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U.S.-China Ties: Reassessing the Economic Relationship


Testimony of Thea M. Lee
October 21, 2003


Testimony of Thea M. Lee, Assistant Director of Public Policy, AFL-CIO, on
Before the U.S. House of Representatives Committee on International Relations

Mr. Chairman, Members of the Committee, I thank you for the opportunity to
testify today on the U.S.-China economic relationship on behalf of the
thirteen million working men and women of the AFL-CIO. As you know,
addressing the problems in the U.S. economic relationship with China is of
enormous importance to our members.

The U.S. bilateral trade deficit with China hit $103 billion last year, up
almost 25 percent since China was granted Permanent Normal Trade Relations
status in 2000. The U.S. deficit with China is up another 22 percent in
the first eight months of this year compared to the same period last year.
Our imports from China continue to outstrip our exports by more than five
to one, making this by far our most imbalanced trade relationship with any
major trading partner. Meanwhile, the United States has lost more than 2.5
million manufacturing jobs since March 2001.

While many factors contributed to this devastating job loss, it is clear
that the Chinese government’s manipulation of its currency, violation of
international trade rules, and egregious repression of its citizens’
fundamental democratic and human rights are key contributors to an unfair
competitive advantage. The Chinese government is flouting its
international obligations, and the U.S. government must act urgently to
hold it accountable.

Unfortunately, to date, the U.S. government has failed to act effectively
to stem the job losses resulting from the burgeoning U.S. trade deficit
with China. The Bush Administration has refused to take concrete steps to
ensure that the Chinese government live up to its international
obligations on trade, currency manipulation and human rights, has denied
American businesses and workers import relief they are entitled to under
the law, and has taken positions at the World Trade Organization (WTO)
that will only worsen our trade relationship with China. As John Sweeney,
president of the AFL-CIO, said in a press statement released yesterday,
“Despite this crisis at home and abroad, the Administration has been
alarmingly slow to respond, and their efforts to date appear to be little
more than fig leafs.”

Violations of WTO Rules Continue

China became a member of the World Trade Organization (WTO) in 2001, and
since then China has repeatedly and consistently failed to comply with WTO
rules. The Bush Administration, rather than take advantage of the WTO’s
formal dispute settlement mechanism to address these violations, has
preferred to rely on prolonged discussions and informal consultations in
its failed attempts to guarantee China’s compliance. Access to China’s
markets has actually gotten worse for some products like meat and poultry,
and China has used a host of new rules and tariff-rate quotas to block
access for a variety of products including soybeans, wheat, and cotton.

China has taken few meaningful steps to protect intellectual property;
piracy rates are still as high as 90 percent or more, and problems with
piracy of textile designs and trademark infringement continue to grow.
China has reneged on its commitment to allow certain high technology
products into China tariff-free, continues to use unpredictable customs
valuations procedures that do not assess tariffs based on the stated value
of a product, and imposes value-added taxes on certain imports. But the
U.S. has yet to launch one formal WTO complaint against China for all of
these violations. China, on the other hand, has joined in the WTO
challenge to the U.S. steel safeguard and has increased its use of
anti-dumping actions against the United States.

The Bush Administration has also failed to make the transitional review
mechanism (TRM)—established in China’s accession agreement—an effective
means of monitoring China’s compliance with its WTO commitments. The WTO
committees that were supposed to review China’s compliance last year were
not even able to outline the areas where China was violating WTO rules,
and did nothing more than submit the minutes of previous meetings as their
final TRM report. China insisted that the TRM take place in a single
meeting, and refused even to give written responses to some questions.
According to the GAO, part of the reason for the failure of the TRM was a
lack of preparation among U.S. officials.

Failure to Act on Currency Manipulation
China has kept its currency—the yuan—pegged to the dollar at the same rate
since 1994, and it is estimated to be undervalued by as much as 40
percent. This gives China an enormous competitive advantage in the U.S.
market and creates an inherently unstable and unsustainable situation.

WTO rules clearly prohibit currency manipulation to gain trade advantages
inconsistent with GATT provisions. Article XV of GATT 1994, for example,
provides that “Contracting parties shall not, by exchange action,
frustrate the intent of provisions of this agreement” (emphasis added).
Currency manipulation nullifies tariff concessions made through WTO
processes and amounts to a de facto illegal subsidy of Chinese exports.
Deliberate undervaluation of the yuan vis-à-vis the U.S. dollar also
violates the principle of most-favored-nation treatment, as it targets one
country’s currency, adversely impacting that country’s trade. Certainly,
the enormous bilateral U.S. trade deficit with China relative to other
countries is evidence of the uneven impact of China’s currency policies on
its trading partners. China’s choice to artificially bolster its own
manufacturing sector at the expense of the United States (and other
countries indirectly) is therefore a violation of its obligations under
the WTO.

As American University economist Robert Blecker wrote in a recent Economic
Policy Institute briefing paper, “ [T]he sheer magnitude of the reserves
accumulated by these East Asian countries, and the rapidity with which
these reserves have increased in recent years, is prima facie evidence of
efforts to keep their currencies undervalued and prevent their currencies
from appreciating to exchange rates that would be conducive to more
balanced trade relations with the United States. This is outright currency
manipulation of a mercantilist nature, intended to maintain those
countries’ trade surpluses with the United States, which by 2002 accounted
for about 40% of the overall U.S. trade deficit” (“The Benefits of a Lower
Dollar: How the high dollar has hurt U.S. manufacturing producers and why
the dollar still needs to fall further,” EPI Briefing Paper, May 2003).

Professor Blecker estimates that the overvalued dollar (relative to all
currencies) has resulted in about 740,000 lost jobs since 1995, as well as
a loss of nearly $100 billion in annual profits and $40 billion in annual
investment over the same period. Blecker does not break out the impact of
the dollar-yuan relationship specifically.

The Chinese government must allow the yuan to reflect underlying economic
and market forces. It must end the current peg and cease its accumulation
of U.S. dollar reserves. While the Chinese government’s reluctance to take
this action is perhaps understandable, the Bush Administration’s failure
to act more forcefully in this regard is not.

We call on the Administration to use all tools at its disposal, including
initiating a WTO case, to send a clear message to the Chinese government
that the current situation is unacceptable and will not be tolerated. We
applaud efforts in Congress to force concrete action on this issue, as it
is now clear that simple diplomacy and jawboning have utterly failed.

Inaction in the Face of Violations of Workers’ and Human Rights
In addition to the unfair competitive advantage gained through currency
manipulation, the Chinese government’s systematic repression of
fundamental workers’ rights is a key contributor to the unfair advantage
Chinese exports enjoy in the U.S. market. Chinese workers’ most basic
rights are routinely repressed, and they do not enjoy the political
freedom to criticize, let alone change, their government.

The Congressional-Executive Commission on China released its 2003 annual
report a few weeks ago. The Commission concluded that: “Chinese citizens
are detained and imprisoned for peacefully exercising their rights to
freedom of expression, association, and belief. . . . Chinese workers
cannot form or join independent trade unions, and workers who seek redress
for wrongs committed by their employers often face harassment and criminal
charges. Moreover, child labor continues to be a problem in some sectors
of the economy, and forced labor by prisoners is common.” In addition, the
Commission found that people seeking to practice their faith were subject
to harassment and repression, while freedom of speech and freedom of the
press were denied.

Enforcement of wages, hours, and health and safety rules is lax or
non-existent in many areas of the country. These abuses allow producers in
China to operate in an environment free of independent unions, to pay
illegally low wages, and to profit from the widespread violation of
workers’ basic human rights. Together, these policies amount to a
deliberate and artificial suppression of wages by the Chinese government.
This exploitation impacts American workers, as well as those in other
developing countries, and artificially lowers the price of Chinese exports
in the U.S. market.

During 2001 and 2002, the number of labor disputes and protests in China
rose significantly. In response, the Chinese government jailed a number of
workers for demonstrating for their rights and cracked down on any
organization that might support the beginnings of an independent trade
union. The official labor union—the All China Federation of Trade Unions
(ACFTU), which is subordinate to the Communist Party—continued to
discourage strikes and work stoppages, and to negotiate sweetheart deals
with employers.

In the face of these grave problems, the Bush Administration chose not
even to raise the case of China before the UN Human Rights Commission in
April of 2003, despite the United States’ regular practice of doing so
previously. In addition, President Bush did not demand any specific
improvements in human rights when he met with China’s President Hu in the
summer of 2003. Instead, the Bush Administration has only engaged in
“cooperative dialogue,” a strategy that has not worked. Since deciding to
pursue a dialogue instead of UN action or public pressure, Administration
officials have noted “backsliding” and a “deterioration in human rights”
in the country during 2003, including arrests of democracy activists,
harsh sentences for labor organizers, and the suppression of independent
media, church groups, and Tibetans.

A recent Wall Street Journal article reported that the Chinese government
has cracked down on free speech and political dissent, closing four Web
sites and clamping down on foreign funding and organizations (Kathy Chen,
“China Curbs Growing Debate over Politics,” Wall Street Journal, September
24, 2003). The government issued a document warning against “hostile
forces,” urging increased vigilance against Chinese organizations’ use of
foreign funding or cooperation with foreign experts and organizations. In
August, the Chinese government attempted to halt debate on three topics,
now labeled “not allowed”: political reform, constitutional amendments,
and the reassessment of historical incidents (presumably referring to the
1989 crackdown on protesters in Tiananmen Square).

The Administration’s failure to take concrete actions on human rights and
workers’ rights in China allows rampant violations to continue. Workers in
China, the United States, and around the world pay the price for this
inaction, while companies producing in China enjoy the profits.

In addition to inaction on China’s currency manipulation and workers’
rights violations, the Bush Administration has failed to enforce U.S.
trade laws effectively with respect to China, denying American businesses
and workers the trade relief they are entitled to under the law.

Refusal to Implement China-Specific Safeguard
In August of 2002, Motion Systems Corporation, a New Jersey manufacturer
of pedestal actuators, filed the first petition for relief under a
China-specific safeguard provision included in China’s WTO accession
agreement with the United States. The U.S. International Trade Commission
(ITC) found that China’s increased exports of pedestal actuators to the
U.S. were indeed causing market disruption to domestic producers, and
recommended that quotas be imposed on Chinese imports for three years
under the special safeguard mechanism. Yet President Bush unilaterally
refused to follow the ITC’s recommendations, instead siding with importers
and the Chinese government in concluding that import relief “is not in the
national economic interest of the United States.”

Domestic wire hanger manufacturers filed the second petition under the
special safeguard mechanism in November of 2002. Hanger imports from China
exploded by 800 percent from 1997 to 2002, contributing to cost cutting
and layoffs in the U.S. The ITC found unanimously in favor of the
petitioners, and recommended the imposition of duties on wire hanger
imports from China for two to three years. Despite this recommendation,
President Bush again denied relief, citing many of the arguments made by
importers and the Chinese government in the case.

President Bush’s repeated refusal to act on the ITC’s recommendations left
domestic manufacturers questioning the Administration’s willingness to
ever use the special safeguard mechanism. In both cases, the ITC evaluated
all of the facts from both sides in finding that safeguard action was
called for, and in both cases President Bush made a political decision to
dismiss the findings and deny import relief. After the wire hanger
decision, one commentator remarked that the special safeguard was a “dead
letter.”

Awaiting Action on Textile Import Surges From China
Another special safeguard mechanism created in China’s WTO accession
agreement with the U.S. deals exclusively with textiles. In July of this
year, a group of textile industry associations filed petitions under the
provision, seeking the re-imposition of import quotas on brassieres,
gloves, gowns, and knit fabric from China. In each category, imports from
China have jumped sharply after the elimination of quotas—for example,
dressing gown imports rose 698 percent in the 15 months since quota
elimination, and glove imports jumped 291 percent during the same period.
Yet the Commerce Department has already rejected the industry petition on
gloves, and importers are urging that relief be denied in the other
product categories as well.

Inadequate Protection from Dumping

One provision of our domestic trade law that U.S. companies have been able
to use to secure some limited relief from unfair trade practices by China
is in the area of anti-dumping. But much more could be done. Though the
United States absorbs almost half of all of China’s exports to the world,
we account for only 15 percent of the anti-dumping measures imposed
against China, according to the WTO. In addition, in many cases the duties
imposed under U.S. anti-dumping measures regarding China have been
inadequate to provide real relief to U.S. companies.

Anvil International succeeded in getting the Bush Administration to impose
a 13 percent tariff on Chinese steel pipe nipples that were being dumped
on the U.S. market. But this duty level is far below the 100 to 200
percent dumping margins levied by the Canadian government on the same
product. While Anvil’s operations have started to recover in Canada,
Chinese nipple exports to the U.S. have continued to increase, causing
Anvil to close one of its foundries and lay off 350 American workers.

Ward Manufacturing filed an anti-dumping case on malleable pipe fittings
from China in 2002, securing small dumping margins in the single digits.
Mexico and the European Union, on the other hand, provided dumping margins
on the same products from China of 42 percent and 48 percent,
respectively, to provide relief to their own domestic producers. After the
case was filed, U.S. imports of malleable pipe fittings continued to
increase, and Ward has had to lay off workers as a result. A Ward
executive testifying before Congress on the inadequacy of administrative
action in this case stated, “Our company can either keep 800 Americans
working and possible rehire 300 back to work at wages of $14 an hour plus
health benefits or the same workers can go on state unemployment benefits,
and pursue alternative jobs that pay minimum wage with no health benefits.

All we ask for is the real enforcement of the trade laws passed by
Congress.”

The FMC Corporation’s anti-dumping petition resulted in the imposition of
a 42.8 percent duty on imports of Chinese persulfate in1997. The
Administration began to use a methodology more favorable to Chinese
producers in its 2001 review of the case, and in 2002 the duty was
completely eliminated. The president of FMC charged that the Department of
Commerce “inexplicably ignored clear evidence of fraudulent practices and
failed to properly verify Chinese conduct,” and that the Administration
has reduced the intensity of its oversight of Chinese export practices
since China’s accession to the WTO.

In each of these cases, the Bush Administration had the opportunity to
effectively enforce U.S. trade laws, but chose not to do so, choosing to
side with the importers and the Chinese government, at the expense of
American workers and producers.

Conclusion

Rifts within the business community have contributed to the U.S.
government’s passivity and failure to act to date. Companies that produce
in China for the U.S. market, retailers, and importers clearly benefit
from an undervalued Chinese currency, as well as from the abuse of
workers’ rights. On the other hand, companies actually producing in the
United States – whether for the domestic market or for export – face
debilitating and unsustainable disadvantages from currency manipulation,
illegal subsidies and dumping, and violation of workers’ rights in China.

American policymakers have a choice to make in trade relations with China.
They can side with the importers and outsourcers, and stand by passively
as China takes advantage of its WTO membership and access to the U.S.
market, abusing its own workers and artificially undervaluing its currency
in order to undercut American workers and domestic manufacturers. Or they
can take a stand for American jobs and act now to ensure that China plays
fair in the global economy.

Thank you for your attention and for the invitation to appear here today.
I look forward to your questions.

 

Promoting the Principles of Genuine Free and Fair Trade