The Subcommittee will explore the U.S.-China trading relationship, with analysis of the current status of trade between the two nations. The Subcommittee will also discuss the impact of U.S.-China trade on U.S. manufacturers, consumers, and workers.
The Honorable Bernie SandersUnited States SenatorVermont
The Honorable Sherrod BrownUnited States Senator, Ohio
Witness Panel 1
The Honorable David SpoonerAssistant Secretary of Commerce for the International Trade AdministrationU.S. Department of Commerce
Witness Panel 2
Mr. James HoffaGeneral PresidentInternational Brotherhood of TeamstersBEFORE THESUBCOMMITTEE ON INTERSTATE COMMERCE, TRADE, AND TOURISMCOMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATIONTESTIMONY OFJAMES P. HOFFA, GENERAL PRESIDENTINTERNATIONAL BROTHERHOOD OF TEAMSTERSHEARING ONTRADE RELATIONS WITH CHINAJULY 25, 2007 at 2:30253 RUSSELL SENATE OFFICE BUILDINGChairman Dorgan, Ranking Member DeMint, and Members of the Subcommittee, thank you for inviting me to testify today on behalf of the 1.4 million union members of the International Brotherhood of Teamsters on this important issue. Under my leadership at the International Brotherhood of Teamsters, the issue of trade and how it impacts workers, families, and our national security has always been a top priority. Our workers have seen directly the impact that our trade policies, especially with China, have had on them. This hearing is especially timely, not only because I have recently returned from my first trip to China, but also in light of all of the alarming news recently regarding Chinese imports, and the fact that China legislation is expected to be considered soon.Ideally, trade and globalization policies should be used as a tool to advance the priorities of the American people, the worker, and American foreign policy and national security interests. In reality, U.S. trade policies have not achieved this; in fact, our trade policies have achieved the opposite effect in all areas, especially with respect to trade with China.Visit to ChinaMy fact-finding visit to China in May included stops in Hong Kong, Shanghai and Beijing. Our delegation included Teamster Vice Presidents Chuck Mack from Oakland, California and John Coli from Chicago as well as Andy Stern of SEIU, Arturo Rodriguez from the United Farm Workers, Edgar Romney from UNITEHERE, and Anna Burger and Greg Tarpinian from Change to Win. I went because I wanted to learn first-hand about challenges that working people face in China. I wanted to know more about working conditions, pay and benefits, and worker organizations. I know that corporations operating globally are profiting handsomely from expanded operations in China, but what about workers?China is now a global economic powerhouse and I wanted to take a fresh look at what that means for Teamsters. I believe that a constructive China policy can unite workers in the United States, China and around the world, all of whom have an interest in stopping the race to the bottom. Many of us in the labor movement are seeking alternatives to the flawed “free trade vs. protectionism” debate seeking new ideas about how the U.S. should respond to globalization.We met with the All China Federation of Trade Unions – ACFTU, the only legally sanctioned trade union body in China. We also met with union leaders and academics that are critical of that union and of the current government. We met with advocacy organizations that are documenting the poor working conditions of millions of Chinese workers in the special economic zones that are set up on China’s east coast. We met with Teamster employers with subsidiaries in China, and with the American Chamber of Commerce in Beijing. We visited key infrastructure facilities including Shanghai’s new deep water port and air hub distribution facilities.We were only there for ten days so by no means do I claim to be any sort of expert, but I came away from the trip with some very clear impressions.My clearest impression is that economic growth is the top priority for the Chinese government.We visited the Yangshan Deepwater Port and Container Terminal. A twenty-mile causeway from Shanghai leads to the port which was inaugurated in 2005 and is now by some measures the second largest port in the world. The Port management and union welcomed us by advising that they had set a world production record the prior evening in our honor. Our questions about what happened to the residents of the fishing village that formerly occupied the island were simply not understood. Any rights of those residents meant nothing in the push for economic growth.We were briefed on large-scale highway projects, bridges, tunnels, electric generation plants, dams, and railways. Parts of Beijing seemed like one big construction project as hotels and sports complexes were being erected in preparation for the 2008 Olympics. But when we asked about the residents whose homes and livelihoods were displaced by these projects we were given vague, unconvincing answers about new housing projects.I had an image of folks all wearing the same design and color clothes and riding bicycles. This was not the reality in the cities I visited. I sat in heavy traffic with lots of late model cars. There are clearly a number of Chinese benefiting from the growth in trade. My impression was that while immigrants from the countryside to large cities and manufacturing areas along the east coast of China were living somewhat better than they did on the farm, Chinese workers linked to the globalized export economy are not getting their fair share of the wealth being generated.While we met with some workers whose wages and benefits were steadily improving, we also spoke to workers earning well below the minimum wage while working sixty and more hours a week with no holidays or vacations; all violations of local labor laws. The health care and pension systems do not afford basic benefits to the vast majority of workers and make it very difficult for workers to plan for the future.China will overtake Germany as the world’s third largest economy by the end of this year, this growth was a great source of pride for the government and union officials we met. We challenged our Chinese union counterparts to seek improvements in the wages and benefits for their members so prosperity is shared and growth can be sustained.China is currently not building a middle class capable of sustaining economic growth through a domestic consumer market. China is setting the global norm for working standards around the world; my conclusion is that those standards are much too low for workers in the U.S. and workers in China. We plan to work with all of the worker advocates we met to improve those standards.We learned about very weak enforcement of laws and regulations and that corruption in business and government are rampant and getting worse. These conditions make it even harder for workers to organize and demand their fair share in economic development.Labor Law Reforms in ChinaChina’s repression of labor rights has suppressed wages, thus subsidizing its exports and making them artificially cheap. This Administration has consistently failed to raise the issue of workers’ rights violations in China. Worker’s rights is just as much an economic issue as currency manipulation or illegal subsidies. This was also an area that we were supposed to see drastic improvement according to PNTR supporters—workers rights and human rights would be improved with China’s accession to the WTO. Unfortunately, this has not been the case. In fact, increased trade and investment have only promoted the continuation of workers’ rights violations, and rising worker unrest.In China, we had extensive discussions regarding the recently approved reforms to the Contract Labor Law. These modest reforms were proposed to address the widespread exploitation of workers who are often cheated out of wages due them. The reforms are intended to enforce employment contracts, protect temporary workers, limit employer rights to fire at will, enhance severance pay and require transparent workplace rules.I was extremely disappointed to learn that US companies actively opposed these modest changes. All of the corporate talk about raising standards through investing in China is hollow rhetoric. Instead of using their influence as a force for democracy and social justice, U.S. companies are pursuing the low road. There was a time when U.S. multinational companies joined with the labor movement to actively oppose apartheid in South Africa and under military dictatorships in Latin America. Worker organizing and unions were encouraged at their facilities, unions were considered to be incubators for building democracy.And now there is a need, a movement to make drastic changes in China’s contract labor laws and yet US multinational corporations have resisted these reforms and have even been successful in weakening the modest reforms. Some have even threatened to move to Vietnam, another country that Congress recently granted PNTR status. Global Labor Strategies has an excellent report on this issue titled “Undue Influence: Corporations Gain Ground in Battle over China’s New Labor Law”. I urge Senators to read the report.An important action that Congress can immediately take to remove any incentive a country, including China, may have to manufacture and import goods made under terrible working conditions, is to pass S. 367, the Decent Working Conditions and Fair Competition Act, introduced by Senator Dorgan. This legislation bans the importation or sale of products made in factories under sweatshop conditions. Such “sweatshop conditions” include gross violations of the wages, hours, health and safety laws of the country where the labor is performed.Also, we must demand that any future Administration accepts a Section 301 petition on labor rights in China. If China does not comply with basic internationally recognized worker’s rights, the U.S. should pursue remedies against China. It is as simple as that, however this Administration refuses to act.Current U.S. Trade Policies with China Hurts U.S. WorkersWhile China’s need for legal reform has hurt U.S. jobs, that is only a piece of the challenges we face with respect to trade with China and trade overall. Our nation’s flawed trade policies contribute to the anxiety and uncertainty many Americans feel about their jobs, their future, and even their children’s future.The public has lost confidence in our trade policies. U.S. trade policies lately seem to be more about the number of trade agreements signed rather than the results they achieve.Sound trade policy means job creation and strong communities. It impacts whether or not we have an industrial base that can supply the materials needed to defend our nation or whether we need to depend on other countries to do so for us; it impacts whether our communities have a good public school for our children or one that is struggling and in desperate need of basic resources because the town’s factory has shut down and moved offshore to China taking with it the community’s tax base; it impacts whether the future jobs of this country will be technology based or burger flipping based.Mostly as a result of our trade policies, especially with China, we have lost more than 3 million manufacturing jobs since 2000. One in six manufacturing jobs has disappeared. This poses a serious threat, not just to the many families and communities who have been crushed as a result of this loss, but also our research and development capacity as a country. We are losing our capability to supply our military troops with uniforms, ammunition, and other essential items. If this trend continues, we will be completely dependent on other countries to provide everything to us. Our manufacturing loss is, in fact, a matter of national security. We are seeing first hand the limitations that our energy dependence has created with respect to our foreign policy and national security -- we should not continue to follow down the same path of dependence and depend on China and others to supply us with all of our defense, food, and manufacturing needs.In 2000 when China PNTR passed, I said it then and I say it now--- China PNTR has nothing to do with access for our U.S. businesses to sell goods to China, and everything to do with moving U.S. companies and jobs out of the U.S. and into China in order to take advantage of workers in China and lax labor laws in China. It has always been about investment there, no matter what the consequences brought upon our workers. The crisis we face now is what I and the Chairman knew would occur back in 2000 during the China PNTR debate.Almost 60 percent of China’s exports come out of foreign-invested firms, not Chinese firms. And yet we have laws on the books that provide tax preferences for companies to move offshore. These preferences must be eliminated.China’s entry into the WTO was touted as a mechanism to bring it into compliance with an enforceable, rules-based regime, which would require that it open its markets to imports from the U.S. and other nations. However the WTO and China’s entrance to the WTO failed to include the necessary protections to improve or even maintain labor or environmental standards, which have resulted in an unfair playing field favoring large multinationals against domestic workers. Proponents of China’s entry into the WTO, just like proponents of every Free Trade Agreement from CAFTA to the pending Peru and Panama FTAs have claimed that it would create jobs in the Unites States, increase U.S. exports, and improve the trade deficit with China. We have seen only the opposite occur. In fact, we have seen the global race-to-the-bottom accelerate forcing the closure of thousands of U.S. factories, and the decimation of our manufacturing base in the U.S.The U.S. trade deficit with China has increased from $50 billion in 1997 to $235 billion in 2006, an increase of $185 billion. Between 1997 and 2001, before China’s entry into the WTO, the deficit increased $9 billion per year on average. Between 2001 and 2006, after China entered the WTO, the deficit increased $38 billion per year on average.According to the Economic Policy Institute, growth in trade deficits with China has reduced demand for goods produced in every region of the United States and has led to job displacement. The dramatic increase in the trade deficit with China between 1997 and 2006 has displaced production that could have supported 2,166,000 U.S. jobs. More than 1.8 million of these jobs have been lost since China entered the WTO in 2001.The U.S. Must Enforce and Strengthen Our Trade LawsThe problem we have with China is not only that we have a one-way trade relationship, but also there is a disregard of the rule of law and international commitments that have been made, and a lack of enforcement on our part, all of which have been devastating to workers.China provides significant subsidies to its companies to give them an advantage over all competitors which prevents our businesses from selling their products to China and floods our markets with their products. The U.S. government must use existing trade enforcement rules aggressively and apply the remedies. We have failed to do this.When China entered the WTO it agreed to conditions, but it has consistently refused to grant access to its markets that we provide to it, and has done so in a way that one would call cheating. But the U.S. government is also guilty because it has allowed the cheating to occur by never utilizing the legal actions we have available to address illegal subsidies, dumping, dangerous imports, and currency manipulation.The U.S. government should be bringing more cases to address China’s refusal to fully and faithfully implement its WTO commitments. Also, before any additional preferences are given to China or any other country in future WTO or Doha negotiations, countries must live up to and implement their existing promises.
China CurrencyForeign ownership of U.S. debt has reached more than $3 trillion, a dangerous level that is another potential threat to our national security. China alone holds $353.6 billion of U.S. Treasury securities. Conceivably, it could cash out anytime and leave us in a financial crisis. Unfortunately, some have used this as a reason to not enforce existing trade laws, specifically China’s undervaluing of its currency. Our indebtedness to China should not delay efforts to offset trade imbalances aggravated by exchange-rate misalignment of the undervalued yuan. This enables Chinese exporters to gain up to a 40 percent price advantage over their competitors in the U.S. domestic industry. In essence, China’s undervalued yuan is effectively a 40 percent tax on all U.S. agriculture and manufacturing exports and a 40% subsidy for china’s exports to our market.The reason for inaction is not that we do not have rules in place. We do have statutory and regulatory authority to address this problem. The World Trade Organization (WTO) and the International Monetary Fund (IMF) also have the rules in place to prevent countries from gaining an unfair advantage through exchange rate action. Yet our own government is not willing to implement the necessary provisions of the law to protect our workers and our manufacturing sector because they do not want to offend or upset China. This Administration has yet to even identify China’s currency manipulation as a problem.The President rejected recommendations from the U.S. International Trade Commission (USITC) under Section 421 of the Trade Act to grant import relief to U.S. industries facing market disruption from Chinese imports. As you are well aware, Section 421 of the Trade Act of 1974 was added to US trade law during the China PNTR debate in order to ensure protection to US industries in the case of surging imports. Specifically, Section 421 allows US domestic industries to obtain relief should an investigation by the USITC finds that Chinese products are imported into the US in such increased quantities as to cause a market disruption.Recently, the Administration has rejected for the third time since 2003 a Section 301 petition by lawmakers demanding action by the Administration against China for subsidizing its exports by keeping its currency exchange rate artificially low which is in violation of international trade laws. As you are well aware, Section 301 of the Trade Act of 1974 allows the Office of the U.S. Trade Representative to initiate investigations of other countries' trade practices and impose sanctions for discriminatory behavior.The USTR and the Department of Treasury continue to tell us that instead of acting to address China’s currency manipulation, diplomacy mechanisms need to be used to address this concern. Diplomacy has obviously not worked. Congressional action is needed in order to ensure that change occurs.The Teamsters are a member of the China Currency Coalition. We believe that it is imperative that Congress pass the Stabenow-Bunning-Bayh-Snowe bill, S. 796, and its counterpart in the House, the Ryan-Hunter bill, H.R. 782. These bills recognize that undervalued exchange-rate misalignment by China or any other country is a countervailable prohibited export subsidy under U.S. and international law, and ensures that finally action will be taken. The bill does the following:
- Recognizes currency manipulation as a government subsidy and allows a U.S. industry to use the anti-subsidy (counterveiling duty) law to seek relief from the injury caused by imports that benefit from a subsidy in the form of foreign exchange-rate misalignment. This is important because an undervalued currency allows foreign producers to price their products more cheaply than would be the case if the currency were properly valued. This applies equally to any country, whether a market or non-market economy, whose exchange-rate is found to be unfairly aligned.
- Clarifies that China’s exchange-rate misalignment is a condition to be considered under Section 421 of the Trade Act of 1974. This holds China accountable to its market-disruption agreements made as a condition to its accession into the WTO in 2001.
- Protects our national security and defense industrial base by prohibiting the Department of Defense procurement of Chinese imports that compete with our domestic defense industrial base if China’s currency misalignment is determined to be contributing to the disruption of the U.S. industry that manufactures those products.
- Requires the Secretary of the Treasury to analyze semi-annually whether there is a fundamental misalignment or exchange-rate manipulation by any trading partner, and bars the Administration from supporting increased voting rights in international financial institution such as the IMF for such violators.
I understand that the House Ways and Means Committee plans to introduce legislation and act on this issue in September. It should be the Ryan-Hunter bill or at the minimum consist of all of the essential provisions I have just listed. I am also pleased at the willingness of both the Senate Banking and Senate Finance Committees to each act on a currency bill. While both the Senate Finance and Senate Banking bills are not perfect, they take a step in the right direction to ensure action on currency manipulation bilaterally, at the IMF, and the World Bank. However, we need to ensure that the President cannot just avoid taking action on currency manipulation by creating loopholes that could potentially leave us in the same bind we are in now, where the Administration just does not act which is a potential problem in the Baucus-Grassley bill. Also, both bills at the moment do not recognize currency manipulation as a countervailing duty or subsidy which is important in addition to using an anti-dumping remedy.I am pleased to see that action on currency is imminent. It is critical that whatever passes and finally becomes law is strong, real, and not an attempt to placate our concerns or put a temporary meaningless band aid on a gaping wound---there is just too much at stake. Ensuring that this issue is finally acted upon can make the difference between having one’s job disappear to China; the difference of having health insurance provided for one’s family, and quite frankly about having an economically stable middle class.
- Strengthens the definition of misalignment in order to make it tougher for the Treasury to avoid giving that label to China’s actions. This is critical in light of the fact that the Treasury Department recently admitted that there exists 'heavy foreign exchange market intervention by China's central bank to manage the currency.' Yet Treasury still refuses to officially identify China as a currency manipulator, despite this evidence that the Chinese government is continuing to undervalue its exchange rate against the U.S. dollar. They fail to call it as they see it and this provision ensures that this will no longer be the case.
Food and Product Import CrisisFood imports constitute a growing share of what Americans eat and what we see on the shelves of our grocery stores. I care about this issue as a consumer, and as a President of a union that has food processing workers and farmworkers.Food imports are more than four times greater today than what they were in 1996. Our Food and Drug Administration inspects less than 1 percent of imports. That means that 99 percent of our imports are entering our nation unmonitored. This is especially troublesome when the bottom-line is put ahead of safety.Senators on the Committee have heard the stories.* Family pets have died from pet food containing wheat gluten that contained melamine.* Concentrations of Carbon Monoxide are found in seafood imports coming in from Asia. Carbon Monoxide treatment makes seafood appear fresh, regardless of its condition. Residues of antibiotics have also been found in seafood imports from China. For now, the Food and Drug Administration has acted and banned the imports of shrimp, catfish, and other seafood from China.* Poisoned toothpaste from China, laced with diethylene glycol which is a chemical most often found in antifreeze and was substituted for the more expensive ingredient glycerin, has been imported into the U.S. I find it especially troublesome that China has stated that in small doses diethylene glycol is harmless, especially in light of the fact that cough syrup laced with diethylene glycol from China killed 100 people in Panama last year.* And its not just hazardous food and toothpaste being imported--Thomas the Tank engines made in China have been recalled for using lead paint.* As many as one million defective Chinese tires were sold in the U.S.China has taken extreme and shocking action recently by executing its former head of its Food and Drug agency, Zheng Xiaoyu, as a response to this crisis. This is by no means consoling or the end to our troubles.It is up to us to take responsibility and act thoroughly and quickly. The United States government has not done enough to keep dangerous Chinese products out of the U.S.Products manufactured in China have so far accounted for more than 60 percent of the Federal Consumer Product Safety Commission’s 178 recalls so far in 2007. Congress needs to pass legislation by Senator Brown and Senator Durbin that gives the FDA the authority to approve or disapprove of countries eligible to import into the U.S.We need to re-examine and make changes to our country-of-origin rules. For example, the Netherlands is the principal source of wheat gluten imports, but most of it initially comes in from China—actually over 80 percent of wheat gluten in the world comes from China. The bags of wheat gluten can simply state that the supplier was in Amsterdam-Holland for example. Since food processors are not required to inform consumers of the origin of its ingredients, it is especially difficult for Americans to know where exactly the ingredients were produced and to seek damages from companies that sell products whose ingredients have harmed. And in cases where they do, the protections are not in place to ensure consumer safety. This brings me back to the tire case. When the National Highway Traffic Safety Administration told the importer of defective tires that they must recall the tires, the company declared bankruptcy. When U.S. distributors rely on cheap imports to then sell back to U.S. consumers, they should be bonded to ensure that there our U.S. consumers are protected.We need more comprehensive food and ingredient labeling on products. Furthermore, the final purchasers of pet foods, meat, fish, and all consumer goods quite frankly, should be provided with the correct source of the goods. The FDA should implement new rules that require all food, vitamins, and other consumer products to list out the origin of all ingredients that come from outside the United States.I was pleased to see that late last week the 2002 law requiring country-of-origin labeling for meat might finally be implemented. Animals born, raised, and slaughtered in the United States will be labeled “Product of the U.S.” The 2002 Farm bill also requires country-of-origin- labeling for fresh fruits and vegetables—hopefully this too will finally become a reality.Only a minimal fraction of the 25,000 daily food shipments are ever tested by a government laboratory. We need to ensure that shipments of food and consumer products and ingredients are more readily tested, which is currently not the case.The U.S. government has a responsibility to its people to ensure that the safety and health of its families are not threatened by contaminated and sub-standard bad food and product imports. The U.S. government has a responsibility that China’s development does not come at the expense of America’s domestic workforce, and national security. I hope to see immediate action taken to reflect this.ConclusionWhile the Chinese government may disagree, I believe that our current trade relationship with China is not just bad for the U.S. and our workers, but also bad for China. China has become dependent on the U.S. consumer market for employment, has suppressed the purchasing power of its own middle class with a weak currency, and have held hundreds of billions of hard-currency reserves in low yielding, risky assets, instead of investing them in public goods.Unfortunately, the reality is that many of the U.S. jobs that have been lost are not coming back. But addressing all of the concerns that I have discussed and implementing actual reforms in China could help create new jobs in the U.S.It is not that the Teamsters Union or the American people are against trade, its that the our major trading partners are not abiding by the rules of trade, and we are not requiring them to either. Once we finally see the field leveled, the right rules in place and enforced, and actual good-paying jobs created, that will be a win-win for U.S. workers and families. You can be guaranteed that the American people will support expanded trade, but until this happens you will continue to sense the unease that currently exists and the strong opposition that we put forth when more FTAs are passed.Congress must take bold steps and big initiatives to address this current globalization crisis. Mr. Chairman, the title of your book comes to mind with what our current trade policies are about—“Take this job and Ship it—How Corporate Greed and Brain-Dead Politics Are Selling Out America.” U.S. families can no longer afford to continue down this path of “Shipping jobs” and “Brain Dead Politics.” We can no longer allow our trade deficit with China to continue to skyrocket; we can no longer allow rules to be broken, or fool ourselves that our current trade policies will create jobs here at home when they are just about investing abroad. Congress is actually set to pass two more Free Trade Agreements with Peru and Panama using more or less the same model that has been used. Yes, the labor chapter is improved and that is a great and significant step, but that will not ensure the creation of U.S. jobs, and certainly will not stem the loss of them.It is China’s right as a nation to develop and gain economically, but it is our right and duty as a nation to ensure that if we are to continue to have expanded trade with China to the extent that we do, we must enforce our trade laws and implement new rules and protections necessary for our own economic development. We need to demand access to their markets because so far, it is just one-way trade. I like the Chinese and wish them well, but I love and fight for U.S. workers and it is time that this Administration and all of us in this room take control of our globalization policies to ensure that our workers benefit and our families are kept safe.Thank you again for the opportunity to testify. I look forward to your questions and comments.
Mr. Brian O’ShaughnessyChairman, Chief Executive Officer, and PresidentRevere Copper Products, Inc.Written Testimonyof M. Brian O’Shaughnessy, Chairman, CEO & President, Revere Copper Products, Inc.a Witnesson behalf of Revere before the Senate Subcommittee on Interstate Commerce Trade and TourismJuly 25, 2007Who should America listen to for trade and tax policy?Three million manufacturing jobs have been lost in the USA since the year 2000.Some attribute it to increased productivity - but previous recoveries typically resulted in a loss of about one million jobs in spite of productivity increases. Even so, some economists cite data that the manufacturing sector is doing just fine as it is producing more than ever before. Such data is misleading and you should consider the source. For example, US produced products include Dell computers which are assembled in the USA from components produced abroad. Foreign outsourcing has a significant impact on productivity and renders the data on productivity useless. Indeed, an article in Business Week describes the “Phantom GDP” and states “the growth of domestic manufacturing (and productivity) has been substantially overstated in recent years.” This is directly linked by Business Week to foreign outsourcing.We could argue endlessly about this but the facts are the facts and the fact is we have become a nation with a colossal trade deficit.In 2005, for the first time in over a hundred years, our nation imported more food products than it exported and our trade deficit in manufactured goods continues to soar. Indeed, our nation’s trade deficit is growing by $2 billion a day! Some think it is our country’s responsibility to support fledgling economies because we are the strongest, most powerful nation in the world. Some say we need to set a good example and others will follow.No matter how we try to rationalize it, millions of manufacturing jobs are going overseas.My company is Revere Copper Products. We were founded in 1801 by Paul Revere and believe we are the oldest manufacturing company in the USA. Our modern copper rolling mill is in Rome, New York and produces copper and brass sheet, strip and coil. Many of our customers are located throughout the USA and use our products to manufacture industrial or consumer products.Since 2000, about 30% of the manufacturing facilities that were customers of this mill have shut down or moved offshore. It is easy to see for yourself if you simply go to any big box store and look at any item made of copper and brass. Turn the package over and you will likely see that the product is now made in China. That’s because the cost of manufacturing in China is so much cheaper, you believe. At least, that is what you have been told…Once you start looking at the facts, however, you will see a very different picture.Let’s say the production cost of a brass doorknob in China is 100 yuan. You can see in exhibit 1 that if the exchange rate for converting yuan to dollars is controlled by the government of China at 8 yuan to $1, then the production cost is equivalent to $12.50. But if the exchange rate was allowed to be set by free market forces, it would be about 5 yuan to $1 and the production cost in China would be equivalent to $20. So a company that produces that doorknob for $18 in the USA is going to get driven out of the market and that factory in the USA is going to shut down or move to China. Conversely, if the yuan were to have an exchange rate based on market forces, U.S. companies would be competitive.In other words, the government of China manipulates its currency so that it subsidizes the cost of manufacturing in China.The current and the former US administration have refused to take any concrete actions against such manipulation by China and have chosen instead to jawbone. The problem with this approachPage 2is that currency manipulation by the Chinese Government is serving China’s strategic best interests at the expense of U.S. manufacturing and employment..The manipulation of its currency reduces the competitiveness of every other product, good and service in the world when compared to its production in China.This form of protectionism by China is reaping huge rewards as its export-based economy is growing 3 or 4 times faster than the rest of the world with factories being built at a pace beyond the imagination of anyone just a few years ago. Meanwhile, factory jobs are disappearing in the USA and throughout the rest of the world. Even manufacturing plants in Mexico are moving to China.But this is more than an economic battle.Did you catch the statement by Congressman Tim Ryan of Ohio concerning the strategic paper (“Unrestricted Warfare”) written by two Chinese military strategists? They suggested that military supremacy could be gained by undermining the manufacturing base of the United States by maintaining its currency at artificially low levels to gain an economic advantage for Chinese manufacturing and destroying the manufacturing base of the United States. Seems to be working, doesn’t it?The importance of a strong domestic manufacturing base to national security and national defense cannot be overstated.Shortly after the Revolutionary War, the US government became concerned about the ability of the United States to respond to a second war with the British. Many scoffed at such a thought but were sadly mistaken when the War of 1812 erupted. Fortunately our forefathers had foresight. They knew that the USS Constitution would need copper sheathing to prevent barnacles from growing on its sides. Barnacles slow down ships and lead to time consuming maintenance on shore. So Paul Revere was offered a $10,000 US Government loan to build a copper rolling mill. The loan was paid back when Paul Revere built the first copper rolling mill in the New World and rolled the copper sheets that were used to sheath the USS Constitution which prepared it for the war of 1812.Personally, I admire the Chinese culture and believe that China does not need such a disruptive currency policy to compete in the world given its many other advantages. The Chinese economic policy is export driven by taxing its citizens through currency manipulation which takes away their disposable income. A market driven currency exchange rate policy would drive China’s economy toward domestic consumption and a better life for its citizens.But make no mistake about it, China is waging a mercantile war on the world and the world is sleeping.Why is the world sleeping? First, we must look at the role of the multinationals. Remember in the 1980s when Japan was such a fierce competitor in so many US markets? The reaction by our largest corporations was loud and largely one voice calling for tariffs and restraints. Contrast that with today as most of the largest US corporations are so much more international and especially with their investments in China. Many that do not have direct investments in China buy substantial numbers of components from China’s factories. Many have set their strategic plans to produce components or products in China.Page 3Today, many of the largest investment banking firms in the world are headquartered on Wall Street but derive half or more of their income from foreign sources. This ranges from managing the reinvestment of US dollars flowing overseas to the construction of manufacturing facilities in China. Unquestionably, they have become beholden to the government of China.It may surprise you to learn that I don’t have a problem with any company that sets up or finances a plant offshore or imports components or products. But if manufacturing in America must compete with the protectionist policies of any foreign government…that is not fair. And if meaningful corrective action by the US government is thwarted by US manufacturing and investment banking firms who gain from such protectionism…that is wrong. CEOs of multinational companies are put in a very difficult position when considering national trade policies.They have to choose between their company and their country. (See exhibit 2)So who should America listen to for advice on tax and trade policy? (See Exhibit 3.) Obviously, none of the above… Let me explain. Earlier I mentioned that China practices a policy of managing its currency at artificially low levels to gain a 40% competitive advantage for any export products or services produced in China. Now, you must realize a simple truth, a multinational corporation that manufactures in China and benefits significantly from this advantage doesn’t want this to change.At a 2006 meeting of an international economic policy committee of an association of manufacturing companies, one domestic manufacturing company said that it buys components from China and does not want the currency to change. Now there’s a breath of honesty. Maybe not patriotic but at least he’s honest.Patriotic…why bring that word into the mix? Well, you see the strength of manufacturing is an inherent strength of our country. Some economists believe our country is in a transition from a manufacturing economy to a service economy just as it transitioned from an agricultural economy to a manufacturing economy years ago. But maybe the manufacturing economy was simply layered on top of our agricultural economy just as the service economy is layered on the manufacturing economy. And it is certainly hard to argue against the proposition that a weak manufacturing sector threatens our national security.Sounds like our nation needs some advice from the real world.The measures that have not worked are jawboning the Chinese to change…you know, throwing adjectives and words at them ‘til they stop. The multinationals have endless arguments for stretching out the process like…. “We don’t want to start a trade war now, do we?” But we are already in a trade war, aren’t we? Of course we are and we are losing. We are pacifists in this war. How about this one by the multinationals…your policies are protectionist! Yes, they actually say that, can you imagine? Blame the victim is frequently their approach. Often the accuser benefits from China’s export subsidies which are clearly prohibited by the WTO as protectionist.The irony is that domestic manufacturing companies are the victims of protectionism not the benefactors.Page 4Another argument we hear is, “What about their fragile banking system?” This one has been around for years and of course, it is impossible to improve a banking system that depends on subsidies to such an extent without removing the subsidy, isn’t it? Besides, their banks are ownedby the same government that is holding almost a trillion US dollars. Maybe their banks are not quite as insolvent as you have been lead to believe…China’s GNP has been growing about 10% a year since it established a new system to manage its currency about two years ago while the US economy has been growing about 3%. This alone should have translated into an appreciation of the yuan against the dollar of at least 5% a year.Since this change, however, the government of China has allowed its yuan to appreciate only about 4% a year, thereby exacerbating the problem.So, China has successfully continued to stonewall any real movement of its currency thanks, in part, to the support of some prominent multinationals and investment bankers.That support is manifested in US trade policy which is oriented to process rather than results. Multinationals and investment bankers are usually results oriented but not when it comes to China’s currency manipulation. But then again, the delaying tactics are good results because this form of protectionism by China suits them just fine. At any rate, they are certainly beholden to the government of China. So their policy positions are in alignment with the policy of China.There is no easy solution to this Chinese puzzle. Even I have supported the verbal approach…for years. Our nation could simply slap a tariff on all imports from China but I think we must take measured concrete steps with each one increasing in severity. The final step would be a tariff scheduled well in advance to force China to end its currency manipulation.It is important to understand that the end of currency manipulation will not end the depreciation of the US dollar against other currencies including China’s yuan.For this reason, it is difficult and perhaps impossible to develop a coherent trade policy to deal with China and the rest of the world without considering the tax policies of our own country. In addition to manipulating its currency, China and 138 other countries use Value Added Taxes (VATs). VATs discriminate in favor of domestic production of goods and services. (See exhibit 4) The USA is the only major trading nation which does not use VATs to protect its domestic production of goods and services. (See exhibit 5) VATs are a tax but they are also a form of tariffs which are legally exempt from WTO rules. VAT revenues are used to lower taxes on jobs and help fund government programs such as national health care.How can a manufacturing facility in the USA compete with a similar facility in China or any other country if the US facility must carry the burden of the health care cost of its workers and its foreign competitor does not?One of Revere’s largest remaining customers recently presented Revere with a cost comparison of sourcing centrifugal chillers from China versus the USA. Revere supplies copper strip for these chillers. Exhibit 6 shows how the costs would compare without the protectionist currency manipulation by China. Note that the total costs are about the same for both countries and indeed, if freight costs were added, the delivered cost to the USA of the chiller produced in China would be higher than the chiller produced in the USA. In exhibit 7, the cost of the product from China is adjusted to reflect currency manipulation by China of 40%. As you can see in exhibit 8, products from China also benefit from a 17% Chinese Government Value Added Tax or VAT rebate on export to the USA. This results in a price war that American factories cannot win.Page 5Of course, if the US producer shipped any product to China, it would be hit with a 17% VAT on entry to China. China will use revenues from that VAT tax to fund weapons systems andprovide health care benefits for its people. Just think about it, the US factory worker produces a product that must bear the health care cost of the US worker and the Chinese worker he competes against in order to export. Of course, some will argue that the American worker or management is to blame because the product made in the USA just can’t compete because we are so inefficient.Market determined exchange rates simply put all nations back at the starting gate for the race to determine who will win the battle to produce competitive goods and services assuming all other things are equal. Of course, all other things are not equal and because of this our nation’s inability to compete with China and the rest of the world simply means that our currency will continue to depreciate and the standard of living of all Americans will decline and our nation will grow weaker.The loss of manufacturing jobs to date in the USA is only the tip of the iceberg. The impact of currency manipulation, VAT taxes and health care costs are not limited to manufactured goods.Future losses will go far beyond the continued loss of manufacturing jobs and extend to the agriculture, food processing and service industries. Indeed, Alan Blinder, former Federal Reserve Vice Chairman, was quoted in the Wall Street Journal on March 28th saying that, “…as many as 40 million American jobs (are) at risk of being shipped out of the country in the next decade or two. ”So, the looming question is, “What should be done to counter this offensive and protective behavior by China and other nations?”The first step in the battle to offset currency manipulation should be to pass the Stabenow Bunning Bayh bill in the Senate and Ryan Hunter bill in the House that would define currency manipulation as an illegal subsidy and allow the application of Countervailing Duties (CVDs) to offset the impact of the currency manipulation for companies that are being injured.. In addition, the remedies should not be contingent on Treasury Department approval. This is the same Treasury Department that does such a good job of representing its friends on Wall Street by consistently failing to cite China for manipulating its currency. Please lead Congress to represent Main Street not Wall Street and factory workers in the USA not China.These bills are designed to be compliant with the rules of the WTO. That being said, if the WTO refuses for any reason to sanction the use of CVDs to offset currency manipulation, we must assume that the system that governs world trade is broken and must be fixed. Immediately! If the use of CVDs to offset currency manipulation does not lead China and other nations to stop manipulating their currency, then the USA must take increasingly stronger measures, even if it means stepping outside WTO rules.At the same time, the USA must reform its tax system and institute VATs on a scale that gives production of goods and services in the USA a competitive advantage.If you are competing with somebody else, you just don’t look at where they are. You try to figure out how to get ahead of them. That’s pretty simple, but that is how you develop a winning strategy.So the competitive objective should be to beat the competition, not simply match them.Page 6In order to achieve this objective, the USA should eliminate all national taxes, both corporate and personal, including income, dividend, capital gain, estate, FICA and unemployment taxes aswell as lifting the burden of health care costs off employers who provide jobs. (See exhibit 9) A new national VAT system would replace these costs.Notice these items are referred to as costs not revenues because one must look at them as a burden on jobs.The new system should be designed to be revenue neutral for all classes. Adverse impacts on charitable and lending institutions need to be considered by matching charitable grants and providing housing subsidies which would help offset the regressive VAT system and make it fair.The regressive nature of a VAT system would be further offset by the provision of a national health care system funded by a VAT for the USA.This step is critical to the health of manufacturing in the USA.A national health care system similar to that employed by Great Britain has features that would appeal to Americans. It provides universal health care for all but allows any citizen to opt out to private care as long as they are willing to pay the cost. I am not aware of the citizens of any nation that are considering having their country adopt the system used in the USA which eats up twice as much GNP per capita and burdens the domestic production of goods and services to such an extent.The lack of a VAT system in the USA allows European nations to gain market share from the USA partially offsetting the impact of China’s manipulation of its currency on the production of goods and services in Europe. That’s one reason why Europe is less vocal about China’s mercantile war on the world.When Paul Revere tried to rouse the countryside with his wake up call, what did the people do? They certainly didn’t go back to sleep. Our nation is being destroyed by the international trade, tax and health care policies of our own country. We all need to wake up and listen. But we must be careful who we listen to…Wake Up, America!
Mr. Scott PaulExecutive DirectorAlliance for American ManufacturingTestimony ofScott N. PaulExecutive DirectorAlliance for American ManufacturingJuly 25, 2007Senate Committee on CommerceSubcommittee on Interstate Commerce, Trade and TourismHearing on the United States’ Trade Relationship with ChinaMr. Chairman and distinguished members of the subcommittee, I commend you for taking the time to study America’s trade relationship with China and thank you for inviting me to testify on behalf of the Alliance for American Manufacturing. I am honored to be before this subcommittee to discuss an issue of such importance to our economy and our national security.First, I would like to introduce the Alliance for American Manufacturing (AAM) and our perspective on this topic. We are a new partnership formed by some of America’s leading manufacturers and their workers to explore challenging public policy topics such as trade, health care, retirement, energy, currency valuation, and other issues of mutual concern. AAM works in a cooperative, non-partisan way, bringing together labor and management, Democrats, Republicans and independents, to work for one goal: strengthening American manufacturing and therefore bolstering our nation’s economic and national security. Our mission is to provide policymakers like you with useful analysis of the issues, as well as innovative policy ideas to move us toward effective solutions.With respect to trade and currency, conscious policy choices and crimes of omission—like the unwillingness of our trade bureaucracy and the World Trade Organization (WTO) to enforce the rules of trade or to apply new ones that were never negotiated—are damaging U.S. workers and businesses in every state in the nation. Our nation has lost more than 3.2 million manufacturing jobs over the past six years. More than 40,000 manufacturing facilities have shut down nationwide; our annual trade deficit stands at more than $764 billion.The largest single source of our trade woes is China. China’s trade surplus was responsible for a staggering 42 percent of the United States’ total, non-oil trade deficit last year. Our trade deficit with China skyrocketed for the sixth consecutive year in 2006, reaching a record high of nearly $233 billion. China’s exports to the United States were six times greater than American exports to China, which were only $52 billion.In just the past year, we have seen a dramatic surge of imports from China in nearly every category of goods. In steel, the increase is more than 65 percent; in paper and wood products, greater than 30 percent; and in computers and electronic goods, over 22 percent. Every day, we export more “know-how,” jobs, technology and intellectual property to China than high-value added products, which we depend on for good jobs and strong economic growth. Some of our fastest-growing exports to China tend to be unprocessed commodities and waste like scrap metal. The truth is, if you removed the names of the countries and looked only at the underlying trade data, you might assume that the United States was the low-cost, industrializing economy and China was the powerful economic engine.The consequences of illegal trade practices to American manufacturers and workers are severe. For example, research conducted for AAM found that from 2001 to 2003 American furniture manufacturers lost $333 million in revenue as a result of wooden bedroom furniture being dumped into the U.S. market from China.A new study by the Economic Policy Institute helps illuminate the egregious impact of this lopsided trade relationship. The report, “Costly Trade with China,” concludes that the trade deficit with China has displaced 1.8 million American jobs since China joined the WTO in 2001. Dr. Robert E. Scott, the report’s author, found that jobs were displaced in every state and the District of Columbia, and nearly three-quarters of those jobs were in manufacturing industries. The study is important because it is one of the few that looks at the entire trade picture. It estimates the labor that would be required to produce a given volume of exports, and the labor that is displaced when a given volume of imports is substituted for domestic output. The job losses in the study represent an estimate of what employment levels would have been in the absence of our growing trade deficit with China.Due to our trade deficit with China, New Hampshire and North Carolina have lost at least two percent of their states’ employment while California shed an estimated 269,300 jobs. In state after state, the story is the same: there may be scattered success stories of exporting to China, but trade can both create and destroy jobs, and the losses from opening up trade with China have far outweighed the gains for American workers and manufacturers.The flood of subsidized imports from China, aided by currency manipulation by the Chinese government, has denied American workers the opportunity to continue their own manufacturing careers, and has denied their children the opportunity for a future career in manufacturing of their own. While many of these workers are able to find new jobs, more than one-third of workers displaced from manufacturing do not. Workers who have lost their manufacturing jobs due to international trade are able to find employment only in lower-paying industries, often without many of the health and retirement benefits offered by manufacturing.In industries as diverse as agriculture, computer chips and other high-tech goods, strategic materials, steel, and many, many others, American businesses and workers—who are highly productive and efficient—are facing a torrent of subsidized products made by workers in China who are paid artificially low wages in deplorable conditions. There is nothing free about that sort of trade. American workers and businesses need rules that are fair to everyone, and they need those rules enforced.The sheer size and structural nature of this trade deficit with China raises serious questions about its causes, including to what extent the deficit is driven by Chinese government interventions in its own economy. In particular, China maintains numerous policies including state-sponsored subsidies aimed at promoting investment, exports and employment. Those policies have a direct role in increasing the U.S.-China trade imbalance and negatively affect the well-being of our domestically-based manufacturers, service providers and farmers.Dr. Peter Navarro of the University of California at Irvine has documented the systematic undercutting of prices by China, which has allowed its producers to establish a dominant position in the manufacturing of many consumer goods and some strategic materials. Professor Navarro estimates that lower labor costs, which include legitimate labor market factors as well as widespread artificial factors including non-enforcement of wage laws and migration restrictions—account for nearly 40 percent of the advantage. Export subsidies—illegal under the WTO—account for 17 percent. Undervalued currency, the product of government manipulation illegal under trade laws—accounts for an additional 11 percent. Counterfeiting and piracy add nine percent and lax environmental, health and safety regulations contribute an additional five percent.Is this the free market at work? Of course not. It is a deliberate strategy on the part of China’s government to grow its economy, providing incentive for many of the world’s manufacturers to shift their production to China. When China became a member of the WTO, proponents argued just the opposite: that it would herald in a new age of opportunity and expand market opportunities for American companies. Unfortunately, China continues to follow a policy of export-led growth to build up its own manufacturing base at the expense of other countries. Almost 60 percent of China’s exports come not from Chinese firms, but from foreign-invested enterprises. Many of these companies set up operations hoping to serve the Chinese market, only to face a web of policies and practices to limit their opportunities there, instead finding incentives to export their products back to their home countries or other markets.Just a few months ago, the director of the Chinese Government’s State-owned Assets Supervision and Administration Commission (SASAC), announced a new policy that raises serious questions of governmental control, involvement and intervention in a number of major industries. In industries ranging from telecommunications to steel to machinery and many others, China’s leaders have made it clear that the state will continue to exert its control, making it virtually impossible for American firms to compete.China also has provided massive subsidies to its companies to give them an advantage over our farmers, workers and businesses trying to sell their products to China, at the same time China is flooding our market with its products. American company after American company has been adversely affected by a Chinese government policy that simply needs to be described for what it is: cheating.China needs to be held accountable. It agreed to certain conditions when it joined the WTO but, time after time, it has refused to grant the kind of trade access to its markets that we provide to it and it has engaged in unfair and predatory practices to increase its exports. The result is one way free trade and, as noted above, skyrocketing trade deficits. Subsidies, dumping, currency manipulation, violation of labor rights, and lax or nonexistent environmental enforcement are just some of the egregious practices that must be addressed.It is regrettable that the choices on trade with China are often presented to you as absolutes: you are an enlightened “free trader” who wants to engage China, or you are a jingoistic “protectionist” who seeks to shore up unproductive industries. These labels are not helpful and they are not accurate. In fact, they needlessly cloud the debate on China. America is demanding action on China; the calls for a congressional response are coming from Red States and Blue States, from groups who have supported free trade agreements, as well as those who have opposed them, and from Senators and Representatives who supported permanent Normal Trade Relations with China, as well as those who opposed it. Our trade relationship with China is no longer a matter of philosophy, speculation and forecasting, but rather one of cold, hard facts.In an era when we expect increased accountability from our own government, it is disgraceful for anyone to suggest that a blind eye should be turned to international trade violations that are contributing to an enormous loss of American jobs and income. Now, as the Congress is considering measures to strengthen trade enforcement, is the perfect time for congressional consideration of appropriate interventions.To ensure that American manufacturers and workers have the same opportunity as their competitors in the global marketplace, Congress must exercise the responsibility given to it under Article 1, Section 8 of the Constitution, and ensure that international commerce is appropriately regulated. The Alliance for American Manufacturing commends the Chairman and the subcommittee for being at the forefront of these efforts.Congress and the Administration have some tools already at their disposal to ensure that businesses operating in the United States and in China have the same opportunity to compete. Quite literally, our trade laws – including anti-dumping and countervailing duty laws – when enforced, level the playing field and allow individual companies, farms and even whole industries in America to remain competitive. We believe those trade laws should be steadfastly maintained, appropriately strengthened, and aggressively deployed.Some critics argue, however, that these trade laws are shortsighted in this era of globalization and that the end results of these laws are limits on consumer choice and thus higher prices. When China’s illegal practices have been challenged, alarm bells have been rung by those who fear escalation into a “trade war” whose victims will be American consumers.Those fears are unfounded.The Alliance for American Manufacturing’s “Enforcing the Rules” study concludes that when our trade laws are enforced, our workers, communities and businesses are able to contribute 50 times more to the economy than any resulting increase in consumer prices.The reality is that enforcing the law works. Imposing clear and direct penalties on China for illegal activities is vital to ensuring that we all have the same opportunity to benefit in the global economy. The rules of international trade are just that – rules, not suggestions. The time is long overdue for the United States to enforce our trade laws and hold China accountable for its unfair trading practices. It is time to stand up for American workers and American manufacturers. Americans should expect—and deserve—nothing less.The continued inability and sometimes the unwillingness of policymakers in Washington to enforce current trade laws have allowed the deck to be stacked against American manufacturers and workers in too many cases. The Chinese government is clearly violating scores of its WTO commitments without facing any real consequences in most cases. As a result, our manufacturers are often forced to play by a different set of rules than their competitors.The Commerce Department has correctly allowed countervailing duty laws to be applied to non-market economies such as China, which may lead to some relief for American paper producers who have been devastated by illegal subsidies. The Administration has initiated dialogues with China on steel and currency and cases at the WTO on some Chinese subsidies and its theft of some intellectual property. These are important and significant first steps, but the size and scope of the issues I have mentioned demonstrates the urgent need to do more.Every nation in the world faces similar challenges from China, but nearly all of our industrialized competitors have managed to maintain an overall balanced current account. Germany, Japan, Korea, Brazil and other industrialized nations understand the importance of a strong and growing manufacturing base. So should we, before it is too late.Manufacturing has been the engine that drives the American economy for more than a hundred years, and it will continue to be well into the 21st Century.Manufacturing in the United States generates about $1.4 trillion, or 12 percent of our gross domestic product.Manufacturing is responsible for nearly two-thirds of private sector research and development in the United States. Nearly 80 percent of all patents filed in the United States originate in the manufacturing sector.Over the past two decades, manufacturing productivity has increased at twice the rate of the rest of the private sector.Manufacturing is a vital part of the economies of most states. As a share of gross state product (GSP), manufacturing in 2001 was among the three largest private-industry sectors in all but ten states and the District of Columbia. Manufacturing is the largest sector in ten states and in the Midwest region as a whole. It is the second largest in nine states and the third largest in 21 others.Manufacturing directly employs 14 million Americans and supports eight million more. Each manufacturing job supports anywhere between four and seven other jobs, providing a boost to local economies. For example, every 100 steel or every 100 auto jobs create as many as 700 new jobs in the rest of the economy. This contrasts with the retail sector, where every 100 jobs generate 94 new jobs elsewhere, and the personal and service sectors, where 100 jobs create 147 new jobs. This multiplier effect reflects how manufacturing’s linkages run deep into the economy, providing the means that translate improvements in manufacturing productivity to the economy as a whole.We depend on domestic manufacturing to supply our advanced materials for equipment like the Joint Strike Fighter, the Bradley Fighting Vehicle, the Abrams Tank, and our naval fleet. If we continue to lose our manufacturing base, our nation’s military could lose its primary source of strategic resources, and we as a nation would become dangerously dependent upon foreign sources of supply.The Congress and the American people have become all too aware of the limitations that dependency on foreign sources of energy creates for foreign policy and national security purposes; it makes no sense to exacerbate that problem by depending on China and other nations to supply our critical defense needs. Just as our nation is seeking to achieve energy independence from the Middle East, we also should avoid becoming more dependent on others to supply our national and homeland defense needs.Our nation’s flawed trade relationship with China unquestionably contributes to the anxiety and uncertainty many Americans feel about their jobs, their future, and perhaps most importantly for them, their children’s future. An effective and meaningful change in trade policy with China can make a difference to the American people in the following ways:
AAM believes that America’s leadership in the information age does not mean that we have to accept defeat when it comes to manufacturing and our trade relationship with China. On the contrary, the nation that has the ideas and innovation, as well as cutting-edge technology and manufacturing, is the nation that will win the global economic battles of the future. That is why we look forward to working with you to ensure that our nation puts into place policies that will allow manufacturing to thrive well into the 21st Century. America’s future growth, security and leadership in the global economy will depend on the strength and viability of our manufacturing base.Contrary to popular misconceptions, the industrial age is not over. In fact, just the opposite is true. From nanotechnology and robotics to lasers and biotechnology, we are on the cusp of incredible advances in manufacturing. America must be the nation that leads the world into the next stages of development. Manufacturing is, and will continue to be, an integral part of the “new economy.” With manufacturing, the new economy will thrive. Without manufacturing, much of this new economy would not even exist. Federal Reserve Chairman Ben Bernanke recognized this fact on February 28 when he said, “Our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.”Mr. Chairman and members of the subcommittee, we respectfully urge you to enforce our trade laws and hold China accountable for its unfair trade practices so that our workers and manufacturers will continue to have the opportunity to strengthen the American economy. Thank you again for the opportunity to testify today. I am happy to answer any questions you may have.
- Whether tomorrow brings the layoff notice or the productivity bonus;
- Whether their community has a top-notch public school, or one that is struggling to keep it doors open because the town’s factory—its largest source of tax revenue—shut down and shifted production to the People’s Republic of China;
- Whether the jobs of the future for their children will be flipping burgers or careers in nanotechnology and advanced manufacturing; and
- Whether their nation will have an industrial base that can supply the critical materials that allow us to defend our nation, or if we will be forced to depend on the goodwill of other nations to do that for us.
Mr. Robert S. NicholsPresident and Chief Operating OfficerFinancial Services ForumStatement of the Robert S. NicholsPresident and COOThe Financial Services ForumTestimony Before theSenate Committee on Commerce, Science and TransportationSubcommittee on Interstate Commerce, Trade, TourismJuly 25, 2007IntroductionChairman Dorgan and Ranking Member DeMint, thank you for the opportunity to participate in this important hearing on the impact of U.S.-China trade relations on American manufacturers, consumers, and workers. The emergence of China will not only be one of the great economic stories of the 21st century, but one of the most significant events in economic history. The integration of a fifth of the world’s population into the global economy – not overnight, but over time – has truly profound implications for U.S. economic growth and job creation. Given the reality and inevitability of China’s continued emergence, the task before Congress and other U.S. policy makers is to ensure that America participates constructively in China’s development, and in ways that work for American producers, workers, and consumers.I am here as President and chief operating officer of the Financial Services Forum. The Forum is an association comprising the chief executive officers of 20 of the largest and most diversified financial institutions with business operations in the United States. The Forum works to promote policies that enhance savings and investment and that ensure an open, competitive, and sound global financial services marketplace. As a group, the Forum’s member institutions employ more than 1.5 million people and hold combined assets of more than $12 trillion.In addition to our other activities, the Forum is also the chairing organization of the ENGAGE CHINA coalition – a partnership among eight financial services trade associations united in our view that active engagement with China remains the most constructive means of ensuring that our two nations mutually benefit from our growing economic relationship.  More specifically, the coalition is strongly of the view that a more open, competitive, and effective Chinese financial sector is a prerequisite if China is to achieve its own economic goals, and if the issues that have complicated the U.S.-China economic relationship – particularly further currency reform and the trade imbalance – are to be satisfactorily addressed. I’ll have more to say on this topic in a few moments.Importance of China to the Global and U.S. EconomiesThe 20 member CEOs of the Financial Services Forum meet twice a year, our most recent meeting occurring this past April. At each meeting, we conduct a survey regarding our members’ outlook on the U.S. and global economies. As part of the survey, we ask our CEOs to rate a number of factors, including technological innovation, improved education, freer and more open trade, and growth in a number of regions around the world, to reflect their likely contribution to global economic growth over the next decade. Our CEOs have consistently rated China as the single most important source of growth for the global economy.Mr. Chairman, the rate of China’s expansion and the impact of its integration into the global trading system are unprecedented in the history of the world’s economy. As recently as 1999, China was the world’s 7th largest economy. China is now the world’s 4th largest economy and will likely overtake Germany as the 3rd largest later this year. Government figures released last week showed that China’s economy expanded at an annualized rate of 11.5 percent in the first half of 2007, its fastest rate of growth since 1994. China has grown at an average annual rate of better than 9 percent for two decades. If such growth is maintained, China could surpass Japan as the world’s second largest economy by 2020. Together, the United States and China already account for half of the world’s economic growth.China’s emergence is also stimulating growth and job creation in the United States. Since China’s joined the World Trade Organization (WTO) in December of 2001, trade between the United States and China has nearly tripled, exports to China have grown at five times the pace of U.S. exports to the rest of the world, and China has risen from our 9th largest export market to our 4th largest.It’s important to point out that as staggering as these figures are, they represent only the beginning of China’s eventual impact. Nearly all of China’s economic activity is currently centered in the large, industrialized cities of China’s eastern coast, and involves only about 35 percent of China’s 1.3 billion people. More than 800 million people in China’s central and western interior – an eighth of the world’s population – are poor subsistence farmers, completely unengaged in the global economy. Even the 500 million people who live in China’s eastern cities, produce its manufactured goods, and comprise China’s rapidly growing middle and affluent classes have so far had a somewhat muted impact on the global economy.This is because Chinese households historically save anywhere from a third to as much as half of their income, as compared to single-digit savings rates in the United States and Europe. This pronounced propensity to save is related to the declining role of the state and the fact that most Chinese do not have access to the financial products and services that we take for granted – mortgages, 401ks, pensions, credit cards, and life, property, and health insurance products – that would help them save, borrow, invest, insure against risk, and, therefore, consume at higher levels.If China’s economy continues to grow and diversify, and if greater availability to a wider range of modern financial products and services helps to eliminate the need for such “precautionary savings,” China’s 1.3 billion potential consumers will begin to consume at more normal levels, with profound implications for global economic growth and job creation, as the following comparison demonstrates:Last year, the United States exported to Japan goods and services worth $60 billion – approximately the same amount exported to China ($55 billion). But China’s population of 1.3 billion is ten times Japan’s population of 127 million. In per capita terms, therefore, China consumed one-tenth the amount of American goods and services as Japan. If China’s citizens were to eventually consume American-made goods and services at the same rate that Japan’s citizens did last year, the United States would export more than $600 billion worth of goods and services to China, 11 times what America exported to China last year, an amount equivalent to 5 percent of America’s GDP, and more than twice what we imported from China last year – replacing the trade deficit with a significant surplus.China’s Growth has Created Challenges – for China and the United StatesDespite China’s remarkable economic development over the last 25 years, the structure and pace of its economic growth has produced significant problems, both economic and social. The country’s fixed investment- and export-driven development – more factories to produce more goods for world markets – has left China vulnerable to economic slowdown elsewhere in the world (particularly in the United States), and to rising energy, materials, and labor costs. The manufacturing and export focus of the economy has also led to widening disparities between rich and poor, made worse by the closing or privatization of state-owned enterprises, which had provided most healthcare services in China. There are, in effect, two Chinas – a wealthy elite and a developing middle class along the coast, and the 800 million poor in the central and western interior. The worsening wealth gap and the resulting social dichotomy have led to increasing political instability. Reports indicate that as many as 100 significant incidents of protest occur in China every day.Almost immediately after assuming leadership at the 16th Chinese Communist Party Congress in 2002, President Hu Jintao and Premier Wen Jiabao sought to distinguish themselves as the “putting-people-first administration.” They also articulated the notion of a “scientific viewpoint of development,” by which economic growth is to be balanced with social priorities such as a more equitable distribution of income, poverty reduction, education, improved medical care, and environmental protection. Such adjustments were necessary, according to the new leadership, to establish a more sustainable course for China’s long-term economic growth and to achieve a more “harmonious” – which is to say, a more equitable and stable – society.These priorities became the framework of China’s 11th Five-Year Plan, which broadens China’s development policy beyond simply promoting rapid economic growth to include a clear emphasis on “common prosperity” – that is, an effort to extend westward the economic gains enjoyed principally in China’s east coast urban areas. The Five-Year Plan seeks to address the twin problems of an economy perceived as being too dependent on external demand and the social consequences of the widening wealth gap by: 1) maintaining high rates of growth and job creation; 2) encouraging a structural shift from industry to services; 3) promoting the development of domestic consumer demand; 4) reducing poverty; and, 5) ensuring a more equitable distribution of opportunity and prosperity.It is important to note that each of these goals is utterly aligned and consistent with the interests of the U.S. economy and working Americans. A growing, more diversified Chinese economy that emphasizes a more active Chinese consumer is more stable, less dependent on exports, more in keeping with China’s responsibilities in the global trading system, and an enormously important and ever expanding market for American-made products and services.But if China is to achieve these ambitious economic goals – and, in doing so, serve as an ever-increasing source of U.S. economic growth and job creation – it needs an open, modern, and effective financial system. Unfortunately, Mr. Chairman, at present, China’s primitive and ineffective financial system represents perhaps the greatest threat to the continued growth and diversification of the Chinese economy.Critical Importance of Financial Sector Reform in ChinaCapital is the lifeblood of any economy’s strength and well-being, enabling the investment, research, and risk-taking that fuels competition, innovation, productivity, and prosperity. The financial system can be thought of as an economy’s cardiovascular system – the institutional and technological infrastructure for the mobilization and allocation of the economy’s lifeblood, investment capital.As a financial sector becomes more developed and sophisticated, capital formation becomes more effective, efficient, and diverse, broadening the availability of investment capital and lowering costs. A more developed and sophisticated financial sector also increases the means and expertise for mitigating risk – from derivatives instruments used by businesses to avoid price and interest rate risks, to insurance products that help mitigate the risk of accidents and natural disasters. Finally, the depth and flexibility of the financial sector is critical to the broader economy’s resilience – its ability to weather, absorb, and move beyond the inevitable difficulties and adjustments experienced by any dynamic economy. For all these reasons, an effective, efficient, and sophisticated financial sector is the essential basis upon which the growth and vitality of all other sectors of the economy depend. It is the “force multiplier” for progress and development, amplifying and extending the underlying strengths of a growing economy.Given the unique and critical role an effective and efficient financial sector plays in any economy, reform of China’s financial sector is a prerequisite to China achieving its own economic goals. Financial sector reform is also a prerequisite to meaningfully addressing issues that have complicated the U.S.-China economic relationship, particularly greater currency flexibility and reducing trade imbalances.Achieving China’s Economic Priorities· Maintaining High Rates of Growth and Job Creation: Maintaining exceptional rates of economic growth and job creation in China increasingly depends on an effective system for mobilizing investment capital. At present, China’s weak banking system intermediates nearly 75 percent of the economy’s total capital, compared to about half in other emerging economies and less than 20 percent in developed economies. Despite some improvements in recent years, Chinese banks’ credit analysis, loan pricing, risk management, internal controls, and corporate governance practices remain inadequate. Meanwhile, China’s equity and bond markets are among the smallest and least developed in the world. More fully developed capital markets would provide healthy competition to Chinese banks and facilitate the development and growth of alternative retail savings products such as mutual funds, pensions, and life insurance products. And by broadening the range of funding alternatives for emerging companies, more developed capital markets would greatly enhance the flexibility and, therefore, the stability of the Chinese economy.· Shifting from a Manufacturing-for-Export to a Services-Based Economy: Facilitating China’s desired transition to a more services-based economy will require that competitively priced capital and credit be channeled to the most promising emerging service businesses, and that the array of financial products and services emerging businesses require – loans, letters of credit, accounts management services, asset management, and insurance products – be made available.· Activating the Chinese Consumer: Activating the Chinese consumer requires the availability of financial products and services – personal loans, credit cards, mortgages, pensions, insurance products, and insurance intermediary services – that will eliminate the need for such “precautionary savings” and facilitate consumption.In sum, a more modern, open, and competitive financial system would greatly enhance the productive capacity and stability of the Chinese economy and facilitate the achievement of China’s economic goals, as described in the 11th Five-Year Plan. Indeed, research conducted by McKinsey indicates that genuine reform of its financial system would expand China’s economic output by as much as 17 percent, or an additional $320 billion a year.Addressing Issues with the United StatesA more effective and efficient financial sector in China is also a prerequisite to successfully addressing issues that have complicated the U.S.-China economic relationship, particularly further currency reform and meaningfully reducing the trade imbalance.· Market-determined exchange rate: A Chinese authorities have repeatedly argued – reasoning generally acknowledged by most foreign analysts – that a more rapid shift to a market-determined yuan is not possible given the underdeveloped state of China’s capital markets. More specifically, China’s banks, securities firms, and other businesses lack the expertise to develop and trade derivatives and other structured instruments used to hedge the risk associated with greater currency volatility. Sophisticated derivative products and hedging techniques provided by foreign financial services firms would clearly diminish such concerns.· Reduction of trade deficit: Reorienting the financial habits of China’s population from precautionary savings to a better balance between savings and consumption – while progressively bringing more than a billion Chinese into the global economy – is the most powerful remedy to the U.S.-China trade imbalance.Status of Financial Sector Reform in ChinaIn addition to working to meet its WTO commitments, China has also taken important steps to liberalize its financial sector and improve financial regulation. For example:· The financial sector has been transformed from a single-bank system to a more diversified system with a central bank – the People’s Bank of China – at the helm.· Meaningful steps have been taken to eliminate state-directed policy lending, and amendments to the Law on Commercial Banks and the Law on the Peoples Bank of China have laid the foundations for commercially viable lending.· The China Banking Regulatory Commission (CBRC) was established in April of 2003 to oversee all banks in China, investigate illegal banking operations, and punish violations of law.· Interbank, equity, and foreign exchange markets have been established and important progress made toward implementing monetary policy through market mechanisms rather than by government fiat.Despite these achievements, China’s financial sector still faces serious challenges:· Non-commercial lending to state-owned enterprises continues, although on a diminishing scale.· The stock of nonperforming loans on banks’ balance sheets remains high.· Banks are undercapitalized and lending practices, risk management techniques, new product development, internal controls, and corporate governance practices remain inadequate.· Prudential supervision and regulation of the financial sector is opaque, applied inconsistently, and lags behind international best practices.· China’s equity and bond markets remain small and underdeveloped.With these problems in mind, efforts to build on the progress achieved to date should focus on:· The critical importance of open commercial banking, securities, insurance, pension, and asset management markets to promoting the consumption-led economic growth that China’s leaders seek;· The clear benefits to China of increased market access for foreign financial services firms – namely the introduction of world-class expertise, technology, and best practices – and the importance of removing remaining obstacles to greater access.Foreign investors in Chinese banks remain limited to 20 percent ownership stakes, with total foreign investment limited to 25 percent. The China Securities Regulatory Commission (CSRC) continues to limit foreign ownership of Chinese securities firms to 33 percent and foreign ownership of Chinese asset management companies to 49 percent. Worse, since December of 2005, a de facto moratorium on foreign investments in Chinese securities firms has been imposed. Foreign life insurance companies remain limited to 50 percent ownership in joint ventures and all foreign insurers are limited to 25 percent equity ownership of existing domestic companies.While these caps were agreed to in the course of WTO accession negotiations, the limitations are among the most restrictive of any large emerging market nation and stand in the way of a level playing field for financial service providers. Most importantly, they limit access to the products, services, know-how, and expertise that China needs to sustain high rates of economic growth, and that China’s businesses and citizens need to save, invest, and create and protect wealth. For these reasons, the United States and other WTO members have urged China to relax these limitations.China also continues to restrict access by foreign credit card companies. Banks in China are permitted to issue cards with a foreign logo only if they are co-branded with the logo of China Union Pay (CUP), an entity created by the PBOC and owned by participating Chinese banks. In addition, all yuan-denominated transactions must be processed through CUP’s network, while the network of the foreign credit card company is used only to process foreign currency transactions.· Non-discriminatory national treatment with regard to licensing, corporate form, and permitted products and services.· Non-discriminatory national treatment with regard to regulation and supervision.· Regulatory and procedural transparency.· Attracting sophisticated institutional investors to China’s capital markets through the expansion of the Qualified Foreign Institutional Investor (QFII) and Qualified Domestic Institutional Investor (QDII) programs.· Priority issues from the Transitional Review Mechanism that remain unresolved.ConclusionMr. Chairman, the fastest way for China to develop the modern financial system it needs to achieve more sustainable economic growth, allow for a more flexible currency, and increase consumer consumption is to import it – that is, by opening its financial sector to greater participation by foreign financial services firms. Foreign institutions bring world-class expertise and best practices with regard to products and services, technology, credit analysis, risk management, internal controls, and corporate governance. In addition, the forces of competition brought by foreign institutions would accelerate the development of modern financial techniques and methodologies by China’s financial institutions.By providing the financial products and services that China’s citizens and businesses need to save, invest, insure against risk, raise standards of living, and consume at higher levels, foreign financial institutions – including U.S. providers – would help China develop an economy that is less dependent on exports, more consumption-driven and, therefore, an enormously important and expanding market for American products and services. In doing so, U.S. financial services firms can help China become a more stable and responsible stakeholder in the global economy and trading system.Thank you very much for the opportunity to appear at this important hearing.
 American Bankers Association, American Council of Life Insurers, American Insurance Association, The Council of Insurance Agents & Brokers, The Financial Services Forum, The Financial Services Roundtable, Investment Company Institute, and the Securities Industry and Financial Markets Association. See “China Growth Revs Faster, Escalating Policy Pressure,” The Wall Street Journal, July 20, 2007. See “China’s GDP Poised to Top Germany’s as Power Shift Speeds Up,” The Wall Street Journal, July 16, 2007. According to an unpublished report by the World Bank that has been shared with the Chinese government, from 2001 to 2003, as China’s economy expanded by nearly 10 percent a year, average incomes of the poorest 10 percent of Chinese households fell by 2.5 percent. See “In China, Growth at Whose Cost,” The Wall Street Journal, November 22, 2006. See Wen Jiabao, closing speech at the Specialized Research Course for Province-Level Cadres on Establishing and Implementing a Scientific Developmentalist Viewpoint,” February 21, 2004. The Five-Year Plan, the 11th since 1953, was approved by the fifth plenary session of the 16th Communist Party Central Committee in October of 2005 and ratified by the National People’s Congress this past spring. See “Putting China’s Capital to Work: The Value of Financial System Reform,” by Diana Farrell, Susan Lund, and Fabrice Morin, The McKinsey Global Institute, May 2006. China’s WTO accession included the Transitional Review Mechanism (TRM) as a means for ongoing review of China’s compliance with its obligations, and to provide those elements of the Chinese government supportive of further economic reform with information and evidence to urge full compliance with China’s WTO commitments.