economic wealth moving to Asia is going to happen; but at the same time, how terrified they were of the Chinese 

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Government. They do not want to be bucking the Chinese Government because there is no real rule of law in China. They are dependent upon favors for non-arbitrary treatment from the Chinese 

Government. So they can end up—and there is a good book called 

‘‘The China Fantasy’’ by Jim Mann, who had the article in the Outlook section of the Washington Post this weekend, ‘‘The China Fantasy,’’ where he says the Chinese in time can make American companies cheerleaders for their policies. 

Senator BUNNING. Thank you, Mr. Chairman. 

Chairman BAYH. Thank you, Senator Bunning. 

Senator Casey, are you needing to leave? OK. Thank you for your 

attendance. 

Gentlemen, just a couple more questions, and I appreciate your 

patience. Mr. Nichols, any effort to quantify if the Chinese really 

did open up—and I thought your testimony was excellent about 

how, you know, that would actually benefit Chinese consumers and 

help to promote U.S. exports and that kind of thing. But with regard to financial services in particular, are there any—have you 

made any estimations about how much business you think could be 

done there and how many jobs that might create here domestically? 

You know, they obviously have a comparative advantage in some 

aspects of the economy. Here is one where we have a comparative 

advantage. If they really did open up, what would our advantage 

be? 

Mr. NICHOLS. Well, it would be significant, and I will answer 

that in just a couple of ways. Actually, I was asked here to talk 

a little bit today about market access. I want to complement a 

point he made and build on it a little bit. It is true that we are 

pushing for increased market access. That is absolutely the case. 

But we are trying to explain why that is good for America. So our 

coalition is aggressively pushing Treasury to focus on market access because of the impact we think it will have on currency, as 

well as the trade deficit. 

There are some estimates that I have seen that suggest there is 

$2 trillion in the pockets of Chinese families, essentially mattress 

money, that if increased access to financial services can help spring 

that and bring that here to America to our exporters and to our 

service providers—I do not know exactly how many jobs that would 

translate into or to the sort of GDP growth, but—— 

Chairman BAYH. We would not get the all the business, right? 

There are other competitors—— 

Mr. NICHOLS. Absolutely not. There would be some growth within China, certainly, as their economy transforms, as well as in the 

euro zone, but certainly here as well. 

Chairman BAYH. Is part of their reluctance, do you think, related 

to the point Mr. Hartquist raised about the fragility of their financial system and perhaps some of their own domestic financial companies and players that are afraid if they just opened up, they 

would be forced out of business, that kind of thing? 

Mr. NICHOLS. I suspect there is something to that. I would like 

to add to a broader point, that, you know, the U.S. financial services industry is not pleased with the pace of reform, and I would 

like to align myself with those who say there is greater risk in 

them moving more slowly than more quickly. 

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In terms of the pace of reform in China, it is not at a pace that 

we think is—— 

Chairman BAYH. And I concur with that. And, look, I am not insensitive for the need for there to be stability in China from a variety of perspectives. But this process of globalization and in our bilateral relationship we have certainly been willing to take on some 

domestic dislocations here. 

Mr. NICHOLS. Right. 

Chairman BAYH. That needs to be, you know, a two-way street 

so that the laws of comparative advantage and natural competitive 

factors can allocate resources, labor, and so forth. 

Mr. NICHOLS. Right. In fact, Mr. Chairman, the Financial Services Forum—I am speaking outside of the ENGAGE CHINA Coalition, but with regard to my day job, we are taking a look at that. 

And, in fact, we have a study that we are working on right now 

that will help come up with a series of public and private sector 

responses to those who are not sharing, to individuals and families 

and communities that are not sharing in or feeling the full benefits 

of globalization. We have hired three economists—a Republican, a 

Democrat, and an Independent, including Matt, whom one of you 

mentioned Matt’s op-ed yesterday in the Wall Street Journal. He 

is one of the three that we have employed. We think in terms of 

this broader trade debate—— 

Chairman BAYH. I am glad you have employed some others. 

Mr. NICHOLS. You know, one of each. But I—— 

Chairman BAYH. Can I nominate Dr. Goldstein? 

[Laughter.] 

Mr. NICHOLS. But the point, though, is that there are dislocations, and those are not—entire communities, regions, families, individuals who are feeling in the full benefits and sharing in them. 

And it is important that both the public and private sector tackle 

that policy issue and help those people. 

Chairman BAYH. It may be a bit soon, but do you have any reaction to the communique that came out at the end of the economic 

dialog? We have touched base with a few of your members, and at 

least from what we heard, I think the word ‘‘underwhelmed’’ perhaps could apply. 

Mr. NICHOLS. Anticipating that, Mr. Chairman, we just met right 

before your hearing today, and we see the results today at this moment as there has been some progress, but there is much, much 

more to do in many areas, specifically regarding market access. So 

there is some progress, and we think we want to see more milestones. We appreciate the long-term structure of the Strategic Economic Dialogue, and we do think engagement with the Chinese is 

the right answer. 

That said, some progress today. Much more to do. 

Chairman BAYH. Said very diplomatically, Mr. Nichols. Thank 

you. 

Mr. Nolan, perhaps can you share with us your perspective? As 

I understand it, in your particular industry the capacity to produce 

steel in China is expanding significantly. Is that accurate? 

Mr. NOLAN. Mr. Chairman, it is extraordinary, is the word I like 

to use. 

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Chairman BAYH. And the concern is that even with the rapid 

rates of growth in China, the expansion of their steel production 

capacity is outstripping their projected domestic demand. Is that a 

fair characterization? 

Mr. NOLAN. That is absolutely the case. They are the most 

underpriced market on the globe today, and it is a consequence of 

oversupply. 

Chairman BAYH. And so if that is true and they continue to add 

capacity in excess of domestic requirements and that production 

then is put on the global market, the 40-percent currency distortion, if that is an appropriate word, what would that do to other 

global competitors and companies such as your own? 

Mr. NOLAN. Well, I think the word that comes to mind is ‘‘tsunami.’’ It would, I believe, put the world steel-producing community 

in a position where the potential to return any opportunities to 

shareholders would diminish to the point of becoming nonexistent. 

Chairman BAYH. And just one last question, and then I will have 

30 seconds of comments. And, again, I appreciate your testimony 

and your patience today. This has been very, very interesting. Getting back to the op-ed yesterday, which seemed to say that there 

were other competitive forces that would more than overcompensate for the currency issue, do you find in your markets, you know, 

is labor alone, is that a 40-percent—and you have got transportation costs, you have other costs, a lot of businesses out there 

where the competitive—we are within 40 percent, that is what I 

am trying to say, for a lot of companies. And if the currency thing 

were removed, there would be a lot of U.S. producers here that 

would be competitive, where otherwise that is not the case because 

of the currency issue? Is that a fair observation or no? 

Mr. NOLAN. Senator, I have been waiting for you to ask that 

question. It was asked in a slightly different fashion just last week, 

and the question was: As an exporter, can I get to China? And I 

would tell you, at eight yuan to the dollar, as they used to say in 

Maine, I can’t get ‘‘they-ah’’ from ‘‘hey-ah.’’ We would struggle at 

six. But we would be there every day at four. 

You know, I can do the financial math for you if you would like, 

but I think you can probably figure it out, you know, or staff can 

figure out for yourself. Clearly, there is enough standing capacity 

to support considerable demand in China. They do not have to 

build it themselves. All they need to do is to give us an opportunity 

to get there. 

Chairman BAYH. Thank you, Mr. Nolan. 

Well, I will conclude by associating myself with some comments 

that Mr. Mulloy made, and I think the rest of you would concur 

with, and that is, that China is a great nation in many respects, 

and they have a bright future. They have got hard-working, intelligent people. They have a rich culture. And it pains me to see 

these tensions in our relationship. We very much want a cooperative relationship with China. There are so many things that we can 

be working on together, and yet this is a source of disruption within what should be a more cooperative relationship. And we can no 

longer allow it to fester because there are adverse consequences to 

our Nation that, as a great country, we cannot sit idly by and allow 

it to occur. And so that is why a course of action on a sustainable 

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timeframe, that is what really is required here, and this endless dialog leading nowhere is only going to lead to worsening relations, 

and that is not in China’s interest, in the U.S. interest, or the 

world’s interest. And that is why we have conducted these hearings 

today, and, gentlemen, that is why I am very grateful for your 

presence and for your thoughts. 

Thank you all for attending. The hearing is adjourned. 

[Whereupon, at 4:28 p.m., the hearing was adjourned.] 

[Prepared statements supplied for the record follow:] 

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PREPARED STATEMENT OF SENATOR CHRISTOPHER J. DODD 

I would like to thank Senator Bayh, Chairman of the Subcommittee on Security 

and International Trade and Finance, for holding this important and timely hearing 

on U.S. economic relations with China. 

One of the very first actions that I undertook as Chairman-elect of the Banking 

Committee in December 2006 was to write a letter with then-Chairman Shelby to 

the Treasury Secretary on the occasion of the first Strategic Economic Dialogue 

(‘‘SED’’). In January 2007, I chaired a hearing with Secretary Paulson on exchange 

rates and the SED. At that hearing, Treasury Secretary Paulson testified that the 

SED is the ‘‘best chance to get some progress [on the currency issue].’’ The second 

session of the SED concluded in Washington this morning and I am eager to learn 

more about any progress made on both the currency and market access issues that 

the hearing today will address. 

The issues of exchange rates and market access represent two significant hurdles 

in the U.S.-China economic relationship. China is a source of tremendous opportunity for the United States, but also a source of new challenges that must be overcome in order to reach the full potential of our economic relationship. Foremost 

among these challenges is the need to level the playing field for American firms 

doing business in China and for American workers and companies producing goods 

for sale at home and abroad. Currently, the trade of goods and services is tilted to 

advantage Chinese firms because of ongoing Chinese government intervention to 

keep the yuan undervalued and China’s discriminatory treatment of American and 

other non-Chinese financial services firms. 

The most recent Commerce Department data shows that the bilateral trade deficit 

increased from $47 billion in the first quarter of 2006 to $57 billion in the first quarter of this year, accounting for over thirty percent of the overall U.S. trade deficit. 

These numbers have very real consequences in terms of our nation’s manufacturing 

base and the communities in which manufacturing firms are based. Nearly 22 percent of manufacturing jobs have been lost in my home state of Connecticut over the 

last ten years. Over the past six years alone, our nation has experienced the loss 

of three million manufacturing jobs. 

To be sure, China’s undervalued currency is not the sole, or even predominant, 

cause of this loss of American manufacturing jobs. But just as surely, China’s devaluation of its currency is, in my view, a major contributor to the loss of U.S. manufacturing jobs and our bilateral trade deficit. Federal Reserve Chairman Ben 

Bernanke said as much last December when he referred to ‘‘the effective subsidy 

that an undervalued currency provides for Chinese firms that focus on exporting.’’ 

While China benefits from this export subsidy, they also enjoy open access to investment in America’s markets. Over the weekend, the Chinese government announced its purchase of a 10 percent stake in the U.S. private equity firm, Blackstone. Far from being protectionist, this transaction demonstrates the openness of 

the American public and the American markets to foreign investment. Unfortunately, U.S. financial services firms are not afforded the same open treatment in 

China’s markets. For too long, U.S. financial services firms have been denied the 

open access that our country provides for Chinese firms in the United States. 

I welcome today’s announcement from the SED on financial sector reform which 

will resume the previous practice of licensing foreign securities companies, raise the 

quota for Qualified Institutional Investors (‘‘QFIIs’’), permit foreign banks to offer 

domestic currency credit cards, and improve the application and licensing process 

for insurance companies. 

However, significant discriminatory policies remain that protect China’s financial 

sector from foreign competition. For example, today’s announcement does not address China’s restrictions on foreign bank branches’ ability to offer full domestic currency services to Chinese individuals, including restrictions on domestic currency 

loans and deposits. China also restricts the operating structures under which foreign firms do business, limiting activities to branch offices instead of subsidiaries, 

and limiting the geographic reach of foreign firms. Because of these ongoing restrictions, only one American bank is fully incorporated in China. China also limits the 

foreign equity stake in state-owned banks to 25 percent, imposes unequal capital requirements on foreign banks, and maintains an onerous application and approval 

process for a range of financial services operations. 

These policies hinder the ability of U.S. firms to compete in China and to expand 

their market presence among a consumer population in need of financial services, 

products, and expertise. I urge the Administration to continue to use all tools available to eliminate unfair trade advantages resulting from China’s discriminatory 

policies. My hope is that American firms in China will soon experience the type of 

fair treatment and open access that the United States provides to the Chinese. As 

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34 

Steve Bartlett, president of the Financial Services Roundtable recently stated, ‘‘if 

the Chinese government is allowed to invest in Blackstone, the Chinese people 

should be allowed to invest in Merrill Lynch or Raymond James.’’ 

Simply put, American workers and businesses are being forced to compete on tilted terrain, and our government must take action to level the playing field. Last 

week, Senator Shelby, who as Chairman of this Committee conducted vigilant oversight and numerous hearings on exchange rates, and I wrote a letter to Treasury 

Secretary Paulson urging him to take the necessary steps that will bring an end 

to the unfair currency practices and market access barriers that are contributing to 

the trade deficit and damaging the competitive position of American workers and 

businesses. 

Adequately addressing these unfair trade practices may require steps beyond diplomacy and the Strategic Economic Dialogue, as Secretary Paulson’s colleagues in 

the Department of Commerce and the Office of the United States Trade Representative have recently demonstrated. I believe that one such step should include citing 

China for currency manipulation in the upcoming International Economic and Exchange Rate Policy Report, which was due to this Committee on April 15th. This 

report is the only mechanism currently in place for the United States to publicly 

monitor and remedy unfair trade advantages resulting from currency manipulation. 

Under a law passed by this Committee nearly two decades ago, the Treasury Department has a statutory obligation to use this reporting mechanism. The American 

public relies on the Treasury to ensure that countries who manipulate their currencies ‘‘regularly and promptly adjust the rate of exchange . . . to eliminate the 

unfair trade advantage.’’ Given Treasury’s current approach on currency manipulation, I look forward to learning from today’s witnesses and others about additional 

strategies and options the United States should consider to better address the unfair trade advantage resulting from China’s currency and discriminatory market access policies. 

PREPARED STATEMENT OF SENATOR SHERROD BROWN 

Good afternoon. Thank you, Senator Bayh, for holding this important hearing on 

U.S. economic relations with China. And thanks to those of you here to testify. 

Our economic relationship with China is one of critical importance to the working 

men and women of Ohio, where we have lost 180,000 manufacturing jobs since 

2001—including more than 50,000 jobs to China in the last decade alone. In a state 

where the economy is largely driven by manufacturing, the dramatic influx of Chinese manufactured products and the loss of jobs in Ohio are surely related. 

We need to think carefully about where these trends are leading us. Manufacturing is not only important to our economy, its essential to our national security. 

What is happening in Ohio and in other manufacturing states has dramatic implications for our nation as a whole. I think most economists would agree that China’s 

exchange rate manipulation has been a major contributor to our trade imbalance. 

China’s RMB is undervalued by roughly 40 percent, due to the government’s strong 

efforts to keep it artificially low. Partly as a result, imports from China have increased by 20 percent in the first quarter of this year and may hit yet another 

record high. 

In the past few weeks, in preparation for the Strategic Economic Dialogue, the 

Chinese have decided to widen the daily trading band on the RMB from .03 percent 

to .05 percent. Gestures like this are certainly not substitutes for real concrete 

measures. 

I’d like to take a minute today to discuss a few important issues with regard to 

the economic relationship between China and my home state of Ohio. Ohio’s largest 

exports are in manufactured goods such as machinery, vehicles, and steel. For 

Ohio’s workers and businesses to remain competitive in the global economy, we 

must ensure that other countries play by the rules. Our manufacturers cannot and 

should not have to battle Chinese currency manipulation and they cannot and 

should not lose out to unfair competition from firms in China that are propped up 

by heavy government support. 

Approximately 30% of the Ohio’s manufacturing activity is related to motor vehicle production. When you consider the indirect jobs related to the industry, it is the 

largest industry in Ohio’s economic base. Nearly 10% of all Ohio workers—over 

652,000—depend on the motor vehicle industry for their livelihood. This is also an 

industry that the Chinese government has explicitly targeted to promote. 

The Chinese government is actively trying to increase exports of auto parts, many 

of which are fake or faulty. The auto parts industry loses $12 billion annually, injlentini on DSKJ8SOYB1PROD with HROC

35 

cluding $3 billion in the U.S. alone to counterfeit auto parts—and China is responsible for about 75 percent of those fake products. 

Moreover, the Chinese do not provide for equal treatment of U.S. auto parts in 

the Chinese market as they committed to do when they joined the WTO. Instead, 

they impose a 25 percent charge on imported auto parts. This is in clear violation 

of the basic commitment that all countries agree to when they join the WTO. 

We often hear proponents of China talking about the complex challenges the country faces in moving towards a ‘‘responsible stakeholder.’’ If it is unable or unwilling 

to simply apply national treatment to imports, I have reservations about our overall 

trade relationship. 

Although the WTO cases recently filed against China’s illegal industrial subsidies, 

as well as the IPR and auto parts cases, are steps in the right direction, manufacturing is too critical to Ohio’s families and future to wait for the often several years 

it takes for the WTO to make it final determination. I look forward to hearing about 

the ways we can address these issues in the more immediate term. Thank you. 

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