Testimony of Dave McCurdy
President, Electronic Industries Alliance

Before the United States-China Commission

Bilateral Trade Policies and Issues between the U.S. and China

August 2, 2001


I. INTRODUCTION

Thank you, Mr. Chairman for the opportunity to testify today on Bilateral Trade Policies and Issues between the U.S. and China. I represent the Electronic Industries Alliance (EIA), a partnership of electronic and high tech associations and companies whose mission is to promote the market development and competitiveness of the industry. EIA includes the Consumer Electronics Association (CEA); Electronic Components, Assemblies, and Materials Association (ECA); Electronic Industries Foundation (EIF); Government Information Technology Association (GEIA); JEDEC -- Solid State Technology Association; and Telecommunications Industry Association (TIA). Simply put, we connect the industries that define the Digital Age.

I am also a former Member of Congress from Oklahoma. During my 14 year tenure, I served as Chairman of the House Intelligence Committee, as well as subcommittee chairman on the Armed Services Committee and the Science Committee. In addition, I have served as a member of the Commission to Assess the Organization of the Federal Government to Combat the Proliferation of Weapons of Mass Destruction (WMD Commission). This experience gives me valuable insight into the complex interplay of technological, economic, and political issues which surround the U.S.-China relationship.

II. CHINA AND THE ELECTRONICS INDUSTRY

With over 2300 member companies, accounting for 80 percent of the $550 billion electronics industry, EIA represents the most dynamic and competitive industry in the U.S. economy today. The companies we represent operate globally, they think and plan in global terms, and they face intense international competition. The fact is, the days when the domestic U.S. market could sustain the industry are also over. In 2000, more than one-third of what the U.S. electronics industry produced was exported overseas, over $200 billion in goods. That means more than a third of the 1.8 million employees who work for U.S. electronics companies depend on exports for their jobs, and the percentage goes up every year. It has become almost cliche, but the global economy is a fact of doing business for us, and is a critically important concept to keep in mind as we formulate public policy in this area.

It is from this perspective that we approach China. China is the single most promising emerging market in the world today, and this fact is especially true for the U.S. electronics industry. In 2000, total U.S. electronics exports to China were an estimated $4.2 billion. This figure represents a 43% increase over just the year before, and a more than 300% increase since 1994. To break these numbers down further, telecommunications equipment exports experienced a 37% increase last year over 1999; consumer electronics experienced a 64% increase in exports; computers and peripherals experienced a 72% increase; and our passive components sector saw its exports to China increase by 108% in 2000.

A significant factor driving these impressive export gains is China's exponential growth in Internet usage. The number of people with Internet access exceeded 22 million last year, up from four million at this time in 1999. Worldwide, Chinese is now the second most used language on the Internet after English. Furthermore, we anticipate that a reduction of personal computer prices and the roll-out of information appliances specifically tailored for the Chinese market will spur even greater Internet diffusion through that country. China is also just beginning to embrace e-commerce. A government-sponsored nationwide survey found that China had more than 1,100 consumer related e-commerce websites in early 2000. More than 800 of these are shopping websites; 100 are auction websites; 180 are distance education websites; and 20 are distance medical and health-related websites.

Nevertheless, our companies do face considerable obstacles to penetrating the Chinese market, and this is reflected in the lopsided bilateral trade deficit. Even in the electronics sector, where in many cases U.S. manufactured products are superior in terms of both quality and price competitiveness, the electronics trade deficit in 2000 totaled over $22 billion. This is due, in part, to the high tariffs China imposes on our products. These tariffs average about 17 percent, and in some sectors tariffs may be much higher. But of even greater significance to our trade deficit with China are the costly and burdensome non-tariff barriers which confront our companies. These barriers take many forms, from a distribution system which discriminates against our companies, to the discriminatory buying practices of state-owned enterprises, to the arbitrary customs procedures we face at the ports-of-entry.

In addition to exports, our industry utilizes China as a vital source for components that are then incorporated into larger, more advanced products. The availability of these components, which often are not produced domestically, are essential to the competitiveness of our industry. Without access to the inputs produced in China, these firms would not be able to be competitive domestically or internationally.

III. China's WTO ACCESSION

Bringing China into the multilateral system of rules and procedures which the World Trade Organization oversees will go a long way towards making China a more attractive, and easier, place to do business. The electronics industry has much to gain from China's accession in the areas of tariff and non-tariff barriers, distribution rights, trading rights, transparency, state-owned enterprises and national treatment. As part of the WTO accession agreement, China agreed to:

Implement the Information Technology Agreement by 2005, which will eliminate tariffs on a wide range of high-tech products.

Provide U.S. firms significant market access rights that include the ability to import, export and distribute their goods throughout China. State-owned enterprises would be prohibited from discriminating against U.S. firms in their buying decisions.

Enforce laws protecting intellectual property, and preventing local content requirements and forced technology transfers.

Open the telecommunications market to foreign competition and investment:
- China has agreed to implement the pro-competitive regulatory principles embodied in the Basic Telecommunications Agreement (including cost-based pricing, interconnection rights and independent regulatory authority), and agreed that foreign suppliers can use any technology they choose to provide telecom services.
- China will allow 49% foreign investment in all services immediately upon accession, and will allow 50% foreign ownership for value added in 2 years and paging services in 3 years. This is a change from the April 8 deal, in that China had indicated it would allow 35% foreign ownership for value-added and paging services two years after accession and 51% four years after accession.
- China will phase out all geographic restrictions for paging in 3 years, value added, and closed user groups in 3 years, mobile/cellular in 5 years and domestic wireline services in 6 years. China's key telecommunications services corridor in Beijing, Shanghai and Guangzhou, which represents approximately 75% of all domestic traffic, will open immediately on accession in all telecommunications services.
- Internet services will be liberalized at the same rate as the other key telecommunications services, and China will permit provision of telecom services via satellite.

Regarding antidumping, the U.S. will continue to treat China as a non-market economy. Moreover, in applying countervailing duty law, the U.S. will be able to take the special characteristics of China's economy into account when we identify and measure any subsidy benefit that may exist. This provision will remain in force for 15 years after China's accession to the WTO.

Should China fail to abide by these commitments, China is subject to the WTO's Dispute Settlement Mechanism, including the possibility of multilateral trade sanctions.

In addition to the substantial economic opportunities the accession agreement creates, China's membership in the WTO also advances our broader foreign policy goals by promoting economic and political reform. The practical effect of adhering to WTO principles and commitments makes China's economic reforms of the last two decades irreversible, and sets China on a course for further free-market reforms. It commits China to abide by the same multilateral trading rules -- like national treatment, Most-Favored-Nation, and impartial dispute resolution -- that we and our other major trading partners already abide by. WTO membership will require greater transparency from China's legal system and bureaucracies, creating unprecedented accountability for the country's decision makers. Furthermore, it creates the foundation for China's prosperity and improving the quality of life for 1.3 billion people. Finally, it promotes the free flow of ideas and information through enabling greater Internet penetration, music and movies, financial information and other news, and increased exposure to U.S. companies and citizens.

Thirty-three emerging market countries have applied for membership in the 135-member World Trade Organization (WTO). The United States has seized the opportunity of potential WTO membership, to negotiate bilateral agreements with countries, such as China, to press them to open and modernize their economies and markets. China, not the U.S., had to make significant concessions to secure membership in the WTO. China must reduce tariffs, open markets for competition and investment from U.S. firms and abide by international rules of commercial behavior and monitoring of its compliance. As a result, US telecommunication and high tech companies have a tremendous opportunity to gain from China's accession to the WTO and concurrent implementation of the WTO deal. It is a commercially viable agreement that is a huge win for the United States and the cause of free trade.

We are very pleased that China's accession now appears imminent and that China will soon begin implementing its commitments. While China is already making progress in liberalizing certain sectors of its economy to prepare for WTO accession, it is also lagging in key areas. For example, in the latest "National Trade Estimates" publication, the Office of the U.S. Trade Representative reports that China is making important progress in deregulating its telecommunications sector. Earlier this year, China passed new regulations that allow for interconnection, cost-based pricing, and foreign investment, as well as set out regulatory jurisdictions and procedures. However, these regulations are vague in important areas and require refinement to be WTO compliant. Similarly, more progress needs to be made with regard to advanced services like Internet services, where regulations hinder foreign companies from owning China-based websites.

Another example of an issue that needs resolution is the Ministry of Information Industry's continuing policy of discouraging the use of imported components in favor of domestic sources. Similarly, "safety inspections" of electronic products are often more rigorous and expensive for imports than for domestic products. There are many other discriminatory practices which require attention and which the WTO can help address.

IV. U.S.-CHINA RELATIONS AND UNILATERAL EXPORT CONTROLS

Clearly, our industry has much to gain from China's commitment to open its economy. However, the potential benefits may be undermined if our own government imposes outdated and burdensome export controls on U.S. electronics companies' dealings with China.

We are very pleased and encouraged by Secretary of State Powell's recent trip to China, and we look forward to further progress in the bilateral relationship when President Bush visits Beijing in October. We believe that the Chinese leadership generally wishes to minimize conflict and desires a mutually constructive relationship with the United States, particularly in areas of economics. Nevertheless, when incidents occur like the recent spy plane shoot-down or our accidental bombing of the Chinese embassy in Belgrade, we can expect China to lash out with nationalistic rhetoric and unreasonable demands. Similarly, on issues like human rights, Taiwan, and others, our two countries have very fundamental disagreements which are certain to be continuing points of contention. These dramatic highs and lows in the U.S.-China relationship have become a predictable, if unnerving, cycle which has persisted for over a decade, and may continue indefinitely.

The best way for the United States to deal with these highs and lows is with patient but firm diplomacy, as the spy plane incident clearly demonstrated. One largely ineffective and counterproductive strategy to affect China's behavior is to use our technology industry as a bargaining chip through the imposition of unilateral export controls.

Whereas U.S. industry once had a virtual monopoly over the development and production of many technology products, today many countries produce comparable or even superior technologies. Furthermore, with the collapse of the Soviet bloc, the multilateral consensus on export control policy collapsed with it. Hence, many of our allies do not impose the same restrictions on their export activities. Despite extraordinary efforts by the U.S. government to strengthen the binding htmects of the Wassenaar Arrangement, our allies agreed only to limited information sharing. This is the reality we are faced with as we consider unilateral export controls.

China is perhaps the best example of the lack of international consensus on export control policy, and from the electronics industry's perspective, the most important. While the U.S.-China relationship may be controversial in this country, there is no such dilemma for our allies. For them, China is a partner to cooperate with on a range of issues, and is also the single largest emerging market.

The impact of export controls on how this industry competes in the global economy is substantial. They hold us back from competing. Unilateral export controls essentially force us to cede the playing field to our overseas competitors, or burden us to the point that we cannot compete effectively. When export controls are used properly, they can be a useful tool in combating the development and proliferation of weapons of mass destruction. However, they are a tool to be used carefully and sparingly because of their negative impact on our industry and their limited impact on the target country.

Much of the rhetoric over export controls always boils down to national security versus economics and exports. But more than ever before, protecting U.S. national security depends on a dynamic and innovative high-technology sector. Whether we are talking about weapon systems, intelligence gathering capabilities, or command and control networks, our industry is constantly improving the technologies that keep us a step ahead of our adversaries. An effective export control policy would recognize the reality that our national security is improved by enabling our high-tech industries to thrive. U.S. national security should be based on maintaining our technological edge through innovation, not on a doomed effort to hoard as much technology as possible.

Another key point to keep in mind is that export controls can severely disrupt the business models which sustain our competitive advantage. The U.S. technological advantage is based, to a large extent, on speed-to-market and mass-marketing through electronic commerce and the World Wide Web. But the administrative costs of trying to determine what products may go to what end user for what purpose can easily wreak havoc with these models. Our industry operates in terms of global R&D collaboration, Web-based, instantaneous order processing, and just-in-time manufacturing. In contrast, our export control system operates in terms of General Prohibitions, notification periods, and interagency dispute escalation procedures.

The system in place encourages regulatory complexity. It emphasizes bureaucratic processes and paperwork over coordination with our allies to prevent the bad end-users from acquiring truly sensitive technologies. Effective export control policy would be based on multilateral cooperation and facilitating effective corporate compliance. But the hundreds of pages of regulations we now operate under have the effect of penalizing those U.S. companies that try to obey the law. Our small companies, which are often the most innovative but which also need the most assistance, are the hardest hit by these policies. A small company can be overwhelmed by the costs, delays and confusion which plague our export licensing system. Faced with the prospect of hiring a team of attorneys to ensure compliance, a small company may simply export only to "safe" destinations like Canada, Western Europe, or Japan, thereby excluding the emerging markets we need to develop most. Sometimes, the potential liabilities loom so large that a company may shun the export market altogether as not worth the risk.

V. CONCLUSION

Managing the U.S.-China relationship is among the most challenging and important tasks facing the new Administration. Among the most challenging htmects of this relationship is managing our own expectations of China's emerging role in the post-Cold War world. We should not expect the rule of law to take hold immediately upon China's accession to the WTO. Similarly, we should not expect WTO implementation to proceed without problems. We must remember that China remains a developing country which is undergoing a wrenching transformation of its society. Many domestic constituencies, including factions of the ruling elite and military establishment, have much to lose in this transformation and will not retire quietly. In this environment, inconsistency of policies and nationalistic rhetoric must be expected.

But accepting this reality certainly does not mean we should overlook or downplay the excesses of the Chinese regime, whether they be human rights abuses or weapons proliferation or saber rattling towards Taiwan. Considering the intense spotlight that the U.S. media, Congress, and interest groups put on China, there is little chance of overlooking these anyway. Rather, we must hold China to the high standards of a mature global power, as it wishes to become. We must insist that China implement its WTO commitments, and other treaty commitments, as it has pledged to do. And we must object clearly and forcefully when it fails. But we must take care not to overreact ourselves when China fails to live up to international standards as expected. This Commission would provide a great service to the nation if helps point the way toward a thoughtful and reasoned approach to this challenge.

I appreciate the opportunity to present these views and welcome your questions.