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.
