[Senate Hearing 111-764]
[From the U.S. Government Printing Office]
S. Hrg. 111-764
FINDING COMMON GROUND WITH
A RISING CHINA
=======================================================================
HEARING
BEFORE THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED ELEVENTH CONGRESS
SECOND SESSION
__________
JUNE 23, 2010
__________
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COMMITTEE ON FOREIGN RELATIONS
JOHN F. KERRY, Massachusetts, Chairman
CHRISTOPHER J. DODD, Connecticut RICHARD G. LUGAR, Indiana
RUSSELL D. FEINGOLD, Wisconsin BOB CORKER, Tennessee
BARBARA BOXER, California JOHNNY ISAKSON, Georgia
ROBERT MENENDEZ, New Jersey JAMES E. RISCH, Idaho
BENJAMIN L. CARDIN, Maryland JIM DeMINT, South Carolina
ROBERT P. CASEY, Jr., Pennsylvania JOHN BARRASSO, Wyoming
JIM WEBB, Virginia ROGER F. WICKER, Mississippi
JEANNE SHAHEEN, New Hampshire JAMES M. INHOFE, Oklahoma
EDWARD E. KAUFMAN, Delaware
KIRSTEN E. GILLIBRAND, New York
David McKean, Staff Director
Kenneth A. Myers, Jr., Republican Staff Director
(ii)
?
C O N T E N T S
----------
Page
Hills, Hon. Carla A., former U.S. Trade Representative,
chairperson, National Committee on United States-China
Relations, Washington, DC...................................... 23
Prepared statement........................................... 25
Responses to questions submitted for the record by Senators:
John F. Kerry............................................ 48
Richard G. Lugar......................................... 50
Russell D. Feingold...................................... 53
Kerry, Hon. John F., U.S. Senator from Massachusetts, opening
statement...................................................... 1
Lugar, Hon. Richard G., U.S. Senator from Indiana, opening
statement...................................................... 4
Tyson, Laura, former chairperson of the President's National
Economic Council (NEC), professor, Berkeley HAAS School of
Businesss, Berkeley, CA........................................ 6
Joint prepared statement with Stephen S. Roach............... 10
Joint responses with Stephen S. Roach to questions submitted
for the record by Senators:
John F. Kerry............................................ 44
Richard G. Lugar......................................... 47
(iii)
FINDING COMMON GROUND WITH A RISING CHINA
----------
WEDNESDAY, JUNE 23, 2010
U.S. Senate,
Committee on Foreign Relations,
Washington, DC.
The committee met, pursuant to notice, at 2:38 p.m., in
room SD-419, Dirksen Senate Office Building, Hon. John F. Kerry
(chairman of the committee) presiding.
Present: Senators Kerry, Casey, Shaheen, Lugar, and Risch.
OPENING STATEMENT OF HON. JOHN F. KERRY,
U.S. SENATOR FROM MASSACHUSETTS
The Chairman. So, this very quiet hearing room will
already--will, I should say, come to disorder so we can come to
order. [Laughter.]
Everybody's so quiet, it's amazing.
Anyway, welcome. The hearing is now formally open. And I
appreciate everybody's patience.
I apologize for being late. We thought we had a couple of
votes coming up at 2:30, and I was going to try and vote, and
then come and open the hearing. And then, as is probably normal
operating procedure here, the votes got put off, and we'll sort
of wait to be interrupted, so we'll try to proceed ahead.
So, thank you all, including my good friend and ranking
member, Senator Lugar, for your patience and--before we open.
Let me just say, at the top of this hearing, that President
Obama has just taken decisive action in accepting the
resignation of General McChrystal. And needless to say, I think
all of us would have been happier if this distraction,
interruption in the mission, had never occurred. I'm confident
that there are a lot of folks in General McChrystal's immediate
circle who would feel similarly. But, it has happened, and we
are where we are. And I applaud the decisive, crisp, swift
action that the President took in making the decision. I think
it was appropriate that he did that, and I think he made the
right decision, to accept the resignation.
I also believe he made the right decision in selecting
General Petraeus to take over that command. The President made
it clear that no one is above the mission, and he's not going
to accept anything less than the unified effort on this
mission, within his administration and within the command
structure. That's appropriate.
So, I know General Petraeus, as we all do. We have great
confidence in him. And he's a proven leader, and I'm confident
that the skills that he brings as a soldier and as a general--
and also as a diplomat--will help to make this transition a
smooth transition.
American lives are on the line, and we simply can't afford
a moment of distraction. It's time for all of us to be strictly
focused on the mission itself.
And this committee will be holding a series of hearings in
order to evaluate that mission and keep the American people
apprised of where we are, measured against the benchmarks that
the committee has previously established.
Today, we are gathered to discuss another important issue,
and one that will be with us, in terms of the relationship,
throughout this century certainly, probably the single most
important relationship that will define a lot of global events
over the course of this century, and that is, how we find
common ground with a rising China.
We're pleased to welcome two very respected experts:
Ambassador Carla Hills and Dr. Laura Tyson. And, I might say,
Zbig Brzezinski, former national security advisor of President
Carter, was supposed to be here to join us this afternoon, but
he had to cancel at the last moment, due to a health issue.
But, I am told that he will be fine, and we look forward to
welcoming him back here soon.
How the United States, in concert with our friends and
allies, responds to China's growing economic might, military
capabilities, and political influence will significantly shape
the international order of this century.
Just about every global challenge that we face requires
cooperation with China. Nuclear proliferation, global economic
stability, climate change, just to mention a few. Clearly,
building a positive and constructive relationship that can
benefit both of our countries and enhance global prosperity and
peace for decades to come is a central objective for all of us.
That's why the administration has made an energetic effort to
manage and to grow the partnership, through the Strategic and
Economic Dialogue, as well as dozens of Cabinet-level visits to
China.
Still, United States-China relations, it is fair to say,
remain a work in progress. We don't always see eye to eye. Our
interests sometimes differ, and so do our approaches to shared
concerns.
What's more, both countries still mistrust each other's
intentions on issues, such as China's defense modernization,
the future of Taiwan, and the situation in Tibet. And there is
still a great uncertainty about exactly how we will manage our
growing economic interdependence.
It's striking how much of the story of United States-China
relations remains yet to be written. Looking forward, as China
becomes more prosperous and powerful--and it will, absolutely
and inevitably--we should not be surprised that it may also
become more assertive. The question is how China will use that
rising influence to shape global institutions, whether our
cooperation can increase as China's stature does, and whether
China will agree, or find it necessary and desirable, to take
on global responsibilities as its own economic and security
interests expand.
This week's announcement on the renminbi is a case in
point. China's decision to allow more flexibility in its
currency is a welcome step, and many people would argue that
it's a long overdue step, toward a rebalancing of the world
economy. But, it was the subject of a very heated debate in
China itself, and we will need to watch closely to see how
vigorously Beijing implements its new policy.
Of the two most important economies of the 21st century,
ours is still the largest, China's is growing and will soon be
the largest. So, the important question is to see how we can
and should compete, but we also need to make certain that that
competition takes place on a level playing field.
We need to do more than just talk about difficult issues,
such as indigenous innovation schemes, government procurement
policies, and protecting intellectual property. We actually
need to find meaningful actions between us that make a
difference in the leveling of that playing field.
In recent days, we have seen positive steps by China to
stop the spread of nuclear weapons. And I think all of us
appreciate China's vote for new sanctions against Iran at the
United Nations. That's an important cooperative effort and an
important measure of China's role in the world today. I hope
that China will now join with us and other members of the
Security Council in aggressively implementing these sanctions,
and also in condemning North Korea's recent aggression against
South Korea.
Differences remain, however, and it's impossible to ignore
them. We need to work to enhance our strategic dialogue, to
increase trust and reach new understandings. And this
engagement should include high-level military-to-military
talks. And these talks shouldn't be switched off whenever one
side perceives some kind of slight, the slight of the moment,
if you will, to its particular interests. If we want to build
our capacity to manage global crises together, those kinds of
talks are even more important when tensions do arise.
Even as we seek common ground with China, we will never
abandon our values. We have to continue to encourage China to
adhere to international human norms for rights--human rights,
labor rights, political rights--and environmental protection.
Based on my own conversations with China's top leaders, I
believe that our commitment to these values can actually
support China's own long-term efforts to build a harmonious
society.
And finally, while our companies will inevitably compete in
many areas, there are challenges, such as climate change, where
our two nations should be collaborating against a shared
threat, and where, together, we have the ability to offer
leadership to the world.
As today's largest producer of greenhouse gas emissions,
and history's largest cumulative emitter of greenhouse gases,
China and America have a special responsibility to lead a
global effort to reduce emissions, and, particularly, we can
work together to develop the clean technologies, the new
technologies, the clean and alternative energy sources, of the
future. The truth is that no two nations have as much
opportunity to set the mark for what we all should be
achieving. And if China and the United States engage in this
effort, and do so together, it is guaranteed that the rest of
the world will follow, and be compelled, ultimately, to do so.
To help us look into the future and navigate the thicket of
issues facing America and China, we have two longtime China
hands here with us today. Ambassador Carla Hill served as the
U.S. Trade Representative under President George H.W. Bush, and
she cochaired the influential Council on Foreign Relations Task
Force on China, and currently chairs the National Committee on
U.S.-China Relations.
Dr. Laura Tyson is the former chair of the Council of
Economic Advisors during the Clinton administration, and the
former dean of the London Business School. Dr. Tyson currently
serves on President Obama's Economic Recovery Advisory Board,
and she is a professor at Berkeley's Haas School of Business.
So, I invite both of our witnesses to feel free to
summarize their comments, if they would. We will introduce the
full text into the record as if read in full, and we look
forward to your testimony. And, again, we're grateful to both
of you for being here today.
Senator Lugar.
STATEMENT OF HON. RICHARD G. LUGAR,
U.S. SENATOR FROM INDIANA
Senator Lugar. Mr. Chairman, I join you in welcoming our
distinguished witnesses for this important hearing.
China's rising financial and strategic power is a crucial
factor in our approach to global economic, energy, and security
problems. The United States must come to grips with the
incredibly complex set of choices and opportunities that China
represents.
China is demanding a greater say in the management of the
world economy through the G20 and other mechanisms. Its global
leverage has increased as it has positioned itself as the
leading creditor nation with more than 20 percent of the
world's current account balance surplus.
According to the most recent data, China is the United
States Government's largest foreign creditor, holding
approximately 23 percent of the $4 trillion we owe to other
countries. The Chinese continue to buy United States bonds at a
rapid pace, but we cannot count on this continuing
indefinitely. Some thought must be given to how we work with
China to establish a more sensible global balance that depends
less on Chinese credit and demand by American consumers.
The Treasury Department decided to delay publication of the
congressionally mandated report on China's international
economic and exchange rate policies until after the May 27th
Strategic and Economic Dialogue with China and the June 5th G20
meetings. Now that these meetings have concluded, Congress is
eager to receive Treasury's assessment.
I look forward to our witnesses's comments on China's
recent decision to increase the flexibility of its exchange
rate, which the Obama administration has welcomed. Is this a
significant step, and can it have a positive impact on the U.S.
economy?
China remains an extremely important market for United
States exports. Currently, China is our second-largest goods
trading partner with more than $407 billion in two-way trade in
2008. Since being admitted to the World Trade Organization in
2001, China has become the United States third-largest export
market, accounting for 5.4 percent of total U.S. exports.
But this expansion of trade has not reached its full
potential, in part because of impediments to American business
activity in China. American businesses and agricultural
exporters report that operating in China is becoming more
difficult, not less. We are hearing increasingly frequent
complaints about inconsistent application of rules,
requirements for so-called ``indigenous innovation,'' rising
nontariff barriers to trade, inconsistent market access, and
lack of enforcement of intellectual property rights.
Civil society within China continues to face immense
challenges in promoting rule of law and human rights reform.
While the administration and the Congress have been focusing on
matters related to currency reform and the China-United States
trade imbalance, other issues also warrant concern.
On the military front, since announcement of the Taiwan
arms sales, the United States has made attempts to reengage
Beijing, including a recent overture by Secretary of Defense
Gates on a reciprocal visit to China this June that was
rebuffed by China's military.
In East Asia, the United States continues economic
sanctions against Burma, while China increases its economic
engagement with the military junta. China has been helpful in
encouraging Pyongyang to participate in the six-party talks.
But at the same time, Beijing is apparently strengthening its
assistance to North Korea, even after the sinking of South
Korea's ship and the loss of 46 sailors.
China's global advances to secure energy assets and
increase its influence are perhaps most intense in its own
backyard. China is dedicating massive financial and cultural
resources to its neighbors in the region, with implications for
traditional United States relations with Asian countries.
Energy security is a strategic interest for both China and
the United States. As the New York Times said on June 18, 2010,
``as China counts on more years of global leadership in
economic growth, global warming remains a secondary concern.
Secure sources of energy to fuel that growth are what matter
most.''
I welcome the Obama administration's high-level attention
to energy cooperation with China, which could benefit price
stability and may enhance Sino-American cooperation on other
international security issues.
While all of this is underway, we must not lose sight of
our strategic and economic relationship with Japan. As
administration officials pursue new avenues to improve the
United States-China relationship, we must maintain and
strengthen our ties with Tokyo.
I look forward to the hearing of the testimony of our
distinguished witnesses, and our questions and answers.
And I thank you, Mr. Chairman.
The Chairman. Thank you very much, Senator Lugar.
Dr. Tyson, if you would lead off, and then, obviously,
Ambassador Hills.
Thank you very much.
STATEMENT OF LAURA TYSON, FORMER CHAIRPERSON OF THE PRESIDENT'S
NATIONAL ECONOMIC COUNCIL (NEC), PROFESSOR, BERKELEY HAAS
SCHOOL OF BUSINESS, BERKELEY, CA
Dr. Tyson. Certainly.
The testimony I have submitted was done jointly with
Stephen Roach, who is the chairman of Morgan Stanley Asia. I've
worked with him for many years on issues of China and Asia.
We focused on some of the policy priorities that were at
the center of the most recent Strategic and Economic Dialogue
discussions. They were the issues of rebalancing growth in the
United States and China; related to that, the exchange rate
itself and the policies and issues around the trade barriers
that you have mentioned. Let me highlight some of our major
recommendations on each of these issues.
First of all, I think it is important to start with the
view that I've heard shared by both of you that the Strategic
and Economic Dialogue is an important forum in which the United
States and China can discuss issues on which they can cooperate
and also issues that divide them to come up with solutions.
At the most recent meetings, a major focus of the
discussion was global rebalancing. Now, I realize that
rebalancing has become a common phrase among economists, but
its meaning is not entirely obvious.
At the height of the great credit and export bubble of
2006-07, China was running a current account surplus of around
11 percent, widely viewed to be unsustainable, and the United
States was running a current account deficit of about 7
percent, also widely considered to be unsustainable. So, both
countries have to get their imbalances down. China has to get
its current account surplus down and the United States has to
get its current account deficit down. And that to the first
approximation, is what ``rebalancing'' means.
``Rebalancing'' also means a change in growth strategies
for both the United States and China. China has followed, very
successfully, a very aggressive export-led strategy. The
Chinese now talk about, and certainly the United States talked
with China about, the need to shift their growth strategy to
depend more on domestic demand and less on exports.
That's what ``rebalancing'' means in China; it means
bolstering domestic demand, particularly consumption, and
relying less on exports.
In the U.S. case, it's actually a bit more unclear what
``rebalancing'' means. At a macrolevel, the current account
deficit reflects the fact that for a very long period of time
now, the United States has been spending more than it has been
producing as a nation. So to reduce the current account deficit
the United States must reduce its spending, particularly its
spending on consumption, or increase its production or do some
of both. And that's a different kind of challenge than the
rebalancing challenge facing China.
Much of our written testimony focuses on the fact that we
think China is taking its rebalancing challenge seriously. If
you look at its stimulus policies--and it cooperated quite
actively with the United States in the G20 on the need for
aggressive stimulus they are very much investment-oriented,
and, as far as we can tell, the investment is directed to
building the center and western regions of the country to
enhance development and consumption at home, not to build
export capacity for the rest of the world. This is not another
export-led investment boom in China; this is an infrastructure-
led investment boom to encourage urbanization and move people
from the countryside to the city. Building infrastructure in
the countryside and moving people to the cities will encourage
consumption by providing the rural population with the
electricity they need to have sophisticated equipment in their
homes and by facilitating their movement from place to place,
thereby improving their access to consumer products and
services.
So, we believe that the stimulus policies reflect a real
commitment, on China's part, to shift away from exports to
domestic demand.
We also think that what China is saying about its upcoming
12th 5-year plan reflect rebalancing. China is introducing new
health care systems, new social security systems, and new
educational systems. These form the social safety net that has
been absent, and without such programs, Chinese households have
been encouraged to save to cover their own educational, health
care, and retirement needs. So, if the Chinese, in fact, build
out their new social safety net systems as they plan, Chinese
households will save less and consume more, and that will go a
long way to rebalancing growth. China is also talking a lot
about the need to bolster labor-intensive services as part of
the 12th 5-year plan. The United States tends to think of
China's export strategy as an employment strategy. But,
actually, China's economy has grown much faster than its
employment. China's development strategy has actually not been
particularly labor-intensive. To boost employment growth, China
needs to encourage the development of labor-intensive services
and it looks like they're on course to do that.
As a result of these rebalancing policies, we believe that
in the future the current account surplus in China will be
significantly lower relative to its GDP than it was in 2006 and
2007. It's already significantly down, and we believe it will
continue to trend down. And we think that will be a very
important contribution by China to the rebalancing part of the
United States-China agenda.
As far as the exchange rate is concerned, I will say a few
things about that.
First of all, we rewrote some of our testimony over the
weekend based on what the Chinese announced; but, in fact, the
first draft of our testimony would have suggested that they do,
essentially, what they did--that they move back to the managed
float exchange-rate regime that they first adopted in July
2005. The regime in place between 2005 to 2008 had a
significant effect on the renminbi dollar rate and on the
renminbi multilateral trade-weighted exchange rate. There was
significant progress on RMB flexibility during that period of
time And this time, it looks like the Chinese authorities will
allow even more movement of the rate within a broader bank.
We think that China has decided to restore the 2005-08
regime now for a number of reasons, many reasons in their own
interest. Frankly, we think China's decision is a win-win
situation. From the United States point of view, this is
something we wanted, but it also is something good for the
Chinese economy--because they were having trouble with
speculative capital flows, with inflationary pressure and with
sterilizing the effects of large purchases of dollar assets on
China's money supply. All of these challenges become easier to
address with an exchange rate which shows some movement over
time.
The new currency regime will also support China's
rebalancing agenda. The exchange rate is a relative price. And
if you adjust the relative price so foreign goods are cheaper,
you will actually import more foreign goods. And if you
actually make consumers in China wealthier because of the
appreciation of the currency, there'll be more demand for
domestic production. And that's essential for rebalancing.
So, we think China's decision to restore its 2005-08
exchange rate regime is a constructive step. We think it's a
win-win step. And we can talk about the particulars of how they
did it.
Let me turn, then, to the trade agenda. I know that
Ambassador Hills is going to talk about this in quite a bit of
detail. I suspect we agree on all of this.
I am concerned that China's trade and industrial policies
of late seem to be changing in ways that reduce the access of
foreign producers to China's market. And nontariff barriers not
traditional tariffs are a growing problem. So-called indigenous
innovation policies to support the development of China's high-
tech companies do not use traditional trade policies.
China is not a signatory of the WTO's Government
Procurement Agreement. The United States is. China is using
preferential government procurement of high-tech products from
Chinese companies to support their development. The fact that
the stimulus package in the United States contained some
controversial ``Buy America'' provisions was interpreted by
some observers in China as a green light for their own
preferential procurement practices. In addition to such
practices, other nontariff barriers hindering the access of
United States companies to China's market include national
standards that favor Chinese companies, the lack of inadequate
intellectual property protection for foreign producers, and
explicit or implicit local content rules. Many United States
companies say that they have to locate a significant share of
their activity in China to gain access to its market.
I think it is very revealing that access to China's market
by United States companies was the first issue highlighted in
the documents describing the S&ED meetings. Although the United
States was not able to convince the Chinese to drop some of the
most troublesome features of their indigenous innovation
agenda, the United States did achieve some changes in China's
product accreditation procedures that will make it easier for
United States companies to bid for government contracts in
China. This is an important first step in easing China's
indigenous innovation policies. And the United States and China
also agreed to ongoing, high-level discussions about trade
concerns in high-technology products.
During the S&ED discussions, China also committed to
proposing a more robust offer to join the Government
Procurement Agreement. I believe that China's participation in
this agreement would be a major step toward easing United
States-China trade tensions, especially in techology-intensive
products.
In our written testimony, we suggest that there's a bargain
that can be made between the United States and China. China
complains a lot about United States security controls on
exports to China. The facts presented in our testimony indicate
that such controls have very little effect on United States
exports to China. So the United States can cooperate with China
on this issue. Moreover, there are several recent studies
recommending that the United States can and should ease its
security controls on exports not just to China but to our other
trading partners in order to bolster United States exports,
without compromising United States security interests.
So, as part of a trade deal with China, the United States
could ease some of our security restrictions on exports to
China. We could also offer to advance the recognition of China
as a country with market-economy status in the WTO. China wants
this very much. It's scheduled for automatic approval in 2016.
The United States can move the date forward. We have been
telling the Chinese that we will do so when they do something
on their exchange rate. They have now done something by moving
back to the 2005-08 managed exchange rate system. Now we can
say, ``Yes, let's work with you on getting earlier market-
economy status. Let's work with you to reduce security controls
on U.S. exports. You, in turn, should make a serious proposal
to join the Government Procurement Agreement and continue to
curb the use of preferential procurement policies to foster
indigenous innovation.'' I think this is an outline of the kind
of bargain we might be able to strike in our trade negotiations
with China.
Finally, since I've run out of time, just let me add two
things.
First, it is very important for the United States to work
with our other trading partners in trying to influence China.
One of the reasons China moved, this week on the exchange rate
is not because we were pressuring the Chinese authorities but
because many other G20 nations were doing so well. There is
widespread agreement within the G20 that as part of global
rebalancing, China needs a more flexible exchange rate system
that allows its currency to appreciate over time in response to
market forces. Many of China's other trading partners,
particularly in Europe, are also concerned about the nontariff
barriers that are part of China's indigenous innovation agenda.
Whenever we can work with China's trading partners, we need to
do that.
Second, I think we should work on forging a new
transpacific partnership agreement that can help move the
United States back into the center of regional trade
negotiations in Asia. During the last few years, many regional
and bilateral trade agreements have been signed throughout
Asia, and the United States has not been at the table. If the
United States becomes the champion of a free trade area for the
Asia Pacific through the transpacific partnership, it would
give the United States a tremendous opportunity to participate
in the benefits of freer trade and investment flows.
And, by the way, on green trade, that is trade related to
environmental products and services; remember that APEC itself
was the organization that first negotiated a sectoral agreement
for free trade in information technology and this agreement was
later adopted by nations around the world. APEC might be able
to lead again on a sectoral free trade agreement in green goods
and services and such an agreement complement our efforts to
cooperate with China on solving global environment challenges.
And finally, let me add that our written testimony
addresses the question of whether China might adjust its
holdings of U.S. Government securities in response to growing
tensions in United States-China relations. For example, if the
United States pursues a policy the Chinese deem to be an
assault on their sovereignty, such as imposing large punitive
tariffs on Chinese products to force China to adjust its
exchange rate, would China respond by selling a significant
amount of these assets, driving the dollar down and interest
rates up? We conclude that there is reason to think that they
would, that we tend to exaggerate the costs to them of using
this form of retaliation and that we tend to underestimate the
strength of their nationalist sentiment in response to what
they could consider unfair and unwarranted unilateral U.S.
pressure. I think we have to keep these conclusions in mind
both in military affairs and in economic affairs.
Let me stop there.
[The prepared statement of Dr. Tyson follows:]
Joint Prepared Statement of Laura Tyson, SK and Angela Chan Professor
of Global Management, Haas School of Business, University of
California, Berkeley, CA, and Stephen Roach, Chairman, Morgan Stanley
Asia
Chairman Kerry, Ranking Member Lugar and distinguished members of
the committee, thank you for the opportunity to testify before your
committee on this important relationship.
The United States-China economic relationship is the most important
bilateral economic relationship in the world. China is the third-
largest and the fastest growing major economy in the world. At current
growth rates, it will pass Japan later this year and reach the size of
the U.S. economy by 2020 or sooner. The United States is China's
second-largest export market and China is America's third-largest
export market--and has been the fastest growing market for U.S. exports
since the late 1990s. China accounted for 18 percent of U.S. imports
and for 36 percent of the U.S. trade deficit over 2008-09. China has
emerged as the center of a complex global supply chain for manufactured
goods in Asia. A significant share of the value of U.S. imports from
China represents intermediate inputs and components produced throughout
Asia and assembled into final products for export to the us. China is
the largest destination for foreign direct investment, much of it from
companies headquartered in the us. More than half of all U.S. imports
from China come from companies that are partially or completed owned by
foreigners, including U.S. companies. This share is significantly
higher for U.S. imports of high-technology products like computers and
smart phones. And China has $2.4 trillion of foreign exchange reserves,
by far the largest such portfolio in the world. Most of these reserves
are held in dollars or dollar-denominated assets. China owns about 25
percent of all U.S. Treasury debt held by foreign investors.
China and the United States both reap substantial returns from the
large trade and capital flows that link their economies. But these
cross-border flows are lopsided: The United States runs a large trade
deficit with China and China runs a large trade surplus with the United
States; the United States is a debtor and China is a creditor. The
United States relies on its deficit with China as a means to satisfy
spending of consumers and businesses and China relies on its surplus
with the United States as a means to sustain its production and export-
oriented economy. The unbalanced nature of these flows complicates the
relations between the United States and China and contributes to
tensions between them. Despite these tensions, however, both countries
are major beneficiaries of globalization and both share interests in
promoting a strong global recovery and fostering sustainable and better
balanced global growth. The Strategic and Economic Dialogue (S&ED) is
an important forum through which the United States and China can
ameliorate the tensions in their relationship and cooperate on policies
to foster a balanced and prosperous world economy. In addition, the
United States and China are cooperating within the G20 and other
multilateral institutions and are committed to strengthening these
institutions to address shared global challenges.
In this testimony, we examine some of the U.S. policy priorities
that were the focus of the most recent S&ED meetings: macroeconomic
policies to promote and rebalance global growth; the currency issue--
especially in light of recent adjustments in China's exchange rate
regime; and policies to reduce barriers to trade. We also assess the
possibility that China might sell some of its U.S. Government debt or
slow down its purchases of such debt to influence the outcome of a
foreign policy dispute with the United States or to retaliate against a
U.S. action that China deems to be an assault on its sovereignty. We
conclude with recommendations for U.S. policy.
I. UNITED STATES-CHINA COOPERATION TO PROMOTE A STRONG GLOBAL RECOVERY
AND SUSTAINABLE BALANCED GROWTH
1. China's Rebalancing Challenge
In recent G20 discussions and in the latest S&ED discussions, China
has committed to cooperate with the United States to promote a strong
global recovery and to foster more balanced, sustainable global growth.
Chinese authorities have adopted ambitious policies that are consistent
with this commitment and that have already delivered measurable
results. As a result of its unprecedented monetary and fiscal stimulus
measures, China recovered more rapidly than expected from the global
slowdown in 2009, ending the year with a growth rate of 8.7 percent.
China's strong recovery boosted global growth by providing strong
demand for exports from the United States and from China's other
trading partners. U.S. exports to China have rebounded much more
rapidly than overall U.S. exports during the last year and are now
about 20 percent above precrisis levels. U.S. exports to China are
still growing much more rapidly than U.S. exports to the rest of the
world. During the first quarter of 2010, U.S. merchandise exports to
China grew by almost 50 percent from year-earlier levels while U.S.
exports to the rest of the world grew by about 20 percent. China is now
the third-largest and most rapidly growing market for U.S. exports,
with double-digit growth across a wide range of U.S. products from
high-tech manufactured goods to agricultural goods. Whether China's
recent stimulus actions will also deliver on its commitment to foster
more balanced future growth, however, is not certain. Faced with a
dramatic collapse in China's export markets in the wake of global
recession, Chinese authorities had little choice but to reorient their
growth policies in the short run. The unprecedented 11.9 percent drop
of world merchandise trade in 2009 choked off China's long vigorous
export sector. In the short span of 7 months Chinese exports went from
boom to bust--a +26 percent year over year increase in July 2008 gave
way to a ^27 percent decline by February 2009. Real GDP growth
screeched to a standstill as measured on a sequential quarterly basis,
and over 20 million migrant Chinese workers lost their jobs in export-
led Guangdong province. For a nation long fixated on labor absorption
and social stability, this was the functional equivalent of China's
dreaded recession and called for a massive stimulus response to bolster
domestic demand.
Within domestic demand, China's stimulus measures have focused
primarily on fixed investment. There are concerns among China's trading
partners that this investment is adding excess capacity in
manufacturing that will feed another surge of exports--and a renewed
widening of China's trade surplus--as the global economy recovers. In
fact, most of China's stimulus investment has been directed to massive,
multiyear infrastructure projects especially in the western and central
regions of the country. (More than 70 percent of China's stimulus
package has been devoted to infrastructure projects, Sichuan earthquake
reconstruction and public housing projects.) The surge in
infrastructure spending in turn has sparked a pickup in private-sector
investment by augmenting demand for goods and services provided by
private firms, especially those in the manufacturing sector. Rapid
growth in investment spending has augmented household income growth,
especially in urban areas; moreover, growth in household incomes along
with targeted proconsumption incentives for selected consumer durables
has supported solid consumption growth.
On the surface, the rebalancing of China's growth toward domestic
demand appears to be confirmed by recent data. In 2009, consumption
accounted for 4.6 percentage points or about half of China's GDP
growth, and in the first quarter of 2010, consumption contributed a
record 6.2 percentage points to China's GDP growth. In 2009, China's
current account surplus as a share of GDP fell to 6.1 percent, down
sharply from its peak of 11 percent in 2007, and dropped further to
only about 1 percent of GDP in the first quarter of 2010. China's
overall trade surplus as a share of its economy has fallen sharply by
about half during the last 2 years.
Some observers express concerns that these trends are temporary and
that the rebalancing of China's growth strategy will end when the
global economy recovers and global markets for China's exports rebound.
In fact, the May trade surplus widened to $19.5 billion from a surplus
of $1.7 billion in April and a modest deficit in March. These results
are consistent with these concerns and suggest that it may be premature
to celebrate the onset of a sustained structural rebalancing of the
Chinese economy. But we believe that China's rebalancing is likely to
continue over the long term out of both design and necessity. For an
externally dependent Chinese economy, the latter motive is especially
germane in the post-crisis era--an era that is likely to face lingering
headwinds from sluggish demand in the developed world. If there was any
doubt about the state of global demand in the aftermath of the global
recession in 2009, recent problems in Europe should dispel a false
sense of optimism. First, the United States and now Europe--the growth
in global final demand that was the sustenance of China's export growth
is in serious trouble. And there are compelling reasons to believe that
such trouble will not be fleeting--that it will be an enduring feature
of the post-crisis environment for several years to some. In order to
avoid a sustained shortfall of export-led growth and the social
instability it would imply, China needs a new source of growth. And it
needs one quickly.
A significant rebalancing of the Chinese economy is really the only
answer to China's post-crisis wake-up call. GDP growth needs to shift
away from the export- and investment-led dynamic that powered the
economy so successfully over the past 30 years toward the sector that
has been left behind--internal private consumption. At their peak in
early 2007, exports and fixed investment totaled 75 percent of Chinese
GDP--more than double the 35-percent share going to private
consumption. To some extent, the low share of consumption is the result
of high household precautionary saving rates necessitated by the lack
of a social safety net--social security, private pensions, medical and
unemployment insurance are all lacking for most Chinese citizens. But
consumption also has been held back by slow income growth, with wages
increasing much more slowly than productivity and rising profits
feeding high enterprise saving rates. Enterprises now generate more
than half of China's saving.
There are signs that this situation may be changing. There have
been recent significant increases (20 percent or more) in minimum wages
in key places like Beijing and Guangdong province, and several strikes
have ended with sizeable wage increases. The number of young people
entering the workforce is slated to decline by almost 30 percent over
the next 10 years, and survey evidence indicates that increasingly
scarce younger workers may expect higher wages and better working
conditions before they are willing to migrate to factory jobs far from
their homes. Fully 40 percent of China's population remains in low-
productivity agriculture, so there is still a lot of surplus labor. But
there are growing signs that the reservation wage for surplus labor is
increasing, and this may be another factor that helps rebalance China's
future growth.
China's infrastructure-led stimulus policies are building a
foundation for strong future growth in domestic consumption through job
creation and through projects that not only bolster the development
potential of the western and central regions of the country but also
reduce physical bottlenecks to rural consumption and rural-urban
migration. These are the regions where most of China's surplus labor is
located. There is good reason to believe that China will use its
upcoming 12th Five-Year Plan (2011-16) to lay out a broad framework to
continue this proconsumption rebalancing. The 5-year planning cycle has
long been Beijing's principal means for refocusing and redirecting the
economy. That purpose seems all the more meaningful in a post-crisis
global climate that challenges one of the critical assumptions that has
underpinned the export-led growth dynamic for 30 years--the vigor of
support from external demand.
China's proconsumption plan is likely to have three major macro
goals--to reduce precautionary household saving; to temper widening
income disparities; and to uncover new sources of job creation. Each of
these goals will require major policy initiatives. On the saving front,
it's all about the social safety net--namely social security, private
pensions, medical, and unemployment insurance. China has taken only
small steps in these areas. It now needs to take big convincing steps
in order to reduce the excesses of fear-driven precautionary saving. At
the same time, income inequality can only be addressed if China tackles
the serious problem of lagging rural incomes--the some 700 to 800
million Chinese who still live at relatively impoverished income levels
in the countryside. Several policy initiatives will be required here--
especially tax rebates to rural families, rural land and ownership
reforms, IT-enabled connectivity of agricultural communities, and
ongoing incentives to sustain rural-urban migration, which is essential
to boosting agricultural productivity. Finally, on-the-job creation
front, China needs a blueprint for the development of large-scale,
transactions-intensive services industries such as wholesale and retail
trade, domestic transportation, supply-chain logistics, and leisure and
hospitality. China needs to shift its development strategy away from
laborsaving manufacturing for export toward labor-intensive services
for domestic consumption.
If the 12th Five-Year Plan contains half of the initiatives
outlined above, we believe that China will make important progress in
shifting sustained support of its macroeconomy from external to
internal demand. As a share of GDP China's current account surplus has
already shrunk from an 11-percent peak in 2007 to slightly over 1
percent in the first quarter of 2010. Although a significant portion of
this reduction is cyclical as we noted above, there is good reason to
believe that China's external imbalance has peaked and that a consumer-
led rebalancing will mean a significantly lower current account surplus
in the years ahead.
Nor do we believe that Chinese families are culturally predisposed
toward high and rising personal saving--suggesting that this
transformation will take decades to occur. With the right incentives
and job-creation initiatives, we would not be surprised to see the
consumption share of the Chinese economy rise from 35 percent currently
to the 42-percent to 45-percent range by 2016--still low by
international standards but a major increase from current levels. The
key for the 12th Five-Year Plan is to move the needle from the old
growth model to the new growth model--setting in motion a powerful
rebalancing momentum that will sustain Chinese growth for years to
come.
2. The Role of China's Exchange Rate Policies in Global Rebalancing
Exchange rate policy has proved to be a lightening rod in United
States-China economic relations in recent years. We applaud China's
June 19 announcement to end the crisis-induced repegging of the
renminbi-dollar cross-rate which has been in place since July 2008. By
returning to the ``managed float'' foreign exchange regime which it
first adopted in July 2005, China has signaled both flexibility and
practicality in dealing with a very contentious global issue. Although
the full extent of the resulting Chinese currency adjustment is
unknown, it should be stressed that this is the same regime that
resulted in a 20-percent appreciation of the renminbi versus the dollar
in the 3 years ending July 2008. Under the presumption of a sustainable
recovery in the global economy, there is good reason to expect that a
resumption of gradual RMB appreciation will track a similar trajectory
in the years ahead. China should be commended for having taken a very
important first step in the right direction.
It was actually an auspicious time for China to act--not just
because of mounting global pressure on the eve of the G20 meeting in
Toronto but also because market conditions may work in its favor.
Recent turbulence in global currency markets caused by the flight from
the euro to the dollar, combined with China's reduced trade and current
account surplus, gives China an opportunity to reform its currency
regime at a time when there is less upward market pressure on the RMB.
China's shift in currency policy also seems well aligned with the
broader strategic objectives of the Obama administration. In recent
congressional testimony (June 10, 2010), Treasury Secretary Timothy
Geithner argued that over time a more flexible market-driven RMB will
be good for the global economy because it will facilitate more balanced
and sustainable global growth. He also argued that it would serve
China's interests because it will support China's rebalancing agenda
and because it will enable China to pursue a more independent monetary
policy. Secretary Geithner did not argue that greater flexibility in
the RMB exchange rate would reduce the U.S. bilateral trade deficit
with China. Nor did he call for an appreciation of the RMB. Rather he
noted that a stronger RMB as the result of market forces within a more
flexible exchange rate system would benefit China and promote global
rebalancing. We agree with the conceptual arguments and recommendations
made by Secretary Geithner in his written testimony and we applaud his
discussion of China's currency policy from a multilateral perspective
rather than from a contentious and misleading bilateral one.
In that vein, it is essential to put the currency issue in the
context of the world's broader rebalancing imperatives. An RMB-dollar
adjustment is not the only option that China has to address its fair
share of the global rebalancing agenda. The key challenge for all
unbalanced economies--including China and the United States--is to
reduce their global imbalances. That is true whether those imbalances
take the American form of a saving gap and current account deficit or
the Chinese form of a saving excess and a current account surplus.
In the case of China, the structural policies that we suspect are
likely to be featured in the upcoming 12th Five-Year Plan could well be
far more effective than the more circuitous option of a currency
adjustment. It is up to China to decide which of those options--or
which combination of them--works best. The rest of the world has a
right to insist that China face up to its saving imbalance, but does
not have the right to insist on the precise mechanism that China
employs to accomplish this task. The same argument, of course, also
applies to the tactics and strategy that the United States employs to
cut its budget deficit and boost domestic saving. While the rest of the
world has a right to insist that America take its rebalancing
imperatives seriously, it is the sovereign right of the United States
to decide on the best ways to accomplish this objective.
That's not to say there isn't a compelling domestic rationale for
China to allow a stronger RMB. Indeed, RMB appreciation would certainly
complement China's domestic rebalancing agenda both by boosting the
purchasing power of Chinese consumers and by encouraging Chinese
producers to shift production away from exports toward domestic
markets. Moreover, a stronger currency would temper the impacts of
imported inflation--hardly inconsequential in light of China's recent
cyclical upsurge in inflation to 3.1 percent in May 2010.
Reforming the exchange rate regime in a way that allows the RMB to
appreciate gradually in response to market forces also gives China time
to liberalize its capital markets to prepare for greater exchange rate
flexibility. We do not endorse the view expressed by many that China
should make an immediate large upward adjustment in the RMB-dollar
exchange rate. China's June 19 policy pronouncement, which stresses a
return to precrisis ``floating bands,'' all but rules out such an
action. And with good reason: As a developing economy with a still
embryonic financial system, China must continue to focus on financial
stability and potential vulnerability to speculative capital flows. For
that consideration alone, there is ample justification for China to
view a tightly managed band on the dollar-RMB relationship as an
important stability anchor.
Bilateral political tensions aside, we agree with Secretary
Geithner that it is critical to assess the currency ramifications of
global rebalancing from a multilateral perspective. In this regard, it
bears noting that on a broad trade-weighted basis, the RMB is up 7
percent (in real terms) from its late 2009 low and up 19 percent from
its early 2005 low. In other words, despite the repegging of the RMB to
the dollar over the past 2 years, it is factually incorrect to maintain
that the RMB has not moved in a broader global context. It is equally
important to stress that there are long and uncertain lags associated
with the impacts of a shift in relative prices between China and the
rest of the world on global imbalances. The example of Japan in the
late 1980s raises serious questions about whether a sizeable
appreciation of the RMB against the dollar over the next few years
would have a sizeable effect on these imbalances. After all, while the
yen more than doubled in value relative to the dollar from early 1985
to late 1988, Japan's outsize current account surplus barely budged.
China's decision to return to its precrisis system and allow the
RMB to fluctuate against the dollar within a tightly managed band is
unlikely to eliminate U.S. concerns about the RMB-dollar exchange rate.
A renewed post-crisis rebound of Chinese exports, in conjunction with
sluggish U.S. job growth and unacceptably high unemployment, has fueled
congressional frustrations about the persistence of a large bilateral
trade deficit with China. As a result, pressures on China for a major
RMB revaluation--or for the U.S. Treasury to name China as a currency
manipulator if that doesn't occur--have intensified. Many Members of
Congress believe that a sizeable RMB appreciation relative to the
dollar would be an effective way to ease the plight of America's
beleaguered middle class. They also believe that if China does not act
voluntarily to relieve those pressures, the United States should take
offsetting action. At least, China's June 19 adjustment of its currency
policy sends an important signal to U.S. policymakers that the Chinese
leadership takes these concerns seriously.
Unfortunately, a significant appreciation of the RMB-dollar
exchange rate--or the countervailing trade sanctions that might occur
in its absence--might well backfire. Much of the growth in U.S. imports
from China has been the result of production moving to lower cost China
not from the United States but from other higher cost foreign countries
especially in Asia. China has become the center of a global supply
chain that enhances efficiency, keeps production costs down and
supplies U.S. consumers with attractively priced products, purchased in
large amounts by low- and middle-income families. A significant share
of the value of U.S. imports from China represents the value of
components produced in other countries and assembled in China for sale
in the United States. China's share of the value-added for some
products may be only 20-30 percent of the total value of U.S. imports
from China. Tariffs imposed on Chinese exports to the United States in
an effort to offset the so-called RMB currency subsidy would raise the
prices of these products for U.S. consumers and drive their production
not back to the United States but to other emerging market countries,
reducing the efficiencies of the supply chain and increasing production
costs. The increase in prices on U.S. imports that resulted would be
the functional equivalent of a tax hike on both U.S. companies and
American consumers.
Moreover, there are other equally serious analytical pitfalls to a
bilateral assessment of the China problem. Yes, China accounts for the
largest piece of America's trade deficit--some 36 percent of the
average merchandise trade gap over 2008-09. But the key point to stress
here is that the United States had trade deficits with over 90
countries during the same period--a multilateral imbalance that stems
from the unprecedented shortfall in U.S. saving discussed below.
Lacking its own saving, the only way for the United States to keep
growing is to import surplus saving from abroad and run a large current
account and multilateral trade deficit in order to attract foreign
capital. The Chinese piece may account for the largest share of this
multilateral imbalance but that is more likely traceable to conscious
outsourcing decisions of U.S. multinationals and strong consumer
preferences for low-cost, high-quality goods made in China than to
unfair trading practices. The bottom line is that America's
multilateral trade imbalance cannot be addressed by putting pressure on
a bilateral foreign exchange rate with China.
Finally, it is important to emphasize that if the U.S. Congress
were to impose trade sanctions on imports from China, it is highly
likely that China would retaliate. That retaliation could take one of
three forms: lodging a WTO complaint; imposing tit-for-tat trade
sanctions on U.S. exports to China; or reducing demand for U.S.
Government securities. The latter two options would hardly be
inconsequential for the United States. Tariffs on U.S. exports to China
would hit America's third-largest export market--a serious problem for
the Obama administration's goal of doubling U.S. exports over the next
5 years. Similarly, reduced Chinese buying of U.S. Treasuries would be
highly problematic for the funding of the Federal deficit at attractive
interest rates and could trigger a spike in U.S. interest rates, a
sharp drop in the dollar's value and renewed instability in global
financial markets. (The possibility that China might respond to U.S.
pressure on its exchange rate policy by adjusting its demand for U.S.
Treasuries is discussed below.)
3. The U.S. Rebalancing Challenge
Rebalancing growth was a major topic at the recent S&ED meetings
and U.S. officials agreed on the need to rebalance growth of the
American economy away from consumption and large Federal Government
deficits toward higher household saving rates, greater reliance on
exports and investment, and sustained deficit reduction. U.S. officials
emphasized the Obama administration's multiyear plan to achieve $1
trillion in deficit reduction over the next decade. The plan includes
freezing nonsecurity discretionary spending for 3 years, reducing
defense spending in Iraq and Afghanistan, and allowing the 2001-2003
tax cuts for households earning more than $250,000 to expire. According
to the administration's latest projections, this plan would reduce the
deficit from 10.6 percent of GDP in 2010 to 3.9 percent by 2015, a
record 5-year reduction that would occur despite an average
unemployment rate of 7.9 percent during the period. If adopted, this
plan would be a significant step toward rebalancing the U.S. economy,
but it would leave the United States with a projected average deficit
of 3.9 percent of GDP between 2015 and 2020, and it would not stabilize
the federal debt to GDP ratio, which would continue to rise through
2020 and beyond. As long as the debt to GDP ratio is rising, U.S.
fiscal policy is not on a sustainable long-run path. This could prove
problematic for global investors, including the Chinese, who are
currently willing to purchase U.S. Government debt at interest rates
that are at or below historical averages.
During the S&ED discussions, U.S. officials assured their Chinese
counterparts that the Obama administration is committed to reducing the
deficit to 3 percent of GDP and stabilizing the debt to GDP ratio by
2015. President Obama has created a special bipartisan National
Commission on Fiscal Responsibility and Reform charged with the task of
proposing additional spending cuts and/or revenue increases to bring
the primary budget deficit into balance and thereby stabilize the debt
to GDP ratio in that year. Primary balance requires that total Federal
Government spending excluding interest payments on the debt, equal
total Federal Government revenues. According to the administration's
latest projections, the primary deficit will be around $174 billion in
2015; by contrast, according to the most recent Congressional Budget
Office projections, the primary deficit will exceed $250 billion in
that year, and many private sector projections are even larger.
A recent study by the Center for American Progress (CAP) found that
closing a primary budget gap of $250 billion in 2015 by spending cuts
alone would require a cut of almost 7 percent in every area of federal
spending, except interest payments on the debt. If cuts in Social
Security spending, additional cuts in Medicare and Medicaid spending
beyond those in the health care reform, and additional cuts in defense
spending beyond those in the President's budget are excluded, balancing
the primary budget by spending cuts alone would require a 16-percent
cut in the rest of government spending. CAP estimates that closing the
primary budget gap by revenue increases alone would require a 7.3-
percent increase in all federal taxes and fees. If those making less
than $250,000 a year are excluded, taxes and fees collected from those
making more than $250,000 a year and from U.S. corporations would have
to increase by almost 25 percent. These calculations make it very clear
that balancing the primary budget by 2015 will require some combination
of very painful spending cuts and revenue increases.
The Commission is charged with making recommendations in December
2010. Given the size of the fiscal problem and the highly charged
partisan atmosphere--a climate that may well worsen after the November
elections--it is unlikely that the Commission will be able to agree on
major recommendations and that such recommendations will be adopted by
Congress. So even though the deficit as a share of GDP is likely to
decline significantly as the economy recovers and as temporary stimulus
and recovery measures die out, the United States will face significant
challenges to deliver on its commitment of rebalancing the U.S. economy
through fiscal consolidation.
Rebalancing U.S. growth also requires more than a sustainable
fiscal path. It also requires reducing the gap between the growth of
spending and the growth of income in the United States, and this
requires an increase in national saving. America's net national saving
rate--the sum total of deprecation-adjusted savings of households,
businesses, and the government sector--turned negative in 2008 before
plunging to a record low of ^2.6 percent of national income in 2009.
This is the most serious shortfall of domestic saving by a leading
nation in modern history. Just as China must reduce its saving surplus
to deliver on its rebalancing commitments, the United States must
reduce its saving gap to do the same. Between 2000 and 2008, U.S.
saving declined both because of increases in the federal budget
deficit--a measure of government disserving--and because of a dramatic
drop in household saving. During the recession, the household saving
rate has recovered somewhat, rising from essentially zero in 2007 to
about 4 percent in 2008-2009 before falling back to about 3.6 percent
in April 2010. Many economists predict that the household saving rate
will rise during the next several years to its historical average of
about 7 percent, but there is considerable uncertainty about this. In
the S&ED discussions, the United States promised to introduce policies
to reinforce rising household saving rates but did not offer any
specifics, and policies tried in the past have not been very effective.
As part of its rebalancing agenda, the administration has also set
a goal to double U.S. exports over the next 5 years and has introduced
supporting policies and organizational changes. An active U.S. trade
policy to reduce access barriers to U.S. exports in rapidly growing
emerging markets including China is essential to realizing this goal.
We discuss trade policy in United States-China relations in the next
section of this testimony. Unfortunately, since Europe is a major
destination for U.S. exports and since European companies are major
competitors of U.S. companies in China and other rapidly growing export
markets, the recent slowdown in Europe and the sharp drop in the value
of the euro pose serious downside risks to strong U.S. export growth
over the next few years.
Nor would such growth ensure a sustained reduction in the U.S.
trade deficit and current account deficit as the economy recovers. The
size of these deficits depends on both exports and imports and reflects
the size of the U.S. saving gap, or the gap between how much the U.S.
produces and how much it spends. During the recession, this gap, as
measured by the current account deficit as a share of GDP, declined
significantly to 2.9 percent in 2009 from its 2007 peak of 6 percent of
GDP. This drop in the saving gap is primarily the result of a sharp
reduction in private sector spending relative to private sector income,
as U.S. households and businesses have curtailed spending to rebuild
balance sheets and deleverage their financial positions. Despite the
retrenchment in private sector spending relative to income, the current
account deficit, which is a measure of the national saving gap, has
remained sizeable because the government deficit has increased as a
result of tax cuts and spending increases to combat the recession.
Most forecasters predict that the United States will continue to
run a significant current account deficit around 3 percent of GDP for
the next several years if the fiscal deficit is reduced and if the
household saving rate increases from its historic lows of the 2002-2007
period. A deficit of this size would roughly stabilize foreign U.S.
debt as a share of GDP. Provided the United States convinces China and
other global investors of its commitment to a sustainable long-term
fiscal path, it is likely that the United States can finance a current
account deficit of this size with reasonable long-term interest rates
on U.S. Government debt in the 4-5-percent range.
What happens to the U.S. trade and current account deficits and to
U.S. borrowing requirements from the rest of the world depends
primarily on what the United States does to increase private saving and
to reduce government dissaving. China's trade and exchange rate
policies are of second-order importance. If the United States fails to
sustain a significant reduction in its saving gap, its trade and
current account deficits will rise again as a share of GDP as the
economy recovers. That will be the case even if China succeeds with its
own rebalancing agenda and reduces its current account surplus as a
share of its GDP and even if China moves to a pure market-determined
exchange rate. The risk in this case would be that of an ``asymmetrical
global rebalancing''--a scenario in which China makes more progress in
transitioning to a consumer-led economy than the United States makes in
closing its saving gap.
The odds of an asymmetrical rebalancing scenario should not be
minimized. China's stimulus policies and the likely components of the
12th Five-Year Plan indicate that China could well make significant
progress in rebalancing its economy over the next several years. In
contrast, the stimulus policies in the United States, while essential
and justifiable to combat the recession, have exacerbated the long-run
saving gap and have not rebalanced growth away from consumption toward
exports and investment. Moreover, given the partisan atmosphere in
Congress, passage of a credible multiyear deficit reduction plan to
reduce the Nation's saving gap on a sustained basis once the economy
has recovered seems unlikely, at least in the near future.
II. AN ACTIVIST TRADE POLICY TO LEVEL THE PLAYING FIELD IN CHINA AND
SUPPORT U.S. REBALANCING
China is now the largest exporter and the third-largest importer in
the world. It is the third-largest and fastest growing market for U.S.
exports in a wide range of products. If the United States is to succeed
in rebalancing its growth--shifting from credit-driven consumption and
housing toward investment and exports--continued rapid growth in U.S.
exports to China is essential. China also receives a major share of the
foreign direct investment of U.S. multinational companies, many of
which have extensive and growing operations there. Offshore Chinese
production platforms are critical to efficiency solutions for high-cost
U.S. manufacturers and support their production, employment, profits,
R&D and investment in the us. Access to China's large and growing
market is a significant factor in the success of many U.S. businesses,
both large multinational companies and many small- and medium-sized
companies as well. Reducing barriers that impede the access of U.S.
companies to China's markets is and should be a major objective of U.S.
trade policy. The Obama administration rightly accorded priority to
this goal in the recent S&ED discussions, focusing in particular on the
effects of China's innovation policies, government procurement
policies, and foreign direct investment policies on American companies
exporting to and/or producing in China.
During the last few years, many American companies (along with
European and Japanese companies) have raised concerns about China's so-
called ``indigenous innovation'' policies to promote the development of
Chinese owned technology and intellectual property and to reduce
China's dependence on foreign technologies. Initially, the call for
indigenous innovation was more hortatory than real. But recently the
call has been given practical effect through policies that include not
only strong incentives for innovation by Chinese companies but also
policies that discourage the participation of foreign companies in
technologies or sectors deemed to be strategic by the Chinese
Government. In a recent survey of 388 U.S. companies conducted by the
American Chamber of Commerce in China, 28 percent said that they are
already losing business as a result of China's indigenous innovation
policies, and 57 percent of high-tech companies said that they expect
to lose more business in the future as these policies are fully
implemented.
Seven of the eight top challenges to doing business in China
identified by the survey's respondents relate to obstacles posed by the
policies of the Chinese Government in a wide range of areas, including
procurement, standard setting, intellectual property protection,
subsidies and approvals for foreign direct investment. These survey
results reveal a growing concern among American businesses that China
is adopting more restrictive promotional policies that favor Chinese
companies and that pose significant access barriers to foreign
companies doing business in China. There is mounting evidence that
China's trade and industrial policies are changing in ways that are
impeding access of foreign producers to China's market and that fall
outside of WTO rules and enforcement procedures.
Preference in government procurement has recently become a key
weapon in China's arsenal of indigenous innovation policies. According
to China's long-term plan for scientific and technological development,
the government should establish a priority procurement policy for
important high-tech products and equipment developed ``by domestic
enterprises with independent intellectual property.'' Since China is
not a signatory to the Government Procurement Agreement (GPA) of the
WTO, its procurement procedures are not covered by the agreement and
not actionable at the WTO. But China's preferential treatment of its
domestic producers in government procurement is not an isolated
development. Indeed, China's preferential procurement policies were
given an implicit green light in 2009 when several nations that are GPA
signatories framed their stimulus actions to provide support to their
own companies and workers. (The ``Buy America'' provisions of the U.S.
stimulus package are a case a point. Although these provisions did not
have a significant effect on procurement and trade in the us, they did
send a strong signal to China.)
In November 2009, several of China's most powerful ministries
issued a joint circular, announcing the intent to create a national
catalogue of ``indigenous innovation'' products for government
procurement,`` and proposing accreditation conditions to determine
whether particular products qualified for inclusion in the catalogue.
Although the accreditation conditions do not include explicit
restrictions against the products of foreign-owned companies, they
effectively deny access to such products if the technology does not
originate in China--even if the products are entirely produced in
China, with 100 percent local content. That's because most of the
products sold by American companies in China embody many technologies
sourced from the United States and other locations and also because
American companies are reluctant to develop technologies in China as a
result of inadequate intellectual property protection there.
We are encouraged that the recent S&ED discussions made some
progress on the indigenous innovation and related government
procurement issues, although China did not agree to a U.S. request for
full suspension of its indigenous innovation policy. Instead, China
confirmed its commitment to innovation policies consistent with the
principles of nondiscrimination, intellectual property protection and
market competition and agreed to hold high-level bilateral talks on
such policies. China also agreed that the terms of technology transfer
should be shaped by agreements among companies without government
interference. In response to U.S. concerns, China removed several
troubling conditions from its product accreditation circular, including
the requirement that products be patented or trademarked in China, and
agreed to delay final implementation of the national catalogue to
assess public comments.
China also promised to submit a revised offer to join the WTO
Government Procurement Agreement by July. Given the importance of the
government and of state-owned companies in the Chinese economy, China's
participation in this agreement should be a major objective of U.S.
trade policy. As part of its WTO accession agreement, China committed
that state-owned and state-invested companies would make their
decisions solely on commercial considerations and that the government
would not attempt to influence these decisions either directly or
indirectly. In principle, these commitments are enforceable through the
WTO dispute settlement mechanism. But U.S. companies frequently
complain that the procurement decisions of state-owned companies either
follow the decisions of state agencies or are influenced by government
actors. A convincing bid by China to join the GPA could help assuage
these concerns.
In response to Chinese concerns, the United States softened its
position on two key issues of longstanding interest to China. First,
the United States promised to ease restrictions on some high-technology
exports to China. While this is a priority issue for China, U.S.
controls on such exports have only a small effect on U.S. trade with
China. According to recent estimates, only about 0.3 percent of all
U.S. exports to China and about 0.6 percent of all U.S. advanced
technology exports to China require an export license. The figures for
Europe are comparable: 0.2 percent of all U.S. exports and 0.4 percent
of all U.S. advanced technology exports to the EU require a license.
Moreover, around 80 percent of the exports to China that require a
license receive a license exemption and the value of all denied
licenses is minimal. Second, the United States agreed to consult with
China on its desire to be accorded ``market economy status'' within the
WTO and scheduled consultations for the fall meeting of the United
States-China Joint Commission on Commerce and Trade. In its original
accession agreement to the WTO, China agreed to be treated as a
nonmarket economy in antidumping and countervailing duty cases. As a
result, the United States or any other WTO member can initiate an
antidumping investigation against Chinese products using the product
prices of a third country as a benchmark. This makes Chinese firms
especially vulnerable to antidumping cases and the imposition of
antidumping tariffs on its products. As part of its WTO accession,
China also agreed to annual compliances reviews of its implementation
of its accession agreement.
So far, the United States has been reluctant to recognize China's
status as a market economy and has posed several conditions that China
must meet including the adoption of a market-based exchange rate
regime. Now the United States will have to decide whether China's
decision to allow the market to determine the RMB-dollar rate within a
managed band satisfies this condition. We think it should and we think
it sets the grounds for progress on China's bid for market access
status during the upcoming JCCT consultations. The United States will
lose its ability to use the market access issue as a bargaining chip
with China in 2016 when it will be accorded such status automatically.
Both the United States and China have been major beneficiaries of
the growth in world trade and foreign direct investment triggered by
the WTO and both have been active users of WTO enforcement to address
trade disputes, including bilateral disputes. In recent testimony, Alan
Wolff, cochair of Dewey & LeBoeufs International Trade Practice Group,
examined the history of United States-China trade relations within the
WTO and concluded that the United States has enjoyed ``reasonably
positive results.'' The United States has brought WTO cases against
China when the U.S. Government has the support of the relevant
businesses or industries and when it believes it can persuade a WTO
panel that China is violating its WTO obligations. China has often
ceased the practices in question without going through a formal dispute
settlement panel process.
But the future is likely to be more challenging because many of the
practices at the center of United States-China trade frictions and many
of the promotional policies playing a more prominent role in China's
development strategy are either inadequately covered or are difficult
to enforce by the WTO. These practices include indigenous innovation
policies, discriminatory procurement behavior by state-owned
enterprises, national standards that favor national champions, lax
enforcement of intellectual property protection and implicit or
explicit local content rules for participating in major economic
sectors like wind and other renewable energies. Such practices are a
violation of the spirit and in some instances the law of China's WTO
commitments and harm not just U.S. companies but companies from other
developed and emerging market nations. That's why the United States
should continue to treat market access barriers as a priority issue in
the S&ED discussions, should continue to lodge WTO cases against such
barriers when they violate China's WTO commitments, and should
encourage China's other trading partners to address such barriers in
regional and multilateral discussions.
III. CHINA'S HOLDINGS OF UNITED STATES DEBT AND UNITED STATES-CHINA
RELATIONS
As of April 2009, China's held over US$2.4 trillion in foreign
exchange reserves, by far the largest in the world. Its holdings of
U.S. Treasury debt totaled $900 billion, or about 11 percent of total
UST debt held by the public and about 25 percent of total UST debt held
by foreign investors. (China also holds around $405 billion or about 6
percent of U.S. agency debt, primarily Fannie Mae and Freddie Mac
debt). At current trends, even with continued rebalancing in China and
smaller current account surpluses as a share of GDP, China's FX
reserves will continue to grow, albeit at a slower pace, and are likely
to top $3 trillion by 2011. Given the lack of attractive nondollar
currency alternatives, exacerbated by the uncertainty and turbulence in
euro-denominated assets, it is likely that a significant share of
China's growing reserves will continue to be held in U.S. Government
securities. And even if there is a sustained increase in U.S. private
saving and a significant reduction in the federal budget deficit--both
of which are far from certain--it is highly likely that the United
States will continue to run a significant current account deficit in
the 3-percent to 4-percent range and will continue to depend on foreign
investors, including China, to finance its saving gap. Moreover, given
the sheer size of China's holdings of U.S. dollars and government
securities, a precipitous action by China to shift out of U.S. dollar
assets could cause a sizeable increase in long-term interest rates in
the United States, and a sharp decline in the prices of U.S. Government
securities and the dollar's value. Even cutting the share of China's
holdings of U.S. Treasury securities by 5-percentage points would
probably be enough to rock global financial markets, with damage on
both the United States and China. China would sustain capital losses on
its large dollar holdings as a result of falling prices on U.S.
Government securities and a drop in the dollar's value.
Despite the prospect of such capital losses, would China be willing
to sell some of its dollar holdings to respond to a foreign policy
dispute with the United States or to retaliate against what it deemed
to be an assault on its sovereignty? For example, if the United States
enacted broad-based trade sanctions on China's exports because China
does not succumb to U.S. pressure for a sizeable RMB appreciation,
would China retaliate by selling some of its stock of U.S. Government
assets or reducing its future purchases of such assets? Many observers
believe that China would not take such actions, at least not on a
meaningful scale, because they would impose painful capital losses on
China. Even if such losses were significant, however, China might be
willing to bear them in retaliation for what it perceives to be unfair
trade or other policy sanctions that infringe on its sovereignty. There
is every reason to believe that China would view such U.S. actions as
an act of economic aggression. Nationalist sentiment inside of China is
very high--suggesting that Beijing would be under considerable pressure
to take retaliatory measures irrespective of any potential portfolio
losses. There is far more to China's FX management objectives than
simply seeking optimal rates of financial return.
Moreover, as Professor Eswar Prasad explained in recent testimony
before the United States-China Economic and Security Review Commission,
the potential for losses in the value of China's foreign exchange
reserves could prove to be quite modest for three reasons:
1. A spike in U.S. interest rates in response to a selloff of U.S.
assets by China would impose a capital loss on the value of China's
U.S. Treasury holdings on a mark to market basis. But given its large
stock of reserves and the fact that it has no obvious liquidity needs,
it is likely that China values its assets on a hold to maturity
approach rather than a mark to market approach.
2. A decline in the value of the dollar against other major
currencies triggered by China's action would reduce the RMB value of
China's dollar-denominated holdings, if the RMB appreciated relative to
the dollar. Otherwise, China would suffer capital losses on the value
of its euro and yen assets as the dollar declined, but it would benefit
from enhanced competitiveness if the RMB declined with the dollar
against the currencies of its other major trading partners.
3. A sizeable appreciation of the RMB against the dollar would lead
to a sizeable capital loss on the value of China's dollar holdings
measured in local currency. But the loss could be offset over time as
China moves forward on exchange rate flexibility, capital market
liberalization, and reserve currency status.
Prasad concludes that a threat by China to move away from U.S.
Treasuries is a credible threat that should be taken seriously by U.S.
policymakers. We agree. And under current market conditions, such a
threat could trigger investor concern about the huge financing needs of
the U.S. Government, causing a sharp spike in interest rates and a
crisis of confidence in U.S. sovereign debt.
China has repeatedly expressed its desire for FX portfolio
diversification--namely, to put in place a disciplined program to
reduce its existing holdings of U.S. Government securities and to slow
down the acquisition of new holdings. It has been attempting to do this
in part through the establishment of the China Investment Corporation,
a sovereign wealth fund with an initial capital base of $200 billion.
But this is a small amount relative to China's overall dollar holdings.
The real problem for China is that there are no relatively safe
investments other than U.S. Government bonds that are deep and liquid
enough to absorb a significant share of the massive inflow of dollars
that enter China each year as a result of its large trade surplus,
inward foreign direct investment and hot money in anticipation of a
significant RMB appreciation. And the dollar-recycling strategy is, of
course, heavily dependent on Beijing's desire to maintain a relatively
tight relationship between the RMB and the dollar. Overall, that means
that China is likely to continue to hold large amounts of dollar assets
and that these holdings will grow each year by a sizeable amount.
IV. RECOMMENDATIONS
The S&ED is an important forum through which the United States and
China can ameliorate the tensions in their relationship and cooperate
on policies to foster a balanced and prosperous world economy.
The United States should continue to cooperate with China in the
G20 on macroeconomic policies to support a strong global recovery and
to foster more balanced global growth in the future.
China's stimulus policies fostered a strong rebound of the Chinese
economy and boosted global growth by providing strong demand for
exports from the United States and China's other trading partners in
2009 and through the first half of 2010. China's stimulus policies
helped rebalance China's growth away from dependence on exports and
toward domestic demand. In 2009, consumption growth accounted for about
half of China's GDP growth and China's current account surplus as a
share of its GDP declined by nearly 50 percent.
We recommend that China continue to rebalance its future growth in
order to increase the contribution of consumption and to reduce the
contribution of exports, and we believe that China will do so out of
both necessity and choice. The likelihood of slower consumption growth
in both Europe and the United States over the next several years will
mean slower growth in the demand for China's exports. To preserve
social stability, on which the legitimacy of its leadership depends,
China must boost domestic demand to absorb its growing labor force, to
move surplus labor from low-productivity agriculture to higher
productivity manufacturing and services, and to reduce rural-urban
income gaps.
We believe that China's infrastructure-led stimulus policies are
building the foundation for strong future growth in domestic
consumption. We also recommend and expect that China's upcoming 12th
Five-Year Plan will spur accelerated proconsumption rebalancing through
investments in China's social safety net, through policies to promote
services industries and through tax and other policies to reduce urban-
rural income inequality.
We believe that as a result of its consumption-led rebalancing,
China's multilateral trade and current account surpluses will be
significantly lower as a share of GDP in the future than they were in
the peak years of 2006-2008.
China's exchange rate should be assessed from a multilateral
perspective rather than from a bilateral, dollar-centric perspective.
We applaud China's June 19 decision to end its crisis-induced RMB-
dollar fixed peg and return to the ``managed float'' foreign exchange
regime it first adopted in July 2005. A more flexible RMB driven by
market forces benefits the global economy because it facilitates more
balanced, sustainable global growth. It is also in China's interest
because it supports China's rebalancing goals and it allows China to
pursue a more independent monetary policy. At the same time, a tightly
managed band on the dollar-RMB exchange rates is an important stability
anchor for China's transition to more open capital markets. China's
decision to return to a more flexible currency regime and allow the
RMB-dollar rate to move within a managed band will allow the RMB to
appreciate gradually in response to market forces. Over time, a
stronger RMB will contribute to China's rebalancing by boosting the
purchasing power of Chinese consumers and by encouraging Chinese
producers to shift production toward domestic demand and away from
exports.
We do not endorse the view that China should make a large
adjustment in the RMB-dollar rate at this time. The RMB has already
appreciated significantly in real terms on a multilateral trade-
weighted basis. The key imperative for China is to reduce its saving
surplus and rebalance its macrostructure. Proconsumption policy
initiatives will be more important than changes in the RMB's trade-
weighted exchange rate in achieving these goals. The United States
should refrain from making explicit demands about how China should go
about implementing its rebalancing agenda. In particular, the choice
between proconsumption structural adjustments and the RMB-dollar
exchange rate should be left to China.
A significant appreciation of the RMB relative to the dollar will
not have a significant effect on the U.S. trade deficit or on U.S.
employment. Much of the growth in U.S. imports from China has been the
result of production moving to lower cost China not from the United
States but from other higher cost countries, especially in Asia. And
China's bilateral trade deficit with the United States needs to be seen
as but one piece of a much broader multilateral problem, reflecting
America's large saving gap.
The United States should not impose tariffs on Chinese exports if
there is not a significant appreciation of the RMB. Such tariffs would
drive production to other emerging market economies not to the United
States. In addition, China would retaliate in one of three ways all of
which would be damaging to U.S. interests: lodging a WTO complaint that
would almost certainly prove successful; imposing tit-for-tat tariffs
on U.S. exports to China; or reducing demand for U.S. securities.
Section 3004 (b) of the Omnibus Trade and Competitiveness Act of
1988, which requires the Treasury to issue a biannual foreign exchange
report assessing whether U.S. trading partners are ``manipulating''
their exchange rates vis-a-vis the dollar, has become dangerously
politicized and should be repealed or revised. Currency values should
be assessed on a multilateral basis rather than a bilateral basis, and
the International Monetary Fund, rather than the U.S. Treasury, is the
appropriate multilateral organization for evaluating the exchange rate
policies of member countries.
The U.S. current account deficit is the result of the Nation's
saving gap or the gap between how much the United States is producing
and how much it is spending. To reduce this gap, the United States must
reduce the federal budget deficit and, as the economy recovers, must
increase the household saving rate, which fell to nearly zero during
the 2001-2007 period. A higher household saving rate will require that
the United States rebalance growth away from consumption toward
reliance on exports and investment.
During the recession, the U.S. saving gap has declined relative to
GDP, primarily as a result of a sharp temporary increase in private
saving as households and businesses deleverage. But the saving gap has
remained substantial as a result of stimulus policies that have caused
a big increase in ``dissaving'' by the Federal Government. What happens
to the U.S. current account deficit in the future as the economy
recovers depends on what the United States does to reduce its saving
gap. China's trade and exchange rate policies are of second-order
significance. If the United States fails to reduce this gap, its trade
and current accounts deficits will rise again as a share of GDP even if
China succeeds in rebalancing its economy.
The possibility of an asymmetrical global rebalancing scenario
remains a very real risk. China's stimulus policies and the likely
proconsumption thrust of the upcoming 12th Five-Year Plan indicate that
China should make significant progress in rebalancing its economy over
the next several years. In contrast, the stimulus policies in the
United States, although essential and justifiable to offset the 2008-
2009 recession, have exacerbated the long-run saving gap and have not
rebalanced growth from consumption toward exports and investment. And
given the partisan atmosphere in Congress, passage of a credible
multiyear deficit reduction plan to reduce the saving gap on a
sustained basis once the economy has recovered seems unlikely--at least
in the near future.
According to projections by the OMB, the CBO, and private
forecasters, U.S. fiscal policy is not on a sustainable path: in the
absence of additional deficit reduction policies, the Federal
Government's debt will continue to rise relative to GDP through 2020
even if the economy recovers from the 2008-2009 recession.
At the S&ED discussions, the United States committed to adopting
policies to achieve fiscal sustainability in the medium to long run and
to stabilize the debt-to-GDP ratio. Given the size of projected Federal
Government deficits, these policies will require some combination of
painful spending cuts and revenue increases. We recommend that the
Congress work with the administration to pass a credible multiyear
deficit reduction plan to stabilize the debt to GDP ratio. This plan
should take effect gradually as the economy recovers: policies to
reduce the deficit too quickly will slow the recovery and increase the
losses in potential output from high unemployment and excess capacity.
Access to China's large and growing market is a significant factor
in the success of many U.S. businesses, both large multinational
companies and many small- and medium-sized companies as well. Reducing
barriers that impede the access of U.S. companies to China's markets is
and should continue to be a major objective of U.S. trade policy.
China's industrial policies appear to be changing in ways that are
reducing access of foreign producers to China's market and that fall
outside of WTO rules and enforcement procedures. Indigenous innovation
policies, discriminatory procurement behavior by state agencies and
state-owned enterprises, national standards that appear to favor
national champions, lax enforcement of intellectual property
protection, and implicit or explicit local content rules in strategic
activities like renewable energy are areas of growing concern to U.S.
companies. The United States should continue to negotiate with China to
reduce these barriers both in the S&ED discussions and in regional and
multilateral discussions that include China's other trading partners
who are also disadvantaged by such barriers.
Given the importance of the government and of state-owned companies
in the Chinese economy, China's participation in the Government
Procurement Agreement (GPA) of the WTO should be a major objective of
U.S. trade policy. The United States should negotiate with China to
ease U.S. security controls on exports to China and to advance the
timing for the recognition of China's market economy status in the WTO
(currently scheduled for 2016) in return for a strong offer by China to
join the GPA. A bargain along these lines could also help revitalize
the Doha talks, something the United States and China committed to do
at the recent S&ED meeting.
The United States should take the lead in negotiating a Trans-
Pacific Partnership agreement as a major step to the creation of a free
trade area for the Asia Pacific. Several bilateral and regional
preferential trading agreements have recently been signed in Asia, and
the region is heading toward the de facto creation of an economic bloc
that would be discriminatory against the United States. The completion
of a Trans-Pacific Partnership agreement would arrest this disturbing
trend and could re-ignite APEC's role in global trade liberalization.
In the 1990s, APEC played a key role in the negotiation of a global
agreement liberalizing trade in information technology products. A
revitalized APEC could play a similar role in the creation of a global
agreement on trade in ``green'' technologies and products.
A threat by China to shift the allocation of its vast foreign
exchange reserve portfolio away from U.S. securities to respond to a
foreign policy dispute with the United States or to retaliate against a
U.S. policy deemed to be an assault on China's sovereignty is a
credible threat that should be taken seriously. Even the suggestion of
such a move could trigger concerns among global investors about the
huge financing needs of the U.S. Government, causing a sharp spike in
interest rates, a crisis of confidence in U.S. sovereign debt, and a
collapse in the dollar. As the world's largest external borrower, the
United States must exercise great caution in exerting undo pressure on
its most important foreign lender.
References
Michael Linden and Michael Ettlinger, ``Restoring Fiscal Balance:
The new Deficit Commission's 2015 Targets, Center for American
Progress,'' April 26, 2010.
Eswar Prasad, ``The U.S.-China Economic Relationship: Shifts and
Twists in the Balance of Power,'' written testimony, hearing on ``U.S.
Debt to China: Implications and Repercussions,'' U.S.-China Economic
and Security Review Commission, February 25, 2010.
Stephen S. Roach, ``Consumer-Led China,'' a paper presented to the
11th annual China Development Forum, sponsored by the Development
Research Center of the State Council PRC, held in Beijing on March 20-
22 2010.
Stephen S. Roach, ``America's China Complex,'' American Review, May
2010.
Alan W. Wolff, ``China in the WTO,'' written testimony, hearing on
``Evaluating China's Role in the World Trade Organization over the Past
Decade,'' U.S.-China Economic and Security Review Commission, June 9,
2010.
Alan W. Wolff, ``The Direction of China's Trade and Industrial
Policies,'' written testimony, hearing on China's Trade Policies, House
Ways and Means Committee, June 16, 2010.
The Chairman. Thank you very much, Dr. Tyson.
Ambassador Hills.
STATEMENT OF HON. CARLA A. HILLS, FORMER U.S. TRADE
REPRESENTATIVE, CHAIRPERSON, NATIONAL COMMITTEE ON U.S.-CHINA
RELATIONS, WASHINGTON, DC
Ambassador Hills. First of all, thank you very much, Mr.
Chairman, Senator Lugar, and the other members of the
committee. It's a great pleasure to appear again before the
Senate Foreign Relations Committee.
I think your focus on the economic issues is absolutely
indispensable today. I have submitted testimony that responded
to your seven questions, and I just picked out three issues
that I thought I would summarize, since I was told 5 minutes
was the limit. One is trade, one is the imbalance, and, last,
the Strategic and Economic Dialogue. And I look forward to your
questions.
Our Secretary of State has stated, not once but several
times, that our relationship with China is the most important
bilateral relationship in the world in this century. And in the
area of trade, I would say that is already evident.
Between 2000, the year before China entered the World Trade
Organization, and 2008, just before the great recession, United
States sales to China increased 340 percent; whereas, during
that same period, our sales to the rest of the world increased
just 29 percent. And, significantly, every State in the Union
has seen near triple-digit growth of their sales to China. Even
more significantly, in my opinion, last year, when global trade
plummeted 11 percent, pulling global growth into negative
territory, our exports to China held steady, where our exports
to the rest of the world fell by 20 percent.
And, as Senator Lugar has pointed out, today China is our
fastest growing export market, and has become our second-
largest export market, behind Canada. And we both benefit from
keeping our respective markets open and avoiding all forms of
protection, such as Buy America legislation and Buy China
policies.
And it is in our mutual interest to work further to open
global markets. As Dr. Gary Hufbauer, of the Peterson Institute
for International Economics, has calculated, the United States
economy is $1 trillion richer per year as a result of our
leadership in opening global markets since World War II, and,
similarly, it's thanks to open markets that China has achieved
double-digit growth for the past three decades that has lifted
hundreds of millions of people out of dire poverty.
So, going forward, we should boost our global trade and
with it our respective nations' growth by reaching agreement in
the Doha Round, and we're more likely to achieve an agreement
in those negotiations if the United States and China work
together.
In addition, while both of our economies are recovering
from the great recession, neither government can ignore the
fact that the existing global imbalance risks triggering
another serious financial crisis. Indeed, the former chairman
of the New York Fed has stated that, even without the housing
crisis here in the United States, the global imbalance would
have eventually led to the crisis that we have suffered.
Now, China, Germany, Japan, South Korea, and others, have
built their growth on exports, accumulating substantial
surplus, whereas the United States, the United Kingdom, and
Spain, and others, have built their growth on consumption,
accumulating substantial debt. Neither growth model is
sustainable. And although the United States has cut its
external Federal debt from its 6-percent peak in 2006 to about
3 percent last year, it still remains the world's largest
debtor nation. And although China has cut its current account
surplus from its 11-percent peak in 2007 to about 5 percent in
2009, it still remains the world's largest creditor nation.
And most thoughtful economists suggest that these declines,
while welcome, are driven more by cyclical factors than by
structural factors. And it's the structural factors that both
nations and their colleagues that find themselves in similar
circumstance need desperately to address.
To ensure that we do not suffer again from a financial
crisis, the global economy simply must be brought into better
balance. And this is a global problem. But, if the largest
debtor nation and the largest creditor nation were to lead by
example and commit to specific structural reforms within
realistic timeframes, with periodic updates, that would not
only give confidence--great confidence, in my view--to the
global market, it would also put our respective economies on a
sustainable growth path and ensure the future prosperity of our
respective populations.
For example, the United States could commit to a plan at a
G20 meeting--we're having a G20 meeting in a couple of days--to
bring its primary budget deficit into balance within say 5
years, and its external deficit into better balance in say 10
years, setting forth benchmarks to measure its progress, which
it would report at future G20 meetings.
Similarly, China could commit to a plan at a G20 meeting to
stimulate its domestic consumption by gradually correcting the
underpricing of capital, water, land, and energy that favors
its state-owned enterprises and heavy industry, that export,
and permitting interest rates to rise on bank deposits, making
credit more available to small- and medium-size enterprises,
and further loosening the controls over its currency, and
providing progress reports in these areas in future G20
meetings.
And the Strategic and Economic Dialogue that was referred
to in your questions provides, in my view, an extremely
valuable forum for thinking through the tough issues, like
rebalancing and protectionism. It brings together Cabinet-level
officials on both sides to discuss difficult challenges facing
both nations, like the need for further opening the global
markets, stimulating innovation, addressing environmental
issues, and resolving bilateral differences over trade and
investment. Its value could be enhanced by smaller delegations:
The last delegation coming from the United States numbered 200,
and there was an equal number on the Chinese side; it's tough
to achieve a real personal relationship in a group of 400. And
more frequent meetings would facilitate the building of the
personal relationships, which I deem to be extraordinarily
important and key to building mutual trust.
There's so much more that I could say, but I notice the
clock is blinking. And so, let me stop. And I am pleased to
take your questions.
[The prepared statement of Ambassador Hills follows:]
Prepared Statement of Hon. Carla A. Hills, Chair and CEO of Hills &
Company, International Consultants, Washington, DC
Mr. Chairman and members of the committee, thank you for inviting
me to share with you my views regarding opportunities and challenges in
the United States-China Economic Relationship. You have posed seven
questions.
I. WHAT ARE THE KEY ISSUES FOR THE UNITED STATES AND CHINA POLICYMAKERS
TO CONSIDER REGARDING FAIR AND OPEN ACCESS TO EACH OTHER'S MARKET?
1. Keeping Bilateral and Global Markets Open
The most important issue for leaders in the United States and in
China to keep firmly in mind is that their nation's prosperity requires
keeping bilateral and global markets open. History shows that no
country has done well by sealing itself off from the world.
Economist Dr. Gary Hufbauer in a comprehensive study published by
the Peterson Institute for International Economics calculates that the
opening of global markets since World War II has increased our nation's
GDP by roughly $1 trillion per year, thus raising the average American
household yearly income by $9,500. He further calculates that the
additional opening of world markets to trade and investment could
increase U.S. wealth potentially by another $500 billion per year,
making the average American household richer by an added $4,500 per
year. It is hard to think of another economic policy decision that
could have such a positive impact on U.S. economic well-being.
And it is thanks to the opening of global markets that China has
averaged double digit growth over the past three decades, enabling it
to lift hundreds of millions of people out of dire poverty. Today,
China has become the world's fastest growing major economy. This year
it is likely to replace Japan as the world's second-largest economy.
The benefits of open markets are enormous. The prosperity of the
peoples of both China and the United States will be enhanced by
maintaining a strong and vibrant economic relationship.
Yet economic hardship inevitably stokes economic nationalism. Last
year for the first time since World War II, global trade plummeted 11
percent and global output fell into negative territory. Americans were
hit by historic job losses, home foreclosures, and bankruptcies. China
did not escape the crisis. It was forced to shutter hundreds of
assembly and manufacturing facilities putting millions of people out of
work.
Although the International Monetary Fund forecasts world output
will grow by more than 4 percent this year and global trade will
increase by 7 percent, there is considerable pain remaining.
Policymakers in the United States and in China will expedite the
economic recovery that is now underway by resisting calls to impose
market barriers on the trade or investment of the other.
In spite of our different histories, form of governments, and
domestic sensitivities, an important fact for both Chinese and American
policymakers to keep in mind is the enormous potential for extremely
positive interaction between the largest and the fastest growing
economies.
2. Rebalancing Our Economies
While both of our economies are recovering, our policymakers cannot
ignore the fact that the imbalance that exists in our respective
economies could trigger another crisis. In the last half decade China
has become the world's largest creditor nation, and the United States
its largest debtor nation. Although China has cut its surplus from its
peak in 2007 of 11 percent of its GDP to about 5 percent in 2009 and
3.5 percent in the first quarter of 2010, and the United States
external federal deficit has come down about from its peak in 2006 of 6
percent of GDP to 2.8 percent in 2009, thoughtful economists who have
studied this issue believe that both declines were largely driven by
cyclical factors and that structural changes are still required if we
are to protect against future global financial crises.
The United States will need to reduce both its primary budget
deficit and its external deficit. China will need to reduce its
reliance on exports and heavy industry. Although the action that each
government takes to restructure its economy is independent of the
other, it is an issue that both policymakers must address.
II. WHAT POTENTIAL DOES THE CHINESE MARKET HOLD FOR U.S. COMPANIES?
The actual and potential of the Chinese market is substantial and
growing. China has become America's third-largest export market behind
Canada and Mexico and is our fastest growing export market. Between
2000, the year before China joined the World Trade Organization (WTO)
and 2008, U.S. sales to China increased 340 percent whereas U.S. sales
over that same period to the rest of the world increased just 29
percent.
Importantly, virtually every state in the union has seen near
triple digit increases in its sales to China. Last year computers and
electronics, crop production, chemicals and transportation equipment
comprised our top four exports to China. These are all sectors that
generate good domestic jobs.
And in 2009 when for the first time since WWII trade plummeted 11
percent dragging world growth into negative territory, U.S. exports to
China held steady whereas U.S. exports to the rest of the world fell
nearly 20 percent. This year through April, U.S. exports to China are
up 42 percent and are 17 percent higher than the comparable period in
2008.
It is not surprising that U.S. companies continue to seek to do
business in and with China. In 2009 in spite of the economic crisis
that adversely affected both China and the United States, the value of
U.S. goods exported to China was about $70 billion roughly the same
amount as before the crisis, and if sales of U.S. goods to Hong Kong
are added, the total climbs past $90 billion. In addition, U.S. exports
of services to China topped $15 billion. And sales of U.S. affiliates
in China topped $84 billion in 2007 before the crisis and the latest
year for these statistics. In short, the U.S. current market in China
exceeds $100 billion and that market is steadily growing.
III. WHAT ARE THE CHIEF OBSTACLES THAT U.S. COMPANIES FACE IN CHINA?
Foreign companies face a number of obstacles in doing business in
China. There are voices in the Chinese leadership, as there are here in
the United States and elsewhere, urging the adoption of restrictive
measures to protect specific interests of domestic businesses. Measures
in China that have been particularly nettlesome to U.S. companies
include:
1. Government Procurement: ``Indigenous Innovation'' Policy
In 2006, China, in an effort to produce ``national champions,''
adopted an ``Indigenous Innovation'' policy that sought to encourage
government purchases of domestic products in specific sectors. Last
year the government produced lists of favored products. As a result of
bilateral dialogues, the government has moved from mandating domestic
purchases to encouraging them. However this ``buy China'' policy is a
major concern to U.S. entrepreneurs, particularly those in the high
technology sectors.
2. Protection of Intellectual Property
According to a survey conducted by the United States-China Business
Council, two-thirds of U.S. companies found China's failure to protect
adequately intellectual property adversely affected their businesses in
China. Getting the legal structure right is important. In 2009, the
United States brought and won a case in the WTO dealing with copyright
infringement which resulted in China amending its laws. However,
enforcement is a major problem at the central, provincial and local
levels.
3. Standards and Testing
U.S. companies are adversely impacted by standards that are drafted
to favor Chinese domestic products. For example, an ingredient that is
harmless may be prohibited in a particular product when that ingredient
is not used in competing Chinese products.
U.S. companies find China's testing process challenging. A Chinese
certification board is responsible for testing most products sold in
China. That top-down approach is different from the process used in the
United States where industry develops the product standards in the
first instance.
4. Investment Restrictions
A United States-China Business Council survey of its member
companies doing business in China indicates that roughly 90 percent of
its member companies invest in China to reach the market there, not to
export back to the United States. Although some sectors are open,
others including chemicals, automobiles, telecommunications and express
delivery encounter some restrictions. China is in the process of
revising its 2007 Catalogue Guiding Foreign Investment in Industry.
IV. HOW CAN THE UNITED STATES BEST STRENGTHEN ITS TRADE AND INVESTMENT
TIES WHILE ENSURING U.S. COMPETITIVENESS IN AN INCREASINGLY COMPETITIVE
ENVIRONMENT?
Our Nation can strengthen its trade and investment ties with the
trading nations of the world including China in a number of ways
including (1) leading the 153 members of the World Trade Organization
(WTO) to a successful conclusion of the Doha Round of Multilateral
Negotiations; (2) expanding efforts to open markets with the 21
economies comprising the Asia Pacific Economic Cooperation forum (APEC)
starting with completing the Trans-Pacific Partnership; (3) approving
the three pending free trade agreements that have been signed with
South Korea, Colombia, and Panama; (4) completing the negotiation of a
Bilateral Investment Treaty with China; and (5) addressing our
restrictions on immigration that reduce our competitiveness.
1. Doha
For six decades the United States under both Democratic and
Republican administrations led the world in opening global markets to
trade and investment with the result that economic growth both globally
and nationally soared for rich and poor nations alike. Our actions in
the early multilateral negotiations under the General Agreement on
Tariffs and Trade (GATT) accelerated the economic rebuilding of nations
devastated by World War II. Today we could be equally far sighted by
achieving an agreement in the Doha Round of Multilateral Negotiations
that would integrate developing nations more solidly into the global
trade regime and in so doing enlarge trade and investment opportunities
that would fuel economic growth at home and around the world.
Unfortunately, we are no longer leading efforts to open global markets.
Currently in its ranking of 133 trading nations, the World Economic
Forum ranks the United States behind 43 nations in terms of how open
the domestic market is to trade. However, the Doha Round offers our
Nation an outstanding opportunity to do well by doing good. One example
stands out. By agreeing to reduce meaningfully our agricultural
subsidies, we could persuade other governments with high subsidies to
do the same. Opening global agricultural markets would not only benefit
our farm exporters, but it would show the world that we are serious
about taking steps to put our Nation on more a more sustainable fiscal
path.
2. APEC and TPP
Expanding our trade and investment ties in Asia offers the United
States a significant opportunity to stimulate domestic economic growth
and job creation. The 21 members of the Asia Pacific Economic
Cooperation forum (APEC) represent approximately 2.5 billion consumers,
58 percent of global trade, and more than half of world output. Over
the past decade most of the increase in global growth has been
generated by the APEC economies. Collectively these economies account
for a majority of our Nation's exports. Further opening these markets
to U.S. entrepreneurs would enhance our Nation's competitiveness in the
world's most vibrant region where other major trading nations including
China, Japan, South Korea, the European Union and the economies
comprising the Association of Southeast Asian Nations (ASEAN) have
negotiated or are currently negotiating bilateral and plurilateral
trade agreements that advantage their entrepreneurs over ours.
Obtaining equal or better access to these markets would enhance our
Nation's competitiveness, create jobs, and boost growth.
Achieving this will require leadership and action on our part. To
strengthen our trade and investment ties in this high-growth region, we
should move forward promptly to negotiate the Trans-Pacific Partnership
(TPP),\1\ which could serve as a first step toward a broad market
opening agreement in the region which over time could incorporate
additional APEC members, such as Japan, South Korea, Indonesia,
Malaysia, and eventually China. Such an agreement would not only
enhance our Nation's competitive position, it would also create a
visible bond across the Pacific to work against the world splintering
into three blocs (Asia, Europe, and the Americas) which would both
impede global and national economic growth and increase the potential
for global instability. The APEC summit in Hawaii in 2011 gives the
United States an excellent opportunity to showcase a completed TPP,
which would demonstrate its renewed commitment to the region.
---------------------------------------------------------------------------
\1\ Currently involving Australia, Brunei, Chile, New Zealand,
Peru, Singapore, the United States and Vietnam.
---------------------------------------------------------------------------
3. Approval of Pending Free Trade Agreements
A. Korea Free Trade Agreement
Approval of the Korean Free Trade Agreement would both enhance our
competitiveness in Asia and demonstrate our continued interest in the
region. Under its terms South Korea, currently our seventh-largest
trading partner, would open its market to U.S. farm products, goods,
and services, enhance its protection of intellectual property and
substantially open government procurement. Ninety-five percent of
bilateral trade in consumer and industrial products would become duty
free within 3 years. The agreement would cause trade to expand between
our two nations and stimulate both economic growth and jobs in both
markets and put our entrepreneurs on an equal footing with the growing
list of major trading nations that have already negotiated trade
agreements with South Korea.\2\ Significantly, it has indicated an
interest in negotiating a trade agreement with China, which if
concluded, would put our exporters at a substantial disadvantage in one
of our key export markets.
---------------------------------------------------------------------------
\2\ Korea currently has five free trade agreements in effect, two
that are signed and pending ratification, negotiations underway with
eight other countries and is considering entering negotiations with six
more.
---------------------------------------------------------------------------
B. Colombia and Panama Free Trade Agreements
Approval of the trade agreements that the United States has signed
but not ratified with Colombia and Panama would substantially enhance
our competitiveness in Latin America. Colombia with its $250 billion
economy is the second-largest in South America. Today in excess of 90
percent of U.S. imports from Colombia enter the United States duty free
while relatively high tariffs are imposed on most U.S. exports. The
agreement would eliminate 80 percent of those tariffs and open up
markets to a broad range of services and investment. That would make
exports more competitive and remove the additional disadvantage our
exporters face not only by ``leveling the playing field'' between the
two countries but also by achieving equality with Colombia's other
trading partners like Canada that have already entered a free trade
agreement with Colombia.
Similarly opening Panama's market would make our goods, services,
and investment more competitive. It makes no sense for us to be the
impediment that enables Panama to ship its products duty free and to
assess duties on our services and goods including our competitive heavy
equipment used for canal upgrades when much of our competition ships
duty free.
4. Bilateral Investment Treaty With China
As economist Dr. Hufbauer has ably documented U.S. outward foreign
investment pulls U.S. exports into the foreign market, while inward
foreign investment into the United States boosts economic growth and
creates domestic jobs. To establish clear rules governing inward
investment gives certainty to the market and confidence to investors,
plus it helps to avoid controversy. In June 2008 at the fourth
Strategic Economic Dialogue, China and the United States agreed to
begin negotiations of a bilateral investment treaty to protect the
interests of their respective investors in the other's economy. Such an
agreement would protect our investors against discriminatory measures
that today account for a major portion of the obstacles that confront
our businesses in China. With economic nationalism on the rise in both
countries, moving ahead to conclude an investment treaty would enhance
U.S. competitiveness by insuring that we can capture the growth and
jobs that attend cross border investment.
5. Immigration Contributes to U.S. Competitiveness
We usually talk of trade ties in terms of goods, services, and
investment and less frequently mention people and ideas. Yet the United
States is a nation of immigrants. Talented people from all over the
world come to work or study in the United States bringing their ideas,
starting businesses, creating jobs and contributing to our
competitiveness. According to a study published in 2008 by the Small
Business Administration,\3\ immigrants constitute 12.5 percent of U.S.
businessowners and start 25 percent of new engineering and technology
companies. Another study published in 2009 by the American Electronics
Association,\4\ found that immigrants were CEOs or lead technologists
in one of four technology and engineering companies started in the
United States between 1995 and 2005. These immigrant-founded companies
employed 450,000 workers and generated $52 billion in revenues in 2006.
Unfortunately for our economic growth, creation of new jobs, and
overall competitiveness the annual number of H-1B visas is sharply
restricted. Current law limits H-1B visas to 65,000 annually with up to
20,000 available for foreign nationals holding advanced degrees from an
American university. America could boost its growth, job creation, and
competitiveness by opening its doors more widely to talent from beyond
its border.
---------------------------------------------------------------------------
\3\ Robert W. Fairlie ``Estimating the Contribution of Immigrant
Business Owners to the U.S. Economy,'' Small Business Administration
Office of Advocacy, November 2008, http://www.sha.gov/advo/research/
rs334tot.pdf.
\4\ ``Workforce & Immigration Overview: Maintaining a High-Skilled
U.S. Technology Workforce,'' 2009, http://www.acanet.org/
GovernmentAffairs/gaet_1B_HIBVisa.asp.
---------------------------------------------------------------------------
V. THE STRATEGIC AND ECONOMIC DIALOGUE IS OUR BILATERAL FORUM FOR
ENGAGEMENT ON MANY OF THESE ISSUES. HOW WOULD YOU RATE THE
EFFECTIVENESS ON THESE ISSUES?
I believe that the Strategic and Economic Dialogue is an important
bilateral forum that can help our government to build a solid
relationship with the world's fastest growing economy. It provides the
opportunity for our leaders at the highest level to meet their
counterparts and discuss critical issues. These discussions can enhance
our understanding of China's economic challenges as well as its
strategic objectives and ensure that China's leaders understand ours.
Mutual understanding is indispensable to finding solutions to tough
issues. The list of economic issues that require collaboration for
proper resolution is long and growing including rebalancing our
national and the global economies, energy security, trade policy,
financial reform, and environmental protection. To address effectively
these and other issues, it is overwhelmingly in our national interest
to maintain a close, candid, and collaborative relationship at the
highest levels, and the Strategic and Economic Dialogues help to do
just that.
We know that high-level engagement works. In recent years our
Deputy Secretary of State met frequently to discuss issues of foreign
policy. In addition our Secretary of the Treasury led the effort called
the Strategic Economic Dialogue (SED) whereby Cabinet-level officials
from both governments met to discuss economic issues for 2 days twice a
year. The purpose of the SED was to discuss complex, longstanding,
economic challenges and to craft solutions satisfactory to both
governments.
Since both our governments are quite compartmentalized and have
different organizational structures, these meetings helped to
circumvent the stovepipe structures that impede decisions by bringing
to the table all the high-level officials on both sides required for a
decision.
These face-to-face meetings enabled both sides to understand the
concerns of their counterparts and led to a number of positive
outcomes. For example in 2007 when food and safety issues were very
much in the news, high-level officials from both governments seriously
discussed at an SED meeting effective ways to deal with these issues.
At the next meeting of the SED, representatives of our Food and
Drug Administration and our Consumer Products Safety Commission and
their Chinese counterparts were able to announce a Memorandum of
Understanding covering how they would cooperate in food and safety
investigations. Representatives of our FDA have publicly stated that
they had never before enjoyed such a high level of positive interaction
with their counterparts in China. They have established offices in
Beijing, Guangzhou, and Shanghai.
More recently at the S&ED meeting this past May, after discussion
the Chinese Government agreed to submit a proposal to join the WTO
Government Procurement Agreement by the end of July. Such an agreement
would protect our entrepreneurs against some of the discrimination that
they name as the top obstacle they encounter today in penetrating the
Chinese market.
The economic dialogues not only provided an effective forum for
raising and solving economic issues of concern to both our governments,
but they also created a mechanism that avoids having to initiate talks
among strangers in the heat of a crisis.
Accordingly I was very pleased when it was announced that our
Secretaries of State and Treasury would share leadership of a high-
level bilateral dialogue, now called the Strategic and Economic
Dialogue. The S&ED first met in July last year and again last month for
2 days on each occasion. The plan is to hold these meetings on an
annual basis dedicating one day to a plenary session and the second day
to separate discussions on economic and strategic issues.
The one downside that I see in the new structure is its sheer size.
In May our delegation to Beijing comprised 200 senior officials, the
largest U.S. delegation to China in the history of our bilateral
relationship. The merged strategic and the economic groups bring
together such a large number of participants that relationship-building
that has been so helpful in the past will be far more difficult.
Another downside I see is that the stated intention is to meet
yearly rather than twice each year. Formerly, two full days twice a
year, four days total, were devoted to economic discussions. Now only
one day each year will be devoted exclusively to economic issues. Our
bilateral economic agenda is long and growing longer which suggests to
me the need for more rather than fewer meetings.
There are two other bilateral dialogues that provide valuable means
to have sustained focus on critical economic issues, but they are not
conducted at the same high level. One is the Joint Commission on
Commerce and Trade, a senior officials group that has formed some 17
working groups to address specific issues including industrial and
competition policy, intellectual property, information technology, and
trade and industry. Most of these plan to meet twice a year.
The second is the United States-China Investment Forum, a deputies
led group that is focused on such issues as procurement, standards, and
access to markets for services.
VI. CAN WE MAXIMIZE OUR ABILITY TO ADDRESS CONCERNS ABOUT CERTAIN
CHINESE ECONOMIC POLICIES THROUGH MULTILATERAL FORA SUCH AS THE G20?
The G20 group of nations representing the world's 20 largest
economies which has replaced the G8 representing the eight large
industrialized nations is far better equipped to deal with today's
global economic challenges.
Three issues of key importance to both the United States and China
are better suited to the G20 forum than bilateral discussion: (1)
China's currency regime; (2) the need to rebalance the global economy;
and (3) the need to keep global markets open in the face of domestic
calls for protectionism.
I. China's Currency Regime
China's currency controls have been an issue of contention not only
with the United States, but also with the European Union, which is
China's largest trading partner, as well as a number of other nations.
China's announcement a few days ago that it will permit the yuan to
gradually appreciate will help to reduce those tensions. Monitoring
this issue at future G20 meetings will be helpful in that it will
maximize pressure on China which wants to be seen as constructive in
international fora and minimizes bilateral contention.
2. Rebalancing the Global Economy
The global recovery that is currently underway, faster for some
than for others, could be derailed by the serious imbalance of the
global economy that has ballooned in recent years. China, Germany,
Japan, South Korea, and other Asian economies have built their growth
on exports, whereas the United States, the United Kingdom, and Spain
among others have relied excessively on domestic consumption,
particularly in the housing sector, to fuel economic growth.
Although investment excesses by the financial sector triggered the
fiscal crisis in 2008, there is general agreement that the global
imbalance made the crisis much worse. As stated last year by Gerald
Corrigan, former President of the New York Federal Reserve: ``It is
highly likely that these imbalances would create a serious
macroeconomic problem even if we had not had the fiscal problem.''
If we are to protect against future global financial crises, the
global economy must be brought into better balance. That will require
debtor and creditor nations to alter their existing economic models to
put their economies on a more sustainable growth plan. Debtor nations
cannot continue to consume at the excessive levels of the past, and
creditor nations must look more to their own consumers to fuel their
economic growth.
This is a global problem and requires a global solution. However,
global balance is more likely to be restored if the world's largest
debtor nation and its largest creditor nation were to lead by example
with each committing to specific structural reforms, spelling out the
steps that each would take within specific timeframes, and agreeing to
provide periodic updates regarding progress. That would boost
confidence in the future health and stability of the global market,
which in turn would help keep our respective domestic economies on a
sustainable growth path.
The required changes will take time to implement. But a plan of
action over a period of years could be announced that would give
confidence to the market and to investors. One could imagine the United
States announcing a plan at a G20 meeting to bring its primary budget
deficit into balance within a specified period like 5 years and its
external deficit into balance in a specified period like 10 years and
to report regularly at future G20 meetings on its progress.
Similarly, one could imagine China announcing at a G20 meeting a
plan to stimulate its domestic consumption by correcting its
underpricing of capital, water, land, and energy to large enterprises,
permitting interest rates to rise on bank deposits, making credit more
available to small- and medium-size businesses, and continuing the
steady and gradual loosening of controls on the yuan that it announced
this past weekend with progress reports on these structural changes at
future G20 meetings.
Such a commitment by the United States to undertake structural
reform necessary to achieve more balanced growth would not be a favor
granted to nor conditioned on action by China, nor would a decision by
China to make structural changes to stimulate domestic consumption be a
favor granted to or conditioned on action by the United States.
The policy corrections that each needs to make are necessary to
ensure each nation's future financial stability and prosperity, for if
corrections are not made the global imbalance will likely ignite
another economic crisis. By their respective actions, they would not
only give confidence to the market but also help persuade other nations
with imbalances to follow their lead. The G20 provides an appropriate
forum.
3. Keeping Global Markets Open
Leaders of the G20 nations which account for 85 percent of world
output and 80 percent of world trade have taken a leadership role with
respect to the global economy. They meet biannually to consult and
collaborate on critical global economic issues.
The G20 leaders instead of simply pledging support could take
action and make history by bringing the Doha Round to a successful
conclusion. Economic studies document that the reductions in trade
barriers that could be secured in this round of trade talks would boost
world output between $300 billion and $700 billion a year. We need that
growth now.
VII. WHAT ARE YOUR BROAD VIEWS ON THE IMPORTANCE OF THE ECONOMIC
RELATIONSHIP AS PART OF A LARGER FOREIGN POLICY AGENDA?
There is no question but that a collaborative, constructive
economic relationship creates a positive environment for discussing
tough and contentious foreign policy issues. Even where national
interests on foreign challenges diverge, a solid economic relationship
makes serious discussion of and possible narrowing of those differences
more likely.
That does not mean that we should forgo pressing our economic
interests. From time to time we will have economic differences with our
large and important trading partners, including China. When we believe
that China or any trading partner has violated recognized rules of the
WTO, or the rules of other international agreements, we should act and
use the dispute settlement mechanisms provided to resolve the problem.
And where the rules of the system are insufficient, we should negotiate
to ensure that they reflect market realities.
Our government has taken China to the WTO eight times. We have
settled four of the cases, won three and have one pending. China has
brought five cases against us. We have settled one, won two, and lost
two.
This is how the WTO trade regime should work. It enables us to
resolve trade issues under mutually agreed transparent rules minimizing
friction.
CONCLUSION
Managing United States-China relations presents challenges but also
very substantial opportunities. Many in America ask: Can the world's
largest and fastest growing economies constructively work together to
enhance our future prosperity and stability? Or have the differences
between our increasingly competitive economies along with those
differences in our histories, forms of government, and domestic
sensitivities become too great to enable us to harness our respective
strengths to deal effectively with today's bilateral and global
challenges?
My answer is that we can, should, and must work constructively
together. Most importantly, I believe that by doing so we can build
habits of cooperation that will help us deal effectively with new
challenges as they arise which will not only enhance the well-being of
the people of the United States and of China but will contribute
meaningfully to global peace and stability.
The Chairman. Well, Ambassador Hills, Dr. Tyson, thank you
very much. You've put a lot of food for thought on the table,
and I want to pick up in a few places right away.
Ambassador, you just mentioned that China's open markets
have resulted in the double-digit growth. A lot of people would
argue about how open that market really is; sort of a one-way
street, in some people's opinion.
I was over there recently, meeting with a bunch of our
companies, all of whom complained about the Chinese Government
bidding process and procurement process, and how really
impossible it was for them. You know, they'd bid, they'd do
well, but they never got chosen. It was always a domestic
company or a majority-owned company. It's always, you know,
China-centric.
Now, that works very effectively for them, obviously. And
with the kind of growth that they've had and the opportunities
they've had, a lot of people are willing to, you know, put
their money down and go for it.
But, it's not creating the kind of--I mean, the single
biggest effect on this question of the current accounts
deficit--on our current accounts deficit while we've gone up
the 300 percent as you've mentioned, it's nowhere near where it
ought to be, nor is their consumption commitment where it ought
to be.
So, I mean given the clear penchant for the Chinese to kind
of do what they want, when they want, which is what they've
done on the renminbi, the reevaluation--way late, not enough,
in some people's view--so, it's sort of an incremental deal,
which won't have the kind of impact it ought to.
So, help us understand, if you would, is there any
leverage? Do you have any leverage with your banker--your
biggest banker? Do we have any ability to do anything except
ask and hope?
Ambassador Hills. Well, first of all----
The Chairman. It's not a new topic. We've been going
through this through several administrations, and it's not
getting better, it's getting worse.
Ambassador Hills. Mr. Chairman, I would say that our trade
with China over the last decade has soared. The figures that I
gave you, of a 340-percent increase and China becoming this
year our second-largest export market, is really remarkable for
a country that, in 1978, was a Communist country, sealed off
from the rest of the world. It's remarkable progress in three
decades.
And if you look at where our trade deficit has gone, in
1998 the composition of our trade deficit--it was 75 percent in
East Asia; today, it is 49 percent in East Asia and 51 percent
with the rest of the world. And when I say ``East Asia,'' of
course, I include China.
The Chairman. Can I just ask you a question, interspersed
there? Is that because you're sort of heralding the upside? You
can look at it and see the glass, you know, in different ways,
here. But, is the upside of that because China has so
successfully brought so many people in from the agricultural
sector, into an urbanized and production role, that they're
able--that it sort of suits their interests, it's in their
interest to have the particular products come in that come in,
but they're still highly selective about what that is, and how
much? Even though it's gone up significantly, we're still at an
enormous deficit, in terms of our overall debt relationship,
and way behind where we could be, in terms of boosting our own
economy and kicking the entire global economy into gear.
Ambassador Hills. Mr. Chairman, I was trying to answer the
question you posed regarding the degree of openness in the
China market. And the fact that our deficit with East Asia has
declined with China being part of it suggests that it's been
opened. It also accounts for the amount of trade that China has
invited in.
One of the reasons why our deficit has shifted from East
Asia being so large a part, down, is because China has invited
in Japan, Taiwan, Singapore, South Korea, and they are
producing products in China. Many of the products produced in
China are made in China, but not by China. When you buy an
iPod, it comes to our shore at a cost of about $150, and $4 of
that value is Chinese, which is based upon snapping together
component parts from Japan, South Korea, and the United States.
But having said that, the Chinese market is quite open by
Asian standards. They're not as open as the United States.
Their average tariff is about 9 percent, versus ours, at about
3. And we want to continue to work with them to open their
market. They're far more open than India, they're far more open
than Indonesia, but they're not as open as the United States,
which has been working on this since World War II.
And you're absolutely right; there are some very tough
restrictions. I listed them in my testimony. Industrial
policies and restrictions in the form of threatened compulsory
licensing, preferences for domestic products, subsidies for
domestic production are real problems. We lump these
restrictions together as ``Indigenous Innovation.'' These
policies are of growing concern to our companies. Our Buy
America is an irritant to the Chinese. We have issues that we
should sit down and talk about. And I think that, when we do,
it does help to make progress.
And we also have the G20, which, as Laura Tyson has
suggested, is a good forum when others share our concern. For
example, on the revaluing of the currency, Europe, as well as
we, believes that the currency is undervalued, to the detriment
of their exports. By having a wider group of nations object to
or encourage change in certain of China's restrictive policies,
is helpful, for China wants to be on the international stage,
and it wants to be respected. And so, it has made a number of
changes, which are very much in its own interest, for example,
to control inflation and to increase consumption through
expenditures on social programs.
The Chairman. Well, let me ask you both, quickly, if I
can--my time's up, but I wanted to get this question on the
table, quickly. And, Dr. Tyson, maybe you begin.
To what degree is this economic surge by China activating,
in your judgment--we've had a lot of focus on the economic side
of this--a more assertive foreign policy, perhaps the rapid
military modernization, and to what end, and mercantilist
economic policy, to some degree?
Dr. Tyson.
Dr. Tyson. OK. I don't really feel that I'm an expert on
their military policy. And I do think that, in areas that are
trade-related and economic-related--and that can include aid
policies to the rest of the world, the organization structure
of multilateral institutions, and right down to a particular
bilateral trade dispute on indigenous innovation, the Chinese
are becoming more assertive.
It's not just because they have done so well, but also
because, frankly, the U.S. economy has stumbled badly, and, I
think, around the world, the recognition that we have stumbled
badly leads our trading partners to be more assertive in their
relations with us. I think we have to look, therefore, to
ourselves, of what we are going to do to restore our own
economy on a very strong growth path, sound fiscal policy,
going forward.
On the issue--I just will say one thing where I think maybe
Ambassador Hills and I have somewhat of a disagreement--I
certainly agree, on the import side, looking at our imports
from China--it's really important to understand that much of
what we import from China we would have imported from other
places, and it's moved to China to be put together and sold to
us. And the Chinese rightly point out, all the time, that the
value of their exports to us, or our imports from them on
average, 25 percent of that value is Chinese-value-added, it's
stuff they've imported. And if we were to slap significant
tariffs on those products, the production would shift gradually
out of China, but it wouldn't come back here. It wouldn't come
back here. So, we--I think we have to be very cognizant of
what--why that import imbalance looks the way it is.
On the export side, however, I think the Chinese are moving
in ways which I think deserve our attention. They are committed
to becoming a technologically innovative nation. They want to
move from a labor-intensive, low-value-added industry structure
to a high-value-added technology structure. And that's where
the indigenous innovation policy comes from, and preferential
government procurement, and standards. The Chinese want to
develop their own standard for things where there are global
standards already that are perfectly acceptable. And when you
sort of look at them doing this, you say, ``This looks like it
could be in violation of their agreement on standards at the
WTO.'' You're not supposed to create standards for the purpose
of affecting trade flows.
So, these are really tough issues, because they're
nontariff barriers. And the protections in the WTO either don't
exist, in some case, or they're inadequate; it's very hard to
bring a case, and win.
I think the United States, therefore, really has to engage
the Chinese on these issues directly. And, by the way, I think
the concern of the American business community, which I've also
picked up, has actually been extremely helpful, because the
U.S. Government now is taking a much tougher position on these
things. The Chinese for a very long time, were very open to
these companies. These major American companies that have
become a major part of their economy--are now saying, ``We're
not being treated appropriately or fairly.'' That becomes a
very powerful, I think, lever for trying to get some
negotiating progress on these issues with China.
So, I think they've become more important, and I think we
should focus on them at the top of our list of priorities.
The Chairman. Senator Lugar.
Senator Lugar. Ambassador Hills, your written testimony
notes that, ``Immigrant-founded companies employed 450,000
workers and generated $52 billion in revenues in 2006.'' Now,
recently, with Senator Kerry, I introduced the Startup Visa Act
of 2010, to allow an immigrant entrepreneur to receive a 2-year
visa if he or she can show that a qualified U.S. investor is
willing to dedicate a significant sum, a minimum of $250,000,
for the immigrant's startup venture.
What do you expect the impact of such legislation to be? Is
it at the right levels? And, second, leaving aside the visa
aspect, is it likely that Chinese companies will simply make
much larger investments now in our economy? I read that, for
example, they've noted that, as the labor costs have risen in
China, it makes more sense to produce the goods and services in
the United States.
On these issues, can you give us some additional comment?
Ambassador Hills. Let me say that my comment about the
immigration and the need to open our nation to bright minds and
to the development of new technology is in response to the
question of enhancing our competitiveness. The statistics that
we have in the Department of Commerce and Small Business
Administration document the high number of startups created by
foreign-born, the substantial amount of jobs they create, and
the substantial amount of growth that they contribute to our
economy. So, I support your Start Up Visa Act. I believe that
65,000 H1B Visas for a country of over 300 million people is
extraordinarily limited, plus it is very, very difficult and
time-consuming to get a H-1B visas for people who want to come
to the United States. It's also very difficult for a student to
come here to study. A student can be accepted at one of our
major universities, and not be permitted to come to the United
States, or, after graduating, cannot be permitted to stay.
We're just cutting ourselves off from talent and new ideas.
I was in China last week, and I addressed the issue of
indigenous innovation, and I said, ``You're hurting yourself by
turning inward. When you keep out an idea, an invention, a
patent, because you prefer to have it made at home, you hurt
yourself not only for the loss of the idea or invention but
also, because you create a monopoly protected from competition
has little incentive to innovate. That protected company is not
going to expend money to become more competitive or move up the
value chain. But if you were to let all the ideas, inventions,
patents come in without government interference; it would
stimulate ideas in your domestic market. So, you're hurting
yourself.''
I think there's a deal here to be made that benefits both
sides. In exchange for a relaxation of our export controls,
China could set aside those domestic industrial policies often
grouped under the name ``indigenous innovation.'' And I truly
believe that.
On the investment side, I believe that Chinese companies
are thinking more and more of investing abroad. We need to take
care that we do not discriminate. And we see, particularly in
the south of our country, there are some small investments from
the Chinese. But, they express concern, having tried to invest
in some larger segments and not fully understanding CFIUS--
Committee on Foreign Investment in the United States--that
operates pursuant to section 721 of the Defense Production Act
of 1950, as amended, and the regulations that we have--that it
is difficult to invest here. And they read our press, and they
believe that their investors will be discriminated against,
that they are not thought well of in our country. I think
that's untrue. I think that most Americans think very well of
the Chinese, applaud their miraculous rise from dire poverty to
where they are today. And, although China's GDP on a per capita
basis is only about one-tenth the size of ours while their GDP
is roughly one-third of ours, they continue to make rapid
progress. Still China has a number of challenges--e.g.,
environmental, demographic, and growing income disparity--but
it is making progress.
Senator Lugar. So, I gather that your sense is, essentially
there are a good number of Chinese who are prepared to come to
the United States and make investments--that is, personally
locate themselves here--if our visa situation was friendlier.
And with regard to investment in the United States, if our
investment climate was perceived as more friendly, these
investments would come. Therefore, at least some of us might
argue that, in terms of creating more American jobs now and
having more capital in the country, our diplomacy really needs
an uptick so that there is a different set of perceptions.
Ambassador Hills. I would agree with you entirely. I think
we ought to open our market to foreign investment. If someone
wants to invest a dollar or an RMB in our market, and create
jobs and good products, that's to our benefit.
Senator Lugar. Let me ask Dr. Tyson this question, that, in
your written testimony, you note a significant appreciation of
the RMB, relative to the dollar, will not have a significant
effect on U.S. trade deficit or on U.S. employment.
Dr. Tyson. Right.
Senator Lugar. But, what measures, if any, vis-a-vis China,
would have a real impact on the trade deficit or the
unemployment rate?
Dr. Tyson. So, what I was trying to say in that observation
was that, basically, what matters to the overall U.S. trade
imbalance is not the relationship with any one country. That
was the first point.
The second point is the point that I mentioned earlier. I
think a significant--a dramatic overnight appreciation of the
renminbi, versus the dollar, would initially raise prices of a
significant number of important imports to middle-class
Americans, and a lot of it would quickly leave China; it would
go to different locations. It wouldn't change our trade
imbalance.
So, I tend to see our trade imbalance as not very sensitive
to an appreciation. Now, I know that Fred Bergsten's numbers
are if you had an appreciation, I think, of 20 percent over a
5-year period, you'd get a million U.S. jobs and a reduction of
the U.S. trade deficit of $150 billion. The problem with that
statement is that we had something like a 20-percent
appreciation of the RMB between 2005 and 2008, and this was the
period when the U.S. trade deficit was going through the roof,
and when the U.S. current account imbalance hit a peak as a
share of GDP.
So, I think the link between that currency value and the
U.S. trade imbalance is a very weak link, and I would prefer us
to think about the other factors that influence that.
I just want to add, because I completely agree, and you saw
me nodding my head, about the importance of inviting, or
certainly not in any way deterring, Chinese investment in the
United States. The Chinese have a massive amount--the largest
holdings of United States-dollar assets in the world--and they
are looking for ways to diversify those assets. They are
worried about what the value of those assets will be as the
renminbi does climb, relative to the dollar. They're worried
about what happens to those assets if we get a spike in U.S.
interest rates. They're worried about inflation in the United
States over the next 20 years. They would like to diversify
those assets.
They don't have a lot of options. The Euro has kind of
disappeared as an option, so they're not going to, I think, buy
a lot of gold and, you know, put it in a building.
I think they would like to diversify into other U.S.
assets. And we are either the first or the second--depending
upon, I suppose, the month--largest destination for foreign
direct investment in the world. China's the other one. We
welcome foreign direct investment from the rest of the world.
We need to be sure we welcome it from China, because it is a
better way, frankly, to alleviate our trade imbalance with
China because some of the stuff we buy from China, imported, we
will buy here.
And if you think about the history of the United States
trade imbalance with Japan, when we had significant friction
with them in certain sectors, the Japanese moved production
facilities here. And today, they produce significant amounts of
product, with significant amounts of American-employed labor,
using their technology, here.
So, yes, I think this is very important.
Senator Lugar. Well, I thank you very much. I would just
underline the thought that we really ought to be thinking in
terms of how we suggest to the Chinese they invest in our
country----
Dr. Tyson. Yes.
Senator Lugar [continuing]. In addition to simply loaning
us money.
Dr. Tyson. Yes.
Senator Lugar. It's a very different----
Dr. Tyson. Exactly.
Senator Lugar [continuing]. Concept, in terms of our own
employment and our own economic growth.
Dr. Tyson. Yes.
Senator Lugar. And I appreciate both of your answers.
Thank you.
The Chairman. Thanks, Senator Lugar.
Senator Casey.
Senator Casey. Dr. Tyson, thank you.
Dr. Tyson. Thank you.
Senator Casey. Ambassador Hills, thank you so much for your
testimony.
I wanted to put my first question in the context of our
current economic climate. When I speak of Pennsylvania, I think
it's emblematic of a lot of places. We are, in our State, at
about 9.1 percent unemployment, but that's 591,000 people, at
last count--almost 600,000--a big, big number. And although I
think we are in a recovery, we've got a long way to go.
One of the persistent, nagging, and most difficult
challenges we face is the problem of trade deficits. And we've
got States like Pennsylvania that are heavily exposed to, or
impacted by, the trade imbalance between the United States and
China. There's obviously been a manufacturing component to
that.
But, I guess recently the Alliance for American
Manufacturing reported that, contrary to some of the
conventional wisdom, it's not simply, or only, manufacturing
jobs, but high-technology jobs, as well, that industry.
Another study, by the Economic Policy Institute, over a 7-
year period, in terms of what happened in Pennsylvania, a net
job loss of more than 95,000, due to the trade deficits with
China.
So, all of that is predicate to a good deal of what you've
already spoken to. I know that, Dr. Tyson, you have a series of
recommendations, starting at page 17 of your testimony. And I
know that, Ambassador Hills, you've got a series beginning on
page 3--a series of obstacles that you set forth as the
obstacles that our companies face with regard to China.
Where's the--if you had to--if you bumped into a--on the
street, a constituent of mine in Pennsylvania, or a similarly
situated State, when they ask you, ``How do we bridge that gap,
how do we begin to--at least begin to chip away at the
problem?''--what are the two or three strategic steps you think
we have to take, in the near term, to begin to put in place a
strategy to get out of that hole?
And I--either one of you want to take a crack at it, or
both?
Ambassador Hills. When you talk about the imbalance that
concerns your constituents, we obviously have to bring, not
only our bilateral, but our global imbalance into equilibrium.
That's going to take both the United States along with other
deficit nations and China along with other surplus nations to
alter their models of growth. Those in deficit cannot point
their finger at the surplus nation and say, ``You are exporting
too much.'' Nor can the surplus nations point their finger at
deficit nations and say you are consuming too much.'' Both
groups need to change their growth models. It is true that
China needs to stimulate its domestic consumption for its own
national interests. It is also true that its currency is
somewhat undervalued, and appreciation would help to stimulate
domestic consumption. But appreciation of the currency is not a
silver bullet. Currency is a factor. But, removing the
distortions in the factors of production--land, water, fuel,
and finance--are undoubtedly far more important factors in
stimulating domestic consumption. China's growth model for the
past three decades has been built on growth generated by large
state-owned enterprises that export. And even the foreign
investors that came in from Japan and East Asia also were
primarily manufacturing and assembling goods for export. And
those exports go on the account of China with the result that
China has the largest trade surplus.
That is not sustainable. This must change. In China it's
creating enormous environmental problems and is contributing to
a wage gap between rural and urban areas. When you take the
five largest of the heavy industry, they are responsible for
most of the pollution. Heavy metal pollution destroys about
1,700 square miles of productive farm land each year and
contributes to the fact that most of China's urban ground water
is polluted. In addition China is home to the most polluted
cities in the world. In 2007 the World Bank reported that 16 of
the world's most polluted cities are in China. And so, for
domestic reasons, China needs to change its model of growth
that up to now has been disproportionately based on heavy
industry and export. China has many challenges, including
demographic challenges that they're going to have to deal with.
And with 1.3 billion people, they can and need to stimulate
domestic consumption to boost growth. That will help develop
small and medium industries and service providers. Moving to a
growth model that relies more on consumption will make the
Chinese population much more satisfied, and make your
constituents much less anxious.
Now, at the same time, I'm sure some anxiety in
Pennsylvania is connected to the fact that our deficit--our
primary budget deficit--has grown to levels that frighten
people, and our accumulated external debt adds to their
anxiety. And so, we also must change our growth model. We can
no longer rely disproportionately on domestic consumption, both
public and private, to fuel our economic growth. We must get
control of our fiscal deficit and boost private savings. And
whether we adopt a ``pay-as-you-go'' program, and really mean
it, or some other fiscal discipline, we need to get our fiscal
house in order. That would provide, I think, substantial
assurance at home and abroad that the United States economy was
not going to have to go through a great recession in the next
decade.
So, there's a lot that both China and the United States
have to do.
Senator Casey. Dr. Tyson.
Dr. Tyson. You've asked a very hard question, because I
don't know, for example, the numbers of workers you announced
that lost their jobs. I don't know how many would have been to
a movement of a production facility to China or an import from
China. I do know that.
Let's take what's going on right now. In the last year,
we've seen, particularly the last 6 months, quite strong growth
in industrial production in the United States. We have seen a
quite strong export of manufactured goods in the United States
to China and the other emerging market economies. This has been
associated with no growth in employment in manufacturing in the
United States. That is not, therefore, a trade issue; that is a
technology issue. That is how the U.S. companies compete,
globally, with building manufacturing products here, and
ramping them up, which they're doing right now, without
increases in employment, because the technology has displaced
the employment.
And one of our issues in the United States is, we have to
be clear, when employment numbers like that show up, what is it
that's the role of China's development strategy. It may
actually be not very important to the employment problem.
Another thing I would say----
Senator Casey. You mean attribution.
Dr. Tyson. Yes. But, I would find it very difficult to talk
to such a person, because, you know, first of all, I would have
to understand. I mean, the second thing I would say is--
Ambassador Hills mentioned that the Chinese encourage their
enterprises through low interest rate through subsidies. They
encourage certain things. They want to develop their economy in
a certain way so they subsidize certain things.
What did we subsidize in the United States, heavily, that
was part of the crisis? Housing. We subsidize. We absolutely
subsidize residential construction in the United States. And a
number of workers--25 percent, as far as I know, last count--of
the unemployed problem in the United States is construction
workers, who were very important to the boom that we created
with our own interest-rate subsidy policy in the United States.
We don't have subsidy policies to create industrial
employment. We don't believe in them. We don't do them. China
does them. China absolutely does them. And they've built a very
powerful employment base in manufacturing.
So, I think--and then, the last thing I would say--in
looking at Pennsylvania's trade imbalance, or any country--or
any State trade imbalance--at the end of the day, I'm not sure
what it would look like in Pennsylvania, because there is a
huge amount of products being bought in Pennsylvania in retail
outlets that are primarily bought in China, and there is
service employment in the United States that's supported by
those imports.
Now, this gets me to another problem in the United States.
We have a polarization of the workforce going on. It's very
dramatic. The unemployment rate is not high--it's high, but not
that high--for people with a college education or higher. It's
around 5 to 6 percent right now, in that range. The 15-percent
unemployment rates are for high-school, or less-than-high-
school, educated workers. And those middle-income manufacturing
jobs, that used to be a way through, for those people, to the
middle class, don't exist anymore. And I would say, not because
of trade with China, but because technology has displaced those
jobs.
So, we have a huge educational challenge in the country,
because where the jobs are likely to grow in the future over
the next 5 years are in college-educated and more. And right
now we're making it more difficult, in many respects. In many
States the tuitions for college education are going through the
roof because of State budget problems.
So, the Chinese, I would say, are restructuring their
economy. They're building infrastructure in the center and
western regions. They're introducing new social security
policies that will reduce the household savings rate in China.
They're doing real, structural things that will change their
growth strategy over time.
I don't think we're doing those. And I don't think a path
to credible deficit reduction, which we need--I'm not saying we
don't need it--but, that, by itself, is not a structural
policy. That's not a structural policy.
So, I think we have to worry about investments to make our
economy more productive and competitive, going forward. Those
have to be part of our strategy. It's not just a deficit-
reduction strategy.
Senator Casey. I know we're out of time.
Thank you.
The Chairman. Thank you.
Senator Shaheen.
And I've been called to a 4 o'clock meeting, so I
apologize.
If you--Senator Lugar will close it out. I don't know if he
has an additional round that he wants to ask.
But, Senator Shaheen and then Senator Lugar.
And I apologize. I thank the witnesses again.
Dr. Tyson. Thank you.
The Chairman. There will be questions------
Dr. Tyson. Thank you for the----
The Chairman [continuing]. For the record. I had some
additional questions I wanted to ask you, and I know some other
colleagues may want to submit them, so we'll leave the record
open, if you don't mind, until the end of the week.
Dr. Tyson. OK, that's fine. Thank you very much----
Ambassador Hills. Thank you.
Dr. Tyson [continuing]. For the opportunity.
The Chairman. Thanks.
Senator Shaheen.
Senator Shaheen. Thank you.
And thank you both for being here this afternoon.
I would really like to pursue the line of questioning that
Senator Casey started with. But, before I do that, I want to
ask you--you talked--Dr. Tyson, you talked about the kinds of
structural investments and changes we would need to make in
this country in order to address some of the challenges that
the economy faces. I certainly agree with you, relative to the
education and the importance of making sure that a whole strata
of people, who are not now getting higher education, need to
get that, and the challenges that that encompasses. But, what
else do you have in mind when you say that? And I know this is
a little off-topic, but you just raised my curiosity.
Dr. Tyson. Well, I personally think we have great
innovative strengths in the United States. We still have those.
But, I think we have to worry about the fact that we have not
kept up our science and engineering talent base. This obviously
goes to Senator Lugar's question. This is a very specialized--
--
Senator Shaheen. Right.
Dr. Tyson [continuing]. Talent base that we need to be able
to take the basic science support, which we have, and continue
to convert it into very successful commercial applications. And
I look down the road, and I worry about the fact that there are
actually projected shortages of this kind of talent in the near
term. We're not talking about 10 years out. We're talking about
5 years out. So, I would put a whole host of things in
education.
I personally think that as a transition strategy, but also
as a strategy to support competitiveness, going forward we
really have a major infrastructure agenda at hand.
And I'm smiling because I just came from a lunch, where a
number of people were talking about this. It's been well
documented, before the great recession, that the United States
was spending significantly less than required to just keep up
the infrastructure it had, much less get to world quality
standards.
So, if you think about ports and airports and high-speed
trains as things that promote competitiveness, they're not just
a pleasant journey--they're that, too. I think that's an area
of investment which has two characteristics. One, it actually
becomes a way to create jobs for these kinds of workers who
were in another kind of construction.
And, by the way, I would put energy efficiency investments
here. I've been a big supporter of the idea of doing more to
promote households to take on energy efficient investments,
because those are, basically, residential improvements that
require labor to do, but they also achieve another goal.
So, some of the things I think we should be doing are in
the infrastructure, energy efficiency, and broadly defined
education area. We need to say that we're going to have a
different strategy, too, our future is going to look different,
too.
Senator Shaheen. Thank you.
To go back to China, one of the concerns that I hear from
New Hampshire business folks who are thinking about exporting
to China is a concern that once their technology--they're
working on a new generation of technology, whether it's in
solar panels or, you know, Internet, or whatever--Web
technology, whatever--that once that technology gets to China,
that it's gone, as far as they're concerned. And so, they get
the benefit of the first round of exports of whatever that is,
but then it's going to get duplicated in China, and they're
going to lose their patented technology.
So, how do we address that? Is it through more action at
the WTO, or are there other ways in which we can better address
China's stealing proprietary technology?
Ambassador Hills. When any nation fails to take measures to
protect our proprietary technology, we should take them to the
World Trade Organization. We have an agreement that covers
intellectual property. It continues to be a problem in China,
although it is improving when compared to a decade or so ago.
China secured a number of patents last year. It moved way
up the scale. And when you have a domestic stake in having a
system that protects innovation, generally that causes most
governments to take a greater interest in developing and
enforcing rules to protect intellectual property.
So, we're finding that China is taking a greater interest
in protecting intellectual property. But, as they say in China,
``the mountains are high and the emperor is far away.'' And
what happens too often at the locality or the province level is
not what Beijing wants to have happen. But, we have to keep
pushing on that. And I know that some foreign manufacturers are
sending their second-tier technology to China because of the
very problem that you suggest. So, once again, China's hurting
itself.
With respect to all of these issues, it is so clear that
opening markets to new ideas is highly beneficial. A government
that puts restrictions that keep out inventions and new ideas
hurts its own people. And that has been known for a long, long
time. But, it is one of the issues that we need to watch
carefully and deal with.
I'd like to underscore what Laura Tyson has stated about
the infrastructure. You know, in China they have high-speed
trains that would take your breath away, literally. And----
[Laughter.]
Ambassador Hills [continuing]. And that kind of investment
adds to a nation's efficiency, cleans up the environment as
people pile aboard and don't get into the cars, and creates
jobs.
And when we talk about education, yes, we need science and
math students to stimulate innovation here at home. So, it's
really a great tragedy, in our great Nation that has come so
far and once led the world in educating its youth, that today
roughly one-third of our high school students fail to graduate.
That is simply not tolerable in today's world.
And so, there are a lot of things that we need to do right
here at home. Maybe we need a commission on education bringing
our teachers unions together with people who deal with
educational reform, for the current situation is simply not
tolerable. And if we continue down this road, United States
tomorrow will not be the same United States today.
Senator Shaheen. I couldn't agree more with both of you. I
think one of the challenges here has been, How do you reconcile
those needs with the deficit and the debt that we have? And--
because what you're talking about requires investment, and
they're longer term, when we look at the returns on those
investments. And so, how do we address the short-term need to
respond to this growing debt and deficit that we have?
So, I will just--I'm out of time--but, perhaps after the
hearing, could respond to that.
Senator Lugar [presiding]. Well, thank you very much.
In behalf of the chairman and the members of the committee,
I want to thank both of you for wonderful opening statements,
which are in the record in full, and for your responses to our
questions.
The title of our hearing was ``Finding Common Ground With a
Rising China,'' and you have addressed that, and I think
members of the committee have, and perhaps increased our
understanding, and that of those who are following our hearing.
We will keep the record open, as the chairman suggested,
for a few days, for additional questions and your responses.
But, we thank you both very much.
[Whereupon, at 4 p.m., the hearing was adjourned.]
----------
Additional Questions and Answers Submitted for the Record
Joint Responses of Dr. Laura D. Tyson and Stephen S. Roach to Questions
Submitted by Senator John F. Kerry
Question. Where does the Economic Relationship Fit into a Larger
Foreign Policy Agenda: What are your views on the importance on the
United States--China economic relationship as part of a larger United
States-Chinese foreign policy agenda? How has the changing economic
relationship altered our broader relationship?
Specifically, are there ways that our economic interdependence
constrains U.S. foreign policy options on other issues of concern, such
as nonproliferation policy, human rights, Taiwan? Are China's foreign
policy options similarly constrained--if so how?
Answer. United States-China economic relationships have been a
major focus of the larger United States-China foreign policy agenda
during the last quarter century and that will remain the case for the
foreseeable future. U.S. policy toward China has been one of engagement
rather than containment or competition. The United States has welcomed
China as an increasingly prosperous and successful member of the
community of nations and has championed China's growing role and
responsibilities in global multilateral institutions. And China has
embraced economic globalization and has been a reliable global citizen
committed to the goals of peace and prosperity. These trends are likely
to persist: given the priority of economic growth and development to
both its domestic political stability and the legitimacy of its
leadership, China has too much to lose to threaten the peace and global
economic order on which its growing prosperity depends.
The growing economic links between China and the United States have
strengthened the overall relationship between the two nations and have
supported their cooperation on many shared interests including
promoting global development, addressing global health and
environmental challenges, and containing piracy and terrorism.
Both China and the United States have reaped significant economic
returns from the large trade and capital flows that link their
economies, and both nations have to weigh these returns when they
consider how to address areas of disagreement such as nonproliferation
policy, human rights, Taiwan and other territorial concerns. In that
sense, the foreign policy options of both nations are constrained by
their economic interdependence: options that impede the trade and/or
capital flows between them would reduce the economic welfare of both of
them. That's why both nations should seek to address issues of concerns
in other foreign policy areas through bilateral consultation rather
than through unilateral confrontation, avoiding economic sanctions to
pursue their foreign policy goals in other areas and using multilateral
and/or regional institutions and agreements whenever possible.
Question. National Security and the Chinese Economy: Do China's
leaders think in terms of national security when they consider the
size, composition, pace of development and protection of China's
economy? If so, how does this impact their foreign and commercial
engagement with the United States and other nations? What is the most
appropriate and effective U.S. policy response? What is the best way to
pursue our national economic interests and national security interest
with China--side by side?
Answer. Despite its dramatic economic progress, China is still a
poor country, as measured by its GDP per capita, and confronts large
domestic problems including large rural-urban inequalities, a
significant pool of underemployed labor in agriculture, and
environmental degradation from rapid industrialization. Moreover, the
legitimacy of China's authoritarian leadership depends primarily on its
ability to deliver rising living standards to its population. For these
reasons, China's leaders believe that both China's national security
and their political security depend on the growth and development of
China's economy: these remain their primary goals and these goals are
the primary determinants of their decisions and actions both at home
and abroad.
When China joined the WTO, it made significant concessions to
liberalize its traditional trade and investment policies as part of its
accession agreement. Since that time, China's trade has soared and it
has gained significant shares in many global markets. In recent years,
China has been relying more on nontraditional barriers such as
discriminatory government procurement policies, national standards
policies, lax enforcement of intellectual property protection, and
local content requirements to boost the competitiveness of its domestic
companies. Such practices impede the access of U.S. and other foreign
companies to China's domestic market and they are a violation of the
spirit and in some instances the law of China's WTO commitments.
The United States should continue to treat such market access
barriers as a priority issue in the S&ED trade discussions, should
lodge WTO cases against such barriers, and should encourage China's
other trading partners to address such barriers in regional and
multilateral discussions. The United States should rely as much as
possible on multinational, multilateral forums such as the G20, the
WTO, the IMF and the U.N. to pursue U.S. economic interests with China
and to address bilateral economics disagreements.
Question. China's Treasury Holdings: China's large holdings of U.S.
Treasury securities, which totaled $900 billion as of April 2010, make
it the largest foreign holder of those securities.
Some U.S. analysts welcome China's purchases of U.S. debt, which
help enable the United States to fund its budget deficit and keep U.S.
interest rates relatively low. Others have expressed concerns that
China's large holdings of U.S. debt could give it significant leverage
over the United States. How should we weigh the risks against the
benefits?
Answer. China's large purchases of U.S. debt over the last several
years have indeed helped to fund the U.S. Federal budget deficit and
have kept U.S. and global interest rates lower than they otherwise
would have been. These purchases are a reflection of the large and
ultimately unsustainable imbalances between saving and investment in
both countries. The United States saves too little and consumes more
than it produces while China saves too much and produces more than it
consumes, relying on the United States and other nations to purchase
its excess production. Both countries need to adjust their growth
strategies, with the United States relying less on consumption and more
on exports and investment to drive growth and China relying more on
domestic demand and less on exports. The United States must also adopt
a multiyear deficit reduction plan to stabilize the debt to GDP ratio
at a sustainable level since dissaving by the U.S. Government is a
major contributor to the nation's saving-investment gap.
China has not caused the imbalance between saving and investment in
the United States or the fiscal deficit. These are problems resulting
from policy choices made at home. To date, the benefits of China's
purchases of U.S. Government debt have outweighed the risks. And on
economic grounds, China is likely to continue to purchase large amounts
of U.S. Government's. But there are risks associated with China's large
purchases and holdings of U.S. Government securities. In particular, as
we argue in our testimony, even a relatively small decline in China's
holdings could be enough to rock global financial markets, triggering a
large increase in interest rates and a sharp decline in the dollar's
value. China itself would suffer large capital losses on its holdings
of U.S. securities as a result. Many observers believe that because of
such large potential losses, there is a very low risk that China would
use its holdings of U.S. securities to try to influence U.S. policy. In
our testimony, we argue that this risk is higher than commonly
perceived. For a variety of reasons identified in our testimony, a
threat by China to move away from U.S. treasuries in order to change
U.S. behavior or in retaliation for U.S. behavior should be taken
seriously by U.S. policymakers. Under current financial market
conditions, such a threat could trigger investor concerns about the
huge financing needs of the U.S. Government, causing a sharp spike in
interest rates and a crisis of confidence in U.S. sovereign debt that
could cause serious economic harm to both the United States and China.
Question. Competitiveness and U.S. Infrastructure: You mentioned
that support for infrastructure investment in the United States was one
way to bolster U.S. competitiveness when facing a rising China. Could
you please explain to what extent infrastructure investment would
reinforce U.S. competitiveness and what needs to happen to ensure
adequate infrastructure investment at the pace and scale to ensure U.S.
competitiveness in the future?
Answer. A significant and sustained increase in infrastructure
investment by Federal, State and local governments should be a
priority. Unlike most other forms of stimulus, spending on
infrastructure both increases demand when the spending occurs and
increases the supply and growth potential of the economy over time The
demand-side case for infrastructure investment is well documented.
According to the Congressional Budget Office, infrastructure spending
is a cost-effective demand stimulus as measured by the number of jobs
created per dollar of budgetary cost. Moody's Economy.com estimates
that $1 of infrastructure spending increases demand and the level of
GDP by about $1.59.
The supply-side or growth case for a significant increase in
infrastructure investment is also compelling. Real infrastructure
spending is about the same today as it was in 1968 when the economy was
a third smaller. The inadequacies of the country's current
infrastructure are displayed every day in freight bottlenecks, road
congestion, and airport delays, all of which reduce business
productivity and make the United States a less attractive location for
business activity. Documenting these inadequacies, the American Society
of Civil Engineers gave America's infrastructure a failing grade of D
in its 2009 report and has identified more than $2.2 trillion in
outstanding infrastructure needs. And using a narrower cost-benefit
approach, a 2008 CBO study concluded that a 74 percent increase in
annual spending on transportation infrastructure alone is economically
justifiable.
Over the next 5 years, the Federal Government should work with
State and local governments and the private sector to finance $1
trillion of additional investment in infrastructure. The successful
Build America Bonds (BAB) program included in the current stimulus
package should be extended to support this goal. As part of its
commitment to a multiyear infrastructure plan, the Federal Government
should also establish and provide the capital for a National
Infrastructure Bank. An appropriately designed and governed national
infrastructure bank would both address gaps and shortcomings in the
current system for selecting and funding infrastructure projects and
attract private investment funds for such projects. The bank would
focus on transformative projects of national significance, like the
creation of a national high-speed rail system or the modernization of
the air traffic control system, that require the participation and
coordination of many States. Such projects are neglected by the
formula-driven processes now used to allocate Federal infrastructure
funds among States and regions. The bank would provide both
coordination among diverse actors and certainty about the level of
Federal funding for such multiyear projects by removing funding
decisions from the politically volatile annual appropriations process.
Moreover, the bank would select projects for funding, not on political
and earmarking considerations that too often influence project
selection in the current system, but on independent and transparent
cost-benefit analysis by objective experts.
Armed with a flexible set of financing tools, including direct
loans, loan guarantees, grants, and interest subsidies for BABs, the
bank could provide the most appropriate forms of financing for each
project. The bank should be granted the authority to create
partnerships with private investors on individual projects. Public-
private partnerships would both increase the total amount of funding
for infrastructure investments and foster efficiency in project
selection, operation, and maintenance. Such partnerships are becoming
common in infrastructure financing around the world and many nations
are using them to attract private capital, but to date they account for
a miniscule share of infrastructure financing in the United States. A
national infrastructure bank could tap into the significant pools of
long-term private capital in pension funds and dedicated infrastructure
equity funds looking for infrastructure investment opportunities.
The Federal Government can afford a capital commitment of at least
$25 billion to establish a national infrastructure bank as an
additional stimulus measure immediately. Given the significant excess
capacity in the economy and the very low interest rates at which the
U.S. Government can borrow funds, there is no danger that an additional
stimulus of this size will trigger a crisis of confidence in the U.S.
Government's creditworthiness. Nor is there any danger that
infrastructure investment financed by the bank will ``crowd-out''
private investment--in fact, it is likely to encourage or ``crowd-in''
such investment.
As the economy recovers, however, the Federal Government must
embark on a multiyear plan to reduce the deficit and stabilize the debt
to GDP ratio. To ease capital market anxiety about the Government's
future borrowing needs, such a plan should be developed and passed by
the Congress now. The plan should include permanent funding mechanisms
for the national infrastructure bank. These mechanisms could include a
small share of funds from a new multiyear transportation bill, a small
share of revenues from the gasoline tax or from a new carbon tax, and
user fees. Whenever appropriate and feasible, user fees should be
linked to the projects financed by the bank. Such fees would not only
raise revenues but would also encourage the efficient use of
infrastructure assets and provide financing for their maintenance.
The United States needs to invest significantly more in its
infrastructure to secure its competitiveness and deliver rising living
standards to its citizens. And there is no better time to begin that
investment than now when millions of Americans can be put to work in
meaningful jobs to help build the infrastructure we need.
______
Joint Responses of Dr. Laura D. Tyson and Stephen S. Roach to Questions
Submitted by Senator Richard G. Lugar
Question. At the hearing, you indicated that the United States
needed to make structural economic changes, increase investments in
infrastructure, increase education levels and, over the long run,
reduce the deficit. In order to support U.S. economic growth and
increase employment, what specific structural changes does the United
States need to make?
Answer. To reduce its imbalance between saving and investment and
its unsustainable current account deficit, the United States must
introduce policies to increase national saving and to encourage a shift
in the composition of demand away from consumption and toward exports
and investment. The most important step is passage of a multiyear
deficit reduction policy that stabilizes the debt to GDP ratio at a
stable level. This plan should include a major reform of both personal
and corporate tax policies to encourage personal saving and business
investment. But the plan must also increase government investments in
infrastructure, R&D and education. Such investments are essential to
boost the competitiveness of the United States as a location for high
value-added economic activity and as a source of global exports.
Question. You note in your written testimony that ``reducing
barriers that impede the access of U.S. companies to China's markets is
and should continue to be a major objective of U.S. trade policy.'' The
United States participates in 49 bilateral dialogues with China
including economics, trade, politics, energy, and health and engages
with China in multilateral for a including the WTO, G20 and United
Nations. What more should the United States do to advance our economic
objectives with China?
Answer. Reducing nontariff barriers that impede the access of U.S.
companies to China's market is and should continue to be a major
objective of U.S. trade policy. Given the importance of the government
and state-owned companies in China's economy, China's participation in
the Government Procurement Agreement (GPA) should be a major objective.
The United States should negotiate with China to ease U.S. security
controls on U.S. exports to China and to advance the timing for the
recognition of China's market economy statues in the WTO (currently
scheduled for 2016) in return for a strong offer by China to join the
GPA. An agreement along these lines could also help revitalize the Doha
Round talks, something that the United States and China committed to do
at the last S&ED meetings.
The United States should also take the lead in negotiating a Trans-
Pacific Partnership agreement as a first step toward the creation of a
free trade area for the Asia Pacific. Several bilateral and regional
preferential trading agreements have recently been signed in Asia and
the region is heading toward the de facto creation of an economic bloc
that would discriminate against the United States. The completion of a
Trans-Pacific Partnership agreement would arrest this disturbing trend
and could reignite APEC's leading role in global trade liberalization.
A revitalized APEC could lead a regional effort for a free trade
agreement on green technologies and products.
Question. Too often around the world, the revenues from natural
resources are a hindrance to economic and political development.
Moreover, conflict over resource revenues can drive price instability
and harm supply of oil. In my judgment, promoting transparency is a
pivotal need for empowering citizens to ask questions of their
governments and hence be empowered to grow economically and
democratically. One measure I have offered with Senator Cardin would
enhance U.S. leadership by requiring U.S. and foreign companies listed
here to disclose their payments to governments as part of Securities
and Exchange Commission filings. The importance of U.S. leadership is
highlighted with recent mineral discoveries in Afghanistan. China's
growing economy also requires oil, gas, and minerals, and at times the
government backs their companies' entry into countries. In your
assessment, how can we make progress at a governmental and corporate
level with China to improve Chinese support for good governance of
resources?
Answer. A basic tenet of economics is that market efficiency and
competition depend on information, and there is a serious lack of
information about the terms of the deals about access to natural
resources between governments and private companies. Without such
information, there is also ample opportunity for corruption in the
decisions by which natural resource rights are allocated. A compulsory
disclosure of payments by governments to private interests in natural
resource deals is an idea that merits serious consideration.
China and the United States have a common interest in the gains to
efficiency and competition and the obstacles to corruption that would
result from global or regional agreements that enforce transparency and
good governance in natural resource deals between companies and
governments. The United States should raise this issue in the S&ED
meetings with China and should explore the possibility of cooperating
with China to foster a global agreement on this issue within in a
multilateral organization like the U.N. or the OECD.
Question. China is currently going through a period of labor unrest
and wages are rising in many areas in response. Some American
businessmen believe this wage inflation will cascade throughout much of
the manufacturing sector. Do you believe this is likely to happen and
if so, will Chinese officials find it too much to swallow to also allow
their currency to appreciate? In other words would sharply rising wages
dampen the pace and size of any currency appreciation? Would the impact
on the United States-China trade balance of widespread wage inflation
be similar to, or different from, the impact of currency appreciation?
Answer. Contrary to Western press reports, China is not going
through a period of labor unrest. The recent increases in wages are a
conscious outgrowth of government regulations introduced in 2004, which
stipulated that provincial governments increase minimum wages of
Chinese workers every other year. During the crisis of 2008-09, when
China's export businesses were under severe pressure, those increases--
like the currency appreciation policy--were suspended. The gains
evident this year were largely a catchup from that hiatus. Even in the
aftermath of this latest round of wage inflation, compensation per hour
in Chinese manufacturing industries is still only about 4 percent of
the comparable pay rate in the United States--hardly a signal that the
days of low-cost Chinese labor are numbered. Moreover, total personal
income in China is currently only about 42 percent of GDP--less than
half the 85 percent reading the United States. In the upcoming 12h
Five-Year Plan, the government will make a determined effort to boost
the wage share of national income in an effort to raise consumer
purchasing power. This policy should not be viewed as an offset to a
further, albeit gradual, pace of currency appreciation in the years
ahead. However, to the extent that it is part of a proconsumption
policy agenda, that will absorb surplus household saving, it can be
expected to reduce China's overall current account and multilateral
trade surplus. Whether that translates into a smaller bilateral
imbalance with the United States, it is equally dependent on actions
taken by the United States to boost America's domestic saving rate--
necessary to reduce the multilateral trade deficits with China (and, by
the way, with 89 other nations) that are an important outgrowth of our
unprecedented saving shortfall. A critical first step is passage of a
multiyear deficit reduction plan that stabilizes the debt to GDP ratio.
______
Responses of Ambassador Carla A. Hills to Questions Submitted by
Senator John F. Kerry
Question. Where does the Economic Relationship Fit into a Large
Foreign Policy Agenda?
What are your views on the importance of the United States-
China economic relationship as part of a larger United States-
China foreign policy agenda?
How has the changing economic relationship altered our
broader relationship? Specifically, are there ways that our
economic interdependence constrains U.S. foreign policy options
on other issues of concern such as nonproliferation policy,
human rights, Taiwan? Are China's foreign policy options
similarly constrained--if so how?
Answer. It is nearly impossible today to separate our Nation's
economic and foreign policy issues. Challenges in one area profoundly
affect our ability to be successful in the other, and nowhere is that
more apparent than with respect to our relationships with China, the
world's fastest growing large economy.
Our Nation's stature as a foreign policy leader requires that we
maintain a strong economy. Building a strong economic relationship with
China contributes significantly to our Nation's growth and prosperity.
Currently China is our third-largest and fastest growing export market.
The benefits of our trade opportunities with China have been
experienced across America. Virtually every state in the union
experienced triple digit increases in exports to China in the decade to
2008, while sales to the rest of the world over the same period grew by
just 29 percent. With domestic consumption and investment currently
quite weak, strong export growth gives our economy a welcome economic
boost.
As two of the world's major players, China and the United States
will need to collaborate if we are to deal effectively with a long list
of challenges like nuclear proliferation, terrorism, drug and human
trafficking, piracy, climate change, and pandemics. It is less that we
are constrained by our economic interdependence, and more that our
aggregate economic strength provides a means to mobilize the capacity
to deal successfully with a growing list of issues that cannot be
solved unilaterally in today's globalized world. Indeed, in many
instances both China and the United States must collaborate if
solutions are to be found.
We will continue to have our differences with China on economic and
foreign policy issues as we do from time to time with even our close
allies. But we will be better able to bridge those differences and to
find solutions that advance the interests of our respective populations
by taking actions calculated to build a closer, more candid and
constructive bilateral relationship. Taiwan is a case in point. China
regards the Taiwan issue as a ``core'' interest involving its
``sovereignty'' and believes that we deliberately ignore its
sensitivity. Since resuming diplomatic relations with China in 1979,
the United States has sought to avoid debating whether Taiwan is part
of ``one China'' but has been clear that Taiwan's future should be
decided without the use of force. Our government pledged in the Taiwan
Relations Act, also signed in 1979, to provide defensive weapons to
ensure that Taiwan could defend itself again an attempt at forceful
acquisition. At the present time, the Chinese have an arsenal of
missiles in Fujian pointed at Taiwan, and we continue to supply
advanced weaponry to Taiwan. The trust among our two militaries lags
far behind the trust that exists among our leaders dealing with
economic or strategic issues. One could imagine that if we were able to
convene a high level and regular Strategic Military Dialogue that it
might be possible to reach an understanding whereby China gradually
reduced its stock pile of missiles in Fujian and as that positive
action occurred the United States delayed sales and downgraded the
level of weaponry sold to Taiwan. That sort of deal would require
building a much closer and collaborative military-to-military
relationship that today does not exist.
Question. National Security and the Chinese Economy
Do China's leaders think in terms of national security when
they consider the size, composition, pace of development and
protection of China's economy?
If so, how does this impact their foreign and commercial
engagement with the United States and other nations?
What is the most appropriate and effective U.S. policy
response?
What is the best way to pursue our national economic
interests and national security interest with China--side by
side?
Answer. The primary foreign policy goal of the Chinese leadership
is to maintain peace at China's borders shared with 14 nations that
suffer from varying degrees of instability. China seeks stability in
the region and at home so that it can focus on its difficult domestic
challenges including existing poverty, income disparity between rural
and urban populations, serious environmental concerns including
extensively polluted water supplies, foul air and loss of arable land,
unemployment, inadequate health care, and a rapidly aging population.
Domestically the leadership has made ``stability preservation'' its top
priority. The leadership believes that in order to maintain domestic
support it must implement policies that ensure that China's economy
continues to grow in ways that will increase prosperity to those who to
date have been left behind and to deal with the issues that affect
quality of life in China. Over the past three decades in an effort to
spur its economic growth, China has opened its markets to foreign
investment and reduced its trade barriers, looking to exports and heavy
industry to provide the engine of economic growth. Although significant
restrictions remain, they are far fewer than existed a decade ago when
China joined the World Trade Organization. Overall, the opening of
China's markets has both generated domestic economic growth and
contributed to global economic growth.
Last year when global growth turned negative and world trade
plummeted more than 11 percent, China, along with other nations
including the United States, experienced a surge of economic
nationalism. Politics in China drove ``Buy China'' policies just as
politics here drove ``Buy America'' policies, notwithstanding objective
economic analysis showed that such policies are detrimental to growth
and serve to strain international relations. Bilateral fora like the
Strategic and Economic Dialogue and the Joint Commission on Commerce
and Trade have been helpful in removing restrictions and building
greater understanding. Meetings of leaders and ministers that represent
the world's 20 largest economies (the G20), that in total comprise 85
percent of world output and 80 percent of world trade, also provide a
useful forum for seeking to reduce trade and investment restrictions.
Of course where a particular trade or investment policy is deemed to
violate a WTO agreement and negotiation has not resolved the
difference, it is appropriate to use the WTO dispute settlement
mechanism to resolve the difference, something which both the United
States and China have done, thus minimizing potential friction.
In many instances the national economic interests and the national
security interests of the United States and China overlap. Both nations
want a vibrant global economy that contributes to domestic growth.
Similarly both want stability internationally. In some circumstances
where we agree on the ends, we differ with respect to the best means to
achieve those ends. For example, China and the United States both want
to curtail nuclear arms in Iran. China has favored extended diplomacy
over sanctions. As a result of our strategic dialogues, China has been
willing to support the U.N. resolutions providing for sanctions but has
not been willing to support the tighter measures that the U.S. Congress
adopted.
In other circumstances we disagree on the risk involved. That is
the case with the nuclear ambitions of North Korea. China assesses the
risk of North Korea developing an effective nuclear weapon as lower
than does the United States. It fears more a collapse of the North
Korean Government, worrying it would lead to a flood of North Korean
refuges crossing China's north east border causing instability in
Liaoning and Jilin provinces and violating China's top domestic policy
of ``stability preservation.'' We are more apt to find means to deal
with both of our concerns through regular and frequent dialogue. What
is missing today is a regular and high-level military dialogue to
encourage both sides to better understand the other's risk assessments
and to talk about ways to deal with our respective concerns.
Question. China's Treasury Holdings. China's large holdings of U.S.
Treasury Securities which totaled $900 billion as of April 2010 make it
the largest foreign holder of those securities. Some U.S. analysts
welcome China's purchases of U.S. debt which helps enable the United
States to fund its budget deficit and keep U.S. interest rates
relatively low. Others have expressed concerns that China's large
holdings of U.S. debt could give it significant leverage over the
United States.
How should we weigh the risks against the benefits?
Answer. Both those who welcome China's continued purchase of our
growing debt and those who express concern over our increasing debt
being in foreign hands overlook a critical point. The fact is that
there is a serious imbalance in the global economy that has ballooned
to unsustainable levels in recent years and puts our future economic
stability at severe risk. China, Germany, Japan, South Korea, and other
Asian economies have built their growth primarily on exports, whereas
the United States, the United Kingdom, and Spain, among others, have
relied excessively on domestic consumption, particularly in the housing
sector, to fuel their economic growth.
Economists agree that neither of these singly focused growth models
is sustainable, and being unsustainable they will change either through
gradual policy adjustment or as a result of traumatic financial
upheaval.
To protect against future financial crisis will require debtor and
creditor nations to adopt more balanced growth plans. Debtor nations
cannot continue to consume at the excessive levels of the past, and
creditor nations must look more to their own consumers to fuel their
economic growth.
Most economists agree that continuing to rely on the growth models
of the past decade raises the risk of a crisis to unacceptably high
levels. The required changes could constructively be led by the United
States, the world's largest debtor nation, and by China, the world's
largest surplus nation.
The necessary changes will take time to implement. But it would
provide substantial market assurance if the United States and China
would publicly lay out a specific 5-to-10-year rebalancing plan at the
next meeting of the G20. Each could set forth benchmarks for measuring
progress, and provide periodic updates on achievements.
______
Responses of Ambassador Carla A. Hills to Questions Submitted by
Senator Richard G. Lugar
Question. You implied that financial and trade protection would
have a negative impact on the U.S. economy. Would you please delve into
those details on why a rise in protectionism would have bad
repercussions? How exactly does protectionism work itself through our
economy?
Answer. For the six decades following World War II, under both
Democratic and Republican administrations, the United States has led
the world in opening global markets. The results have been spectacular.
America's policy of seeking to remove barriers to cross border trade
and investment has greatly enhanced our Nation's economic growth and
the economic well-being of its citizens. As world trade and investment
has exploded, standards of living have soared at home and abroad.
A highly regarded economist, Dr. Gary Hufbauer, in a comprehensive
study published in 2005 by the Institute for International Economics,
now the Peterson Institute for International Economics, calculated that
the opening of markets since World War II has increased our Nation's
GDP by roughly $1 trillion per year, thus raising the average American
household yearly income by $9,500.
Our trade and investment in every region of the world have
contributed to this very positive result. Last year when trade
plummeted by more than 11 percent, the United States economy contracted
by about 2 percent. This year with trade up by 7 percent, the
International Monetary Fund is predicting that the U.S. economy will
grow by more than 3 percent. With domestic demand and job growth still
depressed, external demand is more important than ever.
Unfortunately economic hardship inevitably stokes demands for
protection. Yet policies that restrict trade and investment choke off
the growth that is especially needed in times of economic adversity.
Making matters worse, protectionism is highly contagious. When the
United States adopts ``Buy America'' policies, almost instantaneously
our major trading partners, like China, implement a ``Buy China''
policy. Hence it behooves us to make every effort to explain to the
public the harm that results from protectionism and the benefits that
flow from opening markets to our products and services.
Dr. Hufbauer's study calculates that the additional opening of
world markets to trade and investment would increase U.S. wealth by an
additional $500 billion per year, making the average American household
richer by an additional $4,500 per year.
It is well documented that jobs connected to international activity
earn on average 13 to 18 percent more than jobs in the overall economy.
A majority of our exporters are small- and medium-sized businesses that
serve as the backbone of America's job creation. The prospects for
these businesses and their workers are enhanced by our government's
success in the opening of foreign markets.
By ratifying the three pending trade agreements with Panama,
Colombia, and South Korea, completing the Trans-Pacific Partnership,
and concluding the Doha Development Round the United States could
generate additional growth opportunities for the United States and
global economies and help keep protectionist impulses at bay.
Question. Your written testimony notes that one way to strengthen
U.S. investment ties while ensuring U.S. competitiveness is for the
United States to approve the three pending free trade agreements (FTAs)
that have been signed with South Korea, Colombia, and Panama. Recently,
Senator Kerry and I sent a letter to the administration calling for the
Korea-United States FTA to be sent to the Congress for a vote. Also
this year, I introduced a resolution in the Senate calling for the
administration to develop a framework for FTA negotiations with the
Association of Southeast Asian Nations (ASEAN). Over the last 5 years,
China has signed nine FTAs including ones with Korea, New Zealand, and
the nations of ASEAN. Please describe how U.S. business interests are
disadvantaged when competing against China interests in areas where
China has an FTA and the United States does not.
Answer. Bilateral and regional free trade agreements are
proliferating around the world. The World Trade Organization (WTO)
finds there are 262 free trade agreements (FTAs) in force today; the
United States is a party to just 17. An additional 100 are currently
being negotiated. The United States is negotiating one, the Trans-
Pacific Partnership agreement. As a result our entrepreneurs and their
workers are disadvantaged vis-a-vis their competitors in countries that
have free trade agreements in place which affects our Nation's capacity
to grow and to create jobs.
That fact is starkly documented in the World Economic Forum's
annual report ``Global Enabling Trade'' that ranks 125 countries on a
range of factors affecting competitiveness. One factor it measures is
tariff barriers that impede competitiveness. Chile, as a result of its
network of trade agreements, is ranked No. 1, indicating that Chile's
exporters face the lowest tariffs globally. The United States with few
trade agreements is ranked 114 out of the 125 countries indicating the
poor competitive position faced by our exporters. Of course there are
many other trade restrictions beyond tariffs that trade agreements
alleviate, but the metric on tariffs is illustrative.
The job gains from our trade agreements are substantial. This past
May the U.S. Chamber of Commerce released its study ``Opening Markets,
Creating Jobs, Estimated U.S. Employment Effects of Trade with FTA
Partners.'' Using a general equilibrium economic model, this study
examined the 14 FTAs the United States has implemented over the past 25
years, excluding three agreements most recently implemented. It found
that 17.7 million U.S. jobs depend on trade with these 14 countries and
5.4 million of these jobs were attributed to the increase in trade
resulting from the free trade agreements.
U.S. exporters can lose their competitiveness rapidly when other
governments remove trade barriers for their entrepreneurs and our
government does not. A study issued on May 10, 2010, undertaken in the
House of Representatives by the ranking member of the Ways and Means
Committee, the ranking member of the Trade Subcommittee of the Ways and
Means Committee, and the ranking member of the Agriculture Committee
documented that between 2004-08 Colombia's agriculture market was
expanding at 38 percent per year and had become the largest market for
U.S. agriculture exports in South America totaling over $4 billion. In
2009, after Colombia entered a free trade agreement with Mercosur, U.S.
agriculture exporters' market share in Colombia's agriculture market
fell by 31 percent while the market share of competitors from Argentina
and Brazil climbed 22 percent. In 1 year American saw their combined
sales of corn, wheat, soybeans, and soybean oil plunge 62 percent even
as Colombian total imports held steady and to date records show 2010
sales of those products are down 45 percent.
China is the world's largest exporter. It has arranged 14 trade
agreements with the 31 economies including 10 nations that comprise the
Association of Southeast Asian Nations (ASEAN), is negotiating 5
additional agreements, and is considering negotiations with 2 large
economies, India and South Korea.
U.S. competitiveness in the markets where we do not have trade
agreements but China does is being adversely affected. It should be
noted that the network of agreements that China has and is negotiating
in Asia will disadvantage American entrepreneurs in the world's fastest
growing region. Sadly, the harm is self inflicted.
Question. Too often around the world, the revenues from natural
resources are a hindrance to economic and political development.
Moreover, conflict over resource revenues can drive price instability
and harm supply of oil. In my judgment, promoting transparency is a
pivotal need for empowering citizens to ask questions of their
governments and hence be empowered to grow economically and
democratically. One measure I have offered with Senator Cardin would
enhance U.S. leadership by requiring U.S. and foreign companies listed
here to disclose their payments to governments as part of Securities
and Exchange Commission filings. The importance of U.S. leadership is
highlighted with recent mineral discoveries in Afghanistan. China's
growing economy also requires oil, gas and minerals, and at times the
government backs their companies' entry into countries. In your
assessment, how can we make progress at a governmental and corporate
level with China to improve Chinese support for good governance of
resources?
Answer. The vast majority of U.S. companies are good ambassadors
overseas. In challenging environments they bring American values and
demonstrate a positive agenda of corporate social responsibility.
Expanding their competitive opportunities will lead to a spread of U.S.
values including corporate social responsibility.
The G20 summit meetings provide a multilateral forum where this
issue so critical to improving global governance can be discussed
beneficially. It is clear that transparency with respect to resource
payments to governments would help to limit corruption, enhance global
stability, and promote global growth. Leaders of the world's 20 largest
economies could agree that they would support transparency with respect
to payments made to governments for natural resources by requiring
their companies to make such disclosure. The United States could lead
by example by adopting the reporting measure that you have suggested.
The Strategic and Economic Dialogue meetings provide a bilateral
forum where the United States and China could discuss the benefits that
would flow from transparency with respect to resource payments made to
governments. An understanding followed by action would give tangible
proof of the value of the bilateral dialogue.
Question. China is currently going through a period of labor unrest
and wages are rising in many areas in response. Some American
businessmen believe this wage inflation will cascade throughout much of
the manufacturing sector. Do you believe this is likely to happen and
if so, will Chinese officials find it too much to swallow to also allow
their currency to appreciate? In other words would sharply rising wages
dampen the pace and size of any currency appreciation? Would the impact
on the United States-China trade balance of widespread wage inflation
be similar to, or different from, the impact of currency appreciation?
Answer. China's 2010 overall inflation rate between January and May
ranged between 1.5 percent and 3.1 percent, higher than in 2009 in the
midst of the global recession, but considerably lower than in 2008 when
the rates between January and May ranged between 7.1 percent and 8.5
percent.
There has been pressure to increase wages in the manufacturing
sector. On July 8, Beijing issued its 2010 wage guidelines indicating
an average 11-percent salary increase covering both government and
enterprise workers. Undoubtedly, Chinese officials will watch closely
to see how the higher wage rates affect both growth and inflation.
China's competitiveness will be affected by increases in inflation
as well as increases in wages. The benefit of wage increases, if
inflation remains under control, is that they will encourages domestic
consumption which will help to rebalance China's domestic economy that
currently relies too heavily on exports and too little on domestic
consumption for growth. Inflation driven by increases in the prices of
consumer goods such as housing and food is likely to depress
consumption. In recent months China has taken measures to slow the
housing boom. There is increased recognition within China's leadership
of the need to implement policies so as to stimulate domestic
consumption and to reduce those that encourage expansion of heavy
industry and exports in order to achieve a more sustainable model for
economic growth.
______
Responses of Ambassador Carla A. Hills to Questions Submitted by
Senator Russell D. Feingold
Question. I have serious concerns regarding past and ongoing human
rights abuses in China, including oppression of ethnic and religious
minorities, notably in Tibet, and of political dissidents and
restrictions on press and assembly, just to name a few. As China
continues its economic growth and increases its role on the world
stage, what should we expect to see with respect to China's human
rights record 10 years from now--positive steps and improvements or a
continuation of repression and human rights violations? Is the issue of
human rights being adequately addressed in our bilateral engagement,
and how can the United States better influence the Chinese on this
issue?
Answer. Although it is impossible to predict with any precision the
domestic political environment that may exist in any country a decade
hence, my hope and expectation is that as China gains the confidence
that comes with its enhanced economic security and increased role on
the world stage, its leadership will respect widely accepted
international norms including those dealing with human rights. China's
leadership is increasingly active in international institutions
including the United Nations Security Council, the International
Monetary Fund, the World Trade Organization, the World Bank, and most
recently the G20. All are built on a platform of transparent rules.
Only by becoming a ``responsible stakeholder'' in these organizations
can China establish and maintain a global leadership role that I
believe its leaders want to achieve.
China's domestic political and social reforms have been much slower
in developing than its economic reforms that have transformed the
country with unprecedented speed. Still there has been social change
since the horrific revolutionary period (1960-1970) of Chairman Mao
Zedong. Since 1978 when Deng Xiaoping began the reforms to open China
to the world, China's Government has steadily reduced the social and to
a lesser extent the political restrictions that the Chinese people
faced a generation ago. However I do not see broad support for Western-
style democracy in China today where according to numerous polls the
vast majority of Chinese believe their government is ``on the right
track.'' Nonetheless there is considerable talk among the elite and
scholars of the need to enhance pluralism, build an independent
judiciary, respect the rule of law, and increase transparency.
Over the past several years reformers in the Central Party School,
which serves as the premier training ground for emerging Communist
leaders, as well as university scholars have started to debate openly
the merits of expanding grassroots political participation, judicial
independence, and elections for top party posts. For example, in 2008
Yu Keping, an adviser to President Hu Jintao and Professor and Director
of the China Center for Comparative Politics & Economics in Beijing
wrote a widely quoted book entitled ``Democracy is a Good Thing.''
Significantly, President Hu in his work report presented to the People
Congress in March 2008 urged the Party ``to adapt to the growing
enthusiasm of the people for participation in political affairs'' by
expanding grassroots democracy, increasing transparency, and exercising
power ``under the sunlight to ensure that it is exercised correctly.''
In ``Global Asia,'' a Journal of the East Asia Foundation, Yu Keping
writes in the summer 2010 issue:
[W]hatever political reforms China carries out, and whatever
kind of governance model takes shape in the future, for the
country's far sighted leaders the objectives of the governance
reform are already irrefutably clear: democracy, rule of law,
fairness, responsibility, transparency, integrity, efficiency,
and harmony.
Similarly Zhou Tianyong, senior economist and deputy head of
research at the Central Party School stated in a 2008 interview
published by the Daily Telegraph: ``We have a 12-year plan to establish
a democratic platform.'' He claimed that the government was determined
to reform itself, but there had been some infighting between different
departments, and he called for the number of ministries to be cut in
half to form a ``modern government structure'' adding ``there will be
public democratic involvement at all government levels.'' As support
for his positive projection, Professor Zhou said: ``There will be many
more nongovernmental organizations, chambers of commerce, industry
associations and other social groups. Religion should also be given a
wider platform to play a positive role. We should protect religious
freedom.'' Although he did not predict the end of the one-party rule,
he did state that by 2020 China will basically finish its political and
institutional reforms.''
People can argue about whether China will achieve those goals. But
the fact that Communist Party members within the Party School are
publicly talking in these terms indicates that there is some basis to
believe that a greater liberalization of politics is underway. This
kind of public debate regarding politics represents change for it would
not have been permitted a decade ago.
Public lecturing from the outside in my view is counterproductive.
Our government can most effectively deal with human rights concerns
where it has engaged with China on a broad range of issues of common
interest. Working together to solve problems of mutual concern helps to
build trust and create relationships that permits candid discussion of
differing views and encourages the bridging of differences. There are
instances where that has occurred. For example, China joined in
denouncing North Korea's nuclear test in 2006, voted to impose and then
tighten U.N. sanctions against Iran, supported deployment of U.N.-AU
forces to Darfur, condemned the brutal crackdown in Burma, helped in
dealing with kidnapping and piracy off the coast of Somalia, and has
been constructive in a number of humanitarian efforts. We need to build
on our successes. Many of our conflicts occur in areas that involve our
militaries. Regular and frequent military dialogues at the highest
levels would be helpful in avoiding and resolving a number of our
differences.
The private sector can also be helpful. NGOs continue to multiply
in China. They are changing public perceptions. Our corporations doing
business in China follow high standards that set an example. Also,
there are a number of Tract II dialogues that talk about how rule of
law, transparency and respect for minority rights contribute to
domestic stability and counter corruption, which are objectives given
high priority by the Chinese government.
Question. In recent years, China has emerged as a significant
economic and political player across Africa. Although Beijing continues
to be primarily focused on access to oil and other natural resources,
its engagement is matched by significant investments in infrastructure
development, without regard to political controversies or concerns
about governance or fiscal integrity. I don't think American interests
on the continent are necessarily threatened by China's activity, but it
is definitely in our interest to pay attention to this activity and
consider its long-term strategic implications. How should we address
that activity both in our own policy development and in our
partnerships with African Governments, particularly given our focus on
strengthening good governance and the rule of law?
Answer. China's investment in and trade with sub-Saharan Africa has
contributed to a substantial boost in the region's economic growth.
China has given aid to most of the countries in the region excepting
the few that still recognize Taiwan. Although it began entirely with
what some termed ``no strings attached'' diplomacy which caused concern
in the West as Chinese investments and aid went to governments that
abused their populations, its policies appear to be evolving. China has
positively responded to international pressure.
We can applaud the fact that China's investment both in
infrastructure and natural resources have helped to reduce poverty in
sub-Saharan Africa. At the same time we can encourage China's active
participation in international organizations like the International
Monetary Fund and the World Bank that endeavor to advance rule of law,
transparency and respect for minority rights. These issues can also be
discussed in context of our bilateral dialogues where global stability
is an issue of concern to both governments.
Question. For over a decade, China has been Sudan's closest
economic partner and its leading trade partner. China purchases about
two-thirds of Sudan's exports, and provides one-fifth of its global
imports. China is also the leading developer of Sudan's oil industry
and a major purchaser of Sudanese oil. While Beijing has reevaluated
its relationship with Khartoum in recent years, it continues to be
reluctant to press the Government of Sudan on issues related to peace
and security. As Sudan moves toward a 2011 referendum on self-
determination, constructive engagement from China will be
indispensible. What can we expect from the Chinese as we get closer to
the 2011 vote and how we can help encourage them to play a productive
role within multilateral fora?
Answer. The issues in Sudan are challenging. The April 2010
election resulted in Omar Hassan al-Bashir of the National Congress
Party being elected President of the largely Arab-Muslim North and
Salva Kiir of Sudan's People Liberation Party elected President of the
largely Christian and animist semiautonomous southern region. In
accordance with the Comprehensive Peace Accord which ended 21 years of
brutal civil war, two referenda will be held on January 9, 2011, to
determine whether Southern Sudan will secede and form a new nation and
whether Abyei, a region with vast oil reserves, will choose to stay
with the North under special administrative status or to join the South
which is expected to secede. Intraregional violence has continued in
the South amidst allegations that the newly elected government is
unable to maintain peace. The head of Sudan's Referendum Commission has
warned that Sudan is ``alarmingly unprepared'' for the referendum.
Assuming the referendum proceeds, very tough issues of border
demarcation and sharing of oil revenues remain to be decided. Many
outside observers have expressed the view that the African Union needs
to be more intimately involved. President Thabo Mbeki, Chair of the
African Union panel on Sudan, has expressed cautious optimism. The
African Union held its summit in Kampala the last week of July to
discuss the many daunting pre- and post-referendum concerns.
The United Nations has extended its mission in Sudan. In late July
United Nations representatives met with representatives of the African
Union and expressed a willingness to work with the Sudanese Government
and the international community to ensure a free and credible
referendum. China, a member of the Security Council, has voiced support
for the referendum and a strong desire for stability in the region
where it has substantial investments. Since 2007, it has increased its
support of international peacekeeping missions and there is no
indication that China will alter its current policy either before or
after the referenda. What actions the two governments take after the
referenda will depend on the facts on the ground and future actions
would be an appropriate subject for our bilateral strategic dialogue.
Question. Are we paying enough attention to Chinese attitudes
toward the United States--both those of Chinese citizens and those of
the political and military establishments? There have been some
troubling press stories on this issue--for example a survey conducted
for the Sunday Times of London of Chinese-language media found ``army
and navy officers predicting a military showdown and political leaders
calling for China to sell more arms to America's foes.'' Similarly, the
Washington Post reported earlier this year poll results indicating that
many in China see the United States as ``the No. 1 threat to China's
rise.'' Should we be doing more in the way of public diplomacy to
China?
Answer. There are misperceptions in both China and the United
States about the other. Many in China, not only in the leadership and
media but also ordinary citizens, see the United States as seeking to
limit China's reemergence as a global leader. At the same time many
Americans including some Members of Congress and the media talk about
China as ``tomorrow's enemy,'' which feeds China's misperceptions
regarding the United States and undercuts efforts to build a closer,
more candid, and collaborative bilateral relationship. That is why
engagement at high levels, public and private, is critical. Public
diplomacy in China can be helpful. But we need to take steps here at
home. It would be helpful if more of our leaders were to state publicly
that they want to establish a closer, more candid, and collaborative
bilateral relationship and to inform their fellow Americans about why
and how China is important to U.S. future prosperity and security. Most
Americans are unaware that China is our fastest growing export market
and our third-largest customer behind Canada and Mexico. Many Americans
complain that China limits our inward investment and take that as a
hostile act, but are unaware that recently 50 Members of Congress have
expressed opposition to China's Anshan Iron & Steel Group making a 20-
percent investment in U.S. Steel Development Co., a small plant
in Mississippi, that would bolster a U.S. company and create U.S. jobs.
Many Americans see as evidence of protectionism China's procurement
policies that seeks to limit government high technology purchases to
``indigenous'' products, but do not see our Buy America'' restrictions
as a rough equivalent. With a better informed public, we would be in a
better position to build a stronger bilateral relationship that would
benefit both sides.
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