House International Relations Committee Hearing on Reassessing the U.S. Economic Relationship with China

House International Relations Committee
Hearing on Reassessing the U.S. Economic Relationship with China
October 21, 2003

Members Present:   Chairman Henry Hyde (R-IL), Burton (R-IN), Tancredo (R-CO), Smith (R-MI), Green (R-WI), Lantos (RMM,, D-CA), Faleomavaega (D-AS), Sherman (D-CA), Blumenauer (D-OR) and McCollum (DTX).

Witnesses:       The Honorable Grant D. Aldonas, Under Secretary, International Trade Administration, Department of Commerce; Mr. Franklin J. Vargo, Vice President, International Economic Affairs, National Association of Manufacturers; Nicholas R. Lardy, Ph.D., Senior Fellow, Institute for International Economics; Ms. Thea Lee, Chief International Economist Public Policy Department, AFL-CIO; and Mrs. Jonna Bianco, President and Chairwoman, American Bondholders Foundation.

Chairman Hyde said that Chinese imports are expected to surpass $380B this year, making China the third largest importer after the U.S. and Germany.   Some U.S. policymakers, business and labor representatives believe that China’s currency is undervalued when compared with the dollar by as much as 15 to 40 percent, making Chinese exports into this country cheaper and our exports more expensive than they would be if exchange rates were determined by market forces. China’s undervalued currency has contributed to our trade deficit with China from $30B in 1994 to an estimated $130B this year, which has hurt U.S. production and employment in various U.S. manufacturing sectors. Several reports indicate while China has complied with its WTO obligations in lowering tariffs and changing hundreds of laws and government regulations, there has been little progress in implementing WTO commitments in the areas of financial services, agriculture and distribution and trading rights. Some possible remedies include: the APEC ministers should ensure that all members respect and meet their WTO commitments and enhance efforts to conclude a successful DOHA trade round; China needs to take steps to meet its existing commitments as a member of the WTO; the U.S. and China must develop a plan to ensure that market forces more fully dictate the relative value of our currencies; the U.S. Commerce Department’s International Trade Administration with appropriate U.S. and Chinese government agencies should develop an action plan to increase the growth rate of U.S. exports to China, particularly from small and medium-sized companies; and an interagency task force should review all aspects of our trade and commercial relationship with China to ensure that China is taking adequate steps to meet its WTO commitments and other obligations under U.S. trade laws.

Under Secretary Aldonas testified that the U.S. has the strongest, most dynamic manufacturing sector in the world, larger that the economy of China. DOC in coordination with USTR and other agencies, has adopted an aggressive, multi-pronged approach to ensure that China honors its WTO commitments and that U.S. companies benefit by targeting unfair trade practices and exploring the use of new tools to expand our trade promotion activities in China. “Doing Business in China” seminars will take place in cities across the U.S. to address concerns about the Chinese market from small and medium-sized businesses. Secretary Evans will visit China in October to advance U.S. interests and we will raise outstanding issues during the 15th U.S.-China Joint Commission on Commerce and Trade (JCCT) to be held in Washington in early December. In March of 2003, Secretary Evans announced the President’s Manufacturing Initiative and requested a report be made on the issues influencing long-term competitiveness of U.S. manufacturing. The report will be released later this fall. In response to the concerns from manufacturers in addressing the need for a stronger focus within the U.S. government on manufacturing and the most immediate cases of unfair trade, the following is recommended: to create a new Assistant Secretary of Commerce position to serve as an advocate for the manufacturing sector’s competitiveness; to create an Assistant Secretary for Trade Promotion position to boost our exports; and, the establishment of an Unfair Trade Practices Team to track, detect, and confront unfair competition before it injures an industry.

Mr. Vargo said that NAM envisions a program to include: permanent American Trade Centers that will attract Chinese buyers to see U.S. products and technologies; an increase in Commerce Department personnel in China, with a market research program and tailored export promotion assistance to individual firms; a huge increase in export financing to put US on a par with competitors; a several-fold increase in the Market Development Cooperator Program enabling vertical industry associations to promote their industries’ exports; and new uses of the Export Trading Company Act to create China-specific trading companies enabling U.S. companies to penetrate the Chinese market. We need to address the following issues: the high cost of manufacturing in the U.S.; U.S. industry is burdened by legal and regulatory systems that retard growth and destroy jobs; rapidly rising health care costs; uncertainty over sources of energy supply; lack of support for research and development; and shortages of skilled workers. Also, bilateral, regional and WTO trade agreements must be negotiated to get foreign trade barriers eliminated.

Mr. Lardy stated that the growing bilateral trade imbalance between China and the United States now constitutes the largest single bilateral deficit of the United States. The principal cause is not due to China’s exchange rate system or to Chinese protectionist measures but to China’s becoming a leading location for the assembly of a wide range of manufactured goods, most of which previously were assembled elsewhere in Asia. Major parts and components that make up the goods are purchased mainly from other Asian countries and the final goods are sold mostly in North America and Europe. The majority of these goods are assembled by foreign firms that have relocated their assembly activities to China. American and European investment in China is relatively modest and geared mostly to the domestic market, while the investment of Asian firms in China is not only much larger but tends to be directed to sales in North America and Europe. While China is an open economy, it does not absolve it of its need to fully implement its WTO commitments. China’s full compliance with its WTO commitments could be important for some U.S. exporters but it is unlikely that full compliance would have a major impact on the bilateral deficit the U.S. has in its trade with China. The deficit is a function of the structural factors, not protectionism in China. He believes that the Chinese currency is undervalued between 15 to 25 percent and that the currency should be revalued.

Ms. Lee testified that U.S. imports from China continue to outstrip our exports by more than five to one, making this the most imbalanced trade relationship with any major trading partner. The U.S. has lost more than 2.5 million manufacturing jobs since March 2001. Some of the factors contributing to this unfair competitive advantage are: the Chinese government’s manipulation of its currency; violation of international trade rules; and repression of its citizens’ fundamental democratic and human rights. Called for the U.S. government to act urgently to hold the Chinese government accountable. Called for the Chinese government to allow its currency to reflect underlying economic and market forces and cease its accumulation of U.S. dollar reserves. U.S. companies have been able to use anti-dumping measures to secure some limited relief from unfair trade practices by China, but more could be done.

Ms. Bianco spoke about the activities of the American Bondholders Foundation (ABF) representing the consolidated claims of U.S.. citizens who are holders of sovereign bonds issued by the government of China and on which that government has defaulted and continues to evade payment. These bonds were issued between 1912 and 1942 by a global syndicate comprised of international banks and sold to investors in the United States, Japan and Europe. During the Sino-Japanese war and the WW II, the Chinese government ceased payments on the bonds in 1939 and never resumed payment. In July 2003, the ABF proposed dividing the bonds into 5 billion dollar blocks at current value and offered to transfer ownership of these blocks to Iraq to be used as payment towards their debts to the Peoples Republic of China at an 80 percent discount. This proposal has been shared with officials of the Department of Defense and has been met favorably by some members of the Iraqi Council and Cabinet.

Representative Lantos referenced the $120B deficit with China, the U.S. has some leverage and asked at what point DOC would act on the following issues: China’s lack of compliance on international standards; two labor leaders unexpectedly imprisoned; and international property rights. Mr. Aldonas replied that he is very conscious of the issues and the human rights issues are routinely raised, that no issues are more important than individual freedoms and international property laws, and that putting an end to the pirating of software is critical for U.S. manufacturers. Representatives Green, Blumenauer, Tancredo and Sherman raised the following issues: Chinese currency/exchange rate, trade barriers thrown up contrary to WTO, lack of investment in environmental standards, reduction of the balance of trade and the human rights instances.   Representative Burton said that about 3 million jobs have been lost in the U.S. and asked what can be done to protect the American people. Mr. Aldonas replied on the need for tax relief , that exchange rates have to be market driven and that there are reform bills in Congress that address inconsistencies in systems. Representative Faleomavaega made the case that our manufacturing base has problems with rising health costs, lack of R&D funding, and shortage of skilled workers and Mr. Vargo agreed, adding that the China problem will grow but he believes it is still manageable. Ms. Lee added that it is important to keep focused on tax policy, labor costs and trade unions. Representative Faleomavaega said that the trade imbalance is because China has become the “black hole” for manufacturing and Mr. Lardy added that it was part of the underlying reality, China has a relatively low wage level and a highly educated workforce, it is very easy to do business in China.