Prepared Remarks of Franklin L. Lavin
Under Secretary of Commerce for International Trade
To The American-Beijing Chamber of Commerce
Beijing, China
8:00 a.m., July 31, 2006
As Prepared

Introduction/Opener

Thank you, Bob Poole (VP, China Operations, US-China Business Council.) Thank you everybody for coming out this morning. I'm delighted to be here… delighted for a few reasons, one of which is that as an AmCham member for a number of years, I always took AmCham events very seriously. You are a key element in making sure that a corporate voice is represented in the policy process. As someone who has been an official in companies that were members of the U.S.-China Business Council, I hold your work in high esteem.

We are trying to shape a policy environment that makes it as easy as possible for business to take place, but there's a tendency in both Washington and Beijing to add more complexity to the process. Unless businesses and leadership organizations like your's play a role in reminding policymakers about the second-order and the long-term effects of some of these decisions, we can end up with regulations or laws that are not helpful to business growth. So, your visits are important, your voice is important and the work you do in Washington and here Beijing is critical towards moving the Sino-U.S. relationship forward.

I also want to make sure people here know about our Department of Commerce and embassy team that is here today. These are our field commanders on the ground and they are terrific folks who are engaged on all of the issues. Could they stand up for a second? When you are in Washington, come and see me or call me if there is a problem or an issue. But the first thing I'm going to ask you is, “Have you spoken to our people in China?

Good News

Let me also begin by putting the issues and problems we have in the context of where U.S.-China relations have been and the tremendous, positive progress that has taken place. The fact is that the U.S. and Chinese economies are performing very well. Bi-lateral trade and political relations are progressing quite well. And the more long-term your view is, the more likely you are to have positive feelings about the potential our relationship has, whereas the more short-term your view, the more you may find China frustrating or difficult because there are certainly aspects of the relationship that don't move as quickly as we would like.

If we go back 30 years, the achievements of China and the progress in our bilateral relationship has been nothing short of astonishing. Thirty years ago there was no trade and there were consequently no trade problems. And 30 years ago, there was no real political connectivity either. The fact that an American Secretary of State would even meet with his Chinese counterpart essentially required a secret mission. Today, both the political and economic relationships are rich, complicated, and mutually beneficial. Our overall relationship has more than its share of challenges as well, but both sides are fully engaged and there's a lot of good in that.

I think most people probably know these figures, but let me just remind you of the success that is reflected in recent export figures: exports to China from the U.S. have been growing at a faster pace than any other large economy, up 21 percent in 2005 ($41.9 billion). In the first half of 2006 this rate accelerated to a 37 percent increase ($21 billion) through the end of May. As a reference point, our total exports to India were about $8 billion dollars last year. If the present growth rate is sustained with China, just the increase in exports to China will grow at a rate of nearly two India's a year. China is now the fourth largest export market for the U.S., up from eleventh five years ago. In fact if you look at the trend lines, sometime this year China will surpass Japan as America's the third largest export market.

So there is quite a bit of good news in this picture. There are certainly some challenges as well. Specifically, in China there are many long-standing, conventional market access issues that are important and must be resolved - such as beef, credit cards, IPR issues and compliance issues for example.

Challenges in China

There is, however a broader emerging policy challenge that is of concern to me. It is that the sustained economic reform of China, accompanied by high rates of economic growth, has inured policy leaders here from the need for further reform. That dulling of the sense of urgency for continued reform, combined with a set of WTO requirements that have been met, for some, represent the end of a formal set of undertakings that helped China move through the reform process. These factors working together risk creating an atmosphere where not only is the sense of reform fading a bit, but there is even the potential for retrogression, with reform perhaps swinging back the other way. For example if you listen to some of the discussions in China lately, they are about the need for FDI caps or that China should be less accessible to investment and less of a participant in the international economy. This kind of talk signals a worrisome trend.

Similarly, on the policy side, there's been discussion here about creating indigenous innovation or developing proprietary technology, and that somehow China would be better off if it has its own stand-alone technological standards that don't necessarily integrate into world standards.

I believe that both of these paths are substantially mistakes even though they are very seductive philosophically. Consider Chinese economic growth over the last 30 years. It has in large part been driven by foreign investment. China's own domestic reforms have opened up markets domestically, so in order to turbocharge that China needs to open up internationally. Companies in this room and many others have played this important role in China's economic growth. It is the more open, international sectors of China's economy that have been the most successful, whereas it is the isolated sectors of China's economy that have not yet become internationalized that are still not in the modern era, for the most part.

Similarly, regarding standards, technology and innovation, it would be a mistake for China to go its own way. China is an exporting superpower. It dominates world production in many sectors and has the capability to dominate or play a leading role in others. But that will be impeded if China were to develop standards that are not compatible with world standards. For example this could happen in telephony in the development of 3G standards. There are global standards that are in use around the world, CDMA probably being the most common, but there are others.

China has the capability to play a leadership role in the development of these standards, but it requires “technology neutrality,” meaning the government shouldn't set the standard the market should. Let service providers put up towers; let hardware companies sell their handsets; and let the consumers and businesses decide what works for them. Over time the market will gravitate toward two or three standards that seem to work and seem to offer the best set of technology and value. Determining the development of standards this way is in China's interest, while developing new incompatible standards will work to China's detriment. There are other examples of this. Among them, there are new administrative restrictions in the retail sector under consideration as well as restrictions in direct sales by foreign companies.

Challenges in America

Let me just touch on the challenges on the U.S. side because I'm also concerned about that. The bi-partisan dominant philosophy is for trade liberalization. Most Americans know that keeping our economy open is a path to growth, just as, I think, Chinese leadership knows that keeping their economy open is a path to growth. For example, it is worth noting that in 20 years of FTA votes under both Democratic and Republican administrations, FTA votes won every single time.

There is a tendency, however for economic nationalism or protectionism in America. It is certainly not the dominant philosophy and it is not always coherently expressed, but it can play a role in shaping the international trade debate. We got near it about a year ago when the vote on CAFTA (The Central America Free Trade Agreement) only won by two votes in the House of Representatives, 217 to 215. That was a worrisome sign. I think we saw evidence of it again earlier this year with the Dubai ports decision, which fell apart on the basis of a number of concerns. We saw it again in the tax change put forward this year that negatively impacts the tax status of American expatriates overseas. Each of these shows a lack of awareness about the importance of the international dimension of our economy and the need to encourage U.S. companies to go overseas. It is an unhealthy trend that we see from time to time and it is a concern.

The Bush Administration is committed to free trade, even at the risk of political criticism. Bush Administration is committed to a very positive relationship with China, even at the risk of political criticism. We need to be mindful of the tendency in America to pull away from engagement in the world, and the single best way of guarding against any political push to close markets in the U.S. is to keep markets open in China. The single best way of taking the political steam out of that issue and deflecting protectionism is for China to continue to open its markets.

Conclusion

This takes me back to the great people here in this room. Your voice needs to continue to be part of the discussion back in Washington. You need to continue to expand America's positive relationship with China.

I am grateful for the chance to share some thoughts with you this morning and I would be very happy to take your questions. Thank you very much.