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S. HRG. 110–591

OPPORTUNITIES AND CHALLENGES IN THE

U.S.- CHINA ECONOMIC RELATIONSHIP

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

MARCH 27, 2007

(

Printed for the use of the Committee on Finance

COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

TRENT LOTT, Mississippi

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

CRAIG THOMAS, Wyoming

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)

C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

CONGRESSIONAL WITNESS

Dorgan, Hon. Byron, a U.S. Senator from North Dakota ..................................... 4

WITNESSES

Bhagwati, Jagdish, professor of economics and law, Columbia University,

New York, NY ...................................................................................................... 7

DiMicco, Daniel, president and CEO, NUCOR Corporation, Charlotte, NC ...... 9

Sorensen, Norman, president and CEO, Principal International, Inc., Des

Moines, IA ............................................................................................................. 12

Chu, Steven, director, Lawrence Berkeley National Laboratory, Berkeley, CA . 14

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Bhagwati, Jagdish:

Testimony .......................................................................................................... 7

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

Chu, Steven:

Testimony .......................................................................................................... 14

Prepared statement .......................................................................................... 56

DiMicco, Daniel:

Testimony .......................................................................................................... 9

Prepared statement .......................................................................................... 63

Dorgan, Hon. Byron:

Testimony .......................................................................................................... 4

Prepared statement with attachments ........................................................... 74

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Roberts, Hon. Pat:

Prepared statement .......................................................................................... 80

Sorensen, Norman:

Testimony .......................................................................................................... 12

Prepared statement with attachment ............................................................. 81

Responses to questions from Senator Baucus ................................................ 87

COMMUNICATIONS

American Meat Institute ......................................................................................... 89

Coalition of Service Industries ............................................................................... 94

U.S.-China Business Council .................................................................................. 104

(III)

(1)

OPPORTUNITIES AND CHALLENGES IN THE

U.S.-CHINA ECONOMIC RELATIONSHIP

TUESDAY, MARCH 27, 2007

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:03 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Rockefeller, Bingaman, Lincoln, Schumer,

Stabenow, Cantwell, Salazar, Grassley, Lott, Snowe, Thomas,

Bunning, and Crapo.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. Could we all come to order?

George Bernard Shaw wrote that ‘‘the unexpected always happens.’’ That is certainly true in the relationship between America

and China. Before the 1970s, no one expected Nixon to go to Maoist

China. Before the 1970s, no one expected that ping-pong could

serve as a tool of diplomacy. And before the late 1980s, no one expected that Communist China would embrace market economics.

But the unexpected happened, and we are better for it.

Many continue to tell us what we cannot expect. Today, some say

that we cannot expect China to stop counterfeiting and piracy,

some say we cannot expect the administration to cite China as a

currency manipulator, and some say we cannot expect American

companies to compete with China.

But today we imagine what can happen. We imagine what America and China can do individually, together, and as part of a community of nations. Today we imagine the unexpected that can happen.

Today’s is the committee’s third hearing on international trade

this year. Today we hear from the first of two panels on the U.S.-

China economic relationship. Today we focus on trade, economics,

and energy, and tomorrow we focus on currency.

Today we focus on what we can do. What can we do to make China’s growing economy a greater opportunity for America’s workers,

farmers and ranchers? What can we do to ensure that China fulfills

its WTO obligations, in letter and in spirit? And what can we do

to help American companies and workers become more competitive?

We must also focus on what China can do. What can China do

to accelerate mutually beneficial reforms? What could China do to

2

move beyond its 2001 WTO commitments? What could China do to

move its economy towards sustainable and balanced growth?

And we must focus on what China and America can do together.

What can we do together in the international trade community to

foster regional cooperation? What can we do together to advance

the WTO negotiations? What can we do together to address global

challenges, like energy and environment?

Imagining the possible and crafting solutions is never simple. Julius Caesar wrote that ‘‘no one is so brave that he is not disturbed

by something unexpected.’’ Many continue to be disturbed by China’s unexpected transformations.

We need to imagine solutions to keeping the U.S.-China economic

relationship on track, creating jobs and growing our exports. By focusing on what we can do, we can help Americans understand how

our trading relationships are beneficial. When those relationships

are not beneficial, Americans must understand what we are doing

about it.

What we discuss today is bigger than China and America. Our

economic relationship with China is a microcosm of America’s

greater global challenges. Piracy and counterfeiting are not uniquely Chinese phenomena, neither is currency manipulation. We face

the same tariff and non-tariff barriers in many other economies,

too; rising energy and commodity prices also affect all markets.

Our discussion has broader implications. If we can solve our

problems with China, we can solve them elsewhere. If we can

unlock the potential of the Chinese market, we can unlock other

markets’ potential. If we can learn to cooperate with China without

illusions, we can build stronger partnerships around the world.

George Bernard Shaw wrote, ‘‘If the unexpected always happens,

how incapable must man be of learning from experience?’’

The solution to Shaw’s paradox must be an act of bold imagination. To learn from America’s experience with China, we must

imagine anew. Let us begin that act of imagination today.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Mr. Chairman, we do occasionally look to the

issue of our economic relationship with China, we need to do that,

and I thank you for your leadership in doing that.

You have spoken out on this issue many, many times, probably

more often than I have. But I think that we are working together

in regard to solving these issues, as evidenced by the legislation

that we put in in the past in regard to currency, as an example.

I, first, want to thank our witnesses for being here. And Mr.

Chairman, I want to recognize somebody whom you are going to introduce later on: Norman Sorensen is here. He is president and

CEO of Principal International. He’s joining us from Des Moines,

IA.

And if people forget about Principal International, this is the

very same Principal that you see national TV advertising about.

We may be in the Midwest, but understand we have a very important company there in services, like we do John Deere in agriculture manufacturing.

3

So in addition to introducing him, I welcome the opportunity to

comment on our economic relationship with China. As with any important relationship, it is likely that difficult issues will arise from

time to time. The question is, how do you respond to those issues?

In my view, you do not retreat from the relationship, instead, you

work hard to resolve the issues and improve that relationship.

Clearly, we have significant issues with the Chinese. Infringement on intellectual property rights is one; Chinese currency remains artificially under-valued relative to the U.S. dollar; the Chinese government appears to have a number of policies in place that

are inconsistent with China’s obligations as a member of the World

Trade Organization; and issues that I thought by now would be resolved, considering how hard I worked for China to become a member of the World Trade Organization.

The Chinese government needs to do more to improve transparency. I think China could do more to help advance the Doha

Round negotiations in the World Trade Organization, considering

how active they were at Cancun when things seemed to be falling

apart. It seems to me if you were part of that effort, then you ought

to be part of the effort of putting Humpty Dumpty back together

again.

Those are just some of the issues. I am very frustrated because

China is not moving quickly enough, in my view, to resolve them.

On the other hand, I recognize—and I think more Americans ought

to recognize—that China is engaging with us in an effort to improve our economic relationships. It tends to get lost, the efforts

that are being put forward, because of little irritants that would be

so easy for China to take care of.

That ongoing engagement that we have with China means that

there’s hope that, with a lot of hard work, we can resolve all these

issues. We have already been able to work through some very important issues with the Chinese. March, 2004, we filed a case

against China’s value added tax rebates discriminating against imported semiconductors. We were able to resolve that dispute.

In January, 2006, we were able to bring a case against China’s

imposition of antidumping duties on our exports of liner boards,

and we were able to resolve that issue.

Last year we filed a case against China’s discriminatory charges

on imported auto parts. That litigation, however, is ongoing, but

hopefully can be resolved.

In just the last month, we filed a case against nine prohibited

subsidy programs maintained by the Chinese government. China

responded by terminating one of those programs a very few weeks

ago, and we are in consultation with the eight remaining ones.

That is one of the benefits of having China in the WTO. We have

a forum to resolve problems, and that is what the rule of law is

all about.

I would like to address additionally, Mr. Chairman, our bilateral

trade deficit. In 2006, our trade deficit with China exceeded $232

billion, which is over one quarter of our total trade deficit. But it

is also true that, in 2006, our exports to China grew by 32 percent,

which was significantly higher than the 18-percent increase in our

imports from China.

4

Combined with Hong Kong, China is now our third-largest export

market, behind Canada and Mexico. Our trade deficit with China

is very much a function of U.S. consumption, because we are producing more and exporting more than ever before.

Some critics may argue that our trade deficit with China translates directly into jobs going to China, and that if we just reduce

our deficit, those jobs will come back to the United States.

Of course, that is very simplistic and inaccurate. We have an

open economy, and, if we were to somehow shut off trade with

China, our trade deficit would most likely migrate to other countries in Asia, assuming our consumption patterns remained the

same.

In America, the consumer is king. There is a lot about what their

desires are that the United States is not going to be able to give

any direction to. Trade policy, then, should not be used as an attempt to restrict economic activity to the United States. We tried

that once. It was called Smoot-Hawley, and that protectionism certainly did not help our economy any. It wrecked the world economy, and it directly led to World War II.

Instead, we should embrace the benefits of our open economy,

focus on what other policies will help us to remain competitive and

create jobs, and attend to the needs of our strikers and businesses

here in the United States.

So let us review our economic relationship with China with open

eyes. Let us acknowledge the benefits of that relationship and identify the problems that remain. Let us voice our frustrations and

work for solutions. Above all, let us recommit ourselves to improving the economic relationship with China through engagement, not

retreat.

In the meantime, I would suggest to the Chinese not to be so

sensitive every time we raise issues about them. They are very

quick to say the United States has no right to raise any questions

about what goes on in China.

On the other hand, I think the Chinese know that we are a very

transparent society and we welcome their criticism, or any other

criticism a country has of the United States, but do not say that

we do not have a right to be concerned about what goes on in the

internal affairs of your country.

The CHAIRMAN. Thank you, Senator, very much.

Our first witness is the senior Senator from North Dakota, Byron

Dorgan.

Senator, we deeply appreciate your coming here. You have been

a very active voice on trade policy for a good period of time, and

we very much appreciate your contribution. Clearly, this is a very,

very important subject, and we just thank you again for taking the

time to give us the benefit of your views.

OPENING STATEMENT OF HON. BYRON DORGAN,

A U.S. SENATOR FROM NORTH DAKOTA

Senator DORGAN. Well, Senator Baucus and Senator Grassley,

members of the committee, first of all, thank you for holding this

hearing. I think this is a very important hearing.

I am, of course, not surprised to enter the room and discover that

the ghosts of Smoot and Hawley are not yet dead. I might observe,

5

however, Senator Grassley, that Mr. Smoot and Mr. Hawley were

trying to protect a very large trade surplus back then as opposed

to trying to figure a way to get out of a very deep hole, these days.

Those of us who testify on trade issues are very concerned about

our trade. Not that we do not support trade. I support trade, and

plenty of it. I believe trade is very beneficial, very helpful. But

trade must be fair.

We have engaged in this chanting of ‘‘free trade’’ without respect

to the notion that trade, by and large, with some of our trade competitors, has been pretty unfair. China is an awfully good example

of that.

I actually supported PNTR to China in September of 2000. Let

me read to you what I said in the Senate record: ‘‘I want it to be

clear that if we accord permanent normal trade relations to China

and discover they are not, in fact, complying with the terms of the

bilateral agreement we negotiated with them, then I believe we

must reserve the right to revoke China’s normal trade relations

status.’’

I believe we are at that point. Clearly, China has not abided by

either the spirit or the letter of the trade agreement we signed with

them. I believe we should rescind permanent normal trade relationships with China and, instead, make it a year-by-year normal trade

relationship vote here in the Congress in order to keep pressure

and leverage on the Chinese.

When we granted PNTR to China in 2000, our merchandise

trade deficit with China was $83 billion. I have a chart that I wish

to show. Eighty-three billion dollars. That has exploded to $233 billion. The green is what we export to China, the red is what we import.

Now, I understand, and several of you have made the point, that,

boy, we are sure doing a lot better, all these exports to China. Take

a look at the chart and ask yourself whether that is doing better.

It most surely is not. We are deep in a hole with respect to our

trade agreement with China, and things are getting worse, not better. So that is where we start.

Now, what is the purpose of that? Well, for every $6 of merchandise we purchase from China, the Chinese buy about $1 from us.

We have all kinds of staggering problems. They include intellectual

property theft, piracy, currency manipulation, unfair barriers

against our exports and an unfair playing field in which our jobs

go to China because of sweatshop conditions in China.

Now, I represent an agricultural State. China should be, and in

some cases is, a significant market for us. But I would observe that

in North Dakota we export nearly 10 times as much to the country

of Belgium as we export to China, just as an observation.

Now, why are the exports to China as limited as they are? Well,

because China has not complied with the trade agreements. They

agreed to significantly expand the amount of imported grain coming into China at relatively low tariffs, 8.5 million metric tons per

year. We have not come close to that.

The proposition was that we should bring a trade action against

China. In fact, in March of 2003, the USTR official in charge of agricultural trade with China said publicly that China had failed misVerDate 11-MAY-2000 15:04 Nov 17, 2008 Jkt 000000 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 45236.000 SFIN1 PsN: SFIN1
6

erably to live up to its promises on wheat trade, and the U.S.

would be well-justified in bringing a WTO case.

But the official said the administration was reluctant to do so because a WTO case would be seen as an ‘‘in-your-face’’ thing to do

to China. I mean, so much for taking effective action. It just is not

the case.

This, by the way, is a direct quote from an official in the USTR.

We had the evidence, should have taken action, but it would have

been considered an ‘‘in-your-face,’’ I guess, translated, soft-headed

foreign policy notion, so we should not take effective action in this

case.

The USTR Report on China Trade Barriers had this to say: ‘‘Agricultural trade with China remains among the least transparent

and predictable of the world’s major markets. Capricious practices

by the Chinese customs and quarantine officials can delay or halt

shipments of agricultural products. Sanitary and phytosanitary

standards with questionable scientific bases and a generally

opaque regulatory regime frequently bedevil traders in agricultural

commodities.’’

So the evidence is all around us. The question is not whether we

want to do something. The question is, what should we do? I want

to make just two last points. Senator Grassley, last year, in speaking about Vietnam PNTR, said ‘‘we need to make sure that we

aren’t played for a sucker in the case of Vietnam as we have been

with China.’’ I fully support that. I believe we have been played for

a sucker with respect to that PNTR. They have not met any of the

basic requirements.

Now, let me just make one final point. I have introduced S. 571

with a couple of my colleagues that would revoke PNTR and make

it a yearly determination. I would ask for consideration of that by

this committee.

Let me make a final point. As you know, you see the chart here,

an unbelievable explosion of trade deficit. We have a bilateral deficit of $230 billion with China. It has gotten much worse since we

passed PNTR.

Part of it is lack of enforcement and all the other issues I just

mentioned. Part of it is incompetent trade negotiations and incompetent trade agreements. China is gearing up for a very, very substantial Chinese automobile export market.

Let me tell you what we did in bilateral automobile trade with

China. We said this. We said, when you send Chinese cars to

America, we will charge 2.5 percent tariff on cars you want to ship

into the United States. And by the way, when we send American

cars to be sold in China, you go ahead and charge 25 percent tariff.

We, in a bilateral agreement, had the ignorance to say, it is all

right with a country that has a giant trade surplus with us, or we

a deficit with them, it is all right for them to impose a tariff that

is 10 times higher than our tariff on bilateral automobile trade.

It does not matter if it is Republicans or Democrats, as far as I

am concerned. When we make those kind of deals, they are bad

deals for this country. That is also a part of what causes these

giant deficits.

But I am heartened just by the fact that you are holding this

hearing. I hope that we will substitute action for discussion. We

7

have had discussions for a long, long time. It is time to take some

action.

Finally, I support trade, plenty of it. But I demand that we stop

chanting about free trade and start doing something about fair

trade and stand up for this country’s economic interests.

Thank you for allowing me to say a few words this morning, Mr.

Chairman.

The CHAIRMAN. You bet. Thank you very much, Senator. Very

much. I have no questions or comments. Does anyone?

Senator DORGAN. I would like to bequeath my chart for the permanent record of the committee, if I might. It is a great chart to

continue to look at.

The CHAIRMAN. There is a great tradition of charts from the Senators from North Dakota. [Laughter.]

Senator DORGAN. Right.

The CHAIRMAN. I appreciate it. Thank you very much, Senator.

We deeply appreciate your time. Thank you very much.

We will now go to our other panel. Let me just call them all, if

you will come up, please. Mr. Jagdish Bhagwati, who is professor

of economics and law at Columbia University. Come on up to the

table. Mr. Dan DiMicco, president and CEO of NUCOR. Good to

see you, Dan. Mr. Norman Sorensen, president and CEO of Principal International, as already referred to and introduced by Senator Grassley. And Mr. Steven Chu is director of Lawrence Berkeley National Lab at Berkeley, CA.

Gentlemen, I thank you very much for taking the time to come

and give us the benefit of your thoughts and your views. You all

are very knowledgeable in specific areas, and also generally. I want

to thank you very, very much for taking the time. I urge you—and

I know you will anyway—do not pull punches. Say what you want

to say. Life is short. Let us make the most out of this hearing.

I know Senators will ask very pointed, good questions, too. If

they do not—I know they will, but if they do not—do not let that

inhibit you, just say what you want to say. All right. We will begin

with you, Mr. Bhagwati.

STATEMENT OF JAGDISH BHAGWATI, PROFESSOR OF ECONOMICS AND LAW, COLUMBIA UNIVERSITY, NEW YORK, NY

Mr. BHAGWATI. Thank you very much, Senator. Thank you so

much for inviting me. It is a pleasure to be testifying before you,

and also before Senator Grassley, who presided over the last time

I testified on Jordan FTA.

Senator GRASSLEY. Good memory.

Mr. BHAGWATI. And I think after your two statements, I wonder

whether I should be saying anything at all, since you have covered

most of the sound points.

But let me just mention one thing on the macroeconomic issues.

To me, they are a bit of a red herring—and no pun is intended in

relation to China. Yes, certainly we run bilateral deficits, but this

is no indication of fair trade or whatever you want to call it.

There is no reason why bilateral balances should be balanced, because if we started playing that game, there are lots of countries

with which we would be considered protectionist, because you

8

never have complete balance with each individual country that you

are going for.

If we had worried about our deficit—it is our own excessive

spending. I think Senator Grassley correctly pointed out, if you are

spending too much, we may be able to fix the bilateral with China,

but it will spill over into other countries. So we have to look inside

at ourselves. But since you are having a hearing tomorrow on the

macroeconomic issues, I will just leave it there and get into the

trade issues.

The CHAIRMAN. No. Say what you want to say. You are here.

Mr. BHAGWATI. Well, I would simply say that, if you look at the

surpluses which China is running and the reserves which they

have, we should not really attach too much significance to that either, for two reasons.

One is, if you look at all of Asia, the Chinese reserves are about

a third. The Japanese ones come pretty close to that. India, Taiwan, et cetera add up to about the same thing. So we are talking

about one-third of the Asian reserves right now, so why pick on

China in particular?

Two, both India and China are not going to want to hold onto

reserves, largely because it is wonderful to have U.S. Treasury

bills; we are a safe haven. Nobody is going to want to move into

yen or the euro. But they have alternative users, because you do

not get much rate of return on these.

Both India and China are under great pressure to expand their

infrastructure, to support their increase, the high growth rates,

and, too, getting great demands from within the system to spend

socially, like we are. We, therefore, can fully expect that on medical, health, education, et cetera, both countries are going to have

to spend more, so they are going to be running down their surpluses. So I would simply say, take it easy, on a variety of grounds.

Do not go down this macroeconomic route.

I am a little disturbed about two Senators I greatly admire,

Lindsey Graham and Charlie Schumer—who represents New York,

which is where I live—going down this route which is almost a Buchanan kind of route. Buchanan, if you will remember, wanted

across-the-board tariffs on Japan—just remember that time—and

for pretty much the same reasons, and now we are threatening

something similar, and I think it is really not a very wise way to

go.

Let me now turn to the trade issues more directly. And that is

where I think I am entirely with Senator Grassley. I am completely

opposed to what Senator Dorgan said, which is that we really now

have China inside the WTO.

As long as we deal with China, or earlier with Japan, if you go

back and look at that experience, if you try to deal bilaterally with

these issues, it is virtually impossible not to get a nationalistic reaction from these countries, because it will be looked upon as bilateral pressure.

But now that we have dispute settlement mechanisms, we can

take it to the WTO—we have already had four cases—and have it

settled one way or the other, and then that enables the ministers

and the governments to be able to stand up to their own lobbies.

9

It also enables our USTR, et cetera, and our government to say

to our lobbies, which are complainants, that, look, we have gone

through an impartial dispute settlement. So that is the way out.

You cannot really deal with these issues and move an 800-pound

gorilla by saying, look, I am going to put pressure against you. It

simply does not make sense. It is not the way to go.

Now that we have them inside the WTO, let us not play the old

game of saying, look, we are going to hurt their feelings, and so on.

Actually, it is better for them and for us to go to an impartial dispute settlement mechanism.

We went through this route with Japan, as you know. The Japanese used to say, do not take us to the WTO. It is going to make

us feel embarrassed, and so on, and so forth. Actually, our relations

with them eased a great deal once we started using the WTO.

And I think one thing we should avoid, although obviously our

system is a lobby-intensive system, we should not necessarily take

what our industries say as the final truth of the matter. I mean,

it is simply, if they have a source or reason for complaint, take it

to an impartial mechanism.

So, finally, I think I would just say that, should we be afraid of

China as far as trade is concerned? There I feel that we grossly exaggerate the fear of China, which is really widespread through the

system, which is also driving some of these complaints about

China.

I think the size of China makes people worry, its growth rate

makes people worry. But if you really analyze the size, the size is

really not as big, per capita income is much lower, growth rates are

likely to level off, and we should not really worry about it.

China and we can actually have a lot of trade opportunities and

we can really grow simultaneously together. We put Europe and

Japan back on their feet. They developed the kinds of expertise

which they used to have which are closer to ours. I have never

heard anybody say that that was a bad policy.

In the same way, when China accumulates expertise, engineers,

skills, and so on and so forth, it is going to help us, not harm us,

because trade in similar products will break out. You get a huge

amount of specialization within industries. We can only look forward to very substantial mutual opportunities.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Professor.

[The prepared statement of Mr. Bhagwati appears in the appendix.]

The CHAIRMAN. Mr. DiMicco?

STATEMENT OF DANIEL DiMICCO, PRESIDENT AND CEO,

NUCOR CORPORATION, CHARLOTTE, NC

Mr. DIMICCO. Good morning.

The CHAIRMAN. Good morning.

Mr. DIMICCO. Thank you for the opportunity to be here.

The CHAIRMAN. You bet.

Mr. DIMICCO. Thank you for having this hearing on this very important issue.

The CHAIRMAN. You bet.

10

Mr. DIMICCO. I am Dan DiMicco, chairman, CEO, and president

of NUCOR Corporation. In 2007, NUCOR will be one of the largest

steel producers and manufacturers in the United States and the

largest recycler. I appreciate this opportunity to be here to address

the challenges in the U.S.-China economic relationship.

President Reagan got it right over 20 years ago when he said,

‘‘To make the international trading system work, all must abide by

the rules.’’ When it joined the WTO, China agreed to these rules.

Our relationship with China is not working today because China

is not following those rules, and we are not holding them accountable for that.

Rather, China is breaking them on every front, using massive

subsidies, manipulating its currency, tolerating widespread violation of intellectual property rights, and ignoring its own environmental laws, all to give its exports an unfair advantage in international trade. This behavior has cost the U.S. economy hundreds

of billions of dollars and millions of jobs, and we have let China get

away with it.

Our economic relationship with China can be explained in three

simple charts. The first chart shows the growth in China’s steel

production. The steel industry here is an example of what has happened in many other industries.

A big explosion in steel production was no accident. In its zeal

to turn China into the factory of the world, the Chinese government has funneled hundreds of billions of dollars into many industries from steel, to machinery, auto parts, and appliances.

These subsidies take many forms, including equity investments,

cash grants, and the write-off of nearly a trillion dollars of loans

by state-owned banks. An even bigger subsidy comes from currency

manipulation. The Chinese government deliberately keeps the

value of the renminbi well below its true value. This makes imports from China artificially cheap and exports to China artificially

expensive.

Our own Federal Reserve Chairman Ben Bernanke stated that if

China lets the market determine the value of the renminbi it will

‘‘reduce an important distortion in the Chinese economy, namely

the effective subsidy that an undervalued currency provides for

Chinese firms.’’ These subsidies have worked exactly as the Chinese government hoped.

As chart two shows, Chinese exports to the United States of steel

and downstream steel products have skyrocketed, similar to our

trade deficit overall. I believe we would see exactly the same pattern from many other industries. It affects the entire U.S. manufacturing sector.

The impact of China’s policies on the U.S. trade deficit has been

dramatic, as shown in this next chart which you have already seen.

According to one economic estimate, imports from China have cost

the U.S. at least one million manufacturing jobs.

Since 2000, more than 3 million manufacturing jobs have been

lost. About two-thirds of those may be attributed to the trade deficit, and China accounts for about one million of those jobs.

Were China to revalue its currency and stop its unfair trading

practices, other Asian economies could do the same, and more than

11

one million jobs could be reclaimed. If the trade deficit were cut in

half, we could likely regain 2 million jobs over a period of 3 years.

Manufacturing has traditionally been the way for Americans who

do not have a college degree to work their way into the middle

class and provide a decent living for their families. I refuse to believe that the loss of manufacturing jobs is inevitable, as some have

suggested. That is hogwash.

If we stop the hemorrhaging of manufacturing jobs by enforcing

the rules of free trade—and that is all we are asking for—we will

help to raise the widening wealth gap and ease the sense of insecurity among many Americans who have jobs. Recent polls have

shown only one-third of Americans see free trade as a positive, and

they see trade with China as a way of reducing wages and jobs.

While trade adjustment assistance can be useful, it is no cure

and it is, at best, a Band-Aid and, in reality, an admission of failure. NUCOR workers would rather keep their jobs than retrain for

new ones, especially when they are the best at it in the world.

Above all, they expect their government to stop the cheating and

deliver the level playing field they have promised repeatedly by

presidents of both parties. We could eliminate much of our trade

deficit with China and both save and create many American jobs

simply by enforcing the agreement upon which the rules of free

trade are based, rules that China agreed to, to have access to our

market.

We have to act. We have to act though, and not just talk. The

administration has engaged in a dialogue with China for years, and

China has done nothing. We must take decisive steps now. In some

cases, this will require the passage of new measures to close loopholes and give us the tools we need.

A good starting point would be the passage of the Collins-Bayh

bill that would revoke the free pass that China has received under

the subsidy law. China agreed to be covered by the subsidy law

when it joined the WTO. We must get on with holding China accountable for its commitments.

Restoring the U.S.-China economic relationship to a healthier

balance is absolutely necessary to the long-term economic prosperity and national security of the United States, and the economic

prosperity in the long run for China.

In closing, Mr. Chairman, I want to state for the record that defending and enforcing the rules of free trade is not protectionism,

it is self-defense. It is time for Congress, the administration, and

the American public to make China abide by the rules, rules to

which it agreed to abide by in return for access to the U.S. and

world markets. It is a very simple request. We hope you will do

that.

The CHAIRMAN. Thank you, Mr. DiMicco, very, very much.

[The prepared statement of Mr. DiMicco appears in the appendix.]

The CHAIRMAN. Mr. Sorensen?

12

STATEMENT OF NORMAN SORENSEN, PRESIDENT AND CEO,

PRINCIPAL INTERNATIONAL, INC., DES MOINES, IA

Mr. SORENSEN. Thank you, Chairman Baucus, Ranking Member

Grassley, members of the committee, for the opportunity to testify

today.

My name is Norman Sorensen. I am president of Principal International, based in Des Moines, IA. I testify today in my current

role as president of Principal International and with the perspective as chairman of the International Committee of the American

Council of Life Insurance.

The Principal Financial Group, a Fortune 500 company, is an

Iowa-based financial services company focused on retirement benefits and asset management, operating in the United States and

overseas.

As the Nation’s 401(k) leader, we have a particular interest in

providing retirement savings for employers, employees, individuals

in the U.S. and around the world. I, by the way, testified in favor

of PNTR for China in 2000.

The retirement savings products so successful in the United

States have been emulated in other countries. In developing markets where the Principal Financial Group operates, like Brazil,

Mexico, Hong Kong, and Chile, for example, retirement savings

have been significant, and the seeds for wealth creation and strong

capital markets have been firmly planted.

That is not yet the case in China. Up until this year, there was

no formal private retirement savings program in China, and the

country’s aging population is putting pressure on the government’s

ability to pay for pensions. The number of Chinese retirees will

double to 200 million in 10 years, and will be over 400 million people by 2050, almost 30 percent of the Chinese population.

That is why the new Enterprise Annuity Pension System is so

critical for China. This new program is similar to our 401(k) system

and will be very important for retirement benefits companies like

Principal Financial Group and others.

Our estimates show that, within 10 years, the assets under management for this program should be close to $100 billion. Within

25 years, they should reach at least $1 trillion.

As a company, we have already seen large success in China. Our

asset management company began operations less than 2 years ago

in a joint venture partnership with China Construction Bank.

China Construction Bank is the third-largest bank in China and

was ranked 11th out of the top 1,000 global banks, by The Banker

magazine.

The bank is 14,000 branches, 300,000 employees, and over $600

billion in assets. So far, our Chinese joint venture has successfully

rolled out four mutual funds since November of 2005, with our

most recent fund accumulating over $1 billion in a single day this

month.

The joint venture has also earned awards for most innovative

funds and for sales distribution excellence. All of these accomplishments are significant and have come about in a very short period

of time. We have become one of the major asset management companies in China, but there is much yet to achieve. We hope that

13

regulatory changes in the retirement arena will make that possible,

and this is where this committee could play a very important part.

Principal, along with many other American financial services

companies, sees great promise in the Chinese retirement market.

We believe that development of the Chinese enterprise annuity

market could represent a win-win opportunity for the U.S. and

China.

China needs American pensions’ expertise, and our companies

can provide it. We will encourage this important discussion in

China, in the U.S., and under the framework of the current strategic economic dialogue, the SED, led by Treasury Secretary Henry

Paulson.

In fact, together with Beijing University, I will be hosting a

major symposium on this subject in China two weeks from now. I

happen to travel to China virtually every month.

However, the Chinese rules and standards for the provision of

enterprise annuity pension systems remain unclear. The regulations currently prevent any company from providing a comprehensive package of services and involve several regulators.

As a start, we believe that China should clarify the regulatory

framework to authorize single-provider plans under a single license. Also, American and foreign companies should be allowed to

fully participate in the Enterprise Annuity Pension System.

As pensions are included in China’s WTO commitments, we believe that foreign equity ownership and all enterprise annuity companies should be allowed up to at least the same current limit as

life insurance companies, which is 50-percent, and eventually 100-

percent ownership.

On the life insurance side, our objectives are simple: freedom to

choose a form of establishment, branch, subsidiary, or joint venture; the ability of a U.S. financial firm to own 100 percent of its

operations, currently not possible; and non-discriminatory treatment of foreign companies.

Our highest priority, both on the enterprise annuity side and on

the life insurance side, is for improved access in the removal of equity limitations. We believe China has an opportunity to show leadership in this area.

Mr. Chairman, in conclusion, I sincerely appreciate the interest

of the committee and ask for your support to leverage the strategic

economic dialogue, led by Secretary Hank Paulson, to get positive

outcomes in both enterprise annuity and life insurance from the

current SED meeting, which is meeting in Washington in late May.

Our industry and I are working with the Departments of Treasury, State, Labor, Commerce, and USTR to push for positive commercial outcomes in this area, and your strong support is deeply

appreciated. Thank you very much.

The CHAIRMAN. Thank you, Mr. Sorensen.

[The prepared statement of Mr. Sorensen appears in the appendix.]

The CHAIRMAN. Mr. Chu?

14

STATEMENT OF STEVEN CHU, DIRECTOR, LAWRENCE

BERKELEY NATIONAL LABORATORY, BERKELEY, CA

Mr. CHU. Thank you, Chairman Baucus and Senator Grassley.

I am pleased to talk about something I know a little bit about

with regard to U.S.-China issues, and that is energy issues. I am

Steven Chu. I am the director of Lawrence Berkeley National Laboratory, and I am also currently serving as co-chair of an interacademy council study, Transitioning to Sustainable Energy.

For your information, the inter-academy council represents over

90 science academies around the world, and our report is intended

to provide a road map to scientists and policymakers on how to

achieve affordable, sustainable, and clean energy.

My co-chair is Jose Goldenberg, who is currently Secretary of Environment of the State of Sao Paulo, and the person responsible for

the Brazil sugarcane ethanol industry.

I was also a member of the report, ‘‘Rising Above the Gathering

Storm,’’ that Senators Bingaman and Alexander called for. This is

the Augustine report.

China is the world’s second-largest energy consumer, and over

the past 2 decades China has averaged roughly 9 percent growth

per year. Its official number may be 9 percent, its unofficial number is higher. It is probably 12 percent. It is the only country that

plays down its economic growth.

This growth has dramatically lifted the standard of living of Chinese citizens, but has also created enormous challenges for China

and the world. China’s rapidly growing reliance on coal as its core

energy source has substantially added to global CO2 emissions, and

it is a growing threat. China’s need to guarantee access to its future oil and natural gas supplies could potentially lead to future

conflict with the United States and the rest of the world.

The local air pollution has become global in China. There are

days now in the mountains of California where Chinese contribution to air pollution is comparable to that of California’s cities.

China uses about 15 percent of the global energy, while the U.S.

consumes approximately 25 percent. Almost half the world’s CO2

emissions are due to these two countries. And while our energy

consumed per GDP is significantly better than China, the U.S. consumes about 8 times the energy as China per person.

Now, as far as the world environment is concerned, carbon emissions per person is the relevant metric. The planet Earth does not

care about the GDP of the world, only about carbon emissions.

The U.S. energy consumption and the CO2 emissions per person

are about twice as high as Europe and Japan. And just as the

United States must significantly reduce its carbon footprint, China

must strive to achieve higher efficiencies as its economy grows.

In the next 2 decades, roughly half the buildings in the world

will be constructed in China. More than 300 million Chinese, the

entire population of the United States, will move into cities. During

this massive construction, it is vital that new cities be designed to

maximize energy efficiency.

China has a strong efficiency program for commercial and residential appliances and electronics lighting, but China’s energy consumption is dominated by the industry sector where efficiency proVerDate 11-MAY-2000 15:04 Nov 17, 2008 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 45236.000 SFIN1 PsN: SFIN1
15

grams are weak or non-existent. The need for such programs is urgent.

Before my message is lost, let me state my take-home message.

Engagement with China on energy issues must be strengthened

and expanded. Full Chinese participation in the mechanisms for

the International Energy Agency is appropriate.

China’s rapid rise to the top of the global economic leadership

suggests that full participation in global dialogues such as G–8 are

warranted. I further support my colleague, Dr. Bhagwati, in saying

that it is these international forums that are crucial, like the World

Trade Organization, to force China to do the right thing.

Chinese government officials see affordable energy as its primary

economic engine. As their economy grows, the reduction of carbon

emissions pledged by the European Union will be outstripped by

the growth of energy use in China and the United States.

China added 90 gigawatts of coal-fired power plants in 2006

alone, and these, over the lifetime of these plants, will be emitting

500 million tons of carbon per year; by comparison, the entire EU

commitment of reduction is 300 million tons per year.

The United States currently plans to build about 150 U.S. coalburning plants in the new few years that will also equal the

planned EU reductions.

Between 1980 and 2000, China quadrupled the size of its GDP,

while only doubling its energy consumption. This is a fantastic

achievement. However, free market forces were unleashed in

China, and energy demand is now increasing at 1.5 times the rate

of its economic growth.

The central government of China has announced last year an

ambitious plan to decrease energy intensity by 20 percent by the

year 2010, but it is already falling behind these goals.

Knowing what to do and finding the political will to do the right

thing are very different matters. The central government in China

does not have complete control of the country. Local governments

are reluctant to close down heavily polluting or energy-inefficient

plants and factories for fear of widespread unemployment or decreasing tax revenues, including tax on power generation in older

industries.

China’s energy structure has been dominated by coal and will remain so unless the world can find technological solutions. China

has also become rapidly dependent on petroleum consumption and

is responsible for 30 percent of the growth of demand.

It has implemented strict automobile efficiency requirements, but

at the same time it is following the United States’ example of using

domestic production of automobiles as an engine of economic prosperity. China has constructed the equivalent of the entire U.S.

interstate highway system in little under a decade.

Biofuels. While the international oil prices have spurred efforts

all over the world to develop fuel alternatives, China is considering

coal-to-liquid conversion.

A coal-to-liquid refinery capable of 1.2 million barrels a day has

been submitted for review. The environmental consequences of a

massive coal-to-liquid conversion program would be staggering, and

the world must find other alternatives.

16

Biofuels are a much more attractive possibility, but ethanol produced from corn or biodiesel from oil-bearing plants is not the solution. The yield of fuel per acre is too low and does not reduce overall CO2 emissions.

I am confident that we can develop—we, being the U.S.—far better biofuels based on perennial grasses. In an unaerated, unfertilized plot of land in Illinois, it is shown to produce 10 times as

much ethanol per acre as corn.

Research will be needed in all parts of the world to identify and

improve plants to be used as energy crops. The U.S. is poised to

be a leader in the development of cellulose-based biofuels. This

work will help the world develop alternative sources of transportation fuel and greatly alleviate pressures to guarantee access to

oil.

Thank you.

The CHAIRMAN. Thank you, Mr. Chu. That was very good, very

helpful, very informative, very constructive.

[The prepared statement of Mr. Chu appears in the appendix.]

The CHAIRMAN. I now would like to ask each of the witnesses

kind of one basic question. That is, what should this committee

take from each of you, what is the main point you want to make

with respect to our relationship with China that you think is most

important, and what do we do about it?

What action do we take? Instead of just talking about it, what

action do we take? What is the one sort of major take-away that

this committee should have from each of you?

Each of you is an expert in your field and is certainly very

knowledgeable about China. So what would you recommend? We

can go down the row there, or whoever wants to go first can raise

his hand, whatever.

Mr. Bhagwati, why don’t you proceed?

Mr. BHAGWATI. Senator, I think the most important thing your

committee could do would be to defuse these tensions with China

and really provide a first-rate analysis of why we are exaggerating

the problems with China and understating the opportunities which

Mr. Sorensen, for instance, was talking about.

I think we need to point out that, really, China is part of the

world system. It has been a fairly good player on many dimensions

in relation to the WTO, and I think, even on the Doha Round, it

could have played a bigger role. But remember, we got them to accept many WTO-plus obligations beyond what, in fact, they had,

and made the down payment.

So I think we need to say, look, they are good players. We can,

where we have differences, take them to the international organizations. We should not pay too much attention to the macroeconomics because it is really badly argued in most cases, and we

really have an opportunity.

So I think the main message would be to say, look, China is an

important player. We have had good relations. We can have good

relations. And where we have differences we can negotiate them,

and where we cannot negotiate them, take them to——

The CHAIRMAN. Very briefly, Mr. DiMicco says China is not playing by the rules, we are not doing enough. What do you say about

that? Just briefly. Very briefly.

17

Mr. BHAGWATI. I do not think that is correct, actually. He definitely has a point of view. But suppose the steel industry—and I

see Senator Rockefeller here, my regards to you.

The CHAIRMAN. I am waiting. I am waiting.

Mr. BHAGWATI. Yes. We can take them to court. We can take

them to a settlement that really works. It really works. It really

works in a very efficient way.

The CHAIRMAN. Mr. DiMicco? The take-away here. What do we

do about it?

Mr. DIMICCO. Thank you. The basic message that we have as

manufacturers, as well as steel producers is, it is time for us to get

China to live up to its obligations and commitments. We are not

asking for more than that.

We are not asking for government handouts, we are not asking

for anything except our government to do what it is supposed to

do and give our manufacturers as level a playing field as possible.

Globalization is here to stay.

China is going to be a dynamic, growing economy. There is a lot

of good in that, but there is also a lot of bad in that. The bad is

not being over-exaggerated by any means. It is a serious issue. It

rears its ugly head on a regular basis from one industry to another.

Please have them live up to their obligations. I agree with the

Professor, the WTO is a good place to go. Unfortunately, it is not

the best place to go because WTO does not always rule in our

favor.

The CHAIRMAN. Right. My time is expiring.

Mr. Sorensen?

Mr. SORENSEN. Mr. Chairman, engage with China, especially on

financial services. One little-known factor—I used to be chairman

of the Coalition for Service Industries of the United States, representing all service industries—the only surplus that we have is

in services. We have $60 billion in services surplus in our overall

trade balance in the United States with all the world. Part of that

is financial services.

Financial services is the most competitive area that the U.S. has

with regard to the rest of the world, particularly with China, and

the total surplus in that area could increase incrementally if we applied our forces toward that service.

And they need us. They need our pensions, they need our mutual

funds, they need our banking services. I think that is one area

where it could be extremely useful. And use the WTO for enforcement, aggressively, as Senator Grassley had indicated.

The CHAIRMAN. All right. Thank you.

Mr. Chu?

Mr. CHU. I just want to reiterate my point that China, Inc., does

not really exist the way most Americans portray it. There is a central government, but sometimes the local governments do not really

listen as well, and sometimes they cannot listen.

This is particularly in regard to pollution and industry practices.

Local pollution is killing their people, and they know it, yet they

cannot shut down these factories because it is a loss of tax revenues, it is unemployment, and potential unrest.

The CHAIRMAN. Well, what do we do about that?

18

Mr. CHU. I think we can help China and transfer a lot of the

technologies that we have. It is actually a money-making proposition to the United States to help them transfer some of these

technologies to shut down these grossly polluting plants and very

inefficient plants. So, I think one should work with China in helping them.

If you just put pressure on the central government, the central

government cannot really effectively turn around and say to local

government, put your people out of work. That is the deadlock. I

would be glad to discuss this at great length with you.

The CHAIRMAN. I would, too. This is a fascinating subject. Unfortunately, this setup does not allow us to pursue a lot at this point.

But thank you very much. We will pursue it in other ways with

a lot of the questions that a lot of us have.

Senator Grassley?

Senator GRASSLEY. Thank you, Mr. Chairman. A very good panel.

I appreciate the divergent points of view, and I want to suggest to

the panel and to the Chairman that I am going to have to submit

some questions for answer in writing because I have to go to an

FBI hearing that is going on now before the Judiciary.

Mr. Sorensen, you noted in your testimony that Principal has, in

a short period of time, already had significant success in China.

How much did China’s accession to the World Trade Organization

contribute to the ability of Principal to establish operations in

China?

Mr. SORENSEN. It would not have been possible without it, Senator, because the WTO permitted the entry of financial services industries in a graduated fashion over 5 years. It started with life insurance, then it went to mutual funds and banking.

Senator GRASSLEY. All right.

Separately, you stated that Principal would like to see China provide full transparency in its financial services regulations. Can you

provide specific examples of how China could improve that regulatory transparency? Hopefully there are people from China here

listening.

Mr. SORENSEN. Yes, sir. There are four ministries and four agencies which are critical to the development of financial services:

CBRC is the China Banking Regulatory Commission; CIRC is the

China Insurance Regulatory Commission; the MOLSS is the Ministry of Labor and Social Security; and CSRC is the China Securities Regulatory Commission.

These agencies do not work in an interagency basis. They sometimes do not talk to one another. In the pensions area, which is our

specific interest and which could provide a tremendous opportunity,

$1 trillion within 10, 15 years in assets under management, these

agencies need to provide a single-license environment such that one

regulator regulates pensions, like we do in the United States.

Senator GRASSLEY. All right.

Also, is it your impression that Chinese officials share the view

that more transparency in China’s legal system is needed?

Mr. SORENSEN. Definitely, sir. That is one area where China is

conflicted. The legal system in China is still in development. It is

a young system. It is not 5,000 years old, as the Chinese culture

is. It is a very young system, less than 50 years old. Lawyers are

19

not a very common process of dispute resolution. It is typically arbitration or consent.

Senator GRASSLEY. And Dr. Chu, in previous hearings before our

committee, the director of the National Renewable Energy Lab

gave testimony expressing concern that Europe and Asia have

grown to dominate a $40 billion international energy technology

and equipment industry. Is China still a net importer of advanced

energy technology, and if so, what role does the United States

serve with that industry?

Mr. CHU. I believe it is a net importer of those technologies. Unfortunately, the leadership of energy efficiency technologies is no

longer in the United States. For example, wind power is shared by

Siemens and GE, but was really developed for the European market. Solar technologies are led by Japan. The nuclear industry is

led by France. The Westinghouse branch is now owned by a Japanese company. There is a little smattering of GE that still has

some nuclear technology.

The best thing the United States can do to serve in this industry

is regain leadership in these industries, so we should be doing that

at home. What that would require is long-term plans that give signals to the companies, not up and down, one after another, changing your mind, but long-term plans.

Once you have a long-term plan in mind, then the U.S. industry

will move in the right direction. But they need a 10-year signal.

They do not need a 2-year signal.

Senator GRASSLEY. Professor, you referred in your written testimony to the ‘‘volatility of the comparative advantage in today’s

global economy and enhanced competition,’’ and those are words directly from your testimony.

Can you please elaborate on what you mean by ‘‘volatility of comparative advantage’’?

Mr. BHAGWATI. If you go back to something like Tom Friedman’s

remark about flattening of the world, essentially there are many

reasons why, if you are a CEO and a manufacturer, or even a financial firm, if you look behind you, there is somebody stealing up

on you. But it need not be from India and China. That is where

Tom goes wrong. It can be anybody. There is no CEO in a trading

sector who is leading a happy, comfortable life, except in France,

perhaps, because they are deeply protected. [Laughter.]

So you are on your feet, on your toes all the time. It is not just

the poor countries. Boeing and Airbus are neck-and-neck. A380 was

a disaster for Airbus, so Boeing has gone ahead. Boeing will make

its own mistake, and Airbus will get back into the act. But we have

knife-edged competition, so we have volatility in comparative advantage.

So I think that is the view of globalization we have to have, a

strategic vision of, what does it involve? And I think everything

flows from that, in my view, in the sense that we now no longer

can think in terms of workers getting security.

I am a Democrat, so I believe in security for the workers. But

you cannot have a specific job. You have to think in terms of the

workers themselves. How do we provide security for them?

Through education, increasing the capacity to move from one job to

another, and so on, and so forth.

20

I think that is where, also, you need adjustment assistance in a

very big way, which is one of the positive things your committee

could emphasize. China feeds into that because China also, as I say

in my testimony, is like a tsunami.

Japan in the 1930s, when the $1 blouse and the yellow peril

came up. It was growing very rapidly with a high ratio of trade for

GNP. Japan, in the 1980s, when I think I testified before this committee, and Senator Baucus will remember those debates, too.

Semiconductors, autos, and so on.

So that was a time when we were worried desperately about the

yellow peril again. Now we are worried about China, because in all

three episodes the growth of the economy in question was very,

very considerable and the high ratio of trade to GNP meant that

people were creating waves.

Now, of course, it was not like a tsunami overall, and that is

where we have to be very sensible. It is not China in its totality,

but it creates problems for specific sectors like Mr. DiMicco’s, and

so on. That is where we need to have adjustment assistance, because we need to worry about specific sectors where adjustment

will be required.

The CHAIRMAN. All right. Thank you very, very much. Thank

you, Senator, very, very much.

Senator Bingaman?

Mr. DIMICCO. Can I add something?

The CHAIRMAN. You bet, if you want.

Mr. DIMICCO. On that point.

The CHAIRMAN. You bet.

Mr. DIMICCO. Our people do not want assistance in the form of,

you lost your job, here is some money to get you through. Because

we can compete with anybody in the world hands down. All we

want is a level playing field to compete upon.

The CHAIRMAN. Thank you.

Senator Bingaman, you are next.

Senator BINGAMAN. Thank you very much.

Let me ask, Mr. Chu, picking up on your comments about the energy relationship we have with China and its impact on the world:

one of the arguments, of course, that we are encountering in trying

to deal with greenhouse gas emissions in this country is that China

is not playing by the rules, as Mr. DiMicco says, in a great many

ways with regard to trade relations with the United States, in their

currency, and a variety of things. That is the argument that is

made.

Accordingly, it makes no sense for us to be further handicapping

ourselves in international competition by trying to limit greenhouse

gas emissions, where any reduction in greenhouse gas emissions we

could achieve would be overwhelmed by the growth in emissions

which is expected in China, and they are not willing to do anything

about their greenhouse gas emissions.

Europe is wasting its time trying to deal with the problem because of the relatively modest impact that they are able to have on

the problem.

How do you respond to that? Is there some argument that you

see against that perspective?

21

Mr. CHU. Well, this is the common—I cannot say it is wisdom—

but the common feeling that China and the United States stare at

each other. The United States says, why should we do anything to

hamper our industry that puts us at an economic handicap unless

China does something, and China says, why should we do it, we

are a developing country? The United States should lead. Europe

shakes its head at both of us, but is not living up to its own protocol targets.

So there is a stand-off. This is a real issue. I think I am hearing

some mumbling somewhere. I think this is the stand-off. I think we

have to push ahead. We have to help China. The first thing is, we

should help China with their own local pollution, and we can help

that technologically. This at least gets it in line with dealing with

the harder issue, namely the CO2 emissions.

Now, with regard to the U.S. versus China, which one goes first,

I think in some way we are going to have to both go together or

neither of us is going to go at all, and that is my big fear. We have

to get China on board. They have to do it as well as we do. We are

25 percent of the CO2 emissions in the world, and we are not 25

percent of the population.

This is a very scary concept. If we do not do anything and China

does not do anything about it, nobody else will really be effective.

So, this is a dilemma. We have to engage China and help each

other do this together.

Senator BINGAMAN. Thank you very much.

Let me ask you, Dr. Bhagwati. You say we should not be concerned about the macroeconomic issues, as I understood your testimony. Do you think it should be of concern to us that we are running a very large current account deficit with the rest of the world,

and have been for many, many years?

Do you think at some point that that begins to undermine the

value of our currency, or our standard of living? Do you think there

is any consequence that results from that, or do you think we can

just continue to ignore it as we have very effectively for the last

several decades?

Mr. BHAGWATI. No, I am with you on that. I definitely believe

that the current account deficit which we have is a gigantic one,

and I think we are sort of staring at it down the road. So I think

that needs to be done, but that has nothing to do with the bilateral

deficit with China.

Senator BINGAMAN. Well, how do you propose we fix the current

account deficit?

Mr. BHAGWATI. Try to fix the budget deficit, for example. That

is another committee, probably, huh?

Senator BINGAMAN. No, no.

Mr. BHAGWATI. The Committee on Finance.

Senator BINGAMAN. It seems to me, and my recollection is not

100 percent, but I remember going through this debate back in the

1980s here in Congress, where we started running a very large current account deficit. Everybody said the problem was the budget

deficit. We saw the current account deficit go down again. Everybody backed off of that problem. The budget deficit continued.

Then the budget deficit went away, the current account deficit

went up. So, I do not know that there is a close correlation between

22

what we do with our budget deficit and what happens to our current account deficit. Everything I have seen indicates that the two

are somewhat disconnected.

Mr. BHAGWATI. You would have to analyze each episode. You

cannot just go by these correlations. Right now there is no question

in anyone’s mind that the Iraq war, which really has led to tremendous excess spending, has contributed to the reversal of what

President Clinton had brought about, which was to get a major surplus in the budget, which I think really helps as far as excess

spending is concerned.

So, ultimately what happens in the international payments has

to reflect the state of the aggregate spending and your aggregate

income, so obviously you cannot have a payments deficit unless you

are spending more than you are actually producing. It is just a necessary relationship.

Senator BINGAMAN. Well, but the spending you are talking about

there is spending throughout the economy.

Mr. BHAGWATI. Right.

Senator BINGAMAN. Not just by the government.

Mr. BHAGWATI. Right. But you go down the corporate sector, the

household savings, and so on. Then clearly the fact that your budget is out of whack is contributing to the deficit.

Senator BINGAMAN. No, it is a factor. I would agree with that.

My time is up.

Mr. BHAGWATI. I am definitely an alarmist, if you would like, or

a realist on this question. I think we have to bring it back into balance, or closer to balance.

The CHAIRMAN. Thank you, Senator.

Senator BINGAMAN. My time is up. Thank you.

The CHAIRMAN. Senator Stabenow?

Senator STABENOW. Thank you, Mr. Chairman, for this hearing.

First of all, just as a side note, we passed a Budget Resolution

last week that brings the budget into balance within the next 5

years, so we are focusing on that.

Professor, I have to respectfully say that, from where I sit, we

are not exaggerating problems with what is happening. When we

look at, according to the Chamber of Commerce alone, counterfeiting from China has cost us 750,000 good jobs and 3 million

manufacturing jobs, good jobs leaving, even though we are doing

high-tech manufacturing in America.

I guess, before a question, let me just say for the record that

when we look at intellectual property rights violations, counterfeiting, currency manipulation to name just three, we see a track

record on lack of enforcement that is extremely concerning.

We see civil penalties for IPR violations, and almost no criminal

penalties have been brought. Right now, piracy and counterfeiting

remain epidemic: 90 percent of infringement violations, with 90

percent of infringement levels for all forms of intellectual property

right. Ninety percent right now is what we are dealing with.

I do not mind the numbers we have looked at if it is a level playing field. I would say let us just get ourselves going. But they

achieve this by cheating. It seems to me that, shame on us to allow

it to continue.

23

One other thing I would just say for the record. I have a question

related to what you believe we should be doing. We do have several

provisions to deal with violations to address dislocations caused by

increased imports from China, but in fact when it is found to be

true and the International Trade Commission in fact files a section

421, in four cases where they found it to be true and recommended

import relief to the President, the President refused to apply any

import relief on the basis that it was not in the national interests

of the United States.

I might just say that attorneys for the wire hanger and duct iron

waterworks fitting industries claim that failure to order these safeguards has led to the demise of two domestic industries in the

United States.

My concern is that we are not standing up for Americans in this

fight, where we need to be having a fair fight, and so I would ask

Mr. DiMicco, as somebody on the front lines of this, what do you

think? I mean, when we look at a level playing field, I think it is

the biggest challenge facing our country.

How do we create a level playing field in a global economy which

exists, and will exist? We all want to trade, but how do we do this

in a way that keeps middle-class America, keeps our customers,

keeps our economic engine from the middle class? I mean, how do

you see us overall effecting that level playing field?

Mr. DIMICCO. Thank you. I agree with all of your comments. A

level playing field will not be achieved unless we are, first, willing

to negotiate fair and reasonable trade agreements, number one,

and then enforce the rules of those trade agreements, number

two—and we have failed on both counts.

That is absolutely critical. There are things we need to do here

at home as well. Do not get me wrong, it is not all the other guys

that are doing this to us, but 80 percent of it is. It needs to be dealt

with.

Our government is finally going to the WTO on the export subsidies that China illegally has. They have knocked one off the list,

and there are seven more to go. But then there are a whole host

of domestic subsidies that they give, to the tune of billions of dollars, that also help them compete internationally. We just need to

enforce the rules that are in place on this issue, both in the WTO

and in our own laws here in the United States.

Senator STABENOW. Would you add the way we structure our

health care costs in this country as a part of what we need to

change to level the playing field?

Mr. DIMICCO. Health care issues, over-taxation compared to the

rest of the world, excessive tort issues, and an energy program that

is totally non-existent in this country, which should be a top priority. All of these are things that U.S. manufacturers need to have

done in a way that allows us to be globally competitive.

Senator STABENOW. Thank you.

Thank you, Mr. Chairman. This is such an important issue for

us, and I appreciate the testimony of the witnesses.

The CHAIRMAN. Thank you, Senator.

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. I concur with Senator Stabenow. We appreciate you bringing up such an important

24

issue and giving us an opportunity to visit here with the panel, and

I hope we will continue on this.

I would like to say a special welcome to Mr. DiMicco. Mr.

DiMicco actually has a few Arkansas roots, with NUCOR Steel

being one of our very responsible corporate citizens in Arkansas,

with very effective and efficient minimills, which have been a tremendous asset to our economy in Arkansas, but they have also

been great stewards, corporate stewards. So, we appreciate it. We

are glad the entire panel is here, but I wanted to welcome Mr.

DiMicco for sure.

We have had lots of discussions over the years, that is for sure.

I have been over at the ITC. I am a known face over there in many

instances. Mr. DiMicco’s last comment about making sure that we

implement actually what we have in this country to help—steel

pipe is a good example, with section 421 which we recommended

to the President to use.

Actually, the ITC actually concurred with us that a section 421

would be appropriate on the imports of steel pipe, and yet we still

did not see that happen. So using our own trade laws, and certainly using what we have available to us, is critically important.

Mr. DIMICCO. Absolutely.

Senator LINCOLN. But I do think that it is true that there is

more we can do.

Just a couple of questions. And Mr. DiMicco, I hope you can express to the committee some of the things we have talked about in

the past, and certainly to the effect of what was said here earlier.

That is, is it true that U.S. industries that have been injured by

illegally subsidized Chinese products cannot bring a trade case?

The U.S. Department of Commerce is considering changing their

policy on this.

If so, do we need legislation to clarify that the subsidy law applies to all countries, including China and other non-market economies? We have had a bill in the hopper in the last session. There

is one that has been recently introduced here to really clarify what

we have to use as a tool.

Mr. DIMICCO. First off, I completely agree with you that we are

not using the tools that we have in our tool box to address these

issues. As far as China goes in relation to the last part of your

question, they agreed to be subject to subsidy issues when they got

preferred status.

And our Department of Commerce, for 20 years, had the ability

to apply our subsidy laws against non-market economies, but it

chose not to. Now they are getting to the point where they are considering doing that, and hopefully we are going to have a positive

ruling here in the near future.

But I will tell you right now, for 20 years of not doing it and

maybe 1 year of doing it, I think legislation absolutely needs to be

passed to make sure that, for the long term, that this issue is dealt

with properly.

Senator LINCOLN. Well, in addition to ensuring that our trade

laws and agreements are enforced, you suggest, and I agree, that

there are some new tools that may be necessary, that some loopholes may need to be fixed.

25

I have certainly talked at great length about expedited remedy

and some of the opportunities that we have there that actually the

Commerce Department could do on their own without legislation,

and maybe that is what we need to do here again. Maybe you could

be a little more specific, maybe to the extent of going after repeat

offenders under trade laws, how we would accomplish that.

Mr. DIMICCO. Well, certainly the legislation that you have put

together would be very helpful in dealing with the situation where

either we have repeat offenders or we have repeat offenses on similar products. I mean, how many times do you have to bang your

head into the same wall to know that next time maybe you ought

to walk through the door?

Senator LINCOLN. Well, one of the unfortunate things is, many

of our competitors know our trade laws better than we do.

Mr. DIMICCO. Absolutely.

Senator LINCOLN. And they wait us out, to the point where they

know, if they can hang on for 3 years without having to go to the

courts or without our courts exercising what they need to exercise,

they can pretty much demolish an industry and take over. The idea

of expedited remedy, in my opinion, is a move in the right direction.

Just one last thing. Mr. DiMicco, in your testimony you described

the build-up of the Chinese steel industry with government subsidies. Clearly, the U.S. is not doing enough to address the subsidies that the Chinese government is giving its steel industry and

the threat to the U.S. market.

How long would it take for a deluge of subsidized Chinese steel

to land on our shores and really hurt the U.S. industry and workers?

Mr. DIMICCO. The reality is, it has already been happening for

a number of years. You mentioned the carbon pipe case, the welded

pipe case.

Senator LINCOLN. Right.

Mr. DIMICCO. In the 421, the ITC said there was a problem here,

so you need to do something. The President walked away from it.

Wire rod is another steel product line that has been decimated,

along with welded pipe and tube.

China, in the last 2 years, has built more steel capacity than the

United States and Japan combined. Today they have over 500 million tons of steel capacity in a world that only consumes 1.2 billion

tons.

It is an example of non-market forces, or market forces not being

able to operate to control overcapacity and excess building. This

issue needs to be dealt with. Just this past summer, now that they

have built more and more capacity in the different product lines,

galvanized steel—which is a very high value product for the steel

industry—went from 2,000 tons a month of imports from China for

the last umpteen years to 80,000 tons a month, in 1 month, followed by 70,000 tons.

The same thing has happened in cold-rolled steel. The only reason why it has not happened in rebar and in hot-rolled strip is because we have trade cases against China that are coming up for

sunset review this year, so you will see me in Washington again

on those issues.

26

The day of reckoning is here. We have been talking about it for

5 years. We have gotten no support out of Washington on these

issues, out of the administration. It is time for Congress to take the

action that needs to be taken to level the playing field.

Senator LINCOLN. We appreciate it.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Thank you very much.

Senator LINCOLN. And I would like to tell Mr. Chu that I will

have some questions for him on another day.

The CHAIRMAN. You bet.

Senator LINCOLN. Thank you.

The CHAIRMAN. Senator Bunning?

Senator BUNNING. Thank you, Mr. Chairman.

Mr. Chu, I was amazed at some of the answers you gave Senator

Bingaman on energy, the fact that the United States of America

has squeezed our producers of coal and the opening of new plants

to the point where they have to squeeze the CO2 emissions down.

I can give you chapter and verse if you would like to go into it.

The fact that the Chinese government is going to build 90-plus

coal-fired generation plants with no—zero—capture of CO2 emissions, and you think that we should sign on the dotted line before

the Chinese are—we should do it jointly when they have no recompense to actually lower their emissions because they say they

are a developing nation? I think that is the most unreasonable

thing I have heard any panelist before us ever say.

Mr. CHU. I think you might have misunderstood what I was saying.

Senator BUNNING. Well, I may have misunderstood it, but I listened carefully.

Mr. CHU. All right. Well, let me repeat what I thought I was saying. I was actually, in response to Senator Bingaman’s question,

saying that there was a point of view out there that the United

States should not capture carbon, for example, and worry about

CO2 emissions unless China does, because unless China does that,

since China——

Senator BUNNING. But that is totally false.

Mr. CHU. No. I am saying——

Senator BUNNING. Since we have bills right now for carbon sequestration on almost every new plant that is going to be built.

Mr. CHU. It is my understanding that the carbon sequestration

bills are not to require that we sequester carbon.

Senator BUNNING. They have been changed. Some of them have

been changed to require it.

Mr. CHU. They are now requiring them to be carbon sequestration-ready. That is the issue.

Senator BUNNING. Well, it is something that we have not been

doing, so, to do it, is it going to take some reasonable research to

get it done, and then to learn how to store it, and then where to

store it?

Senator Salazar and myself have a bill to study the geology of

the United States of America to find out where we can store the

sequestered carbon underground.

Mr. CHU. I am very supportive of all the research that is being

done, and research supported by the United States for carbon seVerDate 11-MAY-2000 15:04 Nov 17, 2008 Jkt 000000 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 45236.000 SFIN1 PsN: SFIN1
27

questration. Do not get me wrong on this one, that is very important. But as far as I know, aside from a few test pilot plants in

the world, we, the whole world, is not really sequestering that

much carbon. There are megatons worth of sequestration going on

today, megatons per year.

Senator BUNNING. But any new plant, coal-fired generated plant

in the United States, that comes under licensing and everything

else has to meet certain standards that are not in effect anywhere

in China.

I can tell you this. Two in Kentucky specifically could not get

permitted because they were not going to sequester the carbon and

cut the emissions of all the other oxides that come out low enough

to fire the generation of electricity with coal. So, I can tell you a

personal experience with two plants that I know of.

So, zero sequestration in China. We can get to zero in the United

States as far as carbon sequestration, and China is still spewing

it all over. If you have been to Beijing, you know exactly what I

am talking about.

Mr. CHU. I have been to Beijing. The U.S. Clean Air Act, actually, is exemplary. And I agree with you in regard to sulphur dioxide, nitrous oxides, particulate matter, that we are far better than

China. There is a disconnect here about the carbon sequestration

part.

We are beginning to pass legislation that says they should be

carbon sequestration ready. Maybe I am ignorant of this, but I do

not know of laws that say all new coal-fired plants are required to

sequester carbon today.

Senator BUNNING. Well, that may be the case in some. It is not

the case, particularly in my bill and Senator Barak Obama’s bill on

coals to liquid. We are going to require that all carbon be sequestered or you are not going to be able to build the plant.

Mr. CHU. All right. Then now we are shifting. I thought we were

talking——

Senator BUNNING. No. I am just talking about general reductions

compared to China.

Mr. CHU. Right. I think, again, it is commendable. I think if we

do do coal-to-liquids, we have to do it with sequestration. What

scares me in China, as I just noted in my testimony, is they are

not talking about sequestration when they do coal-to-liquid.

Senator BUNNING. That is correct.

Mr. CHU. That is very scary. So we do not disagree about that.

The CHAIRMAN. Thank you, Senator, very much. Your time is expired.

Senator Rockefeller?

Senator ROCKEFELLER. Thank you, Mr. Chairman.

When China joined the WTO and then we granted PNTR, they

accepted a set of rules. They accepted a set of rules. That is not

incidental. That means you follow the rules or you should not be

in the organization. Now, nobody is perfect, but it appears to me

that they are not living by those rules.

The whole question—Dr. Bhagwati, I am not going to ask you a

question. I just cannot bring myself to do it because your statement

and your attitude is just so far from what some of us experienced

in the steel industry and the whole concept of taking somebody

28

who has been working for several generations, who is 48 or 52

years old and saying, well, now we are going to train you, you go

get another job, that is not understanding what is going on in

America. I mean, we have lost 10,000 jobs in West Virginia in the

last 10 years. And that is not a question, so you do not have to say

anything.

My point is on 421. I would like to ask this to Mr. DiMicco, and

I think we agree. I do not think there is probably any Senator who

has testified before the ITC—in fact, so often as I have when I go

down there, they say, oh my God, here he comes again.

But that is what my job is, because I have to fight for my steel

industry, and I have to fight for what others have called fair play,

which is a fairly decent concept in the world, as it is within families, as it is within countries.

Debbie Stabenow pointed out those four cases. The two that,

when the President said it was not in the national interests of the

United States, those do not exist any more. Those industries do not

exist any more.

I have a bill where I think that 421 cases have to be an effective

buffer, and I do not think that the President should be given the

discretion of taking a quasi-judicial group—which most of us take

very, very seriously, they have an enormous amount of testimony

and information, more specific understanding of trade matters than

anybody else in Washington—and I do not think that we can allow

the President to simply walk away from that.

That is like a signing statement on a bill that he does not like.

He signs the bill, but then puts a little statement on which negates

it. In this case, he does not worry about that. He just goes ahead

and does not support it because it is not in the national interest.

Well, I think you and I would describe ‘‘in the national interest’’

with manufacturing, and in the case of steel, as huge.

So I have a bill which would in fact require him to not be able

to ignore ITC rulings. That is a lot of folks. They have a lot of trade

experience. They have heard a lot of testimony. That is all they do,

all the time, and I want you to be for that bill.

Mr. DIMICCO. We are. We are.

Senator ROCKEFELLER. The other question I have had is, it seems

to me that, if we do not follow up on remedies that the ITC recommends, what we are fundamentally saying to China—and this

chart, which is just extraordinary, of their increase from 1995, we

had a trade deficit of minus $33 billion to $232 billion. It has gone

up every single year. That is very large.

We used to worry about Japan. That has settled out as we came

to be able to talk with each other. Talking with the Chinese at the

WTO is a far more difficult situation than talking with the Japanese. The Japanese tend to accommodate. They resist until the

very end, but they tend to accommodate, particularly us, on these

matters.

The Chinese do not care because they are on their path. They are

the middle kingdom, the center of the world, and I admire them

enormously. I have studied their language. I have been there a

great deal. I applaud what they are doing, except for not playing

by the rules.

29

So when we do not enforce 421, it has really encouraged them

in a sense to wait us out, to bypass our rules, because they know

that nothing is going to happen.

Mr. DIMICCO. Absolutely.

Senator ROCKEFELLER. My final point would be to Mr. Chu. I

have promoted this for years with no result whatsoever, but I think

that one of the ways that you can help the Chinese deal with their

emissions problems in the coming years is something which could

not possibly be done under the present circumstances, but may be

the way to work our way out of a very difficult hostility between

China and Japan.

Japan, obviously, is the first to receive China’s air pollution in

Hokkaido and a number of other ones, they are seeing tremendous

differences already from that. They also have the money and the

technology, as I think you pointed out—or maybe it was you, Mr.

DiMicco—to do a great deal of this.

I think they have the money to be able to go to the Chinese and

say, we will help you retrofit your plants with modern technology,

and they will get rejected. But China, sort of closing down with the

Olympics, is a vast humiliation for China. China does not like to

be humiliated.

This whole idea of the Japanese and the Chinese kind of teaming

up, one helping the other, strikes me as a really good international

solution, which may take a long time.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you. Thank you, Senator, very much.

Senator Snowe?

Senator SNOWE. Thank you, Mr. Chairman. I thank all of you for

being here today. Mr. DiMicco, I could not agree with you more. My

State has been decimated over the years with the loss of manufacturing jobs. We have lost more than 21,000 since 2000, most recently Moosehead Manufacturing that has been around for a very

long time in Maine.

Frankly, it is disconcerting. I could not agree with you more

about the fact that we certainly do have the ability to maintain a

competitive edge in the manufacturing sector of our economy.

I have seen it as examples in my State, but it becomes overwhelming to most industries, given what they are standing against,

with respect to China.

The question is enforcement. I think it is sending a lot of messages, but we have to get beyond the dialogue, as you indicated.

That has been my experience over 30 years in both the House and

Senate. That is exactly correct.

I have dealt with many trade-related disputes before the International Trade Commission and legislation and so on and so forth,

but, in the final analysis, it has come down to sending a message

to the strength of enforcement and through change in statute.

Even in free trade agreements that we have established with

other countries—we do not have one, obviously, with China—the

fact is, we do not require them to meet minimal standards.

China now has been able to escape the ability of meeting certain

standards when it comes to environment, when it comes to minimum wage, the labor exploitation issue that I know that Senator

30

Dorgan raised in his testimony prior to yours, and, of course, currency manipulation.

I guess the real challenge is, what steps do you think we should

take here and now? We can obviously strengthen our enforcement

through statute, but secondly we have the renewal of the trade promotion authority that is set to expire this spring in June.

That is going to be a critical debate that is obviously going to,

I think, be a pivot point on many of these questions, including

China in many ways, because I think we do have to strengthen our

enforcement statutes.

I have joined Senator Rockefeller in his legislation because I do

think we should limit the USTR’s ability in certain instances. I

have been there on behalf of industries in the State of Maine.

There is always a reason why they do not bring a claim for dispute to be resolved, and I think we ought to limit their ability in

certain instances so that industries can bring their petitions before

the International Court of Trade.

But what other steps do you think should be taken that you

think are going to be useful in this process?

Mr. DIMICCO. Well, one that immediately comes to mind when

you mention the free trade authority of the President, any President, it should not be granted unless there is a strong agreement

to enforce the laws, the trade laws that are on the books, the trade

agreements that we have with our trading partners.

If an administration, Democratic or Republican, refuses to apply

the laws of the land or refuses to deal with the issues of the WTO

on a global basis, they should not have free trade promotion authority. So that is the first thing that should happen before any approval is given to this President, or the next President, that they

be held accountable for enforcing the laws that are on the books.

As I have mentioned before, this whole thing of currency manipulation: people underestimate the power of this thing. The Japanese

did it, but China is a thousand times bigger. When they do it, it

has a thousand times the impact. It took a Plaza Accord, with Ronald Reagan and his folks, to get Japan to rescind the manipulation

of their currency.

Ever since then, you have seen a host of Japanese companies

come here and build plants. Automobile manufacturing has not

died. Unfortunately it has died for our domestic producers, but it

has not died overall. Manufacturing jobs can be here, can be competitive if we enforce the laws, enforce the rules and hold people

accountable.

China is a big boy. They understand how to play the game. They

understand how to separate the geopolitical from the business side.

It is we who do not understand that, and we let them get away

with it and embolden them every time we walk away from enforcement of the laws that are on the books, like a 421 or anything else.

Senator SNOWE. Yes. And also that we had failed to bring disputes before the WTO, whether it is on currency manipulation, or

intellectual property rights, or labor exploitation. So there are ways

and means by which we can do it, but we have failed to do so.

Mr. Chu, I know you have engaged in herculean efforts when it

comes to anti-climate change technologies, so I really appreciate

your being here today as well.

31

The administration has said that it will continue the policy of

conducting environmental reviews on its trade agreements, and

yet, as we have seen, even with free trade agreements, those reviews have not occurred.

Frankly, we never require countries to adhere to their own

standards and environmental standards, even to the minimal requirements. So that is really, I think, a vexing challenge that we

face in dealing with free trade agreements.

But when it comes to China, obviously, as Mr. DiMicco said,

using pollution to enhance a competitive position, what would be

the leverage, what would be the incentive to encourage China to

engage in strong environmental standards?

Obviously it could overtake us in greenhouse gas emissions next

year, given the pace at which they are expanding and through their

construction, and also because they are increasing their pollution

exponentially. So how do we engage them in this process? What

would you think would be the best way to do it? What other factors

should we use in order to engage them?

Mr. CHU. The central government, I think, wants to do the right

thing, as I mentioned, but it is when you actually go to enforce it

at the local level, this is where, it seems to me, things break down.

If one goes to Beijing, Beijing’s air is now the deadliest in the world

by some official reckoning.

The people in Beijing, Shanghai, and other areas in China are

really feeling this on a yearly basis. It really is getting perceptively

worse on a yearly basis, and people are going to be dying by the

tens of thousands, or millions.

So there is tremendous pressure on the Chinese government

itself. What breaks down is at the local level, as I mentioned, you

have this gross polluter, and they know a small fine is a part of

doing business, almost.

How do we get people at the local level to—sometimes they do

not even have the capital, quite frankly, to modernize, to put on

controls, to close down a gross polluting plant to put in a much

more modern one.

So I think, as I talk to the Chinese in trying to help themselves,

is it possible—for example, they are seeing a lot of cash. Can they

make low-interest loans to themselves at the local level at the rate

of Treasury notes to say, all right, we will give you the money because you do not have the money to make these investments to

modernize your plants to stop the pollution? And you start with

that and then you go, next, towards CO2 emissions. I do not know

if this is going to have any traction, but any cooperation, let us say,

as mentioned by the Japanese and Chinese in dealing with this,

part of it is a matter of capital at the local level.

Do they have the capital to actually say, we know we have to get

rid of this, and this is a way out? So it is at that level, I think

that—if applying pressure only at the central government is not

going to solve the problem because there is a breakdown as you go

to provincial and local governments—I think that is where we have

to focus our attention.

The CHAIRMAN. Thank you.

Senator SNOWE. Thank you very much.

The CHAIRMAN. I thank the Senator very much.

32

I, regrettably, have to leave and I have lots of questions, and I

do not have time to ask them all. But I am going to try to figure

out a way to do so. I will turn the hearing over, if you do not mind,

to Senator Cantwell, and she can finish up the hearing.

But some of the questions I am going to submit in writing, basically for you, Mr. DiMicco. How can we improve section 421 and

make it work better, and other ways to make our laws work better,

and how to deal with import surges. You already mentioned some

thoughts on that subject, but I would encourage you to take a look

at it.

Mr. DIMICCO. I certainly will.

The CHAIRMAN. And also, for Dr. Chu, with China’s growing energy needs and demands, just if the administration, the Congress,

were to give you a carte blanche and say, Dr. Chu, you develop our

energy policy with respect to China, I would like for you to tell us

what that would be, the top three components of a strategy of encouraging China to make the right decisions on energy use, with

respect to the environment, clearly. What new tools, maybe, do we

need? I might also ask your view in the role of international institutions.

Is there a role there or not that you see? You keep talking about

the mistake we made in this country to focus on the central government as opposed to the provinces, and I would like your thoughts

on what we do about that.

Do we send missions over and go to the provinces? There is a

problem, and we need to figure out some way to deal with it. I am

just curious what your thoughts might be.

I might ask Mr. Sorensen, too, what can we do in the United

States to help China strengthen its financial services industry?

What expertise is needed, where, how? Who can best provide that?

Questions like that. That would be very, very helpful.

In addition, I might ask any of you about what roles these international institutions can better play, whether it is WTO or the

IMF. How do we deal with the stakeholder question?

On the one hand, we want to give China at least the recognition

that it deserves as a large country and encourage them to be a

stakeholder and make responsible decisions. On the other hand, we

cannot roll over and play dead here. We have to encourage China

to be responsible if it is going to be a stakeholder, and your

thoughts on how we can help accomplish that.

I do not have time to sufficiently formulate my question, Dr.

Chu, about China’s energy growth. I think you said last year that

China’s growth is equivalent to two Californias, or something along

those lines, or one U.K., that is, increased demand in Chinese energy consumption.

And your thoughts on what is the significance of that continued

growth in the United States. What are the practical implications of

all that in various ways, climate change, technologies, and so forth?

I would ask all of you, for the record, any other thoughts that

you might have as we advance the ball here. Thank you very, very

much. This has been very, very interesting, and I really appreciate

it.

Senator Cantwell?

33

Senator CANTWELL. Thank you, Mr. Chairman. And thank you

for this opportunity. And if I could thank you before you leave for

also signing a letter that Senator Smith and I are sending to the

administration, asking the President to form a China-U.S. energy

policy as a way for our Nations to work together on energy issues.

I thank the Chairman for signing that letter.

Gentlemen, thank you for your testimony. My perspective on

these issues may be a little different than many of my colleagues’

here. Let us just say that I believe in enforcement of trade agreements. I definitely believe that TAA ought to be on steroids, that

as far as the globalization of an economy, that more trade adjustment assistance should be bolstered many times as just a basic economic strategy for the American workforce to be competitive in

changing dynamics, where we are not going to produce the cheapest products or have the cheapest services.

But the Northwest looks at China a little bit more not just as

a competitor, but as a market opportunity. We sell them airplanes,

we sell them software, and we sell them coffee and many other

products.

So, it came as not a lot of surprise to people, when the President

visited Seattle last year, that our Governor said that we actually

think that we as a State have a positive trade balance with China.

That is not to say that we do not look at them as competition.

We are, I think, a little more interested in the dynamics in a global

economy of ‘‘coopetition,’’ where you figure out where you are going

to compete and you figure out where you are going to cooperate to

secure your economic opportunities, which brings me back to this

U.S.-China energy policy that I feel so strongly about.

Several of you have commented on this issue, both in response

to questions and in your own remarks. That is this. If we are looking at the IEA, the International Energy Agency, estimates of $50

to $70 billion a year is what the Chinese economy is expecting to

keep pace with energy investment, $50 to $70 billion a year, what

do we need to do to be a deliverer of those services, particularly

given, whatever it is, the 13 most polluting cities in the world I

think are in China, and the fact that that pollution does impact us.

So how do we get at this opportunity?

So Mr. Chu or Mr. Bhagwati, to me there always is anxiety and

confusion when you talk about technology. I think you are trying

to articulate that that technology is something that is already

there. We are not talking about technology that the United States

wants to hold onto. You are referring to it as technology that would

actually make the United States money and help us in energy efficiency.

So my question is, is the energy sector not the biggest economic

opportunity for the United States to basically decrease the trade

imbalance that exists with China and the biggest economic opportunity for the United States if we exert our leadership in getting

U.S. technology adopted right now with China?

I will just throw in, I do definitely believe that they ought to be

part of the IEA, the International Energy Agency, so that we can

get better planning and measuring. But Mr. Chu or any of the

other panelists?

34

Mr. CHU. Yes. I think a number of companies, GE and Dow, in

particular, that I know of, do see China as an opening market to

sell their energy technologies. Dow, for example, has in the U.S. reduced its energy consumption per product—it is a chemical company and makes mostly plastics—by about 25 percent.

It has done so well, it sees this as a business. They want to go

to China to show the Chinese how to build plants, factories, plastic

plants that consume far less energy. The Chinese say, this is great,

because if we consume far less energy, looking forward, we have

this huge energy deficit in the country and we are choking on the

coal. So those are two examples where there is a business opportunity that U.S. industry is realizing.

With regard to clean air, we are very good at making scrubbers

and things that actually get, besides CO2, all the gunk out of coalburning plants that should be a business opportunity in China. I

think the issue there is——

Senator CANTWELL. I guess I am asking, how much would an aggressive government strategy help slingshot us ahead of the existing technology relationships that they might be developing with

other countries who either have fuel efficiency on cars, or wind, or

solar, or in our case in the Northwest, hydro? How much do you

think we really could slingshot ahead in securing an economic relationship?

Mr. CHU. I think the way to do it, if I look—and again, I am not

a real expert on this—at what inroads the industry has made, what

China actually seeks are partners. They look to Volkswagen and

say, you come in, you build us a Volkswagen plant in China, and

then we have an arrangement. I think there is going to be this, do

not make it in Germany and ship the cars over.

So I think, with regard to the energy industry, there has to be

a kind of a sharing in order to really get China—they are going to

look for other companies outside the U.S. Do you understand?

Senator CANTWELL. I understand very well. I mean, Boeing has

managed to sell them a lot of planes over the years. And, yes, manufacturing of aerospace has now been sourced around the globe and

final manufacturing still in the Northwest. But I think they sold

a lot more planes than the actual jobs that were created there, so

I think that it was a positive.

Mr. Bhagwati, did you want to comment on this? Do you think

that it is the biggest economic opportunity for the United States?

Mr. BHAGWATI. Oh, I totally agree with you, Senator, on that. I

think I was a bit disappointed in Dr. Chu’s remarks that we had

sort of fallen behind on developing this kind of technology. I mean,

that is clearly an area where any U.S. Government help which can

be provided is useful, because it is clearly an area where we should

have comparative advantage.

I think we really ought to be ahead of the curve. I hope he is

wrong and that we, in fact, can really go ahead and do it. I mean,

for years we have known that you are going to get environmentfriendly technologies being increasingly adopted worldwide.

China is clearly waiting for us to do that. So I think that is an

area where we certainly want to push all our resources into pushing our comparative advantage to go from second gear to fourth

35

gear, whatever you can work out. Clearly, this is a priority area in

my view.

Senator CANTWELL. Thank you.

Mr. Chu, did you want to respond to that?

Mr. CHU. Yes. Actually, unfortunately I will stand by what I said

a minute ago. But I think I see billions of dollars per year now

being invested in the venture capital area in new energy technologies, and so I think a lot of the intellectual property and

things, this should really come from the United States.

I mean, we are still the technology science leader of the world.

But I draw a distinction between being the technology science leader and owning the intellectual property rights.

And by the way, I concur with the sentiment of the Senate. We

have to enforce these piracy actions of China. But what I was talking about was manufacturing of big things, not really high-tech

things like airplanes, but a coal-scrubbing thing is not quite as

high tech. China would say, let us share in that.

Senator CANTWELL. Well, I see my colleague has arrived, and I

want to give him a chance. But I think what I was trying to draw

out from you, Mr. Chu, was your earlier comments about the development of technology.

Everybody gets anxious about the Chinese in a purchase of a

particular energy resource in the United States, but what you are

talking about is technology and patents and efficiency that might

be the standard that might help the United States establish a

standard in China for energy efficiency that would be different

than some other country that might come along.

If we can get that first-mover advantage in helping the Chinese

solve their energy problems, all the more technology that they may

end up buying eventually from the United States.

So, I was trying to draw that comparison so that people understood what the opportunity is with technology that the government

might license to them, as you were referring to, for financial purposes.

Mr. CHU. Yes. I agree with that.

Senator CANTWELL. Thank you.

Senator Schumer?

Senator SCHUMER. Madam Chairwoman, it is a pleasure to be

here under your chairmanship, your first one in the Finance Committee, as I recall. And by the way, thank you for keeping the hearing open.

My first question. I am going to save most of my questions on

currency for tomorrow, because that hearing is on currency, so we

will talk about those tomorrow. I am working, along with Senator

Graham, who will be here tomorrow, and Senator Grassley, and

Senator Baucus, trying to come up with legislation that will deal

with currency.

My first question comes from Professor Bhagwati, who—I do not

know if I am paraphrasing here—who seems to think the Chinese

never do anything wrong. Here are a couple of questions I want to

ask you.

How about allowing American financial services, banks, securities companies, insurance, much greater access? Is access to China

now restricted to those companies?

36

Mr. BHAGWATI. Those are things you negotiate.

Senator SCHUMER. No, no, no. I did not ask you that. I asked

you, is access restricted?

Mr. BHAGWATI. Yes. But we have a whole lot of restrictions ourselves.

Senator SCHUMER. Do you think they are equal?

Mr. BHAGWATI. We have $20 billion worth of trade-distorting

subsidies.

Senator SCHUMER. Do you think——

Mr. BHAGWATI. So does that mean you are not open?

Senator SCHUMER. No, no. Sir, please answer my question.

Mr. BHAGWATI. Senator, of course.

Senator SCHUMER. Do you think that the restrictions that America places on foreign financial institutions are as great as the Chinese restrictions on foreign——

Mr. BHAGWATI. No, of course not.

Senator SCHUMER. All right. Thank you. All right.

Mr. BHAGWATI. And that is where we are stronger, actually.

Senator SCHUMER. Yes. All right.

Do you think that, for instance, it has taken too long for Citibank

to buy Guangdong Bank? It has taken, now, 3 years. It is the Chinese rules. You do not know about that case?

Mr. BHAGWATI. No, no. I do know. I do know.

Senator SCHUMER. Do you think it has taken too long?

Mr. BHAGWATI. I know about the service sector, Senator.

Senator SCHUMER. Do you think it has taken too long? Sir, I go

to upstate New York and I find tens of thousands of industrial

workers who have lost their jobs. Many of them, the head of a steel

company—not Mr. DiMicco’s, which is very prosperous, and I welcome him here and welcome him to open more steel mills in New

York State.

I have been to two of them—said to me, I could compete with

China, I could compete with their lower labor costs, I could compete with everything. But when their currency is under-valued by

30 percent, that is something I cannot compete with, and they laid

off hundreds of workers.

Do you believe the Chinese currency is under-valued? Do you believe it floats to market?

Mr. BHAGWATI. Floats to market is not a correct question to ask.

The question is, what is the optimal——

Senator SCHUMER. Sir, I am asking the question, do you believe

it floats to the market?

Mr. BHAGWATI. Yes, because two of the best macroeconomists in

the world, my colleague Robert Mundell at Columbia, who was a

Nobel laureate——

Senator SCHUMER. Yes.

Mr. BHAGWATI [continuing]. And Ron McKinnon of Stanford, are

way better than any macroeconomists I know. Both think it is correct for China to have a peg with the dollar.

Senator SCHUMER. I did not ask that. See, you do not answer my

questions.

Mr. BHAGWATI. No. But I am saying, yes, I——

Senator SCHUMER. Do they allow it to float to market?

Mr. BHAGWATI. No, they do not.

37

Senator SCHUMER. All right. They do not, right?

Mr. BHAGWATI. Because the best economists in the world say

that they should not be floated. So, I will vote with them.

Senator SCHUMER. All right. Sir——

Mr. BHAGWATI. I will vote with them, just like——

Senator SCHUMER. Sir. Sir. Sir. Sir, all I know is, you do not answer the questions. I did not ask you Mr. Mundell’s opinion as to

whether it is right or wrong. I asked you whether it floated and

you, twice, quoted to me Mr. Mundell and Mr. McKinnon who have

views that agree with yours. There are lots of economists who have

views that disagree with yours.

Mr. BHAGWATI. No. No, no. You have completely—sorry, with due

respect, Mr. Senator——

Senator SCHUMER. Did I ask you, does China allow the currency

to float to market?

Mr. BHAGWATI. And I am telling you why I do not agree with

you——

Senator SCHUMER. That it should.

Mr. BHAGWATI. It should float because——

Senator SCHUMER. But it does not float. Right?

Mr. BHAGWATI. Because, being an economist, I pay attention to

the best economists on the subject. Like, I do not know every subject in full depth. I mean, that is what we teach in our classrooms

to our students

Senator SCHUMER. Yes. The vast majority of economists, including many Nobel prize winners, think they should let it float. All

right? So you can cite two. Yes, they do. Yes, they do.

Mr. BHAGWATI. But, I mean, there are Nobel laureates and Nobel

laureates, Senator.

Senator SCHUMER. Oh, I see. [Laughter.]

Mr. BHAGWATI. And there are people who—I mean, I may be a

Nobel laureate in one area, but I may not know anything about another area. That is often the case, Senator.

Senator SCHUMER. Yes.

Mr. BHAGWATI. So I think all I am saying is, the people who are

most knowledgeable in this field will not agree with you.

Senator SCHUMER. You think it would be better if China reduced

its restrictions on American financial institutions?

Mr. BHAGWATI. Oh, yes, I do agree with that.

Senator SCHUMER. All right.

Mr. BHAGWATI. But for China, too.

Senator SCHUMER. I understand. All right.

Let me go on and ask a second question to Mr. Sorensen. Last

year, I watched the difficulties with Citigroup, that Citigroup faced

while attempting to acquire a stake in Guangdong Bank, and eventually they closed the deal. But China still continues to throw up

barriers.

That is one American bank taking over one Chinese bank. What

are some of the barriers that financial services firms are facing in

trying to do business with China? This is the life blood of New

York.

As you know, I worked hard to open up Japanese financial markets about 20 years ago, and it resulted in greater free trade and

greater transparency, and there were many Bhagwatis out there

38

who said the sky will fall, they should not do it, et cetera, et cetera,

et cetera, and it worked out for the best. So that is sort of my experience. But in any case, can you give us your assessment of how

well China is living up to the commitments it made upon WTO accession more than 5 years ago in terms of financial services?

Mr. SORENSEN. On a scale of 1 to 10—and by the way, Senator,

the Principal Financial Group’s life blood is also financial services

and access to China for us, as I indicated in my testimony.

Senator SCHUMER. Yes.

Mr. SORENSEN. That is also very important.

On a scale of 1 to 10, China is probably, in our opinion, about

a 6. They should be at about an 8 in terms of the financial services

area, which is my expertise.

Senator SCHUMER. Yes.

Mr. SORENSEN. I think the strategic economic dialogue, Senator,

that Hank Paulson is leading is going to be an instrument that is

going to be very valuable for Congress and for the administration

to advance that process.

Senator SCHUMER. Right. All right.

Just one final question to any of the panel. What do you all think

of wage insurance as a way to help temper the blow to people who

are displaced from technological trade change and technological

globalization? What do you think of wage insurance as a possible

answer? Anyone? Mr. DiMicco?

Mr. DIMICCO. Senator, thank you for being here today.

Senator SCHUMER. Thank you.

Mr. DIMICCO. As a matter of first resort, it should not be the solution that we have to these issues. As part of the solution, yes.

When those things happen, there should be a way to deal with

them to cushion that blow. But we are so far away from having a

level playing field, dealing with all the other points such as currency manipulation and export subsidies of all types, that that

would not be the first thing I would like to see people do.

Senator SCHUMER. Right. Understood. Anyone else? [No response.] All right.

Thank you, Madam Chairperson.

Senator CANTWELL. Thank you, Senator Schumer.

And thank you, gentlemen, very much for your testimony. I am

sure the record will be kept open for other questions by members.

If you can get us responses to those, we appreciate it. Again, thank

you for being here.

This hearing is adjourned.

[Whereupon, at 12:06 p.m., the hearing was concluded.]

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