[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]
DOMESTIC SOURCE RESTRICTIONS THREATEN FREE TRADE: WHAT IS THE FEDERAL
GOVERNMENT DOING TO ENSURE A LEVEL PLAYING FIELD IN THE GLOBAL ECONOMY?
=======================================================================
HEARING
before the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
MAY 13, 2005
__________
Serial No. 109-22
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
______
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2005
21-296 PDF
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COMMITTEE ON GOVERNMENT REFORM
TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California
DAN BURTON, Indiana TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York
JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California
CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada BRIAN HIGGINS, New York
KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of
LYNN A. WESTMORELAND, Georgia Columbia
PATRICK T. McHENRY, North Carolina ------
CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont
VIRGINIA FOXX, North Carolina (Independent)
------ ------
Melissa Wojciak, Staff Director
David Marin, Deputy Staff Director/Communications Director
Rob Borden, Parliamentarian
Teresa Austin, Chief Clerk
Phil Barnett, Minority Chief of Staff/Chief Counsel
C O N T E N T S
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Page
Hearing held on May 13, 2005..................................... 1
Statement of:
Holleyman, Robert, president and CEO, Business Software
Alliance; John Frisbie, president, U.S.-China Business
Council; and Mark Bohannon, Software Information Industry
Association................................................ 43
Bohannon, Mark........................................... 60
Frisbie, John............................................ 51
Holleyman, Robert........................................ 43
Wu, Benjamin H., Assistant Secretary for Technology and
Acting Director for National Technical Information Service,
U.S. Department of Commerce; and Charles W. Freeman III,
Office of the U.S. Trade Representative.................... 15
Freeman, Charles W., III................................. 24
Wu, Benjamin H........................................... 15
Letters, statements, etc., submitted for the record by:
Bohannon, Mark, Software Information Industry Association:
Comments dated March 31, 2005............................ 61
Letter dated April 8, 2005............................... 70
Prepared statement of.................................... 75
Cummings, Hon. Elijah E., a Representative in Congress from
the State of Maryland, prepared statement of............... 11
Davis, Chairman Tom, a Representative in Congress from the
State of Virginia, prepared statement of................... 4
Freeman, Charles W., III, Office of the U.S. Trade
Representative, prepared statement of...................... 27
Frisbie, John, president, U.S.-China Business Council,
prepared statement of...................................... 54
Holleyman, Robert, president and CEO, Business Software
Alliance, prepared statement of............................ 46
Waxman, Hon. Henry A., a Representative in Congress from the
State of California, prepared statement of................. 7
Wu, Benjamin H., Assistant Secretary for Technology and
Acting Director for National Technical Information Service,
U.S. Department of Commerce, prepared statement of......... 18
DOMESTIC SOURCE RESTRICTIONS THREATEN FREE TRADE: WHAT IS THE FEDERAL
GOVERNMENT DOING TO ENSURE A LEVEL PLAYING FIELD IN THE GLOBAL ECONOMY?
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FRIDAY, MAY 13, 2005
House of Representatives,
Committee on Government Reform,
Washington, DC.
The committee met, pursuant to notice, at 10 a.m., in room
2154, Rayburn House Office Building, Hon. Tom Davis (chairman
of the committee) presiding.
Present: Representatives Tom Davis, Duncan, Cummings and
Norton.
Staff present: Keith Ausbrook, chief counsel; Chas
Phillips, policy counsel; Rob White, press secretary; Drew
Crockett, deputy director of communications; Victoria Proctor,
senior professional staff member; Edward Kidd and Jaime Hjort,
professional staff members; John Brosnan, GAO detailee; Teresa
Austin, chief clerk; Sarah D'Orsie, deputy clerk; Corinne
Zaccagnini, chief information officer; Andrew James, staff
assistant; Nancy Scola, minority professional staff member;
Earley Green, minority chief clerk; and Jean Gosa, minority
assistant clerk.
Chairman Tom Davis. Good morning. The committee will come
to order. A quorum being present, I want to welcome everybody
to today's hearing on foreign government efforts to institute
unfair procurement rules to gain an economic advantage over
U.S. companies.
I am particularly concerned with the recent actions by the
Chinese Government. China recently circulated draft rules on
government software procurement. These rules make it virtually
impossible for American software companies and other non-
Chinese firms to provide products and services to the Chinese
Government, China's largest purchaser of information and
technology products.
The rules would require American companies striving to do
business with the Chinese Government to manufacture all of
their products in China and to register the copyrights in China
before they register them anywhere else. In addition, at least
50 percent of the product development must be done in China.
These rules make participation in the Chinese Government market
nearly impossible for U.S. firms and I might add firms in other
parts of the world.
The U.S. software industry already has lost billions of
dollars in export revenue due to rampant piracy and
counterfeiting in China. The committee has previously held
hearings on intellectual property and was astounded to learn
that 92 percent of Chinese software products are pirated. A ban
against Chinese Government procurement of U.S. software would
eliminate our industry's best opportunity to expand its
legitimate exports to China.
I am, of course, concerned about the direct impact of the
proposed regulations on the U.S. software industry. But even
more important is the impact on world trade and the
discriminatory precedent this would set if China were to adopt
such onerous rules. The fact that the U.S. trade deficit with
China has reached record levels only adds to my concern.
Additionally, China should beware of the law of unintended
consequences. The proposed regulations would deny China's
government the ability to use the world's best software and
undermine China's efforts to encourage the active participation
of U.S. software companies in developing a vibrant software
economy in China.
For the global economy to operate to the benefit of all
nations, each country must have procurement systems that are
nondiscriminatory, transparent and merit based and technology
neutral.
The primary purpose of today's hearing is to get a better
understanding of our government's effort to ensure a level
playing field for U.S. companies abroad.
We have two distinguished panels of witnesses before us
today.
On the first panel, we will hear from Benjamin Wu from the
Department of Commerce Technology Administration and Charles
Freeman from the Office of the U.S. Trade Representative, who
will discuss their efforts to dissuade China from implementing
this and other discriminatory policies.
Our second panel features private sector representatives
from the Software Information Industry Association, the
Business Software Alliance and the U.S.-China Business Council.
These representatives will explain the implications of the
Chinese law on American competitors.
I have been a strong supporter of trade with China,
supported the resolutions before the House on that, and I am a
strong supporter of free trade, and I have been a strong
supporter of our government not limiting where we can buy our
products.
When Accenture won the contract last year for the U.S.-
VISIT program, even though it was headquartered offshore, there
were efforts on the House floor to strip them of this because
they weren't an American company, I was the one who led the
debate against that, because, I believe in free and open trade
and getting the best products for the American people at the
best price wherever they come from, but we are not going to sit
here and allow other countries to start building walls around
them without us taking a look at other forms of retaliation. We
can't let this happen, and free trade can't continue.
I am hopeful as the U.S. Department of Commerce and USTR
continue to talk to China that this is a two-way street. China
has a lot more to lose than we do by putting up barriers. They
have a huge trade surplus right now with the United States.
We need to take a look at how much is the Chinese
Government buying from America and how much is America buying
from the Chinese Government. Let's take a look at, for the
Chinese products we're buying, how much it would cost us to get
them somewhere else. This committee is going to look at that
data and take a look economically are we really disadvantaged
at this point if we point up the barriers. This is of grave
concern.
The other thing is, I think if China wants to develop its
own software industry, do it the old fashioned way: Enter the
market system. They have a lot of smart people over there.
Their software industry is emerging and growing every day, but
this is not the way to do it. I have to say, I don't think the
U.S. Congress is going to sit still if China were to proceed
with this and implement this.
I want to welcome everybody to today's hearing.
[The prepared statement of Chairman Tom Davis follows:]
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Chairman Tom Davis. I now recognize Mr. Cummings.
Mr. Cummings. I want to thank you, Mr. Chairman; and I ask
unanimous consent that the statement of Mr. Waxman, our ranking
member of the full committee, be a part of the record.
Chairman Tom Davis. Without objection.
Mr. Cummings. Thank you very much.
[The prepared statement of Hon. Henry A. Waxman follows:]
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Mr. Cummings. Mr. Chairman, I agree with what you just
said, and I would add one other element to it before I get into
my statement, and that is that we have heard complaints all
over our country about jobs, people want jobs. With these kinds
of policies, Mr. Chairman, it's very, very clear that, while
Americans would have greater opportunities if the doors were
open and the trade deficit was not as great as it is, the fact
is that Americans want to work. So I thank you for calling this
hearing to discuss these issues that threaten our Nation's
trading relationships with China.
The specific subject of our hearing is a draft law being
considered by the Chinese Government that would effectively
prohibit American firms from selling software to Chinese
Government entities. Technically, the law requires the Chinese
Government to buy software only from Chinese companies or from
a list of preferred foreign companies. However, to be placed on
a list of preferred foreign companies, a company must meet
requirements that are so onerous it is likely that no foreign
firm would even try to meet them.
While this individual law is troubling on its own, it is
all the more troubling because of the context in which it is
being considered. Despite having joined the World Trade
Organization, the Chinese Government has continued to support
policies that are expressly discriminatory; and it has
sanctioned the continuation of practices that harm its trading
partners.
For example, the Chinese Government continues to enforce
discriminatory tax and tariff policies and has thus far failed
to take the steps necessary to protect intellectual property.
Frequently, the Chinese Government has allowed market access
only after firms seeking to do business in China have entered
into the so-called offset agreements which have required firms
to make available to Chinese industries technical knowledge
about a product or process in exchange for increased market
access. The law now under consideration would simply continue
and expand these policies by requiring businesses wanting to
sell software in China to subsidize the research, subsidize the
development and production in China of that software.
As unacceptable as these restrictions on software are,
particularly as China is now reported to be the second largest
market for personal computers in the world, American businesses
are rightly concerned that if this law is enacted it could be
expanded to include other critical trade sectors such as
agriculture, infrastructure technology and other portions of
the high-tech sector. Therefore, it is imperative that we take
the opportunity that this hearing presents us today to make it
known yet again that we oppose the imposition of unfair trade
restrictions on American businesses.
The stakes here are extremely high. Total trade, Mr.
Chairman, between the United States and China exceeded $230
billion in 2004. Unfortunately, that trade was not balanced.
Our trade deficit with China totaled $162 billion in 2004 and
is now larger than our deficit with any other country in the
world. Not surprisingly, our deficit with China has been more--
one of our most rapidly growing deficits in recent years.
According to the Congressional Research Service, in 2004, the
deficit was more than 30 percent higher than the deficit
incurred in the previous year.
I echo the comments of so many of my colleagues regarding
trade with China or with any nation. We must have fair trade.
Unfortunately, the provisions being considered by China will
continue what is an inherently unfair trade relationship
between the United States and China. It may therefore be time
for us to finally take steps to show the Chinese Government
that we simply will accept nothing less than fair trade in our
trade relations.
Mr. Chairman, I look forward to hearing from our witnesses
today; and I yield back.
[The prepared statement of Hon. Elijah E. Cummings
follows:]
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[GRAPHIC] [TIFF OMITTED]
Chairman Tom Davis. Thank you very much.
Mr. Duncan.
Mr. Duncan. Thank you very much, Mr. Chairman; and thank
you for calling this hearing on a very important topic which is
becoming more important all the time. Thank you for your
heartfelt opening statement.
You know, if 10 years ago, or possibly even 5 years ago, I
had said in a speech or put in one of my newsletters or had
spoken publicly and predicted that our trade deficit would be
running at $55 or $60 billion a month now or we would have a
$162 billion trade deficit with China, people would have
thought I was crazy. They would have said that never would have
happened. And there are some people, even in spite of this
shocking trade deficit that we have now, who say, well, we
don't need to worry about that. That means lower prices for
Americans and so forth.
But, you know, our relatively low unemployment rate is
masking a tremendous problem in this country and that is our
very great underemployment. We have college graduates--in fact,
sometimes with advanced degrees--all over this country who are
working as waiters and waitresses in our finest restaurants.
Every kid today is going to graduate school or feel they have
to. They can't get the good jobs they could have just a few
years ago with just a bachelor's degree and so they are going
to graduate schools.
Half the kids are going to law school or thinking about it.
The universities see the law schools as moneymakers and so the
professors tell them, we know there are too many lawyers. Don't
worry about it. There is always room for another good one. They
don't tell them that half the lawyers getting out of law school
can make more money managing a McDonald's or driving a long
haul truck.
We have the college graduates who are having to settle for
low-paying, service-sector-type jobs because the trade deficit
shows us that we are still sending millions of jobs to other
countries; and we have to do better. Many, many--in fact,
almost every Member of Congress is concerned about this.
A recent column by Paul Craig Roberts, who was Assistant
Secretary of the Treasury under President Reagan and who is a
nationally syndicated columnist, he wrote this: A country
cannot be a superpower without a high-tech economy, and
America's high-tech economy is eroding. Corporate outsources
presented the loss of manufacturing capability as a positive
development. Manufacturing, they said, was the old economy,
whose loss ensured American's lower consumer prices and greater
shareholder returns. The American future is in the new economy
of high-tech-knowledge jobs. So far in the 21st century, there
is scant sign of the American new economy. The promised
knowledge-based jobs have not appeared. To the contrary, the
Bureau of Labor Statistics reports a net loss of 221,000 jobs
in six major engineering job classifications, a country that
doesn't need as many engineers; and much of the work that
remains is being outsourced or filled with cheaper foreigners.
His column goes on and on in that vein. But there's great
concern.
I represent a district in east Tennessee whose economy is
better than most districts in the country because of two
things, because so many people are moving there from the north
to retire and because of government spending. But we have
watched the shutdown of almost all of our manufacturing and
furniture, textiles in many other ways.
I have a friend who is one of the richest, most successful
men in Tennessee. He has a medical company that puts out the
lightweight shoes for foot and ankle injuries and puts out the
disposable surgical trays. He has plants in Ireland, one in
Estonia, two in Mexico, two in Nicaragua. He told me recently--
he has eight plants in Tennessee. He said, I want to keep jobs
in America, but I am paying $2,850 for my employees in
Nicaragua, and I'm one of the highest paid employers there. He
says, I pay $3,500 a year for my American employees just for
their health care, and I don't know how much longer I can keep
jobs in this country because the Chinese are breathing down my
neck.
That is happening in every industry; and if we don't wake
up, we are going to slowly but surely turn this country into
some type of Third-World nation.
I am sorry I am going to have to leave in a few minutes to
catch a plane to Tennessee, but I wanted to come and make this
statement and express my very great concern about this
situation they are in, particularly with the Chinese
manipulating their currency, and something has to be done.
Chairman Tom Davis. Thank you very much, Mr. Duncan.
What I heard at a graduation speech recently and that is
that graduates with a degree in science asks, why does it work;
a graduate with a degree in engineering asks, how does it work;
a graduate with a degree in accounting asks, how much does it
cost; and a graduate with a liberal arts degree asks, do you
want fries with that?
The world is changing. There are some educational
components to this equation that China can do very, very well
in a free and open market. I don't know why they would want to
run and hide and look for the protections they are looking at
in this case. But I will tell you, they are not going to be
using American dollars if that's what they think, buying their
goods while putting up restrictions around them.
We have Mr. Benjamin Wu, who is no stranger to this
committee. He's the Assistant Secretary for Technology and
Acting Director for National Technical Information Service,
U.S. Department of Commerce; and Mr. Charles Freeman III, the
Office of the U.S. Trade Representative.
Thank you very much for being here and my regards to Mr.
Portman, one of our former colleagues, who was just sworn in.
Would you rise with me and raise your right hands.
[Witnesses sworn.]
Chairman Tom Davis. Mr. Wu, I will start with you. I am
sure this has been carefully scripted when you get into the
international language. We are not as scripted up here. We are
a little more free flowing in terms of what we have to say, but
thanks for being with us.
STATEMENTS OF BENJAMIN H. WU, ASSISTANT SECRETARY FOR
TECHNOLOGY AND ACTING DIRECTOR FOR NATIONAL TECHNICAL
INFORMATION SERVICE, U.S. DEPARTMENT OF COMMERCE; AND CHARLES
W. FREEMAN III, OFFICE OF THE U.S. TRADE REPRESENTATIVE
STATEMENT OF BENJAMIN H. WU
Mr. Wu. Thank you, Chairman Davis. Congressman Cummings,
Congressman Duncan and Congresswoman Norton, I appreciate being
invited to address the committee's concerns on the use of
domestic source restrictions by foreign governments.
There is a growing concern that some of our international
trading partners are implementing standards and technical
regulations that effectively serve the trade barrier and limit
the expansion of American exports. This has prompted the
administration to take action over the past several years. U.S.
businesses are pushing for a fair and equitable playing field
where standards could be judged not only on the technical
merits but also on the adherence of the principals of
transparency, fairness, due process and open participation. So
in much of 2003 the Department of Commerce launched a standards
initiative to ensure that standards are fair and responsive to
market and technology needs and that we partner with industry
to combat standards as trade barriers to American goods and
services.
In May 2004, as a follow-up, the Department released a
report that called for greater collaboration across government
and within U.S. industry to prevent technical obstacles that
impede U.S. exports. The report also emphasized best practices,
provided critical education and training and expanded our early
warning tools. We believe that, collectively, these actions
will go a long way toward an effective rapid response system
when the use of standards are identified as a trade barrier.
It's clear in today's face of intensifying global
competition neither industry nor government can be complacent
about standards-related issues. Despite the healthy trade
relationships, tensions can arise when certain countries take
restrictive action that could potentially exclude market access
to U.S. businesses. Working in close collaboration with
industry, including the witnesses that you will hear from on
panel two, the Department is pursuing an active multi-pronged
strategy with respect to standards-related issues around the
globe, with particular attention on China, given American
businesses' desire to enter and help develop the Chinese
marketplace. For China, this strategy includes continued
engagement at the policy and technical levels to deal with
issues as they arise, providing support where appropriate to
the U.S.' standards developing organizations to open offices in
China, posting a standards attache to the U.S. Embassy in
Beijing and sponsoring an ongoing series of both general and
sector-specific workshops involving Chinese officials and
relevant U.S. private and public sector interests, among other
initiatives.
Let me address the committee's focus of the specific
example where China is causing great concern within U.S.
industry, its pending software procurement regulation which
could limit the ability of U.S. industry to sell software
products and services to the Chinese Government. U.S. software
companies, which are widely recognized as industry leaders for
their leading-edge innovation, have invested billions of
dollars in China to participate directly in China's growing
information technology market. This is especially necessary to
combat and offset the perceived high rate of software piracy in
China.
The Chinese Government is a major source of legal software
purchases and represents an open market for the U.S. software
industry. China's proposed procurement rules undermine the
stated goal of developing a domestic software industry which
requires close collaboration of foreign software producers and
foreign investment.
On a political level, also, the proposed domestic
preference set forth in China's procurement policy runs counter
to the spirit of Premier Wen Jiabao's commitment to reducing
our trade deficit with China by increasing U.S. exports.
The Department of Commerce, in close coordination with the
Department of State and U.S. Trade Representative's Office, has
been actively engaging the Chinese Government on this issue
since September 2003 to ensure that the U.S.' companies are not
excluded from the government's software procurement market.
Our strategy has been a combination of bilateral dialog,
industry-to-government exchanges and multilateral coordination.
These have included the provision of technical assistance on
government-procurement-related activities and topics to
relevant Chinese policymakers, facilitation of industry
exchanges with key officials at the Ministry of Finance and
Ministry of Information Industry and the State Council
Informatization Office, communication of our dialog and our
concerns directly through bilateral exchanges between the
United States and Chinese senior leadership, and also
solicitation of other key trading partners such as the European
Union and also Japan to engage China directly on this issue. We
continue our strong efforts on this issue.
In particular, I would emphasize we have taken every
opportunity to address and raise this issue with our Chinese
counterparts, especially at the very highest levels, ranging
from Deputy Division Director to Vice Premier. For example,
Under Secretary for Technology Phil Bond, Commerce Under
Secretary, has raised the issue with SCITO Vice Minister Yang
Xueshan. I also raised the issue with the Vice Minister as well
as with MII Vice Minister Xi Guohua during my August 2004, trip
to Beijing where I led a 17-member government industry
delegation to discuss related issues.
In addition, former Commerce Secretary Evans has raised the
issues on several occasions since October 2003 with Vice
Premier Wu Yi, with Vice Premier Zeng Peiyan and also MII
Minister Wang, the most recent which occurred in January 2005
on his final trip to China before he completed his tenure as
Commerce Secretary. And it is expected that current Commerce
Secretary Carlo Gutierrez will also be raising this issue in
his future discussions with senior Chinese ministers as well.
We have also approached the European Union and Japan
repeatedly to enlist their support in this effort since both
have shared goals regarding a fair and nonrestrictive
procurement policy in China. The European Union in particular
is lobbying aggressively for China to begin negotiations on the
WTO agreement on government procurement, the GPA. And Japan's
Ministry of Economy, Trade and Industry has raised the issue
with China's Ministry of Commerce as well.
In our exchanges with the Chinese Government, our message
is clear and consistent. By moving to implement this policy,
China would be undermining its explicitly stated objective of
encouraging the development of a domestic software industry.
Developing software in a global context requires the
formation of partnerships between foreign and domestic
companies to provide users the best products at the lowest
price possible and the lowest total cost of ownership.
Restricting the purchase of foreign software discourages
foreign software vendors from seeking cooperative associations
with local companies, which can also isolate Chinese domestic
companies from the international software community.
Furthermore, firms generally invest in research facilities
where there is an active market for the results of their
research and the strong likelihood of recouping their
investment costs. In the face of limited market potential, many
foreign firms are likely to reduce their research and
development in China, and they will be required to implement
procedures or eliminate it completely. China's best hope for
development for its software industry lies in the creation of
enforcement of intellectual property rights and also in
fostering a climate of innovation, not in implementation of
restricted measures.
The potential impact of China's proposed software
procurement measures on the U.S. software industry is less
certain but certainly would not be positive. We are concerned
that the overly restrictive definition of domestic software
contained in the draft regulations has the potential to sharply
restrict the sales of U.S. software to the Chinese Government.
Mr. Chairman, the fact that you are holding this hearing
underscores the importance of this issue to American software
manufacturers and that the legislative bodies and the executive
branch of the U.S. Government shares the significant concerns
about the implications of China's pending regulation concerning
the Chinese Government's acquisition of software. At Commerce,
we will continue to work collaboratively with State, with the
USTR's Office to ensure that the U.S. software companies
continue to have access to Chinese Government customers. We
will continue to work vigorously to achieve this goal.
Thank you, Mr. Chairman; and I would be happy to respond to
any questions you and members of the committee will have.
Chairman Tom Davis. Thank you, Mr. Wu.
[The prepared statement of Mr. Wu follows:]
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Chairman Tom Davis. Mr. Freeman.
STATEMENT OF CHARLES W. FREEMAN III
Mr. Freeman. Thank you, Mr. Chairman and members of the
committee. It is a great honor for me to be here today.
Thank you for the greetings to Ambassador Portman. I come
from being in the middle of a request by Ambassador Portman to
initiate a top-to-bottom review of our trade policies with
respect to China, so I look forward to coming back to the
committee and discussing those in greater depth.
I appreciate Congressman Duncan's mention of the concerns
that we have as a result of the increasing competitiveness in
this country of Chinese imports. I know we are here today to
discuss market concerns into China, so I will address my
remarks to that. I have submitted testimony for the record,
which I would ask be included.
Chairman Tom Davis. Without objection, your entire written
statement is in the record.
Mr. Freeman. If I could summarize it fairly briefly, we
have had over the past few years, especially since China joined
the WTO in 2001, a series of concerns with respect to their WTO
commitments and also concerns about the extent to which our
companies and our businesses, our farmers and workers have
access to their market. We have some fairly significant
concerns that still remain, although we have made progress.
China has become our fifth largest export market. It has
been our fastest growing by far in the past few years. So we
have grown from a fairly low base a number of years ago to
about $35 billion in exports last year. That is the good news.
The greater concern I think is as a result of some of the
market access problems we have. Primary among those would
obviously be China's protection of intellectual property
rights. If we are talking about the software market, we are
looking at piracy rates of upwards of 90 percent. That is
extraordinarily difficult for our companies to deal with and
extraordinary difficult not just in the Chinese marketplace but
increasingly as a result of exports of counterfeit and pirated
materials from China to either third-country markets or even
into our own.
We have made progress but continue to have concerns with
China's treatment of our agricultural exports, particularly
through the use of sanitary standards that questionably have
scientific bases.
We continue to be concerned about the treatment of our
services industries through the use of high capitalization
costs or other requirements that put an excessive burden
particularly on our smaller firms.
We have concerns about China's implementation of its
commitments on distribution rights, the ability of our firms
not to just get a product in the Chinese market but actually
have it appear on Chinese shelves and reach Chinese consumers.
And, finally, we have concerns with respect to China's
implementation of its commitments on transparency, in other
words, the ability of not just our firms but Chinese companies
and others to see the rulemaking and licensing decisions as
they occur and to have access to the processes which will
ensure that these are not operating beyond the veil of secrecy.
We are here also to discuss the increasing use in China of
industrial policies that have the effect of limiting the access
of our exports and limiting the ability of our exports to
achieve penetration to the Chinese market. We have seen this in
the use of standards, as Under Secretary Wu discussed, where
China produces Chinese-specific standards that make it very
difficult for our firms to produce on an economic basis for the
Chinese market. We have seen this through the use of
discriminatory tax policies. Last year, the United States filed
the first and only case against China in the WTO for its use of
discriminatory tax policies in the semiconductor area.
And increasingly now we are seeing it in the use of
government procurement regulations. To review the bidding in
2002, China promulgated the government procurement law which
set in place in effect a ``buy China'' set of regulations that
made it difficult or created the prospect that certain sectors
would be reserved or at least presented to Chinese companies
more favorably than to foreigners. This comes, as I think the
chairman and others have suggested, at a very bad time when we
do have a $162 billion trade deficit, where increasingly our
products that do have a competitive advantage or should have a
competitive advantage in the Chinese marketplace, including
technology products and software products, when these are
increasingly beginning to have a market develop particularly in
the government's market, which is, as most of you know, the
only legitimate market for software in China. This presents
significant problems to us.
In November 2004, China targeted software as the first
sector in its government procurement law to produce these ``buy
China'' policies; and they fleshed out the law further in March
2005. The policy itself attempts to put in place limitations on
U.S. software and other foreigners' penetration of the
marketplace by insisting upon a narrow definition of domestic.
If a United States or foreign company wants to qualify as
domestic, it has to put in place significant R&D in China,
qualify for tax purposes, have a certain number of Chinese
employees and, in other words, raise the cost of doing business
in China so that--as an exporter--so that, in effect, you are
supposed to relocate to China.
What has the United States done? What has the
administration done? In addition to some of the activities that
Assistant Under Secretary Wu described, the administration has
targeted this policy at the highest levels for discussion at
the Joint Commission of Commerce and Trade, which was in
December 2003, elevated by President Bush and Premier Wen to be
the primary problem-solving dialog in the relationship to
overcome trade frictions and, as has been said and what was
described by Premier Wen, as the process to encourage U.S.
exports, as opposed to discouraging Chinese imports to the
United States. So we have targeted this policy specifically for
inclusion in resolution at that dialog.
In addition, we are working very hard to make sure that
China lives up to its 2001 commitment to join the government
procurement agreement as soon as possible. If it were to join
the government procurement agreement, this policy would be in
violation, in our view, of the agreement. So the shortest
distance between these two points is for China to join the GPA.
They said it is ready to join as soon as possible.
We have been working very hard to make sure we are
preparing China to be technically ready to achieve the
negotiations and accession to GPA. They are saying the key
concern is whether it's possible yet. We have been working with
our fellow WTO members, the Europeans, the Japanese, to
encourage China toward a path that gets them toward GPA
accession. But we are trying to use the power of logic and
persuasion. That is, if the stated policy of the Chinese is to
encourage a domestic software industry, the way to do it is not
to eliminate competition. Silicon Valley was not created in a
vacuum but through the free exchange and flow of ideas. The key
is not to further reduce the ability of others to compete in
that marketplace. That will only stagnate the market, in our
view, and stagnate the development of China's software
development and make it difficult for us to support open
markets to Chinese products.
Mr. Chairman and members of the committee, I greatly
appreciate the opportunity to be here today. I'm happy to
discuss this and other things the administration is doing to
ensure a level playing field with respect to China and look
forward to your questions.
Chairman Tom Davis. Thank you.
[The prepared statement of Mr. Freeman follows:]
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Chairman Tom Davis. Do either one of you have any idea how
much our government is buying in Chinese goods and services
annually? Any ballpark?
Mr. Freeman. I don't have a figure. As a result of China
not participating in the GPA, they are not as active as they
otherwise might be.
Chairman Tom Davis. There was a controversy about buying
those green beret caps from China. But I've got to believe at
least on the good side that there are a number of items we are
purchasing, and I'm wondering if you could try to see if you
could put a dollar figure on what we're buying from China.
Because I think their program, although they cite buy America
and some other provisions in our law which are very, very
slight--which by the way, for the record, I don't like--but
although they cite this, I think they have a lot more to lose
if we get into a trade war on this in terms of the expanding
markets.
The other thing we look at is the component of what we are
buying from China, how much would it cost us if we had to go
somewhere else, what's the cost to taxpayers in value. I think
we need to be aware of those things as we enter into
negotiations and add up some dollars and cents.
I agree with you. There are a lot of minds in China.
They're putting a lot of emphasis on education. Their software
industry is going to do just fine over the long term. Our
countries are offshoring a lot of work to China right now. The
last thing they want to have, I think, is a trade war into
these areas. They can learn and grow and prosper and be very,
very competitive. But if they start putting up barriers, they
are going to be finding out that they're going to be left with
inferior software and they are not going to be able to compete
in global markets. What are the Europeans doing about this?
Mr. Freeman. The Europeans are primarily focused on getting
China to join the government procurement agreement. They have
less of a stake in China's software market than we do. They
have their own problems in terms of developing a software
market for themselves. So their key is, I think, they are
trying to get China to join the GPA so that the next step,
whatever that might be, if it's not software, it's an area that
Europe is even more competitive, that they do not fall afoul.
Chairman Tom Davis. I think in IT we are running an $8
billion trade surplus. It's one of the few areas we're running
a surplus, and now they want to put up a barrier to do that.
You know, I don't think it serves their own purposes
certainly, but I don't think we can sit there and be a punching
bag. You have to remember, the Accenture contract last year on
U.S.-VISIT was almost overturned in the House. The mood of
Members will be very angry if they are to implement these
regulations. And although the administration wouldn't like it,
it's hard to figure there wouldn't be some congressional
retaliation. All a Member has to do is take a look on any
appropriation bill and say no funds shall be expended to a good
company from China and it's made in order. You can't protect
this from leadership.
There are a lot of vulnerabilities that the Chinese need to
understand. They better add up the dollars and cents before
they try to start getting into this. There has to be a better
way to try to get at their end results, I think, than just
putting up a ``buy China'' for software.
Also, I don't know--although American businesses have
invested a lot over there, given the intellectual piracy and
other issues that are raised, I don't think it's a smart move.
And I think you are doing everything to encourage them. I don't
think Congress will sit idly by and watch this happen.
The Chinese Government has stated that its procurement
framework is modeled in large part of those of other countries,
including our Buy America Act. That's not really accurate,
given the depth and breadth of the proposed regulation, is it?
Mr. Freeman. In our view, it is not. The key again is, is
it consistent with the government procurement agreement? If
China has committed, as they have, to join the government
procurement agreement as soon as possible, the fact they would
be putting in place policies in the interim that are not
consistent with GPA neither makes sense nor is fair play.
Chairman Tom Davis. Would you agree that the domestic
source restrictions that we do have on our acquisition system,
such as the Buy America Act or the Berry amendment and various
other restrictions that apply to defense procurements, that
they make it more difficult for us to argue against
restrictions like the ones we are discussing today? Do they
throw that back at us?
Mr. Freeman. They do. I think there is a fairly open and
transparent process by which we arrive at those regulations,
and we feel quite confident that those are consistent with GPA.
Mr. Wu. Mr. Chairman, in relation to software, procurement
by the U.S. Government is done through service contracts. That
means the development, the maintenance and consulting. The Buy
America Act does not apply to service procurement.
Chairman Tom Davis. The Trade Agreements Act has a limited
role there? Trade Agreements Act would have a limited role
where Buy America doesn't apply, or are you familiar with it?
Mr. Freeman. I'm not certain. I have to get back to you.
Chairman Tom Davis. In the written testimony, the U.S.-
China Business Council said some of their member companies
considered the Chinese pending software procurement rules
indicative of the country's overall procurement practices. Do
you think that's accurate?
Mr. Freeman. I think it is. The reason we are spending so
much time on this issue is that it could very well be the tip
of the iceberg. If this is clearly the first sector that they
have targeted, there are others that are out there; and if this
is successful for whatever reason, then we face significant
problems down the road.
Chairman Tom Davis. As you know, China has a huge trade
surplus with the United States. Mr. Duncan talked about it; Mr.
Cummings talked about it. China's Premier has stated that China
will reduce surplus by importing more American products, but it
appears that the Chinese Government is about to throw up a new
barrier to market access for one of the competitive exports by
requiring government ministries to purchase only Chinese
software. This is the one area where America leads the world,
where you would think, if they wanted to develop their own
industry, they could work with us, learn with us, team with us,
contract with us, instead of putting up a barrier. What is the
administration doing to China to hold the Chinese Premier to
its word that they are going to buy more American products?
Mr. Freeman. Well, the initial thing and the immediate
thing is to make sure that China does everything in its power
to dismantle this policy in the context of the Joint Commission
on Commerce and Trade, which we will hold in the middle of this
summer, chaired on the U.S. side by Secretary Gutierrez of
Commerce and now Ambassador Portman of USTR and Vice-Premier Wu
on the Chinese side.
The key is to make sure that China recognizes that in the
context of bilateral trade discussions the injection of this
kind of policy is completely the wrong direction and not just
in terms of its own interest in developing software but
particularly considering the depth of the passions up here with
respect to trade.
Chairman Tom Davis. We have the largest economy in the
world. China's economy is growing, but starting a trade war
with us is not very smart. Both sides get hurt, of course, in
trade wars, but China has more to lose at this point, given the
balance of payments. Do you agree with that?
Mr. Freeman. Exports to the United States are about 10
percent of China's GDP. That is a lot to lose.
Mr. Wu. Mr. Chairman, I would also add, it is not just loss
in sales and revenue. We believe and are trying to underscore
this point with the Chinese that they would also lose
innovation capabilities as well, because the U.S.' industry, if
they are allowed to engage in the marketplace, if they are
allowed to make the investments that they know will be fair and
equitable and able to recoup back, then they are willing to
provide the assistance, the support necessary that will help
develop the Chinese marketplace, and that is so critical in
this international marketplace and global market that we have.
So if the Chinese want to be engaged in the process, they have
to be part of the process and not to be closed and an
isolationist.
Chairman Tom Davis. The procurement side really bothers me;
and, of course, that's the jurisdiction of the committee.
Everybody has a different view on trade. I have been a very
strong free trader. I have looked at it that if we get a pretty
good deal in our relationship with China in the sense that we
are buying goods from them at reduced costs which bring down
inflation here and it's good for our consumers and what China
is buying mostly from us is our paper, that is not a bad
tradeoff; and when we quit doing it from each other, it could
hurt us both.
We appreciate the administration's efforts, but I am afraid
that, if we are unsuccessful, we have to understand they have
to expect some kind of congressional retaliation in terms of
government procurement at a minimum; and I think they end up
losing if that happens. So let's try to work this out.
Everybody gets hurt in a trade war.
Mr. Cummings.
Ms. Norton.
Ms. Norton. I appreciate Mr. Cummings has allowed me to go
ahead of him. I have people waiting in my office.
I wanted to come to this hearing to try to do what I have
been trying to do for a long time, to figure China out. We
don't seem to be getting very far with China. I have a question
of what we think the real strategy is here. In many ways, this
seems a counterproductive proposal, but is it? So the
assumptions we make, it seems to me, about what China is doing
may be peculiarly western assumptions about market and so
forth. Let me ask you a question based on how the Chinese might
be looking at this.
Some of this, 50 percent of the market to be developed,
some of that is what developing countries have done all along.
We are talking about pre-technology. It is not uncommon all
over the world today. We have all kinds of government policies
that say, if you want to do business here, if you want to have
access to our resources, if you want access to our market, the
quid pro quo is, and we are used to that.
Now we are dealing in technology. Technology literally
changes moment to moment. And it looks like from what I can
tell we would not only be shut out, but their own development,
such as it would be, would be copyrighted. So here they want
copyright protection, and to assure it they want the
development on their soil.
Now we have had a kind of nervous quid pro quo: We sell,
they steal. They pirate, but we sell. Now they are going to
continue to pirate, but it's going to be hard for us to sell to
the government. And this is China after all, who is the biggest
purchaser.
I really wonder if this assumption that it's so
counterproductive while they buildup their industry is correct.
The Chinese are smart people. This stuff is developing and out
of date momentarily. Pirating continues. They may believe they
don't need normal trade in order to get access to what it takes
to develop their industry. They will do what they have been
doing all along. More than 90 percent of our stuff gets pirated
anyway, and we haven't been able to do anything about that.
I thought in traditional terms, too, how can they develop
their industry if in fact they don't have access to ours? Hey,
this is the biggest market in the world. They know that
everybody is trying to get access to them. They want to develop
that market for themselves. Everybody, hello. They may be under
the assumption that if they continue to pirate, close their
market, this huge market that everybody is salivating about
really becomes only their market. Yeah, they are a little
behind the curve, but how much behind the curve if they
continue to pirate?
I would like a response to that, but my bottom line is I
don't see China doing anything unless they feel they have
something to lose; and, thus far, I have not heard what they
have to lose. I am very impressed with the way in which China
bargains with westerners: Listen and ignore; listen, talk and
ignore; keep doing what you were doing all along. Until
somebody really does something, and I haven't seen anything of
that kind that has occurred, that makes you have to move.
In the Korea talks, to get to another sector altogether,
we're there. Whatever is their thinking, they are there. Not
only has it not done any good, it has gotten worse. Here, I
don't accept that those poor things, they don't know what they
are doing. I don't accept what the chairman said, it's
counterproductive. Don't they see they are going to be harmed?
I don't think that they're stupid. I think that they think that
this is not going to hurt them, and I have indicated some of
the reasons why. And I would like your response to that.
Mr. Freeman. The Chinese are incredibly patient people, and
they do sit there, and they do tend to listen to us, and
sometimes it takes a long time for it to sink in.
You raise a very excellent point. Do they know what they
are doing? Do the people who have constructed this policy know
what they are doing? Of course. But the question is, who are
they trying to benefit? The notion that the stated policy is to
develop a genuine Chinese domestic software industry with the
notion that China doesn't always want to be the sweatshop for
the world, they want to rise up the value chain and have their
own brands, have their own technology products, they want to do
all of that stuff. So they look out there and say, how do we
deal with this? How can we possibly compete with the
technology, superiority and the software market from the United
States and others?
And what they have decided to do is, while we are going to
try to find some shortcuts for our own software industry, but
instead of having an open policy which allows multiple Chinese
software industries to come to the table and operate, what they
have tried to do is essentially favor some select, very large
state champions.
The problem is, and I think the chairman states it quite
correctly, even if you develop these software champions and you
have producers for China's market, the fact of the matter is
that 90 percent of the software market is pirated. There is not
a whole lot of incentive to produce these world-class software
industries if you don't protect IT, because the market ends up
being very limited to the government market; and it's large but
not a world-class market. It's enough for companies to get a
foothold, but really unless and until----
Ms. Norton. Maybe that is what they want, is to get a
foothold. They are protecting themselves now and, later on,
they might be willing when they get their own--when they
themselves are angered to move forward.
My only concern here is that I think that if we want to
interrupt this--assuming that what they want to do is get
drowned themselves before they have to open up, if we want to
interrupt that thinking, assuming that is the thinking, it
seems to me they have to understand they have something to
lose. And the strategy of sitting there and talking to them and
having them listen, be cordial and they are listening seems to
me favors their strategy, building themselves, doing nothing
while we give them nothing to lose.
WTO really doesn't seem to have mattered a lot here. When
it comes to patience, Chinese patience may be legendary, but we
ourselves are getting the trophy on patience with the Chinese.
Thank you very much, Mr. Chairman.
Mr. Wu. Congresswoman, just to echo some of the points that
Charles had made with my own personal observations from the
discussions that I have had with senior officials in delegation
meetings which I have led here in Washington and in Beijing, it
seems clear that there is a significant voice within the
Chinese Government to try to use the domestic requirements to
try to elevate and create their software industry. It's for
them a sense of nationalism. They want to play as a world
leader, that they have to have world markets; and they are
feeling, as has been conveyed to me, that if they are going to
be purchasing Chinese Government software then they should give
preference to the domestic markets so they can build it up and
then allow that industry and that company to be able to play in
the world stage to compete against some of the international
players.
The problem, though, is that in some of the proposed
regulations, they do it in such a heavy-handed way that
excludes any opportunity for U.S. companies--or any
international software company--to enter into that market. And
there isn't a process of openness, of fairness or due process
or participation.
And what we are seeking is to allow us to be at least part
that have process. And that's the effort that USTR's office and
Department of Commerce have been trying to push.
I think it's also somewhat divided too, within the Chinese
Government. It seems as if there are some people who understand
the notion of the importance of innovation--of reaching out and
being part of the world economy--especially in the software
center. And then there are those who retreat back--that if we
are going to help our domestic countries, we have to have
domestic--strong domestic country requirements.
There was an article from November of this past year
entitled, ``Beijing City Slammed over Microsoft Deal,'' which,
according to Beijing Times, Microsoft won a $21.95 million yuan
contract from the Beijing municipal government. But then they
had to rescind it because it came under fire for damaging
China's nascent software industry.
So I think you are seeing divisions also within China. And
ultimately we like to, through the administration efforts,
through the USTR and Commerce make sure that those who support
the innovation and the openness and the fairness of process,
make sure they win out. And that's why we are so aggressive in
trying to make sure at the very highest levels of government,
the Chinese understand the strong support and the insistence
that they open their markets in a fair and free way.
Chairman Tom Davis. Thank you very much.
Mr. Cummings.
Mr. Cummings. Thank you, Mr. Chairman.
I am seeing and I am listening to all of this. I listened
to the chairman's questions, and then I read the testimony that
will come up shortly from Mr. Frisbie, and then I read the
testimony of Mr. Bohannon of the Software Information Industry
Association, and then I read the testimony of Robert Holleyman,
who is going to testify, president and CEO of Business Software
Alliance, and I have listened to your testimony.
I have to ask you this question, are we impotent with
regard to doing anything? I mean, when I look at everything
that I have read and heard, it sounds like we have to walk a
very--and this is just--I am a trial lawyer, so I am used to
listening to testimony. But it sounds like we have to walk a
very thin line because we don't want to insult anybody, and we
are in the process of trying to negotiate. Is that a fair
statement?
In other words, let me tell you why I refer to Mr.
Bohannon's testimony. Because I said to myself, now, these are
the people who are really--they have something to really lose
here. So I was looking for--I wanted to see what he said with
regard to what is needed.
And what he said here is at a minimum the Chinese must
begin negotiations to join the WTO agreement on government
procurement consistent with the WTO commitments which were made
more than 4 years ago. To date, no such discussions have taken
place.
As for changes in regulations, nonChinese software
companies must be allowed to compete as domestic software
companies if they meet nondiscriminatory minimal requirements
that all companies must meet in order to operate in the Chinese
market.
He goes on to say this includes removing the requirement
that in order to be ``domestic,'' copyright registration must
be held by a Chinese person. The two-scheme, where waivers
before any agency can procure foreign software is simply
unworkable and unacceptable.
Before that though, he talked about--he was very, very
complimentary of the work they have been doing to do with our
folks, with you all.
So I am trying to think--and I was looking for the--you
know, this is what we got to do, and this is the way we do it.
But it sounds like--and then I listened to your answers to Ms.
Norton's question. It sounds like we--do we have a big stick
back here to kind of wave to get the Chinese to do what we want
them to do, or am I missing something? Do you understand the
question?
Mr. Freeman. Yes, I understand the question. There are a
couple of things been, obviously if you talk about $162 billion
in trade deficit, and congressional concern, yes, you have a
fairly big stick.
Mr. Cummings. Does holding this hearing send any kind of
message so far, you think?
Mr. Freeman. I think it does. Let me back up for a second.
I am not a trial lawyer, but I know that one of the problems we
face with this policy is it is not yet implemented.
Mr. Cummings. Yes.
Mr. Freeman. What we are trying to do is we are trying to
prevent it from becoming implemented. So, in theory, it is not
quite right one of the problems we have when we go and scream
at the Chinese people.
Mr. Cummings. You don't scream. You don't look like a
screaming type of guy.
Mr. Freeman. At 2 a.m., I can raise my voice. But what
happens, you know, is you say this is a problem. This is a
problem our companies face. And they say well we haven't
implemented it yet. And, in fact, we just bought $400,000 from
such and such company why are you getting spun up about it?
We say, well, what this does is it has a chilling effect on
the marketplace. This is the kind of a policy which, even if
not implemented, sends the wrong signal. In fact, you have
government entities, maybe not in this building in China or
Beijing, or maybe down in Yunnan Province, but know about this
policy and implement it even actually before it is implemented.
And that's the concern that we have. So we are trying to
get this off the table before it actually fully gets in place.
If and when it fully gets put in place, you may actually see me
scream.
Mr. Wu. We work very closely with USTR and Department of
Commerce. We serve as advocate for free and fair trade and for
industry. USTR has done a very good job in implementing some of
the negotiations, in being part of the negotiations. What we
need to do is if China wants to be a world player, they have
send it to WTO--they have a number of other agreements that
they have agreed to. And we need to make sure they live up to
their obligations.
Certainly moving the Chinese into being a partner, in the
WTO Government Procurement Agreement, is very important.
Because then once they send to that status of being a player in
that agreement, then they will have obligations that they have
to live with. That may very well make issues like this moot.
So moving them forward, they have committed to moving as
soon as possible. But using our leverage, partnering with our
key trading partners such as the EU and Japan to help achieve a
goal and to have demonstrable accountability for the Chinese in
procurement issues, is critical. And so I think that's
something the USTR does very well.
Mr. Cummings. Is there anything that you all need from us,
the Members of Congress, that would help you? I mean, do you
have--what you have. I can't imagine what you might need, but
is there something that you need from us?
Mr. Freeman. Don't underestimate the power of your own
voice with China directly. We hear frequently concerns from the
Hill at USTR and at Commerce. But China needs to hear that from
you all too. So the fact that you are holding this hearing is,
in my view, a very positive thing and something that I think
does send a strong message. I encourage you to pick up the
phone and call the Ambassador if you feel the need.
Mr. Cummings. Mr. Chairman, I have two more questions.
Chairman Tom Davis. Sure.
Mr. Cummings. Mr. Wu, IBM recently sold its personal
computer division to a computer company that is primarily owned
by the Chinese Government. This sale was approved by the
Committee on Foreign Investments, despite concerns expressed in
the United States over the extent of technology transfer that
this sale would represent.
Do you think that the approval of this deal or of other
proposed sales would still be warranted if China is continuing
to impose unfair trade restrictions, particularly on
information technology products?
Mr. Wu. Congressman, you are referring to the CFIUS
procedure for IBM and Novo merger. That was decided on its
merits and really didn't have the externality of these issues
as part of that process.
The question with the CFIUS process is whether or not there
would be concerns of intellectual property transfer that would
raise it to such a level that would warrant the government to
step in and block the merger.
If you like, we can provide you with more information about
the process, the decisions and deliberations.
I think in this particular issue those, at least for IBM
and Novo the issues that--the greater issues that you are
discussing here today were not a party of the discussion.
Mr. Cummings. Finally, let me ask you this. You know,
industry, in order to maintain any business, you have to have
some kind of predictability. You have to be able to reasonably
predict your future. And certainly when you are dealing with
sales, that's a big deal.
I mean, it basically dictates, as you well know, how many
people you are going to employ, whether you are going to
expand, whether you are going to move, all of those kinds of
decisions.
And I would imagine that people in this computer area feel
the same way. I mean, do they still have--they still have the
same kinds of problems. I mean if you all, just based upon what
I have seen so far, if I am a business person and I am sitting
on a seat, I am sitting right now in my office watching this on
C-SPAN--and I am wondering what my future looks like with
regard to this issue. I know you are not--you don't have a
magic ball, but what do you--what is your vision at least of
what you think is reasonable of what will happen in the next
year or two. You got me?
Mr. Freeman. If you are asking do I think we will resolve
this question?
Mr. Cummings. Yes.
Mr. Freeman. I can't say. We are going to try awful hard.
If I am a business person looking at the Chinese market and
seeing this kind of policy being implemented and seeing the
general lack of transparency in government rulemaking and
decisionmaking and licensing and so forth, I recognize the
enormous risks of doing business in China and recognize,
really, that this market has a long way to go before you can
achieve the kind of predictability that you would really like.
It is getting--it is making progress. Things have really
come a long, long way in the past 3 years. But it's a long way
from being what you call a market of perfect information.
Mr. Cummings. And that coming a long way, what was, if you
had to think of one thing, either one of you, that was the
brightest light in that, you said we have come a long way. Is
there something that happened that just made you say, OK, this
looks like we are getting somewhere here? The reason I am
asking that question is I am just wondering, you know, what got
us to whatever that point was is trying to perhaps duplicate
whatever helped us get there so we can get to the next point.
Mr. Wu. One of the, I think, brightest lights, certainly,
in terms of our negotiations on technology matters with China
was the WAPI issue with encryption. And there we were able to
work with the Chinese, elevate the discussion with the highest
levels with Ambassador Zoellig, USTR; Secretary Powell over at
State and Secretary Evans at Commerce to raise it to a level
that clearly underscored the administration's concern about
this, that we were able to have China work on living up to its
WTO obligations.
And we are continuing to work on doing that in that case on
the encryption standard, while it's the example of a successful
resolution, it was at least based on WTO obligations that
helped facilitate the process.
So we need to get China engaged, be party to a number of
obligations and treaties, and make sure they continue to hold
up to their obligations, especially on intellectual property
rights.
Mr. Freeman. Could I just add quickly to that. I think if--
even looking at this issue, and where do I see signs of
encouragement. Five years ago, you never would have seen them
publish the proposed rules or comment. You never would have
seen multiple drafts be exposed to public eye. And the fact
that you have suggests to me that we have made tremendous
progress. Now, the key is to take the next step to not only
have them accept comments, but actually do something with them.
Mr. Cummings. So I guess in a way we are kind of commenting
here today, would you agree? Mr. Wu.
Mr. Wu. Another successful example is the WTO inconsistent
rebate on the VAT for semiconductors manufactured in China. And
once again, there we had the opportunity to have China be
required to live up to its obligation with WTO.
Let me also add, Congressman, in addition to the good work
of the USTR in negotiations requiring China live up to its
treaty obligations, we are also engaged in the Department of
Commerce on the softer side, dealing with the trade and trying
to impress upon the Chinese the importance of innovation, of
enforcement for intellectual property rights, and especially if
they want to be a global player.
Two years ago, when China had ascended to WTO status, I
immediately went over and led a delegation of government
officials to go to the Chinese science parks to talk to their
entrepreneurs and to talk to their innovators and to underscore
the importance of ITR if they want to grow, if they want to
start their open business, and if they want to be successful.
Because they need to have that intellectual property right.
The trademarks all protected around the globe. So Commerce is
engaged in a number of those activities, as well as on
standards to, in relation to China. We have been working very
closely with industry and status of open organizations to make
sure there's a process in China. So when we see a standards or
trade barrier, we can react immediately.
We can then get, if necessary, all of the highest levels of
government engaged. And that's part of the secret, I guess, for
WAPI, is that we were able to respond so quickly to the issue
and alert the Chinese that this was going to be a major issue
for the United States. And they were able to move to concession
and accommodation to our needs.
Mr. Cummings. I just wanted to echo what Chairman Davis has
said. I think you will get pretty much consensus from both
Democrats and Republicans, that when it comes to trade, we are
going to have trade, we want it to be fair trade and we want
our people to have an opportunity to have jobs. We don't want
that college graduate that Mr. Davis talked about with the
liberal arts degree--and here we are at graduation time by the
way--going out to work to ask the question, ``Do you want it
with fries?'' Our young people are working too hard to be the
best that they can be to be denied these kinds of
opportunities. They are invaluable. And these kinds of
opportunities, by the way, will last them until they die. So we
don't want them to be deprived of that.
Thank you.
Chairman Tom Davis. Thank you very much. I want to thank
our first panel. Let me just add, I am somebody with a liberal
arts degree with Amherst, and I was a head fries man on the day
shift at McDonald's early on in my life.
And a voice said, if you can't do anything else, you can
always run for office. You just have to be 25 and a citizen of
the State.
But we appreciate very much what you brought to this. I
hope you will take back to the Chinese some of the concerns
that we are raising on a bipartisan here in Congress.
I am going to declare a 2-minute recess while we get our
next panel. Thank you very much.
[Recess.]
Chairman Tom Davis. Thanks very much, thanks for being
patient. You see, the members have a lot of interest in this
that the administration is trying to finess.
We will recognize our second panel. We have Mr. Robert
Holleyman, the president and CEO of Business Software Alliance.
Mr. John Frisbie, U.S.-China Council, and Mr. Mark Bohannon,
Software Information Industry Association.
Thank you all for being here. Please rise and raise your
right hands.
[Witnesses sworn.]
Chairman Tom Davis. Mr. Holleyman, we will start with you.
STATEMENTS OF ROBERT HOLLEYMAN, PRESIDENT AND CEO, BUSINESS
SOFTWARE ALLIANCE; JOHN FRISBIE, PRESIDENT, U.S.-CHINA BUSINESS
COUNCIL; AND MARK BOHANNON, SOFTWARE INFORMATION INDUSTRY
ASSOCIATION
STATEMENT OF ROBERT HOLLEYMAN
Mr. Holleyman. Good morning, Chairman Davis. It is a
pleasure on behalf of the member companies of the Business
Software Alliance to have an opportunity to testify before your
committee this morning.
The U.S. software industry is a uniquely global industry.
U.S. software companies derive more than half of their revenues
from exports. Trade liberalization in China and elsewhere is
absolutely critical to our industry's growth. And BSA members
have consistently and actively supported WTO trade
liberalization agenda. We strongly advocated for China's WTO
accession in 2001, and we also believe that China must move
forward with accession to the WTO's Government Procurement
Agreement as it pledged to do.
Our industry is confident that given a fair and level
playing field, we can compete in the Chinese market and in any
other market in the world.
Yet, we face an uphill struggle in China. China should
represent a huge opportunity for our industry. It's the second
largest market for personal computers in the world. It has vast
opportunity for PC software. But due to rampant copyright
piracy, it's only the 25th largest market in the world for
software sales, ranking behind much smaller countries like
Denmark.
One bright spot in recent years has been the efforts of the
Chinese Government to insure that the government itself uses
only legal copies of software. The Chinese Government is by far
the largest single purchaser of software in China, and the
procurement market represents one of the most significant
growth opportunities for the U.S. software industry. And we are
concerned that it's about to be closed to U.S. software
products and services.
In 2002, as you have heard, China enacted a broad law
requiring that the government purchase only domestic goods and
services. Unfortunately, the software sector was selected as
the first sector in which to apply this new law. As proposed,
China software procurement regulations would severely restrict
the ability of American software companies to sell to the
Chinese Government. The draft proposals sets up a 2-tiered
preference system, the first tier for domestic software and the
second for qualifying foreign software. Domestic software is to
be heavily favored in that process.
Our assessment is that no American software company will
qualify as Chinese domestic software under the proposed
regulations. And to qualify as eligible foreign software, the
software provider must meet and satisfy a number of performance
requirements, including things like investments in China, R&D,
outsourcing work and taxpayer payments. It's our understanding
that government agencies will still need to get a waiver for
each procurement of eligible foreign software.
In a market where over 90 percent of the software is
pirated and in the Chinese market is by far the largest
purchaser of legitimate software, such a discriminatory
procurement regime would effectively close the door to many, if
not all, U.S. software companies. The Chinese procurement
preference will have an immediate and significant harmful
economic impact in the United States. These are not theoretical
concerns, Mr. Chairman. We are already beginning to see effects
in the marketplace, as we have heard from Mrs. Norton earlier
this morning, even if the regulations aren't fully in place.
Local and provincial governments have been canceling orders
based on pressure and concerns that they would not comply with
new procurement regulations.
I have to emphasize, as you have also heard this morning,
that this regulation is only the beginning of a process of
implementing China's government procurement law. Other sectors
will follow, particularly those where China considers it
strategic to its economic development.
China's premier has committed to addressing the $162
billion trade imbalance between the United States and China by
facilitating an increase of U.S. exports to China. This
proposed regulation fails to advance that policy. It also fails
to advance China's broader goals of developing a vibrant
software economy and efficient, effective-government services.
The single most important thing that could be done to
promote a domestic software industry in China would be to
reduce the $3.8 billion-a-year piracy problem, and thus expand
the market for both domestic and foreign software alike.
Whatever we can do in China to reduce piracy should be aimed at
that result, demonstrable market growth.
BSA has joined with a host of IT and U.S. industry leaders,
a number of whom you will hear from this morning, urging a
delay in implementation of these regulations until a mutual
agreement can be reached. China's procurement framework must be
open, inclusive and nondiscriminatory. It must allow United
States and other foreign software makers to compete without
restriction in China's government market.
We appreciate your holding this hearing, Mr. Chairman. We
appreciate the efforts to work with the U.S. Government. Time
is of the essence as China may move ahead to implement final
regulations at any time. Thank you again for inviting BSA to
testify. I will look forward to answering questions at the
appropriate time.
Chairman Tom Davis. Thank you very much.
[The prepared statement of Mr. Holleyman follows:]
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Chairman Tom Davis. Mr. Frisbie. Thanks for being with us.
STATEMENT OF JOHN FRISBIE
Mr. Frisbie. Chairman Davis, thank you for giving me the
opportunity to testify today. When China joined the World Trade
Organization in 2001, it agreed to conduct its government
procurement transparently. China became an observer to the WTO
agreement on government procurement in 2002 and began the
process of joining the GPA as soon as possible. Accordingly,
our expectation has been that China's procurement rules in the
interim would move it closer to the principles was GPA.
In March of this year, China released draft regulations on
the procurement of software, to raise important questions about
China's commitment to the spirit of the GPA. As currently
written, the draft regulations are a key concern for many of
the U.S.-China business councils, approximately 250 member
companies. It's, of course, a concern for our members who are
software companies. But it is also a concern to other companies
who look at this as an indication of China's government
practices more generally.
I do want to note that we applaud the Chinese Government
for its transparency and the release of the proposed rules for
public comment. This is a step forward, as you probably know.
However, we have significant concerns that the new rules are
also a step backward for their procurement regime.
Our specific issues are twofold. First the software rules
would essentially block American companies from competing on
equal basis with Chinese firms for PRC government contracts for
software products and services. And second, the software rules
could set a precedent for future discriminatory procurement
policies.
The full explanation of the regulations is in my written
statement, but in short the implementing measures for the
government procurement of software lay out guidelines for the
certification of domestic software and services.
The measures also envision a list of preferred nondomestic
software and service providers. Essentially, the implementing
measures would require Chinese Government entities to purchase
domestic software products in domestic software services unless
they receive a special waiver from the Ministry of Finance and
the Finance Administration Ministry to buy a list of qualified
companies. As a result these rules, as they are drafted contain
a number of concerns.
On a technical level, the rules appear to contradict open
procurement principles by effectively prohibiting access by
international software providers to the PRC government market.
The definitions of domestic software products and domestic
software services are restrictive to a point that even those
international companies with subsidiaries, manufacturing
facilities and large levels of investment in China might be
unable to qualify their products as domestic, as that term is
defined in the proposed rules.
To be certified as domestic, the software product must meet
three requirements. It must be developed in China. A Chinese
entity must hold its copyright, and half the development costs
of this software must be incurred in China. Software, of
course, is typically not created in any one country.
In addition, today's software is often based on older
programs written years ago, and therefore could not have been
developed in China. So as a result to meet the domestic
criteria, software companies would likely have to create
entirely new products using programming code written only in
China.
Since the rules, in effect, would therefore grant an
absolute preference to domestic products and services, this
amounts to a prohibition on the procurement of products
developed and distributed by international suppliers.
Furthermore, the procedures and the regulation for a
listing in the catalog of preferred nondomestic suppliers
appear to give international companies only the most minimal
level of market access.
Chinese Government entities will only be allowed to
purchase software listed in this catalog if there is no
domestic substitute and if they obtain a waiver from those
ministries I mentioned a moment ago.
Those are highly restrictive requirements. And the proposed
rules will effectively block international software companies
from competing in this market on an equal basis with Chinese
suppliers.
Many countries, including the United States, grant domestic
firms some form of preference in government procurement
contracts. These preferences, however, are almost always
accompanied by cost thresholds or other mechanisms that limit
the use of such preferences.
In contrast, China's proposed software procurement rule set
out an absolute reference for domestic goods. There are no
general circumstances described in the proposed rules, in which
an international company would enjoy the same access to the
government software market bears of domestic supplier.
So when you combine this absolute preference with the
highly restrictive definition of domestic software, the
proposed rules essentially block companies from competing in
the market.
As such, the proposed rules do not conform to the
requirements of the WTO, the Government Procurement Agreement,
which China has said it intends to sign.
So where does that lead us? Our recommendations are these.
First I want to point out, as mentioned earlier, that China Wen
Jiabao, during his last visit to the United States in December
2003, called for the expansion of U.S. exports to China to help
reduce the U.S. trade deficit.
He also said at that time that the U.S.-China trade
relationship should be based on the principles of mutual
benefit, and that each side should consider the effects on the
other. We support these statements by Premier Wen. We,
therefore, would be disappointed to see China implement
policies that would greatly limit American access to its
government procurement market for software at such a critical
time in the U.S.-China trade relationship.
We need more opportunities for U.S. companies to sell
products to China, not less. Access to the PRC government
procurement market for software is exactly the type of win/win
outcome of significant mutual benefit that Premier Wen spoke of
in September 2003.
In addition, we strongly support the PRC's government
stated intention to join the GPA at the earliest possible time,
and in the meantime, to develop rules consistent with the GPA.
We have asked the Chinese Government to be consistent with
these stated intentions and suspend further action on these
rules until they can be discussed in full at the JCCT meetings
to be held in Beijing in the next month or two. It's our
understanding that these proposed rules will be a key part of
the U.S. agenda at that meeting.
We fully support this approach and encourage the USTR and
the Department of Commerce to first secure commitments from
Beijing to shelve these software procurement rules or to revise
them to address the concerns of American businesses and conform
to international best practices.
Second, to work to establish a timetable for China to sign
the GPA and reinvigorate their commitment to do so.
Third, seek China's agreement to delay in the meantime
other procurement regulations that might be under
contemplation, not in conformity with the GPA.
Through formal and informal channels, we have been making
these points to the Chinese Government in pointing out the
benefits of having access to the best possible software at the
best value, and that this requires open procurement.
China is rightly interested in encouraging technological
development and innovation, but this can best be done through
greater competition and more openness to new technologies.
American business and government should impose measures that
use discriminatory policies to achieve these goals.
Thank you, Mr. Chairman. I am happy to answer any questions
you may have.
Chairman Tom Davis. Thank you very much.
[The prepared statement of Mr. Frisbie follows:]
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Chairman Tom Davis. Mr. Bohannon.
STATEMENT OF MARK BOHANNON
Mr. Bohannon. Mr. Chairman, thank you for the opportunity
to appear here today on behalf of the members of the Software
Information Industry Association. Our more than 600 members
produce world class products for a variety of markets. They
range from some of the smallest and newest in the field to some
of the largest and well-known brands.
In the context of China, we have members that have been
active in the China market for many years, as well as those who
are just at the beginning stages of getting into that market.
Through our leadership and the U.S. information technology
office, which is the leading voice of the U.S. IT industry in
Beijing, we have followed the developments on the new
government procurement law, the drafting of these regulations
and China's efforts to support a domestic software industry.
Unfortunately, based on this, we feel that the developments
here are, at least, one step forward, two steps back. We have,
as my colleague Mr. Holleyman indicated, provided detailed sets
of concerns and outstanding questions to the Chinese
Government. I believe we have made these available to the
committee, and, if appropriate, would ask that they be included
in the record.
Chairman Tom Davis. Without objection.
[The information referred to follows:]
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Mr. Bohannon. In the simplest of terms, our concerns are
threefold. First, it does create a two-tiered system that does
discriminate between domestic and foreign vendors and will
effectively prevent any nonChinese company from participating.
As my colleague indicated, we believe no international software
company will be able to get its products to be eligible.
And I would go so far as to say that even many domestic
Chinese companies will have that trouble as well, which raises
the issue of transparency and consistency of the possible
application of the rules. The second issue is that rules impose
onerous requirements to be able to get on a second tier list of
preferred foreign vendors, requirements that are not imposed on
Chinese companies.
And the third, the rules discriminate against U.S.
companies by demanding a waiver from the ministry of finance if
a local or national government agency wishes to purchase so-
called foreign software, a hoop that no Chinese company has to
go through.
It's unfortunate that this is the result, because today,
U.S. software vendors enjoy generally favorable market access
to the Chinese Government, despite the many challenges of
piracy, lack of transparency and the inconsistent rule of law.
It is our view that this two-tiered system of domestic and
foreign treatment of the rules appears to be intentionally
designed to subvert this current status quo and change the
current situation.
As my colleagues suggested, the developments in China
really bear no relation to international norms or to the
requirements of the Government Procurement Agreement, which
promotes nondiscriminatory, competitive, merit-based purchases
of goods and services.
I would even go further to say that based on our experience
and working in a variety of markets--and in my own background
working on technology development in the U.S. government--that
no country has attempted to isolate its software industry and
software procurement market from the international marketplace
to the degree set forth in the rules.
And as such, the proposed rules represent a large step
backward in the Chinese Government's efforts to integrate its
domestic industries into the global economy. As you pointed out
in your opening statement, Mr. Chairman, the implementation
rules will severely impair the ability of the Chinese
Government to obtain the best possible products at the best
competitive price. Sadly in our view, these rules as drafted
instead appear to promote only the interests of certain
domestic software companies.
As I detail in my testimony, it didn't have to turn out
this way. Over the years, both U.S. industry and the U.S.
Government have been meeting with experts at all levels of the
Chinese Government to better understand their goals and to
share the lessons learned by U.S. agencies in their move from
government-specific requirements for IT purchases to greater
reliance on commercial off-the-shelf products and emphasis on
the best value in government purchases. Our discussions have
emphasized the benefits of open, transparent and competitive
procurement policies.
And we have appreciated very much the leadership of the
Department of Commerce, Department of State and the U.S. Trade
Representatives office, as well as many Members of Congress,
who have engaged Chinese officials on how best to achieve their
goals while not discriminating against U.S. companies and
avoiding trade distorting measures.
I think the key question is where do we go from here? It is
incumbent on both U.S. industry and the U.S. Government to
continue to press for changes and to continue to see a delay in
the rules until real changes are made. We must work to insure
that the government procurement law achieves what it set out to
do originally, to bring China's practices into the mainstream
of international commerce.
This commitment is important, because these regulations are
the first of what is likely to be a series of regulations
affecting other industries and products. And to that point, Mr.
Chairman, I would like to introduce into the record a letter
from 15 association presidents representing the entire IT
industry, as well as the business community generally on this
point.
Chairman Tom Davis. Without objection, it will be entered
into the record.
[The information referred to follows:]
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Mr. Bohannon. As Mr. Cummings stated more eloquently than I
read from my testimony, it is incumbent that the Chinese begin
negotiations to join the WTO Government Procurement Agreement.
And as for changes in the regulations, we must make sure that
nonChinese software companies must be allowed to compete--and I
emphasize the word ``compete''--as domestic software companies
as if they meet nondiscriminatory applicable requirements to
all companies who must operate in the Chinese market.
Mr. Chairman, my members are under no illusion of what it
takes to operate in the Chinese market these days. It is a
complex market. Unfortunately, the developments in the
implementation of the new government procurement law and the
draft regulations we have before us are really not a step,
forward, but a step back in terms of making that situation more
transparent, more open and more competitive.
Thank you, and I would be happy to take any questions you
have.
Chairman Tom Davis. Thank you very much.
[The prepared statement of Mr. Bohannon follows:]
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Chairman Tom Davis. I guess, if we implement the
regulations as drafted, is it fair to say that most of your
members would not be able to compete for the business?
Mr. Bohannon. I think, certainly, they would have
difficulty making and showing the specific requirements there.
I think one of the developments and possibilities here is
that what is going to happen to the existing installed, and I
think that's a question none of us can answer at this stage.
But certainly in terms of meeting the technical requirements of
the regulations, I think many would be hard pressed to insure
they meet those.
Chairman Tom Davis. That is why they are drafting them.
They want the work done in China by Chinese-owned companies.
Mr. Frisbie, do you agree?
Mr. Frisbie. My response would be the same; it would
negatively impact our companies. But also, if they were
implemented as drafted, I think that would get the attention of
our nonsoftware company membership too, who would then have
concerns about what might follow on in other sectors of the
procurement market.
Chairman Tom Davis. All right.
Mr. Holleyman. Mr. Chairman, I think ultimately a huge
concern, in addition to the initial threshold task, which is
unduly burden is that even a company that managed to make a
second-tier list, which is a qualified foreign software, would
always be subject to a waiver requirement that would have to
come out of the ministry of finance before any ministry could
purchase it. So it is a double burden, and it is, we believe,
ultimately going to be arbitrary and harmful.
Chairman Tom Davis. What are software sales, American
software sales to the Chinese Government today? Does anybody
have any idea?
Mr. Holleyman. The estimate--I don't know for American
software sales. I know the total acquisitions in China are
estimated to be in the $606 to $660 million a year. I don't
know what portion of that is U.S. companies, but a significant
portion would be.
Chairman Tom Davis. That's it, and they are going to risk a
trade war over that. I mean, look, let me ask you this. If they
were to do this, if I were to put an amendment in on the floor,
which would pass, that we would not--that we would be
prohibited from buying goods from China. The government would
not be able to buy goods from China, easy amendment to put on a
restrictive spending amendment, it is not subject to point of
order.
What do you think the Chinese reaction would be, and what
would be your reaction to that? It would certainly get their
attention because we are buying everything from AK-47s to
clothing to a lot of other goods from them right now.
Mr. Bohannon. I think certainly it would send a message at
a minimum. I think that, you know, the challenge here is
keeping the focus on making sure the rules don't get
implemented so that we can avoid such a situation. And I think
our focus really is to make sure that they don't get
implemented as they are proposed so we can avoid exactly that
kind of confrontation.
Chairman Tom Davis. But that would certainly send a message
to the Chinese that we are not bluffing, wouldn't it? Mr.
Frisbie, what do you think?
Mr. Frisbie. I think the first thing I would like to see is
what happens at the JCCT meetings, because I know that for the
USTR and Commerce, it is one of the issues at the top of their
list. I also know from conversations with the Chinese
Government that they are considering this as well. So, I want
to see what the results of that meeting are.
Chairman Tom Davis. But if the meeting is bad, if we have a
bad outcome, what are we left to do at that point? Continue to
buy their goods? Continue to go out and have open procurement
with China? I think we have to take a look at how much it will
have cost us if we knock them off of our list. That's a fair
question. But after that, I think, we have nothing to lose and
you have to let countries know that they can't--that this has
to be a 2-way Street. Mr. Holleyman.
Mr. Holleyman. Mr. Chairman, I certainly think this
morning's hearing and your statement is getting a lot of
attention. So I think it's a useful step. And we hold out, as
Mr. Freeman testified on the first panel, that a specific item
of discussion at the JCCT needs to be on this topic.
We think ultimately there are three things that are going
to help in this, making sure at the highest political levels
within China this issue gets attention. Second, that there is
an immediate standstill of any effort to impose these new
regulations for software; and, three, that China move forward
with its commitment to join the Government Procurement
Agreement.
Chairman Tom Davis. Well, if they join the Government
Procurement Agreement, these regulations probably wouldn't be
in order, would we agree with that?
Mr. Holleyman. That's correct.
Chairman Tom Davis. I think that's what we need to work at.
I will just tell you if the we implement these regulations,
somebody will offer the amendment on the floor. We see these
every year for much less onerous actions by other companies and
the governments. They need to know it is coming.
Sometimes we defeat these, sometimes we don't. But Chinese
just need to understand that is going to happen. I don't know
if it is a good idea or a bad idea at this point. Actually,
after the hearing, I am beginning to think it is not such a bad
idea. If that is all we have left--but we all prefer to work
this thing out as adults and recognize whatever the Chinese are
trying to accomplish, help them accomplish that.
But, you know, at the same time, we are opening our markets
to them, and we have a huge trade deficit, that their
government needs to take a leadership role. And this is one of
the few protected areas, right? In terms of software and
integrity if the government buys there.
Let me ask you this: Each of you has identified specific
concern with the proposed rule. We talk about how the U.S.
industry would adopt these requirements of how we are
predicting it. The Chinese regulations require that in order to
be considered domestic 50 percent of a product's cost should be
incurred in China, and that the product must have its final
formulation in China.
Is that realistic in light of the international way in
which software development occurs?
Mr. Holleyman. Well, it's certainly not realistic for any
existing provider who has a global business.
Chairman Tom Davis. Is there any company or, for that
matter, any known software development model that tracks its
costs by geographical input?
Mr. Bohannon. No. I mean, we have gone back to our members
to make sure that we are fully up to speed on the latest. We
are not aware of any company that does that. It's both
impractical and not the reality of the way software development
occurs.
Chairman Tom Davis. Also, the Chinese Government stated its
procurement framework is modeled in large part on those of
other companies. And they quote our Buy American or Trade
Agreement Act. But is this really an accurate statement from
the experience of your member companies?
Mr. Bohannon. I can say categorically, no. I personally sat
for 5 hours with the Chinese experts and brought in some of the
best in both private and public sector procurement experts--and
had them walk through with the Chinese how our system really
works, that it is based on a series of system preferences, not
prohibitions, which is at the heart of the Chinese approach.
And that the U.S. system, for all its complexity, does not
discriminate on the basis of national treatment. And we have
explained this ad infinitum. But they continue to make the
suggestion that is the case. And certainly our experience in
the EU is also indicative that Chinese approach is not based on
any known model that we are aware of.
Chairman Tom Davis. Isn't the Chinese software industry
growing? I mean, it is growing like hopsi, isn't it?
Mr. Holleyman. It is growing, Mr. Chairman. I mean, a lot
of that industry is the industry that is based on the
outsourcing model.
Chairman Tom Davis. Offshoring a lot of it.
Mr. Holleyman. A lot of what India is doing. But they also
have domestic producers of software. I mean, we think that the
inconsistency of this is that it will isolate the Chinese
Government in terms of the type of software it uses. It will
deny the government the efficiency it wants. And no domestic
Chinese producer who satisfies that government test is going to
ever be competitive in our view in the global marketplace. So
long term, it hurts the Chinese software industry short-term;
and long term, it hurts the government for its e-government
efforts.
Chairman Tom Davis. Mr. Bohannon.
Mr. Bohannon. I will just add to Mr. Holleyman, the SIIA
office believes that the revenues of the domestic Chinese
companies have been going up 20 to 30 percent over the last 2
or 3 years, mainly because they have benefited just like U.S.
companies from the positive policies to get government agencies
to procure legitimate software, for example. So what we need is
to make sure that the good pieces of the Chinese Government
policies proceed because they benefit everyone, and not go back
to this discrimination between foreign and domestic.
Chairman Tom Davis. Also, I mean, once, as their software
development grows in China--and we all agree and understand, it
can grow exponentially without doing this--they are going to
have more demands from China to stop piracy and for IP
legitimacy and the right; correct?
Mr. Bohannon. That's exactly right.
Chairman Tom Davis. I don't know why they have such a good
model right now. Everything I read about what's going on, U.S.
companies are a major part of what is growing in the software
industry over there. And I think this is just a major step
backward for them.
And I am not sure if this is part of a political agenda,
but the Chinese are getting a lot of work now on government
work, American government work for our government--because, as
you say, our business models don't call for software to be
developed in one single place, it's developed in pieces all
over.
What actions would you like to see our government take in
response to your concerns? Are we doing enough at this point?
Is going to the table and talking enough, or do you think
hearings like this, congressional pressure helps your meetings
with your counterparts help? What do we need to do? This needs
to be, I think, a coordinated effort. Whoever wants to. I have
asked all of you.
Go ahead. Mr. Holleyman.
Mr. Holleyman. I will start. I think that this hearing is
absolutely useful. I know that a number of Members of Congress
have contacted the Chinese Ambassador in Washington, have
raised this on their trips outside the United States, I think
raised this at the highest political levels, as we have had at
the cabinet level is absolutely important. I think the JCCT,
which is upcoming in the next couple of months, is a golden
opportunity to try to insure some specific commitments from
China that they will not implement these rules and that they
will move forward with the GPA. And as Assistant Secretary Wu
testified, there have also been consultations with the EU and
with Japan.
I know that the EU has become engaged on this. And I think
working with our foreign trade partners who just want to make
sure that this market is open for America or any software to
compete fairly. And we believe there are a lot of allies in
this effort.
Mr. Frisbie. This is clearly an important market access
issue. Again, it is not just software, but they are looking
ahead if this goes forward, how it might impact other sectors
as well. So definitely this hearing helps to bring attention to
the issue, and I think attention will be given to this hearing.
As we have all said, the JCCT meeting is actually the right
next focus. I know that USTR and Commerce have that focus. A
consistent message here and in Beijing is also extremely
important. And to the extent other governments do that as well
here and in China and send a consistent message, I think that
will make a big difference, too.
Mr. Bohannon. I would second all the comments of my
colleagues. The two suggestions that I would make, in addition,
are I think we not only need to talk about this as an issue
that affects the software industry, but, Mr. Chairman, given
your background on procurement reform and the need for open and
competitive procurement issues, I think we need to approach it
at that broad level as well. I think we can, you know--even if
we solved the software regulation issue, we still have a
fundamental problem with the government procurement law that
China has put in place. And that is ultimately where we will
have to deal with this.
The second is that we now have new leadership at the State
Department, Ambassador--Secretary Rice, we now have a new head
of USTR, a new Secretary of Commerce. I think it's essential
that they continue the consistent messages that have come out
of those departments with regard to the need to address this
before the rules get implemented.
Chairman Tom Davis. I supported BNTR, I supported Fast
Track, NAFTA, CAFTA, you like it, I am a free trader. And this
committee doesn't have jurisdiction on trade issues, that's the
Ways and Means Committee. We do have jurisdiction on
procurement. This is the committee that will take those
decisions, and I take it very seriously, I have always--again,
I led the fight last year when they tried to knock licensure
out of the U.S. visit, when they have tried to put domestic
source restrictions. I strike Buy America every year as they
try to expand that on appropriation bills. So my record is
pretty clear.
But we are just not going to sit here and let China take
shots at us without some kind of retaliation. Somebody is going
to do it, and that's under this committee's jurisdiction. So I
am hoping we can work these things out around the conference
table if we need to give the leeway, but I just want to say if
that doesn't happen, I just don't see Congress sitting idly by.
I hope the Chinese understand that as they sit down.
Trade war, everybody gets hurt. Consumers get hurt,
efficiency gets hurt. I just don't see this helping anybody.
But you can't just sit here and have it one sided on the
procurement side.
I believe, when we add up everything, you are going to find
that China sells us a lot more than we buy from them,
government to government, and has a lot more to lose. I guess
the question that we would have to answer, before moving ahead
is, you know, how much would it cost us to take and buy these
goods and services somewhere else than China. We intend to get
that information, just to have that, should we have to proceed.
But let's all work together. I think industry to industry,
government to government, trying to get this resolved in an
applicable way that makes economic sense.
Mr. Holleyman, let me just ask this final question: You
mentioned software piracy in your statement. I know it's a
concern of all of you. How does piracy relate to the government
procurement issue?
Mr. Holleyman. It relates directly in that the best legal
and largest market in China for legitimate software is with the
Chinese Government. And, in fact, there have been significant
efforts by the Chinese Government in the last couple of years
to try to insure that its software usage is, in fact, legal.
BSA is working with the Chinese Government this year on a
number of education seminars for Chinese Government officials
to insure that they are using only legal software. So that's
been very positive.
We are very concerned about anything that would restrict
access to that growing legal market. And let me just add, in
conclusion, that our companies are ultimately very optimistic
about our ability to compete in China. But we have to address
the piracy problem, and we have to make sure that we have fair
access to the best legitimate market that exist here today.
Chairman Tom Davis. OK. Anything else anybody want to add?
Well, our pleasure. Thanks for this important issue, not
just for software developers, but you say this can extend
straight down the procurement system, and that would not be
helpful to anybody at this point.
So I appreciate everybody for sharing your testimony. We
have entered into the record the accompanying data. We will get
some more facts on this, and we will continue to keep an eye on
this as it moves forward.
Thank you very much. This hearing is adjourned.
[Whereupon, at 12 noon, the committee was adjourned.]
[Additional information submitted for the hearing record
follows:]
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