<DOC>
[108 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:24735.wais]
S. Hrg. 108-876
THE TREASURY DEPARTMENT'S REPORT
TO CONGRESS ON INTERNATIONAL
ECONOMIC AND EXCHANGE RATE POLICIES
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
THE TREASURY DEPARTMENT'S REPORT TO CONGRESS ON INTERNATIONAL ECONOMIC
AND EXCHANGE RATE POLICY
__________
OCTOBER 30, 2003
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
LINCOLN D. CHAFEE, Rhode Island JON S. CORZINE, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Peggy R. Kuhn, Senior Financial Economist
Martin J. Gruenberg, Democratic Senior Counsel
Aaron D. Klein, Democratic Economist
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
(ii)
?
C O N T E N T S
----------
THURSDAY, OCTOBER 30, 2003
Page
Opening statement of Chairman Shelby............................. 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 2
Senator Allard............................................... 5
Prepared statement....................................... 39
Senator Dodd................................................. 5
Senator Bunning.............................................. 6
Senator Schumer.............................................. 7
Prepared statement....................................... 39
Senator Dole................................................. 8
Senator Bayh................................................. 9
Senator Carper............................................... 10
Senator Miller............................................... 11
Senator Stabenow............................................. 12
Prepared statement....................................... 40
Senator Corzine.............................................. 13
Senator Reed................................................. 14
WITNESS
John W. Snow, Secretary, U.S. Department of the Treasury......... 15
Prepared statement........................................... 41
Response to written questions of:
Senator Carper........................................... 46
Senator Miller........................................... 47
Additional Material Supplied for the Record
Charts submitted to Committee Members by Senator Paul S. Sarbanes 50
Washington Post article dated September 13, 2003, entitled,
``U.S. Debt to Asia Swelling, Japan, China Lead Buyers of
Treasurys'' written by Peter S. Goodman, submitted by Senator
Paul S. Sarbanes............................................... 58
Various letters submitted for the record by Senator Evan Bayh.... 61
Letter by Joyce Williams, Trion, GA, dated September 15, 2003
submitted for the record by Senator Zell Miller................ 85
Report to Congress on International Economic and Exchange Rate
Policies submitted by the U.S. Department of the Treasury...... 87
(iii)
THE TREASURY DEPARTMENT'S REPORT
TO CONGRESS ON INTERNATIONAL
ECONOMIC AND EXCHANGE RATE POLICIES
----------
THURSDAY, OCTOBER 30, 2003
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 10:17 a.m., in room SD-106, Dirksen
Senate Office Building, Senator Richard C. Shelby (Chairman of
the Committee) presiding.
OPENING STATEMENT OF CHAIRMAN RICHARD C. SHELBY
Chairman Shelby. The hearing will come to order.
Mr. Secretary, we welcome you to the Committee. I am
pleased that you are here to testify on the Treasury
Department's Report to the Congress on International Economic
and Exchange Rate Policies.
Secretary Snow, your report this morning is of great
interest not only to us but also to the American people. The
continued softness in labor markets and the loss of
manufacturing jobs make the trade and exchange rate policies in
China and Japan, in particular, a tangible issue to U.S.
businesses and taxpayers.
Signs of an economic recovery in the United States are
emerging, which is good news. Even today, we have heard that
the GDP grew at a 7.2-percent annual rate. In the third
quarter, the strongest since 1984, business spending rose 11.1
percent, we were told. On the labor front, new weekly claims
were below 400,000 people for the fourth straight week. I hope
this news is sustainable.
In today's global economy, it is important that we also
look at trade and exchange rate policies of other countries.
The news is more mixed in this area. The current account
deficit was a record $480.9 billion last year and is currently
running at 5 percent of gross domestic product. Employment in
the manufacturing sector has fallen by 2.7 million jobs, 15.6
percent, since July 2000.
These trends are certainly cause for great concern to us in
the Congress as well as you at the Treasury. I believe that we
need to have a serious discussion, Mr. Secretary, about what
can be done to reverse these trends. The G-7 nations issued a
statement calling for more flexible currency policies, but it
is unclear how China and Japan will proceed and on what
timetable.
China's trade deficit with the United States hit a record
$105 billion last year. The Chinese capital account is expected
to become increasingly open to short-term flows. Greater
exchange rate flexibility would allow China to maintain a low-
inflation, pro-growth monetary policy. I believe we need to
continue the dialogue to ensure that China moves forward on a
flexible rate path. However, we also need to encourage them to
strengthen their entire financial and banking system. This will
be critical to the success of a more open economy.
Mr. Secretary, I continue to be concerned, as you are,
about the Japanese economy. Japan's banking sector is still
struggling to recover from the effects of the stock and real
estate bubbles of the late 1980's. Even with the recent actions
on nonperforming loans, Japan's financial sector's troubles are
far from over. Japan's focus on using exports to drive an
economic recovery have not been totally successful. In
continuing its active intervention in the currency markets,
Japan holds the largest foreign exchange rate reserves in the
world. We need to encourage, I believe, the Japanese to place
more emphasis on domestic growth and demand.
Mr. Secretary, I know that there are no easy answers to the
issues that I have raised here. At the same time, I believe we
need to be careful about the message we send to the world
community. Over the long-term, both the United States and the
global economy will benefit most, I believe, from the continued
pursuit of free trade and flexible exchange rate policies. The
most desirable way to reduce our current account deficit would
be through stronger growth abroad and more open trading markets
and policies.
Mr. Secretary, I know that you and President Bush are
working diligently on this issue. We look forward to hearing
your testimony this morning and the discussion which will
follow. Hopefully, we can all leave this hearing with a
broadened awareness of the situation and the direction ahead to
do something about it.
Senator Sarbanes.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. I join
with you in welcoming the Treasury Secretary this morning to
present the Department's Report on International Economic and
Exchange Rate Policies.
Section 3005 of the 1988 Omnibus Trade and Competitiveness
Act requires the Secretary of the Treasury to submit to the
Congress on or before October 15 of each year a written report
on international economic policy, including exchange rate
policy, and then to update that with a written update 6 months
after the annual report and testify before the Congress if
requested.
I want to commend Chairman Shelby for requesting the
Secretary to appear on this year's report. It was originally
scheduled for October 16, and then put off until today. The
legislation sought to provide Congress with a means to oversee
the conduct of a critical area of economic policy. Given the
current international economic position of the United States,
and the attention that has been given to the value of the
dollar relative to other currencies, this report and testimony
could not be more timely.
Under Section 3004 of the Trade Act of 1988, the Treasury
Secretary is required to analyze on an annual basis the
exchange rate policies of foreign countries and consider
whether countries manipulate the rate of exchange between their
currency and the dollar for purposes of preventing effective
balance-of-payments adjustments or gaining unfair competitive
advantage in international trade. If the Secretary considers
that such manipulation is occurring with respect to countries
that have material global account surpluses and significant
bilateral trade surpluses with the United States, the Secretary
is required to initiate negotiations with such countries on an
expedited basis for the purpose of ensuring that such countries
regularly and promptly adjust the rate of exchange between
their currencies and the dollar to permit effective balance-of-
payments adjustments and eliminate the unfair advantage.
The report submitted by the Treasury this morning raises
concerns about the conduct of exchange rate policy by China,
but does not make an actual determination of currency
manipulation. In my view, there is compelling evidence that
China and Japan, as well as Taiwan and South Korea, are
engaging in currency manipulation to prevent effective balance-
of-payments adjustments and to gain unfair competitive
advantage in international trade within the terms of the 1988
Trade Act.
Mr. Chairman, I want to take just a moment or two to
present some evidence to support this view.
First, China, Japan, Taiwan, and South Korea are all
running material global current account surpluses and
significant bilateral trade surpluses with the United States
within the terms of the 1988 Trade Act. I want to present a few
charts, and I think Committee Members have a set of those
charts. The first chart shows the global current account
surpluses and bilateral trade surpluses each of these countries
is running with the United States. The size of China's
bilateral trade surplus with the United States, $117 billion,
relative to the size of trade between the two countries is
particularly striking.
In addition, each of these countries has been engaging in
sharply increasing accumulation of foreign currency reserves,
principally dollars. The following charts will illustrate this
clearly. The first of the following charts shows the growth in
China's stock of foreign reserves, $111 billion over the past
12 months. This line is going up almost at a vertical climb.
The second chart shows the growth in Japan's stock of foreign
reserves, $103 billion over the past 12 months. And the next
two charts show the sharp increase in the stock of foreign
reserves by South Korea and Taiwan, respectively. Now, by way
of useful contrast, the next chart provides important
perspective on this issue because it shows the stock of foreign
reserves held by the European Union, which, of course,
participates in the regime of flexible exchange rates and is
abiding by both WTO and IMF requirements. And, of course, what
this shows is that its stock of foreign reserves has actually
declined over the past 12 months.
The next chart shows the consequences of these reserve
accumulation actions by these respective countries and by the
EU for the value of the currencies relative to the dollar. The
euro has experienced a substantial appreciation against the
dollar over the past year, and that is indicated by the top
upward-trending line. The currencies of Japan, South Korea, and
Taiwan have experienced a significantly smaller appreciation,
although there has been some appreciation, as Members will note
as they look at the chart. The value of the Chinese currency,
since it is pegged to the dollar, is represented by the
horizontal axis of the chart and has not appreciated at all
against the dollar. You have this incredible trade deficit,
this huge accumulation of reserves, and no adjustments in the
value of the currency.
In my view, there is no ambiguity as to what is taking
place. Each of these countries is intervening actively in the
market to purchase dollars in order to depress the value of the
currency. Each is manipulating its currency within the terms of
the Trade Act to prevent effective balance-of-payments
adjustments to gain an unfair, competitive advantage in
international trade.
The United States this year is running trade and current
account deficits of more than $550 billion. The four countries,
I have discussed here, collectively account for nearly 40
percent of the U.S. trade deficit, and 60 percent of the U.S.
manufacturing trade deficit, a sector in which the United
States has lost 2.5 million jobs since 2001.
The United States has accumulated an external debt in
excess of $2 trillion, about 25 percent of GDP. Chairman
Greenspan has told this Committee that the rate at which the
United States is running current account deficits and
accumulating external debt is unsustainable. He said,
``Countries that have gone down this path invariably have run
into trouble, and so would we. Eventually, the current account
deficit will have to be restrained.'' The IMF's latest World
Economic Outlook reaches the same conclusion. As Warren Buffett
recently warned, ``Our trade deficit has greatly worsened, to
the point that our country's `net worth,' so to speak, is now
being transferred abroad at an alarming rate. A perpetuation of
this transfer will lead to major trouble.''
If any progress is to be made addressing this problem,
currency manipulation being engaged in by these countries must
be curtailed. Each of these countries is a member of the WTO,
and all but Taiwan are members of the IMF. A condition of
membership in both of those organizations is not to engage in
currency manipulation for competitive trade advantage.
Mr. Secretary, I have difficulty in the seriousness of the
Administration on this issue if it fails to make the elementary
determination, for which I believe there is compelling
evidence, that these countries are engaged in currency
manipulation and, therefore, fails to initiate formal
negotiations as required by the Act. Furthermore, the
Administration may also want to seek remedies within the WTO
and the IMF.
Among the countries--and I close with these observations--
China's intervention has been the most egregious. There is
reason to believe that the other countries in the region, for
competitive trade reasons, are hesitant to allow their
currencies to appreciate unless China appreciates first.
In addition, as some observers have pointed out, it may be
more realistic in the short-run for China to undertake a
substantial upward revaluation of its currency rather than to
simply allow its currency to float. Many observers think there
is little expectation that China would be willing in the near-
term to allow its currency to float freely, which is the goal
being articulated by the Administration.
Their very weak banking system and the concern about a
flight of capital if they were to move immediately to flexible
exchange rates, is certainly a desirable objective. But if they
were to go there immediately, may well inhibit their ability to
move on this issue. I would urge the Administration to add to
its approach prompt--well, to have the flexible rates as the
ultimate objective, but to seek immediately in the short-run
the revaluation of the Chinese currency as against dollar; in
other words, the peg rate.
We do not want to deal with peg rates in the long-run, but
we have to get moving. We are hemorrhaging on this trade
deficit situation. Going to flexible rates right away with a
very weak banking system and the potential significant outflow
of capital obviously raises a problem for the Chinese.
But they could revalue the peg rate. That would, of course,
enable these other countries that I have mentioned in the
region to allow their currencies to appreciate as well and
begin to deal with this issue.
And this is a matter I will revisit when we get to the
question period.
Thank you very much, Mr. Chairman.
Chairman Shelby. Thank you.
Senator Allard.
STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. Mr. Chairman, I would encourage you and
other Members of the Committee to maybe just submit our
statements for the record so we can go on and hear the
testimony from Secretary Snow. I think both you and the Ranking
Member have given pretty good introductory remarks, and so I am
just going to ask that my statement be made a part of the
record.
Chairman Shelby. Without objection, so ordered.
Chairman Shelby. Senator Dodd.
STATEMENT OF SENATOR CHRISTOPHER J. DODD
Senator Dodd. Thank you very much, Mr. Chairman for holding
this hearing, and thank you, Mr. Secretary, for being here this
morning.
Mr. Chairman, I want to address and look at this from the
net effect of what this policy may be creating. I want to look
at this from a jobs standpoint. I represent a State whose
economy historically has been tremendously dependent on foreign
trade. Connecticut is one of the most dependent States on a per
capita basis on foreign trade. We generate $13.2 billion in 200
foreign markets of trade coming out of the State of
Connecticut. We take a back seat to no one in the importance of
having a strong trade policy in the United States.
What concerns many of my constituents, Mr. Secretary, and
others across the country is the net effect of not recognizing
what is quite clear to many of us with currency manipulation is
the job loss. I have lost 26,000 jobs in the last 24 months in
my State in the manufacturing sector. That pales by comparison
to the almost 2.5 million jobs that have been lost over the
last 2 years across the country in this area. You are going to
announce today that we saw GDP growth of over 7 percent in the
third quarter of this year. That is great news, except you
failed to note that we lost 41,000 jobs in that very same
period of time.
So while it is going to be important to discuss the subject
matter of currency manipulation in this hearing, to disregard
the effect this is having on jobs in this country I think is a
significant mistake. I am hopeful that we can focus on that.
In February 2003, the President's economic advisers
estimated that the economy alone would grow by 4.1 million new
jobs by the end of 2004. In addition, the Administration claims
that recently enacted tax cuts signed by the President would
create 1.4 million new jobs by the end of 2004. However, a
recent New York Times op-ed piece October 24 related an
interview you gave last week to the London Times. The interview
cites that you expected roughly 2 million jobs to be created by
the end of 2004.
The question I have to ask you here is what has happened to
3.5 million jobs here. Something is going on here other than
just the status quo. And so for this Senator's interest, while
I am curious to hear what you have to say about currency
manipulation, particularly as it appears, at least in testimony
that Alan Greenspan gave before this Committee in July, where
he seems to indicate that this is a serious problem. The Fed
apparently is taking a different viewpoint than Treasury is on
this. I would be curious how you justify this apparent
contradiction that exists here. I will ask that the article be
included in the record, but Alan Greenspan, Chairman of the
Federal Reserve, yesterday warned that Chinese authorities
could not continue to peg their currency without posing a
danger to China's economy and obviously one to ours. That is
the Chairman of the Federal Reserve in July.
So, I am very interested to know what the Treasury's
response is to really millions of Americans and their families
who are losing their jobs despite the claims the economy is
growing. And so my emphasis will focus on that.
Mr. Chairman, I thank you.
Chairman Shelby. Senator Bunning.
STATEMENT OF SENATOR JIM BUNNING
Senator Bunning. Thank you, Mr. Chairman, for holding this
very important hearing, and I would like to thank Secretary
Snow for testifying today. Don't worry, Mr. Secretary, I won't
ask you any questions about TVA today.
I believe our economy, though still growing rapidly, is
still lagging behind in the creation of new jobs. We have great
news today with the GDP growth at 7.2 percent for the third
quarter, and I was heartened by the new job increase last
month. But I am still very concerned about new job creation,
especially in the manufacturing sector.
One of my biggest concerns is the countries keeping their
currency artificially low. We all know that the People's
Republic of China has continued to keep the yuan at an
artificially low level versus the dollar. It is about a 27.5-
percent premium by pegging it to the dollar that we are
penalized in trading with the Chinese. It has hurt our
manufacturing base by making their products, while inferior, so
much cheaper. This makes it very difficult for U.S.
manufacturers to compete.
When I played baseball, we called that kind of behavior
``cheating.'' And when I see someone cheating against my team,
I always tried to help my team, and I sent a message. Usually
it was in the form of a high inside fast ball.
The Chinese are cheating. That is why I am an original
cosponsor of the Chinese currency bill with Senator Schumer. It
sends the right message. And like a fast ball hard and inside,
I think it will get their attention. Given the reports
yesterday that the Chinese will start increasing their
purchasing of U.S. goods, it may already have done so.
I look forward to hearing your report and your testimony,
Mr. Secretary, and I look forward to engaging you more in the
question and answer period.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Schumer.
STATEMENT OF SENATOR CHARLES E. SCHUMER
Senator Schumer. Thank you, Mr. Chairman. And I want to
thank you, Mr. Secretary, for being here. Again, many of us who
feel strongly about this issue--nothing personal. We know you
are working the best you can on this. But I have to tell you, I
read the report this morning with deep disappointment. Simply
put, the report lets China off the hook, and it will do serious
damage to the United States economy. This report is a
whitewash. It treats China with kid gloves when it should be
taking off the gloves and confronting Beijing about the fact
that it is manipulating the yuan. Pegging the currency to any
set level flies in the face of free trade.
The time for diplomatic niceties is past. The
Administration needs to grow some backbone and take a firm line
with the Chinese on the currency issue, or American jobs will
continue to go overseas faster than children leaving the
classroom on the last day of school. The Chinese want all the
advantages of being part of the world of nations. Well, how
about some of the responsibilities? No one says they have to
let their currency float tomorrow, but they should be making
some progress instead of telling you not to bother to even
bring it up before you set foot in China when you negotiate.
The bottom line is I would like to know what the
Administration thinks we should do if we do not toe a hard
line. I am glad that my colleague from Kentucky talked about
the high inside pitch because we are all exasperated here. We
see China thumbing its nose at what is fair. We see thousands
of jobs lost. Some of it, of course, is related to just the way
capitalism and free enterprise work. But some of them are lost
unfairly because of the pegging of the currency.
The evidence is very clear, Mr. Secretary. China is playing
around with the yuan. This view has been backed by economists,
including the bipartisan United States-China Trade Commission.
It is truly baffling that this report would reach its audacious
conclusion. Something has to change here.
I would ask that my entire statement, Mr. Chairman, be put
in the record.
Chairman Shelby. Without objection, your entire statement
will be made part of the record.
Chairman Shelby. Senator Dole.
STATEMENT OF SENATOR ELIZABETH DOLE
Senator Dole. Thank you, Mr. Chairman, and thank you,
Secretary Snow, for joining us here today. It is no surprise to
anyone here that I and some of my colleagues on this Committee
are focused on the currency policies of the Chinese Government.
The loss of American manufacturing jobs in recent years has
decimated communities across the country, many of which I
represent in North Carolina. The loss of one in six factory
jobs cannot occur without great stress to individuals,
families, neighborhoods, and States. Nearly 3 million
manufacturing jobs have been lost since 1998. According to the
Bureau of Labor Statistics, in September 1995, there were
approximately 818,400 manufacturing jobs in North Carolina.
According to last month's figures, we have lost more than
200,000 of these jobs. It is clear that this is a trend that
many overlooked when economic times were good. But since the
recovery is slow and times are still hard, this trend has
lately been given greater emphasis.
One of the factors that has led to this job loss, in my
view, is the manipulation of the Chinese currency by the
Chinese leadership. I am disappointed that this Treasury report
fails to acknowledge the seriousness of the China currency peg.
At the same time, I am glad that the President, having
recognized the problems with the Chinese currency peg, has been
willing to confront the issue with his Chinese counterparts. I
also want to thank you, Secretary Snow, for your attention to
this issue and for making it a major focus of your trip to
China last month. I was pleased to receive your call from China
reporting on your efforts. In addition, Commerce Secretary
Evans should be thanked for his remarks in China on Monday,
when he stated, ``China is moving far too slowly in its
transition to an open, market-based economy. Time is running
out. We need to see results.'' And he continued, ``The U.S.
Government may take action against China under the WTO rules.''
And I am interested in whether that is a policy that Treasury
supports.
While the Administration continues to examine possible
solutions, we must recognize that the Chinese will not be
easily convinced to remove their exchange rate controls.
Nevertheless, this is no reason to curtail our efforts. We must
demonstrate the depth of our convictions. To this end, six
Members of this Committee and I support legislation to impose a
27.5-percent tariff on Chinese imports if further negotiations
with the Chinese fail. Admittedly, this is an extreme measure
that could not be imposed without some mutual difficulty.
Nevertheless, it appears that this may be the only way to get
the attention of the Chinese leaders. We are the largest export
market for Chinese goods, and this may be the only way to
convince the Chinese of our seriousness on this issue. They
must realize the importance of playing by the rules or risk the
potential loss of American consumers.
The best result would be for the Chinese to take steps to
allow their currency to freely float, hopefully then without
our having to resort to this legislation. I will continue to
work with the Administration and with my colleagues to achieve
this goal, and I want to thank you, Chairman Shelby, for
arranging today's hearing, and Ranking Member Sarbanes, for
your strong interest. This is a critical issue to the people of
North Carolina and the United States.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Bayh.
STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Mr. Chairman.
The Department of Commerce held some Midwest field
hearings, Mr. Chairman, some time ago and took testimony from a
variety of individuals, including some prominent business
leaders in our State. And I would respectfully request that
their statements be included in the record here today.
Chairman Shelby. Without objection, so ordered.
Senator Bayh. Including the head of the Indiana
Manufacturers Association, Pat Kiley, who is the former head of
the Ways and Means Committee in the Indiana House of
Representatives. He is a good card-carrying member of the
Republican Party, demonstrating that concern over this issue is
not partisan. It is substantive and is of great importance to
people across the country.
Mr. Secretary, thank you for coming today and being with
us. I want to personally thank you for your courtesy in calling
me from China when you were over there discussing this issue. I
am grateful for your efforts in this regard. As you know, I
have a longstanding interest in this.
Echoing the comments of my colleagues, our State has lost
one out of every six manufacturing jobs during the last 3
years. That is a total of 143,000. So we do have a crisis in
the manufacturing sector that you are aware of, and I think it
is undeniable that these currency issues have played a
significant role in that.
It is always best, I think you would agree, Mr. Secretary,
to be candid. Some of my colleagues have been candid. You know,
what is going on here is the integration of China into the
global trading system. This is going to involve dislocations
for them and dislocations for us.
The subject of these hearings today is how we manage this
transition, whether it is fair, and how the costs are
distributed amongst the countries that are involved. And
exchange rates are going to be a big part of determining the
outcome of that.
There are several important questions that we need to
confront here, all relating to how much leeway China should be
given to manage some of the challenges that they face. For
example, how much leeway should we give them to absorb the more
than 100 million excess workers in the agricultural sector into
other parts of their economy? How much leeway should they be
given to strengthen their financial system, which would
possibly suffer adverse consequences through abrupt change? How
much weight should be given to other noneconomic issues, such
as security issues on the Korean peninsula? Most importantly of
all, what burdens should American workers and businesses be
expected to bear as we make this transition, as we seek to
accommodate these other interests?
Mr. Secretary, I would echo the comments of my colleagues
in saying that it is undeniable that China and several of our
other trading partners, as Senator Sarbanes' chart illustrates
so clearly, are manipulating their currencies. And I use the
word ``manipulate'' advisedly. I know that is a technical term,
but we damage our credibility when we deny the obvious because
of semantic or definitional disputes.
The report that has been issued today raises the question:
What would it take to reach a finding of currency manipulation
if not the current state of facts as we all know them to exist
today?
We seriously erode the support for free trade policies in
the U.S. Congress and across our country, Mr. Secretary, when
we willfully choose to turn a blind eye to other countries'
efforts to subvert a system of free and open trade and markets.
I know of many of my colleagues, indeed many business people in
my own State, who are seriously revisiting their own previous
commitments to free trade agreements because of the
manipulation that is allowed to exist.
Mr. Secretary, again, let me conclude by saying it is
undeniable that there is a crisis in the manufacturing sector
today. We could afford to be more accommodating when times are
good. But now is the time to insist upon tangible steps and a
long-term commitment on the part of China to a currency policy
that accurately reflects economic reality. And now is also the
time, Mr. Secretary, to send a loud and clear signal that there
will be tangible steps on our part if such steps are not
forthcoming on the Chinese part.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Carper.
STATEMENT OF SENATOR THOMAS R. CARPER
Senator Carper. Secretary Snow, in your last job, you ran a
big railroad company, CSX. Today, when I rode the train down
from Wilmington, we rode by the Daimler-Chrysler plant in
Newark, Delaware, where the University of Delaware is located.
A lot of CSX cars were there bringing in parts, engines, metal
parts, and transmission systems to help assemble cars. And
there were a lot of CSX cars there to take finished vehicles to
other parts of the country to be sold.
That plant was built in 1957--actually, it was built before
that, in 1951. They built tanks there for 6 years and got out
of the tank business, and now they build cars. All the Dodge
Durangos in the world are built in that plant.
When that plant opened in 1957, over 90 percent of the
autos sold in the United States--cars, trucks, vans--were made
by the big four, which included, I think, at the time American
or Rambler. Today, American car manufacturers are struggling to
keep a 60-percent market share and continue to see their market
share erode.
CSX can carry Japanese-made vehicles on their trains as
well as cars that are made at the Daimler-Chrysler plant. But
the erosion of a job market for GM, for Daimler-Chrysler, and
Ford has implications for other sectors of our employment with
which you and I think we are all familiar. It is not just the
people who work in the assembly plants. There used to be 4,500
people who worked at that plant. Today, there are 2,500. There
is a GM plant not far away where they make Saturns that used to
have 4,000 people that worked there. Today, they have about
1,500. Suppliers who build the components for those cars do not
have the kind of employment they had in Delaware or other
places. The plants are still alive. We are grateful for that.
But the economic hit is, as you know, significant.
A number of us wrote to you--and I know you get a lot of
letters. A number of us wrote to you earlier this summer. We
did not write about the Chinese currency. We wrote about the
Japanese currency. And we wrote about the encroachment that we
see occurring with respect to automotive sales. Obviously, I am
preaching to the choir here with Senator Stabenow sitting next
to me. It is one thing for us to be concerned about the
Japanese manipulating their currency. It is one thing for us to
worry about the Chinese. We know the Japanese are doing it, and
their interventions in markets this year just in the space of
the first 9 months of this year. What they have done before
pales by comparison to what they have done previously to try to
keep the value of the yuan low.
So as we focus on our concerns about China and what is
happening, whether it is the loss of manufacturing jobs or
other jobs to China, I would just ask us to keep in mind our
friends in Japan, our allies in Japan, and what they are doing
and the implications that the manipulation of their currency
has for whether it is the Daimler-Chrysler plant in Newark,
Delaware, or plants in New Jersey, Georgia, Indiana, Kentucky,
North Carolina, or Michigan. They are real and they are severe.
Thank you.
Chairman Shelby. Senator Miller.
STATEMENT OF SENATOR ZELL MILLER
Senator Miller. Thank you, Mr. Chairman, and thank you, Mr.
Secretary, for being with us. I will only take a couple of
minutes.
I want to read a handwritten letter that I recently
received from Joyce Williams of Trion, Georgia. I will only
read part of it, but I would like the entire letter to be
included in the record.
Chairman Shelby. The entire letter will be made part of the
record.
Senator Miller. Joyce Williams writes,
I am an employee of Mount Vernon Mills in Trion, GA. My
employment stretches over 30-plus years. Our textile plants
consist of 5,500 employees and we have been in operation since
the 1840's. We have seen tough times in the past, but this is
different. We need your help!
Cheap imports from China and other countries are killing
us. Factories are closing their doors every day. Free trade
with China has flooded the market with low-priced textile and
apparel goods and we cannot compete.
We value our textile jobs and it hurts each time we hear of
another plant having to close . . . permanently. We wonder if
our plant will be next. We are desperate. You are our Senator .
. . We are asking you to do the right thing and help save our
jobs.
Mr. Secretary, I am getting many letters like this from
different manufacturing industries in my State. It is not just
textiles. I am hearing from the automotive industry, I am
hearing from the paper industries. I am also hearing from the
agricultural sector. These industries have complained that the
dollar is making it difficult for them to export profitably and
easier for imports to take market share here in the United
States. Paper company executives tell me of all they have done
to improve efficiency and that there just is not much left to
be done. There have been huge consolidations in the industry
already, so they do not think that they will get there on
efficiency gains alone.
Furthermore, they are often competing with products from
countries that subsidize their industry, either through
currency policies or direct government support. For example, in
the paper industry, more than 90 percent of the growth in U.S.
markets has been captured by imports.
Mr. Secretary, I know you have a tough job, and I admire
and respect you greatly, and I am looking forward to your
remarks, because I want to know what to tell my constituents. I
want to know how to respond to Joyce Williams. I want to know
if you think any foreign countries are engaging in currency
manipulation with the U.S. dollar for purposes of preventing
effective balance-of-payments adjustments or gaining an unfair
competitive advantage in international trade.
Thank you for helping me come up with some answers.
Chairman Shelby. Senator Stabenow.
STATEMENT OF SENATOR DEBBIE STABENOW
Senator Stabenow. Thank you, Mr. Chairman and Ranking
Member. I would ask that my full statement be placed in the
record.
Chairman Shelby. Without objection, your full statement
will be made part of the record.
Senator Stabenow. Secretary Snow, thank you for being here.
I hope that more than anything else what you will take away
from this hearing today is a sense of urgency that we all feel
about the issues of currency manipulation, whether it is China,
Japan, or any other countries involved in manipulating
currencies.
In Michigan, we are feeling it. We have lost 18 percent of
our manufacturing base, more jobs than any other State. It is
not just auto suppliers. Our manufacturing sector in terms of
automobiles, which, of course, is critical to us, but furniture
makers and a wide variety of those involved in manufacturing
are feeling this in very serious ways.
I would join with my colleagues in indicating that Senator
Schumer's legislation, which a number of us are cosponsoring,
is an effort to indicate how seriously we feel about this and
the fact that something needs to be done.
What we are really talking about here is a tax being placed
on American goods. It is a tax being placed on American
businesses, and American employees. When we look at just--there
are so many different numbers to look at, but the Automotive
Trade Policy Council, in speaking about Japan, gave us some
information that indicated--and I will just read a portion of
it: ``Nowhere is this trade advantage more damaging to the U.S.
economy than the U.S. automotive sector. In fact, the windfall
cost advantage to Japanese automakers from the weak yen has
been between $2,500 and $12,000 per vehicle.'' That is a tax. I
cannot imagine if someone was proposing such a tax on our
manufacturers in this country that the Administration would be
supportive of that.
I would urge you to think of it in those terms because that
is exactly what is happening to our manufacturers and to our
employees. And from my perspective, it is not a question of
time running out. Time has run out. And if not now, when will
we act on this?
I would urge your leadership.
Chairman Shelby. Senator Corzine.
STATEMENT OF SENATOR JON S. CORZINE
Senator Corzine. Thank you, Mr. Chairman and Ranking
Member, and I welcome the Secretary. I, too, can relate stories
about the decline of manufacturing in my home State. We are
actually in the process of closing the last two auto plants. We
no longer have any textile manufacturing in the State of New
Jersey, and the loss of these most important middle-class jobs
is a very, very dangerous concept and I think is reflected at a
really troubled regime with regard to our international
economic relationships and certainly our exchange rate policy.
And to that extent, I am joining some of my other colleagues
with my concern that the sense of urgency and the depth of
understanding of that problem is not reflected at least in some
of the written testimony I have seen.
I also think, aside from the loss of jobs--and, by the way,
manufacturing has gone from, I do not know, 25 years ago about
30 percent of the economy down to about 12 percent, some of
that due to comparative advantage and free trade and all those
good things that maybe lift the standard of living, but
sometimes a good thing goes too far, and I think we have
certainly found that.
I think we also have a terrifically unsustainable reality
having to borrow $2 billion a day, business day, to balance out
our current accounts, the analysis that the Ranking Member said
I think is unsustainable and will lead to a deterioration of
America's ownership of its own assets, and I do not think this
is something that can be ignored unless we are willing to take
the risk that we are going to have a shock one day, a one-time
adjustment that we have seen happen periodically through
economic history.
And I think one of the greatest problems in not dealing
with this is something that you hear even in the intonation of
my colleagues around the table: Protectionism is going to gain
root in this country. The risks of that being called for as a
result of what we are seeing and what I think is a limited
response on the part of the Administration is a very real risk
and one that will undermine everyone's long-run economic
security. And we know from history that protectionism can lead
to strategic risks as well.
I believe it is time for a clear and full, comprehensive
review of both international economic policies and exchange
policies among nations. I remember a period in time, another
Republican Administration did an extraordinary job of pulling
together the international community in September 1985--what
was it called? The Plaza Accord--to set right, to find a new
way that was done on a multilateral approach to these issues.
And I think it is time for those efforts to go forward today.
I have serious problems with the valuation of the RMB, but
it is not just China. It is all the other currencies that are
tied to it and lead to a multiplicity of deficits in East Asia.
And the problems that we face are also faced by other trading
partners in Europe and other places.
I think the urgency is real and needs to be addressed. I
have much sympathy for the program that I think the Ranking
Member was outlining that a number of academics and others are
talking about refixing the Chinese peg, acknowledging that
their system is not mature enough to take the shock of freely
floating exchange rates at this point. But I think it is time
for a coordinated international approach to resolving some of
these international economic issues and exchange rate issues,
which I believe really run long term into risks that we have in
the strategic level.
I have a full statement that I would put in the record.
Chairman Shelby. Your full statement will be made part of
the record.
[The prepared statement of Senator Corzine follows:]
Senator Corzine. I also would, for the benefit of the
Committee, recommend that they read the announcement the
Ministers of Finance and Central Bank Governors of France,
Germany, Japan, United Kingdom, and United States--``Plaza
Accord''--released on September 22, 1985. I think people will
find that if you just substitute ``Japan'' with the name
``China,'' you will find that much of the analysis and the
conclusions are very much the same.
Chairman Shelby. Senator Corzine, could you make a copy of
that, have it made for the record?
Senator Corzine. Yes, and I will make sure that--if you
would put it in the record, I would appreciate it.
Chairman Shelby. Without objection.
[The announcement follows:]
Senator Sarbanes. Could I add to what Senator Corzine said?
When they read the Plaza Accord statement, they should read it
and contrast it with the recent statement in Dubai. It is
nowhere near the same thing. And I think there is a very sharp
difference in the strength of what the international community
had been brought together to do in terms of what then-Secretary
Baker did with the Plaza Accord.
Chairman Shelby. Thank you.
Secretary Snow, we appreciate your patience this morning.
This is a very important hearing. We do have a vote on the
floor. We are going to recess the Committee, and we will come
back and hopefully get into your testimony.
We will stand in recess.
[Recess.]
Chairman Shelby. The hearing Committee will come back to
order.
Senator Reed.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you, Mr. Chairman, and thank you, Mr.
Secretary, and I think you have already realized this is a
hearing not about currency but about jobs, particularly
manufacturing jobs. And like every one of my colleagues, I have
seen a tremendous deterioration in the manufacturing employment
sector in my State of Rhode Island, and, frankly, Rhode Island
many, many years ago was the beginning of the industrial
revolution and manufacturing revolution in this country.
One of the reasons--not the only reason but a very
significant reason--is the behavior of China. When China was
admitted to the World Trade Organization, it made commitments
that it would eliminate trade barriers, open its market to U.S.
exporters, but, frankly, they have not lived up entirely to
these promises. And one of the major issues, of course, is
their continuing policy of pegging the yuan to the dollar, but
also in terms of enforcement of intellectual property rights,
industrial quotas, export performance conditions, requirements
that businesses use local content. All of these are inimicable
to a free trade regime, which all of us would like to see, but
we cannot close our eyes to the reality in the relationship.
We should not scapegoat China, but we should not give them
a pass, either. And I think we have to take steps, and,
unfortunately, the report today does little to point in the
direction of a policy. It might be a diagnosis, but it is
certainly not a prescription for what we should do.
We have lost these jobs, and these jobs go right to the
heart of our communities, not just economically but socially.
Although the Chinese have announced that they are going to buy
billions of dollars in anticipation of the visit of their
leadership, a one-time shopping spree cannot take the place of
a systematic, continuous policy that recognizes the reality on
both sides of the relationship.
So, I hope that as we go forward the Administration will
craft a policy and not simply give us a diagnosis.
Thank you.
Chairman Shelby. Mr. Secretary, thank you for your
patience. As I said, this is deemed a very important hearing.
Your written testimony will be made part of the record in its
entire. You proceed as you wish.
STATEMENT OF JOHN W. SNOW
SECRETARY, U.S. DEPARTMENT OF THE TREASURY
Secretary Snow. Thank you very much, Mr. Chairman and
Members of the Senate Banking Committee, for this opportunity
to appear before you and present the report as required by the
Omnibus Trade Act of 1988.
The report reviews economic developments in the United
States and examines, in documents, the wide variety of exchange
rate policies that are employed throughout the world, and they
vary quite a bit. A notable trend has been the move by many
countries to adopt flexible exchange rates, and I was pleased
to hear so many of the Members of the panel voice their
support, including you, Mr. Chairman, for flexible exchange
rates, which really do stand in marked contrast to the accords
that were mentioned earlier.
The report concludes that no major trading partners of the
United States meet the requirements set forth in the statute.
But let me be clear, the Bush Administration believes strongly
that an international trading system works best that relies on
free trade, the free flow of capital, and market-based exchange
rates. That is a message we have taken around the world, to
Japan, to China, to Taiwan, to Korea, to all the Nations of the
world, and a statement that is reflected in the G-7 communique
that was released from Dubai recently. We believe that an
efficient system of trade and finance, with fair rules and
enforced rules, is essential for the United States and all
nations to maximize the benefits of trade and to do what needs
most importantly to be done, generate the highest levels of
economic growth and jobs. And I heard all of you loud and clear
on the jobs point. Senator Reed, you made that point very
clearly. Other have, the Chairman has. And jobs are the
ultimate objective of good economic activity, and well-paying
jobs, jobs that reward people for their efforts.
The report finds that a number of countries continue to use
pegged rates, fixed rates, and/or intervene in the foreign
exchange markets. But it is important to note that a currency
peg or an intervention in and of itself does not satisfy the
statutory test. After all, for many, many years, the United
States was part of a pegged system following the Bretton Woods
agreements. So the peg in and of itself does not satisfy the
statute.
In rendering our decision here, as required by the
statute--and this is important--Treasury has consulted with the
IMF, the expert international agency on currency matters. And
I, myself, spoke with both the Managing Director of the IMF and
the Deputy Managing Director of the IMF, and I am pleased that
the IMF management offered us their thoughts, offered us their
consultation, and concurred in the findings of this report.
But let me make it clear that the Bush Administration is
aggressively encouraging our major trading partners to adopt
policies that promote flexible market-based exchange rates
combined with clear price stability goals and a transparent
system for adjusting their policy instruments. In my testimony
today, I would like to discuss this with you in some more
detail.
There was talk earlier, and, Mr. Chairman, you focused on
it in your opening statement about the need for domestic-led
growth. One of the problems with the world economy--and it is
reflected in the U.S. economy--is the absence of more domestic-
led growth, in Europe, Germany, France and Japan. I would like
to take a moment to discuss the Administration's international
economic strategy as it relates particularly to the issue of
growth.
A stronger world economy is vital to sustaining U.S.
economic growth and job creation. It is the absence of more
growth in Japan, Germany, China, and in the EU which has hurt
our manufacturing sector. So we have made domestic-led growth
in those countries a priority.
We depend on Europe and Japan just as they depend on us. It
starts, though, this issue of jobs and how to create jobs, with
a strong domestic economy, and that is why the Administration
came forward with the President's jobs and growth bill.
I am glad to see the really very good numbers that were
reported at 8:30 this morning, numbers that show that the
American economy is really getting back on path, numbers that
show growth at 7.2, but in some ways even more importantly,
that we are finally seeing some very sizable capital
expenditures in this economy, expansion of plants and
investment in manufacturing equipment, software, and PC's. As
that happens, of course, jobs follow because somebody has to be
there to operate that machinery and that software and those
PC's.
Mr. Chairman, the other encouraging thing about today's
numbers is the fact that we did not rob Peter to pay Paul.
Inventories came down very significantly during the quarter. We
now need to go through an inventory replenishment period in the
United States, and that is going to lead to continuing strong
economic activity, and with it, we should see a nice pick-up in
jobs, which is what, Senator Reed, you said ultimately this is
all about. We should see a nice increase in jobs, and
particularly in manufacturing jobs, which, as we all know
painfully, have lagged so far behind.
At the core of our strategy for jobs and growth is having
good economic policies in place. But it is also important here
to encourage pro-growth and pro-stability policies in other
countries. I want to underline that: Good economic policies in
the rest of the world help the United States, and we have a
stake in seeing those countries adopt good policies.
An important issue that has been mentioned by many of the
Members and by the Chairman is the U.S. international accounts.
There is a great appreciation worldwide that the United States
is a force for strong growth. In fact, many people now talk
about the United States, regrettably, as the only engine of
growth in the world economy, and that is not adequate. That is
not sustainable. We need more engines of growth. As somebody
said, you may be able to take off on one engine, but it is hard
to land on one wheel. We need more engines of growth in this
world economy.
This strong performance is also reflected in the pattern of
our external trade and current account balances, and if you
will let me for a minute just talk about the essence of the
current account.
The current account is best understood in terms of the
relationship between investment and savings. As a matter of
accounting, the current account deficit is equal to the gap
between a country's savings and its investments. Thus, in a
country like the United States where investment is considerably
higher than domestic savings, we turn to foreign investors to
make up the difference. And that difference is what is called
the current account deficit.
Now, in Japan, they are on the other side of that. In
Japan, by contrast, savings rates exceed investment, and,
therefore, they have a sizable current account surplus.
Our current account surplus largely reflects the attractive
investment environment and high productivity growth in the
United States which attracts capital here. Increased savings,
though, in the United States, along with stronger growth
abroad--both, the combination of more growth abroad and higher
savings rates in the United States--offer the long-term answer
to this large current account deficit that many of you called
attention to.
Let me talk for a minute about exchange rate policies,
which is really the subject of the report.
Our report shows that countries around the world continue
to follow a wide variety, really, of exchange rate policies,
ranging, on the one hand, from flexible exchange rate regimes--
this would be the EU--with no or little intervention, to
currency unions and full dollarization. While the choice of
what kind of a currency regime you employ is clearly a
sovereign decision, it is up to each country, we have been
pretty vocal in encouraging countries to use flexible exchange
rates. And why? Well, basically because flexible exchange rates
ease the adjustment to changing economic conditions in the
international financial system. They lead to the best
international allocation of resources, and, thus, they have an
inherent element of fairness to them.
Of course, while flexible exchange rates have a lot to
recommend them, they won't work unless a country also follows
good economic policies. A good flexible exchange regime
requires monetary policy that focuses on the goal of price
stability and has transparent procedures for setting the policy
instruments.
And while we strongly recommend the use of flexible
exchange rates with our major trading partners, a message I
have taken around the world, we recognize that for smaller
country there are benefits from hard exchange, pegs,
dollarization, joining a currency union or a currency board,
particularly, as I say, for small open economies.
These ideas were reflected in the G-7 statement that was
adopted in Dubai. We think that statement was real progress. I
called it a milestone because it focused on domestic-led
growth, focused on the need for economies of the world to take
the steps with their own economies to make them more flexible
and resilient and deal with the problems that slowed growth and
hurt domestic growth. And the statement also reflected broad-
based support among the G-7 for flexible exchange rates, for
letting markets set currency values.
Everything that came out of Dubai and everything that I
have said today is entirely consistent in every way with our
strong dollar policy, which I have reiterated consistently. As
I have said often, a country cannot devalue its way to
prosperity, and a strong dollar is very much in the U.S.
national interest.
I think we are making progress with the world community in
pushing this idea of greater flexibility. We have engaged China
on it. We have engaged Japan on it. I will talk to you later
about clear progress I think we are making, Mr. Chairman, on
China. And let me conclude simply by saying that strengthening
the economic recovery in the United States, jobs in the United
States, is our key objective. High disposable income levels in
the United States is our key objective.
The way the rest of the world manages their economic
conditions, the currency regimes they have affects us, and
where we see other countries throughout the world not adopting
policies that make good economic sense, that allow jobs and
growth in the United States, we will be vigilant and we will
intervene. And as I say, I am in discussions with any number of
countries on that subject today.
I thank you very much and look forward to your questions.
Chairman Shelby. Mr. Secretary, you stated that a peg or
intervention does not meet the definition of what we call
currency manipulation and that the IMF concurs in this
assessment.
Secretary Snow. Yes.
Chairman Shelby. If what the Japanese are doing and what
others are doing in Asia, especially the Chinese, if they are
not manipulating their currency, what are they doing? In other
words, could you tell us what conditions, in your opinion,
would meet the technical definition of manipulation, at least
your definition?
Secretary Snow. Well, yes, Mr. Chairman.
Chairman Shelby. That is troubling. You know, I think most
people and a lot of economists are saying, Mr. Secretary, the
opposite of what you are saying.
Secretary Snow. Let me try and address that. That is an
issue that I am sure is on the minds of many of the Members of
the panel.
The end product of this statute, that is, the objective of
this statute is negotiations, is discussions. It is engagement
with countries with whom we want to advance some currency
objective. That end product, that engagement is going on. I can
assure you of that. We are fully engaged with the Chinese.
Chairman Shelby. We know that, but are they listening?
Secretary Snow. I think they are, Mr. Chairman. I think we
have really got their attention. I think the President got
their attention. I think I helped to get their attention. They
have now committed to going to market-based flexible rates.
They have indicated that they will be and are taking a number
of steps to get ready for it, because, as was mentioned by
various Members, they are probably not ready right now to go to
it.
Chairman Shelby. What kind of timetable did they tell you?
Secretary Snow. They said as soon as possible.
Chairman Shelby. What does that mean?
Secretary Snow. Mr. Chairman, that means as soon as they
get these interim steps put in place, and they are moving on
the interim steps.
Chairman Shelby. Could that take years?
Secretary Snow. I hope it is sooner----
Chairman Shelby. Not weeks or months?
Secretary Snow. No, not weeks or months. But hopefully
weeks or months to see concrete steps. Weeks or months to see
concrete steps that allow for some of these balance-of-payments
adjustments that we so much want to see.
I think we are on a good course. I believe financial
diplomacy here of the sort that we are engaged in is the surest
course to get the result we want.
Chairman Shelby. Mr. Secretary, do you believe that a
timetable by the end of which the currency peg must be lifted
or China becomes ineligible for continued IMF assistance and
WTO membership benefits would make sense? And if not, why not?
Secretary Snow. Senator, I think we should move them,
encourage them to move as fast as possible. I would be
reluctant to set up a fixed timetable because of concern as to
how currency markets would respond to that timetable. That is,
you would set up one-way bets for or against the yuan, which
would not be helpful. But gradual easing, maybe widening the
band over time, maybe going to a basket of currencies with
expansion of the capital--liberalization of the capital
controls, all of that will move in the right direction and help
with these larger adjustments in their current account.
Chairman Shelby. Mr. Secretary, I was not satisfied with
your answer, and maybe you did not answer it, of what you
thought would be currency manipulation.
Secretary Snow. The past circumstances it has been found.
China was designated, I think in the early 1990's. There they
had a discriminatory dual rate system that precluded the
adjustments that you would expect and looked manipulative and
was found to be manipulative. I am not saying there are not
circumstances where it would be appropriate to find
manipulation.
Chairman Shelby. Mr. Secretary, a flexible exchange rate is
clearly an indicator of a more developed economy. Some
observers have expressed concerns about the ability of China's
financial sector to handle an immediate move on their currency.
How would you assess the ability of the Chinese banking system
at the moment to make such a transition?
Secretary Snow. This has been a matter of discussion, Mr.
Chairman, with the Chinese authorities, their very able
chairman of their central bank, Chairman Zhou, and other
leaders there, including Premier Wen.
I think it takes some time. I think it will take some time
for the Chinese to put in place the financial architecture to
sustain a well-functioning system of floating rates or flexible
rates. Their banking system has a very heavy ratio of bad
loans, and the asset side is weak. And I would be worried that
if they moved precipitously to relax capital controls as part
of movement to freely fluctuating rates, you would see the
asset side of the banks weakened enormously as yuan left the
banking system.
Chairman Shelby. Is this mainly state-owned banks making
loans to state-owned industries?
Secretary Snow. Precisely.
Chairman Shelby. And it is a never-ending cycle, is it not?
Secretary Snow. It is something they recognize needs to be
addressed. It was very much the subject of my discussions with
their economic and political leadership. And they are
addressing it. They are moving on it. They know they have to
move on it, and that is the precondition that has to be dealt
with before you can really go to liberalized capital controls
and a floating rate.
Chairman Shelby. I know my time is up, but, last, do you
agree that basically a continued imbalance in our current
account is a ticking time bomb?
Secretary Snow. Senator, we have the best access to capital
and credit in the world now, and I think, as I said earlier,
the issue here really is one of getting more growth in the
world economy so more of our goods get purchased. I think we
are on a course for that. World growth rates, the numbers I
have seen, are going to be higher next year, but we should get
savings rates up in the next year.
Chairman Shelby. Secretary, but how do we sell more goods
if people are keeping their currency down in price and ours up
in price? In other words, manipulating the currency.
Secretary Snow. That is part of the whole story, and that
is precisely why I have gone to China and engaged on that
issue.
Chairman Shelby. Thank you.
Senator Sarbanes.
Senator Sarbanes. Thank you very much, Chairman Shelby.
I actually want to start off by following up on a couple of
points that Chairman Shelby made which I thought were right on
target. The first was his reference to a ticking time bomb. Mr.
Secretary, this is the U.S. trade deficit. Look at that beauty.
Look at this. This is over a $500 billion trade deficit.
Current account, well, over $500 billion. Look at the way this
thing is going.
I think we have a disaster waiting to happen. The
accumulation of these negative figures over these years,
beginning in about 1980--actually we were in plus figures right
at the beginning of the 1980's in the current account. This is
the U.S. net international investment position, $2.5 trillion
negative. Negative. Claims others have on us. It is no wonder
Warren Buffett was talking about losing our assets. It is like
that Blanche DuBois statement in the Tennessee Williams' play,
you know, ``depending on the kindness of strangers.'' That is
what has happened to the U.S. economy.
Now, Senator Shelby asked you about finding currency
manipulation, what is your definition of it, how do you get
there, and you said, well, we have in the past found that China
manipulated its currency. That is quite true. Let me show you
this chart.
In 1992, the Treasury under Bush I found that China had
engaged in currency manipulation. The trade surplus with the
United States at an annual rate, China-United States, when
Treasury found that, May 1992, $12.7 billion; December 1992,
$16.7 billion. Today, October 2003, when you do not find
currency manipulation, the trade surplus, $116.8 billion. Back
in 1992, when Treasury found currency manipulation, as a
percent of GDP, 3.1 percent and 3.5 percent, now, 8.7 percent.
It is just dramatic. Global current accounts, same
performance. And then accumulation of reserves, back in 1992,
$14 billion, $6 billion over the course of 1992. Now, it is
$111 billion. I mean, it boggles the mind to explain how we
could find currency manipulation on the basis of these figures
in 1992, when you can come in this morning and say it is not
happening.
Now, I want to quote a statement made recently by Fred
Bergsten, Director of the Institute of International Economics,
before the U.S.-China Economic and Security Review Commission.
He said in terms of criticizing the approach that was being
taken by the Administration.
They are proposing that China float the renminbi, and that
is a worthy long-term goal. But if we put our efforts in that
direction, it will not happen for 5 years or more. The Chinese
are correct not to float their currency because to do so, in a
meaningful way, they would have to eliminate their capital
controls, and Secretary Snow was consistent in asking them to
eliminate their capital controls as they go to a floating rate.
The problem of course is that China has a bankrupt banking
system, that the vagaries of international capital flows are
such that no country wants to expose itself to those
uncertainties when its internal financial system is not sound.
To put it pragmatically, if China actually floated the currency
and freed up its capital controls, the renminbi would probably
go down in value not up.
And then he discusses why that would happen.
He says,
Their comparative position would improve. The situation
would get worse. So, on both conceptual and pragmatic grounds,
our Government was asking for the wrong thing. What they should
be asking for, and what I believe is eminently doable, is for
the Chinese to keep their fixed exchange rate system, but to
change the price, revalue the currency by 20 to 25 percent on a
one-shot basis, tell the Chinese we respect their desire to
maintain a fixed exchange rate and maintain some restrictions
on the capital account as long as they have a bankrupt banking
system, move toward correction and reform of that over the
long-run.
But in the short-run, to deal with the problem, we want a
one-shot revaluation of a substantial amount which would give a
substantial improvement to our international position and
convert them into a sustainable position.
What is your response to that analysis?
Secretary Snow. Senator, my response to Mr. Bergsten's
analysis is that it is better to work on the banking system
now, it is better to fix the problems now, it is better to
continue to press the Chinese to do that, and I think we will
get a better result long term proceeding that way.
With respect to two of your other observations, if I could
respond, we are not really in the position of Ms. DuBois in A
Street Car Named Desire. We really are not dependent on the
kindness of strangers--hardly. These are international
financial markets, and people invest in the United States, as
you know, Senator, because of the good returns. The risk-based
returns in the United States are higher than in other parts of
the world, and that is because we have a productive economy,
lower inflation, and we honor capital.
Senator Sarbanes. Do you think the Japanese are buying in
the currency market, as heavily as they are doing, unrelated to
trying to affect the valuation of currency and their trade
position?
Secretary Snow. Senator, I was dealing with your concern
that we depend on the kindness, as you said, of strangers. We
do not depend on the kindness of strangers to attract capital.
Finally, I would say that, with respect to your chart,
there are a lot of differences between today and 1992, 1993,
and 1994, back in that time frame, when China was cited. China
had a dual exchange rate system, as you know, with very heavy
capital controls that interfered with the play of market forces
and the balance-of-payments adjustments process. It had
significant restrictions at that time on payments for current
account transactions that very much limited their ability to
import. They have relaxed those a lot now.
The system that was in place in the period when the
designation was made has disappeared. We have a new system now.
It has lasted for some 10 years, and I am the fourth Secretary
in a row who has looked at the question and concluded that no
designation was called for.
We are not happy with the way the Chinese deal with their
currency. We are committed to changing it. We are engaged in
changing it, and I think we are making real progress.
Senator Sarbanes. Mr. Secretary, God save us from the new
system. In the old system in 1992, they were showing about 3.5-
percent trade surplus with the United States as a percent of
GDP. Now, they are up to 8.7 percent. In 1992, they were
accumulating reserves at about $10 billion over a 12-month
period, and now it is $111 billion. The statute actually
requires that they show a trade surplus with the United States
and a global current account surplus.
Secretary Snow. Right.
Senator Sarbanes. They have both of those, but in dramatic
numbers.
Secretary Snow. It says ``material,'' and by most
economists' estimates, 2.8 is not material on the global
current account basis. But however we parse that, the fact is
we are engaged in the very actions that the statute
contemplates. We are fully engaged with the Chinese, and I
think the way we are engaged is going to produce results.
Senator Sarbanes. Well, I will close out and do it in the
next round, but let me just point out, while the long-run
objective of flexible rates I think is desirable, and that is
where we need to go, I do not think you are going to get the
Chinese there in the short run because they have this concern
about capital controls and the weakness of their banking
structure. And for the life of me, I do not understand why the
Administration is not pressing, does not have another arrow in
their quiver, that they should revalue, in the short-run, which
would make a significant difference and, of course, the Chinese
currency is a linchpin for Asian currency appreciation.
Frank Vargo, of the NAM, said the other day:
The Chinese currency is the key not just because of the
huge bilateral imbalance, but also because other Asian
countries are all looking over their shoulders at Chinese
competition and are reluctant to allow their currencies to move
up against China's. Once China's currency appreciates, though,
they will be less reluctant to allow theirs to move upward as
well.
And we mentioned earlier the figures of Japan, Korea, and
Taiwan. I think your short-run strategy is to get a revaluation
of the peg--in the context of a long-run strategy, to go to
flexible rates.
Thank you, Mr. Chairman.
Chairman Shelby. Senator Allard.
Senator Allard. Thank you, Mr. Chairman.
I would like to start out with a few comments to let you
know, Mr. Secretary, where I am coming from. I may be the only
free trader sitting on this panel today. I do not know. But
when you talk about manufacturing jobs, those jobs have been
decreasing for the last 2 decades. Now, it has been a
combination of things, in my view. Number one, part of it has
been due to the fact that we are modernizing our factories so
workers can get more done. We have increased efficiency. We
have increased production, and I think this has all served our
country very well.
Also, you know, our manufacturing sector is being plagued
more and more with rules and regulations that have a real cost
to the value of the goods that they are kicking out, and this
has also had an impact. To be competitive in a world market,
sometimes we lose jobs to other countries because of the
regulatory burden in this country.
I want to pull up this chart here that my colleague had
pointed out where it talked about the trade deficit. If you
will notice the lower parts on those charts, do you know what
was happening at those times? You take this little part right
here. This is when we had the misery index. Remember double-
digit inflation, double-digit interest rates, double-digit
unemployment. We go down here to the 1980's, and the economy
was not doing particularly good there. We go clear back to the
Depression. Our trade deficits were more favorable, but
certainly I do not think that is what we want for this country.
I would hope that we not go too far in criticizing the
trade deficit. Because when our economy is doing well,
consumers are doing well, they are purchasing goods, and that
is a reflection on a prosperous economy that is doing well.
I would hope that you would counsel the President to let us
not have any more trade tariffs like we put on lumber and
steel. There are lumber companies in Colorado who are reporting
to me today that since those lumber tariffs were imposed, the
cost of lumber in Colorado has gone up dramatically. That
impacts the home-building industry. It is a fundamental
industry, and eventually, if we continue impose tariffs, it is
going to have, in my opinion, an adverse impact on the economy,
as well as steel.
And we have had some Members on this panel say, what they
want is tariffs, but I hope that we will avoid that. If you
look at the poorest countries in the world, they are the ones
that have the most trade restrictions, and they are doing the
poorest, as far as their economy is concerned.
Milton Friedman, a Nobel Prize winner is a free-market
economist, and he was an advocate of free markets, and I happen
to agree with that. He said that the dollars are pretty much
like a commodity. He said that if you will treat them like that
and not overreact, they will adjust.
Looking at some of these charts put out by the IMF, they
show that Japan and China both have horded--it looks like $800
million if you look at these charts here. They are not getting
any interest on that money. They are not producing. They are
not doing anything. South Korea and Taiwan, you pull them in,
and it is over $1.1 million.
Now, would you agree that there is a point of no return
where the countries that are trying to hold onto these American
dollars to help with the exchange rate are going to have to
release some of these dollars; where they are going to have to
deal with the market at some point in time? Would you agree
with that?
Secretary Snow. Well, there is always an adjustment process
going on, Senator. I certainly agree with that and with your
broader statement on the power of free trade. Free trade
benefits all parties of free trade. It creates jobs, and it
creates more wealth, and it is critical to the success of the
world economy to continue to push for free trade. And we think,
going hand in hand with free trade, as Milton Friedman argued
years ago, are fluctuating exchange rates. He is one of the
fathers of the idea of freely fluctuating exchange rates.
I agree with your views on the need and the importance of
trade, and the importance of keeping the avenues of trade open,
that trade benefits us, and that there is a continuing
adjustment process going on in the world economy.
Senator Allard. Now, much of today's discussion has
centered on the effect on the manufacturing center. We have
seen a depreciation in this particular sector, but the question
that I wanted to bring up has to do with the parameters in
which you evaluate whether there is manipulation of the market
by the country.
What do you look at to know whether that is happening? Do
you look at their total dollar reserves that they hold, or is
it much more complicated than that. I wonder if you would share
with this Committee what parameters illustrate that a country
is not complying with our agreements in 1988, and that they are
not complying with our exchange policies?
Secretary Snow. Senator, you would look at the things you
mentioned. Is the country involved in some set of practices,
currency practices, which frustrate normal balance of payments
adjustments processes? Are they engaged in a set of practices
which are motivated, are motivated by a desire to disadvantage
U.S. exporters and competitors? Those are the sorts of things
you look at.
And then you look at the question what is happening to
their bilateral balance of trade and their multilateral balance
of trade over time? You try and come to a common-sense
conclusion on it. And you consult with the IMF, as required by
the statute. Those are the general factors that we used and
took into account.
Senator Allard. Mr. Chairman, I would just raise a word of
caution. Mr. Secretary, as you know, I am a veterinarian, and
sometimes you have to look at the disease, and you have got to
decide is the treatment worse than the cure or is the treatment
worse than not doing anything?
I am not saying that we should not do anything in this
particular case, but I think we have to be awfully careful
about the treatment that we might apply. We might dig a big
hole for ourselves, and our economy will not continue to do as
well as it has been doing.
I am surprised today to see the gross domestic product
figures. They are better I think than most economists were
predicting, and I think this is a sign of recovery that is
being stimulated by the Bush economic stimulus package. The tax
cuts played a large part in getting that part of the economy
going that needed to go in order to create more jobs.
And if we look at the overall job picture, at least in my
State, we are beginning to see some things happen there that
make us think we are very solvent and on the way to growth. So,
I hope we are very careful about the way we analyze this issue
and how much importance we put on these exchange rates.
Secretary Snow. Thank you.
Thank you, Senator.
Chairman Shelby. Senator Stabenow.
Senator Stabenow. Thank you, Mr. Chairman.
I feel compelled, as someone representing a State with
great manufacturers, both businesses and employees, to say
that, given a level playing field, our businesses and our
employees can compete anywhere, any time. This is really about
giving them a level playing field.
I am extremely concerned that they are being placed at a
disadvantage through currency manipulation as well as a number
of other factors.
Mr. Secretary, as I said in my opening comments, this is
about jobs. This is about real people and real jobs. This is
about my opening up the paper every morning and seeing another
auto supplier, tool and dye maker, small furniture maker
finding themselves in a situation where they may have to go out
of business or, in fact, are going out of business, not because
they are not smart, they are not effective or competitive or do
not work hard, but because of the situations that they face.
I cannot think of a more important issue for us as a
country than the question of losing jobs. We have to make
things and grow things in this country. That is what we do in
Michigan. We cannot all be in the service business. We have to
have a manufacturing base on which to build in this country, I
believe.
My concern is that, in listening to your comments about how
you come to a conclusion about manipulation, you have indicated
you look at whether or not the country was motivated by a
desire to disadvantage foreign competitors. How could we look
at that and not say yes? How could we look at this situation
and not say that is exactly what is happening?
So one question--I actually have two questions, but the
first is your report concludes that no major trading partners
of the United States meet the technical requirements set forth
in the Omnibus Trade and Competitive Act of 1988--it could be
1888, I think.
Secretary Snow. 1988.
Senator Stabenow. Yes, I know it is 1988, but given the way
it is being used, I would like to know is it time to change
that Act? Are the technical requirements of this Act so out of
touch with what is happening, as it relates to these
situations, that we need to create different definitions?
Secretary Snow. Senator, I have to think about that to
offer you a thoughtful and informed opinion on it. But whether
that is the case or not, the end objective of this statute,
which is discussions, engagement, involvement with other
countries, has occurred. We are deeply engaged, and we are
engaged for the reason that you raise. We want to make sure
that other countries are using regimes that are fair and do not
prejudice opportunities for American jobs and American
manufacturers.
I could not believe more strongly, support more strongly,
your statement about American workers and American
manufacturers. They can compete with anybody. All they really
need is a fair set of rules that are fairly and fully enforced.
That is why Don Evans right now is over in China, and I have
had any number of discussions with constituents of yours from
the auto companies and auto supply industry on these subjects.
If you will just let me offer a personal note on this, I
take these responsibilities as Treasury Secretary very
seriously, and I am deeply honored to be here, but I know it is
heavy responsibilities and none more important than jobs, none
more important than waking up every morning and saying what you
have really got to be concerned about here is American workers,
and jobs for Americans, and rising standard of living for
Americans.
I know what it means to not have a job. I have been in that
position, and I know what it means to have a job and the
dignity that goes with having a job. I could not agree with you
more, and we have to make sure that national economic policy at
home is designed to create job opportunities, with higher
standards of living, and we have to make sure that the
international trading and currency arrangements are consistent
with doing that as well.
Senator Stabenow. I would just indicate again that time is
of the essence on this question. Our businesses and workers are
looking to all of us for action. One other point, we have been
talking a lot about China, and I agree with the concerns that
have been raised by my colleagues regarding China, but I do
also want to speak about Japan for a moment, equally
concerning.
For 3 years, Japan has used massive currency interventions
to intentionally manipulate the value of the yen against the
dollar and keep it artificially weak. In fact, Japan has spent
over $200 billion since January 2000 on intervention actions,
including $120 billion this year alone. They have done this
with the stated goal of gaining competitive advantages for
their exports--the standard that we were just talking about,
particularly the United States.
By maintaining this weak yen, Japan has been providing a de
facto subsidy to their automakers. In fact, automotive exports
represent 60 percent of Japan's exports to the United States,
which means that U.S. automakers have been competing against a
substantial export subsidy. In fact, a recent article in
Automotive News cited a figure of $18,000 per vehicle as the
level of export subsidy received by Japanese autos this year
alone.
Mr. Secretary, does the Administration acknowledge that
this is having an extremely negative impact on the auto sector
and how will you specifically address Japan's unfair trade
advantage in the automotive sector, which was one of the
largest bilateral trade deficits we have with any nation and
any product.
Secretary Snow. Senator, that was a subject that was on my
agenda for my meeting in September with Mr. Koizumi and his
finance and economic team. We raised those issues and
indicated, on the subject of currencies, our strong support for
fair currency regimes that reflect market forces and that let
rates adjust to the marketplace.
We did not designate Japan because I did not think they met
the specific criteria of the statute. The yen has moved quite a
bit. It was at 117 or 118 3 months ago. Today, it is at about
107, 108. Two years ago, it was at about 135, 137, range.
Today, it is at 108. So we have seen some movement of it in
response to market forces. That is what we want to see. We want
to see market forces driving currencies, and that is a position
that we have reiterated time and time again. But I understand
your point, and I have talked with your constituents in the
auto and auto supply industry and other industries very much
about that issue.
Senator Stabenow. Again, we can compete anywhere any time,
but $18,000 per vehicle difference, in terms of a subsidy, is
not fair competition.
Thank you.
Secretary Snow. Thank you.
Chairman Shelby. Senator Dole.
Senator Dole. Secretary Snow, Economist John Makin, of the
American Enterprise Institute, suggested at an October 15
conference that the current growth of the Chinese economy is
not sustainable and warned of a bubble in the Chinese economy.
What kind of impact would such a bubble have on our economy,
especially with the Chinese holding more than $357 billion in
exchange reserves?
Secretary Snow. We certainly are interested in seeing China
have stable growth. They are growing at a rapid rate, as you
know--7.5 to 9 percent. The numbers are a little hard to pin
down with particularity, but very sizeable growth rates.
And one reason we are pressing the Chinese, as we are, to
move to more flexible exchange rates is that we think--and open
capital controls--that it would deal with pressures that appear
to be building up inside their economy, inflationary pressures
that seem to be building up inside their economy, and that was
a discussion we had with their central bank, and with their
finance ministers and with the premier because the peg, and the
whole arrangement they have with the capital controls appears
to be generating some internal inflationary pressures that need
to be taken into account. I do not see them as creating
precipitous problems, but I do see, over time, those problems
being something they need to deal with, and they have
acknowledged that. They have acknowledged that.
Senator Dole. Have these large exchange reserves held by
the Chinese given us caution in exerting greater pressure for
reform?
Secretary Snow. No, not in the least. As I indicated
earlier, the United States can finance its obligations. We are
perfectly capable of financing our obligations, but we are not
happy with the peg. I want to be just as clear as I can. We do
not like it. We see it as a distortion of the world trading
system, and we would like to see them eliminated. We would like
to see them move off of it.
We recognize that moving too quickly, moving precipitously
would create the very problems that Mr. Makin of AEI talked
about. But at the same time we think they are an economy that
is much different today than the one in 1992, 1993, or 1994.
They have matured. They have grown. They are now in a position
they can begin to move in this direction and, in fact, I think,
Senator, the risks for them of not moving in this direction are
greater than the risks of doing so.
It is with that framework in mind that we have urged them
to move forward with and to move quickly, not to wait on this
because these pressures inside their economy are very real, and
there needs to be a safety valve for them.
Senator Dole. Mr. Secretary, you are doing a fine job
looking out for the interests of the U.S. Treasury and
Representative Zoellick, in looking out for our U.S. trade
interests. My responsibility is to represent 8 million people
in North Carolina, and many of them feeling very concerned
about the fact that we have lost more than 200,000
manufacturing jobs since 1995. Of course, I regularly meet with
these people when I am in North Carolina. I see the reports
constantly, day after day, with the plants closing, coming
across my desk. I am committed to looking at every available
option to help remedy this situation.
I recently joined Senator Voinovich in calling on
Representative Zoellick to initiate an investigation under
Section 301 of the Trade Act of 1974, and I would be interested
in your views on that. I would hope that the Administration
would not oppose a Section 301 investigation.
Secretary Snow. Senator, I was not aware of that so I have
not had a chance to examine it. I think that the course we are
on is one that is promising. I want to make sure that the
Committee is aware of my strong view that we are making a lot
of progress here. This is not just talk. This is progress. They
have reaffirmed their commitment to move to exchange rate
flexibility. They have taken a number of very important and
specific steps to do so. I won't take you through all of them,
but they have allowed greater ownership in their banking and
financial system. They have allowed Chinese Nationals to take
more currency out of the country. They have allowed foreigners
to take more currency in. They have established a whole new
banking regulatory regime to go at this issue of the banking
system's problems.
This is working. We are making real progress. We are going
to have a financial attache in Beijing. We have established
technical talks with the Chinese, and to indicate how serious
they are about this, the Chinese have entered into a memorandum
of understanding with the Merc, the Mercantile Exchange in
Chicago, to develop foreign exchange derivatives in China. Now,
you do not have foreign exchange derivatives unless you have
some movement in your currency.
So, I think we are making really positive progress here. I
wish it could go faster.
Senator Dole. Let me just ask you very quickly, certainly
Canada, Europe, and other trading partners are also feeling the
effects of a loss of their manufacturing base to China, and it
seems sometimes like we are just a lone voice on this issue.
Shouldn't our other trading partners be joining us in putting
pressure on the Chinese to make necessary reforms? Shouldn't we
be building a coalition in this area? What are we doing in that
respect?
Secretary Snow. Well, in that regard, Senator, I was
extraordinarily pleased by the statement that came out of Dubai
from the G-7 Ministers meeting, which addressed the issue head
on and expressed a strong commitment for all the major
countries of the world to embrace freely floating rates with
elimination of capital controls. So we have now the G-7--
actually, Russia was part of those meetings--the G-8 embracing
the idea of open competitive capital markets and open
competitive currency markets.
I think there is real movement here. I am encouraged. I
wish it would go faster, but I am encouraged.
Chairman Shelby. Senator Corzine.
Senator Corzine. Thank you, Mr. Chairman.
Mr. Secretary, with all due respect, I read the Dubai
communique, and while it certainly embraces the concepts you
are talking about, in no way does it, in my view, set metrics,
timetables, or an outline, a specific program for moving to the
benefits that one might argue would be the case with flexible
exchange rates and some of the other issues. I believe part of
the topic of discussion today is timing. I think that the
reasons that I outlined in my opening statement, both the
unsustainability of our current account deficit, the growing
embrace of protectionist ideas that are being both advocated
and actually, in some instances, followed by the
Administration, do not seem to me in the context of the job
losses that we have seen in this country. By the way, I am
concerned that there may have been some sense that we have
grown jobs from one of my colleagues' comments earlier, when by
latest calculations I think we have lost 3 million jobs in the
last 3 years. And while all of us are pleased with the GDP
growth, there was a decline in jobs again in the third quarter.
I hope that the growth we see will lead to the pick-up in job
growth because that is what we are interested in. I hope your
numbers that you projected last week actually come to pass.
But it strikes me that there is an urgency with regard to
these trade and exchange rate policies that is not reflected in
either the report or the comments today. I continue to believe
that we need to--and this actually is why I mentioned the Plaza
Accord, and I know that Senator Dole mentioned broadening out
the coalition. We are dealing now with much of the concern in
the developing Asian economy, which is not just China. It is
all of those other currencies that are tied very closely to it,
and it is the competitive position that each of them have with
it. It strikes me that we need to be sitting down and talking
about this in a much broader, comprehensive context than we are
doing it now.
I happen to be a believer, not unlike the Ranking Member,
with regard to an intermediate step before we get to flexible
exchange rates with China, that there needs to be some
adjustment with respect to the peg. That is not an endorsement
of the peg concept. It is just saying that before we take off
exchange controls, before we get all of these revisions in the
economic system, we should not sit here and continue to lose
these jobs in manufacturing and other sectors because we are
not willing to take steps in the interim.
And I think it is in the interest of the global economy,
not just in the interest of the United States with regard to
these issues. This is hurting European expansion, Japanese
expansion. There needs to be a fundamental understanding that
there is a linchpin element here to where the RMB works. I
think the same institute that Senator Sarbanes was talking to
talks about a 20-, 25-percent revaluation would create
somewhere between 250,000 and 500,000 jobs here, but that has
implications around the globe for growth that then feeds back
in everybody's domestic economy that you are talking about.
I do not understand why we would not want to try to take
some interim steps, understanding that China has to move on a
paced basis to change with regard to where they are with regard
to the peg. And it would be something that I think we as a
Nation should be the leaders of bringing about. It is good for
China in the same way that you responded to Senator Dole's
question. They have huge buildups of inflationary pressures and
bubbles in certain parts of their economy because they are
growing their reserve base. Money supply is exploding with this
increase in reserve holdings.
I am concerned that I do not hear the urgency that is
represented by the current account position in the country
relative to the jobs, relative to growing protectionism, and
growing weakness that we see in other parts of the globe, or at
least sustained weakness in other parts of the globe that are
being held back because we are not doing something now.
Senator Sarbanes. Jon, would you yield for just a moment?
Senator Corzine. Sure.
Senator Sarbanes. I just wanted to add, this revaluation of
the Chinese currency many see as a linchpin for Asian currency
appreciation. It is not plausible that other Asian currencies
will appreciate without a revaluation of the Chinese currency.
As the NAM Vice President said, they are all looking over their
shoulders at Chinese competition and are reluctant to allow
their currency--so the point that Senator Corzine is making is
right on target in terms of this wider context in addressing
this question.
Senator Corzine. I think that is actually true with the
Japanese as well, and you know, I can ask for your response to
the tirade, but I would recommend that the Treasury give very
serious consideration in their bilateral conversations with the
Chinese. But I think this is actually a multilateral issue,
much broader, and I actually think the Dubai communique is too
general and does not deal with the real specific issue, which
is, I think, undermining this exchange and currency problem.
Chairman Shelby. Senator Schumer.
Senator Schumer. Thank you, Mr. Chairman. I appreciate the
hearing. I am sorry we had many things going on, so I apologize
for being a little late.
As you know, Mr. Secretary, it is not a surprise to you
that I am very disappointed in the report today, and hearing my
colleagues--well, I was not here to hear, but it was reported
to me, just about everybody else seems to be, too, on a
bipartisan basis. And it leads to a question. We cannot quite
figure this out. You have said let diplomacy work, but the
Chinese seem to say do not even bring this up. We do not see
any progress whatsoever, any progress in this area. The Chinese
just seem to feel they can get away with whatever they want.
The question I have is this: Is there some kind of deal? Do
we tell the Chinese you help us in foreign policy and we won't
bother you on this issue? Because certainly this report lets
the Chinese off the hook. Now the Chinese can say to any U.S.
official, from the President on down, you found we are not
violating any laws, we are not doing anything wrong.
All the pressure that you have been trying to build up on
them, you have pulled the rug out from under yourself with this
report. And I do not get it.
So can I ask you this: Before you issue these reports or go
to China, do you talk to the State Department people? They
traditionally put economic issues second and diplomatic issues
first. Many of us are incredulous here about what is going on
because we, in a different position than you, have to live with
the exodus of the jobs. And, you know, I am well aware of the
fact that not every job is going to be saved by a fair
valuation of the Chinese currency. But it sure means some of
them would, and it also means that everyone who loses a job
thinks that this is related. The good economic news today is
growth. The bad news is jobs. And what we are talking about
here, is directly related to jobs.
I guess my question to you is: Has some kind of deal been
struck either about North Korea, about some other foreign
policy area, something not related to economics, or even
related to economics, well, we will leave you alone if you buy
some planes from us or you do this or you do that? I mean, tell
me what is going on here.
Secretary Snow. Senator, we are, in your words, not
``leaving the Chinese alone.'' We are engaged on a number of
points with them to get them to open up their economy, to get
them to relax capital controls, and to get them to move to a
freely floating rate.
I have been over there. I have been to Beijing. I have
talked to the leadership of the country, from the Premier on
down. I have talked to the Finance Minister and the central
banker in a meeting of the World Bank, IMF in Phuket, Thailand.
I just came back from Oralia, Mexico.
Senator Schumer. Have we made any progress? I know you are
trying hard.
Secretary Snow. We are. I heard you say we are not making
progress. We, I think, are making genuine progress. You were
not here a few minutes ago when I commented on some of this
progress. I will not repeat it all.
Senator Schumer. Okay. I will look at the record.
Secretary Snow. But one important element of progress that
is really pretty startling is the interest which the Chinese
are taking in talking to the Chicago Merc, about derivatives on
their currency and options on their currency. And I confirmed
that in a discussion I had with Governor Zhou, the counterpart
to Alan Greenspan, and Governor Zhou has endorsed this project
with the Merc in which they have asked the Merc to help develop
a currency futures market in China.
Now, Senator, there is no point in having a currency
futures market unless you let your currency----
Senator Schumer. Right, but they have not done anything.
They are talking.
Secretary Snow. Well, I understand they are entering into
or have a memorandum of understanding to retain the Merc to do
this for them.
Senator Schumer. But they could wait 2 years before they
did it. They could say we need time, we need time, we need
time. No one is saying all of this has to be done in 6 months,
but we do not see one inch of progress other than talking. And
talking is not going to get us anything done if the basic
situation is unfair.
Secretary Snow. Senator, since I started this discussion
with them, U.S. financial institutions can now own a larger
share of Japanese financial institutions than had been the case
before.
Senator Schumer. Right.
Secretary Snow. And insurance companies. Non-Chinese, your
constituents, can take more hard cash into the country. It is
not as much as we want. They are not moving as fast, you know.
But we are pressing them, and we will not relent here. We will
not stop. We are going to keep the pressure on.
Senator Schumer. Let me ask you just one other thing. I
know my time has expired. Just one more question with the
Chair's indulgence, and that is, what is the Administration's
position on the legislation that the group of us have put in
about the tariff ? And let me ask you this: Even if you do not
have a position yet, which I do not think you do, isn't it fair
to say that if this were to pass the Senate, it would increase
your leverage and your ability to negotiate with China?
Secretary Snow. Senator, I think we are making good
progress, and I would rather continue down the path we are
going.
Senator Schumer. You do not think it will help you, it will
help your leverage?
Secretary Snow. As I say, I think we are really on a good
path and are making progress, will continue to make progress.
If I thought otherwise, I would respond differently to your
question.
Senator Schumer. Okay.
Thank you, Mr. Chairman.
Chairman Shelby. Mr. Secretary, we have seen such an
acceleration, it seems to me, in the loss of manufacturing jobs
in the United States, more so than any time in economic history
that I am aware of. We understand trade and we understand
people doing this and doing that better than we are. But if the
currency is manipulated to help them reach their goal of a
better economic condition for their people and so forth, stable
growth, but at whose expense, ultimately? I think on both sides
up here today you heard concern about the loss of manufacturing
jobs, not in just my State of Alabama but all over America. And
you are the Secretary of the Treasury. We know you have a tough
job to do. But these are real concerns to us as Senators, as
legislators. And I think that is the message we are sending out
today.
I believe that although it is delicate dealing with China,
Japan, and the other countries in Southeast Asia, they are
going to have to be dealt with because people, if they are not
going to play by the rules--and I know the rules are different.
But if we are going to play by a set of rules and they are not,
we are going to lose the ball game and we are going to lose it
in our current account, in the loss of jobs. I wonder where we
are going to be in 20 years if we continue to hemorrhage
manufacturing jobs.
Mr. Secretary, I think there has been a lot of concern here
about the need for the Chinese to move to a flexible rate
exchange policy. How you get them to do that is very difficult
for a lot of reasons. But as an interim measure, would we see a
measurable effect, a real effect if the Chinese allowed their
currency to trade in a wider band than it does at present as
part of a transition to a flexible rate regime? In other words,
you loosen it up a little bit with a band or a basket or
anything like that.
Secretary Snow. Senator, I raised precisely that question
with the economic and political leadership of the country, and
I think it is something that they are looking at, the market
basket idea, widening the band. No commitments were made, but I
think that is clearly one of the things that is being looked
at. I urged them to look at that hard and see if they could not
embrace movements in that direction. It would be in their
interest as well as our interest to do so. And I agree with you
100 percent. We have to make sure that our workers, our firms,
and our companies are not being prejudiced because of policies
and practices of other countries. We can compete anywhere, but
it has to be a fair, level playing field where the rules are
really enforced.
Chairman Shelby. Well, I think Senator Dole raised the
question in a very articulate way, and so did Senator Miller
when he read you part of the letter from the worker there. What
do we tell our workers at home who have been displaced in
manufacturing--textiles, steel, automotive-related? Do we say,
gosh, we are going to stabilize somebody else but at their
expense? You know, that is a tough thing to say.
Secretary Snow. I would not say that, Senator.
Chairman Shelby. I have not said it.
[Laughter.]
Secretary Snow. I would not say that. I would say, look, we
are working hard on this economy. We are committed to seeing
the economy grow. We are committed to creating more growth and
income for Americans, and as more growth in income, after-tax
income, is available, it will play out in a way--and it always
has--that creates more jobs.
This recession is different. It really is, by the gap that
developed in the recovery between the normal recovery and the
manufacturing sector.
Chairman Shelby. Why?
Secretary Snow. In part because of astonishing productivity
in our manufacturing sector.
Chairman Shelby. You are talking domestically now. You are
talking about the gains in our computer manufacturing, design,
and everything.
Secretary Snow. The whole manufacturing sector has shown
tremendous productivity growth over the last 3 or 4 years, and
what that productivity growth has translated into is the
ability to do more work, more output, with fewer workers.
I am encouraged by the number----
Chairman Shelby. You are not saying that this is going to
be a recovery without jobs?
Secretary Snow. No. I am confident we are going to see
jobs. I think we have already begun to see it.
Chairman Shelby. Yes, sir.
Secretary Snow. The 57,000 in the last report.
Chairman Shelby. The news today.
Secretary Snow. The news today, and 5 of the last 6 months
reduction in initial claims, the fact that aggregate hours
worked are rising. There are some good, positive signs, and all
the economists I talk to say that the linkage between growth
and job creation has not been severed. It has been delayed, but
not severed, and with the growth rates we are seeing, they are
all projecting a very sizable pick-up in employment next year.
Chairman Shelby. There is always lag time, but this
recovery, we have seen more lag time, have we not?
Secretary Snow. Yes, and the reason I think, Mr. Chairman,
is the fact that we have had this astonishing productivity
growth.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Thank you very much, Mr. Chairman.
Secretary Snow, I am going to read a series of quotes that
appeared in major publications between March and October of
this year, the period about which the Treasury report is
concerned.
Financial Times, May 31, 2003.
The Bank of Japan conducted its largest ever intervention
in the foreign exchange markets in May, using <yen>3.9 billion
to weaken the yen against the dollar.
Japan's foreign exchange reserves soared, providing further
evidence that the government has stepped up efforts to weaken
the yen.
And this shows what is happening to Japan's stock of
foreign reserves, a very sharp rise. Of course, this is
happening in all of those Asian countries. That is China. This
is South Korea. And this is Taiwan.
New York Times, August 27.
Japan is spending heavily to pursue a weak yen policy. The
Japanese Government is defying the logic of the foreign
exchange market by keeping the yen from rising sharply in value
against the dollar.
New York Times, October 1.
Yen declines after Japan moves to stem its rise. The yen
fell against the dollar in New York trading yesterday after
Japan's Ministry of Finance sold yen to stem a gain that had
pushed the currency to its highest since December 2000.
How do you justify the conclusion in your report that Japan
is not manipulating its currency?
Secretary Snow. Senator, as I tried to respond earlier, the
yen has fluctuated in both directions. The yen has appreciated
about 10 percent or so from the beginning of the year. More
than that, actually. I think the yen is now about 22 percent
stronger than it was at the beginning of 2002. Over the last
couple of years, it has fluctuated I think a low of 135 or so
to yesterday 108-something. Three-year fluctuation, about the
same, 137 to 108.
There has been considerable movement of the yen. The
current account surplus has fluctuated between, 2 and 3
percent, and as I said earlier, that basically reflects the
excess of Japanese savings, their high savings rates, versus
their investment rate. And their investment rate is low because
they do not have their domestic economy growing faster.
Senator Sarbanes. But you have no problem with their
intervention in the markets in order to affect the currency?
Secretary Snow. I do not want to comment on their
interventions as such. I will reiterate our policy, which is we
prefer fluctuating exchange rates, we prefer use of the market.
Now, when asked about those interventions, their response
is they intervene to avoid undue fluctuations which take the
currency away from fundamental values. We prefer a world of
fluctuating rates, and we continue to reiterate that, and that
was the statement that came out of Dubai. It is not just us. It
is all the G-7, including Japan as a signatory to that.
Senator Sarbanes. Well, Mr. Secretary, I want to address
the Dubai thing. I am glad you brought that up. In September
1985, when the U.S. trade and current account deficits reached
the worrisome level of 3 percent of GDP, the major industrial
countries' Finance Ministers met at the Plaza Hotel in New York
to make an explicit commitment to raise the value of foreign
currencies. The Ministers agreed, and I quote--this is from the
Plaza Accord, ``Some further orderly appreciation of the main
non-dollar currencies against the dollar is desirable. They
stand ready to cooperate more closely to encourage this when to
do so would be helpful.'' So they came out of there committed
to some further orderly appreciation of the main non-dollar
currencies against the dollar.
Now, 18 years later, our deficits have surpassed 5 percent
of GDP, even more troubling. The G-7 Finance Ministers met in
Dubai last month and issued a statement, ``We emphasize that
more flexibility in exchange rates is desirable for major
countries or economic areas to promote smooth and widespread
adjustments in the international financial system based on
market mechanisms.''
Afterwards, the U.S. sought to claim that this ambiguous
language signaled a major change. Other Finance Ministers
claimed otherwise. Since Dubai, the Japanese have continued to
intervene to prevent appreciation of the yen. Should we not be
seeking a Plaza Accord type of the statement rather than this
Dubai type of statement?
Secretary Snow. Senator Sarbanes, the circumstances today
and then I think are quite different. There was an effort to
weaken the dollar, consciously weaken the dollar, as I recall
the Plaza Accord. I think we have made the better commitment,
and that is the commitment to let market forces rather than
central banks and ministers of finance set currency values.
Senator Sarbanes. If you sit and say, we are going to let
market forces work and others are intervening in the market
forces in order to gain advantage, apparently with considerable
success, then are we not a patsy in all of this? It is one
thing to say that the rules should apply, we have these
international trading rules and people should abide by them.
But if you have major actors who do not abide by them and
depart from them in a calculated way in order to gain
substantial advantage, if we just sit there and tolerate that,
we are a patsy in this situation or so it seems to me.
Secretary Snow. Senator, as you know we are continuously
engaging the world on this issue and pressing forward our view
that true flexibility reflecting market forces works best for
the world trading system, for the country in question, and for
the United States. You cannot devalue yourself to prosperity.
Senator Sarbanes. Do you think it is fair to American
manufacturers and workers to be competing against products
produced in other countries where they have anywhere from a 25
to a 40 percent trade advantage because of currency
manipulation?
Secretary Snow. Senator, we oppose currency manipulation.
We think that would be unfair, and we assert as strongly as we
can the need for a world trading community based on open
capital flows and fluctuating exchange rates.
Senator Sarbanes. One final. Is a general appreciation of
Asian currencies plausible without a revaluation of the Chinese
currency?
Secretary Snow. Senator, one of the things that I have
learned the Treasury Secretary should not do is comment on the
specifics of relative exchange rates, so I had better avoid
making a comment there, if you will permit me.
Senator Sarbanes. Thank you.
Chairman Shelby. Mr. Secretary, I know you do not want to
move a market in any direction and you are wise to do this.
With reference to Japan here, is there not a lot of
difference, Mr. Secretary, between a country intervening in the
market, that is buying or selling our currency in order to keep
theirs at a desired exchange rate, as opposed to a nation that
lets the market actually work and they do not try to intervene
or manipulate, or as Senator Bunning used the term, cheat in
the market? What we are trying to do is promote a situation in
the world, as far as monetary policy, where the market sets the
rate of exchange, short of nations trying to manipulate or
actually manipulating the rate.
Secretary Snow. Absolutely. That is our view entirely.
Chairman Shelby. Now how do we get there?
Secretary Snow. We get there by engaging in the dialogue we
had in Dubai and getting the finance ministers of the world and
the central bankers of the world to embrace this idea. That is
what came out of Dubai was a strong statement embracing a point
of view, a philosophy, one that we are in the forefront of.
Chairman Shelby. But Mr. Secretary, how do we really get
countries to change their ways when it is to their economic
advantage at home to intervene in the currency market, to peg
the market, peg the currency, or to intervene in the market
buying and selling like the Japanese do?
Secretary Snow. We have the types of discussions and
engagement that we are having right now, and we bring the full
force of our arguments to bear on them.
Chairman Shelby. But will not these countries continue, by
nature, to do what is in their best interest as they see it for
their own economy and their own people even at our expense?
Secretary Snow. Mr. Chairman, as Alan Greenspan I think
testified before your Committee sometime recently, it is not in
China's interest to pursue this policy. It is not in their
interest because it is creating these adjustment processes
within their own economy. That was not the main message I took
to them.
Chairman Shelby. But it is creating some distortions
elsewhere, is it not?
Secretary Snow. Yes, exactly.
Chairman Shelby. Senator Sarbanes.
Senator Sarbanes. Mr. Chairman, I would like to include in
the record an article from the Washington Post, ``U.S. Debt to
Asia Swelling. Japan, China Lead Buyers of Treasuries,'' in the
course of which it is commented, this has caused some analysts
to even envision the day when China could use threats of
selling Treasuries to try to influence U.S. economic or foreign
policy. `` `The U.S. dollar is now at the mercy of Asian
governments ' said Joan Zheng, a former official at the
People's Bank of China, the country's central bank and now an
economist at J.P. Morgan Chase & Co. in Hong Kong. `If China
wants to influence the market it can. Its financial power is
just so strong.' '' They go on and on with a detailed statement
of holdings.
The Japanese Government also has massive amounts of dollars
because of its efforts to hold down the value of its currency,
the yen, against the dollar, to boost exports to the United
States. To do so, Japan's central bank used yen to buy billions
of dollars this summer but then it had to invest the dollars in
U.S. assets.
China has pegged its currency . . . to the dollar for
nearly a decade. Manufacturers and labor groups in the United
States have complained bitterly about what they say are
undervalued currencies in Japan and China that effectively make
those countries' goods unfairly cheap overseas. Some economists
estimate the yuan is undervalued by as much as 40 percent,
causing some U.S. business groups to blame China for the loss
of millions of manufacturing jobs at home.
I think this is right on the mark. There are lots of
tensions that come from a free trading environment. There are
also benefits that come from it. But there is no way, at least
that I know of, under any free trade regime, that justifies
currency manipulation to the extent that some estimate the yuan
is undervalued by as much as 40 percent. Even if it is 20, 25,
or 30 percent, what do we say to our people? It is one thing to
say to them, you have to compete on a level playing field, and
we get pluses and minuses out of that. What do you say to them
when they are losing their jobs, the manufacturers are going
under, the workers are getting laid off and they come and--by
general agreement I think these currencies are not where the
market value ``would put them'' and people are losing jobs. It
is happening every day.
Secretary Snow. Senator, what we are doing is I think what
you as one of the authors of this statute wanted done. We are
engaging the Chinese in a very direct and forceful way. We are
letting them know that we think a manipulated currency is
unfair. We want a currency that reflects the realities of the
marketplace, not one that is manipulated. The only way to test
that though is to get to the market. That is why we are pushing
the marketplace.
Senator Sarbanes. Mr. Secretary, under the statute there is
a 6-month follow-up to this report. We look forward to
receiving that. Presumably we will have a future hearing. But
in the meantime, I am sure you are going to continue to hear
more about this and you are going to have to deal with these
various legislative proposals that are now coming forward which
are a reaction or a response to this situation.
Secretary Snow. Senator, let me assure you that in this
interim 6 months I am going to be deeply engaged in pressing
forward on this agenda that I have talked to you about today to
make sure we have fair currency regimes across the world.
Chairman Shelby. Mr. Secretary, we appreciate your
appearance and your ability to go through the tortuous process.
The hearing is adjourned.
[Whereupon, at 1 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR WAYNE ALLARD
I would like to thank Secretary Snow for appearing before the
Committee today to discuss international economic and exchange rate
policy and its impact on our economy. The issue of exchange rates and,
in particular, the use of anticompetitive tools, has become an issue of
increasing concern in recent years. While promoting fair and free
trade, it is important that the United States be firm against certain
practices that occur in the global marketplace that can ultimately hurt
our industries.
The United States is committed to promoting and encouraging free
and open markets, providing the ability for capital to find its most
productive home. This flexibility implies that markets in goods and
services will see growth beyond national boundaries. However,
commitment to encouraging free markets means a commitment to
eliminating unfair practices, such as the use of market restrictions
and capital controls, that inhibit the free exchange of capital and
goods through economies of the world. Tight control of either goods or
capital can create imbalances in the economy and inhibit fair
competition in the marketplace.
I look forward to hearing about the interactions of national
economies and the impact of those interactions on the U.S. economy. The
health of Colorado's economy depends a good amount on the success of
its agriculture industry, so I am particularly interested to hear about
how it might be impacted by international economic and exchange rate
policies. I also anticipate hearing ways in which the United States can
both promote free markets, and ensure that those markets provide the
appropriate forum for free and fair trade. Secretary Snow, thank you
again for appearing before the Committee. I look forward to your
testimony.
----------
PREPARED STATEMENT OF SENATOR CHARLES E. SCHUMER
Thank you Mr. Chairman and Ranking Member Sarbanes. This is an
extraordinarily important hearing. As you know, I have more than a
passing interest in Treasury's views on China's currency, as well as
the policies of other Asian nations.
My concern about China's policies is not simply about jobs, or our
manufacturing sector, or even, currency. Those are critical issues--we
hear about them every day in our States. But even more is at stake.
This is now about the strength of our international systems and
U.S. laws. It is about whether we stand up for the rules or turn a
blind eye. It is about whether the trade agreements we spend so much
time negotiating are worth the paper they are written on. And it is
about whether our Government will have the courage to stand by its
convictions.
Some try to frame this debate as ``free trade vs. protectionism''
that those who think China should change its currency practices risk a
global trade war. In fact, the reverse is true.
As we know, free trade is a delicate balance. It rests on certain
conditions--multiple nations both weak and strong abiding by a common
set of rules and responsibilities. When those conditions are violated,
the system must respond or else the actions of one nation will upset
the whole global balance. So it is in the interests of free trade--in
defense of free trade--that I am urging action. We cannot turn our
backs and allow one major nation to engage in mercantilist policies.
It is the view of many economists, and many here, that the Chinese
Government, as well as other nations, manipulates its currency to gain
an illegal and unfair trade advantage. Let me briefly review that case.
I think it is one that has been amply covered in hearings and testimony
before Congress.
IMF Article IV, Section 1, states that members of the IMF should
``avoid manipulating exchange rates . . . in order . . . to gain an
unfair competitive advantage over other members.''
The IMF definition of currency manipulation is very explicitly
defined in Article IV. It refers to currency manipulation as
``protracted large-scale intervention in one direction in the exchange
market.'' That is the standard. Let us look at the data.
The monthly foreign exchange purchases by the Chinese Government
have been huge. They have gone from an average of $3.8 billion a month
in 2001 to over $10 billion a month in 2003. A sharp upward trend.
During that period of time, total Chinese foreign exchange holdings
have more than doubled from $166 billion to now $357 billion. These are
staggering levels of intervention. In fact, this amount of
intervention, according to some economists, is far beyond the levels
ever seen by the IMF.
Putting it all together, let me read a statement that came out 2
weeks ago from the United States-China Security Review Commission, a
bipartisan group established by Congress to look into these very
matters. They state:
China, in violation of both its IMF and WTO obligations, is in
fact manipulating its currency for trade advantage, and we
recommend that the Treasury Department immediately enter into
formal negotiations with the Chinese Government over its
undervalued currency.
That is an unequivocal statement.
But, frankly, none of this really matters. The Treasury Department
is the key voice on these issues. Treasury has the responsibility under
our laws.
Under Section 3004 of the United States' Omnibus Trade and
Competitiveness Act of 1988, the Treasury Department is obligated to
consider whether any countries manipulate the rate of exchange between
their currency and the dollar for the purpose of preventing effective
balance of payments adjustments or gaining unfair advantage in
international trade. If such violations are found, the Secretary of the
Treasury is required to undertake negotiations with the manipulating
countries that are running significant trade surpluses.
The Nation looks to Treasury for leadership on these issues. And
that is why we are here today.
Many of us have supported the Administration's efforts in using
diplomatic channels to encourage China to freely float its currency.
Secretary Snow has gone over to China. The President has gone over to
China. Secretary Evans is in China right now. The G-7 even endorsed a
policy of market based exchange rates.
Well, I think it is clear that diplomacy is not working. China is
not listening or they do not care. The Chinese Government has made it
crystal clear that they have no intention of allowing the yuan to trade
at market levels anytime soon.
China is now a major player in the global economy. If China enjoys
the benefits of membership in the international community, as they
clearly have, shouldn't they abide by the community's rules and
responsibilities?
The Chinese Government wants stability and continued growth--don't
we all. But China's interests do not trump those of its neighbors or
its international partners. Their desire for the status quo cannot put
the long-term health of the international economy at risk.
I hear from some very smart people in the financial community that
the real risk with China is in doing nothing. China's continued and
massive government intervention is helping drive enormous export lead
growth which is overheating their economy which will eventually cause a
global economic train wreck. Unfortunately, the Chinese Government's
intransigence on this issue leaves us no choice but to consider more
forceful measures.
The lack of real action undermines support for free trade in this
country. When we do not hold a country accountable for violating the
rules of free trade, and good U.S. jobs are lost, people start to
question whether the free trade system itself works.
The Administration has taken made bold moves in the interests of
our economy in other areas. I hope we will see some boldness again. If
we really care about jobs and U.S. businesses--if it is not just
rhetoric--and if we are really concerned about the problems in this
country--not all the problems over in China--there can be few other
actions that would have a more immediate and beneficial economic impact
than eliminating China's and other nations' unfair currency advantages
and currency manipulation.
And, I can tell you this, if the Administration does not act, we,
the Congress, will.
----------
PREPARED STATEMENT OF SENATOR DEBBIE STABENOW
Thank you, Mr. Chairman. I appreciate your calling this hearing
today. While the purpose of today's hearing is to look at the Treasury
Department's Report to Congress on International Economic and Exchange
Rate Policy, what this hearing really boils down to is a discussion of
the future of American jobs and the crisis we are facing in our
domestic manufacturing sector. Whether it is furniture makers in West
Michigan or auto suppliers throughout Michigan, it is a challenging
time.
Indeed, our economy has lost 3.3 million private sector jobs since
January 2001--2.5 million or 75 percent of those jobs in manufacturing.
More specifically, 162,300 Michiganians have lost their jobs in the
manufacturing sector. That is a mind-boggling 18 percent of the State's
manufacturing base. One out of six jobs.
This loss of U.S. jobs, in large part due to illegal trade
practices, should be the number one priority of the Congress and the
Bush Administration. We must demand that foreign countries play by the
rules of international trade agreements.
In particular, I am concerned about foreign currency manipulation
and the lack of action from the Administration on this front. I hope
that Secretary Snow, in his testimony today will be able to tell us
what new steps the Administration is going to take, given its current
inability to get China, Japan, and other countries to stop manipulating
their currencies.
Mr. Chairman, there is no question that China and Japan, in
particular are actively and aggressively intervening in the currency
markets to--illegally--protect their domestic businesses.
By manipulating the markets, they artificially depress the prices
of their exports and raise the prices of their imports. And what does
this mean in simple terms? It is the functional equivalent of a tax on
American goods.
A ``currency manipulation tax'' imposed on our American companies
by China and Japan. And, a tax that is forcing our U.S. companies to
lay off good hardworking employees.
These employees are now struggling to find new jobs, to provide
for their families, to ensure that their loved ones have health care
and that their basic needs are covered. We need the President and his
Administration speaking out forcefully.
The Administration has said that the United States has a strong
dollar policy, but I want to see them using all of their resources to
put it into effect.
I want Administration officials to be able to tell laid-off
workers in Michigan and around the country that China is finally going
to allow its currency to rise the 15 to 50 percent it is undervalued
relative to the dollar. And, that the 12 percent undervaluation of the
Japanese yen will stop right away. Not at some vague point down the
road. But, right away.
These percentages are really startling when we think about them,
Mr. Chairman. Let me put them into more concrete terms. I will use the
example of a car which is a product that we in Michigan certainly know
a lot about. We are very proud of our Michigan-made cars.
A 2003 Ford Taurus SEL has a manufactured suggested retail price
of $23,965. This car, when exported to Japan, faces an estimated tax of
$2,876 solely due to currency manipulation.
Conversely, a similar car made in Japan by Nissan would have the
same estimated artificial price advantage over U.S. cars. Should we
give a Japanese car a $2,876 price advantage over the exact same car
made in America?
Who is paying for these special advantages that the Chinese and
Japanese governments are creating for their people? U.S. companies are
paying for this tax. Our workers are paying for it. And, it has to
stop.
I wonder if my colleagues can imagine what the response would be
if the Administration proposed raising taxes on all of our goods an
additional 12 percent or more and gave all the revenue away to people
in other countries? By failing to end this currency manipulation tax,
this is the practical effect.
Mr. Chairman, there is a lot of interest in the Senate and in this
Committee in putting a halt to these illegal trade practices. Recently,
as Senator Schumer has mentioned, I teamed up with him and others on a
bipartisan bill to stop Chinese currency manipulation. Cosponsors on
this Committee include Senators Bayh, Bunning, Dodd, Dole, and Enzi.
China's policies violate the IMF and WTO agreements, and it is
within our rights to take action. In fact, we are creating a bad
precedent if we do not demand that our rights within these agreements
are fully respected. America should not allow other countries to cheat
us out of our full international rights.
I hope that all of my other colleagues will work with me, Senator
Schumer, and other advocates to resolve this problem. We should be
doing everything within our power to protect our American manufacturing
jobs.
Thank you again, Mr. Chairman for calling this hearing. Thank you
Mr. Secretary for agreeing to appear before us. I look forward to your
testimony.
----------
PREPARED STATEMENT OF JOHN W. SNOW
Secretary, U.S. Department of the Treasury
October 30, 2003
Chairman Shelby, Ranking Member Sarbanes, Members of the Banking
Committee, thank you for the opportunity to appear before you this
morning to discuss Treasury's Report on International Economic and
Exchange Rate Policies as well as related economic issues. The Report
reviews developments in the United States and examines exchange rate
policies in major countries across five regions--the Americas, Europe
and Eurasia, Africa, the Middle East and South Asia, and East Asia. The
Report documents the wide variety of exchange rate policies that are
used around the world. A notable trend has been the move by many
countries to adopt flexible exchange rates.
The Report concludes that no major trading partners of the United
States meet the technical requirements set forth in the Omnibus Trade
and Competitiveness Act of 1988. But let me be clear, the Bush
Administration believes that the international trading system works
best with free trade, the free flow of capital, and with market-based
exchange rates. An efficient system of trade and finance, with fair and
enforced rules, is essential for the United States and all nations to
maximize the benefits of trade and generate the highest levels of
economic growth.
The Report finds that a number of countries continue to use pegged
exchange rates and/or intervene in the foreign exchange market. It
should be noted that a currency peg or intervention does not in and of
itself satisfy the statutory test. Treasury has consulted with the IMF
management and staff as required by the statute, and they concur with
the findings of the Report.
The Bush Administration is aggressively encouraging our major
trading partners to adopt policies that promote flexible market-based
exchange rates combined with a clear price stability goal and a
transparent system for adjusting the policy instruments. In my
testimony today, I would like to discuss this work with you and the
progress we are achieving.
Policies to Raise Economic Growth in the United States and the World
The Administration's international economic strategy aims for
higher economic growth throughout the world. A stronger world economy
is vital to sustaining U.S. economic growth and job creation. This is a
reality of our increasingly interdependent world.
At the core of this strategy are the good economic policies we are
implementing in the United States. But also at the core is our
diplomatic work to encourage pro-growth and pro-stability policies in
other countries. Good economic policies in other countries benefit the
United States and the whole world. It is widely recognized throughout
the world that free markets and market-determined prices are best able
to allocate scarce resources to their most productive use. This is as
true for domestic markets as it is for international markets. We
strongly believe that the goals of raising growth and increasing
stability can best be accomplished in an international financial system
that relies on the principles of free trade, free capital flows, and
market-based exchange rates among the major economies.
Free trade, in particular, improves the standard of living across
countries. Thus, the Administration will continue to promote free trade
through bilateral, regional, and global trade agreements. In this
respect, the outcome at Cancun was a missed opportunity. The United
States stands ready to work with others who seek liberalization. Our
free trade initiatives, including the U.S. proposal to cut tariffs to
zero for manufactures, will continue.
Implementing this broad international strategy is an ambitious
endeavor, but it is an agenda that the Bush Administration is
determined to pursue. Convincing others to contribute to further
improvement in global growth prospects is a top priority for the
President. In furtherance of this agenda I traveled to Europe, China,
and Japan this summer to deliver this very message. Growth was also the
key focus of my discussions with Asian financial leaders in Thailand.
Change has already begun among several major economies. For example,
Germany is pursuing critical labor market, tax and pension reforms
under its Agenda 2010, and France is also moving forward through its
Agenda 2006.
With President Bush's leadership, the Administration has made
reform and economic growth a priority goal throughout the world. In
addition to my own travel, Commerce Secretary Don Evans, U.S. Trade
Representative Robert Zoellick and other senior Administration
officials all continue to press nations to put in place pro-growth
policies that will result in higher rates of productivity and growth
both here and abroad
The Administration has urged Japan to implement comprehensive
reforms to bring about lasting recovery. These reforms involve ending
deflation, strengthening the banking system, and undertaking structural
reforms that promote flexibility. Indeed, the Bank of Japan has
aggressively increased the money supply to counter deflation, and the
Koizumi Government has made important headway on improving the health
of the banking system.
Treasury is actively engaged with the Japanese on monetary, fiscal,
and exchange rate policies both bilaterally and through meetings of the
G-7 finance ministers and central bank governors.
At the recent G-7 meeting in Dubai, we made progress, gaining
agreement on a new ``G-7 Agenda for Growth.'' Under this milestone
agreement, G-7 countries have committed to concrete structural reform
actions to increase productivity, spur growth, and create jobs. And for
the first time they have agreed to a process for benchmarking and
reporting on their performance.
Each country will identify its own policy plan under the Agenda.
For example, the United States will work to lower health care costs,
reduce frivolous lawsuits, and streamline regulations and needless
paperwork through the President's Six Point Plan to promote economic
growth. Other G-7 countries will implement policies appropriate to
their situations. Countries in the European Union will be looking at
further ways to revitalize investment and create jobs. Japan has
reiterated its commitment to reform.
The Agenda for Growth must be about action and results, not just
plans and platitudes. When we met in Dubai, my G-7 colleagues agreed to
be ambitious in embarking on reforms and pursuing growth. In coming
months, we will be working to evaluate proposals and assess the results
of our efforts. As the United States assumes chairmanship of the G-7 in
2004 that focus will be maintained.
The Administration is also engaging in other initiatives, both
bilateral and multilateral, to advance growth and stability in emerging
markets and developing countries. For example, Treasury is working with
Brazil through a new ``Group for Growth'' to identify steps to expand
economic potential; the Millennium Challenge Account targets assistance
to countries that perform on pro-growth policies and delivering results
for people; and in the international financial institutions, Treasury
is advocating a sharper focus on measurable results, economic policy
performance, and promoting private sector development.
Recent Economic Developments
The world economy has strengthened during the course of this year,
and the United States is leading the way. Thanks to timely fiscal and
monetary policy responses, economic growth in the United States is
picking up now after the severe shocks of the terrorist attacks,
corporate accounting scandals, and stock market decline of 2000. Growth
accelerated to 3.3 percent in the second quarter, with fixed investment
as well as personal consumption posting large gains. The President's
Jobs and Growth plan, along with low interest rates, put the U.S.
economy in an excellent position to achieve sustained, robust growth.
The President's Six Point plan to enhance growth and job creation will
further boost our performance. We will not be satisfied until we see
strong and sustained job growth.
Looking beyond the United States, global growth is also improving.
There are signs of stronger growth in Japan, as well as in the United
Kingdom, Canada, and several emerging market countries. Much of Europe,
however, is still falling short of a strong economic recovery. While we
can be pleased with the progress made, growth in the major economies
around the world, as a whole, has been too slow for too long.
The U.S. International Accounts
From my discussions with my counterparts in other countries, there
is a great appreciation worldwide that the United States is a force for
strong growth. This strong performance is also reflected in the pattern
of our external trade and current account balances.
Developments in the current account are best understood in terms of
developments in investment and saving. As a matter of accounting, the
current account deficit is equal to the gap between national investment
and national saving. Thus, when investment in the United States is
higher than domestic saving, foreign investors make up the difference,
and the United States has a current account deficit.
Our current account deficit in large part reflects the attractive
investment environment and high growth of productivity in the United
States. Increased saving in the United States along with stronger
growth abroad will reduce the deficit in the current account.
Exchange Rate Policies
The Report shows that countries around the world continue to follow
a variety of exchange rate policies ranging from a flexible exchange
rate regime with no or little intervention to currency unions and full
dollarization. While the choice of an exchange rate regime is up to
each country, we have been encouraging countries to use flexible
exchange rates. Flexible exchange rates ease the adjustment to changing
economic conditions in the international financial system. Of course, a
flexible exchange rate will not prevent the economic damage that is
caused by a bad economic policy. For example, even with a flexible
exchange rate, an inflationary monetary policy would lead to a weak,
constantly depreciating currency with negative effects on economic
growth. A good flexible exchange rate regime requires a monetary policy
with a focus on the goal of price stability, and has a transparent
procedure for setting the policy instruments.
We are encouraging the use of flexible exchange rates with our
major trading partners, we recognize that, especially in the case of
small open economies, there are benefits from a ``hard'' exchange rate
peg, such as dollarization, joining a currency union, or using a
credible currency board. Of course, just as in the case of flexible
exchange rates, a ``hard'' peg will not prevent the economic damage
caused by a bad economic policy.
The G-7 statement from Dubai, which I mentioned earlier in the
context of the
``G-7 Agenda for Growth,'' also addresses exchange rate policy. Here is
what that statement said:
We reaffirm that exchange rates should reflect economic
fundamentals. We continue to monitor exchange markets closely
and cooperate as appropriate. In this context, we emphasize
that more flexibility in exchange rates is desirable for major
countries or economic areas to promote smooth and widespread
adjustments in the international financial system based on
market mechanisms.
All G-7 Ministers and Central Bank Governors--including Alan
Greenspan and myself--agreed with that statement. And let me be clear:
the G-7 message is consistent with our strong dollar policy which I
have consistently reiterated since my confirmation hearing. As I have
said often, a country can not devalue itself into prosperity. A strong
dollar is in the U.S. national interest. The G-7 message is also
consistent with the Agenda for Growth, which is about a stronger world
economy and flexibility.
Among the many currencies discussed in the Report, China's received
special attention. China does not meet the technical requirements of
the 1988 Trade Act--the same finding for nearly 10 years of past
reports. China's global current account surplus has declined, and China
has had a peg over a long time period during both upward and downward
pressures on the currency. But it is clear that a flexible, market-
based, exchange rate is appropriate for China. Given China's strong
growth and substantial foreign exchange reserves, following on a series
of economic reforms, China now has an opportunity to show leadership on
the important global issue of exchange rate flexibility.
Greater exchange rate flexibility would allow China greater scope
to maintain a low-inflation, pro-growth monetary policy. It would also
enable China to enjoy the benefits, while helping mitigate the risks,
of a more open capital account. And it would help improve the
allocation of resources and the quality of financial intermediation in
the Chinese economy. More broadly, a more flexible rate would help
reduce macroeconomic imbalances.
A rules-based system of trade and finance is essential for all
nations to maximize the benefits of trade and generate the highest
levels of economic growth. A pegged exchange rate is not appropriate
for a major economy like China and should be changed.
For all these reasons, we are continuing our efforts to urge the
Chinese to adopt a flexible exchange rate. I took this case to Beijing
last month, emphasizing the need for exchange rate flexibility, along
with reductions in barriers to trade and capital flows. And last
weekend, following immediately on the heels of the President's meeting
with President Hu, I met with the Chinese Finance Minister and Central
Bank Governor in Mexico.
China's response to this engagement is encouraging:
<bullet> Earlier this month China's Central Bank Governor said: ``With
the role of the market becoming increasingly important, the
exchange rate of the RMB will be finally determined decisively by
the market forces and have great flexibility.''
<bullet> China's central bank is undertaking a number of capital market
liberalization measures. In addition, Governor Zhou has endorsed a
project in which the Chicago Mercantile Exchange and the Foreign
Exchange Trade System & National Interbank Funding Center of China
will develop a currency futures market in China.
<bullet> Vice Premier Huang Ju has accepted my invitation to come to
Washington for an in-depth, high-level discussion of these issues.
<bullet> A new technical cooperation agreement on financial issues
related to exchange rates was announced by President Bush and
President Hu. China's Central Bank Governor and I will be
responsible for implementing this program.
<bullet> The G-7 finance ministries and the Chinese finance ministry
and central bank have begun talks on economic and financial market
issues for the first time ever. Their first meeting was last month
in Dubai.
We are encouraged by the steps the Chinese are taking, but we urge
continued and speedy progress toward the goal of exchange rate
flexibility. The Chinese are discussing exchange rate policy in
international fora, and at home. China's leadership recently called for
active advance of the reform in the financials system and exchange rate
policy. The leadership also recognized that opening up of its capital
market is seen by Beijing as an important step in moving to a flexible
exchange rate. Further, the establishment of a strong regulator will
help China's banking system see much needed improvement. Success will
require daily engagement with the Chinese. For this reason, the
Treasury Department is establishing an attache presence in China.
As this example of China indicates, I recognize the need to address
exchange rates as part of our overall international economic strategy.
But, as the example of China also indicates, I believe that the course
we are on of financial diplomacy is the right course and the most
effective way to bring about change.
Conclusion
Strengthening the economic recovery in the United States is our key
economic objective. I am very concerned about job creation in the
United States. The President's Six Point Plan is designed to remove
impediments to growth and job creation. We have undertaken an ambitious
drive to remove rigidities and barriers wherever they exist and to
thereby create a level playing field that promotes increased
international trade. The G-7 Agenda for Growth is an important step
forward. So, too, are the bilateral discussions we have had with many
countries on economic and financial issues. We will continue to work
hard to accomplish our objectives.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR CARPER
FROM JOHN W. SNOW
Q.1. The Treasury report concludes that ``no major trading
partners of the United States manipulated exchange rates.''
However, according to Japan's Ministry of, Finance, the
Japanese Government has intervened more than 60 times since
January 2000 in currency markets, spending over $220 billion on
such actions. How do Japan's repeated and massive interventions
square with your findings of no manipulation to gain trade
advantages, particularly given the fact that high-ranking
Japanese officials, including Prime Minister Koizumi, have
indicated they are intervening in part to provide their exports
with a competitive advantage?
A.1. The Omnibus Trade and Competitiveness Act of 1988 (the
Act) directs the Treasury to analyze the exchange rate policies
of other countries and consider whether these countries
manipulate the rate of exchange between their currency and the
dollar for purposes of preventing effective balance-of-payments
adjustments or gaining unfair competitive advantage in
international trade. We concluded, on careful examination, that
Japan did not meet the technical requirements to be designated
under terms of the Act. In carrying out the most recent
analyses of exchange rate policies we consulted with the
International Monetary Fund, as required under the Act. IMF
management and staff concur with our assessment regarding
Japan.
This year, Japan has increased its money supply sharply to
overcome deflation. Japan has also taken more vigorous steps to
address its banking sector problems in an effort to provide a
foundation for domestic, demand-led growth.
In these circumstances, Japanese authorities have expressed
concern that a strong and rapid appreciation of the yen would
be inconsistent with Japan's underlying economic fundamentals
and would jeopardize a fragile recovery.
Even though we concluded that Japan did not meet the
technical requirements under the Act, we have made clear to
Japanese authorities that they should allow market forces to
play a greater role in exchange rate determination.
Q.2. Japanese automakers have received substantial benefits of
a direct export subsidy over the last several years from a weak
yen, which is kept weak by the massive interventions by Japan.
The weak yen has allowed Japanese automakers to reap a roughly
20 percent windfall cost advantage over the past 3 years, which
they have used in a variety of ways to gain market share here
in the United States, as well as make record profits. Given
that 60 percent of the U.S. trade deficit with Japan is in the
automotive sector, is it U.S. Treasury policy to allow a
foreign government to continue to provide such a substantial
direct export subsidy when it makes up so much of our bilateral
trade deficit with Japan?
A.2. The market for yen financial assets is very large and deep
and Japan has no restrictions on capital flows that would limit
pressure on its currency. Although Japan's intervention may
have slowed the pace of yen appreciation, the yen has still
strengthened materially over the last year. The yen has risen
close to 10 percent against the dollar since the beginning of
this year and over 20 percent since the beginning of 2002. Over
the last 3 years the yen has fluctuated in a range of 135 to
108 yen per dollar. The yen's value, in terms of the dollar, is
currently roughly the same as it was 3 years ago.
Q.3. Mr. Secretary, I have auto plants in my State, which
provide good jobs for good people. If this trend continues--if
the yen is allowed to continue in its overly weak state--those
auto plants and the good jobs they provide are going to be in
danger. Over the past 3 years, Japan's auto exports to the
United States are edging back up to near-historic levels,
despite increased production facilities in the United States.
How do you expect the U.S. auto industry to compete with
Japanese automakers when Japanese automakers have a 20 percent
cost advantage?
A.3. Japan's intervention has not resulted in growing exports
to our market. Our bilateral trade deficit with Japan currently
stands at $64 billion (average through September at an annual
rate), down from a record high of $81.6 billion in 2002.
In particular, merchandise imports from Japan have been on
a downward trend since peaking in 2000 and so far this year are
running about 21 percent below their 2000 level. As a result,
goods imports from Japan as a share of nominal U.S. GDP have
fallen to 1.1 percent--the lowest since 1980--from the 1.5
percent share that prevailed in the latter half of the 1990's.
Although imports of Japanese automotive products (cars,
trucks, and parts) reached record levels in 2002, they have
since moderated and through September were roughly 3 percent
below their year-earlier level.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER
FROM JOHN W. SNOW
Q.1. Mr. Secretary, Paul O'Neill, your predecessor, came before
this Committee on May 1, 2002. I told him then, as I am telling
you now, that as a Senator from Georgia, I have to be a little
bit parochial. I have to look out for those 8 million people in
Georgia. There are some industries in our State--forestry,
textiles, automotive, agriculture, who have been complaining to
me for over a year, pretty loudly, that the dollar is making it
difficult for them to export profitably, and easier for imports
to take their market share here in the United States. The paper
industry has seen more than 90 percent of the growth in their
U.S. markets captured by imports.
How would you respond to my constituent industries that are
so very concerned about this matter? How would you respond to
Joyce Williams?
Are you seeing any foreign countries engaging in currency
manipulation with the U.S. dollar, for purposes of preventing
effective balance of payments adjustments or gaining an unfair
competitive advantage in international trade?
What actions have you taken to date to encourage other
governments to seek to strengthen their currency vis-a-vis the
dollar? Is there anything further that you think should be
done?
A.1. We are concerned about the difficulties that a number of
U.S. industries have experienced. Soft domestic demand and weak
growth abroad (which has hindered export growth) have been
principal reasons for sluggish recovery in many industries. The
U.S. economy is now showing healthier growth. The early and
timely fiscal response of the Administration, working with
Congress, and the Jobs and Growth Tax Relief Reconciliation Act
enacted in May, have spurred an acceleration of real growth in
GDP. Private analysts forecast this growth to continue at above
4 percent, or around 1 percentage point above the growth in
potential output, over the next year. We are now seeing the
beginning of a turnaround in the labor market and sustained
growth above potential should trigger stronger job gains, with
several private sector estimates predicting the creation of
about 2 million new jobs by the third quarter of 2004.
The Administration's international economic strategy aims
for higher economic growth throughout the world. For example,
at the recent meeting of the G-7 Governors and Finance
Ministers in Dubai, we gained agreement on a new ``Agenda for
Growth.'' Under this milestone agreement, G-7 countries have
committed to concrete structural reform actions to increase
productivity, spur growth, and create jobs. They have agreed,
for the first time, to a process for benchmarking and reporting
on their performance.
The Department of the Treasury, in carrying out its
responsibilities under the Omnibus Trade and Competitiveness
Act of 1988 (the Act), analyzes the foreign exchange policies
of foreign countries, in consultation with the International
Monetary Fund, and considers whether countries manipulate the
rate of exchange
between their currency and the dollar for purposes of
preventing effective balance-of-payments adjustments or gaining
unfair competitive advantage in international trade. In the
October 2003 ``Report to Congress on International Economic and
Exchange Rate Policies,'' Treasury concluded that no major
trading partner of the United States met the technical
requirements to be designated under terms of the Act. But in
submitting the report, Secretary Snow explained that the Bush
Administration believes that the international trading system
works best with free trade, the free flow of capital and
market-based exchange rates among the major economies. An
efficient system of trade and finance, with fair and enforced
rules, is essential for all nations, including the United
States, to realize the greatest benefits from trade and to
generate the highest levels of economic growth.
This view was affirmed, in the context of the G-7 ``Agenda
for Growth,'' in the Dubai communique statement on exchange
rates: ``We reaffirm that exchange rates should reflect
economic fundamentals. We continue to monitor exchange markets
closely and cooperate as appropriate. In this context, we
emphasize that more flexibility in exchange rates is desirable
for major countries or economic areas to promote smooth and
widespread adjustments in the international financial system
based on market mechanisms.''
Q.2. In Fortune, from Sunday October 26, 2003, Warren Buffett
said, ``But as head of Berkshire Hathaway, I am in charge of
investing its money in ways tha t make sense. And my reason for
finally putting my money where my mouth has been so long
(investments in foreign currencies) is that our trade deficit
has greatly worsened, to the point that our country's ``net
worth,'' so to speak, is now being transferred abroad at an
alarming rate.''
Mr. Secretary if Warren Buffett is worried, why aren't you?
A.2. The October 2003 Report to Congress on International
Economic and Exchange Rate Policies described how developments
in the overall trade or current account balance reflect
developments in national investment and saving. The current
account deficit is conceptually equal to the gap between
investment and saving. When investment in the United States is
higher than domestic saving, then foreigners make up the
difference, and the United States has a current account
deficit. In contrast, if saving were to exceed investment, then
the United States would have a current account surplus.
In recent years, foreign interest in investing in the
United States has permitted the United States to invest more
than it otherwise would have been possible. Investment in the
United States creates ``net worth.'' This additional U.S.
investment allows business to pay better wages, and earn higher
profits even after paying foreigners an appropriate return on
their investment.
Q.3. The U.S. automotive sector believes Japan is manipulating
its currency to maintain an unfair trade advantage. The
industry believes the Japanese may be violating Article IV of
the IMF Charter and Section 3 of the 1988 Omnibus Trade Act.
Do you agree with them?
A.3. The Department of the Treasury, in carrying out its
responsibilities under the Omnibus Trade and Competitiveness
Act of 1988 (the Act), analyzes the foreign exchange policies
of foreign countries, in consultation with the International
Monetary Fund, and considers whether countries manipulate the
rate of exchange between their currency and the dollar for
purposes of preventing effective balance of payments
adjustments or gaining unfair competitive advantage in
international trade. In its most recent report, Treasury
concluded, on careful examination, that Japan did not meet the
technical requirements to be designated under terms of the Act.
IMF management and staff concur with our assessment regarding
Japan.
Over the last 3 years, the yen has fluctuated in a range of
135 to 108 yen per dollar. The market for yen financial assets
is very large and deep and Japan has no restrictions on capital
flows that would limit pressure on its currency. Although
Japan's intervention may have slowed the pace of yen
appreciation, the yen has still strengthened materially over
the last year. The yen has risen close to 10 percent against
the dollar since the beginning of this year and over 20 percent
since the beginning of 2002.
This year, Japan has increased its money supply sharply to
overcome deflation. Japan has also taken more vigorous steps to
address its banking sector problems in an effort to provide a
foundation for domestic, demand-led growth. In these
circumstances, Japanese authorities were concerned that a
strong and rapid appreciation of the yen would be inconsistent
with Japan's underlying economic fundamentals and would
jeopardize a fragile recovery.
Even though we concluded that Japan did technical
requirements to be designated Act, we have made clear to the
Japanese they should allow market forces to play exchange rate
determination.
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