[Senate Hearing 106-1108]
[From the U.S. Government Publishing Office]
S. Hrg. 106-1108
PERMANENT NORMALIZED TRADE RELATIONS WITH THE PEOPLE'S REPUBLIC OF
CHINA
=======================================================================
HEARING
before the
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
APRIL 11, 2000
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
JOHN McCAIN, Arizona, Chairman
TED STEVENS, Alaska ERNEST F. HOLLINGS, South Carolina
CONRAD BURNS, Montana DANIEL K. INOUYE, Hawaii
SLADE GORTON, Washington JOHN D. ROCKEFELLER IV, West
TRENT LOTT, Mississippi Virginia
KAY BAILEY HUTCHISON, Texas JOHN F. KERRY, Massachusetts
OLYMPIA J. SNOWE, Maine JOHN B. BREAUX, Louisiana
JOHN ASHCROFT, Missouri RICHARD H. BRYAN, Nevada
BILL FRIST, Tennessee BYRON L. DORGAN, North Dakota
SPENCER ABRAHAM, Michigan RON WYDEN, Oregon
SAM BROWNBACK, Kansas MAX CLELAND, Georgia
Mark Buse, Republican Staff Director
Martha P. Allbright, Republican General Counsel
Kevin D. Kayes, Democratic Staff Director
Moses Boyd, Democratic Chief Counsel
C O N T E N T S
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Page
Hearing held April 11, 2000...................................... 1
Statement of Senator Ashcroft.................................... 8
Letter sent to Hon. William M. Daley......................... 10
Statement of Senator Bryan....................................... 10
Statement of Senator Cleland..................................... 30
Statement of Senator Dorgan...................................... 27
Statement of Senator Hollings.................................... 4
Prepared statement........................................... 5
Statement of Senator Hutchison................................... 7
Prepared statement........................................... 7
Statement of Senator McCain...................................... 1
Prepared statement........................................... 3
Statement of Senator Snowe....................................... 33
Witnesses
Daley, Hon. William M., Secretary of Commerce.................... 11
Prepared statement with Summary of U.S.-China Bilateral WTO
Agreement.................................................. 13
Kahler, H. Richard, President, Caterpillar, Inc., China, on
behalf of the Business Roundtable and the American Chamber of
Commerce in Hong Kong.......................................... 62
Prepared statement........................................... 65
Scowcroft, Brent, Lieutenant General, USAF (RET.), President,
Scowcroft Group................................................ 36
Wu, Harry, Executive Director, Laogai Research Foundation........ 39
Prepared statement........................................... 41
Wallach, Lori, Director, Public Citizen's Global Trade Watch..... 43
Material for the record and prepared statement............... 44,46
Valenti, Jack, President and Chief Executive Officer, Motion
Picture Association of America................................. 56
Prepared statement and Appendix to testimony................. 58,61
Appendix
American Forest & Paper Association, prepared statement.......... 85
Gorton, Hon. Slade, U.S. Senator from Washington................. 81
Lowenstein, Douglas, President, Interactive Digital Software
Association, prepared statement................................ 81
Wallach, Lori, Director, Global Trade Watch, Public Citizen
Global Trade Watch News Release................................ 86
Article from Inside U.S. Trade, placed for the record........ 87
PERMANENT NORMALIZED TRADE RELATIONS WITH THE PEOPLE'S REPUBLIC OF
CHINA
----------
TUESDAY, APRIL 11, 2000
U.S. Senate,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Committee met, pursuant to notice, at 9:30 a.m. in room
SR-253, Russell Senate Office Building, Hon. John McCain,
Chairman of the Committee, presiding.
OPENING STATEMENT OF HON. JOHN McCAIN,
U.S. SENATOR FROM ARIZONA
The Chairman. Good morning. I understand Senator Hollings
is on his way, and I would make an opening statement and then
we will wait a minute for him, because he wants to make some
opening comments, then we will move to our witnesses.
There is no question that China represents one of this
country's central foreign policy challenges in the 21st
Century. An important trade partner with aspirations of
increasing influence throughout the Asia-Pacific region, China
will remain at the forefront of U.S. foreign policy discussions
for the foreseeable future.
The subject of this morning's hearing, China's entry into
the World Trade Organization (WTO); and the question of
granting permanent normal trade relations to that country, is
rarely discussed in a vacuum. With China's entry into the WTO
and implementation of the terms of the November 1999 trade
agreement, the United States stands to benefit substantially,
benefits that will be felt by industry and American labor
alike.
As a member of the WTO, China will be required to take
steps it has been historically reluctant to adopt, and at the
risk of a level of social turbulence completely anathema to the
ruling Communist Party regime. These steps include major
reductions in industrial tariffs from an average of 24 percent
to an average of 9.4 percent, reductions in tariffs on
agricultural goods from an average of 31 percent to 14 percent,
as well as elimination of nontariff barriers on agricultural
imports, major openings in industry where China has been
extremely reluctant to permit foreign investment, including
telecommunications and financial services, and unprecedented
levels of protections for intellectual property rights.
As a result of WTO membership, the pillars of one-party
domination, especially the corruption endemic to the current
system, could begin to crumble under the weight of transparency
and reforms that are the price of China's entry into the global
trading system. One need look no further than recent reports of
rioting this past February by more than 20,000 miners and their
families, stemming from the pervasive inefficiency and
corruption in the state-owned enterprises that are at risk of
extinction under the economic reforms China will be required to
carry out.
How China will deal with this social turbulence is one of
the most important questions facing not just Beijing but all
people who care about economic advancement and human rights.
There is no question that increased and better-regulated trade
with China will benefit the United States. What many following
the debate are concerned about, however, is whether and how
increased trade between the two countries will benefit the
population of China beyond the ruling elite.
One of the witnesses testifying here this morning is Mr.
Harry Wu, whose story imbues him with a level of moral
authority that all Americans should respect. Mr. Wu's personal
experience with the forced labor system in China, as well as
his continuing efforts to shine a light on those abhorrent
practices, weigh heavily in the consideration of all who
believe human rights should be a priority of U.S. foreign
policy.
There is also an argument that the quality of life of
hundreds of millions of Chinese citizens is immeasurably
improved as a result of the economic reforms implemented by the
late Deng Xiaoping and continued under his successors, most
prominently Premier Zhu Rongji.
Since the introduction of economic reforms in 1979, China's
economy has emerged as one of the fastest-growing in the world.
World Bank figures show that as many as 200 million Chinese
have been lifted out of poverty as a result of the government's
decision to liberalize the economy. While it is estimated as
many as 30 percent of the population continue to subsist below
the poverty level, the size of the middle class has expanded
dramatically.
A recent Congressional Research Service study noted that by
the year 2005, China will have more than 230 million middle
income consumers. Clearly, economic reform, fueled in large
part by trade, is benefiting the average Chinese citizen. It
has not, however, liberated them from the dictatorial powers of
the state. Moreover, Zhu's threatening statements toward Taiwan
prior to the latter's recent election, as well as his
admonition that a failure by the United States to pass
permanent normal trade relations will be regretted by us for
1,000 years, is heavily illustrative of the Communist Party's
adherence to obsolete and discredited policies.
That said, membership in the WTO carries with it
responsibilities that are at variance with Communist Party
practice. That is why Martin Lee, chairman of the Democratic
Party of Hong Kong, noted that China's participation in the WTO
would bolster those in China who understand that the country
must embrace the rule of law.
Similarly, Wang Shan, a liberal political scientist, state
that, ``Undoubtedly the China WTO agreement will push political
reform.'' And the former editor of the democratic journal,
Fangfa, has written that, ``if economic monopolies can be
broken, controls in other areas can have break-throughs as
well. . . In the minds of ordinary people, it will show that
break-throughs that were impossible in the past are, indeed,
possible.''
[The prepared statement of Senator McCain follows:]
Prepared Statement of Hon. John McCain,
U.S. Senator from Arizona
There is no question that China represents one of this country's
central foreign policy challenges in the 21st Century. An important
trade partner with aspirations of increasing influence throughout the
Asia Pacific region, China will remain at the forefront of U.S. foreign
policy discussions for the foreseeable future.
The subject of this morning's hearing, China's entry into the World
Trade Organization and the question of granting permanent Normal Trade
Relations to that country, is rarely discussed in a vacuum. With
China's entry into the WTO and implementation of the terms of the
November 1999 trade agreement, the United States stands to benefit
substantially--benefits that will be felt by industry and American
labor alike.
As a member of the WTO, China will be required to take steps it has
been historically reluctant to adopt, and at the risk of a level of
social turbulence completely anathema to the ruling Communist Party
regime. These steps include major reductions in industrial tariffs,
from an average of 24 percent to an average of 9.4 percent; reductions
in tariffs on agricultural goods from an average of 31 percent to 14
percent, as well as elimination of non-tariff barriers on agricultural
imports; major openings in industries where China has been extremely
reluctant to permit foreign investment, including telecommunications
and financial services; and unprecedented levels of protections for
intellectual property rights.
As a result of WTO membership, the pillars of one-party domination,
especially the corruption endemic to the current system, could begin to
crumble under the weight of transparency and reforms that are the price
of China's entry into the global trading system.
One need look no further than recent reports of rioting this past
February by more than 20,000 miners and their families stemming from
the pervasive inefficiency and corruption in the state-owned
enterprises that are at risk of extinction under the economic reforms
China will be required to carry out. How China will deal with this
social turbulence is one of the most important questions facing not
just Beijing, but all people who care about economic advancement and
human rights.
There is no question that increased and better regulated trade with
China will benefit the United States. What many following the debate
are concerned about, however, is whether and how increased trade
between the two countries will benefit the population of China beyond
the ruling elite. One of the witnesses testifying here this morning is
Mr. Harry Wu, whose story imbues him with a level of moral authority
that all Americans should respect. Mr. Wu's personal experience with
the forced labor system in China, as well as his continuing efforts to
shine a light on those abhorrent practices, weigh heavily in the
considerations of all those who believe human rights should be a
priority of U.S. foreign policy.
There is also an argument that the quality of life of hundreds of
millions of Chinese citizens is immeasurably improved as a result of
the economic reforms implemented by the late Deng Xiaoping and
continued under his successors, most prominently Premier Zhu Rongji.
Since the introduction of economic reforms in 1979, China's economy has
emerged as one of the fastest growing in the world. World Bank figures
show that as many as 200 million Chinese have been lifted out of
poverty as a result of the government's decision to liberalize the
economy. While it is estimated that as many as 30 percent of the
population continue to subsist below the poverty level, the size of the
middle class has expanded dramatically. A recent Congressional Research
Service study noted that, by the year 2005, China will have more than
230 million middle-income consumers. Clearly, economic reform, fueled
in large part by trade, is benefitting the average Chinese citizen. It
has not, however, liberated them from the dictatorial powers of the
state.
Moreover, Zhu's threatening statements toward Taiwan prior to the
latter's recent elections, as well as his admonition that a failure by
the United States to pass permanent Normal Trade Relations will be
regretted by us for 1,000 years are sadly illustrative of the Communist
Party's adherence to obsolete and discredited policies.
That said, membership in the WTO carries with it responsibilities
that are at variance with Communist Party practice. That is why Martin
Lee, chairman of the Democratic Party of Hong Kong, noted that China's
participation in the WTO would ``bolster those in China who understand
that the country must embrace the rule of law.'' Similarly, Wang Shan,
a liberal political scientist, stated that ``Undoubtedly [the China WTO
agreement] will push political reform.'' And the former editor of the
democratic journal Fangfa has written that ``if economic monopolies can
be broken, controls in other areas can have breakthroughs as well . . .
In the minds of ordinary people, it will show that breakthroughs that
were impossible in the past are indeed possible.''
The Chairman. We have before us today witnesses who will
shed light on both sides of the debate over Chinese accession
to the WTO and the granting of permanent normal trade
relations. First, we will hear from the Honorable William
Daley, who is the Secretary of Commerce.
In a subsequent panel, we will hear from General Brent
Scowcroft, former National Security Advisor and president of
the Scowcroft Group; Mr. Jack Valenti, president of the Motion
Picture Association of America, who will shed light on the
impact of the 1979 trade agreement on intellectual property
right protection, and will also, I am sure, illuminate us with
some more interesting rhetoric; Mr. H. Richard Kahler,
president of Caterpillar Corporation, representing the Business
Roundtable; Ms. Lori Wallach, director of Global Trade Watch;
and Mr. Harry Wu, to whom I referred earlier in my remarks, who
has spoken eloquently of the brutal system of forced labor that
endures inside China.
Before we hear from Secretary Daley, I would like to first
apologize for the length of my opening remarks, but I do
believe that this is one of the most important issues that this
or recent Congresses have undertaken as far as its impact on
the United States, not only financially and trade-wise, but on
our relations with the emerging superpower in the world.
I would also like to note that the major reason why we are
having this hearing is because our Ranking Member, our
respected Senator Hollings, felt that it would be very
important this hearing be held before this Committee.
Senator Hollings.
STATEMENT OF HON. ERNEST F. HOLLINGS,
U.S. SENATOR FROM SOUTH CAROLINA
Senator Hollings. Thank you, Mr. Chairman, for holding the
hearing. The town is alert and alarmed with respect to the so-
called demonstrations against the International Monetary Fund
and the World Bank meeting. Most of the writers have missed the
point with respect to Seattle because the overwhelming majority
of the demonstrators, led by the AFL-CIO, were very, very
peaceful.
The truth is that the Eugene, Oregon crowd of anarchists
came down and started breaking up the peaceful demonstration
near Main Street but the truth is, and the main point is that
the AFL-CIO demonstration in March was led by the United States
of America's premium export industry, Boeing. I know this
keenly, felt it keenly because the Washington Boeing crowd was
always looking for my opinion on the demonstration.
When I stood up for textiles Boeing was hollering free
trade, free trade all the time, drooling Government subsidies
through the Pentagon Department by way of technology and
research, while drooling financial support and subsidies
through the Ex-Im Bank. None of that was ever provided for the
textile industry, but they said they had to do it for exports,
exports, and yet the major export industry of the country and
the continent was leading the march.
Now, why? Because they cannot sell that plane in downtown
China unless as Bill Greider wrote in his book, ``One World
Ready or Not,'' Much of Boeing's product is now produced
abroad. So what it comes down to is the reality that we have
been losing jobs intentionally for 50 years. At the end of
World War II we had the only industry, we instituted the
Marshall Plan, we sent over the money, the technology, the
expertise, and it has worked. Communism has been defeated by
capitalism.
But after 50 years of giving up the shoes and the textiles,
and I mention that because as a young Governor they would look
at me and they would say, ``Come on, Governor, what do you
expect.'' Let them make the shoes and the textiles, we will
make the airplanes and computers.
Point: they are making the shoes, the textiles, the
airplanes and the computers, and we continue on this particular
subject of the People's Republic with soaring trade deficits.
The reality should be clearly stated, the global economy, and
global competition is not one of free trade. It is one of
controlled trade.
Japan has been--a member of GATT for more than 50 years and
in WTO--a member since 1994. We are hearing now that, oh, WTO
will open up trade relations and provide greater transparency.
We cannot get Japan to open up yet, after 50 years. However, if
I operated Japan, I would have the same policy because it
works. They get market shares. They nearly out-produce America,
120 million Japanese workers to 270 million Americans. Mark it
down and watch it happen.
So the Peoples Republic of China knows what they are doing.
They know how to build up economic strength, which in turn--
General Scowcroft will submit testimony in agreement--gives you
political, foreign policy strength. Money talks. Nobody worries
about the Sixth Fleet and the atom bomb. You are not going to
use the hydrogen bomb, and the Sixth Fleet's huffing and
blowing up and down the Straits out there by Macao means
absolutely nothing to 1 billion 300 million people.
What we need to do is build up our economic strength, so
the purpose for the hearing for this particular Senator is an
opportunity to say no. Not to China. We're not saying ``no'' to
China. We are saying ``no'' to the United States. You have got
to sober up, and you have got to institute what Cordell Hull
called reciprocal free trade, competitive free trade.
I will ask that the remainder of my statement be included
in the record. Thank you.
The Chairman. Without objection
[The prepared statement of Senator Hollings follows:]
Prepared Statement of Hon. Ernest F. Hollings,
U.S. Senator from South Carolina
Thank you Mr. Chairman. First, I want to commend the Chairman for
convening this hearing and to thank all of the witnesses for agreeing
to testify. China MFN is perhaps the most important international trade
issue since NAFTA, and it is crucial that we maintain an open dialogue
on the subject. I look forward to hearing from Secretary Daley, the
Administration's point person on the issue. Moreover, the remainder of
the witness list offers a rich and diverse presentation. It should be a
lively discussion.
It would be foolish for the United States to extend Permanent MFN
to China at this time. Currently, China profits much more from our
trade relationship than we do, and granting Permanent MFN will only
serve to worsen an already unfair situation.
Our trade deficit with China has reached appalling levels--some
might even say unacceptable. And it continues to grow every year. The
value of U.S. imports from China almost doubled between 1994 and 1998,
jumping from $38 billion to over $71 billion. Of course, exports also
rose during that time, but only from $9 billion to $14 billion. The
result is trade deficit that has exploded by almost $30 billion in four
years!
The Administration and its supporters hold that trade with China is
beneficial because it gives the U.S. a market for exports--this
argument is a classic example of missing the forest through the trees.
Despite highly-touted increases in exports to China in the past few
years, China receives a mere 5% of total U.S. exports. This is roughly
the same percentage of exports that we send to Belgium and Luxembourg!
Meanwhile, China maintains a $68 billion trade surplus with the United
States while running a $26 billion deficit with the rest of the world
combined. As we listen to the Administration pat itself on the back
over a paltry increase in exports, American imports continue to finance
China's economic boom!
To know the whole story, we have to look at what products comprise
the export increase. What we find is that many of the goods that the
U.S. ships to China are in fact inputs that will be assembled by low-
cost Chinese labor and re-imported by the U.S. as finished products.
The numbers are clear. From 1997 to 1998, the value of American exports
to China of products designated for assembly and reimportation grew by
a dramatic 979%. Over the past ten years, the percentage of China's
exports generated by foreign-affiliated firms has risen from 15% to
almost 50%. Essentially, China, continuing in the great tradition of
Mexico with NAFTA, is a gigantic export platform.
China not only exports billions of dollars worth of merchandise to
the U.S., it also exports its unemployment. More and more U.S.
companies are relocating their production facilities to China to take
advantage of the cheap labor and minimal labor and environmental
standards. Meanwhile, American workers continue to lose their jobs at
an alarming rate. It is estimated that 600,000 Americans were laid off
in 1996 alone due to trade with China--a year when our trade deficit
with China was a mere $40 billion. For the sake of our workers, the
U.S. cannot afford to continue to let the trade deficit with China
spiral out of control, yet that is exactly what will happen if Congress
votes for MFN.
Though the exploding trade deficit is reason enough not to grant
China MFN, there are other compelling reasons as well. Most
importantly, despite continued admonishment by the U.S., China's
government has not made a good faith effort to improve its human rights
record. On the contrary, repression has increased in China throughout
the 1990's, and particularly since the Clinton Administration ended the
link between trade status and human rights record. Currently, every
known political dissident in China has been either exiled or jailed. In
addition, the Chinese government continues to maintain forced labor
camps, and even to export goods produced in these camps to the United
States, despite a specific promise to end this practice. Withholding
preferential trade status is perhaps the most effective leverage our
government has over the Chinese, and it would be foolhardy to terminate
it by granting MFN.
Extending permanent trade status to China does not make economic or
political sense. The last thing the United States needs is a higher
trade deficit with China and the resulting job losses. Encouraging
trade is important, but not when it is accomplished at the expense of
American workers. Also, considering China's unwillingness to improve
its human rights practices, now is not the time to end our major source
of leverage in this area.
Again, I thank the witnesses for coming, and I look forward to
hearing their testimony.
The Chairman.Senator Hutchison.
STATEMENT OF HON. KAY BAILEY HUTCHISON,
U.S. SENATOR FROM TEXAS
Senator Hutchison. Thank you, Mr. Chairman. I will be brief
and just say that I do favor permanent trade relations with
China because I do think it is good for the United States to
have China inside the tent, to have China accountable, just as
every other nation should be in a free and fair trade
situation.
I think we have not had true free trade, as the Senator
from South Carolina has said. It has not been a level playing
field. I have heard Mr. Valenti talk about copyrights and I
think that we must have a way to bring them into the tent so
that there can be free and fair trade.
But what I am going to be most interested in hearing from
you and the second panel today is, how do we link our support
for Taiwan and our support for a free and fair trade
relationship with China, if we do, and should we in any way
link the Taiwan Security Act with permanent free trade with
China?
So with that, Mr. Chairman, I thank you for calling the
hearing.
[The prepared statement of Senator Hutchison follows:]
Prepared Statement of Hon. Kay Bailey Hutchison,
U.S. Senator from Texas
Thank you Mr. Chairman. And thank you for calling this hearing on
perhaps the most significant trade issue facing the United States
today.
I will come right to the point. I support trade with China and I
support the establishment of permanent normal trade relations with the
most populous nation on earth. I do not do so because I believe it will
make China more democratic, although I hope and expect that will be the
case. I am for permanent normal trade relations with China because it
is good for the United States. It will make us more competitive, keep
prices lower for American consumers, and keep our job-creation engine
running at high speed.
It is true that our current relationship with China is flawed, and
it is also true that PNTR is not a panacea for this relationship.
China, the U.S., and the international community have years of work
ahead before we can achieve real trust and cooperation among these
nations. I cannot, and will not try, to defend China's domestic human
rights record.
However, that does not mean we should give up now. Surrendering at
this time would sever any hope of engaging China in a real dialogue.
How are human rights and U.S. security issues served by restricting
trade with China? Such a move may allow us to feel morally superior in
the short run, but I believe it would also galvanize the Chinese nation
as an adversary of the U.S.
For those who see trade as a weapon in the battle for freedom:
Democracy tends to follow capitalism, and there is no question that
capitalism is on the rise. An authoritarian government cannot stand
forever in the face of people yearning for freedom. This has been true
on both ends of the political spectrum: East Germany and the rest of
the Soviet bloc on the left, South Korea, Taiwan, Chile, and the
Philippines on the right. Free enterprise and investment tends to erode
the strength of one party dictatorships such as we have in China today.
Finally, the question of Taiwan. The extension of permanent normal
trade relations with China has almost nothing to do with our commitment
to Taiwan. Taiwan will not be any more secure were we to deny trade
with China. Taiwan itself is rapidly becoming one of China's largest
trading partners and foreign investors.
We remain committed to defending Taiwan, and I fault the
administration for so neglecting our relations with both China and
Taiwan that this false dichotomy of trade with China versus security of
Taiwan has emerged. When it comes to Taiwan, this administration has
allowed doubt to develop about our commitment because it has wavered
between ignoring Chinese belligerence and sending in aircraft carriers.
What is needed is a firm, regular commitment to providing the
island the defensive support it needs. This can be done without
sticking our thumb in China's eye, but it must be done, and our
leadership in Asia depends upon it.
Thank you again, Mr. Chairman for calling this hearing, and for
your willingness to discuss this critical trade issue. If we fail to
take on the Chinese problem, we cannot possibly hope to solve it.
The Chairman. Senator Ashcroft.
STATEMENT OF HON. JOHN ASHCROFT,
U.S. SENATOR FROM MISSOURI
Senator Ashcroft. Thank you, Mr. Chairman. I am delighted
to have the opportunity to comment on this very important
responsibility we have to try and expand the opportunity for
American workers.
Mr. Secretary, just let me thank you in advance for coming.
You have a tremendous record of working for export
opportunities and I am grateful for that. You came to Missouri
last year, and I hope to work together with you on several
trade issues that are important to my home state.
My goal for a balanced U.S.-China trade relationship is to
ensure that Missourians, Missouri farmers, ranchers, and
workers, and businesses will benefit. I have talked with a lot
of Missourians about China's bid to join the WTO and, frankly,
they are very quick to praise the administration for its
negotiation of the November 1999 bilateral agreement in
virtually every area, everything from manufactured parts to
automobiles and agriculture. Missourians want to embrace the
opportunities that the agreement could afford.
This last Saturday, I went to a plant in Ava, Missouri. It
is a Copeland plant. Copeland makes high tech compressors, and
technology of compressors has changed. This is one of the
compressors here. It is called a scroll compressor. It used to
be that compressors were all piston-type, and compressed in by
pistons, but this scroll squeezes the air by turning these
scrolls together.
The industrial tariff, they said, for manufactured products
such as this--and obviously Copeland is the world's leader in
compressors by a long shot--would be reduced from 25 percent to
10 percent. Trading and distribution rights would be phased in
over 3 years so that the company could distribute its scroll
sets and compressors broadly, not just to its own plant in
China, and the company would be given the opportunity to
service their products and to establish service networks.
This is an expanding industry. Because of the superior
capacity of Copeland's superior American technology, this is a
product in very high demand for air conditioning and
refrigeration.
Right now that plant down in Ava, Missouri is sending 40
percent of its manufactured equipment to Asia, and the manager
is expecting to expand the production substantially. As a
matter of fact, I visited the new facility and they expect to
double the 350 workers to over 700 shortly and then close to
800 workers in the next couple of years. Right now, 40 percent
of all these items go to Asia. Production is expected to expand
greatly, with almost all of the new production scheduled to go
to Asia. It would be about 85 percent of all production in the
year 2003 that would go to Asia to be installed in air
conditioning and refrigeration equipment there. This is just
one example that I have talked to Missourians about, of how
open markets to a quarter of the world's population can create
jobs and impact substantially local communities.
The Missouri economy as a whole, would benefit from the
Chinese market opening, because agriculture is also on the list
and is the largest employer in my home state. For instance,
Missouri ranks close to the top in beef and pork, and is a
major producer of corn and soybeans. We rely on free trade. We
do want China's tariffs in beef to drop from 45 percent to 12
percent. That is a far better number. We do want Chinese to
accept USDA-approved meat, and we do want Missouri ranchers to
have direct access to grocery stores and Chinese customers and
not be limited to selling to restaurants and commercial
establishments.
So this agreement, I think, that has been negotiated by the
administration is an agreement that has terms and conditions
which are very attractive, not only industrially in terms of
manufacturing, but in terms of the agricultural industry as
well.
I think the key questions that Missourians have is, will
they really get results? Will there be more than promises? Will
these be enforceable things? Right now, Missouri's agricultural
community is pretty upset about Europe, a WTO member which
simply refuses to accept the rule of the WTO regarding American
beef. They have been in noncompliance in a rather contumacious
sense and is expected to stay in noncompliance and pay the
penalties which are rather meager.
So what I am going to be interested in is primarily a
couple of things. The first is that China in my opinion has a
rather dismal record in complying with its bilateral agreements
with the United States. Under the 1992 bilateral Market Access
Agreement, the Chinese took licensing requirements off about
177 products, and within a couple of years they had reimposed
licensing agreements on about 400 different additional
products.
If they give you something with one hand and take it away
with the other, what assurance do we have of compliance? And if
China joins the WTO without our being able to address the issue
of enforcement in any significant way, I want to be assured
that we will not be left with a lot of litigation, a lot of
resolutions that come down in our favor at the WTO without
compliance. I want to ensure that when it comes to our ability
to get compliance, we simply do not have anything but an empty
piece of paper, much like what we have with the Europeans over
beef, which basically is authority for the Europeans to
continue in conduct which is very, very prejudicial against
American ranchers.
So let me sum it up. Mr. Secretary, I am very pleased that
you are here. The broad outlines of this agreement at least
specify terms and conditions which, if they can be enforced,
are very beneficial. But as a result of our experience with the
WTO in Europe and as a result of our prior history of
agreements with the Chinese, I want to be looking for and
developing ways to make sure we get solid compliance and do not
give up in the process an ability to enforce agreements that
are very important to the United States.
Thank you, Mr. Chairman.
[Letter sent to the Honorable William M. Daley by Senator
John Ashcroft for the record follows:]
February 24, 2000
The Honorable William M. Daley
Secretary of Commerce
U.S. Department of Commerce
14th Street and Constitution Avenue, N.W.
Washington, DC 20230
Dear Mr. Secretary:
This year as Congress begins to consider China's permanent normal
trade relations status, I am listening carefully to what my
constituents are telling me about the current and potential benefits of
the U.S.-China trade relationship. In Missouri, there are many workers,
farmers, and businesses that have been promised expanded markets for
their exports as well as sufficient protection from imports that flood
U.S. markets unfairly.
Clearly, we all want to know that the recently made promises
between the U.S. and Chinese governments will be enforceable and
enforced. More immediate, however, is my concern that current laws
designed to protect U.S. entities are being faithfully executed.
Specifically, a Missouri company recently brought a case involving the
enforcement of anti-dumping laws against China.
Rhodia Inc., which operates in St. Louis and is the only remaining
U.S. producer of bulk aspirin, brought an action May 28, 1999, to
contest dumping of Chinese aspirin in the U.S. market. While the
preliminary determination by the Department of Commerce on January 3,
2000, was favorable to Rhodia, the Department's methodology resulted in
a finding of no dumping by at least one significant Chinese producer. I
have been advised that most of the discretionary issues that the
Department had to decide were all resolved in favor of the Chinese
companies, as opposed to the U.S. company. This has been of substantial
concern to Rhodia, its employees, and the International Chemical
Workers Union (UFCW).
Mr. Secretary, this concerns me. It is my understanding that the
Department is now in the process of investigating and then establishing
a final dumping margin in this case. The Department is expected to
announce its final margin sometime in May 2000.
It is my desire that companies in Missouri receive the protection
and benefits of U.S. agreements and trade laws. The Administration must
demonstrate now that it is a strong advocate on behalf of U.S. workers
and that it will execute faithfully these laws. Such decisive action
now will help dispel concern among Missourians that their jobs will be
threatened by dumping if Congress approves PNTR for China.
I am watching this matter with keen interest. While I am
particularly interested in the effect of this decision on the St. Louis
manufacturing facility because it provides good jobs for Missourians, I
am also tracking this matter for its broader implications on American
policy in regarding expansion of trade with the Chinese. I would
appreciate your keeping me informed of the Department's activities on
this important matter.
Sincerely,
John Ashcroft
The Chairman. Senator Bryan.
STATEMENT OF HON. RICHARD H. BRYAN,
U.S. SENATOR FROM NEVADA
Senator Bryan. Mr. Chairman, I thank you very much for
convening this hearing and thank our distinguished witnesses
for joining us here today.
You know, it strikes me that the United States of America
constitutes about four percent of the world's population, about
20 percent of the wealth in the world. If we are going to
expand our economy, if we all hope to do so, it seems to me we
cannot ignore a potential market of 1.250 billion.
We can disagree, as I do, certainly, with the politics, the
human rights abuses and some of the other difficulties that we
encounter, but it strikes me that to ignore a country of this
size, this magnitude, with the potential that it has to expand
America's economy and generate new jobs, would be a tragic
mistake.
The Chairman. Thank you very much, Secretary Daley, for
your Herculean efforts in this very difficult challenge that we
face, and I thank you for your great work.
STATEMENT OF HON. WILLIAM M. DALEY,
SECRETARY OF COMMERCE
Secretary Daley. Thank you, Mr. Chairman, Senator Hollings,
members of the Committee. Thank you for inviting me back up to
the Committee. It has been a while, and I appreciate the
opportunity to speak on what is one of the most important
economic and political issues that I think the Nation will face
in not only this year but over the next couple of years.
Let me first, Mr. Chairman, put a caveat on this testimony.
I am not a trade lawyer. I did not negotiate the agreement. I
have to praise first of all Ambassador Barshefsky for the
tremendous work which she did on behalf of our Government in
bringing to conclusion an agreement that I firmly believe is a
win, a strong win for the United States, and will present
tremendous opportunities for American businesses and American
working men and women over the next number of years.
I would like to highlight some of the terms of the
agreement, which in my opinion is a one-way deal in favor of
the United States. Attached to my testimony is a much more
detailed summary of the terms. In addition, there are 45
industry-specific fact sheets, 50 State reports, and other
detailed information available on our Web site, which is
www.ChinaPNTR.gov.
This week, President Clinton will be releasing much more
detailed information on opportunities that this agreement will
provide for workers in all 50 States. For industrial goods,
China agreed to cut tariffs from an average of 25 to 9 percent
overall, and 7 percent in those priority products of ours.
China will make substantial cuts immediately, with further cuts
phased in, most within 5 years. These will benefit our
automobiles, chemicals, wood products, and many other
industries. China will eliminate tariffs and quotas on
semiconductors, telecom equipment, computers, and computer
equipment by 2003 in most cases.
Last week, nearly 200 high tech CEO's wrote to Members
urging their support. They indicated this is ``the most
critical vote you will make in support of our high tech
industries this year.'' The agreement does more than lower
tariffs. It lets firms engage in wholesale and retailing,
repairing and transporting their products in China.
In services, China has made significant commitments to
phaseout most restrictions in banking, insurance, and telecom,
and they will open up to professional services such as
accounting, legal, consulting, business and computer-related
services, motion picture, video and sound recording services.
In agriculture, the agreement provides increased access for
a broad range of commodities and eliminates nontariff barriers
that have kept U.S. farmers out of this enormously large
market.
On our priority products, tariffs will drop from an average
of 31 to 14 percent by 2004, with even sharper drops for beef,
poultry, pork, and cheese. China also will create tariff rate
quotas that will expand opportunities for wheat, corn, and
rice.
Right now, the average man, woman, and child in China
consumes less than one dollar's worth of American agricultural
goods a year, but in the future Secretary Glickman tells us
that China will account for nearly 40 percent of the growth of
our agricultural exports. We also negotiated terms to ensure
China lives up to its commitments.
China has agreed to a number of provisions that address
issues raised by the high degree of government involvement in
their economy. They agreed to guard against import surges. This
is in the form of a 12-year product-specific safeguard
provision that lets us take action when exports from China
cause market disruptions. The deal protects American firms and
workers from unfair trade practices, including dumping. China
agreed to guarantee our right to continue using our current
methodology in antidumping cases for 15 years.
The agreement makes it easier to export to China from home
rather than forcing companies to set up in China to sell their
products there, and forced technology transfers will be
eliminated, better enabling U.S. firms to protect their R&D
investments.
The agreement contains effective enforcement tools to
ensure China meets its obligations. For the first time, China's
trade commitments will be enforceable through binding WTO
dispute settlements, subjecting its actions to impartial review
and sanctions if necessary.
Our agreement is very specific, with clear timetables for
implementation and firm end dates for full compliance. When
copies of this agreement were handed out to Members, some
thought that the text looked more like a detailed spreadsheet.
It does, and this was intentional. It reflects past experiences
with trying to enforce trade agreements with China.
As I said, we would be kidding ourselves if we think
everybody in China is all for this, and will not find clever
ways to try to get around this agreement, so we will vigorously
monitor and enforce the terms of this deal.
The President has requested a $22 million increase in new
compliance and enforcement resources for Commerce, USTR, USDA,
and the State Department. This would triple resources dedicated
to China trade compliance at our Department alone. For the
first time, Commerce and State will have compliance officers on
the ground in China, and last week we agreed to provide the
Chinese with legal and technical assistance in their efforts at
making their laws compliant with WTO obligations.
Let me say a few things beyond the economic, because this
debate will obviously go well beyond the economic and
commercial aspects of this agreement. The President has made it
very clear supporting this does not mean an endorsement of
China's human rights policies. We will continue to denounce
China's persecution of citizens for their political or
religious beliefs.
A few weeks ago, Secretary of State Albright personally
presented a resolution to the U.N. in Geneva condemning China's
human rights record. It is also clear to me that entering the
WTO has not been an easy choice for China's leaders to make.
They understand opening their borders to foreign goods also
opens the door wide to new ideas that are uncontrollable. They
made the decision to take this risk, and in my opinion we
should encourage it.
The possibility of positive change is illustrated by the
great potential of the high tech market in China. China will
become the world's second largest personal computer market by
the end of this year, and by then, 20 million Chinese will be
connected to the Internet. Not only will this technology
explosion benefit our companies, but it will give the Chinese
people unfettered access to outside influences and ideas. Based
on what I heard last week as I was in China from academics, the
entrepreneurs, and the NGO's, I feel that this has to help
promote a greater political reform process.
Finally, when the President asked me to lead the
administration's effort, to be frank with you I saw some
misunderstanding of what this vote may actually mean. Normal
trade relations is the same trading status we extend to the
rest of the world, with very, very, very few exceptions.
This legislation would make it permanent, and would remove
China from the annual process which we have had since 1980.
Permanent status is required to meet our obligations to treat
all WTO members the same. Not surprisingly, China seeks
identical treatment, and WTO rules require that it be provided.
This will not be a vote on whether China joins the WTO.
Once China completes its negotiations with other countries, its
application will move forward with or without us. This vote
will determine whether we enjoy the economic benefits created
by China's WTO membership. The vote will not affect whether the
Chinese will have access to our market. They already do. A yes
vote gives us access to their market and the opportunity to
attempt to level the playing field after so many years or
having an unlevel playing field.
Some say vote no on permanent status but then turn around
and vote yes on the annual review. They believe we should not
give up the leverage of annual review. I do not believe there
is much leverage in that annual review. For 20 years, we have
never voted it down and to me the cost of keeping this leverage
is losing the opportunity to open China's market for U.S.
companies, U.S. products, even as our European and Asian
competitors will take advantage of that opportunity.
I was most encouraged by Speaker Hastert's announcement
that the vote in the House will be the week of May 22 and, as
you know, Majority Leader Lott has promised a vote in the
Senate immediately after the Memorial Day recess. These are
very positive developments.
And with that, Mr. Chairman, I conclude my statement and I
ask that it be included in the record. I would be happy to
answer any of your questions and, again, I thank you for the
privilege of being back before the Committee.
[The prepared statement of Secretary Daley follows:]
Prepared Statement of William M. Daley, Secretary of Commerce
Mr. Chairman, Senator Hollings, members of the Committee, thank you
for the opportunity to testify today on the benefits to America of
China's accession to the World Trade Organization (WTO). On Saturday, I
returned from a trip to Beijing where I co-chaired the 13th Session of
the U.S.-China Joint Commission on Commerce and Trade (JCCT). The JCCT
is a government-to-government forum developed to promote U.S.-China
commercial cooperation. Last week we met to discuss China's ongoing
reform efforts and ways to enhance China's transition to a rules-based
global trading system. Obviously a lot of the discussion centered on
China's pending application to join the WTO and on our process for
deciding whether to grant Permanent Normal Trade Relations (PNTR).
This was my third visit to China during my tenure as Secretary of
Commerce. Much has changed even in the few years that I have been
traveling there. The signs of a nascent transition to a market-based
economy are evident everywhere in increased private ownership of
businesses, more freedom for the Chinese to choose their own places of
employment, and the return of privately owned farms. Over twenty years
of domestic reforms have enabled China to lift more than 200 million
people out of absolute poverty. Wireless communications has put cell
phones in the hands of 40 million Chinese (only a fraction of the
potential market) and given them access to a world of ideas and
influences.
But many problems exist. High unemployment, inefficient state-run
enterprises and corruption continue to plague the Chinese economy. As a
result, economic growth has slowed.
The Chinese leadership has recognized the need to open its market
to global competition in order to be able to build a modern, successful
economy. One of the best indicators of the commitment of the Chinese
leadership to a more open economy is its desire to take on the
challenges and obligations of WTO membership. I am here today to
discuss with you how supporting PNTR status for China can move China
toward a more open economy.
Last November, after 13 years of negotiations, the United States
and China reached a bilateral agreement on the terms and conditions of
China's entry into the WTO. China made significant and far-reaching
market access and trade concessions that will benefit American
exporters and import sensitive industries across a broad range of
industrial goods, services and agriculture. It contains strong
enforcement mechanisms and strong protections against unfair trade.
American exporters stand to benefit immediately. China has agreed to
begin opening its markets in virtually every sector immediately upon
accession. The phase-in of further concessions will be limited to five
years in almost all cases, and in many cases only one-to-three years.
In contrast to China's historic set of commitments, we have only
one obligation, and that is to maintain the market access policies we
already apply to China by granting it Permanent Normal Trade Relations
status.
There is no doubt that this agreement is a great opportunity for
American businesses, workers and farmers. It will provide unprecedented
access to a largely untapped market of over one billion consumers. The
benefits for the U.S. are widespread, including significant
opportunities for small and medium size businesses. SMEs are
responsible for a growing share of U.S. exports to China.
Last week, 47 Governors sent a letter to Senators and Members of
the House expressing how important they believe passage of China PNTR
is to maintaining the economic growth and prosperity of families in
their states and territories. These Governors know this is a good
economic deal for America. They do not want America to be left behind.
Yet this agreement goes beyond economics. As President Clinton has
said, this represents the most significant opportunity that the United
States has had to create positive change in China since President
Nixon's visit there in the early 1970s. As a world leader we have an
obligation to foster further reform in China. Encouraging China to join
the rules-based world trading system gives it a greater stake in the
stability and prosperity of its regional neighbors and the rest of the
world. It will create a better, more stable, safer world.
Now, let me highlight some of the terms of our bilateral agreement
on China's accession to the WTO. Attached to my testimony is a more
detailed summary of the terms of the agreement. In addition, over 45
industry specific fact sheets, 50 state-specific reports, and other
detailed information are available on our Web site at
www.chinapntr.gov.
Industrial Goods
China has agreed to cut tariffs from an average of 24.6 percent to
an average of 9.4 percent overall and 7.1 percent on U.S. priority
products. China will make substantial cuts immediately with further
cuts phased in, most within five years. These cuts will benefit a wide
range of U.S. products from automobiles, to chemicals to wood products.
China will also eliminate all import quotas and non-automatic licensing
requirements for industrial goods. For example, China will participate
in the Information Technology Agreement, eliminating tariffs and quotas
on information technology products such as semiconductors,
telecommunications equipment, computers and computer equipment and
other items by 2003, in most cases, and 2005 in a few others. Last
week, nearly 200 high tech industry CEOs wrote to Members of Congress
urging support for PNTR for China and identifying it as ``an absolute
priority for high-tech companies . . .'' and the ``. . . most critical
vote you will make in support of our high technology industries this
year.''
Services
This agreement does more than lower tariffs substantially. Equally
important to U.S. industry is the agreement by China to allow U.S.
firms to engage in trade (importing and exporting) and the full range
of distribution services including wholesale, retail, repair and
transport, for their products in China. At present, China prohibits
foreign firms from distributing imported products or providing after-
sale services such as repair and maintenance, unless they have invested
in China.
China has made significant commitments to phase out most
restrictions in a broad range of service sectors in addition to
distribution, including banking, insurance and telecommunications. Also
liberalized are professional services such as accountancy and legal
consulting, business and computer-related services, motion pictures and
video and sound recording services. China will also take on the
obligations contained in the Basic Telecommunications and Financial
Services Agreements.
Agriculture
The WTO accession bilateral agreement provides increased access for
U.S. agricultural exports across a broad range of commodities and
eliminates non-tariff barriers that have kept U.S. farmers out of this
huge market. On U.S. priority agricultural products, tariffs will drop
from an average of 31 percent to 14 percent by January 2004, with even
sharper drops for beef, poultry, pork, cheese and other commodities.
China will also create new tariff rate quotas that will significantly
expand export opportunities for U.S. wheat, corn, rice and other bulk
commodities farmers. U.S. exporters will also gain the right to sell
virtually all products freely inside China without going through state
trading enterprises or other middlemen. Right now, the average man,
woman, and child in China consumes less than a dollar's worth of
American agricultural goods a year. Looking to the future, China will
account for nearly 40 percent of the growth of U.S. agricultural
exports.
In addition to the benefits of WTO accession, we will have
substantial export opportunities through the 1999 U.S.-China Agreement
on Agricultural Cooperation. This Agreement provides the terms for the
removal of scientifically unjustified restrictions on importation of
U.S. wheat and other grains, citrus, and meat. Already, we have seen
China make historic purchases of all three commodities in the last few
months as a result of this Cooperation Agreement. Complementing this
Agreement are Chinese WTO commitments to permit trading and
distribution rights.
Safeguards and Enforcement
In addition to unprecedented access to the vast Chinese market, we
negotiated additional terms to ensure that we gain the full benefits of
our agreement and that China lives up to its commitments. China has
agreed to a number of provisions that go to the core of the closed
Chinese economy and will result in real and effective market access.
These special provisions address issues raised by the high degree of
government involvement in the Chinese economy and by industrial policy
measures, such as local content, offsets, export performance, and
forced technology transfer requirements. These provisions were sought
to address the legitimate concerns raised by Members of Congress,
Democratic and Republican alike.
The agreed provisions include special protections to guard against
import surges from China. China has agreed to a 12-year product-
specific safeguard provision which ensures that the United States can
take effective action in case of increased exports from China which
cause market disruption in the United States. This applies to all
industries, permits us to act on a lower showing of injury to domestic
industry than under existing safeguard law and allows us to act
specifically against imports from China. This safeguard provision is in
addition to existing safeguard actions authorized under Section 201.
We have also ensured that American firms and workers will have
strong protection against unfair trade practices, including dumping.
China has agreed to guarantee our right to continue using our current
methodology (treating China as a non-market economy) in antidumping
cases for fifteen years after China's accession to the WTO.
The agreement will also require China to reform a number of
internal policies which force foreign companies to locate operations in
China and give up valuable intellectual property rights as conditions
of doing business. The agreement will eliminate unfair practices such
as mandated offsets, local content and various investment performance
requirements. China will take on the obligations of the WTO Agreement
on Trade-Related Investment Measures. This will make it easier for U.S.
companies to export to China from home rather than forcing companies to
set up in China in order to sell their products there. Forced
technology transfers will also be eliminated as a condition of
investment, better enabling U.S. companies to protect their investment
in R&D. China has agreed to stop enforcement of such practices in
existing contracts immediately upon accession.
The agreement contains effective enforcement tools to ensure China
meets its obligations. For the first time, China's trade commitments
will be enforceable through a binding WTO dispute settlement,
subjecting its actions to impartial review, and ultimately sanctions,
if necessary. The multilateral nature of the WTO also strengthens our
enforcement capabilities. And the significance for China is great--its
economic decisions will be subject to multilateral trade review, which
will provide us additional leverage in resolving future trade
disagreements with China.
Our bilateral agreement with China is highly specific with clear
timetables for implementation and firm end-dates for full compliance.
When copies of the agreement were handed out to Members of Congress,
some members commented that the text looked more like a spread sheet
with its defined tariff rates, dates certain and concrete obligations.
This was intentional and reflects past experience with trying to
enforce trade agreements with China. The specificity of China's
commitments in this bilateral agreement will strengthen our ability to
monitor and demand compliance.
The Administration intends to vigorously monitor and aggressively
enforce the terms of this agreement. Our commitment to do so is
reflected in the President's budget request for a $22 million increase
in new compliance and enforcement resources for Commerce, USTR, USDA
and the State Department. For example, the President's new initiative
would triple resources dedicated to China trade compliance here at the
Department of Commerce--including administration of our unfair trade
laws. For the first time, Commerce and State will have compliance
officers on the ground in China devoted exclusively to trade law
enforcement and trade compliance.
We also have retained the right to use the full range of existing
United States trade laws, including Special 301 (intellectual property
rights protection), Section 301 (unfair trade practices), and, of
course, our antidumping laws. It also is important to emphasize that
nothing in this agreement undermines our ability to continue to block
imports of goods made with prison labor, to maintain our export control
policies, or to withdraw trade benefits, including NTR itself, in case
of a national security emergency.
A More Open China
The President has made clear that supporting China's accession into
the WTO does not mean a tacit endorsement of China's human rights
policies. We will continue to denounce China's persecution of its
citizens for their political or religious beliefs. Two weeks ago,
Secretary of State Albright personally presented a resolution
condemning China's human rights record to the United Nations' Human
Rights Commission in Geneva. We will not hesitate to use our authority
to sanction China under the International Religious Freedom Act as we
did last year. We will also continue to pursue our foreign policy goals
with China in a number of important areas such as non-proliferation and
global climate change. Our stance on a peaceful resolution of issues
between China and Taiwan will not change.
It is significant that many of those most supportive of a more
open, democratic China support its membership in the WTO. The newly
elected leader of Taiwan, Chen Shui-bian, supports normalizing trade
relations between the United States and China. Martin Lee, the leader
of Hong Kong's Democracy Party, recently said ``The participation of
China in the WTO would not only have economic and political benefits,
but it would serve to bolster those in China who understand that the
country must embrace the rule of law.'' A longtime Chinese dissident
leader, Ren Wanding, declared in support of the China's WTO membership
``Before the sky was black, now it is light. This can be a new
beginning.''
By seeking to join the WTO, China has undertaken to deepen its
market reforms and open its economy to the rest of the world. It has
agreed to adhere to international trade rules and subject its actions
to WTO dispute settlement. It's clear that this has not been an easy
choice for its leaders. They understand that opening their borders to
foreign goods, services and investors opens the door wide to new ideas
and ideals they can not control. They have made the decision to take
this risk. We should encourage China to choose the path of reform and
involvement with the rest of the world. Bringing China into the WTO
will make a significant difference.
The possibility of positive change is illustrated by the great
potential of the telecommunications market in China. Some analysts
predict that China will become the world's second largest personal
computer market by the end of this year and the third largest
semiconductor market by 2001. It is already the world's fastest growing
telecommunications market. In 1999 alone, the number of Chinese
Internet users quadrupled, jumping from 2 million at the beginning of
the year to 9 million. Growth predictions put Internet users at over 20
million by the end of 2000. Not only will this technology explosion
benefit the U.S. information technology industry, which is the best and
most competitive in the world, but it will also give the Chinese people
unfettered access to outside influences and ideas through satellites
and the Internet. This cannot help but promote greater economic and
political reform in China.
Of course, the trade agreement with China will not, by itself,
resolve serious human rights issues in China. At the same time, I
believe that WTO membership will bring fundamental changes to China
that will advance our goals in this area.
The Vote on PNTR
This Friday, I will head back to China with a group of your
Congressional colleagues. Secretary Glickman will follow with another
Congressional delegation during the last week in April. We will be
meeting with Chinese officials and will visit new privately owned
businesses and older state-run enterprises. We hope that this visit
will give undecided Members the opportunity to observe the changes in
China first hand and enable them to make an informed decision on PNTR.
A few months ago when the President asked me to lead the
Administration's efforts to seek Congressional approval of PNTR, I
discovered that there was a lot of misunderstanding about what the vote
on PNTR means. Let me explain. Normal trade relations, formerly called
most-favored-nation or MFN treatment, is the same trading status we
extend to the rest of the world, with very few exceptions. The
legislation would remove China from the annual NTR renewal process
under Jackson-Vanik, under which we have extended NTR to China since
1980.
PNTR is required to meet our obligation to treat all WTO members
the same. WTO members are required to grant each other ``any advantage,
favor, privilege or immunity'' provided to other countries
``immediately and unconditionally.'' The United States currently
extends PNTR to all countries with whom we share and enjoy the benefits
of the WTO, without the condition of annual review. Not surprisingly,
China seeks identical treatment upon its accession--and WTO rules
require it to be provided.
It is worth emphasizing that this will not be a vote on whether
China will join the WTO. Once China completes its accession
negotiations with other countries, its application to join the WTO will
move forward, with or without United States participation. However,
Congress' upcoming vote on PNTR will determine whether the United
States will enjoy the economic benefits created by China's WTO
membership. A vote against PNTR will mean ceding our share of this
newly opened market to our economic competitors in Europe, Asia and
elsewhere. As President Clinton has stated, ``We must understand the
consequences of saying no. If we don't sell our products to China,
someone else will step into the breach, and we will spend the next 20
years wondering why in the wide world we handed over the benefits we
negotiated to other people.''
The vote on PNTR also will not affect whether the Chinese will have
access to the American market and consumers. They already do. The
United States has the most open market in the world. A vote for PNTR
will give us access to the previously closed Chinese market and level
the playing field in a dramatic way.
I appreciate the thoughtfulness and consideration Members have
brought to the debate. I am optimistic that once all the pros and cons
have been weighed the Congress will vote its support for PNTR. I was
very encouraged by last week's announcement by Speaker Hastert that the
PNTR vote in the House of Representatives will be held the week of May
22. Senate Majority Leader Lott has promised a vote in the Senate
immediately after the Memorial Day recess. These are positive
developments.
When President Nixon first went to China, more people saw the
pictures and heard his words than on any occasion in the history of the
world. During that visit he paraphrased Abraham Lincoln, saying ``what
we say here would not be long remembered. What we do here can change
the world.'' Thirty years later, we now face another history-making
foreign policy choice, identified by President Clinton as his top
remaining foreign policy goal. After all the speeches, after all the
arguments, after all the voices on both sides of the debate, what we
say is not as important as what we do. And on this occasion we should
act to promote further reform and the rule of law in China and to
integrate China into the world economy. It is in our economic,
strategic and national security interests to do so.
Thank you, Mr. Chairman, that concludes my statement. I will now be
happy to answer any questions you may have.
______
China Trade Relations Working Group
summary of u.s.-china bilateral wto agreement
February 2, 2000
AGRICULTURE
The Agreement would eliminate barriers and increase access for U.S.
exports across a broad range of commodities. Commitments include:
Significant cuts in tariffs that will be completed by
January 2004. Overall average for agricultural products will be
17.5 percent and for U.S. priority products 14 percent (down
from 31 percent).
Establishment of a tariff-rate quota (TRQ) system for
imports of bulk commodities, e.g., wheat, corn, cotton, barley,
and rice, that provides a share of the TRQ for private traders.
Specific rules on how the TRQ will operate and increased
transparency in the process will help ensure that imports
occur. Significant and growing quota quantities subject to
tariffs that average between 1-3 percent.
Immediate elimination of the tariff-rate quota system
for barley, peanut oil, sunflower-seed oil, cottonseed oil, and
a phase-out for soybean oil.
The right to import and distribute products without
going through a state-trading enterprise or middleman.
Elimination of export subsidies on agricultural
products.
China has also agreed to the elimination of SPS barriers that are
not based on scientific evidence.
INDUSTRIAL PRODUCTS
China would lower tariffs and eliminate broad systemic barriers to
U.S. exports, such as limits on who can import goods and distribute
them in China, as well as barriers such as quotas and licenses on U.S.
products.
TARIFFS
Tariffs cut from an average of 24.6 percent to an
average of 9.4 percent overall and 7.1 percent on U.S. priority
products.
China will participate in the Information Technology
Agreement (ITA) and eliminate all tariffs on products such as
computers, telecommunications equipment, semiconductors,
computer equipment, and other high-technology products.
In the auto sector, China will cut tariffs from the
current 80-100% level to 25% by mid-2006, with the largest cuts
in the first years after accession.
Auto parts tariffs will be cut to an average of 10% by
mid-2006.
In the wood and paper sectors, tariffs will drop from
present levels of 12-18% on wood and 15-25% on paper down to
levels generally between 5% and 7.5%.
China will also be implementing the vast majority of
the chemical harmonization initiative. Under that initiative,
tariffs will be at 0, 5.5 and 6.5 percent for products in each
category.
ELIMINATION OF QUOTAS AND LICENSES
WTO rules bar quotas and other quantitative restrictions. China has
agreed to eliminate these restrictions with phase-ins limited to five
years.
Quotas: China will eliminate existing quotas upon
accession for the top U.S. priorities (e.g. optic fiber cable).
It will phase out remaining quotas, generally by 2002, but no
later than 2005.
Quotas will grow from current trade levels at a 15%
annual rate in order to ensure that market access increases
progressively.
Auto quotas will be phased out by 2005. In the
interim, the base-level quota will be $6 billion (the level
prior to China's auto industrial policy), and this will grow by
15% annually until elimination.
RIGHT TO IMPORT AND DISTRIBUTE
Trading rights and distribution are among the top concerns for U.S.
manufacturers and agricultural exporters. At present, China severely
restricts trading rights (the right to import and export) and the
ability to own and operate distribution networks. Under the Agreement,
trading rights and distribution services will be progressively phased
in over three years. China will also open up sectors related to
distribution services, such as repair and maintenance, warehousing,
trucking and air courier services.
SERVICES
China has made commitments to phase out most restrictions in a
broad range of services sectors, including distribution, banking,
insurance, telecommunications, professional services such as
accountancy and legal consulting, business and computer related
services, motion pictures and video and sound recording services. China
will also participate in the Basic Telecommunications and Financial
Services Agreements.
GRANDFATHERING
China will grandfather the existing level of market access already
in effect at the time of China's accession for U.S. services companies
currently operating in China. This will protect existing American
businesses operating under contractual or shareholder agreements or a
license from new restrictions as China phases in their commitments.
DISTRIBUTION AND RELATED SERVICES
China generally prohibits foreign firms from distributing products
other than those they make in China, or from controlling their own
distribution networks. Under the Agreement, China has agreed to
liberalize wholesaling and retailing services for most products,
including imported goods, throughout China in three years. In addition,
China has agreed to open up the logistical chain of related services
such as maintenance and repair, storage and warehousing, packaging,
advertising, trucking and air express services, marketing, and customer
support in three to four years.
TELECOMMUNICATIONS
China now prohibits foreign investment in telecommunications
services. For the first time, China has agreed to permit direct
investment in telecommunications businesses. China will also
participate in the Basic Telecommunications Agreement. Specific
commitments include:
Regulatory Principles--China has agreed to implement
the pro-competitive regulatory principles embodied in the Basic
Telecommunications Agreement (including interconnection rights
and independent regulatory authority) and will allow foreign
suppliers to use any technology they choose to provide
telecommunications services.
China will gradually phase out all geographic
restrictions for paging and value-added services in two years,
mobile voice and data services in five years, and domestic and
international services in six years.
China will permit 50 percent foreign equity share for
value-added and paging services two years after accession, 49
percent foreign equity share for mobile voice and data services
five years after accession, and for domestic and international
services six years after accession.
INSURANCE
Currently, only two U.S. insurers have access to China's market.
Under the agreement:
China agreed to award licenses solely on the basis of
prudential criteria, with no economic-needs test or
quantitative limits on the number of licenses issued.
China will progressively eliminate all geographic
limitations within 3 years. Internal branching will be
permitted consistent with the elimination of these
restrictions.
China will expand the scope of activities for foreign
insurers to include group, health and pension lines of
insurance, phased in over 5 years. Foreign property and
casualty firms will be able to insure large-scale commercial
risks nationwide immediately upon accession.
China agreed to allow 50 percent ownership for life
insurance. Life insurers may also choose their own joint
venture partners. For non-life, China will allow branching or
51 percent ownership on accession and wholly owned subsidiaries
in 2 years. Reinsurance is completely open upon accession (100
percent, no restrictions).
BANKING
Currently foreign banks are not permitted to do local currency
business with Chinese clients (a few can engage in local currency
business with their foreign clients). China imposes severe geographic
restrictions on the establishment of foreign banks.
China has committed to full market access in five
years for U.S. banks.
Foreign banks will be able to conduct local currency
business with Chinese enterprises starting 2 years after
accession.
Foreign banks will be able to conduct local currency
business with Chinese individuals from 5 years after accession.
Foreign banks will have the same rights (national
treatment) as Chinese banks within designated geographic areas.
Both geographic and customer restrictions will be
removed in five years.
Non-bank financial companies can offer auto financing
upon accession.
SECURITIES
China will permit minority foreign-owned joint ventures to engage
in fund management on the same terms as Chinese firms. By three years
after accession, foreign ownership of these joint ventures will be
allowed to rise to 49 percent. As the scope of business expands for
Chinese firms, foreign joint venture securities companies will enjoy
the same expansion in scope of business. In addition, 33 percent
foreign-owned joint ventures will be allowed to underwrite domestic
equity issues and underwrite and trade in international equity and all
corporate and government debt issues.
PROFESSIONAL SERVICES
China has made strong commitments regarding professional services,
including the areas of law, accounting, management consulting, tax
consulting, architecture, engineering, urban planning, medical and
dental services, and computer and related services. China's commitments
will lead to greater market access opportunities and increased
certainty for American companies doing business in China.
MOTION PICTURES, VIDEOS, SOUND RECORDINGS
China will allow the 20 films to be imported on a revenue-sharing
basis in each of the 3 years after accession. U.S. firms can form joint
ventures to distribute videos, software entertainment, and sound
recordings and to own and operate cinemas.
PROTOCOL PROVISIONS
Commitments in China's WTO Protocol and Working Party Report
establish rights and obligations enforceable through WTO dispute
settlement procedures. We have agreed on key provisions relating to
antidumping and subsidies, protection against import surges, technology
transfer requirements, and offsets, as well as practices of state-owned
and state-invested enterprises. These rules are of special importance
to U.S. workers and business.
China has agreed to implement the TRIMs Agreement upon accession,
eliminate and cease enforcing trade and foreign exchange balancing
requirements, as well as local content requirements, refuse to enforce
contracts imposing these requirements, and only impose or enforce laws
or other provisions relating to the transfer of technology or other
know-how, if they are in accordance with the WTO agreements on
protection of intellectual property rights and trade-related investment
measures.
These provisions will also help protect American firms against
forced technology transfers. China has agreed that, upon accession, it
will not condition investment approvals, import licenses, or any other
import approval process on performance requirements of any kind,
including: local content requirements, offsets, transfer of technology,
or requirements to conduct research and development in China.
ANTIDUMPING AND SUBSIDIES METHODOLOGY
The agreed protocol provisions ensure that American firms and
workers will have strong protection against unfair trade practices
including dumping and subsidies. The U.S. and China have agreed that we
will be able to maintain our current antidumping methodology (treating
China as a non-market economy) in future anti-dumping cases. This
provision will remain in force for 15 years after China's accession to
the WTO. Moreover, when we apply our countervailing duty law to China
we will be able to take the special characteristics of China's economy
into account when we identify and measure any subsidy benefit that may
exist.
PRODUCT-SPECIFIC SAFEGUARD
The agreed-to provisions for the protocol package also ensure that
American domestic firms and workers will have strong protection against
rapid increases of imports.
To do this, the Product-Specific Safeguard provision sets up a
special mechanism to address increased imports that cause or threaten
to cause market disruption to a U.S. industry. This mechanism, which is
in addition to other WTO Safeguards provisions, differs from
traditional safeguard measures. It permits the United States to address
imports solely from China, rather than from the whole world, that are a
significant cause of material injury through measures such as import
restrictions. Moreover, the United States will be able to apply
restraints unilaterally based on legal standards that differ from those
in the WTO Safeguards Agreement. This could permit action in more
cases. The Product-Specific Safeguard will remain in force for 12 years
after China accedes to the WTO.
STATE-OWNED AND STATE-INVESTED ENTERPRISES
The Protocol addresses important issues related to the Chinese
government's involvement in the economy. China has agreed that it will
ensure that state-owned and state-invested enterprises will make
purchases and sales based solely on commercial considerations, such as
price, quality, availability and marketability, and that it will
provide U.S. firms with the opportunity to compete for sales and
purchases on non-discriminatory terms and conditions.
China has also agreed that it will not influence these commercial
decisions (either directly or indirectly) except in a WTO consistent
manner. With respect to applying WTO rules to state-owned and state-
invested enterprises, we have clarified in several ways that these
firms are subject to WTO disciplines:
Purchases of goods or services by these state-owned
and state-invested enterprises do not constitute ``government
procurement'' and thus are subject to WTO rules.
We have clarified the status of state-owned and state-
invested enterprises under the WTO Agreement on Subsidies and
Countervailing Measures. This will help ensure that we can
effectively apply our trade law to these enterprises when it is
appropriate to do so.
TEXTILES
China's protocol package will include a provision drawn from our
1997 bilateral textiles agreement, which permits U.S. companies and
workers to respond to increased imports of textile and apparel
products. This textile safeguard will remain in effect until December
31, 2008, which is four years after the WTO agreement on Textile and
Clothing expires.
The Chairman. Thank you, Mr. Secretary. I hope you have the
same success that you had in your outstanding efforts on behalf
of the North American Free Trade Agreement. I thank you for
being here today.
Senator Hollings.
Senator Hollings. Thank you, Mr. Chairman. I hope you do
not have the success that you had with the North American Free
Trade Agreement.
Secretary Daley, you said NAFTA was going to create 200,000
new jobs. When in fact we have lost over 420,000. To be exact,
in the State of South Carolina. We have lost 37,200
manufacturing or textile industry jobs.
You said it was going to improve the standard of living for
our neighbor Mexico. On the contrary, they have take-home pay
less today than what they had in 1994, prior to NAFTA.
You said it was going to solve the immigration problem. It
has worsened.
You said it was going to solve the drug problem. They have
got a narco-country down there. They killed a Monsignor, they
killed a candidate for president, and they killed a police
chief in Tijuana, so let us not have your success that you have
had with NAFTA.
Now, after you have been up here for a few years you listen
to a lot of Secretaries--in 1992, Secretary Franklin said that
the agreements made could result in the elimination of the
trade deficit by the turn of the century. We have now hit the
turn of the century, and the Special Trade Representative, Mr.
Kantor, said during his visit that it would help reduce the
deficit a lot.
Secretary Daley it is just unacceptable to have these sorts
of trends continuing. Daley told the American business
executives, quote, ``what these figures say is that the Chinese
market has yet to open.'' The trends have just got to change.
And then, of course, in the Great Hall in 1998, at the signing
ceremony, Mr. Daley held the agreements as a boon to relations
and said that they would reduce the trade deficit and, quote,
``significantly encourage China's other efforts in economic
reform.''
Mr. Chairman, let's include in the record please, the 1990
trade deficit with the People's Republic of China was $10
billion, in 1991 $12 billion, in 1992 $18 billion, 1993, $22
billion, 1994, $29 billion, 1995, $33 billion, 1996, $39
billion, 1997, $49 billion, 1998, $56 billion, 1999, $68
billion, up, up, and away.
You know, after you hear this going on for years on end,
how can we believe that this is in the best interest of the
United States? What is going to change? What is going to
happen?
Secretary Daley. I believe, Senator, that the opportunity
that this agreement creates will not be there if Congress does
not pass this.
Can one guarantee that American products will be sold
anywhere? No. This is a very competitive world. This is a very
competitive market, as our market proves, and even though our
deficit is at a record pace, or at a record level, our economy
in many ways is viewed in a rather envious way by most of the
world today.
They see our economy as strong. They see our employment
levels, and they are rather jealous of them. They see
opportunities with our dynamic economy for entrepreneurs and
for creation of not only jobs but creating these new
technologies that are helping to drive the world, and they are
desirous of that.
We are committed and trying to work to lower the deficit.
How do you do that? You do it either by opening other markets
or trying to close your market. We believe attempting to open
the market of China is the way to go, and this agreement goes a
long way, after 13\1/2\ or 14 years of Republican and
Democratic administrations attempting to negotiate a deal and
get commitments from China, and I think it goes a long way.
Am I going to sit here and guarantee anything to you? No, I
am not, Senator. I believe that the opportunity, if this is
passed, for U.S. companies will be greater than it is today,
and surely greater than it has been in the past. And with no
reflection on the comments of my predecessors. I did not say
that NAFTA would solve the drug problem or the immigration
problem. I did not say that, but I do believe----
Senator Hollings. Come on, you all had them under the white
tent. That is all I heard. You have got all of those Republican
business leaders under the white tent, and you said they were
going to solve all these problems.
But in any event, Mr. Secretary, how can we believe that
when you say it is trade it opens the opportunity for
production in China? They have got to produce the movies now in
China. They have to produce the airplanes in China. That is why
the Boeing workers demonstrated and led the march out there in
Seattle.
Wherever it is, in technology and communications and
everything else, the American business community has pell-mell
gone to invest in China for their production, downsizing back
home, and the jobs are all lost here in manufacturing, and
invested over there. They have not increased our trade. The
proof of the pudding is otherwise. The deficit has gone up, up
and away.
Secretary Daley. I think there are a lot of reasons that
companies produce products around the world. They can be
producing today in China. What this agreement does--and I agree
with you, Senator, historically they have all been forced to
produce there if you want to do business there.
This agreement states so that those sort of requirements
and restrictions will not prevail, and that a freer flow of
reasonable investment and decisionmaking will be made not only
by U.S. companies but companies in other parts of the world.
Senator Hollings. Well, with the labor conditions there, it
is quite obvious they can produce more economically, let us
say, in cold rolled steel. You took up the issue. You launched
an inquiry into cold rolled steel being dumped into the United
States. That is last year in June, and then they found out in
January that the Commerce Department determined that cold
rolled steel products produced by Nippon, Kobe, Kowalski and
Nissan were being sold 53.0 percent below fair market value
over--they are dumping the steel.
So you go over to the International Trade Commission and
they said, ``Oh, there is no injury, and that is a fix by the
Finance Committee that we set up years ago.'' The business
crowd knows how to do that, so you get nothing done.
And that is why I am saying--I ask for this hearing to say
`No' to the United States. We do not know how to maintain our
economic security, and our jobs in manufacturing, unless we
just hold up a while and start using--that is where you have
got to come in. Administration, the executive branch, not this
free trade, free trade. We have got to use this rich market to
have bilaterals, one on one, as to their interests, as to our
interests, and we can maintain our economic strength.
But to throw it into the WTO, where Cuba can cancel me
out--come on. I mean, and you all think this is in the
interests of the working men and women of America.
Thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Hollings.
Senator Ashcroft.
Senator Ashcroft. Again, I want to thank you for coming,
Mr. Secretary, and I commend the negotiation of the terms of
the agreement. I want to move quickly to the enforcement,
because I am troubled about our ability to enforce these
agreements.
I have a letter in my hand from a Missourian James Brown,
the district business representative of the International
Association of Machinists. In part he says, and I quote,
``China has a history of failing to live up to every other
trade agreement it has signed with the United States, the 1992
memorandum of prison labor, the 1996 bilateral agreement on
unilateral property rights, the 1994 bilateral agreement on
textiles, and the 1992 memorandum of understanding on market
access, and this is a matter of concern to me.''
Do you think that he outlined China's record accurately?
Secretary Daley. I think there has been a serious question
of their compliance. At the same time, that is the reason, as I
mentioned in my testimony, and if you have the opportunity to
see this actual agreement, why this agreement was so specific,
and why Ambassador Barshefsky made sure that this was not like
some of the previous agreements back to the 1979 agreement,
which was a three-page kind of memorandum of understanding.
This is very specific. And, in addition to the specificity
of this agreement, and the WTO dispute settlement process,
which we can argue about, and I do not disagree with you,
Senator, we have been frustrated at a number of points along
the way regarding beef and bananas and other fights, we have
gotten relief. Most of the cases that we have brought, the
majority of cases that either we have brought or have been
filed against us, we have been successful in settlement or in
final resolution of them on behalf of our interests.
But in addition to the process, we maintain the full use of
our trade laws, whether they are dumping laws or 301 actions or
201 actions, and Ambassador Barshefsky negotiated specific
provisions in this agreement on product-specific safeguards, so
that for 12 years we would be able to bring a safeguard action
solely against China, not through the WTO, solely against
China, with an injury standard that is lower than the 201
standard.
We can also use--as I mentioned before--continue to use our
nonmarket methodology under the dumping laws administered by
the Commerce Department. In addition, China has agreed to
eliminate the forced technology transfers which have been so
important to American businesses.
So I think in addition to the WTO process, which we will
continue in the next administration, I would assume we would
continue to be aggressive. We have additional safeguards
specific to China, which were specifically negotiated in this
agreement, which have never been there in other agreements that
have been negotiated since the 1979----
Senator Ashcroft. Well, after the 1992 agreement China
eliminated 176 licensing requirements in 1995, but then imposed
400 new de facto licensing requirements, according to the USTR
in the 1997 report. Also, the 1999 USTR report said that China
has removed over 1,000 quotas and licenses on a wide range of
key exports, but despite the removal of these license
requirements required under the 1992 memorandum of
understanding, there are indications that China is erecting new
barriers.
Also, the 1999 USTR report recited the fact that China had
agreed earlier not to impose import substitution limitations
for all sectors specifically mentioning autos in a footnote.
And within the last 2 years China went ahead, then, and imposed
import substitution limitations on autos, and in the last 2
years, according to the 1999 report, China has imposed similar
restrictions on telecom utilities and pharmaceutical
industries.
Now, it seems to me that we have made some substantial
progress in the area of intellectual property and that is an
area where we have had the ability, and used that ability,
under 301 to threatened such retaliation. We threatened about
$4.6 billion in retaliation in 5 years. Everytime we threatened
such retaliation, the Chinese responded, and we have made some
real progress in intellectual property.
We do not have that right in the WTO vis-a-vis the European
Community with the beef dispute. Under the WTO, we gave up your
Section 301 rights in a significant way, because the WTO
determines the level of retaliation.
You have talked about how the Administration has retained,
for a 15-year interval, U.S. rights in dumping cases, which
will allow the U.S. to protect its market from imports. Are you
willing to negotiate and find a way to have a retention of our
Section 301 rights in those settings for market access, which
would allow us to export, and other areas of this agreement
with China?
Secretary Daley. We have maintained, Senator, the ability
to use our existing laws, including 301 and 201, in addition
to, as I mentioned, the antidumping methodology and the sector-
specific safeguards that would only relate to China, so if we
had an incredible surge in a certain sector of imports from
China, we would be able to unilaterally take action against
them.
Senator Ashcroft. But that is to guard against a flood of
unfair imports from China to the United States, and I commend
you for retaining that kind of authority. What kind of similar
stick in addition to the normal WTO procedures are you willing
to have in order to preserve and protect the negotiated right
to market access?
It seems to me that you have conceded that you need extra
authority when you are dealing with China as a result of its
history, and you have got it as it relates to them sending
goods to us. What kind of extra enforcement authority are you
going to have that ensures our right to send goods to them,
because that is where we have come up short when it has related
to things like beef and the Europeans?
Secretary Daley. There are no special market access sticks
we would have in addition to the normal WTO process. Let me
just say, Senator, one of the advantages of this situation will
be others, Europeans, other Asian countries, will be supportive
of our attempts, because if we are running into problems in
China the odds are so will their companies that are trying to
do business in China. So one of the major advantages of being
in a multilateral system would be that we do not stand alone in
our attempt to open the market.
Senator Ashcroft. Well, I guess it is because of the
disenchantment I have with the way we have been shoved aside,
the Europeans totally willing to pay the penalty rather than to
open their markets to certain of our agricultural exports. I
think we need to guard our ability to export with the same kind
of intensity and integrity that you have sought to guard our
ability to protect against the wrong kind of imports.
Article 22 of the WTO's Dispute Settlement Understanding is
that the level of retaliation must be agreed to or approved by
the WTO, and if the WTO does not want us to have very strong
retaliation, we find ourselves, in my judgment, at the mercy of
a trading partner, such as Europe, that is willing just to take
the penalties and deny rights under the agreement.
I guess what I would like to encourage the Administration
to do is to find some way to give the same kind of authority
and rights, which you have given against improper imports, to
secure market access for those in this country who are focused
primarily on exports. Exports are just as related to the
vitality of our jobs and opportunity as our guarding against
the dumping and other things that would erode the job base in
our country.
Mr. Chairman, thank you.
The Chairman. Senator Dorgan.
STATEMENT OF HON. BYRON L. DORGAN,
U.S. SENATOR FROM NORTH DAKOTA
Senator Dorgan. Mr. Chairman, thank you very much.
Mr. Secretary, thank you for being here, and let me say
that I appreciate your stewardship at the Department of
Commerce, and I have worked with you on many issues and have
great regard for your talents and your record.
Let me ask a number of questions about this China issue,
and I might say that for me it is a difficult issue. I had
voted on previous occasions for normal trade relations, but I
think China is going to be a significant influence in our
future, in our lives. The question is, what kind of influence,
and how do we alter that influence in a manner that we think is
important to us and to the world.
You have concluded a bilateral trade agreement with the
Chinese and, frankly, I think less of it than some do. I mean,
it is advertized as a significant market opening in China and
so on, but my colleague from Missouri raises an important
question about compliance.
We have had other agreements with China that did not mean a
thing. They did not comply with them. They talk about, in
agriculture, TRQ's. We have had tariff rate quotas. I think in
1994 and 1995 they announced tariff rate quotas in China. It
did not mean a thing. In fact, during the intervening period
our goods deficit with China has run up to nearly $70 billion,
and we have been displaced as the major wheat supplier to China
by other countries and in fact, of course, China is involved in
a self-sufficiency program for grain, so they are buying very
little wheat in the first place.
But I think it is important to raise these questions:
number 1, is there any reasonable expectation of compliance,
and number 2, I would go back again to the agreement. Even if
you had compliance, I do not think we do a good service to this
country, its producers, its workers, and others, when we
negotiate agreements with such low expectations.
Let me give you an example. We do not produce automobiles
in North Dakota, but my colleague, Senator Levin, raised the
point the other day--and it is an appropriate point, and I
could raise it about agriculture as well--after we negotiate
for a long period of time, we finally get to a point where the
Chinese will have a 25-percent tariff on automobiles, and we
will have 2\1/2\ percent, so after a long phase-in period we
will allow them to have a 10 times greater tariff on
automobiles than we will have.
Now, why would we expect that? Why would we allow that of a
trade competitor, especially one that has a $70-billion surplus
with us, and in agriculture I can make the same point on a
range of circumstances.
Now, when I raised the question the other day with Charlene
Barshefsky and Dan Glickman they said, well, but look at the
progress we have made. You are looking at the 14 percent, or
the 25 or the 48. You know, we came down from 100 percent to
30, or from 50 to 14 percent in agriculture.
And I said, yes, but with a country that has a $70-billion
surplus with us, or we a deficit with them, why would you not
in negotiations start with reciprocal policies, and say, ``Let
us talk about autos, we want reciprocal policies on autos and
same with agriculture?'' Why would you not start in that
circumstance?
So I just mention that to say I am not nearly as impressed
with this bilateral. I think it reflects what was done in
NAFTA. I think it reflects what has been done in most recent
trade negotiations, and we short-change our producers, short-
change our country by trade agreements that I think are not
sound agreements, and expect far too little of our trading
partners.
Having said all that, which is therapeutic for me to say,
at least occasionally, let me ask you a little more in some
detail about compliance.
Again, the WTO negotiator for China, following the
bilateral, went to South China and, as reported in the South--I
believe it is the South China Asia Post said, you know, the TRQ
on grain, he said, that is just theory. That does not mean we
are going to import any more grain from America. He said, the
notion that we will allow more meat in from the several
thousand meat plants in America, you should understand, that is
just theory. That does not mean more American meat will be
coming into China.
And I have written letters asking, what do you really mean?
Do you mean what is in the agreement, or do you mean what you
are talking about in South China to your constituents? I have
not gotten any answers on that.
But give me your impression of all of that, compliance, the
statements that have been made and so on.
Secretary Daley. There is no question in my mind that the
changes that are going on in China are enormous, that you are
very familiar with, and are putting enormous strains on their
economy, and there are many people who are fighting these
changes. They do not want to see any change. They want the old
system, which I think the Chinese leadership has made the
decision cannot sustain what they need to accomplish in this
century.
They are undergoing an enormous change. There is no
question in my mind there are plenty of people in the
political, and in the economic structure which has been very
closed, totally closed over the years, that do not want to see
these changes implemented, that do not want to see the
commitments made implemented.
On the other hand, in order to see the economic growth and
see the benefits that China wants, they are going to have to
implement those changes. I think it will be difficult for them.
I think it will be difficult for us. I do not pretend to think
that the implementation of this agreement by the Chinese will
be easy for them, and I would assume that we will have to, in
the next administration, be very aggressive in their
enforcement of the commitments that have been made.
As to the specific commitments in agriculture, of which you
know much better than I, the industries, the agricultural
interests in sectors that were priorities to us where there
have been reductions, substantial reductions, are, according to
our information, pleased with the levels at which we were able
to get the commitments by the Chinese.
There are many areas of no priority to us, or to certain
agriculture interests, but in those areas of priority to us my
understanding is, from the indications of the agriculture
community, that they are pleased with those levels. We would
like them lower. Will we get them lower at some date? We hope
to. But at this point, compliance will be difficult, no
question about it, Senator. And as I said earlier in my
testimony, we have requested a substantial increase in our
ability to fund additional personnel for compliance efforts.
Senator Dorgan. Secretary Daley, there is no question that
some are pleased with these reductions, but I must say I recall
some while ago, or nearly a decade ago, I guess, when we
reached a beef agreement with Japan, you would have thought we
had won the Olympics. I mean, my Lord, the negotiators were
celebrating; it was on the front page of the Washington Post
headlines.
You know what the agreement was? It was that 12 years
later, which is now, every pound of American beef going into
Japan has a 40-percent tariff on it. What a wonderful thing. So
we get more beef into Japan, but we still have such low
expectations of our trading partners, and I am just wondering
when we can, in bilateral negotiations, start on behalf of
American producers demanding reciprocal trade treatment.
I understand we are not talking about Japan here, but it is
the same principle with respect to the bilateral with China.
Now, let me ask you one additional question, and I should
say, again I find this issue difficult. I do not find it
difficult to evaluate the bilateral trade agreements, which I
think we come up short on, and did again, but I find it
difficult for a range of reasons, because, as I said, I think
China is going to be a significant influence in our lives, and
I want it to be a positive influence.
I would like you, if you would, to respond to the testimony
of Harry Wu. He has not given it yet, but I have read it. Mr.
Wu, as you know, spent many, many years in Chinese prisons for
advocating for democracy. I have not met him, but have read his
testimony. He feels very strongly that essentially it is a kind
of an appeasement to the Chinese leaders to move in this
direction.
Now, I have been to China a couple of times. I am not a
Chinese expert, but my evaluation is that some things have
changed in China for the better. I am not someone in China who
is standing on a street corner trying to speak out, and there
are those who have who are in prison, and so while we talk
about progress, Mr. Wu, who has spent a fair amount of time in
Chinese prisons, says that he thinks that moving in this
direction without forcing some significant political changes in
China is appeasement. Can you respond to his testimony?
Secretary Daley. Well, I obviously have not had the
pleasure of reading Mr. Wu's testimony. As Chairman McCain
stated, we all have enormous respect for him and for those
others who have fought to see a different China and a different
country. As we stated very clearly, and stood alone in Geneva
as we issued our statement regarding the violations of China on
human rights, we do not take a back seat to any country in the
world in condemnation of China on human rights. As a matter of
fact, as of last year we basically stood alone in that
condemnation, and we will continue to do that if necessary.
I do believe that there are others also who have a feeling
that encouraging China and getting China into multilateral
organizations encourages them to continue on the path of
reform. We obviously, as the President said in his State of the
Union address, cannot guarantee which way China will go. We can
hope that they continue, and that there are steps that continue
to see a different China than obviously we have known in the
past.
Twenty five years ago it was a country that was basically
closed to the rest of the world. It is changing. It is changing
dramatically in some people's opinions, not fast enough in most
people's opinions, but as they continue to change we need to--
as the President stated, take the steps so that if by chance
they decide to go another path, a path which we are not
encouraging of, we can at least say we did everything we could
to encourage those in China that want to continue to see reform
and change, and opening.
And that is what we believe part of this, in addition to
the commercial aspects of this agreement is about trying to get
China into multilateral organizations where the pressure would
not be just by the United States but along with Europe and
other parts of the world who have the same, similar economic
interests as us, and hopefully a similar interest in seeing
China change politically.
Obviously, we have a disagreement with Mr. Wu and the way
to do that, but do not question, obviously, his motives or his
position.
Senator Dorgan. One additional brief question. Ten years
ago in the Ways & Means Committee, when I served on that
Committee in the House, there was a big debate about where we
were headed with China with respect to the trade balance,
because at that point we had an $8 or $9 billion deficit. Many
suggested this is going to improve, and I insisted it was not
going to. In fact, now it is nearly $70 billion in goods
deficits. Can you tell me what is going to happen with the
trade balance with China? Is our deficit going to improve and,
if so, when?
Secretary Daley. I would not sit here and tell you that it
is going to improve, or when it will change. I believe this
agreement and a continuing growth in China will give American
companies the ability to sell more in China, and if our economy
stays strong and American consumers continue to purchase at the
sort of levels they have, I would imagine our imports from most
of the world will continue to stay strong.
At the same time, we are the world's number one exporter,
and need to continue in that role, but I would not sit here,
Senator, and predict to you that this agreement alone is going
to bring down the trade deficit, or on any schedule. I think
the goal is to try to keep our overall economy strong and take
steps that give us the opportunity to open markets that have
been historically closed, as China has been.
Senator Dorgan. Thank you, Mr. Secretary.
The Chairman. Senator Cleland.
STATEMENT OF HON. MAX CLELAND,
U.S. SENATOR FROM GEORGIA
Senator Cleland. Thank you, Mr. Chairman.
Thank you very much, Mr. Secretary, and thank you for your
service to our country.
Less than 2 weeks ago, according to the Labor Department,
my State, the State of Georgia, recorded the second highest
number of initial joblessness claims in the country, about
1,300. The reason given for this high number was due to layoffs
in the textile industry.
While overall unemployment in the country is at record lows
and some industries clearly will experience growth because of
permanent normal trade relations with China, do you have any
idea how many U.S. jobs you expect will be lost, particularly
in the textile industry, as a result of permanent normal trade
relations with China?
Secretary Daley. I do not have any estimate. There have
been private estimates made, Senator, by different
organizations. No question about it, the textile industry, as
you and Senator Hollings know much better than most, has been
under great pressure for 20-plus years, and from all parts of
the world, and at the same time there have been some successes
seen in the textile industry and the apparel industry as they
have taken advantage of new technologies in some specific
markets.
We would hope that that trend would change. In many of the
areas of the country where there were predominant textile or
apparel industries other industries have opened and new jobs
have been brought in. These other sectors have created low
unemployment in parts of the country that a few years ago had
rather high unemployment.
It is a dynamic, but as I say, there have been private
estimates. We have no government sort of estimates as to what
impact this agreement would have on potential growth of China.
What we have seen in textiles and some other sectors is a shift
within Asia to China for export. The overall percent of imports
into the United States from Asia has not changed over the last
couple of years, but the shift within Asia has occurred.
Senator Cleland. Actually, a couple of agricultural
products in my State actually stand to benefit from the
bilateral agreement signed last November in Beijing--poultry
and cotton. Mr. Secretary, what assurances do you have that
China will actually live up to these agreements when they
repeatedly failed from time to time to fully honor similar
agreements in the past?
Secretary Daley. We will have the dispute settlement
process of the WTO and be able to take advantage of that, and
we do have a very clear agreement that is not just a broad sort
of statement. It is clear as to what tariffs come down when,
and so it would make a case easier to prosecute, and at the
same time we retain, as I mentioned, different safeguards and
protections under our existing trade laws.
Senator Cleland. I am fascinated by the question by Senator
Dorgan from North Dakota about the trade imbalance or the trade
deficit. We have a $70 billion trade imbalance now, trade
deficit with China.
Actually, there are some who feel that the entrance of
China into the WTO would set off an even larger expansion of
our exports into China. I understand the Institute for
International Economics concludes that accession would lead to
an immediate U.S. export jump of at least $3 billion to China.
Goldman Sachs reports that number could rise to about $14
billion in the next five years. The International Trade
Commission report concludes that as a result of the agreement
the nearly $70 billion U.S. trade deficit with China will drop.
Is that a sense that you have, or do you think it will stay
the same, or do you think it will rise?
Secretary Daley. Well, I believe that if China opens their
market and this agreement helps to open that market, U.S.
companies, as they have proven in many other parts of the
world, can be as competitive as anyone else doing business
there.
As China's economy improves, they will have greater need
for products from the U.S., and from other parts of the world
in those areas that we have expertise. Therefore, if we have an
ability, as you will hear, I believe, from some business people
in the next panel, to distribute the goods and to have a clear
distribution system, there will be a greater opportunity to
sell those goods and not have the barriers, nontariff barriers,
that have been put up in China historically. I believe that
will occur.
Am I going to predict how much and when? I will not do
that. Obviously, as Senator Hollings has stated, previous
Secretaries have made the mistake of doing that, and I would
like him in 10 years not to be able to quote me again sitting
here at this hearing not being as accurate as he would like.
Senator Cleland. Most of us would like never to be quoted
by Senator Hollings. [Laughter.]
Do you believe it is absolutely necessary for Congress to
pass a permanent normal trade relations agreement with China in
order to fulfill our obligation with respect to the bilateral
agreement just signed, a permanent NTR?
Secretary Daley. We do, Senator, and I believe most legal
authorities who have commented on the WTO and commented on the
rules of the WTO believe very strongly that we must grant China
the unconditional NTR that we have given every other member of
the WTO, save, I think, one, who is in the process right now of
being granted that by Congress.
Senator Cleland. Do you have any idea just off the cuff of
how many countries we do have normalized trade relations with?
It must be in the scores of nations.
Secretary Daley. I believe we have normal trade relations
with 134.
Senator Cleland. 134 nations we have normal trade relations
with?
Secretary Daley. And Congress has, on an annual basis, for
20 years given China that normal trade relation status.
Senator Cleland. So we have had these relations for 20
years. It is just that it has to pass the Congress every year.
Secretary Daley. Right.
Senator Cleland. What you are suggesting is that we obviate
that process and go with an agreement and support China's
entrance into the WTO and that that would be ultimately the
best for us in the long run economically and politically for
our country, is that correct?
Secretary Daley. Yes, Senator. It is not about China
entering the WTO. When they complete the final agreements they
will enter the WTO. It is: ``what conditions will China enter
under, and what impact that will have with us.''
If we are the only Nation not to give them what everyone
else has given, they have stated that they will not give us the
benefits of the agreement and they would not be subject to the
terms and conditions of the bilateral agreement, and we would
therefore not be the beneficiaries of it, and American
businesses would be at a serious disadvantage to the European
and Asian and other competitors in doing business in China.
Senator Cleland. That was my next point exactly: that some
feel if we do not take this action, that the Japanese and the
members of the European Union and others will, in effect, go
ahead and be part of normal trade relations with China and put
our own businesses at a disadvantage. Is that your
understanding?
Secretary Daley. That is clearly our understanding and the
Chinese, as I say, have stated that if we were to not give them
what we have given everyone else, that would be their position,
and we would be at a serious disadvantage.
We have negotiated this for 14 years. I would also believe
strongly that if PNTR does not pass Congress, you would see the
Europeans come to the conclusion with their negotiations with
China rather rapidly so that they would be in a different
position than we would.
Senator Cleland. Thank you very much, Mr. Secretary. Thank
you very much, Mr. Chairman.
The Chairman. Senator Snowe.
STATEMENT OF HON. OLYMPIA J. SNOWE,
U.S. SENATOR FROM MAINE
Senator Snowe. Thank you, Mr. Chairman, and thank you, Mr.
Secretary. I did want to drop by, because I did obviously think
this is very important for our Nation, and I also want to state
over the years--I served in both the House and in the Senate--I
have had serious concerns about our ability to enforce
agreements, and as I look at this agreement that has been
negotiated with China, obviously textiles have certainly been
adversely affected. In fact, the industry released a study that
indicated that 154,000 jobs could be lost.
I know the agreement includes a protection against surges,
but that is little comfort for the number of jobs that
certainly could be lost within the overall industry, but also
within my State. You know, under the NAFTA we lost more than
26,000 textile and apparel jobs in the State of Maine, and it
has had a tremendous impact, because those jobs are not
replaced by equally good jobs in terms of pay.
I would like to have you address the issue of compliance. I
know it has been explored with other members of this Committee,
but it has been of little comfort to me in terms of whether or
not these agreements over the long haul would be complied with.
So, could you address the compliance issue within the WTO? I
mean, they may or may not live by the rules. What is it going
to take? We have had experience, under the NAFTA mechanism,
that it has shown us the difficulties enforcing these
agreements in particular disputes.
Secretary Daley. One of the major differences between this
agreement and other agreements, especially the agreements that
have been referred to this morning that we have negotiated in
the past with China, is the specificity in which this agreement
deals with tariff reductions. I just returned from China last
week. There is no question the implementation is of great
concern to us and to the Europeans.
The changes that are necessary, both legal and regulatory,
the changes within ministries at the federal, state,
provincial, and local level are enormous in order to accomplish
much of what has been agreed to. We are working with the
Chinese, in addition to having the WTO dispute settlement
process, having the import surge protection, continuing our
dumping methodology for 15 years, and keeping our section 201
and 301 trade law remedies.
The fact of the matter is, we are working with the Chinese
to try to help them implement this agreement, help them as they
change their regulations and their laws to make sure they are
in compliance with our agreement.
No question about it, as stated to the Committee a few
minutes ago, this will be difficult for them to accomplish, and
for many years we are going to have to be--this Government is
going to have to be very aggressive in pushing them for
compliance with this agreement, as I believe the other members
of the WTO, who will have similar interests in pushing them,
will do also.
Senator Snowe. But is it not true in the past that it has
required extensive negotiations, or renegotiations with the
Chinese with respect to enforcement and compliance? I mean,
what is it going to take? What satisfies you within the WTO
that we will be able to ensure that there will be compliance
with this agreement?
Secretary Daley. I think the changes that are going on in
China are enormous, and the compliance with this agreement, our
condemnation of their human rights, and their efforts to
change, are very difficult; but I believe they are on the road
to changing, and that it is necessary if they want to see the
economic growth that they need for their country. I believe the
leaders have made a basic choice to change, to improve, and to
open their economy in order to accomplish that.
The commitments they have made in this agreement, and
commitments they have made to other countries in the WTO, are a
major part of that economic success that they want to see in
their country, which still to this day lags behind the vast
majority of the world.
Senator Snowe. So what are the specific mechanisms within
WTO that satisfy you?
Secretary Daley. Well, we have a dispute settlement process
we have taken advantage of, and we have won most cases,
including most cases that have been filed against us, and we
have gotten relief.
Are there difficulties with that? Is it too long? Yes. We
need to have a reform of the dispute settlement process, and we
hope to see that occur within the WTO not just for our sake,
but for the other party's sake. Other countries have disputes
with us that they feel the WTO has not been efficient in their
response. We would like to see improvement in the WTO process
itself, but when we have taken action we have usually been
successful, and we have gotten either a change or a
compensation.
In addition to that, as I mentioned, this agreement
specifically allows us to continue our antidumping methodology,
which we in the Commerce Department aggressively take action
under, and the import surge provision and other areas.
Senator Snowe. Could you tell me what you think the impact
will be on the textile and apparel industry as a result of this
agreement?
Secretary Daley. I was saying to Senator Hollings, I
believe, earlier, that there are plenty of estimates, private
sector estimates as to the job impact. The textile industry has
been under siege from the rest of the world for 20-plus years
now. This agreement will probably not change that.
I do not believe it will increase the pressure that is on
that industry and will remain on that industry over the next
number of years, but at the same time, as I said, there is
nothing unique in this agreement, in my opinion, that would
create additional pressure on the textile industry.
Senator Snowe. You do not believe that that will be the
case, that there will be a major shift within China towards the
textile industry?
Secretary Daley. The textile industry in China has been
pretty aggressive. There may be a shift from parts of the world
to China. Many parts of the world that have been producing
textiles and selling not just in the United States but to
Europe and other developing nations are greatly concerned that
China may replace them. You may see a shift in some of that
production from other countries to China, but as far as an
increase by virtue of this agreement, no, we do not.
Senator Snowe. Finally, I know it has been referred to, but
in terms of a potential increase in the trade deficit as a
result of this agreement, the International Trade Commission
did a report last fall regarding the fact that that is
potentially likely. Is that true?
Secretary Daley. I think if our economy stays strong, as it
has done--there are probably three reasons that our trade
deficit has been as substantial as it has, is (1) the strength
of our economy and the very aggressive buying patterns of
American consumers and businesses, (2) the openness of our
market, and (3) many markets around the world being closed, or
not doing as well as they had done earlier in the nineties than
they had.
So the strength of our economy is still the main reason why
the trade deficit continues to grow as much as it does.
Senator Snowe. But with China.
Secretary Daley. Specifically with China, I would not
predict what would happen.
Senator Snowe. Could it go up?
Secretary Daley. It could go up, it could go down,
depending on the strength of our economy and the strength of
the Chinese economy.
Obviously, if the Chinese economy does not grow, they are
not going to be able to purchase goods, not just from the
United States but from other parts of the world, which will
diminish our capacity to export to them. If their economy
collapses, it is not going to be a market where U.S. companies
are going to be selling a heck of a lot. If they grow, and they
open, which this agreement helps them do, then I believe
American companies have an opportunity to sell there, which
will increase our exports.
Senator Snowe. Thank you, Mr. Secretary. Thank you, Mr.
Chairman.
The Chairman. Senator Hollings.
Senator Hollings. I did not understand your answer. Did you
say that your testimony is that with this agreement the trade
deficit will go down or go up?
Secretary Daley. I said I would not--I am not predicting
which way it would go.
Senator Hollings. So you do not say either way.
Secretary Daley. What I am saying is, our economy stays
strong and the rest of the world's stays not as strong as ours
is----
Senator Hollings. I am wondering about the effect of WTO,
in other words.
Right to the point, the International Trade Commission took
a model entitled, ``The Assessment of Economic Effects on the
United States of China's Accession to the WTO.'' This is a
hearing not on whether our economy stays up or down, but the
impact of China's accession to the WTO, and I read:
``A most significant impact was found on U.S.-China trade
flows. Imports into China would be stimulated by its tariff
reductions. As a result, U.S. exports to China would likely be
approximately 10 percent higher. U.S. imports from China are
also estimated to be almost 7 percent higher as trade
liberalization helps make China's export sectors more
competitive. As a result of this increase, the model estimates
an increase in the U.S. trade deficit with China.''
Do you agree with that?
Secretary Daley. I assume one of their assumptions is that
our economy stays very strong. The second thing is, that study
only considered tariffs, and did not consider any other sort of
market-opening activities that occur in this agreement that was
reached with the Chinese. That study only dealt with tariffs.
I do not pretend to be an economist, Senator, but that
study by the ITC only dealt with tariffs, and I assume their
main assumption was our economy would stay strong and American
consumers would continue at the pattern that they have had the
last couple of years.
The Chairman. I thank you again, Mr Secretary.
Secretary Daley. Thank you, Mr. Chairman.
The Chairman. Our next panel is Lieutenant General Brent
Scowcroft, Mr. Richard Kahler, president of Caterpillar, Inc.,
Mr. Jack Valenti, Ms. Lori Wallach, who is director of Global
Trade Watch, and Mr. Harry Wu.
We thank all the panelists for their patience. Obviously,
this is a very serious issue. I would like to welcome all of
our panelists here today. General Scowcroft, we would like to
begin with you, in deference to your age.
[Laughter.]
STATEMENT OF LIEUTENANT GENERAL BRENT SCOWCROFT,
USAF (RET.), PRESIDENT, SCOWCROFT GROUP
General Scowcroft. Thank you, Mr. Chairman, Senator
Hollings, members of the Committee. It is a great privilege to
be here with you today, especially to discuss an issue of such
importance to U.S. national interest. I do not have a formally
prepared statement to submit, but I do have a few opening
observations I would like to make.
Let me state at the outset I am strongly in favor of
granting permanent normal trade relations to China, not as a
favor to China, but because doing so would be very much in the
U.S. national interest. This, in my judgment, goes far beyond
American business and economic interests, important as these
are, to key U.S. political and security interests.
China is certainly no democracy, but instead of judging
where China is now in political development compared to the
United States, let us compare where it currently is with where
it was in 1972, when President Nixon made his historic visit.
On that scale, the degree of change, most of it for the better,
is astonishing, and must also be seen so for the average
Chinese.
I do not want to make too much of this general point, but
it is a fact that the China of 1972, the Cultural Revolution
and so on, is fast disappearing. It still has a long way to go,
but, after all, we waited patiently for 40 years while Taiwan
developed into a democracy.
We face two fundamental questions. The first is, where is
China heading? The second is, how and how much does what we do
affect the answer to the first question?
We cannot know China's vision of its long-term future, nor
how the forces of change now at work will mold that future.
Indeed, it is not at all certain that the Chinese leaders
themselves have a clear vision of where that vast country is
heading, or that a similar vision is held by each Chinese
leader, and even less that the leaders will be able to
accomplish whatever their vision may be.
A few things do seem reasonably clear to me. The Chinese
leaders deeply resent what they consider the humiliation of the
past 150 years at the hands of the, quote, West, unquote, and
they are determined not to submit to western dictation.
Psychologically that affects a lot of what they do.
The Chinese leaders have a deep fear, maybe even paranoia,
of internal political instability, and there is near consensus
within the Chinese leadership on giving top priority to the
continued modernization of the Chinese economy. That now means,
above all, the privatization or marketization, whatever word
you use, of state-owned enterprises and the creation of a
modern banking and financial system.
While it is not easy to project the direction of China's
political evolution, I am basically optimistic on several
counts. One important factor is the tens of thousands of
Chinese students, including sons and daughters of most of the
top Chinese leaders, studying in the United States each year.
Not all return to China, but most do, and they carry with them
a sense of the principles which have motivated this country and
made it such a success.
Another factor is the explosion of information technology.
The Chinese Government is now trying to figure out a way to
control the Internet, for example, but it is almost certainly a
losing proposition. As a case in point, there are already
Internet cafes in most of the large Chinese cities, where one
can rent a computer or rent computer time along with one's cup
of tea.
But arguably the most important factor of all is the
privatization of the state-owned industries. Premier Zhu Rongji
has repeatedly shown his determination to pursue this program,
regardless of its complicating factors for the China social
scene. The WTO is Premier Zhu's ally in abolishing this system,
because there is no way most of these state-owned dinosaurs
will survive the competition which will come with admission
into the WTO and adherence to WTO rules. This program of
privatization is profoundly in the interest of the United
States.
At present, the managers of these state-owned industries
owe and retain their jobs at the political whim of the leaders
in Beijing, and they receive the loans essential to the
survival of their uneconomic enterprises on the same basis.
When an enterprise manager's job and his access to capital
becomes based, not on the goodwill of the political bosses in
Beijing but, rather, on his or her ability to make a profit,
their relationship to the Central Government will undergo a
fundamental transformation as will, I believe, the political
system itself.
It is frequently charged, as we have heard this morning, by
opponents of permanent normal trade relations (PNTR), that it
forces us to give up our leverage to compel political change in
China, and that it will result in us being flooded with goods
made by cheap Chinese labor. To me, it is difficult to find
substance to either of these arguments.
The annual renewal of normal trade relations has not, in
fact, provided much political leverage, as opponents tacitly
admit by claiming that Chinese Government repression has
actually increased in recent years. Annual normal trade
relations to China have not been cut-off, as Secretary Daley
stated, in any year since the Jackson-Vanik legislation was
applied to China. Not exactly great leverage.
And our denial of permanent normal trade relations now
would not deny China WTO membership, but only mean that U.S.
firms would not enjoy the market-opening steps which would then
be available to our industrial competitors. But above all,
Congress will retain the ability to terminate permanent normal
trade relations by the same legislative procedure through which
it can now terminate the present annual renewal.
Additionally, permanent normal trade relations is one of
the few tools we have to provide incentives to those people and
institutions within the Chinese system whose interests are
similar to ours, and who want to make progress similar to the
U.S. model.
And as a last point, China's WTO membership is supported by
the Taiwanese Government and by the duly elected President
Chen. Taiwan's leadership realizes that the WTO will influence
China's behavior for the better, as well as open the door for
Taiwan's own participation in the WTO.
As for being flooded with Chinese goods, U.S. markets are
already open. The important thing to remember here is that the
WTO process is directed at opening China markets. The U.S.
needs to do nothing further. Our tariff system will not change.
In conclusion, Mr. Chairman, this may be one of those rare
occasions on an important issue where there is virtually no
downside to taking affirmative action. We cannot ourselves
determine the ultimate course China will take, and denying
permanent normal trade relations will remove none of the
blemishes that China's opponents have identified. But we can
take steps which will encourage China to evolve in directions
compatible with U.S. interests. To me, granting permanent
normal trade relations is one of the most important such steps
that Congress could take.
Thank you, Mr. Chairman.
The Chairman. Thank you, General Scowcroft. You are always
welcome here before this Committee, and we appreciate your
insight.
Mr. Wu, we are very honored by your presence today before
the Committee. All of us who have followed your service and
sacrifice are very honored by your presence. We thank you for
being here before the Committee today to give us your very
unique and valuable insight into this issue. Thank you, Mr. Wu.
STATEMENT OF HARRY WU, EXECUTIVE DIRECTOR,
LAOGAI RESEARCH FOUNDATION
Mr. Wu. Thank you, Mr. Chairman. It has long been
fashionable to think what is good for Wall Street is good for
the United States, and it is true that PNTR and WTO entry for
China will further help these companies economically, but the
other major beneficiary of China's entry into the WTO will be
the Chinese Communist Party.
The Chinese Communist Party maintains political and
economic control in China, and WTO entry will not change that.
In recent years, many people have argued that money really can
transform a tyrannical government. You heard that engagement
with the Chinese Communist government by trade, investment, and
technology exchange is the best way to foster democracy and
improve human rights in China. Of course, these arguments would
not apply to the former Soviet Union, today's North Korea,
Cuba, and Vietnam.
It is true that living conditions for many Chinese have
improved, thanks to millions of dollars of foreign investment,
but it is the Chinese Government that benefits most from the
foreign trade and investment. This Government needs foreign
money and technology to maintain and increase its power, and to
modernize its system of tyranny.
Do you remember this picture? 10 years ago, the People's
Liberation Army tank almost rolled over the student at
Tiananmen Square in Beijing, and in 1997 Chinese President
Jiang Zemin came here and he said, ``the Tiananmen massacre was
necessary for stability. And, the stability is good for the
foreign investment.''
Have you seen this picture? This is Cardinal Joseph Kung.
He just passed away last month. He was in the Chinese prison
camp for 30 years. He was a champion of religious freedom in
China and today, you know, the Roman Catholic Church is still
illegal in China.
Tibetans are tortured for being loyal to the Dalai Lama.
Members of underground Protestant Churches are imprisoned, and
thousands of followers of the Falun Gong are in the labor camps
today.
Here is another picture of the labor camps of the Chinese
Laogai systems. The Laogai is the Chinese Gulag. Why do you
only condemn the Gulag from Soviet Union and ignore the Laogai
in China? We estimate as many as 4 to 6 million today are in
these Laogai camps. They live in horrible conditions, and they
must undergo thought reform, and they also are forced to labor,
and some of the products continue to come to our markets.
Here is another picture of the execution of a young man,
who participated in a pro-democracy protest in China. China
executes more people every year than every other country in the
world combined, and there is a national policy to harvest these
death row prisoners' organs to make a profit.
The Administration says that we negotiated the WTO
agreement with the Chinese. No, that is wrong. We do not
negotiate with the Chinese Communist government. We negotiated
with the Chinese Communist government, and this government does
not represent the Chinese people. It is not normal. It is not a
normal country, and we do not think it will be permanent, just
like the former Soviet Union and Eastern Bloc.
We must also consider the effects of Chinese entry into the
WTO on national security. The People's Liberation Army, which
the United States fought against in Korea and Vietnam, still
serves as a major component of the tyrannical regime. When we
talk about China slowly achieving superpower status, we must be
aware that this is a communist power.
Last summer, I was in Vladivostok, headquarters of the
Russian Pacific Fleet. I saw many battleships lined up in the
port because the Russian Government does not have the money to
keep them running. But you know that there are two new missile
destroyers in the PLA Navy recently, but the Chinese government
is using hard currency, and it has come from foreign
investment, to strengthen their security force. Today, there
are 2,000 former Soviet Union military experts working in China
for the PLA. They are not pro-democracy in China at all, and
the Chinese government supports terrorist countries like North
Korea, Iran, and Iraq, and they are becoming more and more
capable of posing a serious threat to the security of Taiwan.
Facing this bankruptcy of the socialist economy, what the
Chinese government wants most is increased foreign investments
and guaranteed access to foreign markets with no threat of
bilateral sanctions. The WTO and PNTR will give a timely boost
to this Chinese communist leadership. This blood transfusion to
an obsolete and dying regime is both unwise and unnecessary.
Why do the western capitalists want to rush into China?
China has a population of 1.25 billion. This is a lucrative
market. Nobody can turn away from it, but even more
importantly, China has a huge, cheap, and obedient labor force.
In that country, there are no free trade unions, and all the
men and women are controlled by one hand, the Chinese
government. Chinese officials will maintain order in your
business.
As the Chinese Communist Party grows richer and stronger
from this deal, parts of its new wealth will go to upgrading
its instruments of authority, the police and the military.
Foreign investment will help them crack down on the Falun Gong
efficiently, and it will help them harvest organs from
prisoners with better technology.
In 1994, the Clinton administration delinked human rights
and trade. This fulfilled the basic desires of the Chinese
Communist government. Last month the State Department human
rights report admitted that the human rights situation in China
is worsening, and the Administration intends to introduce a
resolution at the Human Rights Commission in Geneva this year,
but I am asking, why not take a stand in Washington, D.C.,
using our economic leverage?
The Administration says the WTO deal is not an endorsement
of Chinese human rights policy, but it is an endorsement,
because it adds to the legitimacy and hard currency of the
oppressive regime. It is that simple.
If a foreign policy does not contain a moral basis, it is a
typical appeasement policy, and I am asking you, policymakers,
to rethink the United States China policy that currently puts
profit over principle, otherwise we will be traveling down a
road to larger and more difficult problems. We should not give
the Chinese Communist Party in China a blank check.
Thank you.
[The prepared statement of Mr. Wu follows:]
Prepared Statement of Harry Wu, Executive Director,
Laogai Research Foundation
It has long been fashionable to think, ``What is good for Wall
Street is good for the United States.'' Globalization has greatly
benefited multinational corporations, and it is true that PNTR and WTO
entry for China will further help these companies economically. But the
other major beneficiary of China's entry into the World Trade
Organization will be the Chinese Communist Party. The CCP maintains
political and economic control in China, and WTO entry will not change
that.
So we must first consider the effects of China's entry into the WTO
on national security. Congress should, when it considers permanent NTR
status for China, put this agreement under a national security
microscope. The relationship between a lack of democracy, economic
growth, and China's military expansion is a serious one and must be
closely examined. The People's Liberation Army, which the United States
fought against in Korea and Vietnam, still serves as a major component
of this tyrannical regime. When we talk about China slowly achieving
superpower status, we must be aware that this is a Communist power.
In recent years, many people have argued that money really can
transform a tyrannical government. You heard that engagement with
Chinese Communist government by trade, investment and technology
exchange is the best way to foster democracy and improve human rights
in China. Of course these arguments were not applied to the former
Soviet Union, today's North Korea or Cuba. It is true that living
conditions for many Chinese have improved thanks to millions of dollars
of foreign investment. But it is the Chinese government that benefits
most from foreign trade and investment. The government needs foreign
money and technology to maintain and increase its power and to
modernize their system of tyranny. The Chinese government is using hard
currency from foreign investment to rebuild its security force: to hire
2,000 former Soviet Union military experts to work for PLA; purchase
missile destroys and SU-27 jets from Russia; and support terrorist
countries like North Korea, Iran and Iraq.
Faced with the bankruptcy of socialist economy, what the Chinese
government wants most is increased foreign investments and guaranteed
access to foreign markets, with no threat of bilateral sanctions. This
trading status gives just that to the Chinese Communist dictators,
increasing their authority and claims to legitimacy. The WTO and PNTR
deal will give a timely boost to the Chinese Communist leadership. This
blood transfusion to an obsolete and dying regime is both unwise and
unnecessary.
Unfortunately, investing in China is putting your money into the
pockets of the Communist government, and of corrupt officials. The
Chinese government is the ultimate decision maker, and all companies
have to obey its political choices. These investments involve high
risk.
American business partners in China are not free capitalists. Most
of these big companies in China are owned completely by the Chinese
government. That's why you saw many Communist businessmen driving
Mercedes Benzes to come to Wall Street, even to the White House.
It is a serious mistake when some try to tell you that China is
becoming a market economy. The Communist Party cannot institute a true
market economy. The Chinese economic miracle is based on bad loans, a
transfer of wealth from the state to Party cadres, and bad accounting--
not on true production of wealth. The so-called ``market economy'' in
China's mainland is actually a ``socialist market economy,'' controlled
by the government.
The Chinese Communist leadership has not proven to be a reliable
partner in its international dealings. Its human rights abuses violate
the United Nations treaties it has signed, and it continues to violate
other trade treaties by dumping and exporting forced labor products.
Why do the Western capitalists want to rush into China? China has a
population of 1.25 billion. This is a lucrative market. Nobody can turn
away from it. But even more importantly, China has a huge, cheap, and
obedient labor force. In this country there are no free trade unions,
all the men and women are controlled by one hand--the Communist
government. Chinese officials will maintain order in your business.
We've heard many politicians and business people say that doing
business in China helps spread American values and business practices.
It is true, that Chinese businessmen are willing to learn how to be
more efficient, but U.S. businesses in China will never be allowed to
take steps to improve human rights that go against the fundamental
policies of the Communist Party. The Chinese communist government is
one of the worst human rights violators in the world today. In China,
there is a national ``population control'' policy. Every woman and
family is subject to this policy. If a woman in an American company
gives birth to a child without a permit, Chinese law says that she will
be fired. There is nothing the American bosses can do. If Chinese
workers want to organize an independent trade union in an American
company in China, these people would be fired or even arrested. Again,
there is nothing the American bosses can do.
We have seen the ``dollars to democracy'' theory fail over the past
twenty years. The Chinese people may have more brands to choose from at
the store, but they still risk arrest, torture and imprisonment because
of their political beliefs or their faith. China continues to imprison
political dissenters and labor activists, to repress religious freedom,
to execute more of its citizens than any nation in the world, to
violate the rights of women in its population control policy.
The current crackdown on the Falun Gong is a sad but perfect
example of the how the Chinese government treats common citizens. We
have all seen the people of the members of Falun Gong practicing their
beliefs. What are these people doing? Are they throwing bombs? Are they
gathering secretly to discuss the overthrow of the government? No, they
are practicing traditional breathing exercises. But the government is
so paranoid, as all totalitarian regimes are, so it considers these
people a threat. And will treat them as it does any threat, by cracking
down quickly and completely. The members of Falun Gong are dragged into
waiting vans to be detained and imprisoned. Lawyers in China have been
instructed not to represent these people, showing that the Chinese
government will easily break its own laws when it decides to.
As the Chinese Communist Party grows richer and stronger from this
deal, part of its new wealth will go to upgrading its instruments of
authority: the police and the military. Foreign investment will help
them crackdown on the Falun Gong more efficiently, it will help them
harvest organs from prisoners with better technology.
In 1994, the Clinton administration de-linked human rights and
trade. This fulfilled the basic desires of the Chinese Communist
government. Last month the State Department Human Rights Report
admitted that the human rights situation in China is worsening. The
administration intends to introduce a resolution at the Human Rights
Commission in Geneva this year. But why not take a stand in Washington
DC, using our economic leverage? If foreign policy does not contain a
moral basis, it is a typical appeasement policy.
From a human rights standpoint, one can only hope this focus on
trade agreements will not completely overshadow the long road that must
be traveled towards democracy in China. Perhaps one day, the U.S.
government will try to promote human rights in China with the same zeal
that it runs after market access.
I am asking you--policymakers--to re-think the United States' China
policy that currently puts profit over principle, otherwise we will be
traveling down a road to larger and more difficult problems. We should
not give the Communist Party in China a blank check.
The Chairman. Thank you very much, Mr. Wu.
Ms. Wallach.
STATEMENT OF LORI WALLACH, DIRECTOR,
PUBLIC CITIZEN'S GLOBAL TRADE WATCH
Ms. Wallach. Thank you, Mr. Chairman and members of the
Committee.
The question before Congress is: Given China will go into
the WTO, what then is in the U.S. interest in the area that
Congress controls, which is the issue of U.S.-China bilateral
trade status? You have been given two options. You can maintain
the current approach of annual Normal Trade Relations (NTR).
You can preserve the use of assorted enforcement instruments,
such as Section 301, that are banned under WTO. You can
preserve Congress' role by maintaining the status quo and the
leverage, though not now often used, to review and annually
determine U.S.-China trade relations. By maintaining the status
quo, you are clearly not ignoring or cutting off China,
because, absent an act of Congress, Normal Trade Relations with
China will continue year after year.
Alternatively, you can shift to permanent NTR. And you can
shift U.S.-China relations to the World Trade Organization. You
will cede the use of Section 301 and other effective U.S.
unilateral enforcement mechanisms and you will remove Congress'
role from the U.S.-China trade relationship.
Now, here is the hitch. It is not necessary to do the shift
to PNTR, which clearly has some downsides, for the U.S. to
obtain whatever potential benefits could accrue when China
enters the WTO, if China actually complies with the terms of
the WTO. Footnote: As many Senators have noted, China's
compliance is uncertain. And footnote 2: The GAO recently
reported that many of the provisions of China's WTO accession,
including all of those dealing with the state sector and with
subsidies actually have yet to be negotiated. So Congress
cannot even know exactly what it is that the U.S. is getting
prior to the PNTR vote.
That having been said, assume China goes in and they follow
WTO rules. And let us say even that the terms of the full
package are good. Thanks to the agreement on trade relations
between the U.S. and China, known in shorthand around
Washington as the 1979 Agreement, the U.S. gets the goodies if
China complies with WTO rules because that 1979 Agreement
requires reciprocal Most Favored Nation between the U.S. and
China.
The 1979 Agreement explicitly covers tariffs; i.e., all of
the tariff cuts you just heard touted by Secretary Daley if
China enters the WTO, (which Senator Dorgan notes are not good
enough but are something) we get those tariff cuts anyway. You
do not have to give China PNTR. We get those tariff cuts
without PNTR under the bilateral agreement. And I would submit
for the record, the transcript of USTR Barshefsky saying so to
the House Ways and Means Committee as regards to the 1979
bilateral and the tariff cuts.
[The following material presented by Ms. Wallach for the
record.]
House Ways and Means Committee Hearing
february 16, 2000
U.S. Trade Representative Barshefsky Admits China Would Give Tariff
Reductions without China PMFN
REP. KLECZKA. And, using autos as an example, if, in fact, this
Congress would not grant permanent trading status to China, they, in
fact, could continue their tariff of 100 percent on automobiles that we
ship there; however, they would give the current negotiated tariff of
25 percent to all other trading partners.
AMB. BARSHEFSKY. We may have an argument under a pre-existing 1979
agreement with China that China would have to give us the advantage of
tariff reductions, but we would have no such claim in the case of
trading rights, distribution, the ability to service in China, setting
up dealerships in China. We would have no such claims.
REP. KLECZKA. Okay. Now, I have some feel for those who say we
still must keep a short leash on this agreement, know full well that
we've seen China and some of their practices in the past years. What
can we do, either in the permanent trade legislation that we'll have
before us or in existing WTO legislation, to provide for a more
frequent review than that as what's called for today under the trade
policy review mechanism?
AMB. BARSHEFSKY. I think that Congressman Levin had some very, very
good suggestions in that regard. In other words, certainly we are going
to want to be able to have a very strict monitoring regime on China's
adherence to its commitments. I think this is essential and China needs
to know we are watching that closely.
But there is more. That 1979 treaty requires that the U.S.
be given Most Favored Nation treatment--i.e., the best--any
third country gets on all laws, regulations and requirements
``affecting all aspects of internal sale, purchase,
transportation, distribution, or use of imported goods.'' So
not only do you get the tariff cuts without having to do PNTR,
you get distribution rights for the imported goods.
That treaty also requires China to ``accord firms,
companies and corporations treatment no less favorable than it
affords any third country,'' MFN for services and investment.
The benefits of China's accession, if it follows the WTO rules,
accrue to the U.S. under the 1979 bilateral. And I submit, the
1979 Agreement and a memo describing it by Columbia University
Law Professor Barenberg, also for the record.*
---------------------------------------------------------------------------
* The information referred to has been retained in the Committee's
files.
---------------------------------------------------------------------------
Now, let me clarify one thing: the U.S./China November 1999
deal, that is not a freestanding agreement, the benefits of
which go away if Congress does not do PNTR. As USTR stated to
the press, and I submit this for the record also: there is no
quid pro quo. As you can see in looking now at the text of the
November 1999 deal, the U.S. does not agree to give PNTR in
order for the U.S. to get benefits. Rather, the U.S. bilateral
and all the other countries' bilaterals will get
multilateralized. And the best that everyone gets bilaterally
becomes what everyone gets multilaterally. It will become the
terms of China's accession to the WTO.
And under the 1979 Agreement, the U.S. gets whatever is the
best China gives to any other country, which becomes the WTO
accession terms China agrees to--all those tariff cuts and all
the other goodies. The whole basis of MFN is a fluid, changing
notion of countries giving each other the best, as it changes
over time, to each other.
Now, the administration has derided the 1979 Agreement.
Commerce Secretary Daley called it a three-page MOU. It happens
to be 10 pages. But, more importantly, it is the basis for the
billions of dollars of U.S.-China trade. So it is a little
difficult to now say it is inconsequential, to say nothing of
all the other bilaterals that Senator Hollings mentioned, which
stand to cover intellectual property issues and all of these
sectoral issues covered in the memorandum of understanding.
The issue, though, always is enforcement. And many Senators
have raised that. The reason to not go for permanent NTR but to
maintain the annual standard is because we need to maintain our
effective enforcement tools. The U.S. could have the best of
both worlds. We could get the concessions that China has to
make to enter WTO--China's new best treatment--while keeping
tools to deal with China's abysmal record on enforcement.
It is an open question exactly what the WTO requires WTO
Members to give each other, as noted by Georgetown Law
Professor John Jackson. However, the U.S. is going to avoid
ever testing the question. USTR has announced they will apply
for non-application in the WTO between the U.S. and China. The
one thing everyone agrees that means is the U.S. and China will
not have WTO dispute resolution assurances between them. And to
that we say, thank God.
There are many who would argue that it is actually a much
better idea to get the goodies of China's WTO accession, the
trade benefits, and keep our non-WTO enforcement. As a matter
of politikreal, in the WTO, the U.S. is one of 136 countries
versus with U.S.-China bilateral enforcement, the U.S. takes 42
percent--yes, 42 percent--of China's total exports--a bit of
leverage.
Also under Article 23 of the WTO Dispute Resolution
Understanding, which allows that WTO Members only use WTO
dispute resolution to resolve disputes between each other. It
takes at least 2 years; and, as several Senators noted, it
relies on something totally missing in China: the rule of law.
If countries decide not to follow a WTO ruling as with the
E.U., they simply do not.
Now, as we have seen in recent rulings, while the
Administration talks about maintaining Section 301, in fact the
WTO has ruled that the U.S. may not use Section 301 except
within the WTO's 2-year time line, making it Section 301-not.
The U.S. has just lost the first ruling on its anti-dumping
laws last week in the Japan case regarding steel.
I would conclude by saying that as regards the potential
trade concessions of China's WTO entry, the way to proceed is
to maintain the annual review and find out what happens with
China's accession to the WTO. This is a trust-but-verify stance
that allows the U.S. to have the best of both worlds.
Now, before I totally conclude, I would just note that not
only is PNTR not necessary, the arguments for why it is not
merited are equally compelling, as Mr. Wu has pointed out. And
I submit my full written testimony for the record, which also
lays out these issues.
I would just make two final points. One is that de-linkage
in 1994 was a bad idea. The U.S. should reverse that decision.
The Congress needs to have a role to ensure that the enormous
leverage of our market, the U.S. market that everyone wants
access to, is used both to get trade benefits that are
reciprocal and to suit other U.S. goals.
But the one upside to de-linkage was that we tested the
touted policy that more free trade and more liberalization
equals more freedom and democracy. For 6 years we have had more
free trade with China and we have had more trade liberalization
in China, and we have had the U.S. State Department say, under
that little experiment, freedom and democracy have deteriorated
every single year. With that kind of data, it is not the kind
of experiment you want to lock in permanently.
And finally, on the issue of the potential benefits of
China's WTO entry, there are so many issues of injustice that
the U.S. has leverage to deal with, if it would only exercise
it. But on the issue of the Internet, this notion of the great
new China market--here in the Commerce Committee's area, the
Internet--in fact, in China right now, there are many people in
jail simply for using the Internet. It is a crime to send
information disfavorable to the Chinese Government over the
Internet to another country. So in my testimony I list the
names of journalists who are in jail for e-mailing friends in
the U.S. information on Falun Gong. What kind of business
opportunity is it if the customers go to jail for using your
service?
Thank you very much.
[The prepared statement of Ms. Wallach follows:]
Prepared Statement of Lori Wallach, Director,
Public Citizen's Global Trade Watch
Permanent NTR for China: Neither Merited nor Necessary
Mr. Chairman and members of the Committee, on behalf of Public
Citizen and its members nationwide, thank you for the opportunity to
testify on the issue of China's admission to the World Trade
Organization (WTO) and related matters regarding Normal Trade Relations
(NTR) status for China.
My name is Lori Wallach. I am the director of Public Citizen's
Global Trade Watch. Public Citizen is a consumer advocacy group founded
in 1971 by Ralph Nader. My testimony today is also endorsed by the
Citizens Trade Campaign of which Public Citizen is a member group along
with hundreds of other consumer, labor, religious, environmental,
family farm and other citizens' groups across the country. The combined
membership of the Citizens Trade Campaign member organizations is over
7 million nationwide.
Most simply, Permanent NTR for China is neither merited nor
necessary.
PNTR is not merited on the basis of the Chinese government's dismal
and steadily decaying record on an array of issues from human rights
and weapons proliferation to meeting its international obligations or
conducting fair trade. At issue with Congress' PNTR decision is really
one thing: eliminating Congress' annual review of the U.S.-China
relationship under the Jackson-Vanik Amendment, which sets procedures
for annual grants of NTR to non-market economies. Whether or not NTR is
permanent, the U.S. and China will continue to trade. Indeed, absent an
act of Congress to change the status quo, the U.S. would continue to
provide the same basket of trade privileges to China annually that it
grants its most favored trade partners. The only real question is
whether Congress should give up its annual review and the related
ability to determine the U.S. trade treatment China should be granted.
The Chinese regime and U.S. corporations seeking to relocate
production to China and guarantee unconditional access for their
products back into the U.S. market seek termination of the annual
review because it shines a spotlight of scrutiny on an otherwise
totally unaccountable Chinese regime. The Clinton Administration
severely undercut the effectiveness of the annual review by formally
delinking it from human rights and other concerns. However, before the
current Administration put this tool up on the shelf, it was used
effectively. The leverage created by the review combined with the
specter of access to the U.S. market being reconnected to China's human
rights, non-proliferation or trade violations, is a powerful tool for
change that must not be denied to future Congresses and
Administrations. Yet, a core principle of the WTO is that countries may
not consider other countries' human rights conduct or the conditions,
such as with forced labor, under which their goods are produced in
determining those countries' market access rights.
The one useful outcome of the Administration's move to delink
China's trade status and human rights is that it has allowed the
theory--that greater trade links with the U.S. and greater economic
freedom will improve human rights and democracy--to be proved to be
false. Greater trade links and economic liberalization with China have
not resulted in improvement in China's human rights conduct nor
promoted the growth of democracy in China. In fact, the opposite has
occurred. The U.S. State Department's 2000 annual human rights report
documents the worst human rights, democracy, religious freedom, and
free press violations in China of any past year. Meanwhile, during this
same period the U.S. trade deficit with China exploded and now tops $70
billion.
PNTR is also not necessary: even if Congress opposes China PNTR,
U.S. exporters still would obtain the potential trade benefits of
China's WTO accession under the 1979 U.S.-China Agreement. Because
proponents of PNTR have an extremely difficult time making the human
rights case, given the data, they typically fall back on the argument
that PNTR is necessary to avoid putting U.S. businesses at a
competitive disadvantage relative to other WTO countries if China joins
the WTO.
Yet, the Agreement on Trade Relations Between the United States and
China (``1979 Agreement''), which automatically renews every three
years and which is the basis for billions of dollars of current U.S.-
China trade, provides U.S. farmers and manufacturers with the identical
benefits China must give all WTO nations if it joins the WTO. The 1979
Agreement unequivocally requires that the U.S. and China ``shall''
grant each other ``any advantage, favor, privilege or immunity'' they
grant to any other nation.\1\ Thus, the major tariff cuts required if
China enters the WTO apply to U.S. goods regardless of the fate of
PNTR.
---------------------------------------------------------------------------
\1\ 1979 Agreement, Article II.
---------------------------------------------------------------------------
The 1979 Agreement means that U.S. exporters will obtain the same
trade benefits from China's WTO entry as would businesses in other
nations, including regarding distribution and other matters related to
internal sales of imported goods. The broad Most Favored Nation (MFN)
requirement in the 1979 Agreement means that China must give the U.S.
the same best treatment it gives any other nation. If China enters the
WTO, that ``best treatment'' will be the WTO terms China gives other
nations. Thus, claims by the Administration that U.S. goods alone would
miss out on the significant tariff cuts that the Administration is
touting as a key result of China's WTO entry or that U.S. businesses
would still face domestic content or performance requirements are
false.
The plain language of the 1979 Agreement invalidates the USTR's
claim that distribution and other sales-related aspects of importing
goods are not covered. The actual language of the 1979 Agreement
requires China to grant the U.S. ``any advantage, favor, privilege . .
.'' in ``all matters regarding:''\2\ ``all laws, regulations and
requirements affecting all aspects of internal sale, purchase,
transportation, distribution or use of imported goods.'' \3\
---------------------------------------------------------------------------
\2\ 1979 Agreement, Article II.
\3\ Id. at Article II (D)
---------------------------------------------------------------------------
The U.S. could have the best of both worlds: tariff cuts and other
trade benefits required if China enters the WTO and effective
enforcement via U.S. measures such as speedier domestic surge-
protection, anti-dumping laws, and Section 301 which WTO forbids.
The Clinton Administration says that if Congress does not grant
PNTR, it will file at the WTO for ``non-application'' with China--
meaning the U.S. and China won't have a full WTO relationship. PNTR
advocates and opponents agree if this occurs, WTO dispute resolution
will not apply between the U.S. and China. However, opponents see the
ability to use speedy and effective U.S. unilateral trade enforcement
tools as a benefit of maintaining annual MFN. If the U.S. does grant
PNTR it will be bound to only using WTO dispute resolution to enforce
China's trade commitments. As we have seen with assorted U.S.-EU WTO
fights, WTO dispute resolution takes at least two years and ultimately
relies on something entirely missing in China: commitment to the rule
of law.
The U.S. has nothing to lose by taking a ``trust but verify''
approach to China trade by maintaining U.S. enforcement tools forbidden
by the WTO regarding China while reviewing whether China follows its
WTO commitments. The November 1999 U.S.-China WTO deal is not a
separate trade agreement, but rather the U.S. contribution to what will
be the WTO terms China gives to all 136 WTO Members. U.S. negotiators
built on what the previous countries negotiating with China had
obtained, and countries still negotiating, such as he European Union,
will build on what the U.S. obtained. The best commitments that are
obtained in all of these bilateral talks will be multilateralized and
become the terms of China's WTO accession, along with some issues to be
negotiated in Geneva. (This includes how the state-owned sector will be
treated and rules on subsidies unfinished issues noted in a recent
General Accounting Office report\4\ on China-WTO, begging the question
of how Congress would rush to approve PNTR without knowing the terms of
China's WTO accession.) All of these ``concessions'' will be equally
available to all WTO countries. The U.S. will obtain these same
concessions under the 1979 U.S.-China Bilateral Agreement whether or
not the U.S. Congress grants China PNTR.
---------------------------------------------------------------------------
\4\ GAO Report GAO/NSIAD-00-94 ``China's WTO Membership''
---------------------------------------------------------------------------
The U.S. has plenty to lose by granting PNTR, including effective
trade enforcement tools, the leverage of annual congressional review of
China's record and WTO attacks on U.S. laws by China. In the 21 years
of U.S.-China trade, different Administrations have declared each and
every U.S.-China trade agreement as the ``First,'' the ``Last,'' and
the ``Most Important.'' Yet, China has systematically broken trade
commitments to the U.S. and other countries. China has only halted
violations of trade--and other international commitments--when
threatened with dire economic implications in the form of large and
speedy trade sanctions. By not granting PNTR, the U.S. can take a
``trust but verify'' approach on China trade under the WTO, obtaining
the WTO benefits via the 1979 Agreement and maintaining our annual
review until we have evidence that China will follow WTO terms.
Meanwhile, by not granting PNTR and avoiding a full WTO relationship
with China, the U.S. can also avoid challenges by China to U.S. human
rights, environmental, and other laws using WTO dispute resolution. As
the past five years of WTO jurisprudence have shown, plaintiffs
generally win cases at the WTO and each and every domestic
environmental, health, or other public interest measure brought to the
WTO has been ruled an illegal trade barrier.\5\ Thus, in addition to
requiring the U.S. to give up effective U.S. enforcement tools, a full
U.S.-China WTO relationship would mean U.S. laws newly would be exposed
to WTO attack by China whose government has been very vocal in
challenging the legitimacy of U.S. laws and policies.
---------------------------------------------------------------------------
\5\ See Wallach and Sforza, Whose Trade Organization?: Corporate
Globalization and the Erosion of Democracy, (1999) at chapter 8.
---------------------------------------------------------------------------
A. PNTR for China Is Not Merited
In 1994, the Clinton Administration launched a major experiment by
delinking U.S. trade treatment for China from our human rights concerns
regarding China. During each year of this experiment on whether free
markets lead to freedom, the U.S. State Department has reported that
human rights have deteriorated. It is time to reverse that policy and
to use the enormous, if unexercised, U.S. leverage on China. The U.S.
receives over 40% of China's exports and it is these exports that fuel
the economic growth that is the only basis for legitimacy for the
current Chinese regime.
The complete absence of democracy and freedom in China should give
pause to what ``free'' trade might mean to the Chinese government. In
1989, China repressed thousands of peaceful demonstrators at Tiananmen
Square. Hundreds were killed or ``disappeared,'' thousands more served
lengthy prison terms, and even now, nearly 250 still languish in
Chinese prisons.
How will Members of Congress justify to voters back home ending
review and scrutiny over a regime that has brutally repressed the most
basic freedoms Congress pledges to defend while sticking its proverbial
thumb into the eye of Congress time and again with its bellicose
statements. The conduct of the Chinese regime during the years it has
been free of effective congressional scrutiny (thanks to the delinkage
policy) has resulted in tens of thousands of stories of abuse, any one
of which shows how shameful it would be for Congress to give up its
only tool for change.
There is no free flow of information or open press in China. China
says it will permit foreign investment in Internet services in the
future. Yet, in China people who use the Internet freely risk long
prison sentences. Given China's free trade in Internet services
commitments did not include free speech on the Internet commitments, it
is very important to understand the enormous obstacles for both
investors and individuals to free use of this information service and
the enormous obstacles to the free flow of information in and out of
China. For instance, journalist Zhang Ji was convicted and jailed for
``disseminating reactionary documents.'' His ``crime''? Emailing
information on the Chinese crackdown on Falun Gong practitioners over
the Internet to the U.S..6,7 The international Committee to
Protect Journalists reported this year that China had more reporters
behind bars than any other country.
---------------------------------------------------------------------------
\6\ ``Report: China Arrests Archbishop,'' Associated Press,
February 14, 2000
\7\ ``Attacks on the Press in 1999,'' Committee to Protect
Journalists, March 22, 2000.
---------------------------------------------------------------------------
Attacks on democracy activists and journalists have escalated, with
leaders and members of the Chinese Democracy party either jailed or
exiled. For instance, Gao Hongming a prominent member of the Beijing
Chinese Democracy Party (CDP), was under police surveillance for eight
years, including monitoring and videotaping his contacts with
foreigners. The CDP is a banned opposition party because its platform
includes open and free elections in China. Mr. Gao was picked up and
detained in June 1999 when the Chinese government swept the country
free of democracy activists to prevent any demonstrations to
memorialize the ten year anniversary of Tiananmen. Weeks later he was
released, only to be arrested again in August for ``subversion'' and
sentenced to eight years in prison.
The Chinese government controls all religious activity within China
and those who seek religious freedom are imprisoned. There are only
five officially recognized religions in China, and each official faith
is tightly controlled by the Chinese government. For instance, China
recognizes only the Catholic Patriotic Movement as its ``Catholic
Church.'' However, the Catholic Patriotic Movement is not recognized by
the Vatican as a Catholic Church. Though China counts as many as 4
million official Catholics, the Vatican believes there are as many as
10 million ``underground'' Catholics. In the past year several Bishops
ordained and recognized by the Vatican have been detained and a long
list of priests and nuns have been imprisoned. Recently, the 80-year-
old Archbishop ordained by the Pope but not recognized by China
disappeared in Fuzhou in the Province of Fujian. Many people believe he
has been arrested again. Archbishop John Yang Shudao has already spent
nearly three decades in Chinese prisons; thus his health is fragile.
His exact whereabouts remain unknown despite demands for information
from numerous governments and the Vatican.
The official Protestant ``Three Self Patriotic Movement'' has
between 10 and 15 million members, but the growing Protestant
evangelical and home church movement has as many as 30 million
followers. In the past year the Chinese government has conducted severe
crackdowns on these Protestant groups. Protestant churches have been
raided with their followers and Bibles swept up by police, and Xu
Yongze, a prominent evangelical leader was publicly labeled a cultist.
When police in Xinyang arrested 16 Christians on March 2, 2000, they
also confiscated their Bibles, a typical practice. No one is certain
what has happened to Mr. Xu and the others who were interred during
these church raids.
The highest holy person in the Buddhist religion is the Dalai Lama,
yet no picture of the Lama is allowed to be displayed anywhere in his
Tibetan homeland. Indeed, many Tibetans are serving long prison terms
for the crime of posting his likeness.\8\ Amnesty International reports
that the hundreds of teenage girl and boy Buddhist monks jailed in
Tibet face horrible abuse, from systematic rape to starvation.
Meanwhile, the child that the Dalai Lama chose to be the Panchen Lama,
the second holiest figure in the Buddhist religion, has not been seen
in three years since the young child and his family were detained by
the Chinese government. The Chinese government named its own Panchen
Lama and installed that child shortly after disappearing the Dalai
Lama's choice.
---------------------------------------------------------------------------
\8\ U.S. Department of State, 1999 Human Rights Report, China,
February 25, 2000
---------------------------------------------------------------------------
The Chinese government only allows the existence of the official
Chinese government-sponsored union, a notoriously corrupt wing of the
communist party known for ignoring the demands of Chinese workers.
Workers for decades have tried to organize independent unions who will
actually fight to clean up horrifically unsafe work places and demand
living wages. Labor leaders have long been on the front lines of the
fight for democracy in China. Many languished in prison or in forced
labor camps after Tiananmen.
A major Chinese mining operation, Sichuan Xinkang Asbestos, is part
of the ``Laogai'' prison labor camp system.\9\ Americans view the
Laogai system as forced labor camps, but China calls them ``education
camps.'' At Xinkang Asbestos Mine, hundreds toil under the gun; working
and living conditions contribute to the high death rate. The Guangzhou
#1 Reeducation Through Labor Camp also is part of the ``Laogai'' prison
forced-labor system. Prisoners at this facility work in a stone quarry
and also assemble artificial flowers for export to the U.S., among
other nations. The Chinese Ministry of Justice has refused U.S. Customs
officials' requests to visit this facility even though in 1992 China
signed an agreement with the U.S. on prison labor requiring such
access.
---------------------------------------------------------------------------
\9\ ``A Rare Insight into China's Laogai Economy: Dun & Bradstreet
Directory Lists Forced Labor Camps,'' Laogai Research Foundation, 1998.
---------------------------------------------------------------------------
Last year according to the Committee to Protect Journalists, three
people who have struggled for years to establish independent unions
were arrested when they created and published the China Workers
Monitor, a journal which campaigned for workers rights. Two of these
leaders are sentenced to decade-long terms. Yue Tianxiang, Guo Xinmin,
and Wang Fengshan represent the best of the labor movement worldwide by
putting their lives on the line fighting for workers rights and
publicizing the conditions for Chinese workers. China's footwear
industry produces 6 billion shoes a year--enough for every person on
earth. Many name brand sneakers are produced in plants such as the Tung
Tat Garment Factory in Shilong, Dongguan province where workers toil 80
hours a week for 24 cents an hour making Adidas.\10\ Until real unions
are permitted in China, Chinese workers will not be paid a living wage,
much less enough to afford U.S. products
---------------------------------------------------------------------------
\10\ ``Behind the Label `Made in China','' National Labor
Committee, 1998.
---------------------------------------------------------------------------
Retaining the ability to effectively pressure against such abuses
would be sufficient grounds for Congress to reject PNTR and the
termination of the annual review. However, to make matters even
clearer, there is little to be lost and much to be gained economically
if Congress rejects PNTR.
B. PNTR for China Is Not Necessary
There have been numerous misconceptions--as well as a certain
amount of outright mendacity--regarding China WTO accession and
Congress' role. Given I am joined on this panel by Harry Wu, a person
better qualified than I to explain why granting China permanent MFN is
a terrible idea, I will now shift my focus onto clarifying what
Congress' role really is on this matter--and Congress' options. I will
start by clearing up some myths and misconceptions:
Proponents of granting China permanent NTR suggest that China could
not enter the WTO unless the U.S. Congress granted it permanent NTR
status. Contradicting their first point, proponents of permanent China
NTR also claim that if China entered the WTO and the U.S. Congress does
not pass permanent NTR for China, U.S. businesses would be excluded
from whatever trade benefits China grants other countries when it
joins. Both claims are entirely false. However, given that numerous
pro-PNTR experts and the Chinese government have both dispelled the
first notion--that China's WTO admission has anything to do with
Congress' P vote--I will not focus on it.
Recently, the Clinton Administration has intensified its campaign
of misinformation about the second myth, the implications for U.S.
business if China does enter the WTO and Congress refuses to grant
China PNTR. For instance, in late March the Administration widely
released to Congress, the press and public a USTR memo that arbitrarily
reinterprets our existing array of commercial bilateral agreements with
China. In the name of arguing why Congress must approve PNTR, this new
USTR analysis reinterprets existing U.S.-China agreements to be
meaningless while arguing that all U.S.-China trade problems would be
solved by passage of PNTR. The new position contrasts sharply with past
Clinton Administration characterizations, on the front pages of the
U.S. national press, touting the very same U.S.-China bilaterals as
providing unprecedented U.S. market access to China and as tremendous
breakthroughs in U.S.-China relations.
In addition to conflicting with past Administration pronouncements,
these highly restrictive reinterpretations of existing U.S.-China
commercial commitments have no basis in law.
As well, this ``analysis'' puts the short term political goal of
convincing Congress there is urgent need to grant China Permanent NTR
ahead of U.S. economic interests. When Congress rejects PNTR, it is the
1979 Agreement and the other bilaterals on which USTR will need to rely
to obtain trade benefits for U.S. business. Indeed, Chinese trade
officials could employ the USTR memo to try to undercut the clear
language of the 1979 Agreement.
The 1979 Agreement, as was revealed in a March 1, 2000 legal
memorandum by Columbia Law School Professor Mark Barenberg, would
provide U.S. businesses with the trade benefits China must provide WTO
countries if it accedes to that body. Thus, even if Congress opposes
China PNTR, U.S. exporters would obtain the potential benefits China
must provide other nations if it enters the WTO while retaining the
effective U.S. trade enforcement mechanisms forbidden under the WTO,
such as Section 301.
Clarifying this information is vital because it shows that Congress
has an array of options regarding China's trade status that can provide
U.S. economic interests with any potential benefits of China's WTO
admission while maintaining a meaningful Congressional oversight role
in U.S.-China commercial relations.
1. The 1979 Agreement Provides U.S. Farmers and Manufacturers Seeking
to Export to China with the Tariff Cuts and Distribution and Marketing
Rights for Their Products Which WTO Members Obtain if China Enters the
WTO Regardless of What Congress Decides on PNTR.
The 1979 U.S.-China bilateral agreement is unequivocal in requiring
that the U.S. and China ``shall'' grant each other ``any advantage,
favor, privilege or immunity they grant like products originating in or
destined for any other country or region\11\.'' This language describes
a broad reciprocal grant of Most Favored Nation (MFN)\12\ treatment
between the U.S. and China.
---------------------------------------------------------------------------
\11\ 1979 Agreement, Article II, chapeau.
\12\ The term Most Favored Nation comes from the text of the GATT,
is used throughout the WTO and appears repeatedly in the 1979
Agreement. MFN refers to a concept under which a country commits to
give the best trade treatment it provides to any trade partner to all
trade partners with whom it has a MFN commitment. In the U.S., the
statue providing annual grants of MFN treatment to non-market economies
was amended to replace the term MFN with ``Normal Trade Relations.''
---------------------------------------------------------------------------
If this broad coverage were not clear on its face, the general
Article II language in the 1979 Agreement is followed by explicit
extension of such MFN coverage to ``all matters regarding:''\13\
---------------------------------------------------------------------------
\13\ 1979 Agreement, Article II, chapeau.
tariffs, duties and charges of any kind; (Article
II(A))
``all laws, regulations and requirements affecting all
aspects of internal sale, purchase, transportation,
distribution or use of imported goods;'' (Article II (D))
customs clearance, transit, warehousing; (Article II
(B))
taxes and other internal charges levied directly or
indirectly; (Article II(C))
administrative formalities for import and export
licenses.
(Article II(E))
Most simply, the terms of the 1979 Agreement mean that China must
give to U.S. goods the best treatment it provides to any other nation's
goods--including in ``all matters regarding . . .'' the above list of
sales and distribution-related aspects. The plain language of the 1979
Agreement proves false the Administration and business claims that
distribution and other sales-related aspects of importing goods to
China are not covered by the 1979 Agreement.
As well, the Administration continues to be ambivalent when asked
whether all WTO-required tariff cuts would be available to U.S.
exporters regardless of passage of PNTR. The answer to that inquiry is
yes, unequivocally U.S. goods would obtain those steep tariff cuts
which the USTR has touted and which China would be required to make if
it enters the WTO. Article II(A) of the 1979 Agreement explicitly
guarantees these tariff cuts for U.S. goods regardless of what Congress
decides about PNTR for China.
2. The November 1999 U.S.-China Deal on Terms for China's WTO Accession
Is Not a Free-Standing Trade Agreement, and the Potential Benefits of
that Deal Will Not be Lost if Congress Rejects PNTR
Many in Congress have been confused by the Administration's focus
on the November 1999 U.S.-China deal about the terms for China's WTO
accession. That deal is not a free-standing U.S.-China trade agreement,
the benefits of which will be lost if the U.S. Congress does not take
action.
Rather, the process by which any new country enters the WTO
includes a series of bilateral negotiations with key WTO countries, the
results of which are then combined to form one multilateral protocol
which sets the terms for the new country's accession to the WTO.\14\
U.S. negotiators built on the commitments obtained by countries which
had previously completed bilateral talks on WTO terms with China.
Countries still negotiating with China will build off of what the U.S.
obtained. For instance, one major sticking point in the on-going
European Union (EU)-China talks about China's WTO terms is that the EU
seeks even better access for automobiles into the Chinese market than
the U.S. deal achieved. If the EU obtains the improved commitments from
China, the U.S. will also obtain those benefits as they will be
multilateralized into China's overall WTO terms along with the best of
the commitments that the U.S. and other countries obtained in their
bilaterals.
---------------------------------------------------------------------------
\14\ See GAO Report GAO/NSIAD-00-94 ``China's WTO Membership'' at
8-11 for a description of the WTO accession process.
---------------------------------------------------------------------------
The 1979 Agreement's MFN requirements mean that China must give
U.S. goods the best treatment it provides to any other nation's goods--
this treatment will be the totality of the WTO package once all of the
bilaterals, including the U.S.-China November 1999 deal, are
multilateralized.
Currently, China's most favored treatment (now provided to the U.S.
and China's other trade partners) includes higher tariffs than the WTO
permits and assorted distribution and regulatory restrictions forbidden
by WTO rules. When China enters the WTO, China must cut its tariffs and
regulatory restrictions to meet the WTO's rules and to conform with the
assorted additional commitments it has made in its bilateral talks.
Whether or not the U.S. passes PNTR, and whether or not the U.S. and
China have full WTO relations, China must grant its new most favored
treatment to the U.S. under the 1979 Agreement.
Indeed, the very notion of reciprocal MFN that is the basis of the
1979 Agreement requires that whatever and all benefits given to any
other nation must also be granted to all MFN partners. Fluidity of
coverage is inherent in the MFN concept: the benefits available to any
MFN partner changes as does the granting country's treatment of other
nations. Thus, if China gives other countries additional freedom from
internal Chinese regulations regarding distribution and marketing of
imported goods whether or not this is connected to China's WTO
accession U.S. goods obtain the same treatment under the 1979 Agreement
generally and explicitly under the 1979 Agreement's Article II(D)
covering regulatory and issues regarding internal sale.
The notion that the U.S. would not obtain explicit WTO benefits
China grants to other countries regarding imported goods--like those
removing conditions for importing goods such as local content
requirements--is incorrect. The specific example presented in the USTR
March 2000 memo is that U.S. agricultural goods could be banned from
China based on food safety or pest control rules that would be
forbidden under WTO rules. Yet, under the 1979 Agreement, China must
provide the U.S. the same treatment it provides any other country. The
1979 Agreement has a specific provision--Article II(D)--explicitly
extending this requirement to regulatory matters related to internal
sale of imported goods. Thus, if China applies the WTO's Sanitary and
Phytosanitary rules, as required, to any WTO member, it must provide
the same treatment to U.S. goods. The USTR, the Administration and PNTR
business boosters are relying on Congress' lack of understanding of
this core aspect of MFN as a fluid state of equal treatment versus any
one set specific trade benefits.
Moreover, contrary to USTR suggestions, China could not ``make up''
the major tariff cuts by charging U.S. goods higher internal taxes than
are charged other imported goods thanks to Article II(C) of the 1979
Agreement. As well, Article II(C) prohibits taxing U.S. goods at a
higher rate than Chinese domestic goods. This specific example is only
one element of another general point on which the USTR aspect of a
larger point about which PNTR boosters have not been honest: national
treatment for U.S. goods in China.
NATIONAL TREATMENT: The March 2000 USTR memo declares that unless
Congress approves PNTR, U.S. goods would not receive ``national
treatment,'' which means that China could discriminate against U.S.
goods relative to domestic Chinese goods regarding regulatory matters.
This is false. It is irrelevant if the 1979 Agreement does not contain
specific language on National Treatment, as USTR knows.
Under WTO rules, China will be required to treat all of its WTO
trade partners in a non-discriminatory fashion (meaning treating
domestic and imported goods the same for internal taxation and
regulation). As a practical matter, this means that China must apply
the same set of domestic regulations to imported goods that it does to
domestic goods. And, once China provides that treatment for one of its
trading partners' goods, the U.S. and its imported goods must receive
the same treatment, thanks to the requirements of MFN generally and the
specific application of MFN to matters such as domestic regulations in
Article II(D) of the 1979 Agreement. While the concept of National
Treatment is not present in the 1979 Agreement, the results and
benefits of that principle--as translated into the actual treatment
U.S. goods must be given--are guaranteed for U.S. goods because of the
1979 Agreement's broad MFN obligations.
3. The 1979 Agreement Provides U.S. Companies Seeking to Export
Investment and Jobs to China Investment and Service Sector Rights, but
These Rights Are Being Undercut by USTR's New Declarations that these
Sectors Are Excluded from the 1979 Agreement
The 1979 Agreement also contains explicit language on services and
a requirement to ``accord firms, companies, corporation, and trading
organizations of the other party MFN treatment.''\15\ These provisions
and the benefits they provide to U.S. businesses are explained in a
March 1, 2000 memorandum by Columbia Law School Professor Mark
Barenberg. As Professor Barenberg describes, several provisions of the
1979 Agreement require that U.S. investors and service sector firms
also be provided with MFN treatment. Many benefits in the service
sectors which are part of China's WTO accession--including those
negotiated by the Administration in its November deal--would be
covered, thus requiring China to provide equal treatment in these areas
to U.S. ``firms, companies, corporations and trading
organizations.''\16\
---------------------------------------------------------------------------
\15\ Article III, 1979 Agreement.
\16\ Article III, 1979 Agreement.
---------------------------------------------------------------------------
Those trying to minimize the impact of the 1979 Agreement note that
the language in these areas is less detailed than other elements of the
1979 Agreement. Of course, these are same sources who claim the 1979
Agreement does not cover distribution rights, even though there is
explicit coverage by name of distribution and other internal sales
matters. However, more generally, any commercial agreement--and
certainly any commercial agreement with China--will involve disputes
about what is covered and what rules apply. As the U.S. has found in a
series of WTO cases against the EU, having rules in the WTO about an
issue is no guarantee of compliance with those rules.
As well, the U.S. has other bilateral agreements with China that
cover these sectors: two comprehensive 1992 and 1995 Memoranda of
Understanding with China which were touted in the national press as
guaranteeing massive market access for U.S. farmers and manufacturers,
the 1995 intellectual property agreement which was similarly lauded and
other sectoral bilaterals. Members of Congress will recall that these
agreements were lauded as providing incredible market access for U.S.
services and new rights for investors when they were signed and the
results of these agreements have been touted heavily by USTR since. The
specific contents of these additional, specific bilateral agreements
are outside the scope of this testimony, but go to revealing the
fallacy in the Administration's claims that absent PNTR, U.S. firms
would be cut out of all service sector, intellectual property, and
investor rights
4. The Administration Has Pronounced an Array of New Interpretations of
the 1979 U.S.-China Agreement Which Have No Legal Basis and Which Are
Contrary to U.S. Economic Interests
In the name of passing PNTR, the Clinton Administration has gone on
a mission to undercut the scope and coverage of existing U.S.-China
trade agreements. For instance, a March 9, 2000 USTR memo includes an
array of limiting interpretations of the 1979 Agreement which simply
have no basis in law. For instance, the USTR memo cites a highly
politicized Ways and Means Committee report as its ``legal authority''
for newly declaring that the treaty, which has been the basis for
billions of dollars of U.S.-China trade, is nothing more than a concept
paper.
The USTR employs two arguments in its attempt to undercut the 1979
Agreement's coverage.
First, the USTR memo concocts an array of limitations to the clear
language of the 1979 Agreement by referring to U.S. statues under which
the 1979 Agreement was negotiated. For instance, in trying to minimize
the language in Article II of the 1979 Agreement covering
``reciprocating'' satisfactory concessions with regard to trade and
services (emphasis added), the USTR memo argues that this provision was
negotiated to comply with a section of the U.S. trade law with a more
limited scope, and thus, despite the clear language in the 1979
Agreement, service sectors would not be covered after all.
Yet, even if the 1979 Agreement language was negotiated under such
a provision of U.S. law, U.S. law does not cover China. The actual
international commitment between the U.S. and China in the 1979
Agreement is contained in the actual terms of the 1979 agreement. U.S.
law--whether it includes provisions that expand or limit the actual
language of an international agreement--has no legal effect whatsoever
on China.
The actual legal commitment created by the 1979 Agreement is that
which is contained in the actual document which binds both parties in
international law. The USTR argument to the contrary would mean, for
instance, that if China has a domestic law under which it negotiated
its WTO accession agreement which includes provisions contradicting
China's WTO commitments, the Chinese domestic law binds all other WTO
Member countries. Under the USTR's bizarre argument, such a domestic
Chinese law would control and limit any contrary terms of China's
international WTO accession agreement. Obviously, this is not how
international law operates.
Second, the USTR memo stretches credulity one step further in
arguing that despite an absence of language in the 1979 Agreement so
requiring, the 1979 Agreement's application is limited to only what is
covered by the General Agreement on Tariffs and Trade (GATT). GATT was
the precursor institution to the WTO, and now its provisions and
jurisprudence are incorporated under the WTO. USTR employs this device
argument once again to claim that the 1979 Agreement denies U.S.
exporters distribution rights and excludes services sectors, despite
language in the 1979 Agreement to the contrary, because these issues
were not covered by the language of the GATT.
In fact, the 1979 Agreement contains no reference to GATT or any
other agreement which limits the application of its provisions. The
language of the 1979 Agreement focuses on, for instance, all
``products'' originating in or destined for the U.S. or China and
requires the same standard of treatment ``in all matters regarding''
the comprehensive list of activities regarding distribution and sale of
such imported goods. As noted above, the notion of MFN treatment is
inherently fluid with the best treatment granted to one country flowing
to all other nations with which the granting country has MFN
commitments.
5. WTO Dispute Resolution Is Less Effective for the Enforcement of
China Trade Commitments than the Powerful U.S. Enforcement Tools, such
as Section 301, Which Are Banned By the WTO
The USTR has stated that if Congress does not grant PNTR, it will
file at the WTO for ``non-application'' with China. The WTO rules
permit an existing WTO Member to declare, in advance of the admission
of a new Member, that full WTO terms will not apply as between those
countries.\17\
---------------------------------------------------------------------------
\17\ The nonapplication provisions are contained in Article XIII of
the Agreement Establishing the WTO which updates GATT Article XXXV. The
WTO requires ``unconditional'' Most Favored Nation status be granted
between WTO Members, but is silent as to the duration of such grants.
USTR chooses to interpret this provision to require PNTR and invoke
non-application if Congress does not provide PNTR, however, what is
actually required is an open legal question. Thus, if the
Administration did not invoke nonapplication and Congress chose to
remove the free emigration conditions of the Jackson-Vanik Amendment
and grant China one year of unconditional MFN, only a WTO tribunal
could judge whether or not that satisfied WTO requirements. Such a WTO
ruling would require China to bring a case against the U.S. arguing
that its WTO rights were violated. However, because USTR has announced
that it will file for nonapplication absent PNTR, this question does
not arise.
---------------------------------------------------------------------------
PNTR advocates and opponents agree that if the U.S. files for
nonapplication regarding China, and thus the U.S. and China do not have
full WTO relations, then WTO dispute resolution will not apply between
the U.S. and China. PNTR boosters lament this outcome as a major
limitation of relying on the 1979 Agreement.
However, many others view the ability to use speedy and effective
U.S. unilateral trade enforcement tools as a benefit of rejecting PNTR
and avoiding a full WTO relationship with China. If the U.S. does grant
PNTR it will be bound only to use WTO dispute resolution to enforce
China's trade commitments.\18\ WTO rules require: ``When Members seek
the redress of a violation of obligations or other nullification or
impairment of benefits under the covered agreements or an impediment to
the attainment of any objectives of the covered agreements, they shall
have recourse to, and abide by, the rules and procedures of this
Understanding. In such cases, Members shall: not make a determination
to the effect that a violation has occurred . . . except through
recourse to dispute settlement in accordance to the rules and
procedures of this Understanding . . .''\19\ The same constraints to
use only WTO dispute resolution apply to the timing of sanctions even
when the WTO finds a violation\20\ and the amount of sanctions
permitted.\21\
---------------------------------------------------------------------------
\18\ WTO Dispute Settlement Understanding Article 23.
\19\ Id.
\20\ Id. at Article 23.2(b).
\21\ Id. at Article 23.2(c).
---------------------------------------------------------------------------
As we have seen with assorted U.S.-EU WTO fights, WTO dispute
resolution takes at least two years before an initial ruling is
enforceable and ultimately relies on something entirely missing in
China: commitment to the rule of law. The WTO enforcement system relies
on countries' investment in the well-being of the multilateral trade
system so that changing a domestic policy against which the WTO has
ruled is given priority over the specific national interest in that
policy.
Thus, if Congress rejects PNTR, all U.S. trade laws would still be
applicable to China, including U.S. anti-dumping and surge protection
measures. These laws provide for much quicker adjudication of claims.
They also provide for much speedier application of trade sanctions
against trade barriers.
Moreover, many of China's practices which create barriers to U.S.
trade and investment are not covered by WTO rules. Yet, even in these
areas the U.S. could not apply sanctions under U.S. trade law if it has
a full WTO relationship with China. Under WTO, Members cannot increase
tariff levels above the WTO bound tariff levels as against other WTO
Members except when authorized by the WTO's Dispute Resolution Body.
Thus, even if the U.S. has the right to unilaterally determine that a
country has trade barriers that are outside WTO coverage, effective
sanctions to pressure for their removal are not available.
The U.S. has been trapped by the WTO's dispute resolution system
before. A high profile example was the Kodak fight with Japan. When the
U.S. threatened Japan with Section 301 action for an array of private
marketing pacts and informal regulations which kept U.S. film off
Japan's retail shelves, Japan accurately charged that use of a
unilateral trade law such as Section 301 would violate WTO rules.\22\
The U.S. backed down\23\ and instead filed a WTO case on the matter.
The U.S. lost on every point it raised, with the WTO panel concluding
that the conduct alleged by the U.S. was outside the coverage of WTO
rules.\24\
---------------------------------------------------------------------------
\22\ Martin Crutsinger, ``U.S. Sends Film Dispute to Global Trade
Panel,'' AP, 6/14/96.
\23\ Id
\24\ WTO, Japan-Measures Affecting Consumer Photographic Film and
Paper (WT/DS44/R), Report of the Panel, March 31, 1998.
---------------------------------------------------------------------------
PNTR boosters also argue that there is a benefit to the
multilateral nature of WTO dispute resolution. Yet, it is hard to argue
that a multilateral system in which the U.S. is one of 136 countries
provides greater leverage than the lopsided nature of the U.S.-China
bilateral relations, wherein the U.S. accepts a lion's share--40%--of
China's exports. Moreover, either China will or will not comply with
WTO rules. If China fails to do so, the injured country, for instance
the U.S., takes a case to WTO dispute resolution and awaits the outcome
of that process. If that process drags out, under WTO rules, the U.S.
could no longer take action on its own to threaten or put in place
sanctions limiting those 40% of China's exports' access to the U.S.
market to force lifting of barriers. Indeed, the WTO recently ruled
that the U.S. violated WTO rules and faces sanction in the banana case
against the EU because the U.S. imposed sanctions prior to receiving
WTO permission to do so.\25\
---------------------------------------------------------------------------
\25\ The WTO issued a preliminary ruling in early March 2000 that
the U.S. sanctions against the EU on the WTO banana case put in place
on March 3, 1999, violated WTO rules which only permitted sanctions
starting on April 19, 1999. U.S. liability for this violation will be
assessed in the final WTO ruling. (``WTO Rules Against U.S. on Timing
of Banana Retaliation Against EU,'' Inside U.S. Trade, March 17, 2000,
p 3.
6. Given the U.S. Accepts 40% of China's Exports, China Would Not
Terminate the 1979 Agreement if Congress Rejects PNTR Because the 1979
---------------------------------------------------------------------------
Agreement Becomes China's Only Means to U.S. Market Access
Finally, PNTR boosters note that Article X of the 1979 Agreement
allows countries to terminate the pact at the end of its automatically
renewing three-year terms. This argument is of little merit given two
facts: First, WTO rules also allow any country to withdraw at any time
on six months written notice.\26\ Second, the U.S. is China's largest
export market taking more than 40% of total Chinese exports which fuel
the growth which is the sole basis for the current regime's domestic
legitimacy. The U.S. sends less than 1% of its exports to China. If
China refused to renew the current 1979 Agreement's term, which runs
into 2001, it would lose the basis for its entry into the U.S. market.
As the annual U.S.-China trade deficit tops $70 billion, clearly China
has the least interest in terminating NTR access to the U.S. market.
---------------------------------------------------------------------------
\26\ Article XV, Agreement Establishing the WTO.
C. WTO Rules Would Empower China to Challenge U.S. Human Rights, Labor,
---------------------------------------------------------------------------
and Non-Proliferation Policies
One final technical, legal consideration about China and the WTO is
the new powers and rights China would obtain as a WTO Member as against
the U.S. While it is clear that the U.S. would be forbidden from using
enforcement tools such as Section 301 if Congress grants PNTR and the
U.S. and China have full WTO relations, it is also true that China
could use WTO dispute resolution against an array of U.S. laws.
Most simply, WTO rules forbid countries from banning goods made
with child or forced labor and also forbid countries from treating
other WTO members differently according to their human rights, weapons
proliferation or other non-commercial behavior.
If the U.S. sought to use trade sanctions against China--or for
that matter to grant preferential trade benefits to other countries to
reward progress on non-commercial issues--China as a WTO member would
have standing to bring the U.S. to WTO dispute resolution wherein three
trade officials would decide if the U.S. action violated China's WTO
rights. If not, the panel--which includes private trade attorneys and
has no conflict of interest rules for judges and no outside appeal--
could order the U.S. to either change the law or face trade sanctions.
The WTO rules that China could use to challenge an array of
existing U.S. human rights and other laws include:
GATT Article III which requires national treatment
meaning ``like products'' must be treated equally whether made
by domestic manufacturers or foreign made. The past decade of
GATT and WTO jurisprudence has interpreted the ban on
discriminating on the basis of where a product is made to also
forbid treating goods differently on the basis of how they are
made. Thus, a shoe is a shoe regardless if it is coming from
forced labor in a People's Liberation Army factory in China or
from a union shoe craftsman cooperative in Maine.
The Agreement on Government Procurement (AGP) which is
one of the 18 underlying agreements enforced by the WTO,
requires that no non-commercial considerations are used in
choosing bids for goods and services to be purchased by
governments. Obviously, directing the use of one's own tax
dollars has been a significant tool of human rights activism,
for instance regarding preferential procurement policies
concerning South Africa's apartheid regime.
Conclusion
I will end where I began: Most simply, permanent NTR for China is
neither merited nor necessary. There is little to lose by maintaining
the status quo of annual NTR grants but much to be lost by granting
China PNTR.
The Chairman. Thank you very much, Ms. Wallach.
Mr. Valenti, welcome back.
STATEMENT OF JACK VALENTI, PRESIDENT AND CHIEF
EXECUTIVE OFFICER, MOTION PICTURE ASSOCIATION OF
AMERICA
Mr. Valenti. Thank you, Mr. Chairman.
I think that General Scowcroft gave some revelatory
political arguments, and I am going to take just a slightly
different view. I think this transcendent issue can be defined
by a single question. And the question is: How does the United
States benefit from a ``No'' vote on granting permanent normal
trade relations with China? The answer is it does not. And I
think a ``No'' vote would equal tragedy on a grand scale. And
the losers would be the American consumer and the American
working man and woman.
Now, like you, I was deeply moved by Mr. Wu's passionate
description of the landscape in his native land. But I pose
this question: Would a ``No'' vote suddenly and cheerfully
reshape favorably whatever infects the issue of human rights in
China? That is a question I think that ought to be asked. And
the answer, I think, is it would not.
To reject China as a normal trading partner would hardly
entice the Chinese government to leap for joy and gratitude at
this gratuitous slight. The power of the United States to
influence any issue in China would be nonexistent. Every
professional who casts a confiding eye on Sino-U.S.
relationships understands that aspect of the human condition
very clearly. We would have repudiated the largest nation on
earth and we would have done it deliberately.
Now, why would China react in any other manner except
fierce dismay at this humiliating loss of face? I put it to you
this way, in homely terms: If you slapped your neighbor's face
in a public forum, would that neighbor thereafter treat
congenially and satisfactorily your suggestions and your
comments about how he ought to change his behavior toward his
wife and his children? Would you? Put yourself in their shoes.
Would a ``No'' vote increase job formation in this country?
And I recognize very much what Senator Hollings was saying. The
loss of any one job is a great calamity and a malady that we
should cure. But, what I am saying to you is the answer to the
question of would it increase job formation is no. And the
reasons are simple: It can produce an opposite effect. China
would find it far more agreeable to do more business with
nations in Europe and in Asia and in Latin America, those
nations which embrace them, and not the United States, which
snubbed them.
I think every American company now doing business in
China--and, by the way, it is not capitalism, Mr. Wu;
capitalism is defined as jobs. That is how people make their
living. That is how they feed their family. That is how they
educate their children--jobs. Every American company doing
business in China and every American company wanting to do more
business in China would suddenly find the gates closed, the
drawbridge up, the moat filled to the brim. And if that is so,
then those American companies now exporting to China--and we
are doing about $13 billion to $15 billion there, and we will
do a lot more, I pray--would suddenly find their revenues
reduced. And then they come to face this fatal affliction,
which is reducing their own labor force of American working men
and women in this country.
There are those, and Ms. Wallach is one of them, who say,
well, let us just grant annual NTR to China, and then we will
watch. And if the trade deficit balloons, we have got them in
the vice, we will squeeze them and we will raise tariffs or we
will exile their products from America. Well, all I can say is
that, with all due respect, Ms. Wallach, I think anybody that
is endorsing that kind of a program is endorsing a defunct
mythology. That is the kind of thinking that led to Smoot-
Hawley and the Great Depression.
I think Ms. Wallach also said we have to worry about
whether or not China will keep up to their agreements. Well, I
do not know anything about tractors or aircraft or women's
sweaters, but I can testify from personal experience in my
five-plus trips to China over the last several years that when
China made pledges and promises to me in our long negotiations
about protecting American intellectual property from being
pirated in China, they redeemed their pledges and they kept
their promises.
In the written testimony that I have presented to you, I
documented some vivid detail of how China worked very
intimately and closely with me and my colleagues in battling
thieves who were stealing our property. And they ran the virus
out of China. It has taken up residence in Macao and other
Asian countries. These pages of my written testimony document,
I think, the integrity, as far as my own personal experience is
concerned, the integrity of China's commitment to the Motion
Picture Association.
I ask these hard questions. I am not one who believes that
America is always right and everybody else is always wrong. I
might add that, in the WTO disputes, we have won 2 to 1 more
disputes than we have lost. But, again, we are not paragons of
virtue. And it may be we are on the losing side sometimes. But
we are doing just fine in these WTO disputes. I ask these hard
questions because I think it is in the long-term interest of
this free and loving land not to commit a bewildering blunder
that is bound to haunt us and grieve us in the years ahead.
That is why I say I do not know any other way to describe
what a ``No'' vote would mean in the future journey of this
country.
I am quite enchanted with what I am saying up here, Mr.
Chairman, but I will stop now and hope that I have an
opportunity to answer some questions at the proper moment.
Thank you.
[The prepared statement of Mr. Valenti follows:]
Prepared Statement of Jack Valenti, President and Chief Executive
Officer, Motion Picture Association of America
HOW DOES THE UNITED STATES BENEFIT FROM A ``NO'' VOTE FOR PERMANENT
NORMAL TRADE RELATIONS WITH CHINA?
The answer is it doesn't and the losers are the American consumer
and the American working man and woman
A Defining Moment In History
Each member of the United States Senate faces important, even
critical issues, every single day. But at the end of a career only a
handful of votes prove, with hindsight's clarity, to have changed the
movement of history. I believe that the upcoming vote on Permanent
Normal Trade Relations with China is one of those historical
confrontations.
This transcendent issue can be defined by a single question that
every Member of the Senate must ask. The answer will guide the final
vote of this Chamber.
The Question: How does the United States benefit from a ``NO''
vote?
The Answer: It doesn't. ``NO'' equals tragedy on a grand scale.
Will a ``NO'' vote suddenly and cheerfully reshape whatever infects
the issue of human rights in China? It would not. To reject China as a
normal and permanent trading partner would hardly incite the Chinese
government to gratitude for this slight. The power of the U.S. to
influence anything in China would be non-existent and every
professional who casts a confiding eye on the Sino-USA relationship
understands that aspect of the human condition. We would have
repudiated the largest nation on earth. Why would China react in any
other manner except fierce dismay at this humiliating loss of national
`face?' If you slap your neighbor's face in a public place, would that
neighbor thereafter find it congenial to listen to, much less follow,
your suggestions about how to improve his behavior toward his family or
his children?
Will a ``NO'' vote increase job formation in the U.S.? Not only
would this NOT be the case, it would produce the opposite effect. Does
not every expert confirm that in the event of a ``NO'' vote, China
would find it far more agreeable to do business with European
countries, its neighbors in Asia, and its new friends in Latin America
than with the U.S.? It would immediately revise its purchasing plans,
so that every American enterprise now doing business in China and those
who hope to export to China would find the gates closed to them, but
wide open to all other nations. And if that is so, then American
companies residing in this country would feel the pain of reduced
revenues, developing into lost American jobs. Moreover, there would be
no reduction in the appeal of Chinese goods here, nor is it likely that
our government would suddenly ban or restrict the importation of
Chinese products. Those who argue that we need to continue to grant NTR
on an annual basis so that if the trade deficit gets even worse we
could withdraw NTR, raise tariffs, and slam the door on imports from
China are endorsing a defunct mythology. That's the kind of thinking
that led to Smoot/Hawley and the Great Depression in an earlier era.
Raising the cost of Chinese imports, or denying them entry would
severely harm American consumers through higher prices on a wide range
of goods ordinary folks buy.
So, how does a ``NO'' vote help the individual working man and
woman in America? It doesn't. It hurts them.
Does a ``NO'' vote increase our national security? No one who is a
student of security affairs and an observer of the antagonisms which
run through the global arteries anticipates that China would more
readily listen to our counsel in their relationship with, say, Taiwan
after we rejected them in our Congress. When we deliberately exile a
nation from our national community or force them to believe they are
exiled, why should that nation feel any confidence in our counsel in
other areas?
The bilateral WTO accession package that Ambassador Charlene
Barshefsky and her band of first class associates negotiated with China
offers an admirable opportunity to increase exports to China, products
made by American working men and women in America, enlarging job-
creation in America. But in the event of a ``NO'' vote, China will give
the benefits of the Barshefsky agreement to all our trading partners,
but the U.S. industry will be denied those benefits. We are the losers.
Does any one believe differently? Most of us would find any such
opposite view barren of reality.
I can testify from first hand experience that when China made
pledges and promises to the MPAA, they redeemed their pledges and kept
their promises, particularly in the area of piracy of intellectual
property. In the pages that follow I outline for you in detail how
China has worked intimately with MPAA representatives in battling
thieves in China who were relentlessly stealing so much of our valuable
property. These latter pages document the integrity of Chinese
commitments to MPAA.
I pose all these questions on behalf of a creative industry which
produces America's most wanted export, an industry that has a SURPLUS
balance of trade with every one of the more than 150 countries whose
audiences hospitably welcome our visual story telling. But in the
interest of full disclosure, the MPAA member companies are not going to
wax rich and prosperous from our current China trade or in the near
term. We hope that the Chinese market for our films, TV programs, and
home entertainment will grow persistently in the future. But for us now
it is a small market. But the Chinese people love American movies. The
agreement struck by Ambassador Barshefsky opens up new opportunities in
the Chinese market for American visual entertainment. We believe that
over time it will become a most alluring and expanded marketplace.
So it is that MPAA asks these questions because it is in the long
range best interests of this nation not to commit a bewildering blunder
in rejecting permanent NTR for China. There is no other way to describe
the gloomy results of a ``NO'' vote in the Congress.
The Economic Importance Of The American Filmed Entertainment Industry
The filmed entertainment industry is an economic engine, driving
hundreds of thousands of well-paying jobs in the United States. The
copyright industries, including the film industry, provided employment
for 6.9 million U.S. workers in 1997, or 5.3% of the U.S. workforce.
The copyright industries are a bigger employer than any single
manufacturing sector. The number of U.S. citizens employed in the
copyright industries has grown by 24% over the past five years, and has
more than doubled over the past 20 years. The rate of new job creation
in the copyright industries is twice the rate of the U.S. economy as a
whole.
The copyright industries are also big exporters. In 1997 the
copyright industries' foreign sales and exports were approximately $67
billion--larger than agriculture, larger than autos and auto parts,
larger than aircraft. For the filmed entertainment industry, foreign
revenues topped $12.3 billion in 1997. Foreign markets accounted for
almost half the total revenues earned by the U.S. film industry.
PNTR would benefit the American film industry
If Congress approves PNTR for China, the U.S. film industry and its
workers would benefit in the following ways:
China will double access for export of films by the U.S. film
studios. The quota for foreign ``revenue-sharing'' films will increase
from the current level of 10 films per year to 20 films per year.
(`Revenue-sharing' means that China splits box office receipts at
Chinese theaters on a 50-50 basis). Of significance to U.S. independent
film producers is China's pledge to permit access for an additional 20
foreign films per year on flat fee licensing terms. The combined film
quota will grow from 40 to 50 total films per year by the third year.
China's decision to double access for revenue-sharing films is
significant. It shatters the old 10 revenue-sharing films per year
limit that had held firm since 1995. The growth in the quota is also
challenging China to make its film distribution system more efficient
and to introduce some competition into its domestic film distribution
system. These structural reforms will create the conditions to allow
future growth in access for America films.
So far this year, ``Matrix,'' ``Stuart Little,'' ``Double
Jeopardy,'' and ``General's Daughter'' have been released in China.
``Mickey Blue Eyes", ``Mission to Mars,'' and ``Bone Collector'' will
be opening soon. (A complete list of MPA member companies films
released in China since 1994 is attached.)
If PNTR fails, film industries in other nations throughout the
world will harvest the results of the successful negotiations of the
USTR team.
China will, for the first time, permit foreign investment in
joint ventures engaged in the distribution of videos. By participating
in the video distribution businesses, U.S. companies can help build
markets in China for U.S. home video entertainment.
China has lifted its investment ban on cinema ownership. U.S.
investors will be allowed to own up to 49% in companies that build, own
and operate cinemas.
The need for more cinemas in China is acute. The ratio of screens
per person in China is approximately 1 screen per 122,000 persons, if
one generously counts not only theaters dedicated solely to exhibition
of motion pictures, but also general-use theaters that can exhibit
movies as well as live performances. In contrast, the United States has
1 screen per 8,600 people.
Foreign capital to build new cinemas will help modernize China's
aging cinema infrastructure, attract Chinese consumers back into
cinemas, and increase demand for U.S. films. It will also open a new
export market for U.S. companies that manufacture sound and projection
equipment and other furnishings for new cinemas.
Tariffs on films and home videos will fall. Tariffs on films
will decline from the current level of 9% of the value of the film to
5%. Tariffs on home videos will drop from 15% to 10%. Significantly,
China agreed to change the method they use to calculate those duties.
Instead of calculating a percentage of the value of the films and
videos, China will assess a specific duty that is not tied to the value
of the product, substantially reducing the effective tariff rate.
China will assume full obligations to protect intellectual
property, as required by the WTO's Agreement on Trade Related
Intellectual Property. China is one of the few countries in the world
that took effective measures to halt large-scale pirate production and
export of optical media piracy (Video CDs, DVDs, music CDs, and CD
Roms.) While China continues to have a significant piracy problem in
its domestic market, China is not the source of the pirate product.
China suffers from illegal import of pirate products made in places
like Taiwan, Macau, Hong Kong and Burma. TRIPS provides a new tool to
help encourage China to address its remaining domestic piracy problems.
The History of Intellectual Property Enforcement in China
The recounting of history is instructive. I was personally
involved, along with my MPAA colleagues, in all the negotiations with
China, and can confirm its realities. I pay tribute to the United
States Trade Representative, Ambassador Charlene Barshefsky and her
superbly qualified and energetic staff, for their successful labors,
for which the U.S. film/TV/home video industry is grateful.
In January 1992, China and the U.S. entered into a Memorandum of
Understanding that committed China to adopt Berne-compatible
regulations to this copyright law and to join the Berne Convention and
the Geneva Phonograms Convention. China complied promptly, making U.S.
works fully eligible for protection in April 1991, amending its
copyright regulations to in September 1992, joining the Berne
Convention in October 1992 and adhering to the Geneva Phonograms
Convention in June 1993.
A bilateral agreement signed in February 1995 addressed specific
enforcement concerns. In response to the commitments contained therein,
China established task forces to better respond to the pirate threat,
promulgated Customs regulations to help control the import of optical
media production equipment, instituted controls over the output of
pirate CD plants, and conducted raids against retail pirate operations.
A number of temporary plant closures and sanctions failed to stem the
rising tide of pirate production in the initial year of the agreement,
but USTR's continued close monitoring of the 1995 agreement led to
permanent plant closures in late 1996.
To date, a total of 79 pirate plants, including 86 VCD production
lines, have been closed down. Since that time, Chinese authorities have
continued to monitor the production of optical media works closely.
Last year, six new underground plants, which were bold enough to test
the continued resolve of the Chinese government, were shut down by
Chinese authorities.
China's Recent Actions Against Piracy
Although China has succeeded in halting the illegal export of
pirated optical media products that had flooded worldwide markets in
the mid-1990s, domestic markets in China continue to suffer from high
levels of retail piracy. Much of the illegal import of pirate products
is smuggled into China from Taiwan, Macau, Hong Kong and Burma.
Chinese policy makers officially recognize the problem, as
demonstrated by a policy statement by Cultural Minister Sun Jiazheng at
the National People's Congress Standing Committee meeting on February
28. Serious efforts are underway to try to bring the domestic problems
under control.
Four Chinese authorities joined forces in March 2000 to hit DVD
pirates in China. On March 2, 2000, the State Press and Publication
Administration, the National Copyright Administration of China, the
Ministry of Public Security and the State Administration of Industry
and Commerce issued an urgent joint circular to urge every provincial,
regional and municipal government authority to launch a special
campaign against DVD piracy in China. During the special campaign, more
than 200,000 pirated DVDs of MPA titles were seized, and 24 persons
were arrested. Highlights of this recent action included (but were not
limited to) the following:
On March 15, 2000, Chinese authorities in Shanghai
arrested a DVD pirate and seized 24,000 pirated DVDs of MPA
titles.
On March 16-18, 2000, Chinese authorities smashed
three main audio-video markets in Guangzhou, Panyu and Zhuhai
and seized 80,000 pirated DVDs. Seven people were arrested.
On March 17, 2000, Chinese authorities smashed an
illegal warehouse in Fengtai and seized 4,000 pirated DVDs of
MPA titles. Two people were arrested.
This recent action against the Digital Video Disc format follows a
similar action last fall against the older Video CD format. In
September 1999, Chinese conducted a nationwide anti-piracy campaign
against the VCD copying of two different pirated series of blockbuster
movies owned by MPA's member companies. More than 3 million pirated
VCDs of MPA titles were seized.
On January 18, 2000, Chinese authorities put in place a National
Anti-Piracy Reward Scheme in which monetary rewards will be issued to
the informant for successful seizure of pirated products, including
optical discs, publications and optical disc production line and
machinery. The maximum reward is RMB Yuan 300,000 (U.S.$37,083) per
optical disc production line or 2% of the total seizure value. Similar
reward programs in Guandong and in Hong Kong have proven extremely
useful in developing leads into the hidden operations of the criminals
who produce and distribute pirated materials.
Appendix to testimony of Jack Valenti:
MPA FILMS RELEASED IN CHINA
1994
1. The Fugitive
1995
1. True Lies
2. Forest Gump
2. The Lion King
3. Speed
4. Bad Boy
5. Die Hard III
1996
1. Outbreak
2. A Walk in the Clouds
3. Bridges of Madison County
4. Broken Arrow
5. Toy Story
6. Water World
7. Jumanji
8. Twister
9. The Rock
1997
1. Mission Impossible
2. Sabrina
2. Eraser
3. Courage Under Fire
4. Dante's Peak
5. Space Jam
6. The Lost World
7. Speed II
8. Batman & Robin
1998
1. Volcano
2. Daylight
3. Titanic
4. Home Alone III
5. Deep Impact
6. Saving Private Ryan
1999
1. Mulan
2. Enemy of the State
3. Star Wars
4. Tarzan
5. Entrapment
2000
1. Matrix
2. Stuart Little
3. Double Jeopardy
4. General's Daughter
5. Mickey Blue Eyes
6. Mission to Mars
7. Bone Collector
The Chairman. Thank you very much, Mr. Valenti. And I
appreciate always your very interesting and very entertaining
rhetoric. Yet I understand also the passion behind your
statements. And I appreciate it very much.
Mr. Kahler.
STATEMENT OF H. RICHARD KAHLER, PRESIDENT,
CATERPILLAR, INC., CHINA, ON BEHALF OF THE BUSINESS
ROUNDTABLE, AND THE AMERICAN CHAMBER OF COMMERCE IN HONG KONG
Mr. Kahler. Thank you, Senator and members of the
Committee.
While I appear here today on behalf of a couple of very
large organizations, the Business Roundtable and the American
Chamber of Commerce in Hong Kong, I think that perhaps the
perspective that I can bring today, in addition to
complementing that of my fellow panelists, is that of someone
at the micro-level, someone who is living in China, working on
the ground, day to day, in China, trying to make things happen
on behalf of American business and in support of the values
that are important to us.
I represent Caterpillar China. I head Caterpillar China.
And for the last 6 years, we have been trying very hard to
increase our distribution, increase our manufacturing
investments in China, and undertake the people development that
is necessary to accomplish those things, obviously with the
goal of trying to improve our presence in China and our success
there. We would be viewed, I think, as a mid-range company in
that market.
Our sales in China this year will be somewhere in the range
of $300 million. That is not small, but neither is it large by
the scale of some. And that growth, our presence there has
tripled in the last 6 years. So we are headed in the direction
that is very appropriate and very positive for us.
The key point that I want to make here today is that for us
to continue that trend in the direction that we and many others
like us are headed, we need the advantages, the benefits, the
openness of the WTO deal that has been recently negotiated. And
to get there, we need the prerequisite approval by Congress of
permanent normal trading relations with China.
I would like to cite a couple of areas that are
particularly important to my company and I think to many others
that are like us. The first is that the regulatory environment
for the distribution of goods in China is going to change
dramatically.
Using my industry as an example, in China's heavily
regulated and restricted environment today, our independent
dealers, our distributors through which we do business all over
the world, simply are not able to gain the natural advantage
that they can gain in other marketplaces. They must operate
through a complex and very often convoluted series of
regulatory work-arounds to be able to serve our customers.
But people ask for specifics: What happens under WTO?
Under WTO, in the package agreed by the United States and
China, in 3 years, our dealers will be able to operate in China
as they do everywhere else in the world. And based on that, I
can offer you very strong assurance that companies like ours
will prosper, and that will be to the benefit of our sales from
U.S. sources, and other sources around the world, into China.
The second point that I would like to stress in terms of
implications for us in the WTO deal is to build on something
that General Scowcroft said just a few minutes ago. And that is
that we can support the Chinese initiative to change the state-
owned enterprises. Again, using my industry as an example,
China's domestic earth-moving construction industry sector is a
jumbled array of highly inefficient state-owned enterprises,
many of which are surviving and dominating the local markets
only because companies like ours are not able to be there. We
are not able to offer our goods and services.
Clearly, one of the things that China must do is to
rationalize these bloated industries. China's accession to the
WTO, and the concurrent opening of the Chinese market, is, in
my view, going to do more for rationalization of the state-
owned enterprises than any domestic policies that China can
bring to bear in that direction.
I do not mean to suggest that any of this--that the
benefits of tariff reduction and non-tariff barrier
elimination, is going to happen quickly. As several others have
said here today, this is going to take some patience. It is
going to take some time. And I know that even after PNTR and
China's accession to the WTO, we and companies like us are
going to face extreme price competition.
We are still going to face a domestic sourcing bias. And I
regret, frankly, that we are probably still going to face
business channel difficulties. But China's entry into the WTO
is going to create a platform for us to improve those
situations.
I would like to move for just a minute to a question that
Senator McCain pondered in his opening comments. And that is,
what does all of this mean for the average Chinese, the man
that works for a Caterpillar, Incorporated, or another one of
our American companies in China? And critics of my position
would suggest that we can exert more pressure on China by
isolating it than engaging it. I simply do not believe that is
the case. And I will pat ourselves on the back a little bit for
some of the things that we are doing as evidence of trying to
improve the standard of living and the human condition in
China.
Every Caterpillar-related employee in China, which is
gaining on 2,000 now, operates under the standards of the
principles of our worldwide code of business conduct, something
that has been part of Caterpillar's heritage for decades and
which is far more stringent than U.S. laws and regulations
regarding the business conduct that we impose on ourselves. We
are proud to bring our values to our Chinese employees.
A lot of critics of positions like mine say that the
Chinese do not care about the environment. And you know what?
There is some validity to their concern. But companies like
Caterpillar and others are bringing international technology to
environmental control in China.
I would like to cite as another example the fact that if
you look throughout the whole Caterpillar organization in 1999,
the factory with the best safety record in all of the
Caterpillar world was a CAT China factory. We stress safety in
human development in our facilities. We do things in the
community. We are 100 percent sponsoring a school, called the
Chinese-English Language Training Center. In a small, remote,
difficult community we are bringing some Western knowledge to
that.
And in a fascinating area, way out in the most desolate
parts of Central China, the parts of Central China that China
wants today to see companies like ours focusing on, we are
developing a new foundry, where, gentlemen, people come from
their cave houses to work in our clean, well-lit foundry. They
have good jobs. And they come because they find there an
environment that emphasizes training, which gives them hope
about the future for themselves, their families and their
communities.
My point is only that, by our presence there, we are
bringing American values. We are bringing international
standards to the workplace. And through that, I believe we are
contributing to the well-being of the Chinese society and to
its people. And we want to continue that role in a very
positive way.
I would like to conclude with an anecdote. Just about 3 or
4 weeks ago, I was in the office of one of your colleagues, a
U.S. Senator, who was pondering his decision on whether or not
to support China's PNTR. And he asked me, what would he see if
he walked into a Caterpillar facility in China? And would it be
similar to what he saw in other American initiatives in China?
I said yes, it would be similar to what you saw in other
American factories in China.
I said, you would see a world-class manufacturing facility,
managed by employees trained in Caterpillar values and
operating under our code of worldwide business conduct. You
would find a commitment to employee training that is equal to
any Caterpillar facility in the world. You would find
environmental control that matches our worldwide standards, and
far exceeds the Chinese norm. You would find CAT-funded
education, arts and social programs in the community. And you
would find an atmosphere of cooperation and optimism about the
future.
My goal is that the U.S. Congress share my personal
optimism, my passion for China, about the future of U.S.
business there, and about our ability to help bring U.S. values
to that country, to bring U.S. disciplines and expectations to
the forefront in that country. If you share that optimism, I
hope you will support PNTR for China. Because, by doing so, you
will help create an environment in which we, American business,
can do our job. Let's get on with it.
[The prepared statement of Mr. Kahler follows:]
Prepared Statement of H. Richard Kahler, President, Caterpillar, Inc.,
China, on behalf of the Business Roundtable and the American Chamber of
Commerce in Hong Kong
Good morning Chairman McCain and members of the Committee. It is my
privilege to testify this morning regarding the benefits of China's
accession to the World Trade Organization (WTO) and the necessity of
granting Permanent Normal Trade Relations (PNTR) status to China.
My name is Dick Kahler, and I am President of Caterpillar China.
Caterpillar is a long-active member of The Business Roundtable and of
the American Chamber of Commerce in Hong Kong, which I chair this year.
Caterpillar is a $20 billion company; our overseas sales account for 50
percent of our revenue; and we consistently rank among America's top
exporters. Caterpillar sells and operates in most countries of the
world and has been active in China since the early 1970s.
Today I also represent The Business Roundtable, an association of
chief executive officers of leading corporations with a combined
workforce of more than 10 million employees in the United States. The
chief executives are committed to advocating public policies that
foster vigorous economic growth; a dynamic global economy; and a well-
trained and productive U.S. workforce essential for future
competitiveness. They also strongly support China's accession to the
WTO and PNTR.
Finally, I also represent the American Chamber of Commerce in Hong
Kong, one of the largest (with some 2500 members) in the world.
AmCham's top policy priority for 2000 is Congressional approval of PNTR
for China.
I. The Commercial Benefits of the WTO Deal Are Comprehensive
This year Caterpillar's business in China will approach a third of
a billion dollars in revenue--a substantial portion of which is direct
exports from the United States. Those exports include diesel engines
manufactured in Indiana, turbine generators produced in California,
large mining trucks manufactured in Illinois, and components and parts
sourced from approximately 11,000 direct and indirect suppliers from
all over the United States.
Caterpillar companies operate six manufacturing ventures in China,
primarily to serve the Chinese market. And we sell our product through
a combination of Cat-owned and independently-owned dealers in China.
Let me give you one example of our growth trend: in 1996 and 1997
combined, we sold about 85 hydraulic excavators in China. Last month
alone, we sold almost 150 hydraulic excavators there, and this month we
should deliver more than 200! Our dollar sales this year for
Caterpillar and its affiliated companies will be roughly three times
what they were in 1994. We are deeply committed to the customers we
serve in China and to the local communities in which we operate.
Our investments in China have made us better known and respected
there. And because of that we have created an opportunity for an
increase in goods exported from the United States to China. We will
have a record year this year, I project. We are not losing U.S. jobs--
we are gaining U.S. jobs. And the market opening promised in the U.S.-
China WTO deal will move that further forward.
You know the details of the WTO deal, based on input from Secretary
Daley, Ambassador Barshefsky, and others. But let me bring them down to
the micro-economic level, where most of us can understand them best.
A. The regulatory environment for the distribution of goods
will change dramatically based on China's commitments in the
U.S.-China trade package. In countries with open trading
climates, Caterpillar's dealer-driven sales and product
support-driven approach to the market are almost universally
acknowledged to be the best in our industry. But in China's
heavily regulated and restricted environment today, our dealers
cannot gain their natural advantage. They must operate through
a complex and often convoluted series of regulatory
``workarounds'' to be able to serve our customers.
By contrast, under the U.S.-China WTO deal, within three
years, our dealers will be able to operate in China as they do
elsewhere in the world. I can offer very strong assurance that
in that more open environment, Caterpillar, and companies like
us, will prosper. Give us the chance--let us show you what we
can do!
B. China's domestic earthmoving and construction industry
sector is a jumbled array of highly inefficient stated-owned
enterprises, many of which are surviving and dominating the
local market place only because companies like Caterpillar and
our major worldwide competitors are kept out by tariff and non-
tariff barriers for goods and services. Chinese leaders know
these bloated industries must be rationalized; and companies
like mine know we cannot gain full advantage of the Chinese
market opportunity until that rationalization is complete.
China's accession to the WTO and the concurrent opening of
the Chinese market will do more than any of China's domestic
policies and the annual NTR debate to drive the rationalization
of Chinese industry. When that happens, American companies that
offer world-class products at competitive prices will have a
great opportunity for growth in China. Give us the chance!
C. The most obvious advantage of the WTO deal is reduction of
tariffs and removal of other barriers to imports. These changes
will make us more price competitive and provide greater market
access potential. We will sell more products and services in
this more open environment--give us a chance!
I do not mean to suggest that all this will happen quickly or
easily. Six-plus years of working in China have taught me better. I
predict that, even after PNTR and China's WTO accession, we will still
face a domestic sourcing bias, I know we will still face extreme price
competition, and I regret that we will still face business practice and
business channel difficulties. But China's WTO entry provides a new and
more effective process for breaking down these barriers.
If Congress grants PNTR to China, American businesses and their
workers will benefit from the concessions discussed above and from the
corresponding break down of trade barriers. If Congress rejects PNTR,
however, American businesses and their workers will lose almost all of
those concessions and our foreign competitors will gain an unearned
advantage in the Chinese market.
II. Enforcement Is Essential
I understand that there is some concern regarding China's
fulfillment of the obligations it accepts under the WTO. I accept that
concern as valid. But I also accept as valid the assurances by such
people as Secretary Daley and Ambassador Barshefsky that the monitoring
and compliance programs used by our government will be very useful and
that the WTO dispute settlement mechanisms will effectively protect our
interests.
In my view, China has no alternative but to fulfill its
commitments. It simply cannot accomplish its stated economic
development goals unless it opens its economy to international
competition. The breadth of commitments China has made in the WTO
package is impressive. They reflect a vision of the future China that
is more in sync with our Western economic thinking. They need to comply
with their WTO obligations to get there.
It will not be easy! Providing U.S. and other foreign companies
``national treatment'' goes against decades of past policies. So does
opening up distribution and the service sectors. But with the Chinese
leadership committed to progress, I believe that they will take
enforcement seriously.
III. Engagement Is Critical
Critics of the position I present in favor of China's accession to
the WTO believe that we can exert more pressure by isolating the
country than by engaging it. I contend they have not seen the good that
we are doing by our presence there. Let me share some examples with
you:
All of Caterpillar's operations in China operate in
accord with Caterpillar's worldwide Code of Business Conduct.
That key presentation of Caterpillar's value structure is
translated into the Mandarin language and all employees know
that it is a foundation document for us.
In our manufacturing operations in China, we are
applying world-class environmental-control technology to assure
that we deal effectively with air, water, and waste treatment.
We are following the highest standards, and by doing so, we are
showing the Chinese people and other Chinese-based industry our
respect for the environment.
In 1999, Caterpillar's factory in the city of Xuzhou
in Jiangsu Province had the best safety record of any plant in
the entire Caterpillar family worldwide. We teach and stress
safety in a country whose business culture is less committed to
safety than we are.
In the same city, Xuzhou, Caterpillar fully funds and
arranges U.S. teachers for the ``Caterpillar English Language
Training Center.'' This is a program directed at community
support, not corporate development. Through this center, we are
bringing an important new skill-set to some of the people in
this Chinese city.
In the town of Er Li Ban in southern Shanxi Province,
one of the most isolated and economically depressed areas of
China, our employees come to work in a newly developing foundry
where they are attracted, more than anything else, by good jobs
in an environment that emphasizes training, which gives them
hope about the future--for them, their families, and their
communities.
I am not simply ``bragging'' about Caterpillar's commitments in
China. I am telling you that by our presence we (and many other U.S.
companies like us) are bringing U.S. values to China. We are not
imposing those values; rather, we are showing our Chinese partners,
employees, and government officials the benefits of our values-oriented
business culture.
Caterpillar is not alone in making these kinds of commitments. A
number of my colleagues in Hong Kong are involved in programs to
improve the human condition in China. Many orphanages, for example, see
the generosity of Americans living and working in China. By this
presence, we gain their respect and they gain a greater appreciation of
American leadership, values, and goodwill.
A report recently released by The Business Roundtable, entitled
``Corporate Social Responsibility in China: Practices by U.S.
Companies,'' effectively documents that U.S. companies do more than
sell goods in China. It shows that U.S. business is a catalyst for
positive change. We want to continue that role at the same time that we
build our businesses to participate in the longer-term growth of the
Chinese market.
``Engagement'' with China is an objective that has been part of
U.S. foreign policy for some time, through both Republican and
Democratic administrations. The reason: it works.
Engagement does not mean that we endorse all of China's policies or
that we give China any special treatment. And my endorsement of
stronger economic ties does not mean that I am an apologist for the
things that are wrong with the Chinese system. I simply believe we will
do more good working with China as part of the world economic system
than we could by isolating and lecturing it as an outsider.
The WTO deal, which would bring China into the international
trading system, would require it to follow the international ``rules,''
rather than setting its own. Opponents of PNTR would hold us back from
realizing the potential benefits of engagement.
Conclusion
I would like to end my discussion with an anecdote. A few weeks
ago, one U.S. Senator asked me what he would see if he walked into a
Caterpillar facility in China, with special reference to labor and
environmental conditions. I told him: you would see a world-class
manufacturing facility, managed by employees trained in Caterpillar
values, and operating under our worldwide Code of Business Conduct; you
would find a commitment to employee training that is equal to any
Caterpillar facility in the world; you would find environmental control
that matches Caterpillar's worldwide standards and far exceeds the
Chinese norm; you would find Cat-funded education, arts, and social
programs in the community; and you would find an atmosphere of
cooperation and optimism about the future.
My goal is to see the U.S. Congress share my optimism about the
future of China, about the future for U.S. business there, and about
our ability to help bring some U.S. values, disciplines, and
expectations to the forefront. If you share that optimism, you will
support PNTR for China, because by doing so you will create the
environment in which we can do that job. Let us get on with it!
Thank you.
The Chairman. Thank you very much, Mr. Kahler.
Mr. Wu, you wanted to respond, and we certainly would like
to hear it.
Mr. Wu. Thank you for giving me this opportunity. I really
want to respond to Mr. Kahler, when he is talking about
American business in China. I would just say business is
business. Your business in China is to make money. It is not a
charity. Do not try to tell me that you are really helping the
Chinese promote democracy, freedom, whatever.
It is true that American values and business practices are
spreading in China. Two years ago, I was in RIT, the Rochester
Institute of Technology. I met a former CEO from Eastman Kodak,
and we had a conversation. And I said Eastman Kodak is very
well-known in the United States. One of the reasons is they
have a very good welfare policy for their employees. And I
said, do you apply the same standard to your Chinese employees?
He said ``Yes, we do.''
And I said, in China, there is a national population
control policy. Every woman and family is subject to this
policy. If a woman in this American company gives birth to a
child without a permit, Chinese laws says she will be fired. Do
you know about that? He said that he did not know. But the
American worker in America, he would not be fired.
There is nothing that American bosses can do. If Chinese
workers want to organize an independent trade union at an
American company in China, these people also will be fired and
even arrested. And there is nothing the American boss is going
to do.
Today there is a very interesting phenomenon. The
capitalist capital flows into a communist regime. And they
tried to create a kind of a concept that is the best way to
turn down the Communist system and benefit the Chinese people.
I am confused that this idea never applied to some country like
Cuba, North Korea, Vietnam, and even today in Moscow. I am
confused. I cannot answer that.
I really want to emphasize one more thing. I cannot
convince the businessmen's thinking about human rights. They
are concerned with business rights. They are concerned about
copyrights. But as the policymaker, please think about our
national security.
I heard Warren Christopher, in December 1996. He ended his
diplomatic life in China. He said, we have to deal with this
country, because China will become a superpower. How many
Americans realize China has now become a superpower? Normally
we heard superpower as being the Soviet Union and the United
States. Now, we will have to go in, facing a new superpower.
This time, not in Berlin. Not in Europe. And it is happening in
Asia. And we still have 100,000 soldiers in this area.
Thank you.
The Chairman. Ms. Wallach, I also noted that you were
somewhat stimulated by Mr. Valenti's remarks. Would you like to
respond?
Ms. Wallach. Well, in Mr. Valenti's suggestion that
demanding reciprocal, enforced trade agreements would lead to a
return of Smoot-Hawley and the Depression, I was wondering if
he intended to leave Nazism out. His argument is obviously
ridiculous.
The real point is: are we going to have a commercial policy
or a broader relationship that looks at the national interest
or only one that looks at special interests--that special issue
of interest to the Senator. I would say that there is a high
relationship between campaign finance cash at this moment and
the zeal to do a policy with China that suits companies that
want to relocate investment to China and guarantee permanent,
unconditional access back into the U.S.
But given that U.S. goods--agricultural and manufactured--
those made or grown here and sent there, get the benefits that
China will give the rest of the world under its WTO accession
by merit of the 1979 bilateral, it is not in the U.S. economic
interest and, as we have heard in our broader human rights,
national security or other interests to concede Congress' role
and to give China a blank check.
And it is interesting rhetoric to claim that the end of the
world will occur if we fail to dispense this blank check. But,
in fact, the great loss is if we do so. There is nothing to be
gained if Congress makes this change, and great loss to be
suffered if Congress gives up its leverage over China. Thank
you.
The Chairman. General Scowcroft, Mr. Wu just raised the
point that he is, ``somewhat confused over how we can
differentiate China from Cuba, North Korea and other nations
and our policies toward them, and yet obviously our approach to
China is somewhat different.'' Can you respond to what Mr. Wu
just said?
General Scowcroft. Yes, I think so. Although, may I say, I
think Cuba is a very special case. Cuba is basically no longer
a foreign policy issue. It is a domestic U.S. political issue.
But on countries like North Korea, Iran, the so-called
rogue states, we are trying to do things with most all of them.
And maybe, after 60 years or so, the North Koreans may be
coming around. But there has been no opening to do anything.
And I think the issue with China is, does this help a little?
Does it hurt a little?
We cannot remake China in our image. I am very sympathetic
with Mr. Wu's approach to the problem. But I think it is wholly
unrealistic. China is not going to become another United
States. But can our actions help in some way to steer China
toward becoming a more respectable country in the world? China
is not going to go away. And how can we best do things which,
at the margin, help and do not hurt?
What I am suggesting is, basically, since 1972, what we
have done has helped. The China of today is not the China of
1972. And I think Mr. Wu would agree to that. It has a long way
to go. But one of the things that will help is to cut the
umbilical between Chinese industry and the government, so that
the industrialists do not owe their jobs to political whims in
Beijing; they owe their jobs to their ability to make a profit.
That, if you believe in the American dream, is a fundamental
change in their system.
The Chairman. One additional question. This is not exactly
on that subject. How should American policymakers react to the
remarks that can most charitably be described as incredibly
immature by Zhu Rongji before the elections in Taiwan?
General Scowcroft. I think we should react boldly. And to
me, as I tried to indicate in my remarks, this is a country
carrying a lot of psychological burdens. It is run by a
Communist Party which is discredited, is no longer a motivating
force. And I think they do not understand what works and what
does not. And for them, their instinct is still to bludgeon. It
did not work with Taiwan. It did not work in 1996. It did not
work in 2000. And having them open more to the world will teach
them how they have to behave. I think they are gradually
learning, but shutting them off is not the answer.
I think Ms. Wallach's idea is cute, but wholly ridiculous.
The United States cannot behave this way. And if we have our
set of rules alongside the WTO rules, the Chinese of course
will follow the WTO rules and will not grant us the 1975
understandings. And they will have 135 of our trading partners
on their side.
The Chairman. Mr. Valenti, you wanted to speak.
Mr. Valenti. I just want to make three brief points, Mr.
Chairman. No. 1, as General Scowcroft said, what we are
overlooking is if we repudiate China, the rest of the world
will be in the WTO, along with China, and they will be China's
trading partners. They will be their soul mates or whatever. We
will be the odd man out.
And, No. 2, I want to follow on to General Scowcroft's
idea. We cannot remake China in our own image or any other
country, nor should we try. A little story:
When I was a schoolboy, I read about Nero, the mad Emperor
of Rome. And he had a trusted advisor named Seneca. And one day
he woke up and called Seneca in and he said, ``Last night I
realized in a dream that I am without sin and I am without
flaw;'' therefore, said Nero, ``I am a god.'' And Seneca
responded this way. He said, ``Sire, no man is without flaw.
And the man who claims to be without sin does so with relation
to a witness and not his own conscience.''
Now, I might add that advisors to presidents and prime
ministers and kings have taken into account Seneca's bold
remarks, because some months later he was poisoned. And
therefore it did affect how one talked to a president or a
king.
The only point I am making is--and I say this as someone
who loves this country more than life itself--we are not
perfect. There are lots of things wrong in this country. I am
proud to say that when I was in government, we tried, in a
modest way, to reshape that. But we have got a long way to go.
Therefore, I do not understand why it is that we want to
inflict upon others all over the world an imposition of so-
called American values. Maybe somebody in Southern Italy or in
Saudi Arabia or maybe in the Cornwall country of Great Britain
would say, ``Wait a minute, I have got my own values here.'' We
ought not try that.
What I think is happening in China today, though, is the
irresistibility of change. I will promise you, no matter what
the Communist government does--and I do not know how long they
will be in power--they cannot stop this change any more than
Canute could hold back the tides. The binary number world is
upon them. And it will have a profound and shattering effect on
what people learn and what they see and feel.
Frankly, I am hopeful that if we can get more American
movies into China, then they will see the American values. I
think Tom Hanks and Julia Roberts will have more persuasive
effect on the Chinese people than the whole Sixth Fleet moving
off the China Sea. So we ought to keep that in mind. On a cost/
benefit ratio, there is nothing to be gained with repudiating
China. Nothing. Zero.
The Chairman. Ms. Wallach, you wanted to respond again.
And, Mr. Wu, you did, too. Could you both be fairly brief,
because both Senator Dorgan and Senator Cleland would like to
ask questions, as well.
Mr. Wu. First of all, we have to make clear one thing.
Today there is no one, including myself, who suggests to
isolate China. There is no way. It is impossible. But when we
are talking about PNTR, the WTO, whatever, it does not mean we
will try to put the Chinese in a corner, to fight against us.
The other thing is, why not just be a little bit patient?
In China, we have a slogan. It comes from the Communist
authorities in the last 30-some years: The Soviet Union today
is our tomorrow. They would not want to repeat that today, but
they will. The Soviets yesterday will become our today. The
thing happening in Moscow soon will happen in China.
That is why I am thinking why not just be a little bit
patient. To rush into China, to grab this market, to earn
money--I am not talking about the moral basis, I am talking
about security. It is just like a blood transfusion, this
assistance.
Let me give you two incidents. It really makes me kind of
nervous. One is 1998, when President Clinton came back from
China. He said, well, we finally have an agreement. We are not
going to target each other by intercontinental missiles. Wait a
minute. Why did we need this agreement? There are a couple of
countries, including India, who have the intercontinental
missiles. We are never seeking that kind of agreement. Now we
are looking for it from China.
For 2 years now, the number of intercontinental missiles in
China is decreasing or increasing? Why this backward country
today has the ability to become a new superpower and has such
intercontinental missiles? Our money is just fuel in the tank,
running this Communist vehicle.
The second thing is recently I heard Mr. Sandy Berger
talking about WTO. If you carefully read his statement, I want
to be straight--it is just like a salesman talking about
benefit, talking about it is good for the United States. He is
not talking about American security.
And if this thing is still going on this way, we are facing
a Communist giant. This time not in Moscow. This time in
Beijing. And we will have a more difficult time negotiating the
Korean Peninsula issue.
Thank you.
The Chairman. Ms. Wallach.
Ms. Wallach. I wanted to clarify the China WTO process,
because it seems unclear from some of my colleagues' comments.
The theoretical umbilical cord gets cut with the state sector
when China goes into the WTO. And that is unrelated to whether
or not Congress does PNTR. China will have to concede to WTO
compliance and make the domestic policy changes.
Once China is in, then what the 1979 Agreement gets us is
merely that basket of concessions that were required to enter
WTO, which becomes China's most favored treatment, which we
then get reciprocally. So we are not left out alone from the
136 WTO member nations; we are getting the same thing. The 1979
Agreement merely requires, in different sectors, that we get
the best of any third country.
And then, finally, there is nothing cute, General
Scowcroft, about getting U.S. business all of China's WTO
concessions while maintaining effective enforcement. That would
seem to me to be a good policy. And it certainly is doable,
because it is what all the other countries do to us in their
trade policies. It is what is in their interest.
And as far as the leverage to do it, the legitimacy of
China's ruling regime is limited. It maintains itself on growth
and creating jobs. And its export-led growth. And 42 percent of
those exports come into our market. So it is hard to imagine
what more leverage to make this doable policy there could be.
Thank you.
The Chairman. Well, I would like to have this panel exposed
to all Americans, because I think it represents the most
articulate points of view on this issue, so that Americans
could be far better informed as the Congress of the United
States makes this decision. And that is why I want to thank all
of the witnesses for their very eloquent, passionate and
forceful presentation of your points of view. It has been very
helpful to me, and I am sure to the other members of the
Committee. And I thank you for being here today.
Senator Dorgan.
Senator Dorgan. Mr. Chairman, let me echo that. This has
been a most interesting panel, with very different points of
view, but expressed with great passion.
Mr. Valenti, you are always one of my favorite witnesses
before congressional committees. I have long enjoyed your
presentations. But let me describe, if I can, why I think the
export of American values is in fact part of what we need to do
on trade issues. We have had people die on the streets in
America for the right to organize. Workers' rights to organize
are critical.
We have had great strife for almost 100 years over the
question of preventing people from exploiting kids in the job
market, providing for a safe work place, preventing people from
throwing chemicals into the water and the air when they
produce. So we have had very large battles for over a century
on these issues. And as I said, people have died in the streets
for the principle of the right of workers to be able to
organize.
So when we say now, let us set up international competition
under global arrangements, the question is, what is fair
competition? Is it fair competition for us, when we have
established these basic values, to compete against someone that
wants to hire 12-year-old kids and put them in an unsafe plant
and pay them 12 cents an hour and work them 12 hours a day and
pollute the air and the water?
The answer is absolutely not. That is not what competition
is about. Values that we have fought for and worked on for a
century, does that matter in terms of what we are trying to do
in creating fair competition? You are darn right it does. The
part of the march toward globalization has moved much faster
than the issue of fair rules in determination of what is fair
trade. I just wanted to make that point, because you raised it,
and I think it is very important.
Let me just ask two very quick questions, because I know we
are late. But, again, all of you I think are excellent
witnesses and express yourselves with great clarity.
Mr. Kahler, you produce in China. Your company is one I
have great respect for. Let me ask you, who do you produce in
China for? The products that you produce in China move to what
market?
Mr. Kahler. Senator, I am glad you asked that question. We
produce in China primarily for the China market. We do some
very limited exporting of components to other Asian markets and
a very, very small amount of components sold back to the United
States.
But I mentioned before in my comments that our sales, our
revenues in China have gone from about $100 million 6 years ago
to $300 million this year. An interesting and important point I
think that relates to the jobs issue, which may be part of what
you are asking about, is that that $200 million increase over
the last 6 years, only half of that is domestically produced in
China. And so our sales in China that are imported into China
today are double what they were 5 or 6 years ago, when we
started the process of investing in China to give us access to
certain sectors there.
Senator Dorgan. Just briefly, what are the arrangements of
the ownership of your facilities in China?
Mr. Kahler. Well, we have six different facilities. About
three of them are 60/40, 70/30 kinds of joint ventures, with us
the majority owner, with a state-owned enterprise as the
minority owner. And a couple of them are wholly foreign-owned
enterprises, where we have 100 percent ownership and complete
control. And the reason there is a difference in them is a
reflection of the industry in China and what, frankly, made
most sense for us in terms of getting into an investment
position there.
Senator Dorgan. Now, the restriction on ownership in
cinemas is going to be 49 percent. At the briefing I was at the
other day, most of the industrial facilities are going to be 50
percent, not 51. And the bilateral agreement made progress in
improving ownership positions, but not to a majority position.
And I am curious about your 70/30.
Mr. Kahler. Well, in fact, we have one venture that is 85/
15, sir, and then several wholly foreign-owned enterprises. And
I cannot speak to the cinema. Mr. Valenti obviously can. But
one of the situations in investing in China is that they have
set aside certain sectors of the economy for special attention.
The automobile sector is one that is close to us that is
relevant.
In the auto sector, you can only have a 50 percent
investment in a Chinese organization. In our industry, we do
not have that kind of restriction. The Chinese state-owned
enterprises that have any strength on their own will fight very
hard to sustain a majority or at least a 50/50 ownership
position. But absent regulations that require it, we have
simply not been prepared to go into a minority owned situation.
Mr. Valenti. Senator, I would just point out to you that
one of the reasons why is because the three areas where the
Chinese Government has fear that borders on paranoia is
television, the Internet and the cinema. The Chinese love
American movies. The American movies that have been over there
play to packed houses.
I have made it clear to the Chinese with whom I have
developed some good relationships that 49 percent is not going
to cut it. The only way we are going to invest millions of
dollars in cinemas is if we can operate them. But, most of all,
unless we can bring more American pictures into China--because,
at this moment, the local Chinese films and the few amount of
American pictures will not sustain the building of state-of-
the-art cinemas in China today, but they understand this--and
in my judgment, I know in the original agreement--and, frankly,
I am not sure if it stayed in the final one --was that after 3
years we could go into majority control.
Senator Dorgan. Two final points. For example, and
concerning the purchase of American grain, under the new
agreement, 90 percent will be purchased by the state, by the
government, 10 percent privatized, and we say Hosanna. Is that
not wonderful? Look at the progress we have made. We have a
trade arrangement now, under global trade and free trade, that
only 90 percent will be purchased by a government purchasing
agent. So you just shake your head and you say, who negotiated
that?
Mr. Valenti. That is grain?
Senator Dorgan. Yes. And I would say, Mr. Valenti, in some
ways, while I almost always agree with you, in your testimony,
you kind of do what has happened to us in agriculture in trade
agreements. You say the current level of 10 films per year will
be increased to 20 films. And you actually use the words, ``it
shatters the old 10 revenue.'' That is like if we send them one
hog and we get to send them a second hog, we have a doubling of
our hogs.
Well, 20 films? We ought to expect much, much more from a
country with whom we are negotiating and with whom we have a
$70 billion goods deficit. Twenty films is miserable. What a
miserable arrangement.
Now, I understand that you are excited about it. But I
would say, on behalf of your industry, we ought to expect so
much more. We are a cash cow for Chinese hard currency needs.
There is nowhere else in the world they will sell their shirts
and their shoes and their trousers and their trinkets--nowhere
else. There is no market like ours. We have significant
leverage. And every time we enter a trade negotiation, we come
up far too short.
Mr. Kahler, we came up short for you. And I know you are
satisfied. And, Mr. Scowcroft, you are satisfied. I am not
satisfied. Now that does not respond to how I am going to vote
on NTR or PNTR. I would just make one final point and then you
can respond.
This is not a vote about whether or not we repudiate the
Chinese. This vote is not about repudiation. It is about normal
trade relations we are going to accord them this year or
permanent normal trade relations, NTR or permanent NTR, not
repudiation. That is a very important thing for us to
understand. And I have not decided how I am going to vote on
this. I do not like the bilateral, but that is nothing new. We
have never negotiated a trade agreement with our trading
partners in which we exhibited any strength or common sense at
all. So that is not new for me. But this is not a question of
repudiation, yes or no.
You frame an important question, Mr. Valenti. What occurs
if we vote against PNTR? That is a fair and important question.
That is the one you started with. But this is not, in my
judgment, a question of whether we repudiate. So I wanted to
make those comments. Again, let me say that all of you have
presented, I think, some of the most interesting testimony I
have heard from a panel in Congress for some long while.
Because they are very difficult points of view, but expressed
with great clarity from different perspectives. And I think
that is very helpful.
Mr. Valenti. Let me just say one thing, Mr. Chairman. I
used the word ``repudiation'' because is there any other
country in the world that we would so treat if we voted ``No''?
As I understand it, and I may be wrong, we have permanent
normal trade relations with just about everybody in the world,
do we not?
Senator Dorgan. Not Cuba and not North Korea.
Mr. Valenti. Well, not Cuba and not North Korea, but all
Middle Eastern countries and all of Africa.
Senator Dorgan. You asked a very important question.
Mr. Valenti. I am just saying that here we are voting
against that; 134, I think Secretary Daley said, have permanent
normal trading relations with America, and then we single out
China. I understand the logic of what you say. But if you were
the Chinese government, I think you would count it as a
repudiation if you were in their shoes.
Mr. Kahler. May I add just a quick point, Senator?
I do not think anybody would say we got everything we
wanted or we are 100 percent satisfied with the deal. But we
are very, very satisfied with the deal. We got a lot of what we
wanted. And one of the most under-represented, important parts
of that deal is the distribution rights. For Caterpillar and
for many companies like us, it is the single most important
evolution in the Chinese thinking about how they are going to
allow business to be done in their country.
It is going to take us 3 years to get our distribution
system in China good enough to take advantage of what they are
going to allow us to do in 3 years. And that, in and of itself,
is an absolutely critical and positive move forward for us.
Senator Dorgan. Mr. Wu.
Mr. Wu. Yes, we do give 134 countries normal trading
status. Yes, we do single out China. But the basic problem is
China themselves single out themselves, because this is a
Communist country. Very few countries today exist in the world
as a Communist regime. The problem is China is so different
from the other 134.
And I want to say, why do we all the time care about the
Chinese government's face? Do you really give our face? During
the Cold War, we never cared about Moscow's face. Why do we
today all the time care about Zhu Rongji and Jiang Zemin's face
and face and face?
Yes, Cuba has become a domestic issue. Let me say it this
way. If Cuba had 600 million in population, our policy would be
different.
Senator Dorgan. Thank you.
Senator Cleland. Thank you very much.
I agree with the members of the Senate here who have
spoken. And that is that this is the most enlightening panel I
have seen in 4 years here. I wonder in my own mind if we are
not talking about what is the title of a popular book out there
that tries to describe what is going on in the world, ``The
Clash of Civilizations.'' And I wonder if increasing this clash
by normal permanent trade relations with China, what impact
that really has.
I think it is fascinating. If you read ``The Lexus and the
Olive Tree,'' by Tom Friedman, he buys the Jack Valenti
argument that the more information, whether through movies or
television or the Internet--particularly the Internet--the more
democratization occurs--democratization of finance,
democratization of consumption, and ultimately democratization
of politics.
And then Mr. Wu seems to indicate that if we do increase
trade, that strengthens the government, not weakens it. Mr. Wu,
you threw in right at the end of one of your answers a
fascinating point that I have been operating on, and I wanted
to ask General Scowcroft the question and then I will ask you,
Mr. Wu, too.
General Scowcroft, I have been traveling under the
assumption that if we went ahead with normal trade relations
with China, acceded to their entrance into the WTO, that, in
effect, we were enhancing our national security by giving the
administration of their regime something that they wanted, so
that when we wanted something from them, like subtle pressure
on the North Koreans or the Pakistanis, in terms of real issues
that we face, the buildup of missiles, the buildup of nuclear
capabilities that threaten our hemisphere, then that regime
would be more amenable to our interests, as well.
Yet Mr. Wu seems to indicate that if we trade, then we
strengthen the regime and it hardens our ability to get them to
be sympathetic to our concerns about North Korea or Pakistan.
General Scowcroft, do you see increased trade with China as
strengthening our ability to get some of the things from them
that we want in terms of national security, particularly on the
Korean Peninsula?
General Scowcroft. Well, I am not sure, Senator, whether we
can translate increased trade to help on the Korean Peninsula.
But I think what can help on the Korean Peninsula is if we have
a cooperative attitude on the part of China, that they think
they are being treated, from their perspective, in a reasonable
way. If we now, after having negotiated bilateral arrangements,
which were all one-sided--we did not give up anything--we then
turn around and say no, we are really not going to follow
through and we are going to do something else, it is not likely
to enhance the Chinese interest in helping us on the Korean
Peninsula.
On the other hand, they are going to follow their interests
in Korea anyway. I do not think those are too far from ours in
fundamental areas.
But I think what happens with the increase in trade is what
Mr. Kahler was saying. At least we, as Americans, believe that
a modern economy helps preserve and enhance individual freedom,
individual rights. And it seems to me that it is quite clear
that as China--it definitely wants to improve its economy,
because that is the one thing, that is their only claim for
legitimacy with the Chinese people, that they are improving the
economic lot of the Chinese people--that in the process of
doing that, they will set loose these forces, by the Internet,
by people focusing on their business prosperity, not doing what
they need to please the leaders in Beijing. That will in fact
make a more normal country out of China. And I think that is
what this is all about.
Senator Cleland. Yes, sir, Mr. Wu.
Mr. Wu. I just want to indicate one thing. The question is:
Who is our business partner today in China? Are these people
free capitalists? No. They are Communist bureaucratic
capitalists. They are not free capitalists. They have no
interest in promoting democracy or promoting freedom in China.
Yes, they will cooperate with you and do business. They
control these men and women working for you and make profit.
And they share the profit with you. But that does not mean they
are going to give up their Communist Revolution.
Senator Cleland. Yes, sir, Mr. Kahler.
Mr. Kahler. If I may just add. I guess, as a businessman
operating in China, it is not my role to stop the Communist
Revolution. That is bigger than I can undertake. But I would
like to say, in response to what Mr. Wu said, I am a newcomer.
I have only been there 6 years. But I have seen dramatic change
in 6 years in the amount of responsibility and authority and
decisionmaking activity that is taken by executives in Chinese
companies. And I suspect, to somebody who had been there 20
years ago, if they could take a snapshot today and compare it
to 20 years ago, the change would be even more dramatic.
The centralization of power in China clearly, clearly,
clearly is dissipating from a political and from an economic
situation. And I will stick with the point that I have made,
and others have as well, that having people like Caterpillar
and other world-class American companies in China is
contributing to the education and the understanding of the
Chinese people about the international world in which they live
and is contributing to the pressure that they put on their
local communities and on their national government for change
that is in fact in the direction that I think most of us at
this table want to see.
Senator Cleland. Yes, Mr. Valenti, I cannot help but think
that the silver screen has been a powerful influence in the
lives of Americans and other people around the world, and it
would be an increasingly powerful influence in China, as well.
Yes, Ms. Wallach.
Ms. Wallach. On the question that you posed of what way,
which approach, as you characterized it, Mr. Wu's or Mr.
Valenti's China will take. To quote General Scowcroft: ``China
is going to follow its own interests.'' And the history of
relations with China shows that the one thing that has caused
changes in conduct is taking away access to this U.S. market on
which so much of China's growth relies. And before the de-
linkage in 1994 of human rights and trade, there had been
uses--for instance, right after Tiananmen Square, where it
looked like China would be denied the annual MFN--of that
leverage in that instance to spring thousands of kids out of
jail. And then Congress voted afterwards.
And in the commercial context, despite lots of huffing and
puffing, bilaterals, and threats, the only time there has
actually been changed conduct is at midnight plus one minute of
the day the trade sanctions are going to kick in. And the
intellectual property rights fight was a pretty dramatic case
in 1996. That has been the actual record.
So where it may be the case that voting down PNTR would not
earn China's ``joy and gratitude''--as Mr. Vanlenti put it--it
seems to me that is an approach we should use for our mothers.
But for business competitors with different goals and different
philosophies, who are also armed to the teeth and regularly
threaten our allies and our West Coast cities, a more
leveraged, tougher position might be an appropriate one.
Senator Cleland. Mr. Wu.
Mr. Wu. Well, I am not interested about the entertainment
business, but I want to point out one thing. Remember the
Hollywood-produced movie ``Kundun.'' And the Chinese foreign
spokesperson right away said, ``stop it.'' And ``Kundun''
disappeared in the American cinema in about one week. They
crossed over the Pacific Ocean, come to the United States, and
tell the American media ``No freedom of speech. We do not like
this movie.''
So maybe some movie like ``Mulan'' is right now getting to
China. Twenty movies, well, for the Chinese, yes, we like
American movies very much. But we have to know that the thing
is, until this moment, it is still controlled by one hand.
Mr. Valenti. Let me just respond to Mr. Wu. He is now in an
area where I think I am a little more of an expert than he is--
the only area, I might add. And that is that every country in
the world, Mr. Wu, except Germany, Japan and the United States,
have government censorship. The United Kingdom, the cradle of
all of our liberty and Common Law, has banned several American
movies.
Kirk Douglas' picture, ``Paths of Glory'', was banned for
25 years in France. Every country has the sovereign right to
say, ``I do not want this movie in my country.'' And they all
do it. And they did not like ``Kundun.'' But that did not keep
Martin Scorcese from making it. And the Chinese had zero
influence on whether or not we make a movie.
Our total income, total income today, to the movie industry
and the television industry is maybe between $20 million and
$30 million. Even capitalists do not sell their birthright for
that kind of money.
The point is that we know censorship. We fight it every day
all over the world, government censorship in democratic
countries. So China is no different than anybody else on that
score.
Senator Cleland. Well, this is a fascinating discussion. I
wish we could continue for hours. But you all have been very
patient and this has been among the most fascinating issues
with which I have dealt since I have been in the Senate, and it
will continue to be.
Thank you very much. The hearing is adjourned.
[Whereupon, at 12:20 p.m., the hearing was adjourned.]
A P P E N D I X
Prepared Statement of Hon. Slade Gorton,
U.S. Senator from Washington
To begin, I would like to extend a thank you and congratulations to
Secretary Daley for the recent Department of Commerce decision
regarding the apple juice concentrate anti-dumping case against China.
As some of my colleagues here today know, the Department of Commerce
recently ruled in favor of American apple producers in this significant
trade case; a case that could set the stage for anti-dumping actions in
the future.
Essentially, American apple juice concentrate producers charged
that the price paid for Chinese imports was far below market value and
that dumping had occurred. Since initially pursing their case
approximately one year ago, the industry has won a favorable decision
by the International Trade Commission and two subsequent determinations
by the Department of Commerce. Commerce's most recent determination
solidified the fact that U.S. apple producers and concentrate
processors were harmed by the influx of cheap imports. As a matter of
fact, due to Commerce's decision to levy duties of more than 50% on
Chinese concentrate, the price paid for juice apples has increased from
a very low $10 per ton back to the normal level of $120 per ton.
While the specifics of this case might not be of great significance
to my colleagues, what this scenario has provided is a window into the
future and possibility of anti-dumping cases against China. Many
arguments against China's entry into the World Trade Organization or
extension of Permanent Normal Trade Relations hinge on the concern that
free market trade will result in an over-abundance of Chinese product
imported into the United States. I believe these valid concerns can now
be addressed with a concrete response. This particular case exemplifies
that the United States does have an avenue for retribution and recoil
should trade with China result in any dumping scenarios.
While I am still somewhat skeptical about whether or not the trade
agreement between the United States and the People's Republic of China
will be executed to the level at which it is written, I do recognize
that this nation and my own State of Washington have more to lose by
bypassing trade with one-fifth of the world's population. In
conjunction, China has more to gain by embracing our free market
principles.
I will reserve my definitive remarks about trade with China until
the full Senate is prepared to debate and discuss this subject matter,
and thank Chairman McCain for holding this hearing.
Prepared Statement of Douglas Lowenstein, President,
Interactive Digital Software Association
Mr. Chairman, thank you for inviting the Interactive Digital
Software Association to appear before you this morning to discuss
legislation granting Permanent Normal Trade Relations status to China.
My name is Douglas Lowenstein and I am President of the IDSA, the trade
body representing U.S. video and computer game software companies. IDSA
supports granting PNTR to China and its eventual full admission into
the World Trade Organization.
In 1999, our industry generated $6.1 billion in retail software
sales in the U.S. alone. IDSA's 32 members account for 90% of the
edutainment and entertainment software sold in the U.S.. Worldwide, our
industry generates in excess of $17 billion in software sales alone,
and many of our members generate 40% or more of their revenue from
foreign markets. Between 1991-99, the industry has grown more than
145%, far outstripping the growth rate of any other entertainment
sector in the world. In 1999, 215 million electronic entertainment
games were sold in America alone, or two per household. It is estimated
that our industry now employs more than 50,000 people in the United
States, many in highly skilled positions. Video and computer game
software developers and publishers are in dozens of states across
America.
Background on Computer and Video Game Industry
While video games were once thought to be mainly the province of
children, today's industry appeals to people of different ages,
genders, and tastes. In fact, the average age of computer and video
game players in America is now 28 years old, and 43% are women or
girls. Overall, it is estimated that 145 million Americans regularly
play computer and video games.
Increasingly, the interactive entertainment industry is seen as
both a content provider and also a high tech industry driving major
advances in artificial intelligence, computer hardware, 3D graphics,
and silicon chip design. The next generation of video game console
hardware, some available now and some available over the next few
months, will offer consumers a set top box unit which can play video
games, DVD movies, audio CDs, connect to the Internet, download
content, handle e-mail, and more, all for a reasonable price. Perhaps
this is why a recent story in Newsweek said, ``In the century to come,
the medium producing the most dynamic, vital, and exciting new art will
be video games.''
I offer this background to dramatize just how important our
industry is to the U.S. economy, particularly the high tech economy of
the new millennium. Our industry relies totally on intellectual
property to fuel its growth. Demand for video and computer games is
huge. It's clear that wherever our industry can sell legitimate
product, sales explode. Without strong IPR protection in the United
States and around the world, including the Internet, we cannot sell our
products. Indeed, piracy is our biggest trade barrier. Without strong
copyright protection and enforcement, the kind of growth we've
experienced over the last decade will be jeopardized. The plain fact is
that large and small countries around the globe are riddled with
counterfeit and pirate products, making it virtually impossible to
create legitimate markets and build strong businesses.
Computer and Video Game Piracy in China
Which brings us to China. We estimate that our industry loses $1.38
billion annually due to piracy in China, and that the piracy rate there
hovers around 95%. In other words, all but 5% of the products sold in
China are pirate or counterfeit. While we experience similar piracy
rates in other countries, the financial losses we sustain in China far
outstrips that of any other country in the world.
The obvious question is, given these problems, why on earth would
we support PNTR and China's entry into the World Trade Organization
(WTO)? There are three major reasons: First, notwithstanding the
continuing domestic piracy problems in China, we believe China has
taken some important strides under the 1992 and 1995 Sino-U.S.
bilateral trade agreements to improve the IPR environment.
Second, we believe that membership in WTO offers the best way to
sustain and build on even the limited progress made to date.
Third, we believe that membership in the WTO will hasten China's
ratification of the World Intellectual Property Organization (WIPO)
treaties with respect to copyright protection on the Internet. Given
the central role the Internet will play for our industry as a vehicle
for distributing content, this is a fundamental and critical business
issue for us.
The 1992 and 1995 Memoranda of Understanding (MOUs)
In 1992, and again in 1995, the U.S. and China signed Memoranda of
Understanding (MOU) regarding intellectual property rights in China.
The 1995 MOU was further supplemented by a 1996 Action Plan for
implementation of its key provisions. These are relevant in the current
debate since one of the issues is whether China can be trusted to carry
out its obligations under international trade accords. Indeed, there
are some critics who point to the IPR agreements as an example of why
China cannot be trusted.
In fact, China has complied with many of the key provisions of both
MOUs. This is not to say it's been easy, or that all is well. In fact,
neither is the case. But it is also indisputable that progress was
achieved under both the 1992 and 1995 agreements.
The 1992 plan dealt mostly with steps China needed to take to enact
laws to meet various relevant international copyright conventions, such
as the Berne Convention. And, in fact, China did everything it was
asked to do under that agreement within the prescribed deadlines.
However, China did fall well short of meeting the agreement's general
commitment to improve enforcement of the new laws it enacted, and it
was this failure that gave rise to the negotiation of a new, much more
specific agreement in 1995.
The 1995 agreement and the 1996 Action Plan thus zeroed in on
enforcement generally and particularly on the increasingly grave
problem of uncontrolled production in China of counterfeit optical
media products of all kinds. The main focus of the 1995 agreement was
to pressure the Chinese Government to shut down these illegal CD
replication plants that were churning out massive quantities of illegal
video game software, movies, and sound recordings and exporting them
around the world. Indeed, in the mid-nineties, the illegal CD plants in
China were supplying pirate goods to numerous global markets, from
Southeast Asia to South America, thus disrupting many of our legitimate
and growing markets.
Candidly, our industry was not entirely satisfied with the 1995
agreement since it did not cover all forms of entertainment software
(our members now publish games in three formats: cartridges, CD-ROMs,
and DVD-ROMs, and the 1995 pact only covered optical media, not
cartridge product). Nonetheless, the agreement was an important effort
to reduce the global supply of pirate CD software emanating from China
and was a net plus for our industry.
The fact is that the Chinese, over a two year period, have mostly
lived up to their obligations under the 1995 agreement and the 1996
action plan to close down this pirate optical media production and halt
exports. China closed down 86 production lines producing pirated
optical media product since 1996. In addition, China established strict
licensing controls over 50 plants that produce legitimate products. The
volume of pirate CDs being exported out of China is significantly lower
than it was in 1995 and 1996. We believe these gains stem directly from
the determination of the Office of the U.S. Trade Representative, led
by Ambassador Barshefsky and her staff, to enforce the 1995 agreement.
The Current Environment in China
What remains to be done under the 1995 agreement is to complete the
job of cleaning up the domestic market now that the export problem has
diminished. It is in the domestic market where we still face massive
piracy problems in China.
As noted above, the piracy rate for our products is 95% and the
estimated losses are $1.38 billion. According to the International
Intellectual Property Alliance Special 301 Report submitted to USTR in
February, ``the levels of optical media piracy in China across all
lines of copyright business continue to remain high despite reports of
active raiding at all levels in the production and distribution
chain.''
Entertainment software companies have noted that there is now
massive illegal importation of pirate and counterfeit copyright product
into China from Hong Kong, Macau, Malaysia, and Taiwan. This flood of
illegal imports has kept piracy rates unacceptably high even though the
Chinese have achieved some success in shutting down indigenous pirate
manufacturing capacity. For example, we believe that 100% of the pirate
games for use on the Sony PlayStation console are imported, and 70% of
the pirate games for the PC are imported. Many of these pirate products
are titles published by U.S. software companies.
Beyond problems with illegal imports, weak domestic enforcement
remains a major problem in China. The good news is that the Office of
National Antipiracy and Pornography (NAPP) has taken charge of all
copyright enforcement activities throughout the country. But IIPA
noted, ``enforcement remains the principal weak point within the
Chinese IPR system. All industries continue to believe that the system
lacks significant deterrence to further piracy due to nondeterrent
administrative penalties and the woeful lack of resort to the criminal
enforcement system.''
Examples of enforcement impediments abound. For example, the
central copyright office in Beijing must clear local copyright bureau
enforcement actions that involve foreign rights holders, a clear
violation of the Agreement on Trade Related Aspects of International
Property Rights (TRIPS) which slows down or even stops enforcement. In
addition, fines are too low, both in the law and as imposed, and retail
shops that sell pirate goods often remain open even after convictions
for copyright piracy. The list goes on. In short, the requisite
deterrence is lacking.
We also remain extremely concerned that China continues to reserve
the right to keep product out of the country using vague cultural
standards. China requires our members to submit software for content
screening to a Software Approval Board. Only foreign companies are
required to go through this screening process. The Board can reject
sale of this product, and it can take months to do so. Meanwhile,
pirate versions of the same product freely circulate! We were
disappointed that the agreement governing entry into the WTO did not
address this issue.
However, the fact that enormous piracy and market access problems
in China persist does not mean that China is not taking the problem
more seriously, or that no progress has been made, or that there is not
an improved attitude in China toward addressing the issue. To the
contrary, we believe there has been progress and there are signs China
recognizes additional steps are required. Indeed, recent speeches by
top Chinese officials have been noteworthy for their open
acknowledgement that domestic piracy is rampant and much more needs to
be done to attack it. I am not sure these statements would have been
made absent the prospect of PNTR and WTO membership.
WTO: Best Road to Reform
WTO membership is a linchpin in the long term effort to advance the
cause of U.S. copyright interests in China. It offers the following
benefits to our industry:
As a member of WTO, China will be obligated to meet
the requirements of TRIPS immediately upon accession. This is a
significant step forward and will bring China into line with
dozens of other countries that accept TRIPS standards. Most
notably, a major TRIPS obligation relates to enforcement and
will require China to take more effective action to deter
further infringements. This imposes a critical international
obligation on China which we believe China will want to abide
by, and holds out the promise of a vast improvement in the
piracy landscape in China.
We believe the WTO dispute settlement procedures offer the
most powerful leverage to exact progress in the IP area. If,
for example, China does not move to becomes TRIPS-compliant,
the WTO affords a multilateral channel to enforce these
obligations, with real teeth. As the Committee knows, under WTO
rules, if the U.S. were to bring a successful action against
China in the IPR area, it would be free to retaliate in any
sector, even the most vulnerable domestic Chinese industry.
This threat is a powerful weapon to induce responsible
behavior.
The alternative is continued reliance on the bilateral Special
301 Process. While we have generated some results through this
route, it has inevitably involved repeated brinksmanship,
threats, and counter-threats that have unavoidably polarized
dialogue. Moreover, it is not clear to us that any future
Administration, Democratic or Republican, given the tremendous
geo-political issues involving China, will be prepared to risk
the relationship over IPR issues. Thus, bringing China into the
world body established to address IPR and trade related issues
is likely to offer future governments a less confrontational
way to push for continued progress in the IPR area.
The agreement negotiated between the U.S. and China
governing its accession to WTO included a range of market
access provisions which will be helpful to our industry,
including tariff reductions and according ``entertainment
software'' status as an audio-visual work, enhancing
distribution options. These market access gains will be lost if
PNTR status is not granted. Moreover, WTO becomes a forum in
which our industry can pursue these and other market access
relief reforms, such as the content review issue I mentioned
earlier.
The Internet is growing rapidly in China. There are
now an estimated 8.9 million Internet users, double the level
in 1998. IDSA knows from our experience in the U.S. and around
the world that Internet piracy is costing our industry untold
millions, perhaps even billions of dollars. China is currently
amending its copyright law, giving it the opportunity to add
provisions implementing the WIPO Internet treaties which would
increase protection of digital works and provide critical
protection against hacking and the use of circumvention devices
to defeat copy protection. While compliance with TRIPS itself
as a condition of WTO ascension will heighten copyright
protection for digital works (since TRIPS covers both analog
and digital works), we believe membership in WTO will create a
more positive environment for full implementation of the WIPO
treaties by China. As an industry widely regarded as providing
some of the core content which will drive the Internet's
continued emergence, copyright protection of Internet
distributed works is a critical business goal.
Conclusion
As the fastest growing entertainment industry in the world over the
last five years, we see tremendous opportunity for American
entertainment software companies to continue to expand sales in foreign
markets. China is a huge opportunity in this regard. If one looks at
sales figures for our industry in the U.S. and Europe alone of $6.1
billion and $6.6 billion respectively, it's easy to see the potential
for American entertainment software companies to significantly grow
market share in China. On balance, we believe that PNTR, coupled with
membership in the WTO, offers the best hope for building a viable,
legitimate software market in China and realizing that potential. And
that, in turn, means more jobs in the U.S. entertainment software
industry as we continue our sustained growth and expansion.
Thank you.
______
Prepared Statement of the American Forest & Paper Association
The U.S. forest products industry strongly supports China's
accession to the World Trade Organization (WTO), and urges timely
Congressional approval of Permanent Normal Trade Relations (PNTR) for
China.
China holds great promise as a major export market for U.S. wood
and paper products. However, Chinese tariffs in our sector are among
the highest in the world. Those high tariffs--coupled with a broad
range of nontariff barriers--currently inhibit our industry's ability
to take advantage of the potential that is inherent in China's huge
population, relatively low per capita consumption of wood and paper
products, shortage of quality housing, economic growth and burgeoning
middle class.
Bringing China into the WTO rules-based trading system, under the
market access conditions that were agreed bilaterally in November 1999,
should significantly enhance export prospects for U.S. producers of
wood and paper products. At the same time, China's integration into the
global trading system will strengthen the economic and political forces
which are changing Chinese society, and thereby advance important
American security, social and human rights interests.
U.S.-China Bilateral Market Access Agreement
The bilateral WTO accession agreement concluded last
November between the U.S. and China will reduce most Chinese
paper and wood tariffs to the 5-7.5% level, with some tariffs
as low as 1-2%. Most of these rates will be achieved by 2003.
This is well below current levels of 12-18% on wood and 15-25%
on paper products.
China agreed that if an Accelerated Tariff
Liberalization (ATL) agreement is reached in the WTO, China
will join the forest products initiative upon accession. While
an ATL agreement was not reached in Seattle, this suggests that
China is not opposed to elimination of wood and paper tariffs
not later than 2005. It is therefore critical that this
opportunity for tariff elimination in a huge market not be
lost.
U.S. companies' ability to do business in China is
currently limited by restrictions on trading rights (importing
and exporting) and distribution of imported products. Within
three years, any entity will be able to import forest products
into any part of China and engage in the full range of
distribution services.
The agreement requires that China extend to U.S.
forest products suppliers any preferential treatment it
provides to other countries.
Permanent Normal Trade Relations for China
The U.S. forest products industry has long supported
the normalization of U.S. commercial relations with China. As
China prepares to join the WTO, it is essential that Congress
grant permanent, unconditional trade status to ensure that U.S.
exporters and investors get the full benefits of the very
favorable bilateral market access agreement and the other
commitments China makes as a condition of its accession.
The Importance of China's Paper and Wood Market to U.S. Suppliers
China's membership in the WTO, with its system of
rules and obligations, will give U.S. exporters a means for
addressing inconsistent, discriminatory and trade-distorting
practices that have made doing business in China very
difficult.
China already has access to our market, since U.S.
tariffs on forest product imports are at zero or very low. WTO
accession on the terms of the U.S.-China bilateral market
access agreement will ensure a more level playing field on
tariffs.
The removal of tariff and nontariff barriers to
China's market is expected to provide significant export
opportunities for U.S. producers of paper and wood products.
Because China is deficient in forest resources, with limited
potential for extending its own fiber supply, its need to
import paper and wood products is expected to increase
substantially as it pursues economic and industrial expansion.
Pulp and Paper Products: U.S. pulp, paper, paperboard
and converted products exported to China totaled more than
800,000 metric tons in 1998, with a value of $430 million
(there is also significant trans-shipment through Hong Kong).
In 1998, China was the only Far East market which saw an
increase in U.S. exports despite the effects of the Asian
financial crisis (U.S. exports to all other markets in the
region dropped sharply).
Over the past decade, China has experienced the
world's fastest paper and paperboard consumption growth.
However, production capacity has not kept up with this growth.
Projections by the Food and Agricultural Organization (FAO)
show that China's paper and paperboard consumption will
continue to grow strongly over the next decade and that the gap
between supply and demand will continue to widen and be filled
by imports.
Wood Products: Exports of solid wood to China will
approach $60 million in 1999, up from $41 million in 1998. Most
products are imported in the form of logs or lumber and re-
manufactured in China for use in interior applications such as
furniture, flooring, doors and windows. These markets should
continue to grow as more Chinese can afford to upgrade their
current dwellings or purchase new housing.
Almost no U.S. wood is used in housing construction,
but this could change as the Chinese government has launched an
ambitious, market-oriented housing reform plan to privatize and
increase the quality of Chinese housing. AF&PA is participating
in the revision of the Chinese design standard for timber frame
construction with the Chinese Ministry of Construction, and
using our membership in the U.S.-China Residential Building
Council to increase pressure on China to allow greater use and
importation of U.S. wood building products.
In order for U.S. products to compete in both interior
and housing construction areas, high Chinese tariffs must be
eliminated. U.S. value-added interior products such as
flooring, veneer, molding and millwork, windows and doors
cannot compete in local markets when facing an 18% tariff on
top of the Chinese VAT tax.
Price competitiveness in building materials is
foremost in Chinese purchasing decisions, and U.S. wood
products are competing against locally produced materials such
as steel and concrete. Without tariff elimination and major
building code changes, it will remain difficult for U.S.
manufacturers to compete effectively in this growing and
increasingly prosperous market.
______
Submitted for the Record by Lori Wallach, Director, Global Trade Watch
Re: USTR Reveals that U.S. Gets China WTO Tariff Cuts Even if Congress
Refuses Permanent MFN Grant for China
USTR Barshefsky today finally admitted to Congress that the U.S.
could obtain all of the tariff cuts China would be required to make
upon entry into the WTO even if the Congress did not grant Permanent
Most Favored Nation (PMFN) status. Her statement was in stark contrast
to past insistence by the Clinton Administration and the corporate
coalition pushing for PMFN that the U.S. would lose out on China's WTO
tariff cuts unless Congress passed PMFN.
Barshefsky's revelation came in response to a question raised by a
Rep. Gerald Kleczka (D-WI) in today's Ways and Means Committee hearing.
Barshefsky's testimony to the committee focused on an array of specific
large tariff cuts required of China when it joins WTO. Kleczka asked
Barshefsky to reaffirm that large tariff cuts for autos she touted
would not obtain for U.S. manufacturers absent PMFN.
In a refreshing moment of candor, Barshefsky revealed that an
existing U.S.-China treaty granting reciprocal, bilateral MFN treatment
would ensure the U.S. benefitted from China's WTO-related tariff cuts
whether or not Congress approved PMFN. This is a point opponents of
PMFN, who argue the new grant is neither necessary nor merited, have
made for months. Until today, the Administration steadfastly had
repeated the ``Big Lie'' of the PMFN fight, which is that U.S. farmers
and manufacturers would be denied all of the potential benefits of
China's WTO entry and thus be placed at a disadvantage relative to
other nations' businesses unless Congress passed PMFN.
The treaty noted by Barshefsky, first signed in 1979, automatically
renews for three-year terms with the current term running through 2001.
Article II of the treaty, which is commonly called the `79 Bilateral,
requires the U.S. and China to provide the other with the best
treatment offered to any other country--aka MFN. Once China enters the
WTO, China's best treatment will become the WTO package, meaning the
U.S. would enjoy the tariff cuts China is required to make upon
entering WTO.
Unfortunately, USTR Barshefsky then returned to the old talking
points, saying that although the tariff cuts would obtain, that the
U.S. would lose out on distribution and services agreements reached
with China. Actually, the `79 Bilateral also covers these issues. For
instance, the Article II Most Favored Nations Grant Barshefsky noted
also explicitly includes: ``All laws, regulations and requirements
affecting all aspects of internal sale, purchase, transportation,
distribution or use of imported products.'' Art. II(1)(D)
______
Article from Inside U.S. Trade--Dec.17, 1999, Submitted for the Record
by Lori Wallach, Director, Global TradeWatch
CHINA, U.S. DIFFER ON PERMANENT MFN, OPPONENTS SEEK ANNUAL RENEWAL
A Chinese government spokesman late last week said that the Clinton
Administration has promised China permanent Most-Favored Nation (MFN)
status as part of a bilateral deal meant to pave the way for China's
entry into the World Trade Organization. Therefore, the U.S. cannot
benefit from the concessions as negotiated unless it offers China
permanent MFN, Chinese embassy spokesman Yu Shuning said on Dec. 10.
``[T]he giving of PNTR (Permanent Normal Trade Relations] is a
major provision in the China-U.S. agreement on China's accession to the
WTO,'' he said in a press conference. ``Without the giving of the
status to China, the agreement between China and the U.S. will not come
into force.''
But two U.S. officials disputed this assertion. ``China NTR is not
expressly mentioned in the China WTO agreement'' a spokeswoman for the
Office of the U.S. Trade Representative said this week. ``However, the
President made a commitment to seek permanent NTR.''
Similarly, a White House spokesman said the Clinton Administration
made a commitment to the Chinese government on permanent MFN.
Under the Chinese interpretation of the commitment, the U.S. would
not be able to get the benefits it has negotiated under the bilateral
deal even if it decided that it could meet its WTO MFN obligations in a
different form. Some critics of China have insisted that the U.S. is
only obligated to offer unconditional MFN to China, which would allow
an annual renewal of that status outside the current Jackson-Vanik
procedures.
Commerce Secretary William M. Daley did not dismiss this argument
out of hand in a Dec. 16 press conference, but highlighted the fact
that annual renewal would run counter to the political commitment the
Clinton Administration has made to give China permanent MFN.
``There's a question whether you can move forward on an annual by
annual basis,'' Daley said. ``There are some lawyers who believe it
must be permanent, but the President has been emphatic for quite a long
time that for our overall political and economic relationship, the
permanency of NTR is needed.''
If the Clinton Administration had made a permanent MFN commitment
as part of the bilateral deal with China, it would have overstepped its
statutory bounds, a congressional source said. Extending permanent MFN
is the prerogative of the Congress, which leaves the Administration
free to promise a major lobbying effort to persuade Congress.
Administration officials along with business supporters of the
China-U.S. deal have maintained that permanent MFN is necessary for the
U.S. to reap the benefits of any market access concessions China made
to enter the WTO to any of its members. Under this argument, failure of
the U.S. to extend permanent MFN would run counter to U.S. obligations
under the WTO.
This would mean the U.S would have to opt not to apply the WTO to
China, these supporters said. This would preclude the U.S. from the
dispute settlement rules and the market access benefits, they said.
These proponents of permanent MFN for China dismiss the notion that
China would have to extend to the United States the trade benefits it
extends to other trading partners because of a 1979 bilateral trade
agreement between China and the United States. This trade agreement
obligates both sides to extend MFN to each other, which arguably would
mean the extension of all WTO benefits China negotiated.
Opponents of granting permanent MFN for China have argued that
granting annual MFN, if it is unconditional and does not lapse, is
sufficient to meet U.S. obligations under the WTO. That argument was
put forward Dec. 8 by Lori Wallach, Director of Public Citizen's Global
Trade Watch, at the House International Relations Subcommittee on
International Operations and Human Rights.
``There is simply no GATT [General Agreement on Tariffs and Trade]
or WTO text nor any GATT or WTO case law precedent of requiring that
MFN be granted for a specific period of time,'' Wallach testified.
This argument was implicit in a Dec. 2 letter to Clinton signed
Rep. Dennis Kucinich (D-OH), Rep. Christopher Smith (R-NJ) and Wei
Jingsheng, a Chinese democracy advocate, opposing permanent MFN for
China. Opponents of permanent MFN for China said this week that if they
can persuade swing congressmen on this argument, they have a better
chance of defeating permanent MFN and substituting an annual renewal of
MFN.
A USTR spokeswoman, however, called Wallach's argument a ``creative
alternative,'' that is not a ``reflection of reality.'' The WTO obliges
the U.S. to treat all countries equally, and since all other WTO
members have been granted permanent MFN without a time limit, China
should get the same arrangement, she argued.
But a critic of permanent MFN dismissed that argument by pointing
out that it is theoretically possible that the U.S. would deny MFN to
any country. ``As long as we are applying MFN on a given day, we're
fulfilling our obligations under GATT,'' said Scott Nova, director of
the Citizen's Trade Campaign. ``The possibility of the suspension
always exists for any country, and that possibility exists for China
even if they have permanent MFN.''
But the House Ways & Means Committee issued a background paper on
Dec. 15 on the procedures it sees as required for U.S. businesses and
farmers to realize the benefits of China's WTO commitments. If the U.S.
does not remove China from the annual review under the so-called
Jackson-Vanik amendment, it will have to invoke non-application of
China's WTO commitments, according to the paper. ``The one-page paper
does not address the issue of a stand-alone annual renewal procedure
that has been advocated by Wallach.''
The congressional vote on permanent MFN for China will likely come
in early summer, according to Rep. David Dreier (R-CA) and House Ways &
Means Trade Subcommittee chairman Phil Crane (R-IL). At that point,
China will have concluded much of its accession process, Dreier said.
But Yu expressly rejected any linkage between approval of permanent
MFN and completing the accession process. ``These things are on
different tracks,'' he said. ``We are opposed to any linkage between
these two.''
He said the U.S. should extend permanent MFN as soon as possible.
``This is a promise by the U.S. administration,'' he said. ``They said
they had a plan to work with the Congress to have this passed as soon
as possible.''
In further remarks on Dec. 10, Yu said that China would not take
over Macao's textile quota now that Macao, a former Portuguese colony
will be reunited with China as a special administrative region, a
status similar to that of Hong Kong.
Yu also said that China ``cannot discard the use of force'' in its
relations with Taiwan, which it considers a part of one country with
mainland China, because that would ``encourage separatists and foreign
powers.'' Yu said that military exercises conducted during the last
presidential elections in Taiwan were meant to send a message to
``separatists,'' those who advocate independence for Taiwan. He also
did not rule out again conducting military exercises during next year's
Taiwanese presidential election.
``That all depends on how the separatists in China behave,'' Yu
said.