[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
CHINA'S EXCHANGE RATE REGIME AND
ITS EFFECTS ON THE U.S. ECONOMY
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON
DOMESTIC AND INTERNATIONAL
MONETARY POLICY, TRADE AND TECHNOLOGY
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
OCTOBER 1, 2003
__________
Printed for the use of the Committee on Financial Services
Serial No. 108-56
92-336 U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800
Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001
HOUSE COMMITTEE ON FINANCIAL SERVICES
MICHAEL G. OXLEY, Ohio, Chairman
JAMES A. LEACH, Iowa BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana MAXINE WATERS, California
SPENCER BACHUS, Alabama CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair JULIA CARSON, Indiana
RON PAUL, Texas BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio GREGORY W. MEEKS, New York
JIM RYUN, Kansas BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio JAY INSLEE, Washington
DONALD A. MANZULLO, Illinois DENNIS MOORE, Kansas
WALTER B. JONES, Jr., North CHARLES A. GONZALEZ, Texas
Carolina MICHAEL E. CAPUANO, Massachusetts
DOUG OSE, California HAROLD E. FORD, Jr., Tennessee
JUDY BIGGERT, Illinois RUBEN HINOJOSA, Texas
MARK GREEN, Wisconsin KEN LUCAS, Kentucky
PATRICK J. TOOMEY, Pennsylvania JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut WM. LACY CLAY, Missouri
JOHN B. SHADEGG, Arizona STEVE ISRAEL, New York
VITO FOSSELLA, New York MIKE ROSS, Arkansas
GARY G. MILLER, California CAROLYN McCARTHY, New York
MELISSA A. HART, Pennsylvania JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia JIM MATHESON, Utah
PATRICK J. TIBERI, Ohio STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota ARTUR DAVIS, Alabama
TOM FEENEY, Florida RAHM EMANUEL, Illinois
JEB HENSARLING, Texas BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey DAVID SCOTT, Georgia
TIM MURPHY, Pennsylvania
GINNY BROWN-WAITE, Florida BERNARD SANDERS, Vermont
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
Robert U. Foster, III, Staff Director
Subcommittee on Domestic and International Monetary Policy, Trade and
Technology
PETER T. KING, New York, Chairman
CAROLYN B. MALONEY, New York
JUDY BIGGERT, Illinois, Vice BERNARD SANDERS, Vermont
Chairman MELVIN L. WATT, North Carolina
JAMES A. LEACH, Iowa MAXINE WATERS, California
MICHAEL N. CASTLE, Delaware BARBARA LEE, California
RON PAUL, Texas PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois BRAD SHERMAN, California
DOUG OSE, California DARLENE HOOLEY, Oregon
JOHN B. SHADEGG, Arizona LUIS V. GUTIERREZ, Illinois
MARK R. KENNEDY, Minnesota NYDIA M. VELAZQUEZ, New York
TOM FEENEY, Florida JOE BACA, California
JEB HENSARLING, Texas RAHM EMANUEL, Illinois
TIM MURPHY, Pennsylvania
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
C O N T E N T S
----------
Page
Hearing held on:
October 1, 2003.............................................. 1
Appendix:
October 1, 2003.............................................. 49
WITNESSES
Wednesday, October 1, 2003
English, Hon. Phil, U.S. Representative from the State of
Pennsylvania................................................... 13
Green, Hon. Mark, U.S. Representative from the State of Wisconsin 11
Aldonas, Hon. Grant, Under Secretary for International Trade,
Department of Commerce......................................... 17
Goldstein, Morris, Dennis Weatherstone Senior Fellow, Institute
for International Economics.................................... 34
Taylor, Hon. John B., Under Secretary for International Affairs,
Department of the Treasury..................................... 16
Vargo, Franklin J., Vice President, International Economic
Affairs, National Association of Manufacturers................. 32
APPENDIX
Prepared statements:
Oxley, Hon. Michael G........................................ 50
English, Hon. Phil........................................... 53
Green, Hon. Mark............................................. 56
Manzullo, Hon. Donald........................................ 58
Aldonas, Hon. Grant.......................................... 60
Goldstein, Morris............................................ 71
Taylor, Hon. John B.......................................... 85
Vargo, Franklin J............................................ 91
Additional Material Submitted for the Record
Maloney, Hon. Carolyn B.:
Exerpt from a statement by Kathleen P. Utgoff, Commissioner,
Bureau of Labor Statistics, September 5, 2003.............. 103
CHINA'S EXCHANGE RATE REGIME AND
ITS EFFECTS ON THE U.S. ECONOMY
----------
Wednesday, October 1, 2003
U.S. House of Representatives,
Subcommittee on Domestic and International
Monetary Policy, Trade and Technology,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to call, at 2:02 p.m., in
Room 2128, Rayburn House Office Building, Hon. Peter King
[chairman of the subcommittee] presiding.
Present: Representatives King, Biggert, Paul, Manzullo,
Ose, Kennedy, Feeney, Hensarling, Murphy, Barrett, Maloney,
Sanders, Sherman, Hooley, Baca and Emanuel.
Chairman King. [Presiding.] Good afternoon. This hearing
will come to order.
The subcommittee today meets to examine the issue of
foreign currency exchange rates and their relationship to the
United States economy, in particular, the much-publicized
relationship between the Chinese yuan and the U.S. dollar.
I want to thank my Ranking Member, Ms. Maloney, for her
usual bipartisan cooperation in preparing for this hearing, as
well as the cooperation the subcommittee has received from the
administration.
We are particularly fortunate that both Under Secretary
Taylor from Treasury and Under Secretary Aldonas from Commerce
have made themselves available to share their expertise on
currency exchange and trade-related matters. I am aware of the
time constraints these gentlemen face today, and we will do our
best to accommodate their schedules.
My understanding is that the next series of votes is at
about 3:30 p.m., so we will try to move this along as much as
we can.
As the subcommittee specifically charged with international
monetary policy, we have been looking at this issue for the
better part of the year. In fact, it was my colleague on the
committee, Congressman Green, and also Congressman English, who
initially approached me in the spring, underscoring their
concerns as they relate to their manufacturing bases back home.
While currency pegs have been a reality for some time, it
has really only been in the last month or so that considerable
national attention has been paid to valuations of foreign
currencies and the effects they may be having on U.S. export
opportunities and the economic recovery overall.
I am very aware that many see this as a U.S.-jobs issue.
Others view it as a function of global economic integration.
Some also contend that currency intervention by China and
others in Asia is tantamount to currency manipulation and thus
actionable under appropriate trade remedies.
It is my hope that this hearing today will provide a
thoughtful and appropriate forum for the various viewpoints we
discuss as Congress works with the administration to ensure
competitive free markets for U.S. manufacturing and its labor
force.
When we look at the challenges to our manufacturing sector,
the key, of course, is getting the fundamentals right at home,
in other words, putting in place a strong domestic growth
agenda. The China challenge is complex, and there are a number
of dimensions to the problem. These include ensuring that China
continues to open its markets, plays by the rules of free
trade, removes restrictions on capital flows and moves toward a
market-determined exchange rate.
While we need to address all these challenges, it is
important that China is one of the few engines of growth in the
world economy today, and that imports and foreign investment
into China are expanding rapidly.
However, there is much more that China can and should do to
implement its WTO commitments, and we look forward to hearing
what the administration is doing to hold China to these
commitments. To that end, I want to underscore my strong
support for the efforts of Treasury Secretary Snow in his most
recent visit to China, as well as the APEC meetings in Thailand
and G-7 finance ministers meetings in Dubai. This
administration continues to press for market-based exchange
regimes and the need for flexibility.
Under Secretary Taylor will understandably be limited in
his ability to speak to many of these issues pending the
upcoming currency report. I am confident that he, along with
Under Secretary Aldonas, will be able to discuss efforts
currently taking place on multiple fronts to promote job
growth, economic expansion, and level the global economic
playing field.
One truth seems to be universal with regard to the topic of
discussion today. There is unanimity that the yuan is
undervalued. Where to go from there and the potential effects
stemming from any corrective action raise a myriad of
questions, such as a possible U.S. interest rate predicament,
given massive Chinese holdings in U.S. treasuries.
Regardless of the resulting exchange regime in China, steps
to bring about that change must be taken, mindful of the
delicate economic interplay our own economy has with it and
countries in that region. I would caution against a rush to
judgment, particularly in light of the current political
environment.
I look forward to the testimony, in which I thank all the
witnesses in advance for their time today.
With that, I recognize the Ranking Member, the gentlelady
from New York, my colleague, Ms. Maloney.
Mrs. Maloney. I thank the Chairman for yielding and for
calling this important hearing. And I congratulate my two
colleagues for their hard work, and I appreciate their time and
testimony today.
This afternoon, the subcommittee considers the issue of the
Chinese exchange rate and its impact on the U.S. economy. Any
discussion of the current state of our nation's economy must
begin with employment. For many of our constituents, these are
extremely difficult economic times.
More than 9 million Americans are without jobs. Since
January 2001, the number of unemployed Americans has grown by
3.2 million, the most in our history since President Hoover was
in office.
Worse yet, the number of Americans experiencing long-term
unemployment has nearly doubled. In New York City, the national
unemployment rate is a high rate. But in New York, it is even
higher, so it is of tremendous concern, I believe, to everyone
in New York and I would say to all of our colleagues in
Congress.
In this environment, it is understandable that concern
would focus on a country that utilizes an artificial peg to
maintain a set exchange rate with the U.S. dollar. While many
economists believe the Chinese currency peg maintains an
undervalued remimbi that benefits Chinese exports, the full
impact of this policy and the increasingly intertwined
relationship between our two economies is even more
complicated.
While making it difficult for domestic producers of
textiles, furniture and other manufactured goods to compete,
some economists point to lower-priced consumer goods in the
U.S. and lower interest rates as a result of an undervalued
Chinese currency.
Additionally, the growth of the U.S. bilateral trade
deficit with China is not nearly the result of an exchange rate
mismatch. In part, it reflects the fact that China is
increasingly an assembly point and final destination for goods
manufactured in other Southeast Asian countries before export
to the United States.
In this way, China absorbs trade deficit numbers that would
otherwise be dispersed throughout the region. Overall, China's
markets are opening to foreign trade and the country must be
pushed to fully comply with commitments it made for entry into
the World Trade Organization.
In 2002, China was the U.S.'s seventh-largest export
market, while the U.S. was China's second-largest export
market. If this relationship is to continue to grow, China must
make strides in enforcing U.S. intellectual property and market
access, especially in the service sector.
China also has a major impact on the financing of the
growing U.S. national debt. The fiscal year 2004 budget deficit
will exceed $500 billion, forcing the U.S. to seek increased
foreign investment. Currently, China is the third-largest
foreign holder of U.S. treasuries, as of June 2003, with a
total of $123 billion. I look forward to hearing our panels
discuss the impact of the currency peg on this investment.
In the long run, China and the U.S. will benefit from a
free-floating Chinese currency that is determined by market
forces. As we push the Chinese to move in this direction, it
must be part of an overall effort to comply with WTO rules and
move toward freer, fairer trade between our two countries that
can benefit both countries.
I yield back the balance of my time.
Chairman King. Thank you, Ranking Member Maloney.
And now, does anyone in the subcommittee have an opening
statement? Ms. Biggert?
Mrs. Biggert. No.
Chairman King. Mr. Manzullo?
Mr. Manzullo. Thank you, Mr. Chairman, for holding this
important hearing this afternoon.
For the last several years, American manufacturers have
lost about 50,000 manufacturing jobs per month for the last 38
months in a row. The unemployment rate in Rockford, Illinois,
the biggest city in the district that I am honored to
represent, is 11.3 percent. The erosion of manufacturing jobs
continues to happen over and over again. Americans can compete
with anybody in the world. We need fair competition.
You have four countries in Asia that are purposefully
fixing the currency. In the Financial Times today, ``Dollar
lifted as Japan steps in to sell the yen.'' They are not even
casual about it. That means that the rules of free trade no
longer apply. What that amounts to is when Asian countries fix
the currency, that is the equivalent of a 15 to 40 percent
price advantage over U.S. manufacturers. This amounts to an
additional 40 percent tax on our exports to China and a price
break of 40 percent for Asian imports into the United States.
NAM believes that if this continues, two-thirds of the
trade deficit with those Asian countries will be sustained.
These four Asian nations have cost manufacturers $140 billion
in lost exports. It cost at least a half-million workers their
jobs.
And the bleeding continues. To make it even more bleak, the
Chinese argue that were it not for their generosity in keeping
their dollar pegged to ours, there wouldn't be anybody in the
whole wide world that is available to buy our Treasury bills
and notes.
So to manipulate the currency, they help destroy American
jobs, and then they tell us that ``we are buying your T-bills
to support your debt. And by the way, if you change the rules
on currency, we won't buy your bills and the rate of inflation
will go up, and we will also control not only your inflation
but your lending rate.''
The United States should not be in a position for China to
determine the monetary policy of this country. It has to come
to an end. The massive unemployment in this country continues
unabated until we get some fair rules with regard to the
currency. There is only on thing to do. The Chinese understand
one thing. They have to be pushed against the wall to make that
yaun float, and the yen too.
[The prepared statement of Hon. Donald Manzullo can be
found on page 58 in the appendix.]
Chairman King. Thank you.
The gentleman from Vermont?
Mr. Sanders. Thank you very much, Mr. Chairman. And thank
you for calling attention today to an issue that many of us
have been talking about for a number of years, essentially, as
Mr. Manzullo just indicated, the collapse of manufacturing in
the United States. In the last 3 years, we have lost some two
million manufacturing jobs, jobs in Vermont, the Midwest,
California. It is high time that the United States Congress
started to pay attention to that issue.
While I share your concerns, Mr. Chairman, about the
manipulation of currency, the truth of the matter is that it is
not the most fundamental issue that must be addressed. The
issue that must ultimately be addressed is our trade
relationship with China, permanent, normalized trade relations.
Now when that agreement was first brought forth, we were
told by all of corporate America what a great agreement it
would be and how many new jobs would be created here in the
United States. I think all of us understand that many of us,
not me, but others, were sold a bill of goods. Trade policy
with China has been an absolute failure. We have a trade
deficit of over $100 billion with China as part of a $435
billion trade deficit.
Ultimately, what we must do is while all of us want a
positive relationship with China, we want to work well with
China, we have to recognize that our current trade policy has
failed, and we have to eliminate and do away with permanent,
normalized trade relations.
I am happy to mention to you, Mr. Chairman, that I have
introduced tripartisan legislation with Congressmen
Sensenbrenner, Pence, Burton, Gene Taylor, Goode, Pascrell,
Wamp and Michaud to repeal permanent, normalized trade
relations with China.
Now in case anybody doesn't know what is going on, let me
just tell you. Over the last short period of time, we have lost
180,000 jobs in the textile industry. We have lost 46,000
steelworker jobs. Our apparel industry is virtually nonexistent
anymore. One in five jobs among companies producing aircraft is
gone; 360,000 jobs in industrial machinery; 290,000 jobs in
electronic and electrical equipment, and on and on.
Some people have told us in the past, Mr. Chairman, ``Don't
worry. It is just those blue-collar factory jobs, and Americans
don't want those anymore. They really want the high-tech jobs,
the computer jobs. That is where the money is.'' Well, if
anybody doesn't understand that we are losing those jobs in
leaps and bounds, then you don't know what is going on.
What we are seeing now is a huge exodus of information
technology jobs, computer jobs, high-tech jobs that are going
out the window. Large companies from Microsoft to many, many
others are now moving their high-tech efforts to Third World
countries where well-educated people can do those jobs for a
fraction of the wages earned in the United States of America.
So again, Mr. Chairman, while I think it is important to
look at the currency issue, and I support your efforts there,
we have got to ultimately get the bull by the horns and say,
``Our current trade policy has failed.''
Do we want to trade with China? Yes, we do, but it should
be in a bilateral way which works well not just for China but
for American workers as well.
I am not critical of the Chinese. They have done very well
in this trade agreement. But it might be a good idea if the
United States Congress started representing American workers
for a change, and we can work on that in the months to come.
Mr. Chairman, thank you very much.
Chairman King. Thank you.
Mr. Paul?
Dr. Paul. Thank you, Mr. Chairman.
I, like the rest of you, am very concerned about the loss
of jobs. I think everybody is. The whole country is concerned
about the loss of jobs to other nations.
I think most people recognize that it is related to our
currency problems. Of course, what we are dealing with today is
whether or not we should put pressure on China to change the
valuation of the yuan.
But I think at times we are going at this in an incorrect
fashion, because we are arguing the case for fluctuating rates.
We want the Chinese to do something that is inherently not
normal. Because when we want to measure something, if you are
building a building or measuring something in the economy, you
want a sound and dependable unit of measurement.
China, as a matter of fact, has done well because they have
had a fixed measurement of value. They have good growth rates,
and now we say, ``Well, we are not doing so well so we are
going to put all the blame on China, and we want them to have a
fluctuating rate.'' That is sort of like arguing that if there
was one State in this country that wasn't doing as well as
another one for other reasons that, ``Well, maybe if we had 50
different currencies, and we could adjust currencies, we might
be able to achieve something.''
So instead of going in the direction of having a single
currency with which we could measure production and goods and
services, we are going in the opposite direction of blaming a
currency, whether it is too weak or too strong.
I think the thing that we fail to see is when we say that
we don't like what the Chinese are doing, we fail to see the
other half of the coin, of the benefit of what the Chinese do
when they buy our debt. I mean, what are the Chinese supposed
to do with the money? We say, ``Well, buy some goods and
services.'' But what if we can't compete? There is still the
balance of payments; so the dollars always come back here, and
they do a great service because they finance our extravagance,
our deficit financing.
Not too long ago, a financier, a financial journalist,
actually, went over to China, and visited with businessmen. He
asked, ``Why are you over here? Why are you starting a business
in China?'' Their answer was very clear, and it should send a
message to us: ``It is so much easier to start a business in
China than in the United States, especially in places like
Massachusetts and California.'' That was the answer. Why?
Because of the taxes and the regulation and labor costs, all
kinds of things.
So maybe sometimes we have to look to ourselves on why we
make ourselves less competitive through our tax system.
Mr. Sanders. Will my friend yield for a second?
Dr. Paul. Yes, I will be glad to yield.
Mr. Sanders. Does my friend think that it might also be
easier to do business in China because people are paid 30 cents
an hour because there are no environmental regulations?
Dr. Paul. I will take my time back. Yes, I think that is
obviously the case, but that is not the only reason. There are
a lot of different reasons why our companies have to leave, and
that obviously is one of the major reasons. But the point that
I want to make is that stability in currencies is not a
negative. Stability is not a negative. It is a positive,
especially if it could be ever internationalized in a voluntary
commodity fashion, rather than having fluctuating fiat
currencies dictated by central governments around the world
where there is no standard of value. Someday we will have to
determine that currencies should have a standard of value and
be something real, or you are going to continue to have trade
imbalances.
Chairman King. The time of the gentleman has expired.
Mr. Emanuel?
Mr. Emanuel. Thank you, Mr. Chairman.
The fact is in the 1980s, we had a severe trade problem
with Japan. In the 1990s, we had a major problem related to
Mexico, starting with NAFTA. And today, we are facing
manufacturing job losses that may relate to China's trade
practices and currency policies.
The currency issue is certainly important. It is relevant.
Additionally, there are a host of other issues that are
relevant. But in my view, what distinguishes the current
situation from Japan and Mexico is that we are now without an
economic strategy in the United States focused on retaining
jobs and investing in our own future to maintain our
competitive edge.
The currency issue is relevant, but solving it is not the
solution to three million lost jobs and to a destruction of the
industrial base. It does not answer the whole problem as it
relates to China. I believe in free trade, having worked on
NAFTA and GATT. The truth is, the premise behind trade and free
trade and globalization has been that high-tech, high-skilled
jobs would move north; low-skill, low-tech jobs would move
south; and that would be kind of where things would settle out.
But what has happened is the high-tech, high-skilled jobs
have moved to India, and the low-tech, low-skill jobs have
moved to China. All of us who would believe in globalization as
a good thing have got to acknowledge not only has it not worked
out, but the principal underpinning of globalization has not
worked out.
And we need to address it. Rather than having a win-win
situation, right now we have a win-lose situation here at home.
And American people will not support a policy if it is seen as
one where 75 percent of the folks on one side of the ledger are
losers.
Although we will deal appropriately here with the issue of
currency and how that affects trade with China, it is a piece
of the puzzle but not the whole puzzle.
Mr. Sanders. Would my friend yield?
Mr. Emanuel. Sure.
Mr. Sanders. Is my friend suggesting that the trade
policies developed by Ronald Reagan, George Bush the first,
Bill Clinton and this President may have some fundamental flaws
that need to be addressed?
Mr. Emanuel. Yes and no.
[Laughter.]
Well, you asked me part of the Clinton question so I
thought I would give you both answers. The fact is, I still
believe free trade is the right thing to do. What has to go
with that is an investment in education, job training, and
health care. The fact is, health care costs that our companies
are bearing here, running at 20 percent inflation in this
country, make them competitively disadvantaged to countries
that don't pay health care and don't have a health care policy,
or do have a health care policy that doesn't actually fall to
their bottom line. So I think the right strategy is to make
investments in our competitive future. Is that my time?
Chairman King. The time of the gentleman has expired. You
can finish your thought.
Mr. Emanuel. But it would be an interesting discussion. I
don't think the trade policies were wrong. I think the trade
policies were right. The question is whether we are going to
have an investment strategy that emphasizes both trade and
training.
Chairman King. I thank the gentleman.
Mr. Ose?
Mr. Ose. Thank you, Mr. Chairman.
I am sitting here intrigued by this entire question. It
seems to me that the subject of the hearing being the exchange
rate between the Chinese currency and American currency and
whether or not it has been unduly influenced from the Chinese
side, there is the exact reciprocal argument that could
potentially be made relative to the United States, or the value
of the United States currency, as it relates to every other
currency in the world except the Chinese currency.
I would just be very cautious about the arguments one might
make in favor of the Chinese not being able to manipulate their
currency in terms of our partners in the WTO and elsewhere
coming to us and suggesting that by virtue of interest rate
changes here domestically and the like, we might be
manipulating our currency.
Now, while I don't subscribe to Mr. Paul's comments about
the inadequacies of a fiat currency, I do find his observations
illuminating in the context of value in exchange for something.
I do want to point out that Mr. Emanuel is correct from
where I sit relative to the trade policies that we need. The
stuff we have done here in the last few months, in the last
couple of years, is now manifesting itself in terms of economic
growth. We have had in the last couple of months significant
growth in retail sales. We are having significant growth in
after-tax discretionary income.
I know that the unemployment rates in California, in
particular, seem to have stabilized. There may be some minor
fluctuations, but they seem to be stabilized. And if there is
one State in the union that benefits from trade around the
Pacific Rim, and consequently with China, it would be
California, just by its geographic location.
The other aspect of this is that there is only one class I
got an A in college, and that was currency valuations. I am
most intrigued to hear what Secretary Taylor will offer in
terms of the long-term implications of trying to argue only one
side of this question relative to Chinese valuation as opposed
to having to account for both sides of the equation if the
United States is viewed as also manipulating its currency.
Mr. Chairman, I yield back.
Chairman King. Perhaps at the next hearing we can bring in
your currency professor.
Mr. Ose. And ask him about the grade.
Chairman King. Maybe we will turn it over to Judiciary.
Mr. Kennedy?
Mr. Kennedy. I would like to join my voice to those who are
expressing concern with how big of a hit our manufacturers are
taking and what that is meaning for our jobs. But I would like
to reject the idea that some are suggesting that the solution
to that is to close down relations with China or to close down,
really, freedom or relations with anyone else.
I am a strong believer that the problems of freedom, which
we are wrestling with right now, are best solved through more
freedom. And if you look at it, it has been mentioned by Mr.
Paul and others, that we have some limitations on freedom in
this country as well, whether that be the steel tariffs where
we are imposing a cost on our manufacturers that is not borne
by anyone else, whether that be the high cost of health care
where we are paying double in our country for health care as
other industrialized countries, whether it be the very big
burden from litigation that we have imposed on our businesses.
We have a number of costs, and lack of freedom for our
businesses that we bear here that is hurting us.
But also no other country of a similar scale in the trade
environment has a fixed currency like China does. That lack of
freedom is something we need to address. We need to have that
be a free-floating currency like everyone else's. And that will
help us be more competitive, help bring the trade deficit in
line.
Other Asian countries, like Japan, are happy to prop up
their currencies to keep them on a par from a regional
perspective with China, which is also similarly hurting us.
Increasingly, it is unhealthy for America to be the sole
engine of growth for this world economy where we are having a
huge trade deficit and growing every year. That has to stop.
The way it has to stop, as economists will tell you, is, and I
also probably got that A, too, but we have to get these
currencies to allow for that adjustment.
One of the concerns I have that may or may not be addressed
here is, the banking system is said to be, by Glenn Hubbard and
others in China, not stable enough to really absorb a floating
currency. Are we going to be addressing that? And with the $360
billion in reserves that China has built up, can they
recapitalize that banking system, and move us towards a
stronger banking system to allow that?
They also need to open up their markets. We have to have a
strong, stable world economy that has more engines than just
the United States, and part of that is certainly opening up
their markets, having a free-floating currency.
I thank you, Mr. Chairman.
Mr. Sanders. Will my friend yield for a second?
Mr. Kennedy. Certainly.
Mr. Sanders. Thank you very much.
Just a question. You used the word ``freedom'' a whole lot
in your introductory remarks. Is it your understanding that
freedom is about a company throwing American workers out on the
street, moving to China, paying people pennies an hour, having
those people arrested when they try to form a union, and then
bring that product back into this country tariff-free. Is that
what you are talking about as freedom?
Mr. Ose. Would the gentleman from Minnesota yield, please?
Mr. Kennedy. Certainly.
Mr. Ose. If I might just observe, if I were living in the
early 1900s and was asked that question of an imperial America
in terms of our ability to go into another country and impose
an economic doctrine, I would answer in the affirmative to Mr.
Sanders's question.
Mr. Sanders. But we no longer live in imperial America.
Presumably we have moved beyond that phase of our development.
And I would hope that we don't go backwards to where we seek to
impose such an economic regime.
Chairman King. Fascinating discussion, but the gentleman's
time has expired.
Mr. Murphy?
Mr. Murphy. Thank you, Mr. Chairman.
I am looking forward to hearing the testimony especially
from my colleague from Pennsylvania, Congressman English. But
as part of this, in historical perspective, although the Cold
War has long been over, we are still very much in a battle
between communism, socialism and capitalism, that neither
communism nor its cousin, socialism, has been able to survive
in a capitalist world and create jobs and pay people decently
without certain manipulation.
And those manipulations from government control and central
control, which oftentimes run roughshod over environmental
issues, run roughshod over paying people decent wages and safe
workplaces are part of what allows the Chinese to have
workplaces where they can have goods manufactured at much lower
cost than in America.
Now as long as there are Americans, of course, who are
looking for less expensive goods, they have a marketplace here.
And I suspect they will continue to do that, and that is part
of the thing that we want to protect in a capitalist
marketplace, to allow people access to goods.
That being the case, we also have to recognize that it does
no good over the long run for us to destroy our own
manufacturing sector in the meantime. If one looks historically
at anyone who has done this, where they will be in a
competitive position, a tradition you have seen time and time
again is, you move into a marketplace, you sell goods lower,
you destroy your competitors, and then you can go ahead and
raise the prices, or you control the marketplace. So in the
long run, I don't think that is helpful for America.
We see some of these manipulations, for example, in steel.
We have to remember that steel is a manufactured product. And
we look at the kind of things taking place now with tariffs,
and we have to remember that in America we are so good at
producing steel at perhaps one or two persons per ton, but I
believe in some Asian countries it is maybe 14 or 15 people per
ton it takes, and you have to do that by manipulating jobs and
manipulating currency.
I think this is a serious issue that we have to look at.
What is the long-term impact not only upon our jobs and our
manufacturing base, but long-term impact upon our own safety
and security with jobs and so on?
I am looking forward to hearing the comments made by
Congressman English and the solutions he is proposing.
Thank you, Mr. Chairman.
Chairman King. I thank the gentleman.
I thank the members for their opening statements.
On the schedule, we are going to have votes at about 3:30
p.m. I also understand that the two Secretaries from Commerce
and Treasury have to leave here by 3:30 p.m. So what I would
like to do is ask Congressman Green and Congressman English to
make their statements, and then ask if the members of the
committee would defer questioning the two members so we can get
right on to the administration officials.
With that, I would like to acknowledge Congressman Mark
Green and Congressman Phil English, both of whom really are
responsible for this hearing being brought in the first place.
I want to thank them for their input, for their long-time
interest in this issue.
I will ask a member of the full committee, Congressman
Green.
STATEMENT OF HON. MARK GREEN, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF WISCONSIN
Mr. Green. Thank you, Mr. Chairman, Ranking Member Maloney,
distinguished members of the subcommittee, for not only holding
this very important hearing, but also I was very interested to
hear the discussion we had leading up to this.
Obviously, the questions of manufacturing job losses go
well beyond currency issues. I think manipulation of currency,
because it is the jurisdiction of this subcommittee, but also
because it represents a concrete issue, a tangible issue, that
we can act upon and take action on and have an immediate impact
it makes it so very important.
We have all heard a lot about the loss of the American jobs
in the last few years. Obviously, this news has been terrible.
We have been losing jobs for 38 consecutive months. While few
sectors seem to escape the downturn, manufacturing has been hit
especially hard.
In Wisconsin, we have lost over 60,000 manufacturing jobs
in these last 3 years. We have seen some of our oldest and most
established companies, such as Mirro and even Evenflo buckle
and finally break under the pressure. As a result, whole
communities in my state have been thrown into turmoil. Many
families in my district are facing, at best, an unsettled
future.
As I have said, there are a lot of factors that contribute
to the flight of our manufacturing jobs. I think all of these
factors do have to be addressed. But I believe that an
important concern is the unfair advantage by some East Asian
countries, particularly as we have all said already, the
People's Republic of China. The unfair advantage that they have
been creating for their manufacturers through a policy of
currency manipulation is one that we must take up. This policy
is unfair. It is anti-competitive. It is anti-freedom. And it
is costing us jobs.
It is not the only factor. Again, it may not even be the
largest factor. But it is one that we should address, and if we
can address it, I believe it would provide an immediate benefit
to manufacturing and manufacturing jobs in this country.
As some have already mentioned, since 1994 China has pegged
its currency at 8.3 yuan to the dollar. The goal behind this
effort is simple and intentional: to drive exports and fuel
economic development. The Chinese success in this policy has
been remarkable and costly. Our trade deficit with China has
grown from $20 billion in the early 1990s to an estimated $125
billion this year. Our ratio of imports to exports in China
stands at about 6 to 1, while in the same period, U.S.
manufacturers have struggled to compete with China's economic
surge.
Fueled by an exchange rate policy that some economists and
manufacturers estimate makes Chinese products 15 to 40 percent
cheaper compared to U.S. goods, many manufacturers have found
it nearly impossible to compete, no matter how efficient they
become, no matter how much they are able to accomplish through
cost cutting.
In the last several years, the world has stood by as China
has promised that change is forthcoming. We even helped bring
China into the world economic community and WTO with the
commitment that they would live up to international rules of
fair trade, including reforms of their currency policies.
Unfortunately, this has not been the case, and I believe that
we can no longer afford to wait to see if these promises will
ever be kept.
Now, if Congress could pass a law requiring China to at
least partially float its currency, I would introduce one
tomorrow. Unfortunately, Congress does not have that luxury,
and even more unfortunately, the Chinese know it. Earlier
today, Congressman Manzullo and I had the opportunity to meet
with senior Chinese officials to talk about the problems that
we are seeing in our bilateral trade relationship, including
the problems of currency manipulation.
Their response was to say that they heard what we had to
say and they appreciated our point of view. That is all they
said, they said no more. Why? Because they know that we cannot
pass a law today that would force them to float their currency.
There are steps that we can take, however. One thing we can
do is pass a law to try to offset the advantage that the
Chinese are providing for themselves through currency
manipulation. In fact, Congressman English, Congressman
Ballenger, and I have already introduced such a bill. This
legislation is H.R. 3058, the China Act.
Under this legislation, the Secretary of the Treasury is
required to analyze whether China is, in fact, manipulating its
currency to achieve an unfair advantage in trade. If in fact
manipulation is found, the Secretary is directed to levy
tariffs in a percent equal to the degree of manipulation. For
example, if the Secretary finds what some have suggested, a 40
percent advantage, there would be a 40 percent tariff on
Chinese goods coming into this country.
Such a high tariff would almost certainly help offset the
unfair gains that Chinese producers have been receiving. Most
importantly, this legislation sends a clear message to other
countries that we are prepared to take bold action. I know this
committee does not have jurisdiction over this legislation, but
I am hopeful that members will work with me, Congressman
English and others to pass this legislation through the House.
Make no mistake, we understand that this is tough medicine,
that it is harsh medicine. But we think that tough medicine is
important right now because we do need to send a signal of
strength and impatience.
For those who oppose this legislation and our approach, I
would ask them, quite frankly, for their alternatives. If we
all agree that there is a problem of currency manipulation, and
if people don't support the approach that Congressman English
and I have taken, then what is the approach that we should
take? What steps should this Congress take to try to level the
playing field?
Getting China to reform its currency policies is going to
require a full-court press, more than just Congress. I am
pleased that the Bush administration has taken some actions and
that they also support more flexible currency, a more floating
currency for China. I think that is an important step. I look
forward to continuing to work with the administration in
ensuring that this body is doing everything it can to enhance
their efforts.
Our legislation is a powerful and appropriate tool. I
think, at the very least, it will help convince China that the
time has come now for action, no more stalling, no more
delaying, and no more waiting.
Mr. Chairman, thank you once again for allowing me to
testify. I appreciate it.
[The prepared statement of Hon. Mark Green can be found on
page 56 in the appendix.]
Chairman King. I thank the gentleman for his testimony and
for the interest he has shown in this throughout.
And now the gentleman from Pennsylvania, Mr. English.
STATEMENT OF HON. PHIL ENGLISH, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF PENNSYLVANIA
Mr. English. Thank you, Mr. Chairman, Madam Ranking Member,
distinguished members of the subcommittee. It is a real
privilege to be able to appear here today to explore what I
believe to be substantial negative effects to the U.S. economy
as a result of Chinese monetary policy. I want to thank you all
for the opportunity to testify before you today, and especially
thank you, Mr. Chairman, for having the foresight to schedule
this hearing on something so topical for our economic future.
When President Clinton approved China's entry into the WTO
in 1999, many believed that a new era of vast opportunity for
U.S. businesses and workers had been opened. Those in Congress,
like myself, who were skeptical that this opportunity would not
come without substantial risks, voted to grant permanent normal
trade relations to China only after insisting that special
safeguards relating to Chinese imports be included.
Looking back from China's accession to the WTO until this
point, I would like to convey a clear message. Few of the
benefits intended for America have been realized as a result of
this Chinese accession to the WTO because China has not abided
by the terms of their international commitments. And while the
current administration has begun to develop a comprehensive
strategy to ensure China plays by the rules, these steps need
to be accelerated, strengthened and reinforced.
China has pegged its currency, the yuan, at a rate of
approximately 8.3 to the dollar since 1994. As a result of this
peg, other major currencies in East Asia have also been under
tremendous pressure to intervene by infusing massive amounts of
foreign currency into their reserve accounts or manipulate
their currency to maintain stability.
If China were to freely float its currency, it would deny
other Asian countries a convenient excuse for manipulating
their currencies. This would bring about a revaluation of Asian
currencies against the dollar, and for that matter, against the
euro, which is needed to restore a balance among global
currencies and reduce the threat of a hard landing for the
dollar.
Misalignments in currency, particularly in the case of
China, adversely affect the benefits gained from trade
concessions. In fact, misalignments in currency caused by
government policies intended to maintain an unfair trade
advantage can impair and even nullify trade concessions.
Many economists estimate that the Chinese yuan is
undervalued against the dollar by as much as 40 percent.
Essentially this amounts to a 40 percent subsidy on all Chinese
exports to the U.S. and a 40 percent barrier on all U.S.
exports to China. U.S. exports to China currently face an
average bound tariff of 15 percent.
If recent estimates of China's currency undervaluation are
correct, the effect of a free and open currency market would be
more than twice as large as the effect of eliminating every
tariff that China imposes on U.S. imports. Therefore it is
imperative that countries allow their currencies to reflect
their true value, or else all of the benefits of bilateral
trade will be compromised.
Because China's currency is pegged to the dollar and other
currencies have readjusted against the dollar, the economic
effect of China's currency policy to the United States is more
pronounced. To illustrate the point, since February the dollar
has fallen by approximately 25 percent against the euro, but by
10 percent or less against the yen and most other Asian
currencies. The dollar has, of course, remained unchanged
against the yuan. At the same time, China's net exports to the
U.S. have grown rapidly, but China's trade surplus with the
world as a whole has actually been falling. It is down sharply
this year.
This strongly suggests that China's currency regime is
contributing strongly to the rapidly ballooning trade imbalance
between the U.S. and China. The U.S.-China trade deficit is
projected to reach more than $120 billion in 2003, $17 billion
over the previous year, and the largest bilateral trade deficit
in the world. This is precisely why the practice of maintaining
currency to obtain an unfair advantage in trade is illegal
within the frameworks of two international bodies, the World
Trade Organization and the International Monetary Fund, as well
as U.S. law.
While each provision contained within international or
domestic law defines this highly destructive practice slightly
differently, the end goal of each provision of law is the same:
to provide a mechanism to countries which play by the rules, to
address the egregious practice of currency manipulation and
thereby restore the benefits of free trade.
As I have studied this issue further, Mr. Chairman, I found
that the international mechanisms to make this adjustment are
flatly inadequate. For this reason, I have recently introduced
along with my colleague, Mr. Green, and Representative Cass
Ballenger, H.R. 3058, the Currency Harmonization Initiative
Through Neutralizing Action Act of 2003.
While there have been multiple bills and resolutions
introduced in Congress on this topic, the CHINA Act enjoys the
most robust co-sponsorship, currently supported by over 60
members of the House of Representatives. The premise of the
CHINA Act is straightforward. It requires the Secretary of the
Treasury to determine if China is manipulating its currency to
gain an advantage in trade.
If the Secretary finds manipulation is occurring, then he
is directed to impose a tariff equal to the degree of
manipulation on all imports from China. This is in addition to
any existing tariff, or any other existing findings, like
antidumping provisions, on Chinese products. This is a measure
that actually levels the playing field. It strips China of its
ability to give itself an arbitrary advantage. It is a flexible
tariff, and it can be adjusted to meet the actual extent of the
distortions from the artificial undervaluation of the yuan.
While I understand that participation in an open and fair
global economic system is essential to U.S. economic prospects,
when China breaks the rules the U.S. suffers the consequences.
Through observing the direct effect China's state-sponsored
mercantilism has had on my district in northwestern
Pennsylvania, it is very clear to me that China's currency
regime is neutralizing gains made through trade liberalization,
heavily contributing to our bilateral trade deficit with China,
subsidizing Chinese exports to the U.S. and taxing U.S. exports
to China.
Of potential greater consequence, however, is that this
type of blatant disregard for international trade law will
erode support within the U.S. for the WTO and the multilateral
trading system.
Very simply, Mr. Chairman, Congress must ensure that the
U.S. maintains the ability to police our own markets and force
others to play by the rules.
Thank you for the opportunity to present this testimony.
[The prepared statement of Hon. Phil English can be found
on page 53 in the appendix.]
Chairman King. Thank you, Mr. English.
As I stated before, Mrs. Maloney and I have agreed, because
of the time constraints, to forego questioning of Congressman
English and Congressman Green so we can get to the
administration officials.
But I do want to thank both of you for the tremendous input
you have had on this. I want to thank you after the fact for
all the buttonholing you did of me on the floor earlier this
year as you were convincing me of the necessity of having this
hearing, and thank you for the job you are doing for your
constituents on this very vital issue.
Mr. English. Mr. Chairman, thank you for you farsighted
leadership.
Chairman King. Now, if the second panel will step forward
please?
I want to thank Under Secretary Taylor and Under Secretary
Aldonas for being here today. I realize the time constraints
you are under. Rather than go through introductions or anything
else, I just want to welcome you to the committee and thank you
for being here.
I will give it to Secretary Taylor.
STATEMENT OF HON. JOHN B. TAYLOR, UNDER SECRETARY FOR
INTERNATIONAL AFFAIRS, DEPARTMENT OF THE TREASURY
Mr. Taylor. Thank you very much, Mr. Chairman, for inviting
me to this important hearing.
This is the fifth time I have appeared before this
subcommittee to address various international economic issues.
Previous testimonies were on emerging markets, developing
countries, removing barriers to the free flow of capital. In
each of these cases, I have stressed that the goal of our
policies is to raise economic growth and increase economic
stability around the world and, in doing so, benefit the
American people with more jobs, more security and a better
life. My testimony today will be no different in this respect.
The administration's major economic endeavor now is to
strengthen the economic recovery in the United States. The jobs
and growth package enacted into the law this summer was
essential, but there are barriers to economic growth in other
countries. This is where our international economic strategy
comes in.
Our policy towards China is part of this strategy. The
strategy is to urge the removal of rigidities and barriers
wherever they exist and to encourage pro-growth, pro-stability
policies that benefit the United States and the whole world. It
is a two-track approach of domestic and international. The
international part is applied both bilaterally and
multilaterally.
I am pleased to report that this endeavor is working.
Economic growth in the United States is picking up
significantly now after the severe shocks of the terrorist
attacks, the corporate accounting scandals, and the stock
market drop of 2000. Global economic growth is also improving.
There are also notable improvements in economic stability
around the world. The number and the severity of financial
market crises are down. Capital flows are up, and interest rate
spreads are down compared to the late 1990s. This improvement
is very important for the United States. Greater economic
stability is essential to creating a long-lasting recovery,
which is needed for sustainable job growth in the United
States.
Despite this progress, we need to do more. During the
summer months, Secretary of Treasury Snow embarked on an
international pro-growth tour to Europe, to Asia, including
China, as I will discuss in a minute, culminating in the annual
meetings of the IMF and World Bank in Dubai, where he forged a
new agreement on a new G-7 agenda for growth.
But now let me address China's economy and its exchange
rate policy and how it fits into this overall strategy. Free
market reforms in China have made China one of the largest
economies in the world. But for nearly 10 years now, the
Chinese have maintained a fixed exchange rate for their
currency, the yuan relative to the dollar. In doing so, they
have accumulated a large amount of foreign exchange. At the
same time, China has significantly restricted capital flows
into and out of China.
With this rapid growth and accumulation of foreign exchange
reserve, China is now in a position, in our view, to show
leadership on the important issue of exchange rate flexibility.
A flexible exchange rate regime would be good policy for China.
It would allow China to open the nation to capital flows and at
the same time reduce macroeconomic imbalances.
We have been urging China to reduce barriers in other
areas, such as trade and capital flows. As you know, tariffs on
manufactured goods are scheduled to come down from the average
of 17 percent now to an average about 9 percent as a result of
the WTO commitments. I think this should be accelerated. Even
at 9 percent, China will be well above the United States's
average and the average of other large economies, which now
stands around 4 percent. It is important for China to go
further in reducing these trade barriers as well.
Secretary Snow has encouraged these changes during his very
successful trip to Beijing last month. He met with Premier Wen,
Vice Premier Huang, Central Bank Governor Zhou and Finance
Minister Jin. During Secretary Snow's visit to China, a number
of important announcements were made by the China Central Bank,
including steps to remove restrictions on money and capital.
They have indicated the intention to move forward towards more
exchange rate flexibility.
In addition, following Secretary Snow's trip, a number of
new economic engagements between China and the United States
have been discussed, in particular a whole new engagement
between China and the entire G-7. The first meeting between
senior officials from the G-7 and the finance ministry in
Central Bank of China took place in Dubai last week and
represented a significant degree of exchange on economic
issues.
So I am pleased to report, Mr. Chairman and other members
of the committee, that our efforts to engage in financial
diplomacy are bearing fruit. Active engagement with China and
other countries is paving the way towards freer markets. The
administration's effort to raise growth in the United States
and abroad, and thereby create jobs at home, is already showing
signs of success.
Thank you very much, Mr. Chairman. I will be happy to
answer your questions.
[The prepared statement of Hon. John B. Taylor can be found
on page 85 in the appendix.]
Chairman King. Thank you, Secretary Taylor.
I understand Mr. Manzullo wanted to make a motion to have
his full statement made a part of the record. Without
objection, so ordered.
Secretary Aldonas?
STATEMENT OF HON. GRANT ALDONAS, UNDER SECRETARY FOR
INTERNATIONAL TRADE, DEPARTMENT OF COMMERCE
Mr. Aldonas. Thank you, Mr. Chairman.
If I might, I would like to submit my full statement for
the record and summarize my comments.
Chairman King. Without objection, so ordered.
Mr. Aldonas. Mr. Chairman, Ranking Member Maloney and
members of the committee, thank you for the opportunity to
appear. This is obviously an important topic, and I very much
appreciate the opportunity to appear to discuss it. I want to
focus on two aspects of the topic of the hearing, on our trade
relationship with China and the impact on our manufacturing
sector.
I do want to provide a little bit of context at the outset,
because I think they are facts that are often lost in the
discussion about our trade with China.
The first thing is that the United States starts from a
position of real strength in manufacturing, which is often lost
in the discussion. The United States remains the largest
producer and exporter of manufactured goods in the world.
Standing alone, our manufacturing sector would be the fourth-or
fifth-largest economy in the world. Our manufacturing sector
alone is larger than the entire economy of China.
Productivity and manufacturing, which is the best indicator
of our future strength, is way up, higher than it was in the
late 1990s. In fact, in the last 2 years we have seen stronger
productivity growth than we have at any time since 1960.
What is more, manufacturing after many months of slow
growth, as Congressman Manzullo pointed out, is beginning to
participate in the broader economic recovery. Orders for
durable goods and the purchasing and managers index, which is
an indicator of future demand for manufacturers, are up
significantly.
Now having said that, there are three statistics which
generate real cause for concern. The first is the employment
numbers, which have been discussed; second is the trade
deficit; and the third is the sharp drop in the share of world
trade made up by our exports, which is another good indicator
of our relative competitiveness, our manufacturing sector.
What drives all three, as you pointed out in your opening
statement, Mr. Chairman, is the lack of stronger economic
growth abroad. Now that is not to say that government-imposed
constraints, like the Chinese currency peg, as John was
referring to, help the matter. They certainly create a sense of
unfairness in terms of the trade, which we heard loud and clear
from manufacturers as we went across the country over the last
6 months, visiting 23 cities, meeting with manufacturers large
and small in every industry, basically. And there was no topic
other than China that was a higher concern from their point of
view.
Now having said that, they, too, recognize that growth at
home and stronger growth abroad were the keys to a broader
manufacturing recovery. In terms of growth abroad, I do want to
pick up on the comments of Congressman Kennedy. The problem
there is, frankly, slow growth in Europe and Japan and certain
other Asian trading partners that have not yet fully recovered
from the 1997 financial crisis.
It doesn't happen to be China. China, together with the
United States, has accounted for most of the world's economic
growth this year. China's imports and our exports to China have
risen significantly despite the currency peg. China's trade
with the world is roughly in balance as has been noted. Our own
exports are up 15 percent per year and are growing faster than
exports to any other destination.
Now could we do better? Absolutely. And this is where I
think the peg comes into play.
I hope no one operates under the illusion that China
represents a market economy. Many of the drivers of the economy
and the production of manufactured goods remain in state hands.
What that means in practical terms is that Chinese companies
will not face the same capital market pressures that ours do to
turn a profit, which may be the ultimate subsidy in the system.
In other words, the common concern identified by U.S.
manufacturers about the lack of a level playing field went
right to the heart of both the issue of the exchange rate peg,
but more fundamentally about the underlying operation of the
financial markets, which I think is the key that John really is
turning to. I know that the Treasury has been working on that
with the Chinese.
The effect on trade is that a heavy investment in China
funded by state-owned banks has led to a great deal of capacity
on the market that continues to pump out manufactured goods
that are looking for an outlet.
The question is, how do we respond. John addressed the
currency side of the equation. I want to say that there are two
things underway on the trade side. First, we are using every
opportunity to press the Chinese for full compliance with their
WTO commitments. The first year following China's accession to
the WTO, I personally think that both the administration and
Congress showed an extraordinary amount of patience as China
worked to pass the literally thousands of new laws that were
needed to bring the country into compliance with WTO rules.
But now, as we move deeper into the second year of China's
participation in the WTO, we need to see the actual enforcement
of those laws and compliance with WTO rules in other areas.
Toward that end, the President, Secretary Evans, Ambassador
Zoellick, Secretary Snow, certainly John, have all made that
point vigorously to their counterparts in China, as have I.
Secretary Snow's recent visit represented the start of a 3-
month process in which the administration will be regularly
engaged in discussions with our Chinese counterparts on these
issues, including meetings between the President and President
Hu, at the time of the APEC meetings, Ambassador Zoellick's
trip to China.
The Secretary and I will be going to China at the end of
the month. We will then be followed up with a visit of the
Chinese premier here in December, as well as a meeting of the
Joint Committee on Commerce and Trade, at which point WTO
compliance will be front and center in our discussions.
Second, we also have been extraordinarily vigilant with
respect to the injurious effects of other forms of government
support for Chinese industry. Over 50 percent of the
antidumping actions initiated by this administration focused on
imports from China. Nonetheless, I do think we can do a better
job.
That is why one of the principal recommendations that we
will be moving forward with is the creation of an unfair trade
investigation scheme, which is to adopt a proactive approach
with respect to trade with China, as well as our other trading
partners, since this isn't a problem with China alone.
The point is that we do not have to wait for a petition to
know that there are unfair trade practices going on, that those
ought to be investigated when we know of allegations, that we
ought to certainly be going after the issues that we face with
our trading partners. And there certainly are industries, like
tool and die, that we have talked about, Mr. Manzullo, where
you can see the net effect of a lot of government involvement
in the Chinese economy, not just the currency peg in terms of
creating an unlevel playing field.
Let me stop there, and I will be happy to answer any
questions you have.
Thank you.
[The prepared statement of Hon. Grant Aldonas can be found
on page 60 in the appendix.]
Chairman King. Thank you very much.
In view of the time constraints, I am going to limit myself
just to one question, actually the same question to each of
you.
If China did float its currency, how do you respond to the
argument that traders would dump dollars on the world market
and lower the value of American investments, corporate bonds?
And also, what impact would it have on manufacturing service
sectors in this country? Would it necessarily increase the
demand for U.S. exports? So I guess I am asking you to give the
downside of the free-floating currency.
Mr. Taylor. Mr. Chairman, the United States treasury
markets are resilient. They are deep. They are liquid. The
amount of treasury securities that are held in China is under 4
percent, by our best estimates, of our total amount of
securities. And the total amount of reserves that the Bank of
China holds are much more than our treasury securities. So we
emphasize the great attractiveness of our treasury securities
and will continue to do so. We don't see that as an issue.
With respect to the impacts on the United States economy, a
change in price affects buyers and sellers in different ways.
It is difficult to estimate exactly how much a change in the
yuan would have on the United States. In fact, there is large
debate about how much overvaluation there is of the currency
amongst economists. Both Congressman Green and Congressman
English indicated a significant range of uncertainty there, and
I would think it is even wider----
Chairman King. Actually, the number they mentioned was 40
percent, I believe.
Mr. Taylor. They talk about a range. I believe it was 15 to
40--a large range. I think it is even wider than that.
Chairman King. Secretary Aldonas?
Mr. Aldonas. Thank you.
First of all, just to pick up on John's comment, obviously
what drives investment in the United States, including
investment in manufacturing, actually has a lot more to do with
the relative rates of growth between our economy and other
economies. To the extent the United States is growing at a
pretty fast clip right now means it is a more attractive
investment at the end of the day. I think that is part of the
attraction of investors, whether it is in T-bills or whether it
is in foreign direct investment.
The second thing is, would a change in the currency
increase exports? I think it is very much about what you would
see as the knock-on effect in the Chinese economy if in fact by
de-linking the peg or revaluing they slow their economic
growth. Odds are it would have a negative impact on our
exports, frankly. And that is, I think, the risk that many
point to.
We have an interest in a stable and growing Chinese economy
as long as the terms of trade are fair. That is why I have a
tendency to look more to the tools that we have and grapple
with the problems that are facing individual industries than
look to a change in the currency peg necessarily to improve our
exports.
Chairman King. Ms. Maloney?
Mrs. Maloney. Thank you, Mr. Chairman.
Secretary Taylor, I am trying to understand what you
intended and what was accomplished by the U.S.-led statement on
exchange rate flexibility at Dubai. In some ways it seems to
have created more confusion than anything with little agreement
even within the G-7 countries about what the statement means.
If it was indeed an effort to achieve more exchange rate
flexibility globally, then why do you say in your testimony
today, ``There are benefits from a hard exchange rate,'' and
``The choice of an exchange rate regime is one where country
ownership is particularly important''?
After the meeting, the dollar declined after the release of
the Dubai statement. Was this a desirable outcome, for the
dollar to decline?
Mr. Taylor. Well, let me answer your question in four
different ways.
First, I think it is important to understand exactly what
the statement was. If I could do so, Congressman Maloney, I
would like to read the statement.
The ministers and Central Bank governors of the G-7 stated,
``We reaffirm that exchange rates should reflect economic
fundamentals. We continue to monitor exchange markets closely
and cooperate as appropriate. In this context, we emphasize
that more flexibility in exchange rates is desirable for major
countries, for economic areas to promote smooth and widespread
adjustments in the international financial system based on
market mechanisms.''
The second point I would make is, there was strong
agreement among the ministers and Central Bank governors who
made this statement in Dubai. I was at the meeting and I can
attest to their support for this statement.
The third point I would mention is that Secretary Snow
indicated at the time this statement was released that he
reiterated the strong-dollar policy for the United States.
And the fourth thing I would like to emphasize very
strongly here is this statement was part of a larger document,
still pretty short, just a little over one page, but a larger
one nonetheless, that emphasized a whole new agreement on
raising economic growth in the G-7.
For the first time, the ministers and the Central Bank
governors agreed on what they called the G-7 agenda for growth.
Under this agenda for growth, each of the countries are
endeavoring to take policies that raise growth in their own
countries It is very important to the United States that growth
rise in Japan and in Europe and in Canada, the other members of
the G-7, and I think this part of the statement is very
significant, this so-called G-7 agenda for growth.
I would be happy to talk to you more about that.
Mrs. Maloney. But what happened after the Dubai statement
was that the dollar declined, so when all the G-7 countries
voted together, were they voting together to bring down the
dollar, because that was the outcome?
Mr. Taylor. As I say, the second part of what my answer to
your previous question was that Secretary Snow reiterated a
strong-dollar policy in Dubai.
Mrs. Maloney. Well, also, both of you testified about the
recent trip of Secretary Snow that he made to China where he
met with many important Chinese leaders, and he prodded the
Chinese to float their currency.
Besides being courteous and having many important meetings,
did the Chinese give the administration or our country, any
timetable for when we can expect real progress in this
direction?
Mr. Taylor. There is not a timetable.
Mrs. Maloney. Did we win any concessions during the trip,
where you can point to an action the Chinese will take at a
given point in the future?
Mr. Taylor. I think there are a number of significant
actions that the Central Bank announced, mainly related to what
I would call preparatory actions related to the exchange rate,
such as beginning to remove some of their restrictions on
capital flows, the restrictions that Chinese citizens have to
hold foreign currencies, which affects currency values. A long
list of things was put out in terms of announcements along
these lines.
In discussing the issue with China, Secretary Snow has
noted, I have noted, that there is clearly an intention to move
towards a flexible exchange rate at some time. There is not a
deadline. There is not a time line, so I can't give you that. I
do feel that this intention has been there for a while. My
sense is that perhaps it could have even come earlier were it
not for the 9-11 attack, the other uncertainty that occurred in
the world economy.
So, you can't put time lines on things like this because
events occur which affect time lines. But again, I think it is
promising about the intentions.
Mrs. Maloney. So the intentions are there, but there is no
concession, no time line and really no decision when they will
take action.
Mr. Taylor. As I just said, there are a number of
announcements and changes in policy that are related to
flexibility in the Chinese economy, related to the financial
mark of flexibility. And those had to do with the gradual
removal of capital controls. I think that is very significant.
Chairman King. The gentleman from Illinois, Mr. Manzullo.
Mr. Manzullo. Thank you.
First of all, I want to thank both of you gentlemen for the
tremendous work that you have been doing. John Snow is just a
remarkable individual.
And Grant, you had one of those hearings in my
congressional district and you got an earful there. But we told
you that was going to happen and you knew that prior to coming,
and we appreciate your sensitivity.
I just have one remark and a question. There are a lot of
things that we can do to bring about and narrow the trade
imbalance. We have a horrible system of issuing visas to
Chinese who want to come to this country to buy stuff. This is
scandalous. And, Grant, how many times do we call you with a
list of people? We are not talking about export-controlled
items, things that are not subject to a validated export
license.
Every Chinese purchaser is presumed to be a bad person by
our government. I am the chairman of the American-Chinese
Inter-Parliamentary Exchange. We are hosting them. They are in
town this week, and they said, ``There is a lot of stuff we
want to buy from you,'' and it is not even high-tech stuff,
``but we can't even come to your country to shop.'' Now, whose
fault is that? The Chinese? That is the fault of our own U.S.
government.
The task force that we have put together, and I know,
Grant, you have helped us out on it and Treasury is engaged and
everything. We have got to loosen up dramatically. We need a
yearly multi-visit businessperson's visa to allow people to go
back and forth freely for the purpose of looking at stuff to
buy.
How stupid our own government is that we close the doors to
people who want to buy stuff from us, and then we end up
complaining that we are not selling enough stuff to the
Chinese. It is just absurd, and I know both of you agree with
us.
In an article in today's Financial Times Japan intervened
again, they are not even subtle. The New York Federal Reserve
had to come in and conduct the sale for the Bank of Japan
because by law it was obliged to do so. The question is, what
plan does the administration have to stop this type of overt
currency manipulation by Japan?
Mr. Taylor. We have a very good set of engagements with
Japan on their policies, with the finance ministry, with the
Central Bank.
What we have stressed in the last year-and-a-half or so is
the importance of Japan to grow more rapidly. The way we have
emphasized that is to do two things related to the financial
markets. One is to for the Bank of Japan to raise the growth
rate of the money supply, to put the monetary policy, if you
like, which is more conducive to growth in Japan, and the
benefits that higher growth in Japan will have for the United
States's job creation, as well as the rest of the world, and
Asia in particular.
The second part of it is to deal with the problems in the
banks, the nonperforming loan problems. These are very much
related to your question, and in fact a significant part of
this is that they are actually making some changes here which
are very, very good.
The new Central Bank governor, Governor Fukui, has had
increase in money growth which is substantial. The person in
charge of the financial market regulations, Minister Tanaka,
has put on a very good reform plan under Prime Minister
Koizumi's guidance and leadership. That is beginning to show
up, and for the first time in a long time we see some signs of
the harmful deflation in Japan starting to be eliminated,
starting to come back, starting to diminish.
On top of all this, we see some strong growth in Japan, as
I indicated in my written testimony. So that has been our
focus.
The issues with respect to the currency are the kind of
things that are being done there, the kind of things that are
reflected in the G-7 statement that I read for Congressman
Maloney, which was established in Dubai.
So that is the strategy. We think it will work, and there
are already signs of it working. As always in changes in
economic policy, it doesn't occur overnight, but we think there
is really good progress being made here.
Mr. Aldonas. Congressman, if I could add just a couple of
comments to that. One is really to compliment John and
Secretary Snow, and I have worked in this area for over 25
years at this point. This Treasury, more than any other I have
seen, worked with, whether I was in the private sector or in
public service. If there was a point at which we could divorce
finance from trade back in the 1940s and live in what we
thought was a fixed exchange rate regime, that ended a long
time ago, and obviously the dialogue that has gone on and the
efforts that John has undertaken to bring these issues back to
the forefront and really allow us to grapple with the
underlying problems.
In fact, I think John's point about working with both the
Japanese and the Chinese on their financial markets is in the
end the answer in terms of trying to open up the market
further, and that has real value for our economic growth and
the growth of exports.
The other point I wanted to raise was in direct response to
what you said, Congressman Manzullo, about the other things
that our exporters worry about and that our manufacturers worry
about. What would probably surprise everybody is the degree to
which we heard more comments during the roundtables about
keeping our own side of the street clean, in effect, than we
actually heard about the level playing field. The arguments
about the level playing field were intense in a way that some
of the others were not.
But by and large, most of the comments recognized we have
things like a visa policy which gets in the way of our
exporting, that we have things in terms of costs that our
manufacturers bear that we need to be observant about otherwise
we are not going to be creating the most favorable place to
invest in manufacturing. And those are things that are the real
levers we have in our own hands and know how to use.
Chairman King. The gentleman from Vermont?
Mr. Sanders. Thank you very much, Mr. Chairman.
And thank you very much, guests, for being with us today.
Mr. Aldonas mentioned phrases like the fact that the United
States today still has the most powerful manufacturing sector
in the world. But I think he also understands that in the last
3 years we have lost 2.7 million manufacturing jobs in that
powerful sector. According to The Washington Post, we have lost
16 percent of the jobs in our manufacturing sector.
I hope that instead of just talking about how wonderful we
are doing, he would look at some of the real crises that exist
in that sector.
According to the U.S. Business and Industry Council, this
is a business organization, Beijing has a trade surplus with
the U.S. of about $120 billion this year. The rule of thumb is
that every $1 billion in the trade balance represents the gain
or loss of 10,000 jobs. Using that standard, the trade deficit
with China could explain the loss of more than one million
American jobs. Now here is another point. According to
Forrester Research, we will lose 3.3 million high-tech jobs in
the next 12 years in the areas of life sciences, legal work,
art design, management and so forth and so on.
I see us as being in a very serious crisis. I see the
situation, according to these forecasters, is actually getting
worse.
Now my questions for the gentlemen are as follows. What
does the Bush administration say to General Electric, IBM,
Motorola, Kodak, Intel and dozens of other corporations who are
throwing American workers out on the street and moving to
China, where they are hiring people at 30 or 40 cents an hour?
What do we say to those guys? Is that good public policy? Thank
you very much, General Electric.
Furthermore, it is not just the loss of jobs. It is the
loss of wages in the private sector in the last 30 years.
Today, a worker in the private sector is earning 6 percent less
in real wages than was the case 30 years ago. What is your
attitude toward large corporations who are throwing American
workers out on the street and moving to China?
You talk about a level playing field. Maybe I am living in
a different world, but in China, workers make 30 or 40 cents an
hour. How is that a level playing field with workers in the
United States who in the middle class are trying to make $15 or
$20 an hour? What does a level playing field mean when a worker
in China goes to jail when he or she tries to join a union?
What does it mean when there are virtually no environmental
regulations in China, causing havoc environmentally in that
country and perhaps for the rest of the world? So those are my
questions.
What do you guys say to those corporations who throw
American workers out on the street and go to China? Tell the
workers of Pennsylvania or Vermont about the level playing
field that exists when workers make 30 cents an hour.
That is my question.
Mr. Aldonas. If I could, Congressman, the first thing is,
to be very clear with China, is that where there are issues
like the sorts of things they adopt with respect to labor
rights, that the policy of the administration is they have to
reform. We have a conversation with these guys regularly about
the human rights aspects of these policies.
Mr. Sanders. And that conversation has been going on for 20
years, and Chinese workers are going to jail when they form a
union. But I don't want to let you off the hook that easy,
Grant, if I might. I want you to get back to the basic issue.
Mr. Aldonas. Sure.
Mr. Sanders. Tell me about the level playing field when
workers go to jail for forming unions and when they make 30
cents an hour. If you were a corporate executive, would you
move to China?
Mr. Aldonas. Congressman Sanders, two points. One, I do
know that we are living in a global economy.
Mr. Sanders. Yes.
Mr. Aldonas. And to do that, to succeed locally, you are
going to have to succeed globally.
Mr. Sanders. Not necessarily.
Mr. Aldonas. Yes, and that means what we are going to have
to do is get the fundamentals right and we are going to have to
allow our companies to get their costs down. And indeed what
has happened in that global economy is real economic geography
has reasserted itself, which means a lot more is going to be
done closer to where consumers are.
So to give you an example on some figures that go with it,
when U.S. companies invest in China, there are $60 billion
worth of sales by the U.S. companies that invest in China in
China, to Chinese consumers. There are $20 billion of sales by
U.S. companies that invest in China that export back to the
United States. Net, in terms of their activities in China,
there is real value, which means jobs back in the United
States.
Mr. Sanders. But how do you talk about jobs in the United
States, when according to the trade deficit we have probably
lost a million? Of course, some jobs are being created, but you
are losing a lot more than you are creating.
Mr. Aldonas. Well, then we ought to talk about what goes on
in the context of the labor statistics. I mean, what you have
is, you have two surveys.
Mr. Sanders. You have two what?
Mr. Aldonas. Two surveys that the Bureau of Labor
Statistics does. One is the establishment survey, which is the
figure that is commonly cited about the 2.7 million job losses.
The other is a household survey. And there is always a lag
between the two surveys.
What you have right now, and I don't know if you saw the
column by Allan Meltzer, a professor at Carnegie Mellon, in the
Wall Street Journal, but he identified the difference right
now. If you look at the establishment survey, which surveys
existing businesses, it does not capture start-ups that have
happened in the last couple of years, they will show $2.7
million job losses. If you look at the household survey, when
they survey households and ask are you employed, what it will
show is there are 220,000 job losses. Not good, but not bad in
the context of this recovery.
I see your staff aid seems to be expressing some shock
behind you. But what I would ask him to do, then, is actually
go to the Bureau of Labor Statistics and talk to them seriously
about the two surveys and what the differences are.
Mr. Sanders. We have $100 billion trade deficit with China.
Do you agree with that?
Mr. Aldonas. Absolutely.
Mr. Sanders. And you see that as the loss of how many jobs?
Chairman King. I am sorry, the gentleman's time expired, so
I would allow Mr. Aldonas to answer the question and then move
on.
Mr. Sanders. Thank you, Mr. Chairman.
Mr. Aldonas. What I see is a trade deficit that is
expanding generally, of which China represents about one-sixth.
And just to make it a little more poignant, I had to order
a cell phone recently. I said, ``Look, I am the Under Secretary
of Commerce for International Trade, get me a Motorola,''
because I want one that operates all over the world, right,
rather than a Samsung or something else. I picked it up and
turned it over. Guess where it was made?
Mr. Sanders. Let me guess.
Mr. Aldonas. Ireland.
[Laughter.]
My point is that this is a global phenomenon. And my point
in saying that is that we have a trade deficit----
Mr. Sanders. I am glad that you found something in Ireland.
When I go to a department store, most of the products that I
find are made in China. I am glad you found Ireland.
Mr. Aldonas. I am sorry, Mr. Sanders, but my point in
saying that is that we have a trade deficit which is growing
because of the relative growth rates in our economy compared to
others. That is not a China phenomenon alone. My point in
saying that is not to diminish what we need to do with respect
to China. It is to make sure that we don't let others off the
hook as a part of that process. A lot of what John was talking
about with respect to some other countries in terms of growth
is the real key to driving a recovery in manufacturing at the
end of the day.
Mr. Sanders. Thank you very much.
Chairman King. Mr. Ose?
Mr. Ose. Thank you, Mr. Chairman.
This is perhaps the most interesting hearing I have sat
through in my 4 1/2 years.
Chairman King. See, what you are going to be missing, Doug?
Mr. Ose. Let's go on to my questions.
[Laughter.]
Mr. Taylor, do interest rates, relative interest rates,
affect currency valuations?
Mr. Taylor. Yes, among many other factors, they do.
Mr. Ose. There is also productivity.
Mr. Taylor. Productivity, prices.
Mr. Ose. Inflation? Inflation affects it?
Mr. Taylor. Yes, very much so, many factors.
Mr. Ose. You said something a little bit ago about how
Treasury had advocated to the Bank of Japan that they increase
the domestic money supply in Japan. Does domestic money supply
affect interest rates?
Mr. Taylor. In Japan, the interest rate is now effectively
zero because of the deflation. So they are trying to get to a
situation where inflation is above zero, equal to or greater
than zero, as they say. And they want to keep the rate of money
growth up until that happens. Until that happens, the interest
rates are going to be zero. And so effectively in Japan, it is
not a direct impact.
Mr. Ose. It does come around, though.
Mr. Taylor. Ultimately when you get a situation where the
deflation is over, which I hope is soon, then it will be more
back to the natural situation where you have a nominal interest
rate which fluctuates as in most countries.
Mr. Ose. So there is a connection between money supply
activities taken to reflate an economy, a relative inflation
rate, and ultimately around the circle to interest rates.
Mr. Taylor. Yes.
Mr. Ose. The question I have is, in advocating for an
increase in money supply, is that currency manipulation?
Because if you affect interest rates, you affect relative
currency valuations.
Mr. Taylor. I would answer your question as no. There are
many, many factors that affect exchange rates. The importance
of growth of the money supply ultimately is that it will
increase money growth, it will get translated into higher
inflation, and higher inflation makes the currency less
valuable. So in an extreme, extreme situation of very high
money growth, there isn't going to be an effect on the exchange
rate.
What we have noted, after years and years of looking at
exchange markets, is there are many manufacturers and it is
always hard to trace the impact of any one. But certainly in
extreme situations you can see countries, for example, which
have very high money growth and very high inflation, they have
depreciating currencies.
Mr. Ose. Correct.
Mr. Taylor. We saw that in the past and will in the future.
Mr. Ose. I would argue that there is a connection. It may
well be round-about, but there is a connection. And there are
multiple factors.
Mr. Aldonas, I find your testimony fascinating, because you
are out there on the front line, so to speak. Both of you have
mentioned not only the current account, but also the capital
flows out of China in terms of the overall net effect. Can you
expand, if you will, on your estimation of the relative
importance of capital outflow and the inability of the Chinese
to freely flow capital out?
Mr. Aldonas. I really should defer to John on that. I am
happy to give you my personal view, but I think we should let
the Treasury speak for the administration with respect to that.
Mr. Ose. All right. Mr. Taylor?
Mr. Taylor. The extent to which capital outflows are
restricted in any country, it effects the currency because it
restricts the amount that people can buy of other currencies.
That certainly is not a factor that would affect the pressure
on the yuan if the changes in the capital restrictions went
through.
That is one of the reasons why when we engage with the
Chinese, when you just talk about the exchange rate, you
automatically start talking about capital controls.
Mr. Ose. Let us talk basics here. A restriction on capital
outflow supports the value of the currency is what you are
saying.
Mr. Taylor. Yes.
Mr. Ose. All right. Now I just asked that question because
I just want to be very clear on that, because I have heard a
lot of argument about what is supporting the value of the
currency right now is demand for Chinese goods. But as you have
pointed out, the restriction on capital outflow is part and
parcel of this argument too.
Mr. Taylor. It most certainly is. I go back to the
beginning. There are a multitude of factors that affect
exchange rates, as you know from your course.
Mr. Ose. Thank you, Mr. Chairman.
Chairman King. Thank you, Mr. Ose.
Ms. Hooley?
Ms. Hooley of Oregon. Yes, thank you, Mr. Chair.
Mr. Taylor and Mr. Aldonas, thank you very much for being
here today.
This is an important issue facing American workers. I would
venture to say, however, that the reason this issue has
received so much attention is not the Chinese manipulation of
its currency, but what is happening to the loss of American
jobs. People are very concerned what is happening to
manufacturing in this country and what is happening to jobs.
So I have a three-part question and a little story to tell
in between. Aside from the policy of tax cuts and maybe dealing
with the Chinese currency issue, what else is the
administration doing to help create jobs?
And then, I was talking to a gentleman the other day who
happens to manufacture furniture. He was talking about most of
the manufacturing in furniture-making having left this country.
He said at first they went to Mexico, and then they have now
really left Mexico and gone to China.
So I want to know what part does this currency issue play
in the loss of manufacturing jobs? And what other factors are
contributing to the loss of jobs and manufacturers leaving this
country that Congress should be aware of or that we can do
something about?
Thank you.
Mr. Taylor. Well, let me start.
First of all, I think dismissing the tax cuts at the
beginning is a mistake. I think the tax cuts are an important
part of what we can do to raise----
Ms. Hooley of Oregon. I didn't dismiss the tax cuts. I said
aside from that.
Mr. Taylor. I just wanted to mention that. Anyway, sorry.
In addition to that, the health care reform proposals to
reduce the very high and rising cost of health care will create
more opportunities for workers. President Bush has emphasized
the importance of tort reform to reduce the costs on small
businesses, in particular start-up firms. Of course, it is a
concern right now; and the medical field as well. Those are
things that are very important.
I think from speaking with the international portfolio at
the Treasury, that getting growth to be high in other countries
is very, very important. And that is what I have spent most of
my time on, is getting higher growth not only in China, but
higher growth in Japan and especially Europe right now.
Because a number of people have mentioned how the United
States really cannot and should not be the sole engine of
growth, because the U.S. economy is doing quite well now as it
is starting to move ahead. And that is going to create more
jobs in the manufacturing sector, as in other sectors. But
growth in other countries, growth around the world, is a very
important part of this, in my view.
Mr. Aldonas. If I could add, the first question was what
else is the administration doing and what has the President
proposed. One thing I always like to make clear is, the
President has never said it is only about tax cuts. What he has
identified are a lot of other drivers in the economy.
What was interesting about it, Congresswoman Hooley, was
that it is exactly what we heard from manufacturers themselves.
When they talked about keeping our side of the street clean,
what they were talking about were things like health care costs
and energy costs, tort reform, cost of tax compliance, just to
give you an example.
We have an alternative minimum tax that applies to
corporations in this country. We collect almost no revenue from
the alternative minimum tax as applied to those. And yet, for a
manufacturer, what it means is, it used to be illegal to keep
two sets of books. Now, by virtue of the alternative minimum
tax, you keep four.
So you have a dead-weight economic loss that flows simply
from the cost of compliance. And the depreciation schedules,
under the alternative minimum tax, deeply erode some of the
competitiveness and the productivity gains that our
manufacturers are trying so hard to achieve.
So what they talked about, and really a number of the
comments went right to the heart of the agenda that the
President has put forward about trying to match what the
private sector has done in manufacturing to cut costs so that
the government is lowering the burden on our guys as well.
Ms. Hooley of Oregon. Do you believe that manipulation of
the Chinese currency is adding to the loss of manufacturing
jobs?
Mr. Aldonas. I think we need to be careful about the word
``manipulation.'' They are maintaining a peg.
Ms. Hooley of Oregon. Okay, maintaining a peg. Do you think
that is contributing?
Mr. Aldonas. I think to the extent that it contributes, to
the extent that it is currently undervalued, it would mean both
higher import competition and less of an export market. And
that has the potential to affect both the competition we feel,
even if it is simply on the basis of price and there was no
greater volume in the goods, or in terms of our export
potential.
But I always like to think past the exchange rates, because
it is the fundamentals that drive it that are probably more
important to be working on. In some respects what Secretary
Snow and Secretary Taylor have been doing is really to go to
the heart of the problem. The problem is not so much the
exchange rate. It is what you have to do with the underlying
financial markets so that you can have that freedom.
The thing that I really want to get to is that, and this is
what I think the hearing is really about, just as you were
saying, Congresswoman Hooley, is that when there is something
like a peg, and when another government has intervened in the
market, it creates a perception of unfairness. And in fact,
what we see is the friction that comes in the trade accounts.
One of the reasons we are having trouble with this, and we
are grappling with some of the pressures on trade, and you see
folks who have lost their jobs point to this as a problem, is
simply by virtue of the fact they can see the government
visibly intervening. I think that is a lot of the issue and a
lot of what we have to grapple with in terms of trying to make
sure that we are having this constant agenda with the Chinese
on trade, on finance, that keeps the spotlight on the problem
and tries to remove these things, because it is that perception
of unfairness which drives a lot of the demand for protection.
Chairman King. The time of the gentlelady has expired.
Votes have been called. What I would like to do is I will
be recognizing Mr. Paul to ask one question, then I understand
that the two witnesses have to leave.
I would ask if our third panel, Dr. Goldstein and Mr.
Vargo, can stay around, and we will recess until approximately
4:15 p.m.
Ms. Hooley of Oregon. Mr. Chairman, a point of
clarification, if I could. Mr. Chairman, I just want to add
something to the record in answer to Mr. Aldonas's comment on
the household and the establishment surveys of unemployment.
He said we should ask the Bureau of Labor Statistics about
the two surveys. I just wanted permission to place into the
record comments from the Bureau of Labor Statistics
Commissioner at a recent joint economic hearing endorsing the
use of the establishment survey as a more accurate measure of
unemployment in an exchange that he had with Senator Bennett. I
would like to get the relevant comments and place them in the
record establishing that as the one that they believe is the
most accurate on unemployment.
Thank you.
Chairman King. I would also like to say to members that
they can submit questions to the witnesses up to 30 days.
And with that, Mr. Paul.
Dr. Paul. Thank you, Mr. Chairman.
This is directed to Secretary Taylor. Has the
administration taken a position on this legislation that was
briefly described earlier, H.R. 3058? Does the administration
have a position on that?
Mr. Taylor. No. I have not fully digested it myself.
Dr. Paul. But it essentially threatens the Chinese if they
don't do what we want. We put on a possibly a 40 percent
tariff. In general, would you support something like that?
Mr. Taylor. With what I have looked at so far, it seems to
me the approach that we are taking now to this issue is more
productive than an approach which raises tariffs. As far as I
know, there is not a formal position, but it seems to me that
we have a good strategy in place with respect to this issue and
we would like to pursue that.
Dr. Paul. Okay. Also, very briefly, we are talking about
flexibility, we are talking about really devaluation of the
dollar in comparison to the yuan. Is it not true that
throughout history when countries have used competitive
devaluations that they don't work that well? That generally
they do not achieve what is sought and that frequently prices
go up rather quickly and most of those who promote devaluations
are somewhat disappointed?
Mr. Taylor. I agree with that very much.
Chairman King. That will have to be the last question
unless Secretary Aldonas wants to add to that.
I want to thank both of you for your testimony today. It
has been very illuminating. I appreciate your time and your
patience.
If the third panel can wait, we will reconvene at
approximately 4:15 p.m.
Thank you very much.
[Recess.]
Chairman King. It is very seldom we have a panel of
witnesses with such exceptional credentials. It is even more
unusual to have experts who are so patient and tolerant and
understanding of the foibles of the House of Representatives.
So I do thank you for enduring all this and for waiting around
for this length of time.
So I would like to introduce to the subcommittee Dr. Morris
Goldstein, Senior Fellow of the Institute for International
Economics, and Mr. Frank Vargo, Vice President of International
Economic Affairs at the National Association Of Manufacturers.
I would certainly welcome any statements you wish to make.
We will begin with Mr. Vargo.
STATEMENT OF FRANKLIN J. VARGO, VICE PRESIDENT, INTERNATIONAL
ECONOMIC AFFAIRS, NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Vargo. Thank you, Mr. Chairman. I have a prepared
statement for the record and some very brief remarks to make at
this time.
Exchange rates are one of the main things that have been
affecting our trade, and that is why the NAM has been making
such a big fuss over them for a while now.
China poses an enormous opportunity for American exporters,
workers and investors, but also a huge, huge challenge through
its exports to the United States, a huge challenge to a growing
range of U.S. manufacturing industries such as plastics, tool
and die, furniture and many others that are feeling
particularly impacted right now.
China has an increasingly modern infrastructure, low wages,
productive work force and a significantly undervalued currency.
So it is simultaneously the largest threat that many NAM member
companies see and also the largest prospective market for
exports and investment that other members see.
Our trade deficit with China is the largest in the world
now. The growth of that deficit and the rapid spread into more
and more products and industries is leading to significant
increase in calls for protection. I have never seen anything
like it in my years at NAM or my many years at the Commerce
Department.
I want to stress the NAM wants a productive trade
relationship with China, and we are very concerned about the
present trends. We need to see our trade move in a more
sustainable direction and we do not have much time. We have to
reject protectionism. That road will not work.
We believe that the best direction for the future with
China is for China to move as quickly as possible to market
forces. Most importantly, that means the Chinese currency has
to stop being held at a very undervalued level. There is no
question, as you have heard repeatedly already, that the
Chinese yuan is very undervalued. Last year, the U.S. trade
deficit with China was $100 billion. So far this year it is
running close to $130 billion.
It is important not to overstate China's importance in the
current U.S. manufacturing slowdown, for China is not the
principal cause of that difficulty, but it is a factor. Other
factors including the drop in our global exports, which is a
larger factor, and cost pressures are also very important. But
the greater importance of China lies not with the present, but
in the future. Because if the 20-year trends continue, our
deficit with China will triple in five years.
I have a lengthy prepared statement, but I do encourage you
to look at some point at the table in the very back of my
statement which gives a matrix showing alternative trade
balances under varying assumptions of export and import growth
rates for the next five years. What that shows is that even the
most robust export growth rate of, say, 30 percent a year or so
is still going to leave us with a trade deficit that will be
more than two-and-a-half times as large.
So it is clear, if we are going to have a more balanced
relationship, the rate of import growth is going to have to
slow. We don't want to do that through protection or through
legislation. So the best way to do it is through the currency
valuation that is either market-determined or that emulates
that.
We want to be very careful to note that China cannot be the
scapegoat for our economic difficulties. It is a mistake to say
that if we just fix the China currency we have done everything.
That is not so. We have to work on the cost of regulation, the
cost of litigation, so many things in the United States as
well. But still, if we do not deal with the China currency now,
we are going to have a problem that is just going to get away
from us and we will not be able to deal with it.
We are very pleased at the administration's very active
program in seeking to bring about a more market-determined
currency and we support that, and we want to see the
administration have the maximum leverage.
Finally, just let me note that there are already is some
legislation being introduced that would put on tariffs across
the board, and the NAM has not taken a formal position, but it
is extremely unlikely that we would be able to support that
legislation.
One piece we do support is Manzullo-Stenholm, Congressional
Resolution 285. We hope that it will get a lot more cosponsors.
We see it as very WTO-consistent and a very reasonable way to
go. We hope that that will pass before the President goes to
Asia later this month.
Thank you, Mr. Chairman.
[The prepared statement of Franklin J. Vargo can be found
on page 91 in the appendix.]
Chairman King. Thank you, Mr. Vargo. Your full statement
will be made a part of the record.
Dr. Goldstein?
STATEMENT OF MORRIS GOLDSTEIN, DENNIS WEATHERSTONE SENIOR
FELLOW, INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. Goldstein. Mr. Chairman and Ranking Member Maloney,
thank you for the opportunity to testify before this committee
on the important issue of China's exchange rate regime and its
effects on the U.S. economy.
I have a written statement for the record, and then I am
going to give just a brief summary of it now.
Chairman King. Without objection, your full statement will
be made a part of the record.
Mr. Goldstein. My colleague, Nicholas Lardy, and I have
recently been analyzing China's currency regime, and I would
like to share with the committee five of our main conclusions.
First, so long as China maintains controls on capital
outflows, runs surpluses on both the overall current and
capital accounts and its balance of payments, and accumulates
international reserves in large amounts, there is a compelling
case that the Chinese currency, the remimbi, is significantly
undervalued. Our preliminary estimates suggest that the
undervaluation of the remimbi is on the order of 15 to 25
percent.
Second, a revaluation of the remimbi is in China's own
interest as well as in the interest of the global economy. If
China does not revalue the remimbi, net capital inflows and the
large accumulation of reserves will continue. With its mountain
of bad loans, China should not permit capital inflows and
reserve accumulation to exacerbate the already excessive
expansion in bank lending, money supply growth and investment.
And appreciation of the remimbi is, likewise, in the
interest of the United States and the wider community. Unless
China permits the value of its currency to rise, it will be
much more difficult to obtain the broader realignment of key
exchange rates in Asia and elsewhere needed to produce a marked
correction in global payments imbalances, including a reduction
in the U.S. current account deficit.
Third, urging China to adopt a flexible exchange rate
regime and to open its capital markets, as U.S. Treasury
Secretary Snow and others have suggested, is sensible advice
for the longer term. But that advice is not appropriate for
China's current circumstances, especially its weak banking
system. Therefore, it is not likely to be heeded anytime soon,
providing little relief for current exchange rate and payments
problems.
A more practical approach is to urge China to reform its
currency regime in two steps. In the first step, China would
immediately revalue the remimbi by 15 to 25 percent, it would
widen the currency band to between 5 and 7 percent from less
than 1 percent, and it would switch from a unitary peg to the
dollar to a three-currency basket with roughly equal weights
for the dollar, the euro and the yen.
Step two should be adoption of a managed float after China
takes further reforms to put the domestic financial sector on a
sound enough footing to permit significant liberalization of
capital outflows.
The advantage of a two-step approach is that it neither
asks the rest of the world, including the United States, to
live too long with an undervalued remimbi, nor does it ask
China to ignore a key lesson of the Asian financial crisis by
prematurely opening its capital account.
Fourth, the United States should take a multilateral tack
in persuading China to alter its exchange rate policy and
should reject proposals for unilateral trade measures directed
against China's exports. Other countries also have a strong
interest in seeing the remimbi rise closer to the level implied
by fundamentalists. If China resists a rise in the remimbi, too
much of the global exchange rate adjustment will fall, for
example, on the euro, worsening Europe's anemic growth
performance.
The U.S. Treasury should therefore continue to enlist the
support of other countries in convincing the Chinese
authorities that a more appreciated exchange rate for the
remimbi is in the common interest.
As the institution charged with exercising firm surveyance
over the exchange rate policies of its members, the IMF should
take a more active stance in monitoring exchange rate
misalignments and in applying a mix of persuasion and pressure,
both private and public, to reduce the duration of such
misalignments. Endorsing a vague G-7 call for more exchange
rate flexibility is not exercising firm surveyance.
``Multilateral'' does not mean everybody but the United
States. The United States also needs to do its part to
contribute to global adjustment by improving our savings and
investment balance, and in particular by adopting a workable
plan to reverse the now projected long stream of U.S. budget
deficits.
What the United States should not do is impose a unilateral
import surcharge on China's exports. China is not the only
country to have used or is now using prolonged large-scale
unidirectional exchange market intervention to maintain an
undervalued exchange rate. China's import ratio relative to GDP
now stands at a level three times higher than Japan and twice
as high as in the United States.
An import surcharge directed exclusively at China's exports
might well invite retaliation against U.S. exports to China and
could risk a wider upsurge in protectionism when the opposite
is needed to support global growth. An improvement in U.S.
competitiveness calls for a broad-based decline in the value of
the dollar, not for a tax on one side of one developing
country's trade.
Fifth and finally, the impact of a medium-sized revaluation
of the remimbi on the external accounts of the United States
should not be exaggerated. Even if China did revalue the
remimbi by, say, 20 percent, and even if other emerging
economies in Japan followed that by half, that is appreciated
by 10 percent, the trade-weighted value of the dollar would
decline by about 5 percent.
By my numbers, that might produce an improvement in the
U.S. current account on the order of $50 billion. The current
account deficit in the United States this year is expected to
be $550 billion. If we wanted to reduce the U.S. current
account deficit by half, it would require a much larger and
more broadly based further depreciation of the dollar in the
neighborhood of 25 percent on a trade-weighted basis.
The long-running decline in U.S. manufacturing employment
started well before the Chinese currency became undervalued and
has a much wider set of origins than exchange rate factors.
Thank you, Mr. Chairman.
[The prepared statement of Morris Goldstein can be found on
page 71 in the appendix.]
Chairman King. Thank you, Mr. Goldstein.
You are talking about the practical approach of urging
China to immediately devalue by 15 to 25 percent. What leverage
do you think we have to bring that about? And what is the
possibility or probability of that happening?
Mr. Goldstein. I think we have some leverage, first of all,
because such revaluation is actually in China's interest. China
is having a problem with an excessive increase in bank lending,
money supply growth and investment.
Investment share is 42 percent of GDP, the highest it has
ever been. Bank lending is going up at double-digit rates, near
20 percent, and they are starting to worry about financial
stability. So part of the leverage is convincing them what is
in their own interest.
Second of all, I mean, this is a large export market for
China. China participates in the International Monetary Fund
and other fora, so I think there are levers that we can use.
The problem with asking them to float now and open their
capital markets is they are not going to do it. So you are not
going to get anything now. The reason why they are not going to
do it is a very good reason: Their banking system is very weak.
If they get bad news, and the capital market is completely
open, capital is going to flow out in very large amounts, and
the exchange rate is going to depreciate by a large amount, not
appreciate.
Household savings deposits in China are 100 percent of GDP.
If 5 percent of that flows out, that is bigger than the current
account adjustments or other things that we are asking for. So
until China gets its banking system in better shape, they are
not going to do a float, and they are not going to have free
capital movements.
So it seems to me a better strategy is let's ask them for
something they really can do. They have a preference for a
fixed rate. Let's revalue the rate by 15 to 25 percent now.
Let's try and get them to agree to that. Let's get them to
agree to a basket peg where the dollar is one of three
currencies so that if the dollar has to depreciate more in the
future, we won't have to have the remimbi-dollar changes parity
every time.
That would bring some relief right now if they could do it.
Later on, we can get the float. But a doctrinaire insistence on
a float and an open capital markets now is going to get us
neither. I don't see why the world should live with a seriously
undervalued remimbi now.
Chairman King. Assuming there is this revaluation of 15 to
25 percent, what impact would that have on other Asian
economies? And would they follow, for instance, Korea,
Singapore?
Mr. Goldstein. I think it would make it much easier for
them to appreciate. As I say, even if they follow halfway,
well, it starts to add up.
The main message I want to leave with the committee is, if
you want to get a real correction in the U.S. current account
deficit, I mean a large one, you have to get a broad-based
decline in the dollar, not just against one currency. As I
said, even if China goes 20 and the others in Asia go 10, that
is $50 billion. And if you want to get $200 billion off, you
need a 25 percent trade-weighted depreciation; 5 percent would
be helpful. We should push for it, but I think people are
exaggerating.
If you just pick one country and you just pick one side of
the trade accounts, it is small. That is why these import
surcharges, even if they were legal, which I think they are
not, is not going to do much.
Chairman King. Mr. Vargo, how would you react to that, the
15 to 25 percent adjustment? And also, what impact would it
have on other currencies in Asia? And also, how would it impact
our economy and our jobs?
Mr. Vargo. It would make a very significant impact on our
trade with China. We would start to see the import growth rate
moderate very significantly by market forces, not by any
protection action. Second, we would start to see our export
growth rate pick up with China.
I agree with Dr. Goldstein's analysis that we would also
see the other Asian currencies come up. Because while they are
looking at our market, I can tell you they are terrified of
China. I was down in Cancun representing the NAM at the Cancun
WTO ministerial and can't tell you how many other countries
told us, ``We are happy to do a free trade agreement with the
United States, or a regional, but we are not going to cut our
tariffs. It is because of China.'' So the Chinese currency in a
sense could be affecting the entire WTO negotiation. So getting
it up would have a very broad effect.
Could I just add the point that we have to have an overall
realignment of our currency. The dollar is still too strong
globally. People are too used to seeing in the press all of the
euros at a new 2-year high, and other currencies are high. The
dollar is still stronger today measured by the Federal Reserve
Board currency index. It is stronger today than it was the day
Secretary Rubin left office. It was too strong then, it is too
strong now. The basic reason is the Asian currencies have not
come down.
Chairman King. In the earlier testimony today we heard a
possible impact would be if China stopped buying our paper,
stopped buying treasury notes. Do you see this 15 to 25 percent
impact having any impact, any effect that way?
Mr. Vargo. No, Mr. Chairman, I don't, because the impact
will be a moderation of the increase of the deficit with China.
They will still have a lot of funds to put in, and there is
nothing else they can do with it but put it in the United
States, or in some other country's market, but then they have
the dollar. The dollar has got to come back to the United
States to earn interest.
Chairman King. Well, I would be interested in Dr.
Goldstein's view of that.
Mr. Goldstein. I agree with Frank. I don't think that is
the primary worry right now. In any case, even if we were
worried about foreign holdings of U.S. Treasury securities, the
way to get that problem down is to shrink the current account
deficit, which of course we need to finance. That is why we
need a broad-based decline.
China is very important because without getting the Chinese
to move, it is going to be harder to get others to move. That
is why it is a very key part of the puzzle, even though by
itself it is not that big.
Let me also say, I think the focus that we have heard a lot
about at this hearing, about the $100 billion U.S.-China
bilateral deficit, is misplaced. China has a deficit with the
rest of the world of $75 billion. It is the overall current
account deficit we want to look at. In China, this year, that
is about 1.5 percent of GDP. It is going to be about $20
billion. We have a bilateral trade surplus with Australia. It
doesn't mean we are manipulating the Australian-U.S. dollar.
I understand why people focus on it, but really, we want to
look at the overall position of the Chinese balance of
payments.
Chairman King. Ms. Maloney?
Mrs. Maloney. Thank you for your testimony.
Dr. Goldstein, you stated that the U.S. was working in a
multilateral way on the currency in China and this issue and
that unilateral measures, such as the tariff, would not
succeed. How effectively are we working on a multilateral basis
on this issue? And do you have ideas of how our government
could be more effective in working in a more multilateral
broad-based way as you advocated?
Mr. Goldstein. I think we are going in the right direction,
but I think we have got to press harder. I think we ought to
particularly press harder in the International Monetary Fund.
There are provisions in the Fund where you can have a special
consultation with a country to talk about exchange rate
problems. I think we ought to use every venue we can to push on
this issue.
Under the IMF rules, countries can pick any currency regime
they want, fixed, floating, something in between. But what you
are not allowed to do, or supposed to do, is have the wrong
exchange rate. You can have the wrong exchange rate when you
are fixed, you can have the wrong exchange rate when you are
floating. And I think they have the wrong exchange rate. We
ought to press on it.
The Fund, I think, has not been strong enough, active
enough. That is the institution we have that was created to
deal with this problem in a multilateral way. I think we have
to get more serious about monitoring the rules that we have and
enforcing them.
Mrs. Maloney. Many of my colleagues, during their testimony
and their questioning, talked about the large and growing
unemployment challenge in our country. Some of them believe
that it is tied to this, China's currency peg. What is your
belief as to the aggregate impact of China's currency peg on
U.S. unemployment across all sectors, not just manufacturing?
Is it having a huge influence or is it a minor influence?
Many people believe that our unemployment is tied to this
currency exchange, but possibly it is not. What is your
opinion?
Mr. Vargo. Could I begin by answering that?
The currency with China is certainly not the main reason
that we have lost 2.7 million American factory jobs you talk
about, but it is a significant factor.
Mrs. Maloney. How much of a factor?
Mr. Vargo. Well, let me just get back to the first part of
your question saying the whole economy. This is a manufacturing
recession. Manufacturing is about 14 percent of the American
workforce, but about 90 percent of the increase in
unemployment. So we really have to look at manufacturing here.
If we look strictly at the role of China, one way of
looking at it would be to say how much has China's import
penetration, its share of the U.S. market increase since
unemployment started to increase back in 2000? Viewed that way,
about 15 percent, not 50, percent of the decrease in U.S.
manufacturing production, the increased import penetration by
China is equivalent to 15 percent of the drop in our
manufacturing production. I will say that the larger factor in
trade has been the drop in our exports worldwide, and China has
relatively little to do with that. That is about 30 percent of
the drop.
So you take the increased import penetration, which is all
from China, the import penetration from the rest of the world
has been flat, and you take our export drop, that is about half
of the drop in U.S. production and the other half can be
attributed to domestic factors.
Mrs. Maloney. Dr. Goldstein?
Mr. Goldstein. I would agree with the general conclusion. I
think there are many factors going on that are important in the
decline of manufacturing employment.
First is a slow growth in this country. Second, you have
slow growth in our trading partners, particularly Europe. We
have rapid productivity growth in manufacturing. We have a high
dollar more generally. China's weight in the broad trade-
weighted index for the dollar is a little less than 10 percent,
so that tells you something right there. We are talking about
9, 10 percent of a high dollar.
I would also note that the manufacturing share of
employment has been falling for 40 or 50 years. It has fallen
in most industrial countries. So it can't be mainly the Chinese
rimimbi. That is just not plausible. It contributes some. We
ought to try and get rid of the undervaluation, but it is not
the main thing.
Mrs. Maloney. So blaming China for our unemployment is not
the proper policy? It is wrong?
Mr. Goldstein. I think the fact that China has the wrong
exchange rate is an important part of policy, and we ought to
push as hard as we can to get that misalignment taken care of.
But to blame it as the key factor behind the manufacturing
employment situation is I think inaccurate.
Mr. Vargo. Could I add to that for just a moment, because I
agree with that. My testimony states that and the NAM has never
claimed that. It would be a mistake for us to be able to
resolve the China currency problem and dust off our hands and
say the job is done, because we have huge cost increases in the
United States to deal with. We have a lot of problems.
But with China, it is not just where it is today. The
problem, even though for some industries this is very, very
painful right now, today, the problem is going to be so much
worse in the future. As I noted in my testimony, if the trends
continue for just 5 more years, we will have a tripling of the
trade deficit. We have to head that off. The best way to do
that is by moving towards market-oriented mechanisms.
If China is unable to go to a floating exchange rate very
quickly, then certainly emulating that by removing some of the
undervaluation is a very important thing to do for China as
well as for the United States.
Mr. Goldstein. If I could, let me just mention one other
quick point. Some people assume that if the Chinese currency
goes up and they lose competitiveness, we will be the main
beneficiary. Not so. Who will be the main beneficiaries? Other
low-cost producers. Most of the substitution that occurs
between China's exports to the United States occurs with other
low-cost producers.
So some of the people that are getting complaints from
their constituencies about China displacing jobs are going to
find out they are being displaced by the Taiwanese or by the
South Koreans or others. So that is a large part of the
picture.
Again, one doesn't want to exaggerate and assume whatever
they get will be our gain. We will get some of it, but a lot of
it will go to others. That is why you need the broad-based
decline in the dollar. One piece won't do it.
Mrs. Maloney. Secretary Taylor, though, in his comments
testified that he was for a strong dollar, that after the
decision of the G-7 countries in Dubai and the dollar declined,
he more or less said that was not a desirable outcome, that is
not what they wanted. They wanted a strong dollar. But you are
saying that is not going to help us economically?
Mr. Vargo. I can tell you from our position, and again I
will go back to the Federal Reserve data, the dollar, using
their broad measure of all currencies, today is still 15
percent higher than in early 1997, which is the last time when
the NAM believes that our trade was in deficit, but a
sustainable deficit. We are still 15 percent higher than that,
largely because of the Asian currencies, and we are still
higher than when Secretary Rubin, the architect of the strong
dollar policy, left office.
So the dollar still has to come down if our trade accounts
are to move more into equilibrium. There is no question of
that. I don't want to speak for the administration on what they
mean by a strong dollar policy. I will note that the
administration has also been saying that markets should set the
value of the dollar, and they have been saying that for over a
year. And the currencies that are free to move have been moving
in beneficial directions. The currencies that are not free to
move, they have not.
Mr. Goldstein. I think Secretary Snow and Under Secretary
Taylor are in a difficult position. The strong-dollar mantra
has been around a long time.
If you are the one to say, ``Well, we no longer believe in
a strong dollar,'' you risk the dollar falling very rapidly,
too rapidly, which could have an effect on our financial
market. So once it has been out there, it is difficult to pull
back from it.
I think a better expression would have been a sound dollar,
because a sound dollar can move down and still be sound. When a
strong dollar moves down, people start to say, ``Well, if you
are for a strong dollar and it is weakening, the policy must
not be working.'' But I think if you worry about the U.S.
current account deficit, as I do, as a medium-term problem,
then a lower value of the dollar, broad-based, would be
helpful. The dollar would still be strong and sound.
Mrs. Maloney. My time has expired. Thank you both for your
insights.
Chairman King. Going from a sound dollar to a very sound
congressman. Mr. Kennedy?
Mr. Kennedy. Thank you very much, Mr. Chairman and Ms.
Ranking Member, as well as both of you for your excellent
testimony.
I would like to, first, Mr. Goldstein, explore the banking
issue, the concern that we cannot really float the Chinese
currency right now because the banking system is not able to
sustain it. What changes do we need in the banking system for
them to be able to sustain it, that we need to encourage them
to move towards? And is part of this a function of them
restricting U.S. financial firms, from participating in their
financial industry?
Mr. Goldstein. I think we want to distinguish between
floating and open capital markets. The administration has
called for both of those things.
It really is the open capital market that is the problem
for them, because if people could take their money out freely
and send it out of the country, well, whenever there is bad
news about the banking system, they could move it out in very
large amounts, and that would leave strong downward pressure on
the currency.
They have made some progress in the last couple of years
trying to bring down the nonperforming loan ratio. You need to
get to a system where loans are made more on a commercial basis
and less on a government-directed basis. I think it would be
good if they had a larger role for foreign-owned institutions.
But they have to change the way they allocate credit. They
are trying to do that. Instead of just doing it for various
objectives that we wouldn't think of as kind of good loan
policy, they have to move away from that. They have to
recapitalize some of those weak banks, and that is going to
take some time. The problem is, if you say, ``We want you to do
that instantaneously,'' go to free capital markets, they are
very unlikely to do it. And then you want the rate to be freely
floating also. It is too risky for them.
So I think in a 3-year, 5-year time horizon, they can make
quite a lot of progress on banking reform. Once they have done
that, then they might seriously consider moving to a float. But
asking for too much risk, getting very little right now that,
and what we could get now I think if we press is something
helpful.
Mr. Kennedy. Now, you also mentioned that the change in the
Chinese currency might only bring down the trade-weighted value
of the dollar by 5 percent or so. We have already seen a fairly
significant decrease versus European currencies. How much has
that really been? I am also trying to understand why the other
Asians want to try to just stay in lock step with China, why
China would let them really appreciate vis-a-vis them.
And what do we really need to do, and is it even realistic
to try to get to this 25 percent adjustment in the trade-
weighted basis without competitive reaction by other countries?
What is really the best we could hope for in this type of
scenario?
Mr. Goldstein. China's weight, again, in the broad index is
about 10 percent. So when I was saying the 5 percent kind of
weighted average, that was China did 20 percent appreciation
with its 10 percent weight, Japan did 10 percent, the other
emerging economies did 10 percent. All together, they have a
weight of almost 40 percent. But if you assume those kinds of
exchange rate configurations, you get about 5 percent. Since it
has peaked, the dollar has come down 10, 12 percent, on
weighted average, depending on which index you look at.
The rule of thumb that I use is, for every 1 percent you
get in the trade-weighted dollar, that gives you about $10
billion on the current account. So you get 10 percent, you have
50. If the current account deficit this year is $550 billion,
and we were to say, well, what would be safe would be, let's
say, half, 275 or so. Well, we still need about 20, 25 percent,
in that ballpark.
To get that, it is very hard to get it out of a few
currencies. You have to get a lot of people participating in
that by nontrivial amounts. I think that could happen. I think
that could happen, and it would be a good thing for us and the
world economy if it did happen. The tricky part is trying to
manage it so that it doesn't happen too fast and in too sharp a
manner. But if it stops now, we are still a long way away from
what I think is a safe external position.
Mr. Kennedy. You are saying if we have already had a 10 to
12 percent reduction in the trade-weighted value of the dollar,
and this may give us another 5 percent, so we are really
talking an impact of $50 billion to $170 billion, maybe up to
$170 billion, combining the Chinese impact with the current
impact.
Mr. Vargo, how would we think about that in terms of jobs?
I mean, how much does adjusting the trade-weighted balance, or
the export, current account balance by $50 to $170 billion, how
many jobs is that really going to help us create here in
America?
Mr. Vargo. It will have a very significant impact because
of changes in trade, not because of trade agreements or WTO or
permanent normal trade relations, but basically because of the
dollar and because of slower economic growth abroad have
accounted for perhaps half of the decrease in U.S. production.
Getting our production back robustly cannot happen until we are
able to get our net exports to start moving back up, and that
means that the currencies have to become much more realistic.
I would be a little bit more optimistic than Dr. Goldstein
in that I believe that the Asian currency reaction to China is
even more robust and that everybody is looking over their
shoulders at China. As China comes up, I think there would be
even more of an upward movement on the part of other
currencies. So this is a very necessary thing.
Is it the only thing that needs to be done and we can all
go home and say we have put everybody back to work? No, but it
is perhaps the single most definable thing. We still have to
address the cost of litigation in the U.S., the rising cost of
health care, so many things, but it is a very important thing
to do.
Mr. Kennedy. Mr. Goldstein, did you have a rule of thumb of
1 percent reduction trade-weighted equals $10 billion change in
the current account, how many jobs, you know, would $10 billion
in the current account equal?
Mr. Goldstein. No, I don't.
Mr. Kennedy. We have talked about Europe and about the
impact on Europe. Clearly, when we would have our currency
weaker versus Europe, but the same versus China, China has got
to just be killing Europe right now. If they are hurting us,
the pain is double over there. Presumably, there would be a
secondary effect by making the European economy stronger by
having China devalue vis-a-vis the U.S. dollar as well, I would
presume.
Mr. Goldstein. Yes. That is why I said other countries have
a big interest. This should not be about, ``Oh, we are taking
it by ourselves.'' Because many countries have a very strong
interest in the same outcome.
We need a decline in the dollar, but the euro has already
taken a fair amount of that adjustment. If the Chinese rimimbi
doesn't move, then the euro is going to get too great a share.
We want that shared out in a more equitable way. The Asian
emerging economies as a group have to take a larger share of
the total adjustment. Europe will have to take some more euro
appreciation, but we need to put relatively a bigger slice of
that pie in Asia, and that starts with China.
Mr. Kennedy. Thank you both for your comments.
Chairman King. Thank you, Mr. Kennedy.
The gentleman from California, Mr. Sherman.
Mr. Sherman. Thank you.
I think this is, when we look back at it, in which we
fiddled while Rome burned, we have the largest trade current
account deficit in the history of mammalian life. I assume you
gentlemen don't think that we can continue it for half a decade
or a full decade without the whole thing exploding. We hope the
dollar slides instead of crashes.
I am not so sure because, as you have pointed out, although
you haven't used these phrases, we suffer from testosterone
poisoning. It just feels so good politically and
nationalistically to say we want a strong dollar, when more
mature societies are all trying to have a ``weak currency.''
Put another way, they want a strong manufacturing capacity.
Every time we say we want a strong dollar, what we are really
saying is we want a weak manufacturing capacity. Only we don't
phrase it that way and so the politics work against us. Now, it
is not just currency values. There are a host of other things.
There is a horror story where a man is tied up in a crypt
while someone builds a brick wall, brick-by-brick, until he is
completely enclosed. And you can turn to the man who is tied up
in that crypt and say, ``You should not object to any one of
these bricks. After all, it is less than 1,000 of anything that
would wall you in or deprive you of oxygen or any other
sustenance.''
And so, to give you an example, we export to China almost
nothing compared to what we should, compared to what Europe
does. That is I think in significant part because the Chinese
government instructs its entities to do it that way. And if you
do it wrong, well, it is implied that you might go to a re-
education camp. And since this is all oral, it is not a
violation of WTO because oral intimidation is not a violation
of anything. You can't prove it. And of course, you have to be
aware of it because you see the examples.
Of course, we are not going to do anything about it,
because the way you make money and power in our society today
is figure out a way to make something for a nickel over there
and sell it for $10 bucks over here, and that is where the
fortunes have been made. Now they are being made in the service
sector as people figure out a way to import services as well as
importing goods.
My colleague asked how many jobs for each $10 billion. I
have heard rules of thumb that each billion is 40,000 jobs. Do
you gentlemen have any reason to think that that is in gross
error?
Mr. Vargo. Yes, Congressman. The figures that have been
worked up by the Commerce Department, and we have looked at
them, are much more like somewhere in the range of 10,000 to
13,000 for jobs, 40,000 once upon a time, but that is overall
in the economy, with all of the multipliers.
Mr. Sherman. Is that with a multiplier?
Mr. Vargo. It is indeed, sir, yes.
Mr. Sherman. So still, for each 1 percent, you are talking
about 130,000 jobs. If they would all be in Los Angeles, so
much the better.
That is a lot and shows the expense that we are paying for
the testosterone high over at the White House and the Treasury.
Because when they say they are for a sound dollar, every 1
percent of that is 130,000 unemployed Americans, a painful,
painful discussion.
But I don't think it is enough to just reduce the trade
deficit a little bit. In theory, we have to pay off the
accumulated trade debt. We have to pay for the Mercedes we
brought in last decade. It is not enough just to stop bringing
them in sometime in the middle of this decade.
What currency slide would the dollar have to have for us to
reach a balance of payment equality, let alone start repaying
for the deficits we have accumulated when we in effect bought
all of those Mercedes on time and haven't made any payments on
them?
If we had a euro at 220 to the euro, maybe 60 yen to the
dollar, would that be enough, assuming we reach there over a
period of 2 or 3 or 4 years, to bring us into the trade
balance? Gentlemen?
Mr. Vargo. Congressman, I don't see anything that extreme.
Mr. Sherman. Would something that extreme bring us into
trade balance, or actually give us a trade surplus?
Mr. Vargo. Oh, I think it would throw the world into such
turmoil that we would all be in the soup, that we wouldn't
care.
Mr. Sherman. Even over 2 or 3 or 4 years?
Mr. Vargo. Yes.
Mr. Sherman. So what would bring us into trade equilibrium?
Or do you really think that we can continue to run some sort of
trade deficit for the rest of this decade and well into next
decade?
Mr. Vargo. Let me start by noting that the NAM chairs a
coalition for a sound dollar, not a strong dollar. We believe
that the dollar has got to return at least to the relative
level of 1997, which means it has got to come down.
Mr. Sherman. But would that give us a balance of trade?
Mr. Vargo. It would bring us to a deficit that probably
would be about 1 percent or so of our GDP. It would not balance
our trade.
Mr. Sherman. One percent of GDP meaning?
Mr. Vargo. It would be about $100 billion.
Mr. Sherman. $100 billion.
Mr. Vargo. Yes.
Mr. Sherman. That is still huge for our society which has
already run up this huge debt. I mean, our credit card is
already in double arrearages, and now you are just going to add
another $100 billion.
Mr. Vargo. To get it above that would take a further
downward movement of the dollar.
Mr. Sherman. Twenty, 25 percent and we are in balance?
Mr. Vargo. Oh, over a couple of years, I think that would
certainly do it, but our goal has been to get us back to a
sustainable level.
Mr. Sherman. Sustainable deficit is an interesting----
Mr. Vargo. Well, something in the range of 15 to 20 percent
further I think would suit manufacturing quite well.
Mr. Goldstein. Representative Sherman, just a few points.
I think one has to be careful about saying we want just a
weak dollar as if that is always a good thing. I think the
strong dollar in the second half of the 1990s had a lot of
advantages and was appropriate, given the way the U.S. economy
was performing at that point.
Mr. Sherman. If I can interrupt, I have been following
these things, perhaps not as long as you, but I have heard
every conceivable excuse from the business-as-usual folks as to
why we are running a trade deficit. We are running a trade
deficit because we had a federal budget deficit. Well, then we
had a federal budget surplus. Oh, well then it is because we
have a strong economy. Well, then we have a weak economy. Well,
we have a bigger trade deficit because we are running at a, all
that happens is every possible combination of fiscal, monetary
and economic circumstances between us and our trading partners
has existed over the last 20 years, and there is only one
constant: a U.S. trade deficit.
Mr. Goldstein. If you want me to continue, I will try and
give you an answer.
I think you have to look at the dollar, given the
circumstances and what the economy is doing and what other
economies are doing. The strong dollar in the second half of
the 1990s was appropriate, given the way the U.S. economy was
expanding. If the dollar was weaker, we would have been even
more overheated at that point. But over the past 2 or 3 years,
that has not been the case. The economy has been much slower,
and therefore a lower dollar is appropriate, and the current
account position has gotten worse.
Mr. Sherman. So you are saying the trade deficit of 1999
was a good thing?
Mr. Goldstein. I am saying that a stronger dollar had an
advantage, given the cyclical position of the economy.
Similarly, in Europe the weaker exchange rate had an advantage,
given that they were having very, very slow growth.
Mr. Sherman. If I can interrupt for a second, I think
cyclical trade deficits make sense in a world in which they are
genuinely cyclical. But if, because we ignore how many
different ways we are taken to the cleaner brick by brick, we
never run a trade surplus, then I would argue that a trade
deficit is never cyclical and is therefore never appropriate
because it is part of the brick wall.
Under your circumstance, where you say in 1999 it was
appropriate for us to have a trade deficit and to have a high
dollar, you would also have to----
Mr. Goldstein. No, that is not what I said.
Mr. Sherman. Well, you said a high dollar, which led
inevitably, inextricably----
Mr. Goldstein. No, we were talking about a high dollar
versus a low dollar. Then we can talk about what is the
sustainable, with all due respect, what is the sustainable U.S.
current account deficit.
Mr. Sherman. Sustainable, so over a century we would
accumulate $20 trillion, $30 trillion worth of accumulated
debt?
Mr. Goldstein. Well, no, not without limit. I would say a
sustainable U.S. current account deficit is about 2 percent of
GDP, not 5 percent.
Mr. Sherman. But if you do that for a century, then at the
end of the century how large is your accumulated debt?
Mr. Goldstein. It depends on what the return is on U.S.
investments. One of the things you find is that investments in
this country have yielded a much higher return than, I mean, a
much lower return than investments abroad. So actually net
interest payments that we have are quite low.
Where the sustainability issue comes in, I think, is that
over time foreigners who are holding U.S. assets, dollar-
denominated assets, those dollar assets become a larger and
larger share of the foreign portfolio that they want to hold.
When that gets too high, then they are very uncomfortable with
it. But the economy grows, the rate of return on those is
important. I think it is not the case that we necessarily have
to have a U.S. current account surplus. We can have a deficit,
but it has to be one that is coincident with our ability to
service it. It has to be coincident----
Chairman King. If the gentleman would yield for a moment, I
hate to inject myself into this testosterone-charged dialogue,
but the gentleman has far exceeded his time. If you could begin
to wrap it up, it would be much appreciated.
Mr. Sherman. Yes. I would simply say that talking about a
sustainable deficit is like talking about a sustainable carry-
forwarded-forever credit card balance that expands every year
as the bank decides to grant you a little bit more credit, and
that what you should have is a credit card that you actually
pay off from time to time, and that we ought to be talking
about a much lower dollar versus the yen and versus other
currencies.
My time has expired.
Chairman King. I thank the gentleman for his illuminating
questions.
I would hope that now that the word has gotten out that we
deal with such testosterone-rich issues, that in a subsequent
hearing there will be standing room only with people out into
the hallways.
I want to thank the witnesses for their time and their
patience. Again, I can't thank you enough. It was very
interesting testimony, very illuminating testimony. I also
thank you for your patience.
Without objection, the record of today's hearing will
remain open for 30 days to receive additional material for
members and supplementary written responses from witnesses to
any question posed by a member of the panel.
I would also ask unanimous consent to members of the full
committee that were unable to be present today be allowed to
insert their statements into the hearing record.
The subcommittee is adjourned.
[Whereupon, at 5:15 p.m., the subcommittee was adjourned.]
7 A P P E N D I X
October 1, 2003
[GRAPHIC] [TIFF OMITTED] T2336.001
[GRAPHIC] [TIFF OMITTED] T2336.002
[GRAPHIC] [TIFF OMITTED] T2336.003
[GRAPHIC] [TIFF OMITTED] T2336.004
[GRAPHIC] [TIFF OMITTED] T2336.005
[GRAPHIC] [TIFF OMITTED] T2336.006
[GRAPHIC] [TIFF OMITTED] T2336.007
[GRAPHIC] [TIFF OMITTED] T2336.008
[GRAPHIC] [TIFF OMITTED] T2336.009
[GRAPHIC] [TIFF OMITTED] T2336.010
[GRAPHIC] [TIFF OMITTED] T2336.011
[GRAPHIC] [TIFF OMITTED] T2336.012
[GRAPHIC] [TIFF OMITTED] T2336.013
[GRAPHIC] [TIFF OMITTED] T2336.014
[GRAPHIC] [TIFF OMITTED] T2336.015
[GRAPHIC] [TIFF OMITTED] T2336.016
[GRAPHIC] [TIFF OMITTED] T2336.017
[GRAPHIC] [TIFF OMITTED] T2336.018
[GRAPHIC] [TIFF OMITTED] T2336.019
[GRAPHIC] [TIFF OMITTED] T2336.020
[GRAPHIC] [TIFF OMITTED] T2336.021
[GRAPHIC] [TIFF OMITTED] T2336.022
[GRAPHIC] [TIFF OMITTED] T2336.023
[GRAPHIC] [TIFF OMITTED] T2336.024
[GRAPHIC] [TIFF OMITTED] T2336.025
[GRAPHIC] [TIFF OMITTED] T2336.026
[GRAPHIC] [TIFF OMITTED] T2336.027
[GRAPHIC] [TIFF OMITTED] T2336.028
[GRAPHIC] [TIFF OMITTED] T2336.029
[GRAPHIC] [TIFF OMITTED] T2336.030
[GRAPHIC] [TIFF OMITTED] T2336.031
[GRAPHIC] [TIFF OMITTED] T2336.032
[GRAPHIC] [TIFF OMITTED] T2336.033
[GRAPHIC] [TIFF OMITTED] T2336.034
[GRAPHIC] [TIFF OMITTED] T2336.035
[GRAPHIC] [TIFF OMITTED] T2336.036
[GRAPHIC] [TIFF OMITTED] T2336.037
[GRAPHIC] [TIFF OMITTED] T2336.038
[GRAPHIC] [TIFF OMITTED] T2336.039
[GRAPHIC] [TIFF OMITTED] T2336.040
[GRAPHIC] [TIFF OMITTED] T2336.041
[GRAPHIC] [TIFF OMITTED] T2336.042
[GRAPHIC] [TIFF OMITTED] T2336.043
[GRAPHIC] [TIFF OMITTED] T2336.044
[GRAPHIC] [TIFF OMITTED] T2336.045
[GRAPHIC] [TIFF OMITTED] T2336.046
[GRAPHIC] [TIFF OMITTED] T2336.047
[GRAPHIC] [TIFF OMITTED] T2336.048
[GRAPHIC] [TIFF OMITTED] T2336.049
[GRAPHIC] [TIFF OMITTED] T2336.050
[GRAPHIC] [TIFF OMITTED] T2336.051
[GRAPHIC] [TIFF OMITTED] T2336.052
[GRAPHIC] [TIFF OMITTED] T2336.053
[GRAPHIC] [TIFF OMITTED] T2336.054