June 23,2005

Senate Finance Committee Hearing on U.S.-China Economic Relations Opening Statement of Senator Chuck Grassley

Senate Finance Committee Hearing on U.S.-China Economic Relations
Opening Statement (Unabridged for Hearing Record) of Senator Chuck Grassley
Thursday, June 23, 2005

Today’s hearing will explore economic relations between the United States and China.Before we turn to witness statements, I want to offer some comments on that relationship. After thatI’ll turn to Senator Baucus for his comments, and then we’ll hear from our first panel. The fact thatwe’re holding this hearing today demonstrates the importance of our trade with China. Considerwhere we were just 20 years ago. In 1985, we had $3.8 billion in exports to China, and we importedthe same amount from China. Our two-way trade of $7.6 billion was equivalent to less than twotenthsof 1 percent of U.S. gross domestic product (GDP) that year.

In contrast, last year we had $34.7 billion in exports to China, and $196.6 billion in importsfrom China. Our two-way trade of $231.3 billion was equivalent to about 2 percent of U.S. GDPlast year. And this growth in bilateral trade is only projected to continue. Some say that by 2010,China will surpass Canada as our largest single trading partner. The way we approach thisdeveloping relationship with China has vast implications for both our futures. We must be thoughtfulin our actions and get it right. We cannot afford to act rashly, and get it wrong.

Now, there are a number of policy prescriptions floating around. Some say China’s currencyis a problem, so we need to slap 27 percent duties on Chinese imports as soon as possible. Some sayChinese subsidies are a problem, so we have to apply our countervailing duty laws to China as soonas possible. Some say we should call for more cases to be brought against China in the World TradeOrganization as soon as possible. And those are just a few of the ideas out there. Maybe those folksare right. But before I rush to any conclusions, I think we need to take stock of the problems thatexist and the efforts of the Administration to address those problems, and then consider whetherthere are any appropriate legislative measures to complement those efforts. This hearing is a stepin that direction.

Senator Baucus and I are taking another step by requesting that Ambassador Portman appearbefore the committee after he completes his top-to-bottom review of the Administration’s tradepolicy toward China. Our letter requesting that meeting is being sent to Ambassador Portman today.The fact is, we’ve had some important successes in securing China’s compliance with its tradeobligations. I want to further those efforts, not undermine them. Therefore, I intend to wait to hearfrom Ambassador Portman before I consider supporting any new legislation.

The Administration has a responsibility to keep this committee informed about developmentsin its trade policy toward China. And we also have a responsibility to ensure that USTR has theresources it needs to effectively administer that policy. Earlier this year, I joined some of mycolleagues in trying to get an additional $2 million appropriation to fund 16 new positions at USTRand to cover unplanned security costs. But I was stymied in that effort. I hope my colleagues willjoin me to see that those funds are in fact appropriated by the end of the year.

China’s economic integration and commitment to the rule of law was formalized with itsaccession to the World Trade Organization in December 2001. Since then, our bilateral trade hasalmost doubled. I supported China’s accession to the WTO because that offered the dual benefitsof opening China’s market to U.S. exports and also committing China to respect the rule of law inour international trade relations. And we’ve reaped those benefits to some extent. Exports from myhome state of Iowa almost tripled from 2000 to 2004. Pennsylvania and New York saw their exportsto China more than double over the same period. And exports from Tennessee to China increasedmore than seven-fold.

But that doesn’t mean we can be complacent. China’s commitments on paper must bematched by actions that demonstrate full adherence to its obligations. And the fact is, China’scompliance record has been spotty. I’ve been vigilant in monitoring our trade relations with China.

I’ve fought to ensure that Iowa’s exporters enjoy the market access they expect from China’saccession to the WTO. In September 2003, I wrote an article highlighting concerns about China’suse of non-tariff barriers to trade and China’s failure to adhere fully to its WTO commitments. InOctober 2003, I followed up with a lengthy letter to China’s Minister of Commerce, in which Ipressed for action on a number of deficiencies in China’s implementation of its WTO obligations.

I encouraged the Administration to address these issues with China as well. One of the issues Iraised was how China failed to provide the full market access for our soybean exports that waspromised in China’s accession agreement. Today, U.S. soybean exports to China are expected toreach a record of almost $3 billion for the full year, and China is our number one export destinationfor U.S. soybeans. I look forward to hearing more on this from Neal Bredehoeft, President of theAmerican Soybean Association, later today.

In November 2004, I joined Senator Baucus in writing to the Chinese Ambassador andChina’s Minister of Industry and Information regarding draft regulations on government procurementof software that would shut U.S. companies out of the Chinese market. As China prepares its finalregulations, we must insist that discriminatory regulations that distort trade are simply notacceptable. I note that China has yet to sign the WTO Government Procurement Agreement. Chinashould do so without delay. More recently, in April I joined every other member of this committeein writing to President Bush to express our concerns over China’s deficient enforcement of laws toprotect intellectual property rights. We stressed that China must fully live up to its commitmentsin joining the WTO. That’s the bottom line, and I will remain vigilant in demanding no less fromthe Chinese. I will not stop until our exporters in Iowa and across the United States enjoy the accessto China’s market that they were promised – and, once in the Chinese market, that they enjoy thelegal protections that our international agreements require.

Now, the bilateral trade issues I’ve discussed are all vitally important. But they are notprimary purpose of today’s hearing. Today’s hearing is primarily meant to explore themacroeconomics of our trade relations with China. The Committee will hear from somedistinguished witnesses, and it’s my hope that their testimony will help inform the development ofappropriate policy to improve our trade relations. Right now the United States and China are theengines of global economic growth. We need to ensure that growth occurs in a positive, sustainablemanner.

Which brings me to our bilateral trade deficit with China. Some argue that our bilateral tradedeficit means jobs are migrating from the United States to China. But I understand that accordingto the Congressional Budget Office, the primary factor driving the increase in U.S. imports of goodsfrom China is that manufacturers have shifted the final assembly of many of their products fromother countries in Asia to China. Much of the value of Chinese exports consists of parts madeelsewhere in Asia. The U.S. bilateral trade deficit with China reflects the net balance of trade ingoods with many Asian countries that are channeled through China.

For example, between 2000 and 2002, the U.S. trade deficit with China grew 33 percent from$84.3 billion to $104.2 billion. But while U.S. imports from China increased by $25.2 billion overthis period, imports from other East Asian countries decreased by $48.8 billion. The net result wasan overall $23 billion decrease in imports into the United States from all East Asian countries in theperiod of 2000-2002.

It seems to me that this changing pattern of trade has broad policy implications. A policydesigned to reduce our trade deficit with China could simply have the effect of redistributing aportion of that deficit to other countries in Asia. And that would not help reduce any potentialinstability associated with our overall trade deficit. Nor would it help retain and grow jobs here inthe United States. I look forward to hearing the views of our witnesses on this issue.

Another issue to be explored today is China’s currency valuation policy. China hasmaintained a fixed exchange rate for its currency of about 8.3 to the dollar since 1995. I believe aflexible, market-based valuation of China’s currency is necessary for China’s long-term economicgrowth and prosperity. And it’s important for ours, too. I’ve stressed that to the Chinese, and to ourAdministration as well. Without a floating exchange rate policy, China runs the risk of impedingits economic competitiveness and fostering inefficient economic decision-making. That could makean eventual currency adjustment that much more painful, for China and for China’s trading partners.

Those risks only loom larger as China becomes a more important participant in the global economy.

Finally, this hearing is also intended to provide Senator Collins and Senator Bayh theopportunity to discuss a bill they are cosponsoring that would extend our countervailing duty lawto non-market economies such as China. I’m still not persuaded of the need for this legislation. Justthis week, GAO released a report that raises legal and administrative concerns that need to beaddressed if this concept is to be developed legislatively. At a minimum, I would need to feel certainthat those concerns are allayed before I could consider supporting such legislation. With thatframework in mind, I will now turn to Senator Baucus for his opening remarks.