Remarks by Franklin L. Lavin

Under Secretary of Commerce for International Trade

China Trade Policy
National Association of Manufacturers
Washington D.C.
April 2, 2007

(as prepared)

I. Introduction

Let me thank the National Association of Manufacturers for inviting me here and thank you for your kind introduction, Frank. ( Vargo ). I’d like to talk to you about U.S. China trade policy, particularly in light of last Friday’s announcement of our Countervailing Duty (CVD) decision. What does this decision mean, and how does it fit into our overall China trade policy framework?

Let me begin with a comment on the bilateral relationship. I just returned from China this weekend, making this my 6 th trip in some 17 months. In my view the bilateral political relationship is quite positive. Both President Hu and President Bush are committed to keeping it that way, and we just need to look at cooperation in the six-party talks as an example of the progress that can be made when both sides work together.

But having said that the political relationship is quite positive, I believe that the economic relationship is facing some serious challenges. I would like to review those challenges and then outline some of the steps we are taking to address them.

China has undergone a significant economic transformation since its reforms started some thirty years ago, resulting in some of the highest rates of sustained economic growth the world has ever seen. This took on a stronger international dimension when it acceded to the WTO more than five years ago. Chinese exports increasingly became the locomotive of China’s economic growth. Since Chinese products tend to enjoy open access to the U.S. markets, it is not surprising that the view in the U.S. is that our products should have the same access in China. This sense of unfairness on the U.S. side is exacerbated by the strong trade imbalance – at record levels for several years.

And there are indeed a range of trade and economic practices in China that most would consider unfair. Let me cite a few examples: U.S. telecommunications companies are banned from selling basic services. U.S. financial houses and securities firms face numerous restrictions on selling securities and providing analysis. Insurance companies have trouble getting registered locally as do direct selling companies. Pharmaceutical companies have to put up with large-scale industrial piracy, perhaps the worst in the world. Film and entertainment companies are largely locked out of the market and suffer losses from widespread piracy as well. China is on a path of creating global over-supply in the steel industry. Retailers are subject to cumbersome, time-consuming procedures to get approval to open new stores. Medical devices and other products are subject to redundant regulatory requirements.

So whether it is market access issues, intellectual property protections, or simply the international implications of the transformation underway in China’s economy – the U.S. and China are looking at a range of issues we need to tackle.

II. Five Pillars

Our approach to these problems is built around five pillars: First, bilateral negotiations; second, the WTO process; third, trade remedies, including countervailing and anti-dumping duties; fourth our overall trade agenda; and fifth, our export promotion work.

Given the Friday decision, let me turn to the trade remedies pillar. Last Friday the Department of Commerce made a ruling in an anti-subsidy investigation that China is subject to countervailing duties. In the specific case before us, we found that government subsidies in the production of glossy paper are distorting the market and providing an unfair advantage to those exporting glossy paper to the United States.

Just to give a little background: this case originated in October with a petition by NewPage Corporation of Dayton, Ohio asking us to investigate Chinese subsidies of their coated free sheet paper manufacturers.

For those of you who aren’t in the paper industry, coated free sheet paper is thin, glossy paper typically used in magazine and catalog production as well as picture books, labels and textbooks. This is a multi-billion dollar global industry and many leading U.S. manufacturers of glossy paper, including NewPage, have made significant investments in the last few years to prepare themselves for the increasing competition they expected from abroad.

NewPage is at a competitive disadvantage because market-distorting subsidies make it impossible for them to compete.

Chinese companies exported about $225 million worth of glossy paper into the US in 2006. That is only about five percent of the U.S. market, it, however represents an increase of more than 1000% since 2004.

The facts we examined led to the preliminary conclusion that subsidies distorted the market in glossy paper, putting NewPage at an unfair disadvantage. All we insist is that China play by the rules. China’s grants, loans, tax incentives, and export subsidies to Chinese exporters are basically unfair. Specifically, in the last PRC five-year plan for economy and social development, China singled out glossy paper producers for special treatment. Then, China funneled low interest loans from state owned banks to these glossy paper producers. Thus, we have a wide array of subsidies that appear to be at odds with U.S. and WTO laws and guidelines.

Let me say that this anti-subsidy procedure is not only called for under U.S. law, it is also strictly in accordance with the WTO. Indeed, over the past decade, the United States has investigated 77 such anti-subsidy cases.

This ruling has the ability to remedy concerns that American industry has about disruptive and illegal subsidies, not only from China but also from our other trading partners. With this decision we could well see additional petitions by other aggrieved domestic companies in other industries. So the implications of this case on U.S.-China trade could go well beyond the case particulars.

The other pillars

Let me review the other four pillars of our economic engagement with China. I mentioned CVD because of its topicality, but the primary pillar is our bilateral negotiating mechanisms, chiefly the Strategic Economic Dialogue, led by the Treasury Department, and the Joint Commission on Commerce and Trade (JCCT), co-chaired by the Commerce Department and USTR. These bodies allow us to raise trade issues with our counterparts in China and explore ways to resolve them. These mechanisms remain our preferred way of doing business in China, because they allow us to move ahead expeditiously. For example, at the last JCCT, China committed to requiring all computers manufactured or imported into China be preloaded with licensed operating systems. This was in our view a significant step forward in addressing software piracy. The challenge, of course, is that the negotiating approach does not always show results, so we must utilize the other trade tools at our disposal.

The second pillar is one such mechanism: The WTO Dispute Settlement System, which allows member states to file for dispute resolution when another country is not honoring its WTO obligations. The U.S. filed against China last year on a case involving kraft linerboard, and the Chinese side quickly agreed to settle the complaint. A second dispute, brought last year by the United States, Europe, and Canada, challenges Chinese auto import regulations. And in February the United States challenged Chinese export subsidies. Lastly we’re considering a possible case involving intellectual property rights.

The third pillar is trade remedies, including the CVD case described above as well as anti-dumping cases. We currently have 61 orders against unfair exports from China, totaling almost one fourth of our total global caseload.

Fourth, we need to look at our China trade policy in the context of our overall trade agenda. Improving trade practices globally through the WTO is part of this process. Supporting our global FTA agenda is also part of this process. If we are concerned about unfair trade practices in China, we need to work to improve trade relations with countries that do follow fair trade practices. With FTA partners, we have a level playing field, our trade is much more in balance, and we have a range of legal recourses if there is a problem. To those who complain about U.S. market access in China, let’s work together to lock in U.S. market access elsewhere. In this context I’m pleased to note that last night we completed our FTA negotiations with Korea.

Finally, our fifth pillar is an aggressive export promotion strategy in China, with 120 men and women on the ground in 6 cities. NAM has been an important partner in this process. We’re proud that we have a full time officer stationed at NAM to help members export to China. It should be no surprise that U.S. exports to China grew about 32% in 2006, from a very strong base. Indeed, just the growth in U.S. exports to China last year was greater than all U.S. exports to India. And so far this year, exports are growing at a run rate of 25%

V. Conclusion

In conclusion, the China CVD case last week was an important step ahead in our economic engagement with China. As China continues to sort through its approach to reforming its economy, we believe this provides an additional incentive for China to move away from subsidies and continue pursuing market economics. If we add the other pillars of negotiations – bilateral negotiations, WTO actions, our overall trade agenda, and export promotion, I believe we have a comprehensive strategy that advances U.S. interests and is fair to both sides.

I am frequently asked my views about the future of China. I am, at base, optimistic about the nature of the U.S.-China economic relationship. Leaders on both sides want to make sure the relationship stays on an even keel. President Hu has stated that it is not healthy for the relationship to be imbalanced and we look forward to steps to address that imbalance. A prosperous China is very much in the U.S. interests, provided that China is fair and open in its economic dealings. I believe this is the path China is seeking, and working together we can help the process along

Thank you. I will be happy to take a few questions.