Grant D. Aldonas
Under Secretary of Commerce for International Trade Administration
Testimony Before the House Committee on International Relations
United States-China Economic Relations and
Mr. Chairman, thank you very much for inviting me to participate in this hearing to discuss the “U.S.-China Ties: Reassessing the Economic Relationship.” The topic is particularly timely since it comes in the midst of an ongoing dialog with our Chinese counterparts about our economic relationship in general and our trade relationship in particular.
That
dialog is taking place at the highest levels.
President Bush met with President Hu a few days ago in
I
appreciate the opportunity to appear before the Committee for another reason as
well. It offers me the chance to review
with the Committee some of our findings from the six-months of more than 20
roundtable discussions the Department held with U.S. manufacturers, both large
and small, across the country. In particular,
it offers the chance to put our trading relationship with China in an
appropriate context among the other issues raised by U.S. manufacturers due to
their impact on our industrial competitiveness.
Let me start by setting the economic
context for discussing both the health of our manufacturing sector and our
trade relationship with China. I want,
first, to take the argument that American manufacturers are weak and being
“hollowed out” head on. They are
not. We have the strongest, most dynamic
manufacturing sector in the world. While
focusing on the legitimate concerns raised by our manufacturers, we tend to
forget that the United States remains far and away the largest producer and
exporter of manufactured goods in the world.
Standing alone, our manufacturing sector would rank as either the 4th
or 5th largest economy in the world.
Far from being hollowed out, our manufacturing sector is, in fact,
larger than the entire economy of China.
For those of us old enough to
remember many of the industrial policy debates of the 1980s, we recall that the
issue, in the face of an onslaught of Japanese imports, was the decline in
American productivity. The debate
recognized that a healthy manufacturing sector is critical to the U.S. economy
not only because it currently makes up 14 percent of our gross domestic product
and 11 percent of total employment, but also because of the innovations that it
creates that allow us to be more productive.
Even the severest critics of President Bush’s economic policies
acknowledge that productivity is a key measure of our manufacturing sector’s
and our economy’s health. Paul Krugman,
for example, put it this way –
Productivity isn=t everything, but in the long run it is almost
everything. A country=s ability to raise its standard of living over time
depends almost entirely on its ability to raise output per worker.
How do the U.S. manufacturing sector
and our economy measure by Krugman’s standard today? In fact, productivity is higher today than it
was even during the late 1990s when everyone was glorifying the “new
economy.” The U.S. manufacturing
sector’s hard won gains in productivity, and the policies that we have adopted
to reinforce them, allowed the United States to reclaim the top spot in the
World Economic Forum=s 2002-2003 rankings as the most
competitive economy in the world.
Having said that, there is no doubt
that our manufacturers face a uniquely challenging competitive environment
today. The combined effects of rapid
changes in communications and transportation technology have made more trade
possible just as trade barriers have been falling worldwide and the end of the
Cold War ended the decades-old division of the world economy. That has meant continuing pressure on pricing
power and profit margins due to the excess capacity on the market for
manufacturers worldwide, not just in the United States. A week ago, the Wall Street Journal reported
on the decline in factory employment worldwide.
For purposes of this hearing, it is probably useful to contrast the
roughly 11 percent decline in manufacturing jobs from 1995 to 2002 against the
more than 15 percent decline in manufacturing employment in China.
What is different for U.S.
manufacturers is the fallout from several macroeconomic events that have flowed
through the trade accounts. Starting
with the Asian financial crisis in 1997, U.S. exports of manufactured goods
have faced a considerable slow down in foreign demand. The fact that major trading partners like
Germany and Japan, which still make up over 20 percent of the world economy,
fell into recession at roughly the same time as the United States meant that
they could not act as a counterweight when the U.S. economy fell into recession
in late 2000. Significantly, the recession
in manufacturing began 10 months earlier in the 1st Quarter of
2000. What that meant, as then-Secretary
of Treasury Lawrence Summers said, was that the “[w]orld economy is flying on
one engine,” and that engine is the United States. The net effect was upward pressure on our trade deficit.
Fortunately, as the stimulus of the
2001 and 2003 tax cuts have begun to kick in, the U.S. economy has returned to
a vigorous rate of growth – 3.3 percent in the second quarter of this year and
the pace of economic activity, according to most private sector economists’
estimates, appears to have accelerated since then. It now appears that manufacturing, after many
months of very slow growth, is beginning to participate in that broader
economic recovery. Durable goods’ orders
have been up generally, although down in August. And, the Purchasing Manager=s Index, a key indicator of future economic growth, is
now consistently above the level that means stronger growth ahead.
Even on the unemployment front, there
are signs of job growth consistent with a stronger economy. The most recent figures reflect that
unemployment claims are falling and the Labor Department’s household survey,
which generally picks up on job growth faster than its survey of employers,
shows rising employment. Just to put
that in perspective, virtually all economists agree that due to rapid policy
responses, the recession was shallower than most and unemployment, with the
exception of a rise to 6.3 percent in June of this year, generally stayed
within 5.5 and 6 percent throughout the recession and the early stages of the
recovery. Not long ago, according to an
article in the Wall Street Journal, then-President Clinton was encouraging this
Committee to take a hard look at our unemployment insurance programs on the
grounds that we were at full employment by historical standards – at the time
President Clinton made that statement, unemployment stood at 6.8 percent.
Having said that, I want to
reiterate, as the President has, that the Administration is committed to
working towards an economic climate where everyone that wants a job has
one. And there is an important story to
tell about the unemployment figures in manufacturing. The job losses began in
2000 when, as I noted, the manufacturing sector entered into a recession about
10 months earlier than the economy as a whole.
The economy was just beginning to cope with the effect of a sharp drop
in business investment as industry pulled back from a period of heavy
investment in technology. Not
surprisingly, the industries with the most significant job losses in
manufacturing are precisely those industries – telecommunications equipment and
computing – that benefited most from the boom in investment related to the
“dot.com bubble” of the late 1990s and then fell when
that bubble burst and the stock market began to decline sharply.
What has surprised most economists
has been the fact that manufacturing continued to shed jobs deep into the
recovery of the economy. Employment in
manufacturing has been declining for decades as productivity gains have
significantly reduced the number of worker-hours needed to produce a given
product. In the last 15 years, in
particular, those gains have averaged 3 percent or more, demand for
manufactured goods has grown less than that amount, and employment in
manufacturing has fallen commensurately.
Some share of the recent reduction in manufacturing employment during
the initial stages of the recovery and expansion is directly attributable to
the efforts of manufacturers to cut costs and raise productivity. Under considerable competitive pressure,
American manufacturers are finding ways to do more with less. And, the labor market is responding by
shifting jobs to other industries where growth in demand outstrips rises in
productivity.
With that as context, I want to focus on the link
between the competitive pressure that has driven American manufacturing to
pursue those productivity gains and what is going on in the international
environment, particularly with respect to our trade with China and its emergence
from a fully state controlled economy to become a major force in manufacturing
globally.
On the international front, one of
the most frequently cited statistics is our trade deficit, which has been
growing overall and particularly with China.
Although the trade deficit is often thought of as an indicator of our
competitiveness, it is better understood as a reflection of the relative growth
in our economy compared to our trading partners. Perhaps the best example comes from the
1991-92 recession, when the trade deficit contracted sharply. No one would suggest that the decline in the
trade deficit was due to a further opening of world markets to U.S. exports –
neither the NAFTA nor the Uruguay Round of multilateral negotiations were yet
complete at that stage. Nor had Japan,
which saw the greatest decline in its trade surplus with the United States,
suddenly opened its economy to U.S. goods and services. Instead, the decline in the deficit was
directly attributable to the differences in the rates of growth in the U.S.
economy and the world economy as a whole, Japan’s in particular.
In past recessions, continuing growth abroad mitigated the effect of the
U.S. recession on our manufacturers. In the most recent recession, that did not
happen. The data behind the trade
deficit bear out the effects of differences in economic growth rates between
economies. In eleven of the last twelve
years, US economic growth has outpaced that in Japan, Germany, and the European
Union. What=s more, slow growth among our leading trading partners
is not new. Japan=s economy, which still represents close to 2/3 of the
gross domestic product of Asia, has barely grown for a decade. Germany=s economy has not grown appreciably
in three years. On top of that, the rest
of Asia, with the notable exception of China, has presented a very mixed
picture in terms of economic growth since the onset of the Asian financial
crisis in 1997. While some economies
have recovered, others have not. And,
these are markets that were once among the fastest growing in the world B markets that had become significant consumers of the
sorts of advanced technology capital goods that our manufacturers sell.
What that should tell us, both in
terms of the economy as a whole and the manufacturing sector in particular, is
that perhaps the most significant single action we could take is to step up
encouragement of our trading partners, particularly Japan and Germany which
together make up 20 percent of the world economy, to jettison their anti-growth
policies and to adopt policies that are designed to boost economic growth. We need to preach what we practice because
the alternative to growth is always a zero-sum game of dividing up the existing
pie, and that leads directly to the sort of strains we are seeing now in our
trade relationships.
But, those statistics also bear on
our economic relationship with China in two respects. First, it is clear that China’s extraordinary
growth – currently estimated to grow 8.6% this year and another 8% in 2004 – has
helped our manufacturers in that it has provided a source of foreign demand
that would not otherwise exist in today’s world economy. It is worth underscoring that, for U.S.-based
automotive companies, earnings in China may well be the difference between
profitability and losses. That has a
very human dimension that I do not want us to lose sight of in our discussions
on China – growth there right now is one of the reasons our automobile
companies can continue to keep their U.S. workers employed and to pay the
pension benefits they have guaranteed their retirees.
Which leads me to China. In the more than 20 roundtables the
Department held with manufacturers across the country over the past six months,
there was no single topic that garnered more attention than China, its
emergence from state-imposed economic isolation to become a major center of
manufacturing, and our trade with China.
The Chinese have made considerable progress over the last two decades in
lifting more than 200 million people out of poverty by relying ever more
heavily on the market to direct resources within its economy.
The stakes involved are high. China is our fourth largest trading
partner. Bilateral merchandise trade
reached $147.2 billion in 2002. Last
year, China overtook Japan to become our third largest source of imports. In July of this year, China surpassed Mexico
to become our second largest source of imports.
Our imports from China are more than five times greater than our
exports. The bilateral trade deficit hit
$103 billion in 2002 and reached $65 billion in the first seven months of this
year.[1]
A large share of what we now import
from China used to be imported from other Asian countries. China’s role in the restructuring of global
manufacturing is that of the final assembly point for most Asian electronic
equipment destined for the United States China becomes the exporter of record
before would have been export to the United States from other Asian countries. What that means in practical terms is that it
would be more appropriate to look at our trade account with China as an
indicator of our competition in manufacturing across Asia, as opposed to the
rise of Chinese manufacturing alone.
There is an obvious upside to China’s
growth and the benefit the Chinese derive as investment in Asia shifts toward
China for final assembly. That shift,
together with China=s economic policies, has brought
about a rising standard of living in China and a considerable rise in
disposable income for the average Chinese.
And, what that has created is a consumer demand that did not previously
exist in China. What that means is an
expanding market for goods and services, as opposed to the largely one-way
street of the past. The fact that
China’s trade is nearly in balance overall, even though it runs a huge surplus
with the United States, reinforces the point about rising consumer demand and
growth in imports.
To put that in perspective, China,
along with the United States, currently accounts for most of the current growth
in the world economy. It is worth noting
that since 2001, China has been our fastest growing export market by far among
our top ten trading partners. Our
exports to China surged 19 percent in 2001, 15 percent last year, and more than
22 percent from January to July of this year, even while our exports to the
world as a whole declined 7 percent in 2001, and 5 percent in 2002, and rose
less than 3 percent during the first six months of this year.
All of that makes China an attractive market for much of what we produce
in the United States, including for our manufacturers. We are far more likely to sell the sorts of
capital equipment in which we have a comparative advantage in China than in
most world markets based simply on the growth in the Chinese economy and the
nature of that growth. If, for example,
we continued to see the construction industry boom in China and a major
investment in infrastructure to link the western provinces with the coast,
companies like Caterpillar will find a growing market for what they sell. The same is true for Boeing.
Here, it is worth stressing that we
need companies like Caterpillar and Boeing to succeed in the Chinese and other
overseas markets because their supply chains are filled with what are known in
business as tier 3 and tier 4 suppliers.
Many of those suppliers are small and medium-sized businesses that do
not export directly, but their future success depends on whether Cat and Boeing
remain globally competitive.
But, it is not just the Boeings and
Caterpillars of the U.S. manufacturing sector that see growth in the Chinese
market as an opportunity. Direct exports
by small and medium-sized businesses in the United States have grown as well. For example, Bitrode Corporation is a Fenton,
Missouri, company that manufactures equipment used by the battery manufacturing
industry. The company produces testers
as well as chargers, and all their equipment is for use by battery
manufacturers or researchers. Many of
Bitrode=s products are destined overseas,
including two specific products for China.
Last year the company sold equipment to China to the tune of $1.5
million. The company says their exports
to China are growing about 15 percent annually, while their sales in the United
States are holding even at best.
Similarly, Numatics, a Highland, Michigan, company that
works in a highly specialized field, developing and manufacturing components
for automated machinery used in many branches of industry, including
automotive, petro-chemical, aerospace, and medical equipment, participated in a
Commerce Department trade mission in early May, 2002, to China and signed deals
with four new distributors, each covering different geographic regions of
China. Last year, Numatics staff worked
closely with the new Chinese distributors to complete training and set up
inventory. In 2003, Numatics reports
that sales are picking up. The company is planning to participate in a Chinese
trade show in November.
One of the basic reasons for negotiating for 15 years
with the Chinese over their accession to the World Trade Organization was to
ensure that we would knock down the many barriers to entering China=s market. On
paper, the accession agreement represents a considerable success. Today, the tariff rates that China imposes
are lower on average than much of the rest of the developing, and in some
instances, the developed world. In
addition, the WTO agreement obliges China to protect the intellectual property
of U.S. manufacturers and service suppliers. The agreement also phased out many of the
barriers to the free distribution of American goods throughout the Chinese
economy. American goods are freer to
move through a variety of channels instead of being beholden to trading through
a Chinese state enterprise as in the past.
The situation facing our manufacturers from a competitive perspective
was far worse prior to China=s entry into the WTO. Our manufacturers lacked access to the
Chinese market, but their manufacturers had relatively free access to ours.
In the first year following China=s accession to the WTO, I think both Congress and the
President showed an extraordinary amount of patience as China reviewed
literally thousands of laws and regulations in an effort to make the necessary
changes to bring them into compliance with WTO rules. Now, as we move deeper into the second year
of China=s participation in the WTO, we need
to see actual enforcement of those laws and basic compliance with WTO rules in
other areas. I know that the President,
Secretary Evans, Ambassador Zoellick, and most recently Secretary Snow have all
made that point vigorously with their counterparts in China. And, I can attest that, at a working level,
the rest of us have taken up the cause just as vigorously.
But, there is still a very, very long
way to go. And, that distance goes to
the heart of the complaint many manufacturers have about China. It is the pace of the ongoing reform of the Chinese
economy toward a market model, of which the implementation of the Chinese WTO
obligations is a part, that causes friction within our trade relationship. The WTO rules, and, indeed, the whole concept
of trade is based on free competition in the marketplace. The gains from trade arise when countries
open their economies to gain the benefits that comparative advantage
yields. But, where one economy is
organized under principles that are inconsistent with that free market model,
it can cause an enormous amount of injury and friction within our trading
relationships. That is, in my view, the
current situation with China.
The recently concluded plenum of the
Central Committee of the Chinese People’s Congress reinforced the commitment of
the Chinese government to undertake the reforms needed to push their economy
toward a market-based model. That
renewed commitment is welcome. That said
using WTO compliance as a surrogate for China’s overall movement toward a free
market model reflects the distance we still have to go. We have considerable challenges in terms of
WTO compliance, particularly in areas like the protection of intellectual
property that represents the key U.S. competitive edge in many manufacturing
industries.
In fact, no country raised more
attention as a source of concern than China during the roundtable discussions.
Our manufacturers complained about rampant piracy of intellectual property;
forced transfer of technology from firms launching joint ventures in China; a
broad range of trade barriers; and capital markets that are largely insulated
from free-market pressures. We also
heard rising concerns about the timeliness and direction of China=s implementation of its WTO commitments in areas such as
transparency, trading rights and distribution services, agriculture, financial
services, and standards.
In the area of standards, the
Commerce Department and U.S. Government complaints on a new Chinese standard
for cadmium levels in fertilizer has led to an indefinite delay in China's
finalization of the standard. Strong
export sales of U.S. fertilizer to China continue and industry representatives
are pleased with the results of our engagement with the Chinese standards
authorities in this matter. We will continue to work to ensure that any
mandatory standards China issues, in this sector or others, fully comply with
its WTO obligations in the area of Technical Barriers to Trade.
Construction services are another
area in which we have made some progress.
Working with the Department of State and others, Commerce successfully
convinced China=s Ministry of Construction (“MOC”) to
extend the deadline for non-Chinese construction companies to incorporate as
either foreign invested construction enterprises or construction design
firms. This will allow foreign firms to
continue to operate on a project-by-project basis. MOC officials have also agreed to meet with
industry to discuss the new rules.
Commerce and State currently are working to organize this meeting.
Fundamentally, China=s change from a non-market economy to one that operates
fully on market principles is incomplete.
Although the Chinese often make the case that they are a market economy
because they want the benefits that designation would yield under our
antidumping laws, the simple fact is that many of the main drivers of the
Chinese economy remain in state hands.
Whereas U.S. companies face continuing pressure from our capital markets
to turn a profit, that pressure simply does not exist in many cases in
China.
In one sense, this problem is not
new. American firms have seen the same
pattern in other Asian markets for years.
Even the 1997 financial crisis has not weaned industries or governments
from those unhealthy practices – witness Korea=s
continuing support for the Hynix semiconductor operations, a company
that was otherwise headed for liquidation.
On the other hand, we need to make clear that it’s time for this to
end. There is no reason today for this
kind of support either by China or by other Asian countries of their
manufacturing industries. It is
precisely these sorts of practices that are so injurious, not only to our own
industry, but to the process of trade liberalization that all can benefit from
as long as we are all playing under the same rules.
I recognize that many commentators
see a demand for a Alevel playing field@ as a demand for protection, but that is not always, or
even usually the case. Most
manufacturers I have spoken with over the last six months did not want protection; they wanted the unfair trade practices
that rigged the game against them eliminated.
A good example is the forest products industry, which has an enormous
fight with Canada over subsidies. Yet,
in the context of our roundtable on forest products manufacturing what these
firms sought was not protection – they asked that the President negotiate the
elimination of the barriers they faced abroad and the subsidies they faced in
terms of competition from imports. The same held true for most manufacturers
with whom we discussed China. There was
a strong recognition that we were better off in a world in which the rules were
observed and the competition was fair, than a world segmented by trade barriers
which would mean less trade and slower economic growth for all.
At the same time, I also must stress
that there are significant parts of our manufacturing sector that are under
extraordinary pressure to adjust to new levels of competition from imports,
particularly from China. Industries like
textiles and apparel in the South and tool and die in the Northeast and Midwest
offer examples of the sorts of pressures our manufacturers face. Both the challenges and the pain felt in many
communities are very real. In the case
of textiles and apparel, the challenges are particularly intense because the
industry is emerging from a 40-year period when it was protected by quotas on
imports of competing material and clothing.
As a consequence, the industry remains highly fragmented and is being
forced to go through, all at one time, the adjustment and consolidation that
most U.S. industries went through in the 1970s and 1980s.
In the last round of world trade
negotiations, President Clinton agreed to phase out the quota system that had
protected the textile industry. Most of
the truly sensitive items from the perspective of U.S. industry were given the
longest phase-outs. But, the quotas will
come to an end on January 1, 2005, and that will mean still stronger
competition from imports. What is not
generally understood is that most of the sharp increase in Chinese imports has
come at the expense of our other trading partners. As new products have been freed of quota
arrangements, retailers no longer face the need to source products from
multiple countries. Instead, much of
what was previously shipped to the United States from other Asian countries now
comes to us from China. But, that has
not meant less pressure on U.S. manufacturers in terms of price competition.
While the argument most frequently
raised about China by commentators seems to be the difference in wage rates,
most of my conversations with manufacturers, particularly in textiles,
suggested other reasons for increased Chinese competition. What is not often understood is that, today,
the textile industry is actually very high tech. There is very little labor involved in many
products that come out of the industry and wages are a relatively small portion
of the total cost of production except in the case of products that require
considerable hand stitching.
The truth of that statement was
brought home to me in a conversation with a North Carolina manufacturer of
textile products used in the luggage industry.
Most bags today are made with some form of rip-stop material, none of
which is hand sewn. Nor is the frame of
most roll-on bags manufactured by hand.
Yet, the North Carolina manufacturer showed me 5 suitcases, one nesting
inside the other, that sold for a total price – delivered from China – of under
$30. In other words, the total cost of
the five bags was below the North Carolina manufacturer=s cost of materials alone.
The point to that story is simply
that it is not wages alone that allowed the Chinese manufacturer to sell the 5
pieces of luggage for a delivered price of less that $30. The cost of most of the materials is
determined in world markets, so if the Chinese economy were open to international
trade and competition, then the Chinese manufacturer=s materials costs would be comparable to that of the
U.S. costs. This means that to get the
delivered price down to below $30 there must be a very large amount of
government subsidy, express or implied, to the manufacturer – a subsidy that
can take the form of an outright cash grant to the exporter, but more often
will take the indirect form of tariff protection against competition, the
forgiveness or rebate of taxes, or the continuing extension of credit to
noncredit worthy enterprises.
In my view, although the textile
industry is commonly criticized for seeking protection based on the past 40
years of quotas, the complaint that has led the industry to seek safeguards
against Chinese imports stems from a different motive. There is no real argument that the Chinese
market operates fully on a market basis, and the reasons for the industry=s request for help stem from that simple difference
between the pressures they face in our market on a day-to-day basis and the
pressures that their Chinese competition does not.
What that also points out is the fact
that, in addition to pressing the Chinese at every opportunity on their
compliance with their WTO commitments, we also have to be extraordinarily
vigilant regarding the injurious effects of other forms of government support
for Chinese industry that are not covered by current WTO rules. Those sorts of practices require a different
type of tool – one that requires digging out the facts regarding the underlying
competitive differences that our industry faces in terms of import competition
from China.
As I noted above, the textile
industry is not alone in facing Chinese subsidies and protection. Other industries like tool and die and U.S.
foundries face similar competitive conditions.
That is why one of the most forward-leaning recommendations we intend to
make regarding our trade is the establishment of an office in the Commerce
Department, the sole function of which will be to investigate these sorts of
practices. When we find these
anti-competitive practices, we will vigorously seek their elimination by the
Chinese and by other trading partners.
The one thing I can assure you is
that the Department of Commerce is dedicated to making sure China does play by
the rules. We will vigorously pursue
China=s compliance with its WTO commitments
and we will enforce our domestic unfair trade laws rigorously and fairly, as
both President Bush and Secretary Evans have made clear. And, that will be the single most important
topic of conversation with our counterparts this coming week.
The Department of Commerce, in close
coordination with USTR and other agencies, has adopted an aggressive and
multi-pronged approach to ensure that China honors its WTO commitments and that
U.S. companies benefit from these opportunities. We will target unfair trade practices
wherever they occur. We are exploring
the use of new tools to expand our trade promotion activities in China. We are expanding efforts to engage Chinese
officials to make sure they Aget the rules right@ as they continue their enormous task of restructuring
their economic system.
The Commerce Department has actively
provided WTO-related technical assistance to China since September 2000, well
before China=s accession to the WTO. Initial
programs focused on increasing the awareness of general WTO principles among
Chinese government officials. As China developed an increasingly sophisticated
understanding of the WTO system, our programs have been tailored to more
specific areas, such as standards development and intellectual property right
(IPR) protection. For example, in 2003 Commerce sponsored or coordinated
programs on fertilizer standards, antitrust, government procurement, medical
device regulatory training, and information and communication technologies
standards and conformity assessment.
Despite China=s commitments to crack down on rampant piracy,
counterfeit CDs, DVDs, and pharmaceuticals continue to flood the market. In
addition, piracy and counterfeiting in China has a significant impact on U.S.
intellectual property rights holders in China itself. In fact, the International Intellectual
Property Alliance estimates that business software, music, movie and
entertainment software piracy rates in China exceed 90%, with damages of $1.85
billion in 2002. We have raised specific
IPR concerns during our meetings with senior Chinese government officials and
have repeatedly demanded that the Chinese government uphold its bilateral and
multilateral IPR commitments.
Through the annual Special 301
process, we scrutinize China's IPR conditions in close coordination with our
colleagues in other agencies. To make
sure that China has the tools to implement its commitments, we have organized a
series of seminars with Chinese officials. Programs in development for later
this year include a WTO pharmaceutical regulatory seminar and anti-counterfeit
training, and IPR criminal & border enforcement seminars. We have worked on these programs on an intra
and inter agency basis, using the resources of US Patent and Trademark Office,
Department of Justice and other agencies. We think China can and should do
better in these areas. We continue to
press for progress.
However, keeping our focus on China=s WTO implementation and the country=s other trade practices is only part of the solution. We
must continue to enhance the ability of U.S. businesses to compete in
China. We are increasing our efforts to
ensure that U.S.-developed technical standards are accepted in China just as
they are throughout the world. We are
launching ADoing Business in China@ seminars in cities across the country to address
concerns about the Chinese market from small and medium-sized businesses. We are exploring ways to develop more trade
leads in China and to provide even more targeted information on opportunities
in China for companies in the U.S.
Combined with these domestic efforts, we regularly engage
Chinese government officials to ensure trade agreement compliance and market
access for our products and services.
Secretary Evans will visit China in October to advance U.S. interests
and advocate for a level playing field in our economic relations with
China. We will have another opportunity
to raise outstanding issues during the 15th U.S.‑China Joint Commission on Commerce and Trade (JCCT) to
be held in Washington in early December.
With that, I would like
to turn to the topic of the President=s
Manufacturing Initiative and the context it provides for our discussion of
trade with China. In March of this year,
during Manufacturing Week, Secretary Evans had the opportunity to speak before
the National Association of Manufacturers in Chicago. At that time, he announced the President=s Manufacturing
Initiative. As a part of that
initiative, Secretary Evans directed me to lead a comprehensive review of the
issues influencing long-term competitiveness of U.S. manufacturing. The central goal of the review is to develop
a strategy to ensure that government is fostering an environment that promotes
a dynamic manufacturing industry. The
review will conclude with the release of a report later this fall.
The Commerce Department=s senior management,
including Secretary Evans and Deputy Secretary Bodman, all pitched in. We held roundtable discussions with
manufacturers in the aerospace, auto, semiconductor, and pharmaceutical
sectors, among others, in more than 20 cities across the United States – from
Manchester, New Hampshire to Columbus, Ohio, to Detroit to Los Angeles – to
develop the report and recommendations.
What we heard from
manufacturers in terms of the challenges they face was significant. While the international competition is what
has garnered most of the attention in the press, by far the greater weight of
the manufacturers=
comments focused on domestic issues – what I call “keeping our side of the
street clean.” What I mean by that is
simply paying attention to the needs of our manufacturers as we develop
legislation or implement regulations. It
is the steady accumulation of multiple burdens, rather than a single cause,
that has had the most severe impact on the competitive environment in which our
manufacturers operate.
The list of issues our
manufacturers identified should not surprise anyone who has taken a serious
interest in manufacturing. While our
manufacturers have tightened their belts and raised their productivity in an effort
to remain competitive and, in fact, to succeed in the day-to-day competition in
the marketplace, they have seen that advantage and the hard-won productivity
gains eroded by everything from higher energy costs to higher medical and
pension costs to higher insurance costs due to a run-away tort system.
Just a few examples might
suggest why manufacturers have seen their costs rise. We heard from manufacturers in New Jersey
that 30 cents of every dollar of revenue went to pay health benefits for
employees. Manufacturers gladly pay for
their employee=s
health benefits because they see their own interest served by a healthy and
motivated workforce, but if we are serious about manufacturing, we have to be
serious about grappling with the underlying drivers that have created 145
percent increases in health care insurance costs that obviously are not
sustainable indefinitely.
In Michigan, I met with
auto parts suppliers that faced continuing pressure from the auto companies to
lower their prices by 20 percent or face the prospect that the auto companies
would turn to overseas sources of supply.
The concern those parts suppliers reflected involve the terms on which
they compete with those overseas suppliers, particularly in China. But the auto parts suppliers knew that the
ultimate source of the problem lay in an auto industry that is grappling with
the same sorts of legacy costs that burdened the steel industry. If we are serious about manufacturing, then
these industries will have to get those financial obligations under control.
In Columbus, Ohio, Des
Moines, Iowa, and in my hometown of Minneapolis, Minnesota, I met with
manufacturers in the plastics and adhesives businesses that are heavy users of
natural gas. The companies in the
plastics businesses in particular risk seeing whole new markets fall to their
foreign competitors who see lower natural gas prices. If we are serious about manufacturing, we
have to adopt a national energy plan that will help us access new sources of
supply and improved transmission to reduce the cost of energy to our
manufacturers as well as to consumers.
Another example we heard
from virtually every manufacturing trade association we met with was the need
to eliminate the complexity and the disincentives our tax system creates for
investing in manufacturing in the United States. A number of issues fall in that
category. Take the bias in the current
tax code against equity financing, which raises the cost of capital, thereby
reducing the investment. This bias also
translates into a preference for debt, which yields highly leveraged companies
and a highly leveraged country, all the while encouraging the worst sorts of
gaming as clever tax lawyers try to find ways to take what is an equity
interest and call it debt in order to qualify for an interest deduction. Taken together, even without cutting rates,
reforms of the tax code could make a profound difference to the relative
attraction of investing in manufacturing in the United States.
But, perhaps the most
egregious example comes out of the tort system in this country. One issue, in particular, stood out among the
manufacturers=
concerns about the tort system. That was
the ongoing asbestos litigation. There,
the continuing litigation has yet to help many individuals who were harmed by
prolonged exposure to asbestos, while, at the same time, the litigation hangs
over virtually all U.S. manufacturing, raising their insurance costs and
dampening their returns. Clearly, if we
are serious about manufacturing, we have to get serious about reforming the tort
system.
Manufacturers also
pointed to declining vocational school programs, declining enrollments in
engineering and the funding of scientific research, all of which are essential
to the productivity gains that keep our manufacturing sector competitive and
keep a skilled workforce employed.
Finally, as I noted
above, in addition to keeping our own side of the street clean, U.S.
manufacturers demanded a level playing field.
For most, that translated into a demand that we negotiate down tariff
rates that are higher than ours and break open new markets. Or it translated into a demand for the
enforcement of rules barring the theft of intellectual property. It translated into a demand for the
enforcement of our unfair trade laws or laws against customs fraud.
What I did not see was an
interest in outright protection. Rather,
most manufacturers saw trade as a simple question of equity. If we keep our markets open to our trading
partners goods, they should do the same for us.
But, where our trading partners did not live up to the terms of our
agreements or otherwise heed the rules, our manufacturers expected that those
trading partners should pay a price.
That is where what we do
domestically bears on our trade with China.
In my view, if we have done what we can to grapple with the
disincentives we create for investing in manufacturing here in the United
States, our manufacturers will be in a far better competitive position to gain
access to the supply chains that will take them global and into the Chinese
market in particular. In addition, we
would come to our discussions with the Chinese knowing that any disparity in
competitiveness between U.S. and Chinese manufacturers is not attributable to
our own actions, but to the function of the market or the intervention of the
Chinese government on behalf of their firms.
Most manufacturers I have met with are prepared to live with the first
result; they are not prepared, nor is this Administration, to live with the second.
While we are still in the
process of finalizing the report and recommendations across many fronts,
Secretary Evans has outlined several new initiatives in response to the
concerns we heard from manufacturers, particularly the need for a stronger
focus within the U.S. government on manufacturing and the most immediate cases
of unfair trade affecting our manufacturers.
The first initiative, announced by the President on Labor Day, is a new
Assistant Secretary of Commerce to serve as the point person in the
Administration and within the U.S. government for manufacturers and as an
effective advocate for the manufacturing sector=s competitiveness. There
are many programs within the federal government that bear on manufacturing, but
heretofore there was no one person or one office responsible for bringing their
efforts into a coherent strategy. The second would call for the creation of
Assistant Secretary for Trade Promotion to boost our exports, particularly to
those markets that our negotiators have recently opened to our trade like
China. And, the third is the
establishment of an Unfair Trade Practices Team to track, detect, and confront
unfair competition before it injures an industry here at home.
We expect the manufacturing report and the remainder of the recommendations to be out soon. In addition to moving on the implementation of those recommendations, we intend to do two things to follow up. The first is to go back to the manufacturers we visited earlier this year to get their reaction on what we have suggested and to help us refine our approach as we move forward. The second is to discuss the next set of issues we intend to tackle as part of our on-going commitment to support our manufacturing sector.
That concludes my
testimony. I would be pleased to answer
any questions that you may have.
[1] Interestingly, despite the attention focused on China, Europe’s trade deficit has grown more quickly in recent years than China’s, and Japan’s deficit remains as high as ever. That simply tends to confirm that what we are seeing in our trade accounts is largely driven by disparities in growth that show up as lower exports to and continued high imports from slower growing economies, and stronger growth in exports to faster growing markets.