STATEMENT

OF

WILLIAM PRIMOSCH

DIRECTOR, INTERNATIONAL BUSINESS POLICY

THE NATIONAL ASSOCIATION OF MANUFACTURERS

 ON BEHALF OF THE NATIONAL ASSOCIATION OF MANUFACTURERS

BEFORE THE

U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION

ON

CHINA AND THE WTO: COMPLIANCE AND MONITORING

FEBRUARY 5, 2004

Hearing Co-Chairs and Members of the Commission,

Thank you for giving the National Association of Manufacturers (NAM) the opportunity to testify on China’s WTO compliance and U.S. government monitoring efforts.

The NAM represents 14,000 manufacturing companies, both large corporations that do business around the world and over 10,000 small and medium-size firms, including many successful exporters and others which concentrate on the domestic market.   For large and small companies, the future of U.S. trade with China is of great commercial importance.  And we hear almost daily from companies that are affected by that trade, either to express concern about Chinese trade and currency practices or interest in expanding their business there.

With an economy growing 8 percent a year and a rapidly expanding industrial base, China has emerged within a short span of two decades as an important competitor of U.S. manufacturers and a key emerging market for U.S. manufactured goods exports.  In 2003 China exported $438 billion in goods, mainly manufactured products, making China the world’s fourth largest exporter.  At the same time, high rates of business and government investment and rising personal incomes have fueled a strong demand for western products and services for which the United States is highly competitive.  China imported products valued at $413 billion in 2003. an increase of 40 percent over 2002. 

While China ran a relatively small trade surplus with the world, the trade imbalance with the United States was highly skewed in China’s favor.  Chinese exports to the U.S. in 2003 were valued at approximately $150 billion and imports, approximately $27 billion (U.S. Department of Commerce data).  As China produces most of its manufactured exports from parts and components made elsewhere in Asia (e.g., Japan, South Korea and Taiwan), these economies also benefited substantially from the large U.S.-China trade imbalance.

The NAM does not insist on balancing trade between countries.  But in China’s case, we believe that a substantial part of the trade imbalance results from unfair trade and currency practices that give Chinese exports an advantage in the U.S. and foreign markets and artificially limit China’s import of U.S.-made products and services.  That is why China’s entry in the World Trade Organization (WTO) in December 2001 was so important for U.S. manufacturers.  It provides an important tool for ensuring a level international playing field with China on trade. 

In its WTO accession agreement, China committed to open its internal market further to U.S. and other foreign products and services.  It has also agreed to bring its trade and business practices in line with WTO rules and agreements.  Both htmects are important for U.S. manufacturers.   The NAM supported China’s membership in the WTO and Permanent Normal Trade Relations (PNTR) status with the understanding that the U.S. government would press China to adhere to its WTO commitments and become a responsible participant in the international trading system.

Overall Assessment on Compliance

As China begins its third year as a WTO member, the NAM has serious concerns about Chinese compliance with both the letter and spirit of its WTO obligations.  China has apparently made good on its commitments to reduce tariffs according to the agreed schedules.  It has also published new regulations and laws required by its membership agreement.  Implementation of these measures, however, has been spotty and often ineffective.  U.S. manufacturers continue to encounter a variety of market access barriers that limit their ability to export and do business in China notwithstanding steps taken by the authorities to implement market-opening commitments.   At the same, U.S. producers focused on our domestic market express concern about Chinese trade and currency practices that tilt the playing field in China’s favor and appear to violate WTO obligations. 

These trade problems and the rising trade deficit with China come at a time when U.S.  manufacturers have yet to recover from a 3-year long economic slowdown and remain concerned about their longer-term prospects.  Since July 2000 the manufacturing sector has lost nearly 3 million jobs, and some industry segments continue to reduce employment levels in the face of weak demand.

NAM members recognize that China is still in transition to a market economy and in the process of phasing in certain WTO market-opening commitments.  However, because China has quickly become such an important global importer and exporter, it is vital for American businesses, workers and farmers that the U.S. government ensures China complies fully with all its WTO obligations and that it takes effective action when China fails to do so.    

Specific Issues of Concern

NAM member companies and associated organizations have identified a variety of Chinese policies and practices that either provide Chinese exporters with unfair trade advantages or create significant barriers that hinder market access for U.S. products.  China’s undervalued currency and large-scale product counterfeiting are the two most frequently cited problems in our bilateral trade.   The following section provides more details on individual issues of concern.

--Currency Manipulation 

The NAM has received the greatest number of complaints about China’s deliberate policy of undervaluing its currency, which gives Chinese products unfair competitive advantage over U.S.-made products.  Economists have estimated that China’s currency could be undervalued by 40 percent or more.  The Chinese yuan has remained pegged to the dollar at an exchange rate of 8.28 for the past nine years despite an extended period of robust economic growth, continuing trade surpluses and a large build-up in foreign exchange reserves, which now total $403 billion--$117 billion more than a year ago.  This level of foreign exchange reserves is, according to IMF analysis, far in excess of what would be required to cushion China’s balance of payments from normal fluctuations in trade and investment flows.

Pegging the yuan to the dollar appears to be part of a deliberate strategy to limit import competition and boost exports, particularly of manufactured goods.  This kind of currency undervaluation for commercial gain goes against the intent of the General Agreement on Tariffs and Trade (GATT), which seeks to remove trade barriers and allow markets to determine trade flows.  Article IV of the GATT states that “Contracting Parties shall not, by exchange action, frustrate the intent of the provisions of this Agreement…”  China’s undervalued currency acts as an additional trade barrier to U.S. exports and an unfair subsidy for all Chinese exports. 

The NAM believes that Chinese exchange rate policies are not in accord with WTO obligations and in violation of Section 301 of the Trade Act of 1974.  On Jan. 29 the NAM announced that it was supporting a decision of the Fair Currency Alliance, a group of associations and unions representing manufacturing, agriculture and labor, to develop a Section 301complaint against China for currency manipulation.  We believe that China should have a flexible exchange rate determined by the market and not government intervention.  As a first step, we urge, as Treasury Secretary John Snow has suggested, that China revalue the yuan to some level that more closely reflects its true exchange rate. 

The NAM appreciates efforts by the Bush Administration, particularly Secretary Snow, to raise the importance of market-based exchange rates with Chinese leaders and obtain unprecedented support from other finance ministers in the G-7 and APEC.   We are confident that a more flexible market-based exchange rate would result in a significant appreciation of the yuan against the dollar and help to level the playing field with Chinese producers both here at home and in the global marketplace.  We strongly urge the Administration to continue pressing the Chinese government to break the current yuan-dollar peg and allow the yuan to move up to its true market value.  China’s undervaluation of the yuan is distorting trade not only with the United States but with other countries as well.   As President Bush said recently in commenting on U.S.-China trade, the Chinese “have got to deal with their currency.”  We agree.

--Counterfeiting and Ineffective Enforcement of IPR Protection  

The counterfeiting of U.S.-branded products and other violations of intellectual property rights are serious and growing problems in China.  While Chinese laws on intellectual property rights (IPR) have improved considerably, the lack of consistent and effective enforcement by local governments has severely limited the ability of U.S. companies to protect their intellectual property rights.

Violations of trademarks through product counterfeiting is rampant and on a massive scale.  The violations involve a wide range of manufactured products, including consumer hygiene and health care products, athletic footwear, pharmaceuticals, food and beverages, motorized vehicles and vehicle parts, and even entire automobiles.  Pharmaceutical counterfeiting is now, according to U.S. industry representatives, a serious public health concern in China.  We believe that the lack of criminal penalties for counterfeiting, including jailing, prevents effective enforcement of trademark and labeling violations.

We are also concerned about reports that local government authorities are aware of counterfeit production and taking no action to halt it.  There appears to be no mechanism for the national government to force local governments to stop counterfeiting by local industry or prevent them from aiding and abetting such activity. 

The failure of Chinese customs officials to block counterfeit product exports is a problem as well.  An NAM member company reported that the Chinese customs service refused to cooperate in preventing the export of counterfeit products even when solid evidence of counterfeiting was provided.  Chinese officials claimed that, since the “exporting” of counterfeit products did not constitute a “sale” of the products, the relevant Chinese law did not apply.

Other IPR violations are also common.  They include: unauthorized duplication of computer software, music and films; copying of designs; unauthorized use of patented technology; and unauthorized use of U.S. product certification and testing logos.  The makers of air conditioning and refrigeration equipment note that the ARI (Air-Conditioning and Refrigeration Institute) certification symbol was being used without authorization by a Chinese company.  Other U.S. safety and testing marks are also being inappropriately used.  Efforts to have the Chinese government stop this unauthorized use have proven ineffective.

The pharmaceutical industry does, however, also report improvements in intellectual property protection, notably by the promulgation of a new regulation on data exclusivity for clinical trials, as required in TRIPS and committed in China’s accession package.

The NAM welcomes increased efforts by the U.S. Trade Representative’s Office and the U.S. Embassy in Beijing to bring greater attention to the counterfeiting problem and encourage more effective action by the Chinese government.    For example, the U.S. Embassy in Beijing organized a highly productive meeting of business representatives and Chinese officials on Nov. 18, 2003, to discuss counterfeiting issues.  U.S. Deputy Trade Representative Josette Shiner and China Vice Premier Wu Yi attended the meeting and helped to underscore the seriousness of the problem.  Ambassador Shiner and her staff have also actively engaged in a dialogue with affected companies to identify possible solutions, including changes in Chinese law that would permit criminal penalties and confiscation of counterfeiting equipment.  We believe that the latter measures in particular are needed if IPR enforcement is to have a meaningful deterrent effect.

--Subsidized Exports  

We continue to receive reports from different industries (e.g., tool-and-die, metal forming, steel and chlorinated isocyanurates) that suggest Chinese producers are receiving direct or indirect subsidies that give them unfair competitive advantages.   Companies report that Chinese products are being sold in the United States at prices so low that they could not even cover the cost of raw materials and shipping much less full production and marketing costs.  A tool-and-dye company, for example, stated that a Chinese competitor was selling a product similar to one made in the United States for $40,000, compared to the U.S. producer’s price of $100,000.  The U.S. company maintains that the cost of the raw materials alone would amount to $40,000, not including shipping, duties and other costs.  A U.S. producer of chlorinated isocyanurates, which is used as a cleaning agent in swimming pools, reports a similar situation.  As a result of pricing which appears to be below cost, Chinese exports of this product increased by an estimated 400 percent in 2003 over 2002 levels.  

These reports indicate the possibility of widespread use of subsidies, either direct or indirect, to help Chinese exporters gain unfair competitive advantage in the U.S. market.  They merit further investigation by USTR and the Department of Commerce.  One source of indirect subsidy is continued lending by Chinese banks to money-losing or insolvent Chinese manufacturers, often state-owned or state-controlled enterprises.  Since the Chinese banks providing these loans are either state-owned or state-controlled, the Chinese government bears responsibility for their lending practices.  U.S. steel producers note that the Chinese steel industry is the largest recipient of interest-rate subsidies authorized by the national government.  Since many of the companies that benefit from either directed bank lending or subsidized interest rates are engaged in international trade, they have an unfair competitive advantage vis-à-vis U.S. based companies, which must rely on private financing at market rates.

--Manipulation of VAT Taxes   

We have reports that China is manipulating the application of taxes, notably the Value-Added Tax (VAT), to both restrict imports and indirectly subsidize exports.  U.S. producers of semiconductors continue to experience discrimination in the Chinese application of the VAT on imported and domestically produced semiconductors.  China levies a 17 percent VAT on imported integrated circuits.  Domestically designed and produced integrated circuits are taxed at VAT rates ranging from 3-6 percent.  Integrated circuits produced in China but designed abroad are taxed at 11 percent.  This discriminatory treatment of domestic and foreign “like” products violates Article 3 of the GATT.  Despite repeated protests by U.S. industry and the U.S. government, this issue remains unresolved.

The scrap recycling industry reports a different kind of problem relating to VAT administration in China.  Industry representatives have told us that Chinese users of imported copper and other scrap metals are deliberately undervaluing their invoices to pay less VAT on the imported metal.  When the finished metal products are exported, however, Chinese producers claim a rebate of the VAT based on the metals’ real import price.  This results in a substantial subsidy for the exported product that translates into lower prices in the U.S. market.  It also enables Chinese scrap metal users to pay higher prices for scrap metal than their U.S. competitors.  Chinese customs and tax authorities have not taken action to investigate these practices.   Because China is the world’s largest importer of scrap metals and its purchases have a major impact on U.S. and international scrap metal prices (notably copper and steel scrap), its trade practices merit close scrutiny to ensure that they are consistent with international trade rules and accepted practices.

Effective Jan. 1, 2004, China reduced by 3 percentage points the average VAT rebate on a variety of industrial and consumer goods exports.  This is a step in the right direction toward leveling the playing field for U.S. manufacturers.  However, even the new VAT rates leave many categories of manufactured goods eligible for rebates of 13-17 percent of their value.  Since VAT rebates can be easily abused to provide indirect export subsidies, China should be encouraged to consider even further reductions. 

--Inappropriate Standards and Concerns about CCC Mark System

Several NAM members have raised concerns about China’s application of technical standards and the CCC Mark system.   One problem relates to China’s definition of “international standards” in the internal market.  China is requiring that certain products (e.g., electrical products) be manufactured only to “international standards” as determined in the Organization for International Standardization (ISO) or International Electrotechnical Commission (IEC).  Other “international standards,” notably those developed in the United States and widely used in the global marketplace, are not allowed.  This does not conform with the interpretation of the WTO Technical Barriers to Trade (TBT) Committee that “international standards” need not be limited to ISO or IEC standards.

A second problem relates to a Chinese requirement for special national technical standards that do not conform to accepted international standards.  Recently, Chinese regulatory authorities announced a standard for wireless local area networks (WAPI) that contain unique encryption elements available only to Chinese companies.  Thus, the only way U.S. wireless equipment manufacturers can gain access to the encryption is through co-production of the equipment with a Chinese manufacturer.  This would require the affected U.S. companies to provide free access to their intellectual property and design specifications.  Under the WTO TBT Agreement, China is required to use international standards whenever they are already established.  The requirement for special national WAPI encryption elements, therefore, would appear to violate the TBT Agreement.  Given the potential commercial importance for U.S. manufacturers of this emerging technology, we strongly urge the U.S. government to give a high priority to resolving differences with China over the WAPI standard.

A third set of standards concerns relates to the CCC mark system.  China introduced the CCC mark system to comply with WTO requirements for a single mark for like domestic and imported products.  It is, in that sense, a step forward on standards and mark requirements.  However, the inconsistent, non-transparent and inflexible application of the CCC Mark on a variety of products (e.g., electrical products, air conditioning and refrigeration equipment) has created market access barriers and needlessly raised the cost of importing products into China. 

Generic problems relating to the CCC mark include:  the high cost of having Chinese inspectors audit factories in the United States and other foreign countries on compliance with the standards; continued delays in allowing U.S. testing and certifying bodies to certify compliance for the CCC mark; and lengthy delays and relatively high cost of obtaining testing and certification for the CCC mark in China.

--Restrictions on Import/Export Rights of Joint Ventures 

China is not fulfilling its commitment to allow foreign joint ventures to import and sell products (e.g., tires, automobiles, auto parts and industrial equipment) in China, which was to have gone into effect on Dec. 10, 2002.  In a related matter, a major tire company reports that the Chinese government has still not issued the 2004 regulations on import quotas and import licensing for tires and natural rubber that were due to be published on Jan. 1, 2004.  As a result no tires or natural rubber could be imported into China during the month of January.

--Unjustified Labeling Requirements  

In 2002 the Chinese Ministry of Health promulgated a new regulation mandating the labeling of all genetically modified (GM) food products.  While the implementation of the regulation was subsequently suspended indefinitely, the fact that it remains on the books is already having significant adverse economic effects and creating barriers to trade.  Some producers have ceased shipping these products in anticipation of the regulation going into effect. 

U.S. food producers have questioned whether the Health Ministry’s action was in conformity with China’s WTO obligations.  The ministry did not provide a justification for the labeling requirement based on an assessment of health risks, which is a requirement of the WTO Agreement on Sanitary and Phytosanitary Measures.  The WTO TBT Agreement also suggests that China is giving inadequate attention to the treatment of “like products,” the question of whether the labeling requirement addresses a “legitimate objective” and the requirement to base technical regulations on “performance” rather than “design” characteristics.

--Lack of Transparency in Trade Regulatory Process

Many companies complain about the lack of transparency in the trade regulatory process and the difficulty in obtaining current laws and regulations governing trade and business operations.  This is a continuing problem that affects all U.S. exporters and companies doing business in China.  The U.S. government should press for concrete steps that improve transparency at all levels and seek continual progress.

Assessment of U.S. Government Monitoring of Compliance

Given the limited resources available, U.S. agencies, notably the Commerce Department, Office of the U.S. Trade Representative and State Department through diplomatic missions in China, are doing a good job of monitoring China’s WTO compliance.  The NAM has noted with satisfaction the increased efforts undertaken by all three agencies in 2003 to identify compliance concerns and maintain an open dialogue with business on seeking solutions.  We were pleased to see that senior U.S. officials, including Ambassadors Zoellick and Shiner, Commerce Secretary Evans and Commerce Undersecretary Aldonas, have raised WTO compliance concerns with their Chinese counterparts during the past several months.  Treasury Secretary Snow’s meeting with senior Chinese officials on the undervalued yuan, an issue the NAM believes also falls under WTO compliance, was particularly helpful in raising the profile of this issue.  It is vital that the Chinese government understand the importance of full WTO compliance, and regular discussions at senior government levels serve to reinforce that point.

However, given the high level of U.S.-China trade (nearly $180 billion in 2003) and the current growth rate of 20-25 percent annually, U.S. government resources are still not adequate to ensure effective monitoring and enforcement of WTO compliance.   USTR, Commerce and U.S. diplomatic missions in China require larger and more technically qualified staffs to perform these functions.  More specialized technical expertise is particularly important for addressing legal issues involving counterfeiting and intellectual property protection, technical standards and regulations that impede trade, and direct and indirect subsidies to industry that provide unfair advantages.  U.S. agencies have established a good foundation to strengthen their monitoring efforts, but clearly more needs to be done to ensure full Chinese compliance with their WTO obligation. 

The NAM supports the additional programs and funding for monitoring and enforcing China’s WTO compliance that are contained in the Department of Commerce and Related Agencies section of the recently passed Omnibus Appropriations bill.  In particular, we welcome:

--Funding for 8 additional positions at USTR dedicated to issues relating to China’s WTO compliance;

--The requested Commerce Department study, to be carried out in consultation with the U.S.-China Economic and Security Review Commission, on such important issues as China’s industrial policies, exports from state enterprises, means of IPR compensation, professional service outsourcing and the relocation of supply chains in China;

--Authorization of 6 positions in China to support the American Trade Centers Initiative; and

--Establishment of an Office of China Compliance in the Commerce Department’s International Trade Administration.

We believe these initiatives will help improve monitoring and enforcement of China’s WTO compliance and enhance the ability of U.S. business to take better advantage of a more open Chinese market.   And we are grateful to Representative Frank Wolf for recognizing their importance and working so hard to include them in the legislation.  

Conclusion

For many U.S. manufacturers, China is rapidly emerging as their most important competitor both at home and abroad.  They look to the enforcement of China’s WTO obligations as an essential tool for leveling the international playing field.  The NAM, therefore, very much appreciates the Commission’s work on WTO issues and wants to cooperate with Commission members and staff and others in the Administration and Congress to make China’s WTO compliance as effective as possible.