The United States needs to both engage and pressure China. We must engage with China because the country is too important to ignore and we are better off if China is a part of the international system than if it is isolated. We must pressure China because our values demand that we help China to move in a positive direction and to prepare for a future based upon the rule of law, open markets, and respect for human rights. It continues to be vital that we carefully monitor and actively shape our relationship with China.

During the PNTR debate, it was often necessary to remind people to look at China not only as a potential market, but also as a competitor. And China’s accession to the WTO helped address both of those facets of the relationship — China agreed to open its markets to U.S. goods and services and at the same time it agreed to be bound by a thorough set of rules establishing acceptable terms of competition with the rest of the world.

I have taken an active interest in ensuring that China plays by the rules — that it complies with its WTO commitments and that U.S. manufacturers and producers have a fair shake in China. Over the past several months I have become increasingly concerned that China is not complying with its WTO commitments and is in fact trying to give itself an unfair advantage.

A number of the concerns in our economic relationship with China relate to China’s industrial and investment policy. Yesterday I had a chance to speak on China’s WTO compliance at some length. I am attaching a copy of that testimony. To briefly summarize the points in these comments:

China has moved toward compliance in some important respects, but in others, there is non-compliance and bending of the rules in support of what is essentially a mercantilist industrial policy to the detriment of U.S. workers, farmers, and businesses. It is necessary for America to adopt a more active approach.

It is remarkable that in the face of China’s non-compliance, the Bush Administration has refused to use all of the tools that the U.S. bargained for. As part of the China PNTR deal, we included a special safeguard so that U.S. industries would not be injured by surges of imports from China. But, the Bush Administration has denied relief to two U.S. industries which the independent ITC found to be injured by Chinese imports.

The China PNTR bill also called for a special annual review in the WTO of China’s commitments. The reason for this provision is that, unlike the normal WTO accession process, China was allowed to join before it had made the changes to its laws necessary to be in compliance with its WTO obligations. This fact, and the clear importance of China’s economy, required an intensive review of China’s WTO implementation. China has blocked effective use of this specially-negotiated review, refusing to provide written (and sometimes any) answers to questions or giving vague and evasive answers. The Bush Administration has essentially acted as if resigned to continuing uncooperativeness by China. The USTR has also failed to demonstrate any inclination to bring cases in the WTO against clear violations by China.

This essentially passive approach has characterized the Administration’s handling of the currency issue. Currency manipulation has characterized our relationship with Japan for years. The U.S. Government never took any concrete action to address this problem. The failure to address this problem had and continues to have a negative impact on the United States, limiting access of U.S. goods to Japan. It also had and continues to have a negative impact on Japan. Japan has maintained a protected domestic market too long, and has used export-led growth as a substitute for necessary domestic reforms.

China’s undervalued currency now also poses a major problem. The China and Japan situations are not identical — China maintains a peg, while Japan actively intervenes to manipulate the level of its currency. However, many economists agree that the outcome is the same — undervalued currencies hurt U.S. exports and advantage Chinese and Japanese imports.

Just as we need to actively utilize all the tools available to engage and pressure China in other areas, we need to actively consider what action to take in response to China’s undervalued currency. And, we must act responsibly; this is an admittedly complicated issue.

Article XV, paragraph 4 of the GATT — the original WTO agreement — prohibits WTO members from using "exchange action" to "frustrate the intent of the [GATT] provisions." To my knowledge, Article XV has never been used. The obligation has been in trade rules since the inception of the multilateral system in 1947 in recognition of the importance that exchange rates have on trade.

The Administration’s current approach of "jaw-boning" has demonstrably failed. Secretary Snow’s trip to China yielded only a re-statement of China’s policy that calls for an exchange rate determined by market forces as an ultimate goal without any timetable, and with an attitude by the Chinese government that makes it unclear when, if ever, this might occur. Worse, he did not even mention currency when he visited Japan.

As a prelude to utilization of Article XV, paragraph 4, USTR has the power to self-initiate a "Section 301" investigation into the "exchange action" by China and Japan. A Section 301 investigation would provide an opportunity for a thorough examination of the issues, positions, and options. If the USTR self-initiated a Section 301 investigation, it would demonstrate the Administration’s commitment to take this issue seriously — an issue so important to America’s manufacturers, farmers, and workers.

If there are other reasonable approaches, they should also be considered. One way or another, we need to get serious and start taking concrete actions that yield results to address imbalances in our trade relationships.

These problems in our trade relationship with China demonstrate vividly the importance of expanded trade and the importance of vigorous efforts by Congress and the Administration to shape the terms of expansion. Thank you.