Testimony of John W. Douglass
President and Chief Executive Officer
Aerospace Industries Association of America, Inc.

Before the U.S.-China Commission
Public Hearing on Bilateral Trade Policies and Issues between the U.S. and China
"Aerospace, Autos and Small Manufacturing Issues"

August 2, 2001

On behalf of the Aerospace Industries Association, I would like to thank Chairman D'Amato and the U.S.-China Commission for inviting me to testify today. The creation of your Commission attests to the fact that the Congress recognizes that the United States' relationship with China is of prime importance. Similarly, the U.S. aerospace industry considers China a priority as a major current and future market for our commercial aerospace business.

The Aerospace Industries Association, or AIA, represents the nation's major manufacturers of commercial, military and business aircraft, helicopters, aircraft engines, missiles, spacecraft, materiels, and related components and equipment. AIA currently has 68 full members and 120 associate members representing nearly 800,000 highly skilled workers in jobs that pay well above the average for the U.S. workforce. Aerospace technologies and products are also fundamental to maintaining our national security.

Mr. Chairman, let me begin by explaining how important the global marketplace is for our industry. Last year our industry's production totaled $144 billion. Of that, $55 billion, or forty-one percent, was exported. Our industry had a net trade surplus of $28 billion, which is by far the largest of any sector in the U.S. economy.

As impressive as these numbers seem, it is important to note that the 2000 figures for sales, exports, and trade surplus have all declined over the past three years. These downward trends are due to the fact that there has been a significant rise in sales of foreign-built aircraft, and our market share in commercial aircraft has dropped in the past fifteen years from 72 percent to just over 52 percent. The U.S. aerospace industry does not hold the same control over the global marketplace as it once did ñ there are competitors waiting to take over wherever opportunity arises.

Now, let me turn to China. Unlike other U.S. industries, last year the aerospace industry had a $1.7 billion trade surplus with China ñ mostly due to commercial aircraft. This surplus translates roughly to more than 22,000 jobs here in the U.S. As of last month, Chinese airlines operated 548 jet aircraft, 357 of which were made by U.S. manufacturers. Over the next 20 years our manufacturers forecast that China, including Hong Kong and Macau, will need 1,764 jetliners worth about $144 billion. This growth means that China will become the world's second largest market for airplanes over the next two decades (second only to the U.S.).

The rapidly expanding market for civil aircraft is due to two major factors. First, the railway and road infrastructure within China (especially in western China) is woefully underdeveloped. Consequently the demand for air passenger and cargo transportation will become increasingly important as China's economy develops and as it continues to expand its participation in the global economy. China's air cargo industry is currently in its infancy. Therefore, improved airport infrastructure, an open freight forwarder sector, improved service standards, streamlined customs processing, and seamless transfer of cargo between transportation partners will be necessary, and will also require major imports of equipment. These imports will have to include ground radar and air traffic control systems. And similar to benefits of general tourism, increased business from air cargo will spill over into U.S. companies that will fly into and out of China.

Second, China's increased economic and trade liberalization ñ as evidenced by its almost certain entry into the World Trade Organization later this year, its apparent interest in Open Skies agreements, and its eagerness to host the 2008 Summer Olympic Games ñ will translate into increased growth in aircraft purchases for use both within China and in the Asia-Pacific region overall. The number of Chinese willing and able to travel will increase significantly. As international business, economic trade, and tourism flow in and out of China, airline traffic to and from other Asian countries will expand. Furthermore, it is estimated that by 2019 there will be approximately 350 weekly flights between China and North America, helping our domestic airlines increase their business, and in turn prompting the purchase of more aircraft.

Commercial aircraft sales are not the only market opportunities that interest the U.S. aerospace industry. The growing need for communications within China and by China with the rest of the world has spurred the demand for satellites in the region. Just as the lack of ground transportation forces reliance on air transport, the fact that China's ground-based communication network is quite primitive means that it will have to rely heavily on satellite-based systems for telecommunications, Internet and television requirements.

We estimate that China plans to purchase at least $3 billion in communications satellites and related equipment over the next ten years. Although the U.S. government has been very reluctant to allow U.S. companies to sell and launch American-made satellites in China, there is even more potential for future sales and launches as China is brought into the global community with their accession into the WTO.

Let me give you a little bit of background on the satellite jurisdiction issue and the role China has played in our domestic debate over satellites. Before the Challenger shuttle disaster in 1986, the U.S. government had required commercial satellites to be launched by the shuttle. U.S. commercial launch capability consequently atrophied. After the Challenger disaster, President Reagan decreed that the shuttle would no longer carry commercial cargoes. About that time, demand for launch capability greatly increased, partly because of the growth of low earth orbit projects.

To help alleviate the shortage of launch capacity, President Reagan allowed the launch of American satellites on both Russian and Chinese rockets, under strict regulatory control. Presidents Bush and Clinton subsequently transferred commercial satellites from control under the Arms Export Control Act, and hence the jurisdiction of the State Department, to control under the Export Administration Act, and hence the jurisdiction of the Commerce Department. This followed the normal pattern of shifting control of products that had begun as primarily military products, to products widely used in the commercial marketplace, or so called dual-use products.

However, two unsuccessful launches of U.S. satellites on Chinese rockets resulted in subsequent post-launch failure investigations that included U.S. firms. Allegations were made that rocket technology might have been transferred to the Chinese as part of the investigation process. These allegations led to Congress transferring commercial satellite jurisdiction from the Commerce Department back to State by defining satellites as munitions. It should be noted, by the way, that at no time had rocket technology ever left the jurisdiction of the State Department.

I am not privy to the details of the two cases under investigation, nor would it be appropriate to comment on them if I were. However, I would like to express some skepticism over the notion that significant technology transfer can be accomplished in a few meetings or a few pages of comments on an investigation. I can only note that rocket programs involve thousands of scientists, engineers, technicians and workers, and incorporate thousands of individual parts and components. Getting everything to work together is a major challenge. Almost all new American, European, and Russian rocket projects have suffered failures during the first launches, in spite of having work-forces and companies that have far more experience in rocket programs than the Chinese. If engineering fixes and quality control were a simple matter of a few individuals looking at the problem, this would not be the case.

In any case, in 1999 the Congress did transfer satellites back to the munitions list. It seems to me that this has had three negative impacts on U.S. economic and security interests. First, by not focusing on China, but treating all trade in satellites and components as defense transactions, trade with our European allies has been disrupted. In fact, most of the 2,600 new licenses that State must cope with annually affect trade with Europe. Most of these would not have required separate licenses under Commerce rules. Hence companies are trying to cope with a military-oriented licensing system that takes an average of two to three months to review license requests in a commercial world that expects companies to be able to respond to bid requests in a matter of days. In frustration, Europeans design out American components, and we see our industry becoming weaker and theirs becoming stronger. And this dilemma comes at a time when our own military is increasingly dependent on commercial technology and commercial communications networks to meet its own needs.

Second, all defense exports to China have been prohibited under the Tiananmen Square sanctions enacted over a decade ago. As satellites were defined by law as defense items in 1999, a U.S. satellite manufacturer can only conduct business with China with a Presidential waiver. This transfer has also hit our supplier base in other markets. U.S. law with respect to items on the munitions list, including components, requires foreign countries to obtain permission from the U.S. government before transferring a U.S. product, including parts and components, to another country. Thus a European satellite manufacturer using U.S. components must obtain a Presidential waiver to export his satellite to China. Communications satellites are often produced in series, with multiple customers. Rather than take the risk that one of a series might be destined to China and run afoul of U.S. law, it is prudent to simply design out the U.S. supplier. Thus we not only lose the China market, but also the European one as well, and face new competitors even in the U.S. market. The sanction policy aimed at China has a boomerang effect on U.S. industry's ability to operate in many markets, including our own.

Finally, the practice of denying American manufacturers participation in satellite sales and launches in China has not only hurt our aerospace business, but has been directly detrimental to U.S. national security interests. Currently, U.S. law stipulates that the Department of Defense will monitor any launch of a U.S. satellite on a Chinese vehicle. These monitoring requirements also include any future investigations in the event of a launch failure. A bill that has been introduced in Congress to return commercial satellite licensing jurisdiction to the Commerce Department includes the same monitoring requirements.

These monitoring requirements, which were actually first imposed by executive order by the previous administration, assured that there would be no loss of U.S. technology in working with the Chinese. Perhaps equally important, our involvement with Chinese launches provided the U.S. government an extraordinary opportunity to evaluate Chinese rocket technology capabilities. Clearly when the Europeans sell a satellite to China and launch it on a Chinese launcher, we are neither in control of what technology is transferred, nor do we gain the insight as to current Chinese rocket capabilities.

Overall, we believe that as China modernizes its economy and opens its doors to the rest of the world, the requirements for air transport, tourism, air cargo, communications, and overall infrastructure offer an enormous potential market for the U.S. aerospace industry. I would acknowledge to my labor colleagues that it is quite likely that if indeed China is the world's second largest market for new sales over the next decade or two, it will certainly play some role in aerospace production. However, we believe that any arrangements that our companies make to source some product from China will be in the context of facilitating increased sales to China.

I would also like to point out that the bilateral agreement on civil aircraft between the U.S. and China that was agreed upon during negotiations leading up to WTO entry is very beneficial for U.S. industry, and discourage unreasonable demands on us for offsets and technology transfer. Currently, U.S. companies' ability to do business in China is severely limited because the right to import and export is restricted to a small number of companies that receive specific authorization from the central government. That has allowed the government to use aircraft purchases as a means of applying political pressure on the U.S. As part of the WTO agreement, China has agreed that any entity will be able to import civil aircraft and related parts and components into any part of China (this commitment is to be phased-in over three years). In addition, China will permit foreign enterprises to engage in a full range of distribution services - something that was not allowed before the agreement was negotiated.

Other terms of the civil aircraft agreement include elimination of all quotas and licenses, and the removal of local content requirements. The Chinese have also agreed not to condition imports or investments into China with requirements of technology transfer or the providing of offsets.

We believe that it is in China's best interest to abide by these obligations. As I have stated, China requires an enormous influx of aerospace products over the next several decades in order to facilitate their entry into the global marketplace. Such trade will require them to open their doors and live up to all of the commitments to which they have agreed.

In conclusion, let me say that the number one goal for the U.S. aerospace industry is strengthening our access to the global marketplace. We believe that U.S. economic and national security depends on our ability to overcome structural obstacles to that goal. In the case of China, these obstacles are generated by Chinese practices and by the slow response of our national policies to the evolution of the aerospace market. The barriers put up by China are being dismantled with their entry into the WTO. Our government now needs to look at changing outdated policies so that we do not lose business to our competitors overseas, without any gain for foreign policy or security interests.