Remarks by Franklin L. Lavin
Under Secretary of Commerce for International Trade
UCLA Anderson School of Management
Los Angeles, California
April 16, 2007
As prepared
Thank you for that kind introduction and for inviting me here at UCLA. I’d like to discuss and put in context some of the current issues surrounding U.S.-China trade policy with you today.
Growth and Good News
Let me begin by putting the economic relations in political context. The United States views the overall relationship with China as a positive one, despite differences on a range of issues. I had the chance to participate in the meeting President Hu held with President Bush last year at the White House, and it is clear that both presidents are committed to keeping the relationship on a sound footing. This includes both the economic as well as the political dimension.
On the economic side of the relationship, the rapid rise of China is one of the central economic facts of our era. In less than thirty years, China has transformed itself from an impoverished centrally planned economy to one that is rapidly industrializing, headed toward middle income status, and substantially market-oriented. Over this time period, China has experienced the highest sustained rate of growth that the world has ever seen. As a result, more people have been escaped poverty over these past thirty years in China than at any other moment in human history.
An important factor in that growth has been international trade. Last week, the WTO released the 2006 trade statistics, which showed that China is now the third largest exporter in the world, trailing only the U.S. and Germany. And China is enjoying a rate of growth in its exports that projects it will win top place within two years.
We see this same pattern in our bilateral trade figures, with two-way trade growing at persistent double-digit rates. In 2006, U.S. exports to China were up about 32%, to $55 billion. China’s exports to the U.S. were up at a slower pace, 18%, but on a considerably higher base, taking their total exports to us to $288 billion.
Challenges
Although I mentioned the bilateral political relationship is positive, I believe that the economic relationship is facing some serious challenges, this despite the fact that many U.S. companies are enjoying success in the China market.
Let me cite a few examples of trade and economic practices in China that most would consider unfair: 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 protection, 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.
Resolving Challenges and Promoting Trade: Five Pillars
Our approach to these problems is built around five pillars:
First, bilateral negotiations;
Second, the WTO process;
Third, trade remedies;
Fourth, export promotion work; and
Fifth, our overall trade agenda.
Let me review each of these.
The first pillar, and the most important mechanism in addressing trade challenges, is bilateral negotiations. The two main bodies we have for our China negotiations are 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 the WTO Dispute Settlement System, which allows member states to file for dispute resolution when another country is not honoring its WTO obligations. This process is led the United States Trade Representative. Last week we initiated WTO dispute settlement proceedings on two cases involving intellectual property rights.
The first case has to do with protecting copyrighted material from being pirated in China. In our view, there are laws that impede effectively stopping fakes. For example, in order for a counterfeiter to be criminally prosecuted there must be at least 500 infringing works found. This creates a substantial loophole for piracy.
The second action has to do with the distribution of legitimate products in China. Many of the fakes flourish not only as the result of a lack of punishment for violators, but also due to the lack of real product availability in China. This is the result of an inability of copyright holders to import and distribute their products in China.
China agreed to eliminate state run monopolies for the importation of goods into China when it joined the WTO. While many of these monopolies have been disbanded, this is not the case for movies, DVD’s, books and music. China largely still prohibits many distribution activities for publications and home entertainment videos, and discriminates against foreign distributors.
Each of these violations causes serious harm to American companies. And all of these issues have China in direct violation of their WTO obligations. So we are using the WTO process to protect our interests and resolve these disputes for the benefit of both our countries.
The third pillar is trade remedies, which includes anti-dumping and anti-subsidies cases. We currently have 61 orders against unfair exports from China, totaling almost one fourth of our total global caseload.
Earlier this month 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.
To give you 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.
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 the Chinese exporters have benefited from that appear to be at odds with U.S. and WTO laws and guidelines.
The fourth pillar is export promotion. At the Commerce Department, our primary mission is to help U.S. companies succeed overseas. In practical terms, this means we undertake projects from trade missions and trade fairs, to advocacy on behalf of U.S. companies, to the trade negotiations I mentioned earlier. Among those responsibilities are the promotional activities that assist U.S. firms with entering the market, and untangling problems that might arise. We have over 120 people on the ground in six cities across China, making our China mission by far the most active country in our system.
All of these policy pillars need to be viewed in the context of our overall trade agenda, the fifth pillar. The point is that, an important tool in inducing better performance from China on trade issues is to work on improving trade practices globally through the WTO and through an aggressive policy of free trade agreements. With FTA partners, we have a level playing field, and we have legal recourse if there is a problem. To those who complain about U.S. market access in China, let’s work to lock in U.S. market access elsewhere. We’ll have the opportunity to do so later this year as votes come to pass on four pending FTA’s with Korea, Peru, Panama and Columbia.
Conclusion
As China continues to sort through its approach to reforming its economy, we believe our approach will provide additional incentives for China to move away from subsidies, keep its international trade obligations and continue pursuing market economics. Together the five pillars offer a comprehensive strategy that advances U.S. interests and is fair to both sides.
I am 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. 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.