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PERMANENT NORMAL TRADE RELATIONS FOR CHINA (PNTR)
THURSDAY, MAY 11, 2000
U.S. House of Representatives,
Committee on Banking and Financial Services,
The committee met, pursuant to call, at 10:05 a.m. in room 2128, Rayburn House Office Building, Hon. James A. Leach, [chairman of the committee], presiding.
Present: Chairman Leach; Representatives Roukema, Bereuter, Royce, Paul, Ose, Biggert, Terry, LaFalce, Waters, Sanders, C. Maloney of New York, Watt, Bentsen, J. Maloney of Connecticut, Hooley, Sherman, Meeks, and Inslee.
Chairman LEACH. The hearing will come to order.
Let me just say to begin with we have an awkward circumstance that because of the continuation of voting from a bill that was on the floor last night, we will, starting at 10:15 a.m., have a series of six votes on the House floor. Therefore, I am going to ask unanimous consent that all Members be allowed to place opening statements in the record. I have a particularly lengthy one that I will not read and will keep my comments to about 30 seconds and then turn to Mr. LaFalce, at which point then we will begin the testimony.
Page 2 PREV PAGE TOP OF DOC Let me just say from the Congress' perspective, I believe this is one of the most symbolically important international issues that is going to face us this year. I personally have concluded that based upon the vested interest of the American people in our own economy, particularly the fact that the math is on our side that in this trade circumstance, China will have to lower their tariffs and non-tariff barriers dramatically, whereas ours are already quite low and we will have to do virtually nothing; that, in a trade situation from a mathematical perspective, this is highly in the United States' national interest.
Second, I think we have an extraordinary national political interest in bringing China into the world trading system and into the world political system, and that this vote is a reflection of a 19th Century American position that was very profound called the ''Open Door'' policy and very consistent with it.
So I am very hopeful that Congress will act in a progressive way.
At this point, let me ask Mr. LaFalce if he has an opening comment.
Mr. LAFALCE. I do, Mr. Chairman, and I ask unanimous consent that the entirety of my statement be included in the record.
Chairman LEACH. Without objection, yours and all other Member statements will be in the record.
Mr. LAFALCE. Thank you.
Page 3 PREV PAGE TOP OF DOC I share your thought that this is an extremely important vote, perhaps the most important that we have cast or will cast in the new millennium, and one of the most important that I will have cast in my entire tenure in Congress. I have conflicting thoughts and I will share those conflicting thoughts with you.
First, Mr. Chairman, and this is something you can relate to very well, because you and I shared a common experience over twenty years ago when you and I were a part of the congressional delegation that represented the United States on January 1, 1979 in Beijing. We met with our Ambassador at the time, the former President of the United Auto Workers, Leonard Woodcock and with Deng Zhoupeng. We talked at great length extensively with Deng Zhoupeng and the other leaders of China at the time, but more than that, we heard, and we observed.
The China that we saw was a China where individuals were almost exclusively dressed in military uniform; where there were millions of pedestrians on the street at the same time and bicycles, but virtually no cars; where, to my recollection, we had the best accommodations in Beijing with one light bulb in the entirety of the room, with no phone, no TV, no radio, no newspapers, except if we walked down where there was a new opening and you could have newspapers posted on a wall within China. There was little communication within China, and almost none with the outside world.
Recently I went to China again and I saw the great advances that had been made in the human condition, not nearly as much as you and I would like, not nearly what we have come to expect as the minimum that is required for human beings, but probably a greater advance in a twenty-year period than most any other country that I am aware of in the history of mankind.
Page 4 PREV PAGE TOP OF DOC I am convinced that would not have happened were it not for the opening that President Jimmy Carter made twenty years ago; were it not for the trade that we had with China; were it not for the fact that on an annual basis, we approve either MFN or now NTR.
The China that we saw recently was a China where you had a vitality on the streets rivaling the vitality of New York City; where you saw millions of individuals with their digital cell phones; where I was able to talk with people who said let us keep in touch via e-mail, so I could have instantaneous communication with them.
I read a recent article on how the internet is probably going to be the most potent force for democratization that we have ever known, especially now too that the Internet is going to bring us visualization and visualization within the palm of our hands and without wires, wireless. That makes me want to support PNTR so much.
On the other hand, I am a product of Jesuit education and the first speech I gave in my junior year of high school was on the Papal Encyclicals ''Rarum Novum'' and ''Quantrajesama Honum.'' I spoke about the imperative of recognizing the rights of working men and women, the right to associate, the right to just wages, the right to safe workingplaces, and so forth.
I went to Seattle in December with Ms. Barshefsky and I was so proud of the United States' position which said that the rights of workers should be on the table for discussion as part of the trade agreements and we were rebuffed by the other nations of the world, even our friendliest partners, and the business community doesn't have their heart in that at all, and either gave lip service to it or just was silent on it and denounced the debacle. The debacle was that we could not get workers rights on the agenda for discussion.
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If you are going to deal with the rights of capital, how appropriate it is to deal with other components of trade in goods and trade in services. That is the rights of labor. So one of the issues is how are we going to best advance the human condition, advance the cause of these rights? By saying no or by saying yes?
At lot might depend on the issues that are framed before the Congress for the vote. A lot might depend on the actions of the Republican leadership and the Rules Committee in permitting the product of individuals who have attempted to bring forth as much as we could bring forth on human rights, environmental rights, on mechanisms for bringing about periodic reviews and possibly even periodic votes, even though the periodic votes might not be on the issue of trade, but other issues such as being espoused by Congressman Cox.
So it is difficult for some of us, because of these conflicts to give a definitive answer until we see exactly what it is we are going to be voting upon as much as we want to vote yes on all those issues.
I thank the Chair.
Chairman LEACH. If the Chair could interrupt, we have a problem that Ms. Barshefsky has to leave at 11:00 a.m. I have made an announcement to one-minute opening statements.
Mr. LAFALCE. Do I have any time left on my minute, Mr. Chairman?
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Mr. SHERMAN. The vast majority of the American people are in opposition to this terrible agreement and I think there should be at least one opening statement in opposition.
Chairman LEACH. I appreciate the gentleman's concern, but I will tell the gentleman that we have a number of Members of the committee, we have one statement made on the Republican side, one on the Democrat side, one that is committed to this approach, one that is undecided and all Members under appropriate testimony will be able to make their views heard during the course of the hearing.
Ms. Barshefsky has to leave at 11:00 a.m. I am sorry that based upon the so far length of the opening statements, it may be difficult to hear from her, but I would like at this point to begin with Secretary Summers.
Mr. SHERMAN. Mr. Chairman, if we could have opening statements either after Ms. Barshefsky or before the second panel, that might be a way to accommodate everyone.
Chairman LEACH. I appreciate that, but under the five-minute rule, everyone can make statements. We are going to have a series of panels. The Chair is going to be very generous with time, depending upon the number of Members that are here, but I think we really should proceed.
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STATEMENT OF HON. LAWRENCE H. SUMMERS, SECRETARY OF THE TREASURY
Mr. SUMMERS. Thank you very much, Mr. Chairman, for convening this hearing, for your very thoughtful statement, and thank you also to the Ranking Member and the other Members of the committee for the attention that they have given to this issue.
I will try to briefly state the case for a vote in favor of PNTR.
The first pillar of that case is the commercial advantages that the United States gets and the benefit to the American economy. A commitment to open markets has been the safety valve on our high pressure economy and has maintained and perpetuated this expansion. That will be supported by this vote.
By failing to pass PNTR, we would sacrifice enormous commercial advantages. Ambassador Barshefsky has negotiated a remarkable deal.
Much worse than not being able to take advantage of the deal Ambassador Barshefsky has negotiated, a failure to pass PNTR would enable all our major competitors to take advantage of the benefits that she has realized, putting American workers at a competitive disadvantage.
Page 8 PREV PAGE TOP OF DOC Second, PNTR supports the evolution of China in directions that we prefer. It does so in a number of ways. It does so, as Mr. LaFalce highlighted in his statement, by opening up China to telecommunications, technology and foreign businesses which carry practices that are liberalizing in their impact. It does so by influencing the balance of forces within China in favor of those who are more committed to reform relative to those who are less committed to reform.
It used to be said of the old GATT system that the only thing better than the concessions you get is the concessions you give. The Chinese authorities who are committed to seeing China change recognize the scope of this agreement to provide a framework for this change.
Moreover, there is the consideration that if the United States were to repudiate this agreement, while China would still be able to join the WTO, our own capacity to influence Chinese behavior on a very wide range of areas would be undercut.
The third pillar of the case for China PNTR is the one that was stressed by the former Presidents at the White House on Monday. That is the national security casethe recognition that history teaches us as a great United States Secretary of State, Cordell Hull said: ''When goods don't cross international borders, armies do.'' The reality is that rising economic powers that are insecure, that confront a sense of being excluded from the global economy have, since Assyria and Sparta, been sources of conflict.
None of us can predict how the Pacific region will evolve, but we are convinced that the prospects for its stable evolution over the next several decadesand for the United States to influence that evolution in a way that is conducive to our interestsare maximized by China's accession to the WTO and granting of PNTR.
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Let me say that the perspective that we take, and that I believe is appropriate for the Congress to take is that this vote should not be a referendum of approval or disapproval on Chinese practices, but a judgment as to how best to advance U.S. interests, U.S. commercial interests, U.S. interests in China's evolution, U.S. security interests. We believe this approach offers the best prospect for advancing U.S. interests.
Frankly, the annual review process has proven in many ways to be unsatisfactory. It creates too little uncertainty to provide real leverage for the United States on issues of major concern, but it creates enough uncertainty to be a source of periodic irritation in relations and to undermine close economic ties.
Chairman LEACH. If I could interrupt, and I am very sorry, Mr. Secretary, we have a vote on the floor and we have a minute-and-a-half left, so I am going to have to recess the hearing pending a series of votes, and that means probably thirty to forty minutes, at which point we will commence again with your testimony.
The hearing is in recess.
Chairman LEACH. The hearing will reconvene.
As we left for our vote, Secretary Summers was in the middle of his testimony and we will give him a minute to conclude. Ms. Barshefsky had indicated that she could only be with the committee until 11:00 a.m., so without objection, her testimony will be placed in the record.
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Chairman LEACH. We will return to Secretary Summers.
Mr. SUMMERS. I was just finishing my testimony and I want to conclude by making two additional observations that may be of interest to the committee.
First, because this is the Banking Committee, I want to highlight the agreement and the financial services area and I want to acknowledge the work of my colleague, Meg Lundsager, who worked with Ms. Barshefsky in producing what I think is an outstanding deal. The deal includes four main financial services elements: broad branching and national treatment for banks within five years in China; broad national access for the first time beyond Shanghai to the Chinese insurance market; automobile finance, which is very important if we are going to succeed in exporting automobiles to China; and progressive liberalization of the securities market, where the Chinese Finance Minister and I have agreed to a dialogue on further steps.
I think, insofar as we see in the United States that financial liberalization and financial markets have an opportunity to drive real change, we have seen important steps to democratize the access to capital in China.
The second observation I would make is that as importantand I think it is very importantas this agreement is, we in the Administration are very, very much aware this is not the entirety of our relationship with China or the entirety of our relationship with the global trading system, and that there is a broad set of concerns that need to be addressed.
I might say in that regard that we believe the proposals that have been developed by Congressman Levin, working with many others including Mr. Bereuter, are constructive and address issues of major importance. We welcome further dialogue on these proposals among Members on both sides of the aisle.
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I refer, for example, to the priority attached to the U.S. pressing for improvement in China's human rights, religious freedoms, labor rights and rule of law. Finding alternatives to the annual NTR process, such as a process based in some ways on the Helsinki Commission, seems to us very desirable.
We agree as well on the importance of vigorous programs to monitor China's implementation of its WTO commitments and to ensure that China lives up to those commitments. We agree that such monitoring needs to be fully resourced.
We agree that we need to make clear the rules and procedures that this Administration and future Administrations will employ to implement the strong import safeguard protections that were negotiated.
We, of course, could not accept anything that would explicitly condition PNTR. However, we are very committed to working with Congress to address these and other similar concerns and are receptive to ideas that make good sense and can garner broad bipartisan support.
Chairman LEACH. Thank you very much, Mr. Secretary.
I would like to stress this committee's jurisdiction is, in one sense, for macro-economic issues and in another sense, for narrow financial services concerns. From a macro-economic perspective, I take from your testimony that you are affirming to the committee that it is the view of the Department of the Treasury that this is in the economic best interest of the United States, is that correct?
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Mr. SUMMERS. Yes, both in terms of the direct export promotion benefits and in terms of the maintenance and expansion of a global open market system, which I think is essential if our economic expansion is to be maintained.
Chairman LEACH. Second, from the financial services sector, it appears to me impressive that China has acquiesced to a new opening of financial services and this uniquely puts the American financial services industry in a position to lead. Is that a valid conclusion?
Mr. SUMMERS. I believe these are very substantial steps. I believe they have been welcomed by the U.S. financial services community, and I think they put the U.S. financial services community, because of its global competitiveness, in a very strong position with respect to the Chinese market.
I might say that a failure to pass this agreement would relegate the U.S. financial services industry to a very much secondary position in China, because the financial institutions of other countries would then be granted a much more extensive set of privileges than the U.S. financial services industry.
Chairman LEACH. This then has enormous commercial/industrial implications in the sense that many countries' financial services industry follows their industry and without American banks in China, but with French, German, British banks you would have a circumstance that they would be aiding their industries without the implication that they would be aiding American industries, is that correct?
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Mr. SUMMERS. I think that you have slightly led the witness, but I am delighted to follow. I think there is no question that the financial services industry often has a very catalytic role with respect to economic development broadly and that American financial services presence will finance American-oriented economic development. The relegation of the American financial services industry to a secondary position would tend to subjugate American industrial and commercial interests.
Chairman LEACH. At the risk of exaggeration, if you have a world in which other countries are welcomed in finance that spur their exports and their commercial enterprises, might arguably this be a quasi-unilateral capitulation in financial services, therefore disadvantaging the entire American economy?
Mr. SUMMERS. I used the word ''subjugation,'' but I think your word ''capitulation'' is also a very good word. In terms of the U.S. financial services industries' capacity to do business in China, I think it would be catastrophic for this agreement not to pass, and I think the failure of the U.S. financial services industry to be able to establish a beachhead in a growing Chinese market would have much broader consequences for U.S. industry and ultimately for the U.S. economy.
Chairman LEACH. Let me conclude by saying often when you deal with protectionist societies, which China is a major example in the world, there are two types of dramatic protectionism in gross terms. One is tariff barriers which apply to a lot of commercial enterprises, all of which are being lowered in this agreement. Then there are non-tariff barriers which end up particularly being relevant to industries like financial services, because there are simply rules that preclude activities.
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For the United States not to want to dismantle the tariff barriers as well as the non-tariff barriers would be against our national interest. Is that fair to say?
Mr. SUMMERS. Yes, that is fair to say.
Chairman LEACH. Thank you.
Mr. LAFALCE. Mr. Secretary, before you were at the Treasury Department, you were Chief Economist at the World Bank?
Mr. SUMMERS. Yes.
Mr. LAFALCE. And before that?
Mr. SUMMERS. I was a Professor of Economics at Harvard University and MIT.
Mr. LAFALCE. When the Secretary of Commerce was in my office, he said, ''What would it take for you to commit yourself?'', and I said ''Couple a vote on PNTR with repeal of Helms-Burton.'' What was your position on the embargo on trade with Cuba before 1993?
Page 15 PREV PAGE TOP OF DOC Mr. SUMMERS. To be very honest, Mr. LaFalce, I didn't have a position in 1993 and was not aware of the complex range of issues, both economic and political, that had led successive Congresses to take the judgments that the country has taken with respect to Cuba.
I think there are very challenging issues there, but honestly I would have been only vaguely aware of the presence of the embargo on Cuba before coming into Government.
Mr. LAFALCE. That amazes me, but I will accept it.
When we made the decision to participate within the WTO that I supported, we also provided, wisely or not, a mechanism that could permit a vote on withdrawal at least every five years. Without that vote, there would be no withdrawal and we could have brought the issue up at any time, but we created a mechanism. As a matter of fact, that mechanism is triggered this year and some individuals have taken advantages of their individual ability to trigger it, so it looks as if we will have to vote on whether or not we should withdraw. If that goes down, we automatically stay in. That was probably not desired by the Administration as their preferred approach five years ago, but they certainly accepted it.
Would there be anything inconsistent with the WTO if we had a similar provision with respect to PNTR, that is, it continues automatically, but we could trigger a vote on disapproval which would require a majority of votes of both Houses and the signature of the President, or overriding of the veto? We don't have an automatic trigger.
Mr. SUMMERS. I am sorry, Congressman LaFalce, that Ambassador Barshefsky is not here, because she is much more expert on the legalisms associated with the WTO than I. The issue that would have to be explored, that I suspect might raise problems with your suggestion, would involve the nature of the MFN obligation and the provision of the benefits to an individual country on less than a permanent, unconditional basis.
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Mr. LAFALCE. That would be applicable with respect to a sunset. It would not be, it would seem to me, be applicable if there was automatic continuation unless there were a vote to the contrary. The argument is made by the Administration there is nothing permanent in life, Congress changes laws all the time, so you always have the right to do this. The only issue is whether or not we could in any way develop a mechanism so that at the end of maybe a five-year period, we could at least vote on it and the burden unchanged in the law would be on the proponents of termination. There would be no automatic termination whatsoever.
Mr. SUMMERS. We clearly could reaffirm the procedure we already have, which, as you say, will require a vote on U.S. participation in the WTO. Whether such a vote is possible by the United States with respect to China's participation in the WTO or whether such a vote is possible with respect to the United States' willingness to continue to extend certain benefits to China, I think is questionable.
Mr. LAFALCE. Be careful where you are going, Mr. Secretary, because if you are arguing that once we cast a vote granting normal trade relations it would be beyond our competency to pass a law taking that way, I think you would be doing your cause a disservice.
Mr. SUMMERS. I take note of what you have said, Congressman LaFalce. I am sorry not to be able to give you a precise legal answer. It is something we can touch on, but I do not want to minimize the nature of the problems associated with a kind of commitment with respect to China's participation in the WTO that is differentiated from the kind of commitments we undertake with respect to other countries' participation in the WTO.
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Of course the Congress has the prerogative of modifying the Nation's trade laws at any point in the future. I didn't mean to suggest otherwise. I think the question goes to what kind of institutionalized commitments are possible at the moment of accession, and that is something I can arrange for our legal experts to consult with you on.
Mr. LAFALCE. I thank the Chair.
Chairman LEACH. Mrs. Roukema.
Mrs. ROUKEMA. Thank you, Mr. Chairman.
I am sorry I was not here, I was unavoidably detained, but I would like my statement included in the record.
Chairman LEACH. Without objection, all statements will be included.
Mrs. ROUKEMA. I want to thank the Secretary for his testimony and certainly for making the point that both you, Mr. Chairman, and the Secretary have made that without PNTR it would be catastrophic not only for American industrial and commercial interests, but the relationship they have to the financial services. This is a well directed hearing today.
I do want to say I don't understand the shortsighted, if not myopic, attitude with respect to not understanding the essential importance in the global economy of what this means to not only financial services, but industry as a whole.
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Mr. Chairman, as you know, I am supporting PNTR, but I would like to ask the Secretaryhe has answered most of my questions and done it wellcould you please amplify on your references to how the monitoring can be fully resourced and what means would you have of doing this, the monitoring, so that we can directly address these horror stories or fears people have expressed that this is too unilateral and will be at everyone else's beck and call?
Mr. SUMMERS. Secretary Daley has laid out a set of proposals for a unit within the Commerce Department that would provide for the expanded monitoring and provide for additional staffing and provide for procedures for fast tracking complaints to the WTO when that is appropriate.
Mrs. ROUKEMA. Under this agreement and whatever Treasury is now proposing, and you mentioned the Commerce Department, whatever they have out there, I would like to see in writing and have submitted, but you were telling me there is nothing in the law that would contradict that or would not make it enforceable without further action by the Congress? In other words, it is enforceable under PNTR, WTO and existing law that the Administration has control over?
Mr. SUMMERS. That is right, yes.
Mrs. ROUKEMA. Will you forward more amplification?
Mr. SUMMERS. I will forward some materials on Secretary Daley's proposal and ask that they be included in the record. I will forward them both to Congresswoman Roukema and you.
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Chairman LEACH. Without objection.
Also, without objection at this point, we will put in the record Chairman Greenspan's letter on the subject.
Mrs. ROUKEMA. Thank you. But again, as far as financial services industry as we are examining it today, it is absolutely essential to the furtherance of industrial and commercial interests of the United States.
Thank you, Mr. Chairman, for this opportunity.
Chairman LEACH. Thank you, Mrs. Roukema.
Ms. WATERS. Thank you, Mr. Chairman. I thank you for the opportunity to share some thoughts on this important issue that is confronting us here in Congress.
Members of the House of Representatives will soon vote on whether to grant permanent, normal trade relations to the Peoples Republic of China and I want to point out that this decision is not a choice between free trade with China and no trade with China. The United States already has normal trade relations with China subject to an annual review.
Page 20 PREV PAGE TOP OF DOC Furthermore, if Congress does not renew normal trade relations with China, trade with China will not stop. A suspension of normal trade relations would simply mean that Chinese products would be subjected to higher tariffs.
Like many of my colleagues, I am concerned about human rights in China. The government of China continues to deny its people their basic human rights. Chinese citizens frequently endure harassment and imprisonment for peacefully expressing their political or religious beliefs. The detention of thousands of practitioners of the spiritual movement Falun Gong last year is just one example. Torture is still common in Chinese prisons. Police subject detainees to beatings, electric shocks, incommunicado detention and prolonged periods of solitary confinement.
Nevertheless, I am hopeful that through trade and skillful diplomacy, the United States will be able to exert influence over the Chinese government and promote respect for human rights and the development of democratic values.
I am interested in hearing from our Secretary of the Treasury and the United States Trade Representative what actions they have taken to promote human rights during their negotiations with Chinese officials. I also look forward to hearing from the representatives of the financial services industry regarding how the activities of their companies in China promote democratic values.
I am committed to making fairness the cornerstone of my decisions regarding international trade. Trade should be fair not only for the American people, but also for the people of other countries. Many aspects of our Nation's trade policies are blatantly unfair. I am especially concerned about our policies toward Cuba. The United States has maintained an embargo against this small countrywhich is only 90 miles from our shorescontinuously since 1962. This embargo prohibits most exports to Cuba as well as imports from Cuba.
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The people of Cuba desperately need access to medical supplies from the United States. Although Cuba's health care system had functioned quite effectively in the 1980's, the system experienced a decline after the collapse of the former Soviet Union. Prior to the collapse, Cuba was able to purchase U.S. medical products through other countries at higher costs.
The 1992 Cuban Democracy Act further exacerbated the problem by placing additional burdens on an already financially strapped Cuba. These burdens included prohibitions against foreign subsidiaries of U.S. corporations from selling to Cuba and restrictions that forbid ships that dock in Cuban ports from docking in U.S. ports for six months. That is outrageous.
Earlier this year, I led a congressional delegation to attend a U.S. Healthcare Exhibition that I helped to organize that took place in Havana, Cuba, from January 25 through 29. This historic exhibition, which was ''U.S.-sanctioned and Cuban-approved'' through the waiver agreement that we have, featured more than 65 U.S. companies, companies such as ADMArcher Daniels Midland3M Puerto Rico, Eli Lily, Proctor and Gamble, Medical Products Sales, Novartis-Gerber, Ortho Technology and ThermoRespiratory Group. These exhibitors showcased a variety of medicines and medical supplies including pharmaceutical, ambulance, hospital, medevac, physical therapy, dental and eye care equipment.
The Cuban health care professionals were impressed with many of the products and orders were taken at the exhibition and the American companies are now trying to fill the orders and it is very difficult, given all of the complications of our policy.
Page 22 PREV PAGE TOP OF DOC Many other American officials and businesses have expressed an interest in improved trade relations with Cuba. The American Farm Bureau, the Chamber of Commerce, the Governor of Illinois, and many former Members of Congress have all expressed support for trade with Cuba. Furthermore, many Members of Congress have visited Cuba recently and discussed the impact of the embargo on the Cuban people.
There is simply no logical reason to grant permanent, normal trade relations to China while prohibiting all trade relations with Cuba. Like China, Cuba is a communist country and they have violated human rights and we want to exert the same kind of pressure on Cuba that we want you to exert on China to get rid of human rights violations. Yet, the United States continues to impose an outdated embargo on this neighboring country. This is clearly inconsistent and unfair.
If the Administration contends that trade with China will inevitably lead to respect for human rights and democracy, then the exact same logic ought to apply to trade with Cuba. I wish someone would explain to me the difference. I would be willing to support policies to facilitate trade with China, possibly including PNTR, if the Administration would urge Congress to support policies to allow trade with Cuba.
Supporters for PNTR for China frequently point out that isolation by the United States would not be in the best interest of the Chinese people. From my own experience, I know that isolation has not been in the best interest of the Cuban people. As a matter of fact, I would go so far as to say if we included Cuba in the PNTR legislation, I would easily support it. What is good for the goose is good for the gander. I think there are a lot of others who share my concerns.
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I guess I am out of time, but at any point in the exchange if our Secretary would like to further explain the difference or if you know something I do not know, I would like to understand and hear it, and if we have something we are doing as we promote this policy to promote human rights in China, I would like to hear about that too.
I thank you for your patience, Mr. Chairman.
Chairman LEACH. Thank you. This question is not designed to ask the Secretary to tell us everything he may know that Ms. Waters may not.
Mr. BEREUTER. Thank you very much for holding these hearings on this important issue on which the Congress will focus its attention in thirteen or fourteen days.
Mr. Secretary, thank you for your excellent written testimony and for being here with us for our questions today. I saw your previous testimony before the Senate Banking Committee and found it extremely helpful.
Thank you too for mentioning the effort that Congressman Levin and I have been involved in and I think you described it well. I appreciate your support and comments.
I would say the question my colleague from New Jersey was just raising about monitoring we believe is addressed adequately and more than adequately in Section 5 of the framework that we presented on a bipartisan basis. It provides additional resources for Commerce, Agriculture, State and the USTR to make sure that monitoring for enforcement does go on.
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I might also say we need to be reminded, I think, that an import anti-surge agreement or safeguards were already reached between the government of China and the United States and now it is up to us to see they are properly implemented. So Section 2 in the effort that Congressman Levin and I are involved in does exactly that.
The whole framework is open for further refinement by Members that have concerns and we have good input from the Administration coming to us. I am hopeful and already see that it is causing Members on both sides of the aisle to decide they will now vote for PNTR.
Mr. Secretary, would you say what areas, if at all, you are most concerned about within implementation within the financial services sector, and what does this committee need to watch most closely after the Congress approves PNTR?
Mr. SUMMERS. I think probably the two most important areas are the securities area and the banking areathe securities area, because while a process of liberalization is underway, there is some distance yet to move. It will be the task of this Treasury and Treasuries in future Administrations to carry out further dialogue and refine the procedures under which liberalization will take place in the securities area.
We do not have nearly as strong a commitment to securities market liberalization as we do, for example, in the banking area with the five year full branching and national treatment.
The second area I think it will be particularly important to monitor is the banking area. While the commitments we have reached are very strong, there is always the possibility that, in the actual licensing and regulatory procedures, the intent of those commitments could be subverted. While I have no particular reason to expect that at this point or to fear that prospect, I think it is important that we be vigilant with respect to that possibility. Ms. Lundsager and her colleagues, who I think did a superb job of negotiating this agreement, are very much committed to monitoring its effective implementation.
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Mr. BEREUTER. I thought it was better than we might have expected, so I was extremely pleased with what Ambassador Barshefsky and team have done and I want to thank her and Secretary Daley for what you are doing now to help the American people understand why PNTR is in our national interest, as it is.
Chairman LEACH. Mr. Sanders.
Mr. SANDERS. Thank you, Mr. Chairman and thank you for holding this important hearing.
Thank you to Secretary Summers and Ambassador Barshefsky for being with us today.
On this issue, I am in agreement with according to the polls the overwhelming majority of the American people. I am in agreement with the trade union movement which represents some 15 million American workers. I am in agreement with virtually all of the environmental groups, including the Sierra Club and Friends of the Earth. I am in agreement with the U.S. Catholic Conference and the U.S. International Council for Religious Freedom. I am in agreement with those people in the United States who believe that trade should represent the best interests of American workers and not just the multinational corporations, people who believe that trade policy must protect the fragile environment of this world, and who believe that the United States must stand for democracy, human rights and religious freedom and not just corporate greed.
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I am in agreement with those people in our country who are crying out for campaign finance reform, because they are disgusted with corporate America contributing hundreds of millions of dollars to both political parties and heavily influencing public policy which is precisely what is happening on this issue.
I agree with Secretary Summers that the recent U.S. bilateral trade agreement with China is ''a one-way street,'' but I hold this belief for a very different reason. The fact of the matter is this trade agreement represents a one-way ticket for disaster. It is a ticket for corporations to continue to leave the United States and lay off American workers, push real wages down, exploit the people of China, devastate the environment and trample on human and democratic rights.
This agreement is supported by the major corporations in the United States, because it allows them to pay workers in China 15, 20, or 30-cents an hour rather than to hire workers in this country at a living wage. It allows them to hire a work force in China which cannot form unions, which cannot speak out for their rights and which cannot criticize their government without going to jail. What a great climate for American corporations to do business in.
Some examples according to the National Labor Committee are: Wal-Mart, the largest importer of goods into the United States uses 1,000 contractors in China; 46 percent of the workers in one of their factories earned nothing at all. That is a good business arrangement. The fines they incurred were more than the wages they earned.
Page 27 PREV PAGE TOP OF DOC Nike has approximately 50 contractors in China employing more than 110,000 workers and pay their workers 20 cents an hour working 11-12 hour shifts and refuse to hire anyone over the age of 25.
Huffy bikes are made in China by workers forced to work from 7:00 a.m. to 11:00 p.m., seven days a week, earning as little as 25 cents an hour. Failure to work overtime is punished with a loss of two days' wagesa good business climate, no doubt.
Mr. Chairman, our Nation is experiencing a recordbreaking, overall trade deficit of $220 billion, and I have not heard one word of that discussed this morning yet. Our trade deficit with China was $68 billion in 1999. In other words, our overall trade policy is a failure and our trade policy with China is a complete disaster. It would be an outrage to formalize this and make it permanent.
In 1999, the U.S. imported approximately $81 billion in goods from China and exported $13 billion, a 6-to-1 ratio of imports to exports that represents the most unbalanced relationship in the history of U.S. trade. While exports generated about 170,000 jobs, and we hear a whole lot about those jobs, imports eliminated about 1.1 million domestic job opportunities for a net loss of over 900,000 manufacturing jobs, many of them high wage jobs.
China's entry into the WTO on the permanent NTR with the U.S. will lock this relationship in place, setting the stage for a rapidly rising trade deficit in the future. Over the last twenty years, many of the largest corporations in America have invested tens and tens of billions of dollars in China. They are not investing in the State of Vermont, they are not investing in New York State, they are not investing in Iowa; they are investing in China, because they have workers there who work for 20 cents an hour.
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Despite the so-called economic boom that we hear so much about, tens of millions of American workers today are working longer hours for lower wages than was the case twenty-five years ago. In fact, importantly, young, entry level workers without a college education saw their average real wages fall by 28 percent between 1979 and 1997, because they are now forced to work in the low wage service industry as opposed to manufacturing where they could have earned decent wages.
One of the reasons the United States today has the most uneven distribution of wealth and income of any industrialized nation, and why so many Americans in the middle class have to work so hard to keep their heads above water is because of our failed trade policy and the fact that we are exporting jobs rather than goods.
Before the so-called economic boom that we are now living in, one worker was expected to work 40 hours a week and bring in enough income to take care of the family. That was before the economic boom. Now with the great economic boom and our great trade policy, the vast majority of middle class families have to have two workers out working, sometimes 50 and 60 hours a week, because of low wages in order to pay the bills.
Today, the United States has the dubious distinction, according to the International Labor Organization, of having our working people work longer hours than any other country on earth. We have recently surpassed the Japanese and I would argue that because real wages in many instances have not kept up with inflation, because of our disastrous trade policy, millions and millions of families in this country are working terribly long hours at inadequate wages.
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PNTR is a bad deal for American workers, it is a bad deal for the world's environment, it is a bad deal in terms of religious freedom and human rights, and I would hope the United States Congress has the guts to stand up to the big money interests who are flooding Capital Hill with all kinds of money and defeat this disastrous trade agreement.
Chairman LEACH. Thank you, Mr. Sanders.
Mr. ROYCE. I think that one of the observations I would make is that until now the debate has been really partly about the balance of trade and that trade was a one-way street. We had Chinese goods coming into the United States. With this agreement, we are actually going to have the tariffs eliminated in many cases, drastically reduced in others, so that American exports go into the Chinese market. From that standpoint, we move to a two-way street.
One of the things I would like to ask the Secretary is just some of these observations made by the Chinese dissidents inside China, because we are being approached. Martin Lee, for instance, was up here last week pushing for this agreement. We have Mr. Bao reporting to us that ''A broad array of dissidents, environmentalists and labor activists in China are united in their support of passage for this Act.''
Page 30 PREV PAGE TOP OF DOC Their argument is this. They say people should realize that supporting PNTR for China is not supporting the Chinese generals. To the contrary, support for PNTR is a vote for those Chinese who want to change their country. They say China's entry into the WTO comes at a price, it requires fundamental reform of an economic system designed by and for the Chinese communists. It is the Chinese generals and the party functionaries who have the most to lose and that is why it is the Chinese generals who are largely opposed to China's WTO agreement, including Mr. Lee Ping.
One quoted Chairman Mao. He said, ''Political power grows out of the barrel of a gun. Unfortunately,'' he said, ''that is all too true in today's China, whose government has no moral foundation. It is also true that political power grows out of the control of the economy, in China's case, control of the state enterprises. Let's not pass up this opportunity to allow American businesses to undermine that government control in China.''
So as we go down the different sectors of the economy such as financial services, this means for the first time giving American businesses unprecedented market access; it means for the first time our exports from our shores into China are going to face zero tariffs or very low tariffs and compete with those state-run industries and that, they argue, will empower China's growing middle class to work for democracy, it will empower the rule of law, it will grow freedom.
This impact is why the leading environmentalist dissident in China, Dai Qing, is quoted in today's Washington Post1 as saying, ''We must break the monopoly of the state. To do that, we need a freer market and the competition mandated by the WTO.'' She spent quite a bit of time in prison for her activities in Tiann amen Square.
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Many other workers for human rights inside China support PNTR for the same reason and that is one of the interesting aspects of this, that first, it seems on this occasion for the first time, you have the Chinese agreeing, those who are trying to reform their economy, that they are going to lower the tariffs and allow U.S. goods into their market. Second, they are going to allow us to compete in their market and agree to these basic reforms. Third, you have the environmentalists inside China and the reformers inside China arguing for this.
I just wanted to ask for your view of this. In the past, I have opposed PNTR for China and I have done that on the basis that it was a one-way street, it was Chinese access to our market. This is a different vote. This is a different issue. This is ratifying an agreement on the part of China to lower their tariffs to U.S. goods and make these reforms. That is why I think this is in some ways a pretty complex issue.
Mr. SUMMERS. Thank you for your comments. Let me make three points if I could that address what you have raised and touch on some of the concerns that were mentioned in the earlier statements.
First, I believe all of us have common objectives in supporting the interests of the vast majority of American workers, common interests in seeing the end of the behavior that we deplore in China. Our question is not with respect to our objectives, but with respect to the best tactics for meeting those objectives.
Page 32 PREV PAGE TOP OF DOC Second, we share the viewand I think it is very significant, as you pointed outthat those who have been to prison in China, those who in some cases have faced torture in China have made the judgment that the way in which we can best help them is through our engagement through PNTR. I think that is a judgment that we ignore at our peril.
It seems to me that the moral side of this equation is very much to look to those who have stood up to the Chinese authorities. I think it is very instructive that those within China who would most like to see the Congress vote against PNTR are the most traditional reactionary elements of the People's Liberation Army. I think taking steps that would give them comfort and support is something we should need to be extremely cautious about undertaking.
Third, I would like to come back to the economic dimension. Here, there is both the commercial argument in terms of U.S. firms gaining advantage and there is the much larger argument about whether trade has benefited the U.S. economy through this period. It is my judgmentand I think this is a judgment that is shared by the vast majority of professional economists; it is a once a generation event for economists like Milton Friedman and Paul Samuelson to come together to sign the same letter, and they have come together on this ideathat a more open trading system as would be represented by China's accession to the WTO and PNTR would maximize the prospects for real income growth for American workers. That, too, is a judgment that I think has to be given very considerable weight in formulating this issue.
Chairman LEACH. Thank you, Mr. Royce.
Page 33 PREV PAGE TOP OF DOC Mr. WATT. Usually when I come to hearings, I don't come prepared with a statement and I don't have one today either, because I always want to hear what the witnesses typically have to say on the subject we are addressing.
Obviously I missed something, because Ms. Barshefsky's nameplate is there and I was not here at the beginning of the hearing, because I thought we were going to have votes promptly at 10:00 a.m. Did I miss Ms. Barshefsky or did she not come today?
Mr. SUMMERS. Ambassador Barshefsky was here at 10:00 a.m. and had indicated to the committee that she was able to remain until 11:00 a.m.
Mr. WATT. Did she testify?
Mr. SUMMERS. Because of the committee's opening statements and then my opening statement and then the vote, which took until about 11:15 a.m., she was not able to come back and testify, but has submitted her statement for the record. I believe the Chairman indicated he was prepared to include it in the record.
Mr. WATT. I just wanted to make sure I didn't miss some testimony even with the best of intentions.
I am not going to lecture you about this, but I would say that I have a lot of difficulty reconciling based on what I have heard and what people are saying our position on this issue with our position on Cuba.
Page 34 PREV PAGE TOP OF DOC I had to run out at the end of Ms. Waters' statement to make a quorum in another committee, so I don't know whether you got the opportunity to respond to her questions or not. I would also like responses.
How do you reconcile this with our posture toward Cuba, if, in fact, it is reconcilable?
Mr. SUMMERS. I think you raise a very important question. Let me first say that I will attempt to reconcile the positions in several ways in just a moment, but first, let me say if there are difficulties in the reconciliation, it hardly follows that PNTR is not a good idea.
Mr. WATT. I can wrestle with that too myself, but I didn't ask you that question. I wanted to know how you reconcile the two positions.
Mr. SUMMERS. With respect to the two positions, the way I would reconcile them is this. I think the lesson of history is that strategies of engagement and economic contact do over time bring substantial benefits. That is why China PNTR is very much in the national interest.
It has been the traditional practice in the United States to engage in such measures and to extend the benefits of the U.S. market following constructive steps toward reform on the part of the country that is at issue. Before the trading process with China began in the 1970's, China had made a set of commitments and taken a set of steps. China has taken very substantial steps over the last twenty years and Cuba has not taken steps
Page 35 PREV PAGE TOP OF DOCin the economic arena of similar magnitude to the steps that China has taken.
Moreover, I think the prospects for progress with Cuba were attenuated. We had some prospects for progress prior to 1996 when Cuba shot down two American planes in international air space. That led the Congress, acting in a bipartisan way, to pass the Helms-Burton Act and to put in place an embargo with respect to Cuba. So I think it is a combination of the relative dearth of movement toward market-oriented reform in Cuba compared to what is taking place in China and the rather substantial provocation, in the judgment of a very large bipartisan majority of the Congress in 1996 with the passage of Helms-Burton, that has led us to maintain the policy toward Cuba that we have pursued.
It has always been the American hope that Cuba would be prepared to commit itself to an evolution in its economic policies and in its political approach of a kind that could form a basis for a more intense economic engagement between the United States and Cuba.
Mr. WATT. We have some indication that China is planning to reform its political outlook?
Mr. SUMMERS. We have seen the American political leader at a very senior level who perhaps has been most associated with the human rights agenda, former President Carter, who has made clear that he believes the human rights agenda is very much advanced.
Mr. WATT. Are you using the term human rights and political system interchangeably? What are we doing here?
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Mr. SUMMERS. Obviously there are differences as you say. President Carter, certainly in my judgment, has been a leader on both the promotion of democracy and on the human rights agenda.
Mr. WATT. You are not telling me that China is about to cease being a communist nation?
Mr. SUMMERS. No, I am not, but I am able to suggest to you that if one considers the degree to which citizens of China have access to dissent in the press, if one considers the extent to which they have choice not at the level of their national leaders, but at the level of local village leaders, there has been real evolution over the last twenty years.
None of us can be satisfied with the pace of progress and none of us is satisfied with the pace of progress. If one looks to the stated orientation of policy, if one looks to the access to information on the part of Chinese citizens, if one looks to the rules in China that govern the ability to move from place to place, for example, there have been real changes over the last ten to twenty years that dwarf anything that has taken place in Cuba.
That, in addition to the provocations of 1996, does, in my judgment, provide a basis for distinction. It is my understanding of why the Congress took such a strong leadership role in taking such a strong position with the Helms-Burton legislation in 1996.
Mr. WATT. Remind me once again what year Tiann amen Square was?
Page 37 PREV PAGE TOP OF DOC Mr. SUMMERS. Tiann amen Square was in 1989.
Mr. WATT. Thank you, Mr. Chairman.
Ms. WATERS. With unanimous consent, 30 seconds so that I can ask a question.
Chairman LEACH. The gentleman has gone five minutes over, but he will entertain the unanimous consent request.
Mr. WATT. I will yield the 30 seconds to Ms. Waters.
Ms. WATERS. Thank you.
Mr. Secretary, are you aware that China has broken every trade agreement with the United States over the last ten years?
Mr. SUMMERS. I am aware, and we have been very focused on, issues relating to compliance, but I don't think it would be the Administration's characterization that China has broken every agreement with the United States.
Ms. WATERS. Are you also aware that the incident you referred to of the planes over Cuba were planes that were dispatched by anti-Fidel Castro Cubans such as you have seen in the press recently and that there had been discussions between the United States and Cuba about us helping to stop those flights flying over a sovereign nation and not only do they feel that we did not help keep that from happening, but they did not know who they were and felt they were at risk and being threatened? Are you aware of that?
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Mr. SUMMERS. Congresswoman Waters I want to be as helpful as I can. I am not the right Administration witness on the details on the Brothers to the Rescue situation. I would suggest to you that those events did take place involving firing on unarmed airplanes in international air space. I don't think there has been any suggestion of which I am aware that the actions of Cuba in that case were within the confines of international law.
Chairman LEACH. Dr. Paul.
Dr. PAUL. Thank you.
I have basically two questions, one dealing with the term free trade, whether or not that is a legitimate term, and also dealing with national sovereignty.
I believe in free trade and low tariffs and I vote that way, but I think it is misleading to call current policy free trade in the laissez faire sense, because there is a lot of management and lot of subsidies involved. I think that the conventional wisdom here in Washington both by the Administration and Congress should be out of fairness not to refer to it as free trade, but to call it managed trade which puts them in not too much of a different category than their opposition who are the pseudo protectionists.
We don't have true mercantilists anymore, but we have a protectionist faction that tends to argue for fair trade, but that is basically the same argument for the free traders. They want fair trade managed by the World Trade Organization.
Page 39 PREV PAGE TOP OF DOC One thing we do ignore entirely when we deal with free trade is we don't talk too much about currency fluctuations and the degree of trade imbalances that we have and why the World Trade Organization, the IMF and the World Bank will never be able to deal with a pending crisis with our current account deficit.
In the area of managed trade, I strongly object to this being called free trade, because it is subsidized as well. Once we get involved with a country like China that qualified for a lot of subsidies, China gets more export/import subsidies than any other country, so we literally subsidize a foreign country. Countries that qualify for OPIC, literally we encourage our businessmen to go overseas and send jobs over there. Then, if there is a political or economic risk and they go broke, we come back to our working people in this country and we bail them out. I think it is very unfair to the people who protect those individuals who take these political risks.
In the area of the management, not too long ago we all know that the World Trade Organization ruled against us. It said our tax laws are a subsidy and we have to change our law, which means that labor and environmentalists, even though I would disagree in many ways with some of the laws they want, I strongly agree that the World Trade Organization should not be dictating to us.
Some people make fun of us who talk about the sovereignty issue and they say, ''That is just a smoke screen, there is no sovereignty issue.'' Let me read a sentence from the CRS who did a summary of the World Trade Organization on how they describe the legal obligations that we have:
Page 40 PREV PAGE TOP OF DOC ''As a member of the WTO, the U.S. does commit to act in accordance with the rules of the multilateral body. It is legally obligated to ensure national laws do not conflict with WTO rules.'' For us to be an upstanding member of the WTO, we will do something about this unfair tax subsidy to our corporations.
One the one hand, we help our corporations unfairly and on the other hand, we are going to succumb to the pressure of the WTO to change our tax laws. So consider changing the name of free trade. Would you agree with me that this is not really free trade; it is qualified or pseudo free trade and tell me why nobody in this country should ever have a concern about sovereignty issues when it comes to trade issues like this when clearly our laws are being challenged by unelected, international bureaucrats, which I believe contradicts our Constitution, contradicts morality and contradicts our laws?
Mr. SUMMERS. With respect to the first question, I would certainly agree with you that this is not a laissez faire system in the classic sense. However, I believe the approaches that the Administration has favored, represented by PNTR come much closer to the free market and involve a much greater degree of openness in markets than do the alternative approaches represented by a repudiation of PNTR.
Certainly, as you point out, it is not laissez faire, because, over time, successive Administrations and Congresses have made a judgment that it is appropriate to provide various kinds of encouragements to exports and to provide various kinds of encouragements to international integration.
With respect to the sovereignty questionwhile I believe that our participation in the WTO has been very much in the United States' interest, and while I believe that participation has involved an appropriate balance of commitments between those imposed on the United States and those we have received from other countries providing some significant benefit to usI would certainly recognize the appropriateness of sovereignty as an issue for debate and for discussion. It is inherent in any agreement between two individuals, between two companies, between two countries thatif it is a meaningful agreementan agreement constrains future choices. So it is inherent in the notion of an international trade agreement that one accepts certain constraints on one's options and the parties with whom one is agreeing accepts certain constraints. It is felt that both sides are better off by agreeing to those constraints.
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So the fact that there are constraints on our subsequent choices is inherent in the nature of a trade agreement. What the extent of those should be, it seems to me, are appropriate to debate in any particular case.
I would highlight in the case we are debating here, which is PNTR for China, there are essentially no restrictions on U.S. choices that would be represented by enabling China to join the WTO, but a rather substantial set of constraints on China's choices with respect to the possibility of blocking access to U.S. products, with respect to the prospect of flooding the U.S. market, and with respect to accepting incursions of information technology. It it seems to me their willingness to contract in that way with us is something that very much serves our interests.
Dr. PAUL. Would you agree that if there are to be constraints that those constraints should be more designated by the U.S. Congress which in the Constitution is rather clear rather than an international bureaucracy?
This is a problem for a lot of people and I think the reason you see demonstrations in Washington State and Washington, DC., I think people feel intensely about this, and I think if we ignore this, we are kidding ourselves.
Mr. SUMMERS. I would certainly agree with you that we ignore those concerned about globalization at our peril, and we do need to understand their concerns and find the most effective ways to respond to them.
Page 42 PREV PAGE TOP OF DOC I believe that it is appropriateI don't think anyone has ever suggested to the contrarythat before the United States makes a trade agreement or before the United States joined the WTO that congressional consent be a requirement, precisely because such actions do embody consequential steps for the economy. That is why Congress' consent was required before the United States could join the WTO, and Congress' assent will be required before the United States extends PNTR to China.
Dr. PAUL. Since this is not laissez faire, would you accept the title pseudo free trade?
Mr. SUMMERS. Congressman Paul, with respect, I think the term pseudo is somewhat pejorative in its implication.
Dr. PAUL. Do you have one? Do you have a term?
Mr. SUMMERS. That would not be my choice of terms. How about ''non-laissez faire open markets''?
Dr. PAUL. There is a contradiction in terms.
Chairman LEACH. Mr. Bentsen.
Mr. BENTSEN. Mr. Secretary, a few questions for you. Is there anything in the bilateral agreement between China and the United States that is the subject of the PNTR agreement which increases access to U.S. markets by Chinese manufacturers?
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Mr. SUMMERS. No.
Mr. BENTSEN. So under the current trading rules that we have, as long as we are granting normal trading relations with China, they have basically unfettered access to our markets, correct?
Mr. SUMMERS. That is correct.
Mr. BENTSEN. So the agreement, were it to be enacted, would not lower any barriers to Chinese goods?
Mr. SUMMERS. That is correct.
Mr. BENTSEN. There have been some who have raised the concern, some of the opponents, that the permanency in granting PNTR of U.S.-China trade relations would, in effect, give a green light to U.S. manufacturers and other producers that it is now OK to shift production operations to China at the expense of U.S. jobs. Is that a fair assessment in your opinion or is that a red herring?
Mr. SUMMERS. I doubt that it is a large factor. The evidence that I have had an opportunity to study suggests that insofar as there are issues of businesses locating in China, the choice is rarely a choice between the United States and China as a locale for production. It is much more frequently a choice between China and other countries in the same region that have in common with China relatively low wages, labor forces suitable for assembly operations and the like.
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My judgement is there would not be a large impact arising from the reduction of uncertainty with respect to investment decisions in China. Such impact would be likely to have more to do with the allocation of investment in Asia than with the allocation of investment between the United States and China.
Mr. BENTSEN. Mr. Bereuter touched on this a little bit, but he and my other colleague, Mr. Levin, have been working on complementary legislation to the PNTR legislation. Is it fair to say that the Administration would support that and believes that complementary legislation is an added benefit to the bilateral agreement and to the extension of permanent normal trading relations?
Mr. SUMMERS. Obviously I don't want to make a blanket statement with respect to legislation, but I can reiterate we believe that the effort of Congressman Levin and many others, notably Congressman Bereuter, has been an enormously constructive one. We believe that some type of legislation, properly drafted, has the prospect of advancing U.S. interests complementary to PNTR in a number of very important respects, including, in particular, the human rights area, the protection of American labor interests and broader American economic interests in full compliance.
Mr. BENTSEN. There have been some in the House in leadership positions on the other side of the aisle who in recent days have said they believe where Mr. Bereuter and Mr. Levin are headed perhaps is overly broad and not constructive, and that some in the business communityI know you don't speak for the business communityfeel that it would be burdensome.
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I take it that is not at all the opinion of Treasury or the Administration and I don't want to draw you into a House battle.
Mr. SUMMERS. I think there is always a legitimate concern, anytime we legislate, that procedures will become too cumbersome or too unwieldy. That always has to be a concern. I respect those who advance that concern.
From the discussions that I have had and the discussions my colleagues in the Administration have had, we certainly believe that working with Congressman Levin and Congressman Bereuter and others has every prospect of crafting legislation which will be very much appropriate to the objective, is not cumbersome and unwieldy, would complement in a very valuable way the PNTR legislation, and would serve to advance American commercial, and more broadly, American economic interests. We believe the vast majority of advocates of PNTR should be entirely comfortable with legislation drafted in this way.
Mr. BENTSEN. Thank you.
Chairman LEACH. Ms. Biggert.
Ms. BIGGERT. Thank you, Mr. Chairman.
I think the PNTR vote is going to be so important and will dramatically affect our economic prosperity in the future, so I certainly would like to complement you, Mr. Secretary, Ambassador Barshefsky, and Secretary Daley on all that you have done in working with WTO and moving this bill forward.
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Both you and Ambassador Barshefsky stated that regardless of our decision on PNTR, China will enter the WTO and China will continue to sell in the U.S. market, but if the Congress rejects PNTR, you stated, ''We will enable our European and Japanese and other world competitors to reap the benefit of the opening China markets and U.S. companies, workers and farmers would be left behind.''
I wanted to ask two questions in regard to that statement. Have you an estimate of what losing out on the China market might cost in terms of jobs and dollars to U.S. companies? Second, what might we tell those who argue that China will not accede to WTO until it knows it has U.S. PNTR at hand, that it is really the U.S. market and relationship that it seeks?
Mr. SUMMERS. With respect to the second question, my impression is that China has made it clear it would be their intention to accede to the WTO whether or not the United States granted PNTR, although it would obviously be very much their hope that the United States would grant PNTR. It would, I think it is fair to say, have a very grave and material impact on their relationship with the United Stateswhich would affect our ability to pursue all of our various objectivesif China were not to gain PNTR.
With respect to your first question, I don't have particular quantitative estimates to cite for a scenario in which European and Japanese producers were to gain at the expense of the U.S. producers, but I certainly think it is fair to say the impact would be well into the hundreds of thousands of jobs, and well into the billions of dollars in trade.
In my judgment, the impact of a decision by the Congress to repudiate PNTR would be much more broadly felt in terms of the signal that it would send with regard to the United States' attitude and approach toward the global economy. An adverse signal could have very material effects on confidence around the world, with very large consequences for the global economy, and, ultimately, for U.S. exports.
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Ms. BIGGERT. I know both you and Ambassador Barshefsky have spent a great deal of time with the Chinese counterparts in the negotiations, and certainly the internal politics of China are not directly in your portfolio, but you have had a chance to observe firsthand what is happening over there, particularly as regards the so-called hardliners versus the moderates within the Chinese government.
Would you comment on the Administration's view of the potential political fallout of a no PNTR vote, particularly with respect to what this failure might mean for the moderates within the Chinese government? I know we talked about the citizens, what this would mean, but what does that mean for the government?
Mr. SUMMERS. Let me say that I think we need to recognize that China's destiny will be shaped in China by forces that are largely Chinese. It has been a united, most of the time strong, country for 5,000 years. It would be a mistake for us to assume that we hold China's destiny in our hands.
That said, it seems to me that a vote in favor of PNTR would be a vote that would be reinforcing the progressive, information technology market oriented media using group within China, and a vote against PNTR would be undermining very seriously that group. A negative vote would be reinforcing their adversaries, those committed to continued state control, with a continued military stranglehold on large parts of industrial production, who see information technology and telecommunications as fundamentally subversive within China.
It seems to me that it is appropriate for us as we look at Chinajust as it is appropriate when we look at other countriesto be very conscious of the internal dynamics, while being aware that we are not decisive with respect to those internal dynamics, trying to act in a way that reinforces those elements with whom we are more sympathetic. That approach, it seems to me, commends a positive vote on PNTR.
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Ms. BIGGERT. Thank you.
Chairman LEACH. Ms. Hooley.
Ms. HOOLEY. Thank you, Secretary Summers for being here today.
We are soon going to have a vote and I think a positive vote will be good for our businesses and jobs in the United States, and certainly in my State where we exported about $133 million to China which is a fivefold increase over the last five years. It has made a difference in the jobs we have.
I want to talk a bit about how this will affect the financial services and financial market in China, and how that will impact the Chinese. We are used to a free flow of money in our capital markets and that is a controlled economy. How does that work when you have financial institutions with this very free flowing money working in a very controlled economy?
Mr. SUMMERS. I don't mean to be facetious, but in a complicated way.
Ms. HOOLEY. I assume so.
Mr. SUMMERS. Clearly the broad challenge that China is going to face over the next decade is reconciling the internal contradictions that are inherent in having portions of the economy be governed by free market principles and other portions be governed by controls.
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Someone once compared that kind of process in a Communist economy to changing the side of the street on which traffic travels, but deciding to do it gradually by beginning only with trucks. That, I think, points out the dilemmas that are involved. I think experience around the world tends to suggest that, once reform creates a certain critical mass, the force to push away remaining restrictions becomes overwhelming.
The juridical principle that governs these agreements is the concept of national treatment. That is, it is for China to decide what its economic and financial policies are going to be, not for us to dictate. On the other hand, it is for us to insist that American banks that operate in China are not subject to additional rules and restrictions beyond the rules and restrictions which apply to Chinese banks. That is what the principle of national treatment means.
Our effort has been, first, to ensure national treatment as we essentially have in the banking and insurance sectors, and then build on that assurance of national treatment, since national treatment in the securities industry, for example, doesn't mean that much if nobody is allowed to do any underwriting under any circumstances. So, our effort has been to build on the establishment of national treatment by seeking to broaden the range of products which it is possible to issue and the types of loans that it is possible to grant.
For example, one of the important issues in the banking area goes to the question of ensuring that institutions have the capacity both to make local currency loans and accept local currency deposits, and to make foreign currency loans and accept foreign currency deposits. These issues are all reflected in this agreement.
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Our priority is support for national treatment and support for evolutionary reform, recognizing that at a certain point the process of economic reform has a bit of a snowball characterthat once the critical mass has been achieved, it gathers speed.
Ms. HOOLEY. Maybe I should ask this question after the vote where we wouldn't have to worry about it, but one of my concerns is looking out after the first few years of an agreement, what are the pitfalls and things as legislators we need to be watching for? We witnessed the aftershock of the Russian economic collapse of their capital markets. What are the dangers for the banking industry as they expand into China? What do we, as legislators, need to think about and look at?
Mr. SUMMERS. Let me say first I think there are major issues that the Chinese authorities have recognized they face with respect to their financial system. One of the American authorities in this area is Nicholas Lardy, who has been affiliated with the Brookings Institution. He has put together estimates that at certain points suggest the Chinese banking liabilities that are not fully backed may be as much as ten times as large relative to GNP as the S&L crisis liabilities were in this country.
So, I suspect your private sector panel that follows me will be able to discourse knowledgeably on this topic. There are very large financial challenges in China.
The experience we have had around the world, and Argentina is a classic example, indicates that a greater presence of foreign institutions is stabilizing in difficult situations, for the same reason that interstate banking has been stabilizing in the United Statesthe external presence provides a reservoir of capital, and a reservoir of expertise and promotes greater diversification with respect to what takes place.
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I would hope that the Congress wouldthrough the international financial reports Treasury provides periodically and in other waysmonitor very closely the economic and financial situation in China, because it seems to me that it does have important ramifications for growth prospects, which in turn have important ramifications for both our commercial and political interests in China.
Ms. HOOLEY. Lastly, what do you estimate opening the Chinese markets to American financial institutions might mean as far as jobs in the United States?
Mr. SUMMERS. I am not able to give you a precise estimate, but I would certainly think that strengthening those institutions to compete and distribute globally, would certainly be measured in thousands or perhaps tens of thousands of jobs in the United States.
I think even more, it would show up in the global strength of those institutions. As we had a chance to discuss earlier with the Chairman, our experience is that industry tends to follow finance. So, there are important indirect benefits to American producers of having American financial institutions present relative to other countries' financial institutions in China.
For that reason, I suspect the financial services agreement really would have a very positive material effect on the American economy.
Ms. HOOLEY. Thank you. I am looking forward to some of those challenges ahead.
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Chairman LEACH. Mr. Sherman, and I apologize. You have been here since the opening bell and I am sorry it has taken so long.
Mr. SHERMAN. But what could be more entertaining?
I want to take you up on your offer to use my time for that riveting opening statement that I had planned to give at 10:00 a.m.
Mr. Secretary, I want to thank you for your service to the country, for coming before our committee. It is unfortunate that my esteem for you is equaled only by the degree to which I disagree with you on this issue.
I want to emphasize that I am for engagement, I am for communication, I am for democracy in China, I am for everyone in China having access to the internet, I am for trade, I am against isolationism and I am against this agreement. The status quo cannot be defended. It is a $70 billion trade deficit which is six times the size of our exports to China. That is like a human being who has cancer cells six times the size of the healthy tissue.
The choice is not between the status quo and this agreement; the choice is between this agreement, which I think, unfortunately, locks in the status quo with a few improvements, and the idea of exploring bold new approaches to make use of the fact that 42 percent of all Chinese exports come to the United States only less than 1 percent of our exports go to China and if we were to engage in genuine hardball negotiations, they would have to realize their entire economy would collapse after a week or a month without access to the American market. We could do better, we should do better.
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Why don't I think this deal is so good? It looks real good on paper. We make changes in our laws, they make bigger changes in their laws, but the changes in our laws are significant. We make access to the U.S. markets permanent and predictable. What is more important is that law in the United States is so important. Law is sovereign.
China will also make big changes in its law, in its published law, but in China, what does law mean? Is it significant? I think not.
The Chinese Communist Party Central Committee has determined that they should purchase about $13 billion worth of American goods and no change in their published law is going to change that by itself more than a few percentage points. Who is going to import American goodsbig, state-owned enterprises. It doesn't matter what tariffs or regulations are published, the government of China doesn't need to publish a single law. Restricting its airline from buying American airplanes, it owns the airline and it will not buy American airplanes if it chooses not to do so. It will not do so unless it forces Boeing or others to build plants in China with offsets, which means that parts previously made in the United States would be made in China, not only for Chinese-use planes, but for planes around the world.
Let us say there was an independent business enterprise capable of signing a major contract with the United States, say this enterprise was about to buy American goodsafter all, low tariffs, no quotas, great products, made in Americaand the control of the CEO of that business gets a call from a Commissar of the Chinese Communist Party saying, ''Well, the Central Committee was just reading one of Nancy Pelosi's speeches delivered right after one of Chris Smith's speeches, they are angry at the United States, they don't want us to give arms to Taiwan or sell arms to Taiwan, so they have decided it is best if that businessman doesn't buy those American goods.'' Well, no tariffs, good laws, do you think that business person is going to defy the Chinese Communist Party? I think not. Imagine, you know, we think you will make the right decision, because you have been well educated, Mr. Businessman. We would hate to think you need reeducation.
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There is also the issue of whether this is going to help unravel tyranny in China. The dissidents cannot tell us what they think because every one of them has friends and relatives subject to imprisonment tomorrow if they don't toe the line today. Many of those dissidents have the courage to tell us to vote against this agreement.
We are told there are the moderates inside the Chinese government. Well, they may differ on a few things, there may be hardliners and maybe moderates, but one hundred percent of the Chinese Central Committee of the Chinese Communist Party is dedicated to a total monopoly of control of China by the Communist Party. They may differ on exactly what policies, but they are completely dedicated to the continued control of the Communist Party.
They have concluded by an overwhelming majority, and these are politicians who know their country and know how to stay in control, they have risen through the ranks, they know China like we know our own districts, and they say, give us this deal. Why? Because it will help them achieve their overwhelming objective, continued monopoly control of the Chinese Communist Party in China.
We are told that factories will not move to China. This is not entirely true. There are those offsets. Also it is not the individual factory, it is capital. The $100 million factory in China designed to produce goods by employing 20-cent-an-hour labor could have been a $100 million factory in California or Vermont designed to make similar goods, but to make them in a different way, using $20-an-hour labor and high technology. That capital, capital that we are short of, ends up going to China knowing the goods produced there will have permanent, guaranteed access to the American market, because that is where the profits are. The profits are in the $83 billion made in China, 20 cents an hour, sold in America at American prices to American consumers. The profits are not in the $13 billion the Chinese grudgingly and temporarily allow us to sell in China.
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I guess I shouldn't really be listed as undecided on this.
I also want to point out that the compromises that have been offered by the import lobby have been rather tiny. I am intrigued by Mr. LaFalce's idea that we should review our situation every five years, that we are a sovereign country and we should have a mechanism every five years, vote up or down and by a majority vote, signed by the President or with an override, we could end MFN for China. That might get a lot of votes. I don't think it is likely to occur.
Instead, we have an agreement before us that does nothing for the environment, nothing for labor. Another of my colleagues suggested that we just put into this bill that if Taiwan is invaded or blockaded, that would end American Most-Favored-Nation status of China. I don't think that will be in the bill either, because I don't think the import lobby will allow it.
Instead, we are given some very small fig leaves. We are given anti-surge protection that does nothing to prevent surges of imports. All it says is it codifiesand this is rather nice of the Chineseit allows us to put into law that this Congress is free to appropriate money to provide for aid and reeducation to displaced workers. It allows us, if we have the money, if we can appropriate it. Of course not a penny of that comes from the importers. It has to come from somewhere else and I don't know where we have loose change lying around in the Federal budget.
So, the anti-surge protection is a codification of the right of Congress to pass education programs for American workers. That is not a major concession.
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Likewise, the monitoring will simply allow us to watch as that $70 billion trade deficit continues. I would certainly prefer a provision that would reinstitute annual review of our relationship with China if the trade deficit does not decline below the $70 billion level it is now. My fear is that it increases.
We have all the cards, we have 42 to 43 percent of their export market coming into the United States. I think I am supposed to slip a question in here somewhere and I do have one or if my time has expired, I will yield.
Chairman LEACH. I will tell you what. You have gone about five minutes over. We have two more speakers.
Mr. SHERMAN. I will yield back my time.
Chairman LEACH. If there is time, then we will come back, but I would rather get to Mr. Meeks at this point.
Mr. SHERMAN. Mr. Chairman, you have been very indulgent. Thank you.
Chairman LEACH. Mr. Meeks.
Mr. MEEKS. Thank you.
Page 57 PREV PAGE TOP OF DOC Thank you, Mr. Secretary for the work you have done.
I am still undecided on this issue and I am deliberating, because I want to make sure that whatever my vote is, is the right vote that I believe would benefit the people of the United States of America and of course, the people of China also.
I have heard a lot of arguments and debates regarding human rights and human relations or the violation of human rights by particularly the Chinese government, but it seems to me sitting and listening to this particular debate, listening to questions that have come from colleagues here and talking to individuals in and out of my office, that the major concern is the violation of human rights by American corporations who may do business in China.
My first question is, are there any provisions in the bill or any precautions taken so that an American corporation doing business in China will be prevented from being guilty of exploiting people in China for the cheap labor that they may be able to produce?
It seems to me when I talked to some of my friends who were part of the labor movement, that is one of their biggest fears, that they will have unfair competition and that American companies can go there and there is nothing we can do if they retain people at the 20-cents-an-hour level as opposed to the level they would pay Americans here. My question is, is there anything to prevent them from doing that?
Mr. SUMMERS. I am not aware of specific provisions that bear on the conduct of American corporations in China. I would make three points.
Page 58 PREV PAGE TOP OF DOC First, the overwhelming evidence is that plant location decisions in China are made vis a vis other Asian or less developed country alternatives, not vis a vis location in the United States. The suggestion of jobs in the United States being exported to China is largely, in the judgment of most who studied the issue, I think, a chimera.
Second, the evidence isand this is monitored by the business groups in Chinathat the American firms in China are, with few if any exceptions, exemplars and sources of pressure for Chinese businesses, because of the higher wages they pay, because of better benefits they provide, because the commitment to working conditions that they embody.
So there is, I think, no basis at this point for a concern that the American companies that do business in China will do so in a way that is exploitive of Chinese workers. Indeed, all the evidence suggests that their presence exerts some upward pressure on Chinese wages and living standards.
Third, even if one rejects those two premises, it is worth mentioning that there is currently no barrier to a U.S. company relocating to China, taking advantage of low wage Chinese labor, and reexporting to the United States. There is no barrier to that kind of activity that will be removed by this legislation or by PNTR. Every such opportunity that could conceivably exist after this legislation exists before this legislation.
What this legislation does is protect American workers from surges, protect American technology from offset requirements that encourage foreign investment, and provide for the prospect that is not fully there now of producing for the Chinese market outside of China by removing tariff and non-tariff barriers to the export of goods into China.
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So, if one's concern is with exploitive production by businesses in China, the reality is that this agreement does not do a single thing that construably increases that possibility, and it takes a number of steps that make that kind of production less likely.
Mr. MEEKS. I want to affiliate myself with some statements made by Representative Waters. For the life of me in trying to make a decision in this, and I indicated I want to make sure I make a decision based on the right thing to do. I understand the whole economic prosperity aspect of the situation, but economic prosperity sometimes could be at the expense of human capital.
For sure, this country is enjoying economic prosperity, but when I look at the history of the development of this country, it was done on the backs of slave labor. Now we try to work as though we have clean hands when we are dealing with other countries. Yet I think about the many things we have done in this country.
I have been scratching my head and asking a number of individuals what is the difference between China and Cuba, other than 1.5 billion people? Which then seems to indicate to me that maybe the only difference is the amount of money that can be made in China as opposed to the amount of money that can be made from a neighbor 90 miles to the south of Florida.
For the life of me, I don't understand why we have one policy on China and are looking to move toward a permanent, normal trading relationship with China, yet have a complete embargo on the people of Cuba who I see are suffering. I have had the opportunity to visit both places and it seems to me if we are going to engage with China, it seems only right that we engage in Cuba. I am just trying to figure that out to see how we could reconcile the two.
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Mr. SUMMERS. I think it is a very important issue and obviously the country will, on an ongoing basis, be engaged in consideration and reconsideration of the policy toward both China and Cuba. Two distinctions seem to me to be salient with respect to the difference.
One, which I am less qualified to speak to, is the set of political issues and security issues surrounding the Brothers to the Rescue incident and the death of a number of people in unarmed airplane in international air space at the explicit hands of the Cuban government.
The second is the rather different economic strategies and commitments that China and Cuba have made. This morning's Financial Times reports on what it calls a landmark study by the International Finance Corporation of the World Bank that describes how China has evolved its economy to the point where production in the private enterprise sector is now comparable to production in the state enterprise sector, and how that is a process that has been ongoing for a number of years and reflects an economic strategy of embracing market principles.
I am confident that, without some such process underway in China, there would not have been a possibility of negotiating the kind of WTO agreement that we have seen. Unfortunately, no such process has been initiated with Cuba.
While it is tempting to suggest that might just be a consequence of our policies, given the nature of European policies toward Cuba, which are much more oriented to economic integration, I think that is a difficult argument to sustain. I think the essential fact is that the Chinese government has made a much more substantial decision to move to the market than the Cuban government has.
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Chairman LEACH. Thank you, Mr. Meeks.
Mr. INSLEE. Thank you.
I am going to get to a question, but I want to make a statement first.
I am going to support PNTR for two reasons, one having to do with China and one having to do with this country. I want to start with China.
I believe firmly that 20 million Chinese with cell phones and internet access and their own businesses are a heck of a lot more effective in advancing democracy in China than 435 Members of the House of Representatives giving a speech every year. I really believe that is the issue in this vote.
What do you think is more likely to change the Chinese stranglehold of the Chinese governmentmillions of Chinese with some of their own economic power base and the technology to deal with communications or us standing up, once a year and beating our breasts and giving sometimes eloquent and sometimes somewhat verbose speeches about China? I think that is the crucial issue in this.
I want to read into the record something I thought was so telling in the Washington Post this morning. I want to quote it, because these folks have a lot more credibility on the subject than I, the Chinese dissidents who are risking their freedom continuing to resist the Chinese government: '' 'All of the fights for a better environment, labor rights and human rights, these fights we will fight in China tomorrow,' said Dai Qing, perhaps China's most prominent environmentalist and independent political thinker, who also served time because she opposed the 1989 crackdown on student protestors in Tiann amen Square.' ''
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Here is where I think she said something very eloquent: ''But first we must break the monopoly of the state. To do that, we need a freer market and a competition mandated by the WTO. One of the main economic and political problems in China today is a monopoly system, a monopoly on power and business monopolies, both elements are mutually reinforcing. The WTO's rules would naturally encourage competition and that is bad for monopolies.''
I just want to say we need to break the stranglehold of China on their own people.
Second, Mr. Sherman brought up airplanes. Airplanes are close to my heart, because I represent about 12,000 Boeing workers. I want to say very strongly to people concerned about jobs that rejection of this treaty has the capacity of losing jobs in this country. If you don't think rejection of this treaty is not going to result in us losing jobs in this country, you don't understand essentially some of the trade imperatives.
We are in a struggle between Boeing and Airbus frankly right now. I can tell you if this treaty goes down, the workers in Toulouse, France are going to have benefits under the WTO that the workers in Seattle, Washington are not going to have.
I am not going to cast a vote to give workers in France tariff reductions in the Chinese market and deny the same tariff benefits in reductions in the Chinese stranglehold to the people I represent. I don't believe that makes sense.
This is a competition between workers in this country and workers in France, as much as it is a competition between workers here and workers in China, because the real issue is who is going to get the benefit of these tariff reductions, people in France or people in Seattle? I am voting for the people in Seattle to get those tariff reductions.
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Mr. Sherman brought up the issue of offsets. This is what is so stunning to me about this debate, because we hear over and over about the terrible things the Chinese government is doing to our workers. There is a long legion of things the Chinese government is doing unfair to our workers, one of which is requiring these offsets of production capability before they buy our planes.
But guess what? This is the first treaty we have which has some mechanism to reduce their offset requirements. I cannot understand for the life of me why we would reject the first case of medicine we have available to deal with this illness. The Chinese government is not just abusing Chinese workers, it is abusing American workers and I want to break their abuse of American workers, both of their insidious tariffs and their grossly unfair offset requirements. This finally gives us a mechanism to deal with that.
Now I want to ask a question. I want to thank you for your efforts, but I want to ask, how come I haven't seen you or any of the other Secretaries on Larry King or the Imus Show or any other talk show in America that I have heard of? This is a very serious question.
One of the reasons this is a difficult vote is that the people in this country have not been exposed to what this treaty really does. Most Americans think this is some kind of referendum, ''do you like China or not?'' Believe me, it is 100-to-1 if you ask that question, ''no'', in a sense, at least the Chinese governmentlove the Chinese people.
We need you to get out there on these talk shows and I would just ask if that in the plans somewhere? It would certainly be helpful and I think it would be helpful to understanding this treaty.
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Mr. SUMMERS. I very much appreciate your statement, which I think was a very powerful statement of the argument for China PNTR. I would like to pick up on the last thing you said, because I think it is the single sentence I would ask people to most keep in mind as they think about this issue. This is not a referendum on whether China should get a merit badge. This is a judgment about what is in the interest of the United States. I think, seen in that light, the case is relatively compelling.
With respect to the talk shows, I think all of us are willing to appear, if asked, to make that case in any reasonable forum. Certainly I am, and we are all very much committed to trying to get out that message.
Mr. INSLEE. I am going to do everything humanly possible to get you asked, because we need your information out there. These are lonely battles sometimes without you.
Mr. SUMMERS. Fair enough.
Mr. INSLEE. Thank you.
Chairman LEACH. Let me just conclude with a couple of observations.
First, the word corruption hasn't come into the dialogue today and I think it should. I would only raise it in this sense. Chinese society is a little more corrupt than we would like to think.
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It is my view that managed trade is a fertile ground for corruption and that this agreement leads to freer trade which is a less fertile ground and that is a seminal part of this kind of agreement.
Second, I would like to raise one partisan observation in as constructive a way as I can. That is this is an approach that has division in both political parties, but it appears that the majority of Republicans are going to support it. That is in a seminal foreign policy initiative of a Democratic Administration, the Republican Party majority is going to stand with the President of the United States. This is important in terms of a bi-institutional, bipartisan foreign policy, but we do not have enough votes to carry it, because there is significant Republican opposition as well.
Nothing would be more ironic than if the President's own party ends up driving a stake into a bi-institutional, bipartisan foreign policy. In fact, with the exception of the vote which went down of whether or not we would give the Executive Branch free reign to negotiate trade agreements a year ago, I know of no instance in the post-World War II era of any Western democracy in which the President's own party will vote against a bipartisan, bi-institutional foreign policy.
The reason that I have invited you today is to provide the Administration opportunity to lead. I hope you are successful, but it is self-apparent that this is a very difficult vote and that you will have to lead within your own party principally. I am hope that it is successful. I think it is clearly the most important vote of the new century for this Congress and clearly something we are going to have to come forward on.
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I think some of the frustration that Mr. Inslee was reflecting at the end was the frustration of where one puts priorities. My own sense is that the Department of the Treasury understands the implications of this vote and I wish you well in bringing enough common sense to bear.
In any regard, I appreciate very much your testimony. I think you have laid forth a very common sense case, one that this Congress is going to have to take seriously.
At this point, I apologize, but there is another series of votes on the House floor. It is probably going to be forty minutes of voting, so the members of the next panel are advised we will commence at 2:00 p.m. or as shortly thereafter as possible.
The hearing is in recess.
Chairman LEACH. The hearing will come to order.
Our second panel consists of Norman Sorensen, Senior Vice President of International Operations of the Principal Financial Group and he is President of Principal International Inc. Previously he served as a senior executive for the American International Group where he was responsible for business development efforts in Asia.
Our second witness is John Lipsky, Chief Economist, Director of Research, Chase Manhattan Bank. John serves as the Director of Research of Chase's Global Bank. He is responsible for the corporation's economic and financial market research and coordinates issuer specific research among the various lines of businesses.
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Our third witness is Marc Lackritz. Marc has served as President of the SIA since December 4, 1992. Prior to this position, he was an Executive Vice President of SIA and before that, the Public Securities Association.
I apologize that the hearing has gone on longer than we thought with regard to votes and complications thereof, but we welcome each of the witnesses and we will begin with you, Mr. Sorensen.
Without objection, all your statements will be placed in the record and you may proceed as you see fit.
STATEMENT OF NORMAN R. SORENSEN, PRESIDENT, PRINCIPAL INTERNATIONAL, INC.
Mr. SORENSEN. Thank you, Mr. Chairman, Members of the committee.
As the Chairman has indicated, I am Norman Sorensen and I run international operations for the Principal Financial Group under a company called Principal International, Inc. which has operations in eleven countries and a representative office in Beijing, China for the past five years. We also have a relatively large and growing operation in Hong Kong, which is now part of the Chinasphere Administration, which is called the Hong Kong SAR.
The Principal Financial Group is a pension and retirement services specialist company, although it is also in the United States the fourth largest life insurance company in the country by premium volume. It manages $117 billion in assets around the world.
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Chairman LEACH. Where would it be headquartered?
Mr. SORENSEN. We are headquartered in Des Moines, Iowa.
Chairman LEACH. I thought that would be appropriate for the record.
Chairman LEACH. And you are the fourth largest life insurer in the country?
Mr. SORENSEN. We are the fourth largest life insurance company in the country by premium volume, the eighth largest by assets, and we are based in Des Moines, Iowa.
We would like to congratulate you, Mr. Chairman, and the committee for holding these hearings on permanent normal trade relations with China with obvious consequences for entry for China into the WTO.
We come to this perspective with a unique approach which is the pensions and retirement services area. We have colleagues in the insurance and pensions industry which have somewhat more interest in the life insurance business than they do in the pensions area.
Page 69 PREV PAGE TOP OF DOC The Principal Financial Group is fortunate enough to be the largest provider of 401(k) plans in the United States, larger than any mutual finds company or insurer or bank in that sector, and this is the expertise and the technology and the sales that we would like to bring to China for which we so strongly support the granting of PNTR to China.
As with other nations around the world, China has aging problems. Its population pyramid has moved very quickly from lots of workers supporting few retirees to gradually and very, very fast fewer workers supporting a growing number of retirees. Most recently, I met three weeks ago with Anthony Neoh who is the Chief Advisor to the State Council of China, Zhu Renjii, on pensions and retirement services. He is also the number-three person in the China Securities Regulatory Commission which is trying to build capital markets in China in the U.S. model.
He just came out in the press today, in fact, in the Financial Times, indicating for the first time ever China's problems in funding the retirement services and pension programs over the next fifteen years. They need technology, they need the expertise and they need the products that are somewhat like the Principal and other companies in the United States can offer.
Equally, last year, China's Minister of Labor, Mr. Zhang Zuoji visited the United States officially to learn more about our retirement plans, our technology. We hosted part of the delegation to some of our other international pension companiesChile, where they saw our Chilean company, our annuities company there. We shared our technology with them and I think Minister Zhang went away last September with a much better picture of the types of structures for pension and retirement services which could be available to China from U.S. companies, among them the Principal.
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Ambassador Li, the Chinese Ambassador to the United States, visited our Des Moines, Iowa headquarters and we took him through our whole technology last November. Ambassador Li was equally impressed with the type of advanced retirement services structure that can be implemented in China.
Proof of this type of thinking comes from the most recent implementation of something called MPF, Mandatory Provident Fund, in Hong Kong Special Administrative Region, which is part of China. That model is almost an exact replica of the U.S. 401(k) system except it is compulsory. All employers and all employees must contribute to a Mandatory Provident Fund and that started this February.
Should we succeed in convincing the mainland that such a model is applicable, American pension and retirement services and life insurance companies could have much to gain and the U.S. balance of trade enormous advantages, because financial services do not require the type of capital intensive deployments in-country. You are dealing with consumers that are buying essentially American-style financial products. Banking is very similar in that sense.
There lies the challenge, Mr. Chairman. If Congress does not grant PNTR to China and China enters the WTO, as I think most of us in this room believe it will anyway, American financial companies will be effectively barred from the China market. If PNTR is not approved under WTO, China would be able to continue to block U.S. companies, which at the moment are virtually shut off from the China market. Only a handful of American insurance companies have licenses to operate there under tightly restricted conditions. Such licenses would no longer be granted to new companies. Companies that are currently in China under the current regulations would be at some peril in the future should the treaty not be sanctioned by this body.
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If PNTR is approved, insurance companies, pension companies such as ourselves, 401(k) type providers, banks, securities companies, will be able to use our expertise in China which is the best in the world. The American financial services industry is the example of the world. We should not deny our industry the ability to play in China under the same rules that others enjoy.
I think Secretary Summers said most of the things that I personally would have wanted to say, so I won't take more than a few more moments. Keep in mind that China has 23 percent of the world's population and only .3 to .4 percent of the world's insurance and pension business. The enormous potential, and we heard other congressmen and congresswomen remark about penetration of other services. There are today, not 20, but 60 million Chinese in the mainland, not Hong Kong which has 3 million by itself, but 60 million users of cell phones, 60 million. This happened literally overnight. There are 8 million internet users in China, users not computer owners, there are many more than that.
It is expected the earlier number is hard and the next number is soft, that within five years, 25 million Chinese will be using the internet. That as a preamble of financial services expansion and dissemination in China to us seems to be a perfect entry.
China will attempt to springboard the technology that we in the West have had to go through and in Europe, copper wires and all the rest of the pass-through technologies. They are going into cellular and over-the-air type communications. That is very supportive to financial services, extremely supportive.
Page 72 PREV PAGE TOP OF DOC The last remark I would like to make is we have prepared for China a matrix of the various pension systems around the world. We translated this into Chinese, we met with the Minister of Labor and their staffs throughout China in the various provinces. I would like, with your permission, to submit that for the record.
Chairman LEACH. Without objection. That is a very unusual submission and I think the committee would be delighted to put it in the record.
Mr. SORENSEN. Thank you, sir.
The Chinese regulators are currently considering it. The bottom line is China's admission to the WTO is for the financial services industry of the United States an extremely important step. It will not hurt American employment in the financial services industry; it will only increase its ability to compete very effectively in those markets.
1.3 billion people today, of which there are about 40 million households. Household size in China, because of the one baby policy, as you know, has been reducing and that is one of the problems in the pyramid changing on the pension side, is extended and includes about 4 to 4 1/2 people. So you have over 100 million people in China today of the 1.3 billion that have the beginning ability to consume financial services, among which saving for retirement and pensions in the U.S. style and that segment is the fastest growing of the 1.3 billion.
America should continue to provide leadership in opening markets throughout the world. As I travel, and I am in China every month, but as I travel throughout Latin America, Asia and Europe, I am questioned sometimes about America's moral authority in leading trade issues. I don't think Congress should fail in this; I think Congress should adopt PNTR on behalf of the American financial services industry. We at the Principal strongly support it.
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Thank you for the opportunity to testify. If you have any questions, I will be happy to answer them.
Chairman LEACH. Thank you very much.
Mr. Lipsky, you represent the Chase Manhattan Bank?
Mr. LIPSKY. Yes, Mr. Chairman.
Chairman LEACH. That is in New York City.
Mr. LIPSKY. Yes, it is headquartered there.
Chairman LEACH. How does it rank in American assets in banking? It is number one, is that correct?
Mr. LIPSKY. Following recent mergers, we are now number three.
Chairman LEACH. How does it rank in life insurance? Are you as large as the Des Moines, Iowa company or are you substantially smaller?
Mr. LIPSKY. We are a midget compared to Des Moines, Iowa.
Chairman LEACH. Thank you. I just thought the record ought to reveal this circumstance.
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Chairman LEACH. Please proceed.
STATEMENT OF JOHN LIPSKY, CHIEF ECONOMIST AND DIRECTOR OF RESEARCH, CHASE MANHATTAN BANK, ON BEHALF OF FINANCIAL SERVICES ROUNDTABLE AND THE COALITION OF SERVICES INDUSTRIES
Mr. LIPSKY. In fact, Mr. Chairman, I believe that Chase Manhattan's insurance operations may be smaller than the insurance operations headquartered in Cedar Rapids, Iowa, but I am not sure.
Chairman LEACH. I would be confident of that. Cedar Rapids is the home of Aegon, which is one of the largest insurance companies in the world.
Mr. LIPSKY. Exactly. Thank you for that clarification.
I also would like to thank you and the committee for the opportunity to be here today.
In addition to the roles that you mentioned earlier as Chief Economist and Director of Research, I am also a member of the Chase Manhattan Bank's Management Committee. Today, I am testifying on behalf of the Financial Services Roundtable and the Coalition of Services Industries.
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The thoughts I have to express today are quite straightforward. The earlier sustained expansion of market-based international trade previously under GATT and now under the WTO, has provided a critical boost to the United States' recent economic success. Continued progress in opening foreign markets to the U.S. firms will help to extend that success into the future.
It is only logical therefore, that the member firms of the Financial Services Roundtable and the Coalition of Services Industries strongly support the establishment of permanent normal trade relations with China under the terms of the bilateral agreement. Approval of PNTR will create significant new business opportunities for U.S. financial sector firms. This will benefit both their shareholders and their employees.
In addition, expanded opportunities in the financial sector will aid other U.S. firms engaged in business in China and elsewhere and more broadly, China's accession to the WTO under the terms of the bilateral agreement will represent a significant step forward in creating a fair, more efficient and more open world trading system.
The benefits to U.S. financial services firms from this bilateral agreement are straightforward and fundamental. I would like to signal just a few of them. Today, foreign equity ownership is limited and the licensing process for foreign banks is neither transparent nor based entirely on commercial considerations. Under the bilateral agreement, China will allow bank branches and joint venture partnerships upon accession; within five years 100 percent foreign ownership will be permitted.
Page 76 PREV PAGE TOP OF DOC Today, there are significant national treatment problems for foreign banks in China. In general, foreign banks are only permitted to engage in wholesale business, to offer only foreign currency products, and to transact only with foreign invested enterprises. Under the bilateral agreement, China, upon accession, will allow foreign banks to handle all foreign currency transactions for foreign clients.
In addition, such transactions will be allowed with Chinese businesses and individuals subject to an already agreed timetable. Moreover, within two years, foreign banks will be allowed to handle local currency transactions for Chinese businesses subject to a geographic phase-in and within five years, for Chinese individuals without any geographic restriction.
From the outset, non-bank financial institutions will be allowed to provide auto financing and foreign financial information providers will be able to operate without special restrictions. A little noticed, but very important part of this agreement, is that access to information, at least financial information, will be widespread and without restrictions.
Within two years after accession, foreign firms will be allowed to issue credit cards for local currency transactions and to offer wholesale credit such as mortgage lending. Within five years, non-bank institutions will be allowed to engage in consumer financing and when China allows commercial leasing, both Chinese and foreign enterprises will receive identical treatment.
Foreign securities and asset management firms also will receive new powers under the agreement. Of course, we have to recognize that the Chinese securities industry is very much at an early stage of development. Major steps will be required to complete a modern, regulatory and legal framework. Thus, it is understandable and appropriate that the liberalization of China's financial markets will be accelerated most in the banking and insurance sectors, but it should be noted that the Chinese Securities Regulatory Commission is working actively on plans to develop the domestic industry that will include foreign participants.
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Other benefits will flow from the PNTR agreement with China. For example, by establishing a preagreed timetable for implementation, this agreement sets a new, higher standard for future negotiations with other countries on opening financial services industries to international competition.
In essence, there are no negative aspects to this agreement for U.S. financial sector firms. The only action required by the United States for U.S. firms to benefit is the establishment of PNTR with China. However, if China's WTO accession were to proceed without the U.S. granting PNTR status, U.S. financial sector firms would be put at risk. In such circumstances, non-U.S. firms operating in China would seek to take advantage of such a turn of events.
Thank you very much, Mr. Chairman, and I would be happy to answer any questions.
Chairman LEACH. Thank you very much.
Marc, please proceed.
STATEMENT OF MARC E. LACKRITZ, PRESIDENT, SECURITIES INDUSTRY ASSOCIATION
Mr. LACKRITZ. I appreciate the opportunity to present the Securities Industry Association's perspectives on permanent, normalized trade relations with China to the committee and it is a pleasure to be here to testify this afternoon.
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I guess I would like to begin by saying we really appreciate the work the committee has done in the past, along with the Administration, to open foreign markets to financial services firms internationally. Opening foreign markets, international growth and globalization is one of the great areas of growth in the securities industry. Because of our world leadership in providing these kinds of services, these kinds of opportunities are important to keep the growth going, to keep our markets growing and to keep our business growing.
We very strongly support permanent normalized trade relations with China for three basic reasons. First, opening the Chinese markets to both the goods and services sectors will help to bolster China's economic growth, thereby benefiting our own economy through increased exports.
Second, PNTR will create new business opportunities for U.S. financial services firms, some of which have been described already.
Third, I think we reap the benefits from China's concessions to join and abide by the rules of the world trading system without giving up anything in return, which means it is really a win-win situation for us and for our economy.
Low interest rates, low inflation and very high productivity growth have helped produce the longest period of economic expansion and prosperity in U.S. history. The U.S. financial services sector has been quite critical, I think, as a component of that growth and development and played a critical role in fueling the economic expansion.
Page 79 PREV PAGE TOP OF DOC Our industry, for example, has raised more capital for U.S. businesses in the last ten years in the 1990's than the combined total raised in all previous years of U.S. history. In addition, we almost doubled the number of shareholders in the last decade and there are now 23.5 million more shareholders at the end of the decade of the 1990's than there were at the beginning.
Financial services firms contribute about 8 percent of gross domestic product and employ about six million people to support the products and services that we supply. The voracious appetite of industrial and developing countries for our innovative products and services have helped our sector turn in a record $16.5 billion of exports in 1998 with a trade surplus of $5.9 billion.
So I think the continued well-being of the financial services industry really is directly linked to our ability to sell our products in foreign markets.
The U.S.-China trade agreement is an important first step toward opening the Chinese markets to both the goods and services sectors. Their concessions to join the WTO, including the steep reductions in tariffs and the elimination of many non-tariff barriers are quite real. The beneficiaries of these concessions are U.S. consumers, U.S. investors and businesses that are seeking to expand and grow.
With more than 1.3 billion people, China is now the largest market in the world. In just over a decade, China has become our fourth largest trading partner with aggregate trade flows between the two countries now topping more than $95 billion per year.
Page 80 PREV PAGE TOP OF DOC China has also exhibited one of the world's fastest growth rates with its economy literally doubling every seven years, so the potential opportunities for our exporters are enormous in China. The Congressional Research Service now expects China's WTO accession to generate export growth of as much as $13 billion a year by 2005. Currently our exports to China support about 200,000 jobs, but as China becomes wealthier, it is going to demand a higher level of U.S. exports and as a result, it will create meaningful new business opportunities, additional jobs and have a very positive impact on our trade surplus with China.
Many of our leading companies who already have established offices in China, now see China as the largest, single emerging market and believe the WTO accession agreement gives them the opportunity to strengthen their business operations there. Despite a number of difficulties entering and operating in China in the past, our firms have now established offices there and have really begun to participate in China's international securities offerings.
The commitments from China for the securities industry, which include provisions for minority ownership and securities underwriting, asset management firms and advisory companies, really represents just a first step upon which to pursue additional liberalization of China's capital markets.
As my colleague mentioned earlier, the liberalization of the securities area is not nearly as extensive as it is in both banking and insurance, but we believe this is a good first step and opens a dialogue to enable us to get more concessions and more opportunities in the future.
It is important that the Chinese commitments for the securities sector also include grandfathering of our existing activities and investments, national treatment and the elimination of China's economic needs test which currently governs whether or not licenses are granted for firms coming in.
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Additional improvements that can be achieved subsequently by the European Union and other WTO members will only make the overall accession deal for China better for us as well. Moreover, financing China's infrastructure needs presents a great opportunity for the U.S. financial services industry. Over the next decade, analysts estimate that China will really need over $1 trillion to invest in transportation and communications infrastructure.
Currently, China's public and private sectors alone cannot provide that kind of capital and cannot access that kind of capital, so they will require the services of financial services intermediaries like the securities industry, the banking industry, the insurance industry, to access those kind of pools of capital to finance their infrastructure needed for their economic growth.
I think importantly not only will our companies be exporting our new products and services to China, but they will also bring with them our own very best business practices, our own principles and our own values. Through these best practices, principles and values, I think the Chinese people will be able to build on the economic and political reforms that currently are underway.
Our bipartisan policy of maintaining trade ties with China has shown that positive change is the product of engagement, not of isolation. PNTR now gives us the opportunity in the coming years to continue to use our influence in China's markets to achieve domestic reforms. We strongly feel that granting China PNTR status is in the very best interest of both the United States and China.
Page 82 PREV PAGE TOP OF DOC While the securities industry still faces some significant obstacles to entering and conducting business in China's burgeoning market for financial services, this trade pact is clearly a breakthrough for American trade policy. China's entry into the WTO, coupled with U.S. extension of PNTR will create a platform that will further support development of China's markets through a comprehensive and fully enforceable agreement.
We benefit from these concessions without giving up anything in return, as I mentioned before, a win-win situation. Indeed, our refusal to grant PNTR would only serve to put our firms at a disadvantage globally with our major European and Asian competitors.
We look forward to working with the Administration and Congress to further expand the U.S. securities industries' access to China and again, thank you very much for the opportunity to testify. I look forward to answering questions.
Chairman LEACH. Thank you very much, Marc.
I would like to begin a discussion on this issue of commerce following finance and politics following economics. I would like to first ask Mr. Lipsky, it is my sense in a general way that many foreign banks give particular deference to the companies from the countries in which they are located, so that if carte blanche is given in China to the British, the French, the German firms, this will particularly advantage British, French and German commercial manufacturers and therefore, commercial jobs in those countries, implicitly to the competitive disadvantage of the United States. Would that be a fair statement?
Mr. LIPSKY. That is certainly a fair assessment, Mr. Chairman.
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Chairman LEACH. Mr. Sorensen, let me ask you, because I think of the three panelists you are the one that has the most direct experience in China, the sense one has as we look at China from the outside, some of us as infrequent visitors, but obviously observers of changing circumstances, is that compared with a generation ago, particularly with the period of the great cultural revolution, in many ways despite all the human rights violations that continue, China is a more open society than it was a generation ago. Is that a fair statement?
Mr. SORENSEN. That is correct. Mr. Chairman, I am a very frequent traveler to China and my direct reports both in Hong Kong and China indicate the same. The vice president that runs my Asian operations is Chinese, Hong Kong Chinese, and he would echo that sentiment.
The household in China, although still significantly restricted in terms of what we would consider complete freedom of expression and complete freedom of gathering, there is no question that they are more restricted, the transformation of that environment, their ability to access information, the internet is just one example, television is an entirely different thingSky News is widely seen through Shanghai, and that is mainland China. Sky News is a totally uncensored television broadcast.
Chairman LEACH. My sense is that there is a greater freedom of expression.
Mr. SORENSEN. That is correct.
Page 84 PREV PAGE TOP OF DOC Chairman LEACH. One doesn't go to jail if one says something to one's
Mr. SORENSEN. That is correct. There is a vast improvement over the past ten years, no question about it, but in terms of American perceptions, we know that complete freedom of expression does not yet fully exist.
Chairman LEACH. In this regard, one senses this is politics following a freer economics and that the best system that fits free economics is free politics, and there is a movement, at least modestly, in this direction, particularly at the local and regional level.
Let me ask you about the insurance agreement in general. Everything is a step forward and maybe a major step forward, but there are still some vexing aspects that it isn't immediate and it isn't immediately open. In particular, this agreement does not include provisions for agency brokerage services and for third-party liability in the auto area. Why doesn't it and are these fatal flaws? Do you have any sense that there is going to be continued movement?
Mr. SORENSEN. No. I think the opening of the insurance sector in China is a sequence of steps. Once the market opens, particularly to majority ownership and majority control of jointly owned insurance companies and insurance enterprises which is still not possible in China, the next step is obviously accommodating to worldwide standards, because consumers are very smart, particularly Chinese consumers.
Once they have access to the right insurance products, cost effectiveness, low cost ratios, low loss ratios, profitability and particularly customer service quality, technology, speak very loudly, so there is no question in my estimation within five years or even earlier, after China's accession into the WTO, those particular shortcomings that currently exist will in fact take place.
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Chairman LEACH. One of the interesting aspects of the agreement on insurance is that they are only opening to companies of a given size, $5 billion in assets; second that one has to have an office in China for two years. Can you tell me in definitions, can $5 billion in assets be a banking company that might have trivial assets in insurance or does it mean insurance assets?
Mr. SORENSEN. Basically, it is assets under management as my advisor tells me, that is the quantifying factor. So at the moment, the WTO entry, if the NPTR is approved, will free up much of those economic conditions, currently, we, as Principal, because we have the required assets under management to qualify. Many other smaller companies do not.
Chairman LEACH. Would a modest sized company like Chase Manhattan qualify?
Mr. SORENSEN. It would if it had a properly capitalized insurance enterprise within that banking structure.
Chairman LEACH. Second, the interesting issue to me is the two years in China. Is there a definition of China? Here, let me be precise, if it was two years in Hong Kong, would that qualify?
Mr. SORENSEN. No. At the moment, the two years in Hong Kong would not qualify. It would be two years in the mainland.
Page 86 PREV PAGE TOP OF DOC Chairman LEACH. So Taiwan wouldn't qualify either?
Mr. SORENSEN. That is correct.
Chairman LEACH. Mr. Watt.
Mr. WATT. First of all, I want to do what I didn't do earlier and thank the Chairman for holding this hearing and providing an opportunity for us. I think a lot of people seem to have kind of tuned out and have kind of made up their minds about this issue. I am kind of going out of my way now to listen more and more and more and resisted the temptation to not come back to this second panel this afternoon.
I don't want to dwell on the details of the financial agreement like the Chairman has, but I would like to know, Mr. Sorensen, what kinds of things are you doing, is your company doing now in China?
Mr. SORENSEN. We have two operations, one large, one very small. The operation in China that is large is our Hong Kong Mandatory Provident Fund Pension Company which started three years ago and became fully operational once government permissions were granted in February. That company currently has $200 million in assets under management and in a very modest projectthis is not a forward-looking statement, because we are not a public company, we are a mutual company, as the Chairman can testifywe will grow to about $2.5 billion in assets under management within three years, very modestly speaking. It is a major opportunity for us. It is in Hong Kong.
Page 87 PREV PAGE TOP OF DOC In the mainland, in Beijing, we have had a representative office of Principal Life Insurance Company for five years. We have been awaiting the type of liberalization of the financial markets that, in fact, PNTR and WTO personify should they happen.
Mr. WATT. So from your perspective, when it comes to China other than Hong Kong, you are kind of a bride in waiting, you are waiting for these millions and millions of people to become available to you to begin a new market, in effect?
Mr. SORENSEN. That is correct, Congressman, along with 86 other worldwide and some American companies that are also brides in waiting.
Mr. WATT. I am fascinated by this, because it seems to me that there are a number of businesses that are in that posture. If you look at this on a kind of global level, larger big picture, not global in the world sense, quite often when you find a company saying I am going to benefit from something, its employees are also saying that. This management and labor, ''ne'er the twain shall meet'' and there just doesn't seem to be any meaningful give and take.
I can understand the benefits that you are going to get and this list of companies that are brides in waiting with the new market. If those benefits are going to inure substantially to people in America other than your shareholdersyou are a mutual company so maybe this is a better question to ask Chase Manhattanthen is there this substantial divide if there is going to be a substantial benefit to both management and labor, to employers and employees? How do you explain this horrendous chasm between the two on this issue?
Page 88 PREV PAGE TOP OF DOC Mr. SORENSEN. I will let John answer that.
Mr. WATT. You are going to give him the easy question.
Mr. SORENSEN. I will say, only John, if you permit me, I think the world is a bit more bipolar in that sense in manufacturing and in more non-financial entities than it is in the financial industry.
Mr. WATT. I can understand that. Maybe I am anticipating the answer, but if you get it out of the financial services context and move it into the manufacturing context, I would assume most of the people a manufacturer would be hiring in that new frontier market in China would be Chinese. There is the risk of transferring some of the manufacturing operations to China from the United States to chase cheaper labor. Is that what is creating the chasm?
Mr. SORENSEN. To some extent. Let me make a quick example. Forgive me, John, I will be very brief on this.
When we implement a wide open pension system in China, which is what we are waiting for and hopefully Congress will see the logic of this and will give us the tools to do this, Chinese workers will benefit from private pensions in precisely the same way that American labor union members do. So by benefiting our trade balance, our shareholders and our employees in the United States will have a lot more to do in order to service these financial services products and also in the technology sector.
Page 89 PREV PAGE TOP OF DOC In the case of the Principal Financial Group and I think other financial services companies, it is like Marc was saying, it is more of a win-win.
Mr. WATT. What about non-financials, if you can address both of those at the same time. Maybe employees in the financial services businesses see that most of these pension plans, most of the work is going to be done in the United States. Maybe I am unfair to say that your employees are not there, but it is absolutely clear to me that employees, labor in general and other segments of the economy, just are not there.
If there is this compelling case to be made for it, why have you not been able to make it to labor in those areas? That is the thing that is kind of blowing my mind, because this has turned out to be a more divisive issue than most U.S. labor issues when it comes to management and labor differences of opinion.
I will stop, Mr. Chairman, and that is the last question. I just wanted to get some feel for what people think is happening here.
Mr. LIPSKY. If I may respond, I don't know that I am particularly well suited to answer for the working people as a whole. Certainly at Chase Manhattan Bank, which with our new Robert Fleming Associates, probably total about 80,000 workers, I am sure that it would be virtually unanimous support for this.
The financial services industry, which is not inconsequential, actually generates a trade surplus with China right now. I think we would expect that balance would be more favorable.
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I don't know if it is a complete response to your question, but my suspicion is that very few people understand or have had the case put before them of the details of what exactly the legislation before you would do. I think that was a suggestion the Chairman left with Secretary Summers earlier.
This legislation will unambiguously provide new opportunities for U.S. firms like our own without giving up anything in the commercial sphere. It completely allows firms in the financial industry new opportunities that are not available to them right now, without any countervailing concessions to Chinese firms operating in the United States, other than granting permanent status.
I suspect if that case was put clearly before the American people, they would find that much easier to support and to understand.
Mr. WATT. I confess I find it easier to understand in the financial services sector.
Mr. Chairman, would you indulge me just to get a response from Mr. Lackritz? He is the securities guy and he represents all these people in the manufacturing area that have issued securities, I guess.
Chairman LEACH. Absolutely.
Mr. WATT. What is going on?
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Mr. LACKRITZ. It is an excellent question and it has baffled us as well, because we think the case is a very clear case for this agreement creating new opportunities for American industry, manufacturers, servicers, goods, everything across the board. It is really a win-win agreement.
The only thing I can respond is that we haven't done a very effective job of educating or explaining to the labor leaders or the union members all the benefits that are in this agreement or on the other side, I think part of it may be that we are in a time of so much change. I look at financial services, I look at the securities industry, I look at how much change is being wrought by technology, new markets, competition, demographics, all the different forces that are really changing our industry and I assume that is also changing other industries, manufacturing and other industries as well.
In that climate of change, I think you can approach it from a standpoint of either hope or fear and I am afraid that right now what has happened with a lot of the labor movement is that they are really consumed with a fear about the change and as a result they are blinded to the new opportunities that are being created by these new open markets.
I guess I can only respond that we need to do a better job in other industries and the labor movement about this, because I really think it is a no-brainer.
Mr. WATT. Mr. Chairman, I yield back and I appreciate it. I apologize to Mr. Bereuter in particular since he was next in line. I hope I haven't backed him into an impossible timeframe.
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Mr. BEREUTER. No, I think we have time for my five minutes before we go to vote. I hope that is the case.
I want to join the Chairman in regrets to you gentlemen who have had to wait for so long, because of the voting schedule that complicated your life here and ours as well. Thank you very much for your testimony.
I did want to sayI didn't have a chance to respond to Mr. Sherman before when he spoke about the import surge limitation section. It is far more than education that is offered in the agreement between the Chinese and the U.S. in 1999. It relates directly to response to inappropriate surges in a particular sector from China.
I would like to ask you, Mr. Sorensen, if you could tell me briefly in a nutshell, what the state of acceptance of life insurance is today in China? In a cultural sense, where are they and how soon will they adjust and open up to life insurance as a major purchase?
Mr. SORENSEN. The life insurance state of play in China is rather undeveloped for U.S. and European standards which are the two standards which we hold ourselves to. The U.S. life insurance products that we find common, such as universal life products, whole life products, interest-sensitive life products, are not readily available in China yet.
China is essentially a government monopoly of two very large companiesthe PICC, the People's Insurance Company of China and the GICC, the General Insurance Company of China. A handful of life insurance companies have been approved, among them my prior employer, AIG, which was the first life insurance company approved.
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These handful of American companies, some European companies, four or five, have begun to offer very elementary term life products which are the beginning, really, of life protection for husband, wife, children when that household group of 40 million households feels that they need that protection should something happen to the breadwinner of the family or the breadwinners of the family.
Other than term life and some whole life products which are slightly interest-sensitive type products, there is no other life insurance in China. So it is a very, very undeveloped, very primitive environment.
What we have seen is a totally bipolar situation develop. Those households want more developed, more sophisticated products which the foreign companiesAIG among themhave not been allowed to offer. So the demand is there, the supply is certainly being protected through PICC and GICC.
Mr. BEREUTER. Mr. Lipsky, I want to particularly apologize to you, because I had to go out and try to catch up with some constituent meetings. I read your remarks, but I would like to ask you to what extent do you think that opening up China to commercial banking enterprises, even though it is limited at this point, to what extent is that going to have an impact on bringing some necessary reforms to the banking sector, the domestic banking sector in China?
Mr. LIPSKY. That is a very good question. The answer is uncertain, but the existence of technically competent, well-capitalized and well-managed banks in the form of banks like my own in the Chinese market will raise the pressure on the Chinese government to clarify the financial underpinnings of the domestic banking system.
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The Chinese authorities have made significant efforts to cleanse the financial accounts of existing Chinese commercial banks. Previously, these banks have not operated on modern standards, and they accumulated extensive amounts of non-performing loans. This system could be converted relatively rapidly into the basis of a much more modern securities business, however. This large stock of non-performing loans are being taken off bank balance sheets by RTC-like entities.
If the pressure on the Chinese authorities is increased, as I think it would be, by the increased openness of the banking system, this ought to speed up the modernization of the whole securities industry. Moreover, a profit-oriented financial system will improve corporate management and governance in all of Chinese industry. That is why the financial services aspect of this agreement is a very critical one for accelerating the reform and market-directed modernization of the Chinese economy.
Mr. BEREUTER. Thank you very much, Mr. Lackritz. I know my time has expired, but I hope that you will be thinking and undoubtedly have in your industry about how we might improve securities entrance into China next time.
Thank you very much.
Chairman LEACH. Thank you, Doug.
I would like to conclude with another comment on the corruption issue which seems a problem in China, frankly not as grave as it has become in Russia, but still very deep.
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Mr. SORENSEN. It is decreasing, but, Mr. Chairman, you are correct, it still exists.
Chairman LEACH. It is my sense that the freer the trade and the less managed it is, the less fertile the ground for corruption, would you agree, all three of you?
Mr. SORENSEN. Yes.
Mr. LIPSKY. Yes.
Mr. LACKRITZ. Yes.
Mr. SORENSEN. Particularly, Mr. Chairman, the influence of the American financial institutions through the GAAP and certainly through the Foreign Corrupt Practices Act. That is an absolute lily-white standard and the European companies that used to toe the line, no longer are. They are adopting the same practices.
Chairman LEACH. I appreciate that. That raises the next issue I wanted to get at as carefully as I can. It is my sense that in many countries around the world where there is some corruption, some greater than others, that American commercial enterprises either don't choose to play the game or don't do it as well as many foreign companies. Is that your experience?
Mr. SORENSEN. In the case of the use of what we are beholding to, which is the Foreign Corrupt Practices Act, sometimes we cannot participate in some businesses.
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Chairman LEACH. I emphasize this, because to the degree that the United States, particularly financial companies, are boxed out of the Chinese market, you are left with a system where you are more likely to have a little greater dependence on grease for corruption, which is a system in which American commerce competes least well.
I emphasize that as strongly as I can, because in my view, it underscores the nature of our dilemma that not to go forward with this kind of approach is not only counterproductive to your industry, but to basic American commerce which depends upon your industry. Would each of you agree with that?
[All respond in the affirmative.]
Chairman LEACH. I thank you all very much. I am sorry that the attendance was not quite as strong as I had hoped, but your testimony will be widely distributed and may form the basis of some comments made on the House floor. I thank you all very much.
The hearing is adjourned.