Printable Version

Promises and Perils: The U.S.-PRC Trade Relationship

A CNP Discussion with Jeremy Haft, Jeffrey Bader and William Reinsch

JULY 11, 2007

MR. JEREMY HAFT:  Welcome one and all.  Thank you for joining us.  I think we’re using the mike for recording purposes, but not for sound.  So if my volume is not okay, raise your hand or pelt me with a banana. 

I want to first thank CNP for having us today, and I’m honored to be here in this assemblage.  As you know, CNP has a (deep?) Asia program; started under the tenure of Maureen Steinbruner who’s here today with us.  And we welcome her. 

I’d like to jump in and begin.  I feel like I’m sitting in Plato’s Symposium with the minds that we have up here today.  We have Ambassador Jeffrey Bader and the Honorable William A. Reinsch.  And we’re going need experts today because we’re going about a tough topic.  We’re looking at the U.S.-China trade relationship, which in effect touches on every aspect of our relationship; and we’re looking at the perils and the promises of this relationship. 

Now, anyone who’s lived in China or worked in China will tell you that discerning peril from promise in China is not always such an easy task.  To give you a brief introduction of who I am and why I’m sitting here, I come from the business side.  I’ve run a business on the mainland for the past 10 years.  We tap into a network of about 8,000 privately-owned Chinese factories and raw material producers and assemblers and distributors.  So this is a network that we put into the service of U.S. companies, European companies, some Japanese companies, and Taiwanese companies.  And we help these firms buy and sell on the mainland. 

So working in these Chinese factories for the past 10 years, one sees a different reality from the reality that we see mediated to us on the other side of our Google screen.  I should say that this product recall briefly distills the conundrum of what is a promise and what is a peril.  We read about this every day in the papers and we’re seeing that China is being cast very much in the way that we perceive our history during the industrial revolution.  And we’re reading about Dickensian entrepreneurs and greed that’s run amok in China, and that is why we can expect a rash of tainted and impure products. 

Well, greed does play a factor sometimes in why defects happen, but more often than not, there are structural problems that are very similar to what we had in the U.S. 100 years ago that we have in China.  Before the robber barons came and integrated our industries, every industry was fragmented, and the same goes in China for different reasons.  So, for example, what might take us three producers to make this bottle, from raw material to fabrication to distribution, may take China an average of 17 to 20 producers.  And the reason is simply because the low value players in the chain have yet to be shaken out.  And so what you have in China is a preponderance of subscale, tiny, low-value players that take control of the goods and materials and add risk and cost and time to the equation.  More often than not, Chinese factories make tainted goods because of the complex operating environment they’re working within. 

And from a trade perspective, we Americans can look at this and say, “Hmm.  More than just a product scare, this is an opportunity for U.S. business to sell into the fastest growing export market for U.S. goods and services.  So we’re going to look today at some of the problems and some of the potential solutions to the promises and perils of the U.S. trade relationship. 

And with that, I’d like to introduce my esteemed panelists.  I’m going to introduce them both up front, and then we’ll begin with Ambassador Bader first.  Ambassador Jeffrey Bader is senior fellow and director of the China Initiative of the Brookings Institution.  He worked at the State Department, the National Security Council, and the United States Trade Representative’s Office on U.S.-China relations in a 27 year career with the U.S. government.  In his last assignment, he led the U.S. delegation in completing negotiations on the accession of the People’s Republic of China and of Taiwan into the World Trade Organization. 

During his career with the U.S. government, Ambassador Bader worked in Beijing, Hong Kong, and Taipei.  He has served as deputy assistant secretary of state responsible for China, Taiwan, and Southeast Asia; as director of Asian affairs at the National Security Council; and as director of the State Department’s Office of Chinese Affairs.  Ambassador Bader also was served several tours in Africa, culminating in his assignment as U.S. ambassador to Namibia from 1999 to 2001.

Born in New York, Ambassador Bader received a B.A. from Yale University and an M.A. and Ph.D. from Columbia University.  You were slumming in Columbia, I guess.  He speaks – my alma mater by the way – he speaks Chinese and French.  He is married to Rohini Talalla and lives Chevy Chase, Maryland.  We welcome Ambassador Bader, and I will welcome the Honorable Reinsch when we begin your speech. 

So let’s begin with Ambassador Bader.  Thank you.

AMBASSADOR JEFFREY BADER:  Thanks, Jeremy.  Do you want me here or however you feel comfortable.  I’ll just turn to the mike.  That (unintelligible).

MR. HAFT:  Is any – is it working?  Yes, it is working.  Why don’t we switch places? 

AMB. BADER:  Thanks, Jeremy, for what I think was a more than usual interesting introduction – your comments on the health and safety issues in China and your perspective on it.  It strikes me as on the mark. 

I’m going to be talking about U.S.-China trade from the perspective of someone who’s done U.S.-China relations his whole career.  Trade is the most difficult and potentially damaging issue in U.S.-China relations at the moment.  We all know the basic reason – the basic number: a $232 billion trade deficit between U.S. and China last year.  In 2000, that figure was $84 billion, so it’s virtually tripled in the last six years.  It’s our largest bilateral trade deficit anywhere in the world by several orders of magnitude.  I’m going to talk for a few minutes about the bilateral trade deficit, then we’ll hear about the global trade deficit. 

Economists will tell you that bilateral trade deficits don’t matter.  It’s so more –no more logical for countries to have their trade balanced with other countries than it is for a company to have bilateral – to have balanced trade or balanced relationships with all their vendors and all their customers.  But politicians tend to disagree with the notion that bilateral trade deficits don’t matter. 

The U.S. trade deficit with China is basically a reflection of our long-term deficit with East Asia.  In fact, our deficit with the Asia-Pacific region was 76 percent of our global deficit in 1995 and now it’s down to 48 percent.  The dramatic increase in the share of the deficit that China holds reflects the massive shift in manufacturing capacity in the region – in the East Asia/Southeast Asia region into China.  One indicator of this shift is our deficit with East Asia minus China from 2000 to 2006 increased by 2 percent.  From 1990 to 2000, that same number was 128 percent.  But really that – where’s the difference?  That difference is all China. 

We’ve had the development of an integrated East Asian regional economy centered in China and with China as the final assembly point for many products.  And I’ve got some trade numbers – some inter-Asian numbers that I think illustrate the point.  I used to have numbers from 1993 to 2003 that were considerably more dramatic and someone objected saying, “Well, we’re starting from such a low base in 1993, those number don’t mean much.”  So I got numbers from 2000-2006 and they show pretty much the same trends.  With Korea, China’s trade has increased by over 200 percent, with Taiwan over 200 percent, with Singapore 275 percent, with Thailand 240 percent, with Philippines 700 percent, India 375 percent, Japan 115 percent, Malaysia 250 percent.  In all of these cases except for Singapore and Japan – all of these countries except for Singapore and Japan are running substantial surpluses – substantial surpluses with China. 

China’s also become a magnet for a foreign direct investment not only from the West, but even more from East Asian region.  In 1990, China drew about 18 percent of all the foreign direct investment flowing into Asia.  ASEAN countries drew about 66 percent.  By 2004, those numbers essentially reversed.  China was drawing close to 60 percent of all foreign investment in Asia.  And ASEAN was drawing about 22 percent.  So you see the pattern that’s developing.  Basically, the countries around China periphery that used to over manufacture and used to export directly to the U.S. have brought China into their production chain.  They’re investing massively in China.  They’re sending components there for assembly and they’re providing raw materials, in some cases energy, for China’s production. 

So the U.S. trade deficit that was once dominated by Japan, Korea, Taiwan, Hong Kong, Singapore is now dominated by China.  But Asia as a whole is the beneficiary, as you can see from trade numbers and the investment numbers.  And that’s important to keep in mind as we contemplate how to respond to the trade deficit with China.  It’s important to understand that actions that we might take to correct it are going to have ripple effect – more than a ripple effect, similar to a ripple Tsunami effect around the region.  We will get more into that, but I just wanted to put a marker on that.

And to cite one product that I think it demonstrates the trends I’ve been talking about, that’s computers.  Computer and computer parts are imported by the U.S.  China’s largest exports to U.S. are not, as you would expect, clothing and textiles.  They’re computers or computer parts – about $45 billion in the last year. 

The figure five years ago, in 2002 – that figure’s up on computer imports from China – it’s up 1,000 percent since 2002.  During the same period from 2002 to 2006, U.S. imports of computers from Korea, Singapore, Hong Kong, Taiwan have essentially all but vanished.  From Taiwan, we used to – the 2002 report close to $5 billion per year, now it’s under a $1 billion.  So basically what’s happened – when you press a button under your computer now and order a Hewlett Packard or a Dell computer now, you’re not going directly to Silicone Valley.  You’re going probably to – it’s bouncing from Silicone Valley to Taiwan.  And from Taiwan, it’s probably bouncing – the order is being placed there and then it’s probably bouncing down to Southeast Asia where the keyboard is assembled and then finally with China, where the final production is put together.  The intellectual property remains American, the intellectual property remains Taiwanese, but the final product is Chinese. 

And it’s also noteworthy that U.S. exports to China have increased by about 150 percent since 2002, since WTO accession.  That’s basically the fastest increase of U.S. exports to any place in the world.  They totaled $55 billion last year.  If you (fill?) in Hong Kong – which I think frankly you should – for the year, it’s about $73 billion.  The Congressional Budget Office estimates about 500,000 jobs are related to exports to China and that about 0.5 percent of U.S. per capita income is owing to China trade.  The last point on the bilateral is that about close to 60 percent of China’s exports are produced by foreign invested enterprises, not Chinese enterprises. 

I want to talk briefly about global trade surplus.  As I say, I think that the bilateral trade surplus – there are a lot misunderstandings about it and I wanted to put some of those figures in perspective so that – I think it deserves less attention than it gets.  I think, on the other hand, China’s global surplus deserves more attention than it gets.  Last year, its global surplus was about $177 billion.  For the first half of this year, it’s about $112–$113 billion.  Running last month, it was closer to $27 billion and it’s running well ahead of last year. 

For a country that’s attracting over $60 billion a year in foreign direct investment, also to be running large surpluses makes no sense.  China should be contributing to the global economy, not by running these massive – running these massive surpluses.  That said, China’s competitiveness primarily hurts upper-tier developing countries like Brazil, Poland, Mexico, India, which find themselves unable to compete with China in attracting investments or in exporting labor intensive products. 

I recall when I was in the final stages of the WTO negotiation, it was these countries that resisted China’s accession.  And now as we’re into the Doha Rounds, it’s precisely these countries that continue to be uneasy about reaching a deal in Doha because they’re afraid of what it might mean for China’s place in the global trading system. 

A few closing remarks on the causes of China’s surplus.  Currency is a factor.  I’d say an important factor, but not the dominant factor.  (I think China?) revalues significantly.  The effect had been mitigated, first of all, by the fact that much of the – much of its exports come from foreign direct investment and they’re just part of the chain of production, so the value added on an export from China or in China might be 30 percent – something like that.  So if you increase the value of China’s currency by 25 percent, 25 percent of 30 percent, (you’re talking about?) 7.5 percent increase in the price of the good.  That’s not going to hurt China’s competitiveness that much. 

Secondly, imported components of products for export – it will be cheaper if China revalues and that in turn is going to continue to make them competitive.  So I don’t think the currency really is the key issue.  The key issue really is structural inside of China.  China’s savings rate is the major factor.  It’s a country with a savings rate of over 40 percent.  We for our part have a savings rate of about 0 percent.  China and U.S. have mirror-image economies. 

The reason Chinese have a savings rate of about 40 percent is there’s essentially no social safety net.  Chinese spend more per capita for health, I think, than any other country in the world.  The rural health insurance system essentially doesn’t exist.  The urban health insurance system – I forget the numbers, but it’s under half of Chinese are insured and even the insurance they have doesn’t go very far.  One hospitalization basically takes more than the average Chinese earns in a year.  So for health catastrophes, Chinese have to save and for old age they have to save.  It’s a one-child family policy.  You can’t count on your children to take care of you when you get old, and they do not have a national social security system that functions.  They’ve set one up on paper.  It’s funded at the local level and the local governments are either bankrupt or choose not to fund it.  The state-owned enterprise safety net that used to support Chinese workers has ceased to exist in that respect, so Chinese are being prudent in saving. 

They also have a financial services sector that does not rationally allocate capital, that does not provide a decent return – rate of return on savings.  These are the primary factors why China is running these massive surpluses, and those will take time to correct. 

A last comment before I turn it over to Bill, I just want to say something about the recent health and food safety messes.  Obviously, the brand name of “Made in China” has undergone some consequential setbacks in the last month or two – fish, toothpaste, cough medicine, tires – you name it.  That’s just the tip of the iceberg, I suspect.  And the reasons are multiple.  I think that Jeremy has put his finger on a principal one.  I think, in addition, a poor regulatory system; a terrible, terrible, terrible environmental pollution. 

Things like fish – I mean, how can you have healthy fish shipped to the U.S. when you basically have only less than half of the water in the country that is usable for any purpose?  And only 25 percent of the water is drinkable and it is hard to – we import about $2 billion a year in fish from China, so that’s not an inconsequential import. 

You have the IPR problems.  You have improper labeling of products, manufacturers squeezing costs.  It’s a consequential problem on many levels and I would – I was on a trip to China recently and I went with a group that had someone from the generic business.  And he was telling me about the drug business in China, something I wasn’t aware of, but maybe people in this room may be aware of.  The chances are that the pills you take every day (are from?) China – the chances are pretty good that they do.  A lot of the major pharmaceutical companies are shipping the chemicals to China and they are pilled.  I didn’t know that was a verb, but it is.  They are pilled in China because they’re very efficient and it’s very cheap, and then they come back here in that form. 

Now, I presume that the Pfizers and the Mercks and the Glaxos of the world have control over their chains of production better than fish farmers.  I’m presuming that.  But the point is that the number of different ingestible products that we are getting from China probably goes well beyond what any of us have thought, and we really need to see some improvements. 

Now, the execution of the head of the state food and drug administration, while it may be gratifying to some Chinese party members and they may feel that this is a traditional way they deal these problems – you know, you kill the chicken to scare the monkey, or whichever – monkey, chicken.  I can’t remember how the it goes.  That is the traditional Communist Party way of dealing with these problems.  And it is extremely far from adequate in dealing with this particular problem, and I just want to give a (unintelligible) that I see as relevant here to supplement what Jeremy said. 

You talk to Chinese about this kind of issue and they say, “Well, you have mad cow,” and we have all kinds of product safety issues in the U.S.  What we do have, however, that they don’t have is a system of transparency, a system of accountability, and a system of correcting defects once they are demonstrated.  It struck me in reading about some of these food safety cases, the experience of the Food and Drug Administration people and the U.S. Department of Agriculture people and some of the U.S. embassy people.  And there was also a very good article in the Wall Street Journal this week and you saw it on IPR about this fellow – I can’t remember where he is – I forget the name of the product, but it’s basically something that you would put your bra or your wife’s bra – put it in the washing machine so that it doesn’t tangle up and destroy it.  All of us who have washed bras in washing machines are familiar with this problem.  (Laughter.)  And I have. 

But anyway, this guy apparently has this (family?) business and he went off to China and there were like 80 companies that have ripped it off.  And he went knocking around the doors of all 80 companies to try to correct it.  And six of them said, “We’re sorry.”  And the other 74 slammed the door.  And he went to knock on officials’ doors everywhere and they provided no help.  In the experience of the USDA and FDA and the American embassy, it’s pretty similar that they get essentially no response or opacity from the authorities and from the manufacturers. 

And now that China is fully integrated into the global production chain, that is not satisfactory.  We’ve gone through these debates about China figures, about do we accept China as it is and do we – Bill and I went through the (Clinton?) administration with conditional MFN and do we demand a reform in China, and does China have to be democratic in order to be considered a responsible member of the international community – a responsible stakeholder? 

To me, that was always kind of the wrong arguments and the wrong debate, but this I think is the right debate.  If China is going to be an integral member of the international trading system, it cannot have this degree of lack of transparency, lack of responsiveness, and slamming doors in the face of inquiries that many of us have gotten. 

I’m sure Bill was used to that in his export control days and now we’re suddenly back on that issue.  This is an issue where the international community, based on WTO agreements that talk about standards – technical standards and (unintelligible) standards, has a right to demand performance, and performance is going to need more than executing the director of the state food and drug administration.  It’s going to need reforms, and the reforms are fairly deep.  They’re structural and I hesitate to say, but I think they may also be cultural.   But that’s (inaudible) an introduction. 

Thank you. 

(Applause.)

MR. HAFT:  Thank you for those remarks: very enlightening and some good questions that we can get to in the Q&A session afterwards.

I’d like to welcome, as our second speaker, the Honorable William A. Reinsch who currently serves as president of the National Foreign Trade Council of the NFTC, which was founded in 1914.  It’s the oldest and largest business association dedicated solely to trade policy, export finance, international tax, and human resource issues.  The organization represents nearly 400 companies through its offices in New York and Washington, D.C.  As president, Reinsch oversees NFTC’s efforts in favor of open markets, in support of Eximbank and OPIC, against unilateral sanctions, and in support of sound international tax policy, among many other international trade and tax issues of concern to U.S. businesses. 

Currently, Mr. Reinsch also serves as a member of the U.S.-China Economic and Security Review Commission, although today Mr. Reinsch is here in his capacity as NFTC and is not representing the commission in and of itself. 

Prior to joining the NFTC, Reinsch served as the under secretary for export administration in the U.S. Department of Commerce.  In that position, he administered and enforced the export control policies and anti-boycott laws of the U.S. government and monitored the condition of the nation’s defense industrial base.  Prior to taking this position, Mr. Reinsch spent 20 years on Capitol Hill from 1973 to 1993, most of them as senior legislative assistant to the late Senator John Heinz and subsequently to Senator John Rockefeller IV.  He received a B.A. in international relations from the Johns Hopkins University and an M.A. degree from the Johns Hopkins School of Advanced International Studies.  I should have memorized this.  I apologize, next time I’ll have it tattooed on my forehead.

(Cross talk.)

MR. WILLIAM REINSCH:  Johns Hopkins.

MR. HAFT:  Johns.

MR. REINSCH:  We take the “S” very seriously.  (Laughter.)

MR. HAFT:  It must have been slurred.  I take it seriously, too – all consonants at the ends words.  (Laughter.)  He lives in Bethesda, Maryland, with his wife and two sons. 

Welcome, Bill Reinsch.

MR. REINSCH:  Thank you.  I’m glad to be here.  I’m honored to be here.  I’m particularly happy to see Maureen Steinbruner, who more than anybody else I think has built this organization and sustained in it for so long, so it’s nice to have you here and to see you again.  Thank you also for mentioning I’m talking wearing my NFTC hat.  If I attempted to represent the commission, I’d probably be executed (unintelligible, laughter) the appropriate step under the circumstances.  (Laughter.)  I think some of them are here.  Some of the staff are here, so you don’t have to make notes on that last statement, but take any other notes you feel like. 

Jeff has done, I think, a superb job of laying out the larger macroeconomic context and some of the internal difficulties in China, and I’m not going to disagree with anything he’s said.  I’m going to try to build on that and focus on some specific issues, particularly pending legislation and what the Congress might do.  Because I think that if some of you in this group from the Hill here, and those of you that are not, tend to follow them pretty closely, so that might be useful opportunity for some further dialogue afterwards. 

I think – two predicates for this.  One: I believe that we’re moving into an era with China that for those of you that are old like me will be very reminiscent of what we experienced 20 years ago with Japan, which is a lot of very heated rhetoric about how they – then Japan, now China – are stealing our jobs, hollowing out our manufacturing base, destroying our economy, and just generally undermining life as we know it on the planet.  And that’s already well underway now.  It was well underway back then.  I think it probably culminated, some of your remember, with the several members of Congress breaking the Toshiba radio into pieces on the Capitol – not on the steps, but just beyond the Capitol steps.  We haven’t done that yet with a Chinese product – with bra (unintelligible, laughter). 

In any event, one of the salient characteristics of that era which I think will also repeat itself this time is that despite the rhetoric, remarkably little was actually enacted into law, and I think that’s what will happen again this time.  And I don’t think that’s going to be zero, and I’ll talk about that in a minute.  But I suspect that there will be, as before, many proposals and few of them actually make their way all the way through the end and are signed by the president and become law. 

One reason for that is, I think, at the end of the day on these things, the sensible center tends to prevail.  And the sensible center, I think, in this area knows that a lot of the problems that we’re trying to address are fundamentally U.S. problems and not Chinese problems.  And they need to be addressed by U.S. policies in the way we (run?) and the way we structure our economy.  I’ll get to that at the end, but not tell you how. 

The other predicate I think we face is trying to get our hands around the meaning of and a significance of globalization both for them and for us.  And from my point of view, and I emphasize this as personal as much as anything, the dilemma that we’re all facing is understanding that globalization is force for both stability and instability because it simultaneously pushes countries to conform to market principles and to Western norms as rule of law, while at the same time it rides roughshod over deeply ingrained cultural values.  It exacerbates growing problems of income inequality, and that’s dramatically true both here and in China.  And it facilitates of exploitation of workers, women, and children, and it contributes to environmental degradation and resource depletion. 

Countries are challenged to solve those problems anyway and their challenged to solve those problems in a context of a rapidly globalizing world economy which accelerates the pace of change that makes all those problems worse. 

Now, if you think about probably notice that all those problems are not trade problems in the classic sense of WTO tradeoff things that can be addressed procedurally.  They end up being treated that way more often than not, and that’s demonstrated in the legislation that’ll I’ll talking about it in a minute, for two reasons. 

First, it’s human nature, well demonstrated over the years that it’s a lot more fun and easier to blame the foreigners for our problems than it is ourselves.  And it is true in the United States, as well as elsewhere, that most bad economic news ends up being blamed on trade and ends up producing calls or demands for protection of various sorts, whether or not trade has anything to do with it. 

Second, complicating that, it remains a fact that the WTO is the only multilateral organization that has an effective dispute resolution mechanism.  And as a result, nations have an incentive to define problems as a trade problem because that’s the one place they can go and get some kind of an outcome that is semi-transparent, reasonably prompt – if you count two or three or four years as prompt.  But at least there is an outcome that isn’t dependant on a consensus solution.  So problems, whether they’re trade or not, end up often becoming trade problems for those reasons and you can see that in congressional activity right now on China, both in an effort to blame our problems on the Chinese and an effort in part, at the end of the day, to force some of these problems into multinational venues along with unilateral ones.

Now, what are those problems?  I think Jeff has done an excellent job of defining the macroeconomic problems, and I’m not going to repeat any of that.  I might mention – I think we both alluded to the way those problems play out in a politically sensitive, more micro way: job loss, offshore outsourcing, erosion of the manufacturing base – so-called hollowing out, mostly fear and insecurity about the future.  One of the new phenomena – maybe not so new.  One of the phenomena currently is even people who have jobs, have not lost their jobs, are afraid that they’re going to.  A growing number of people have friends, neighbors, colleagues who have had some kind of a downsizing, off-shoring, or other kind of layoff experience, and even people that are or ought to be in the normal course of things secure don’t feel secure. 

The congressional response so far, aside from lots and lots of speeches, has been to attack China on currency misalignment, which Jeff mentioned, and impose remedies that range from trade law changes to multilateral action to a variety of specific retaliatory steps.  And I want to mention briefly the four – what are think are the four current most relevant pending bills, although I think typically there will be at least one more that will probably end up being – as in 1984 – more equal than the others that are equal.

First is S.1607, which is the Baucus-Grassley Bill, which has – in response (to other?) bills has sort of retooled the problem in I think a clever way.  Whether it will pass legal muster remains to be seen.  I sometimes think on these things, having worked for senators on the Finance Committee for a long time, the secret of success in proposing remedies is timing and not the quality of your remedy.

If you propose it too soon, you give people a long time to figure out what’s wrong with it and to attack it.  If you propose it too late, the die is cast and it’s irrelevant.  If you propose it at just the right time; i.e., just the right number of weeks before they actually take it up, there’s not enough time to expose its weaknesses and it flows right through.  (Laughter.)  And so we’ll see which one of these is – right now, that would be Baucus-Grassley, but the next bill, which will be Sandy Levin’s I think, is – may end up being more in that category.  In any event, I won’t go through all the provisions of these bills because there’s not enough time, but in essence what Baucus-Grassley as well as some of the others do is to require the Treasury to determine fundamentally misaligned currencies.  And Baucus-Grassley divides that into two groups: fundamentally misaligned and fundamentally misaligned that deserve priority action, and there’s criteria for that distinction. 

And then there’s a set of things you have to do.  Now, you don’t have to do them until six months after you’ve made the decision that the currency is misaligned.  In the interim period, you’re supposed to consult with the offending country.  Assuming you do that and nothing happens, then after six months what you do – and this is creative – in pursuing anti-dumping complaints against that country, you make an adjustment in determining the amount of anti-dumping duty.  You make an adjustment that reflects the misalignment of the currency.  I can go into excruciating detail on why and how you do that, if you want, but it is a response, by the way, to other bills including Ryan-Hunter or Hunter-Ryan in the last Congress that attack the problem by making currency misalignment a countervailable subsidy. 

And those of you who know trade law know that there are sort of two separate tracks.  Dumping is – to grossly oversimplify – selling below the cost of production or selling below what you selling it for in your home market.  A subsidy is subsidizing the production of the product through one means or another.  Both have the same kind of response which is, under WTO rules you can attach a tariff or a duty to the offending product that is sufficient to remedy the amount of the dumping or the amount of the subsidy.  You can’t go beyond that.  You can just – it’s a compensatory duty.  It’s not a punitive duty.

Ryan-Hunter, which is the next bill I’ll talk about, proposed making currency misalignment a countervailable subsidy.  A significantly large number of legal scholars have pointed out that that probably will be rejected by the WTO outside the permissible definition of what constitutes a subsidy.  I can elaborate on that, if you want.  I think in response to that, the Senate folk, who always have an incentive to be different than the House, have decided that they’ll take another approach and they’ve done this through a dumping adjustment. 

And as I said, the legal scholars have not yet had enough time to figure out if that passes WTO muster or not.  And if the mark-up is before they figure that out, it might skate through.  If they figure it out soon – and it’s not clear.  I mean, it is a closer call legally, I think, than the subsidy question.  If they sort of pronounce that this WTO (isn’t sufficient?), then a bunch of members of Congress will say, “Oh, we can’t do that” and then the search will be on for a third approach.

But in addition to that – Baucus-Grassley – there are other retaliatory steps that ought to be taken: prohibiting federal procurement from that country, asking the IMF to consult with the offending country, blocking OPIC financing or insurance, and instructing our representatives at various multilateral banks to oppose bank financing to those countries.  After a year – in other words, six more months – if those haven’t done the job, then the USTR would have to request WTO consultations and the treasury secretary will have to consult with the Federal Reserve Board to discuss remedial intervention in currency markets, which has a whole bunch of implications that Jeff could probably comment on more intelligently than I.  There is in this bill a waiver provision for the president that would allow him not to do any of that stuff if he makes the appropriate determination. 

Hunter-Ryan – I’m sorry, Ryan-Hunter, in a Democratically-controlled Congress, is – and this is a new version, there was a previous version – is essentially a graft of pretty much what I just described added on to the subsidy penalty that I described a few minutes ago.  So under Ryan-Hunter, if you’ve got your misaligned currency, then at the appropriate time – and its process is a little bit different than the Senate’s Baucus-Grassley, but at the appropriate time the menu of things that would kick in would be not only the dumping requirement, but also the subsidy would be determined to be countervailable and you can file complaints against Chinese – the currency misalignment would be determined a countervailable subsidy and companies could go after that. 

Hunter-Ryan also provides that the CVD law, the law that provides countervailing duties for subsidies, specifically will apply to non-market economies.  That is – at this point, I don’t want to go into the whole long history of it.  Basically, the Commerce Department decided for a lot of reasons 20 years ago that they weren’t going to do that, and the court told them – the court ruled that was okay.  In other words, not that it was right, but that it was within the scope of their lawful judgment to do that.  The Commerce Department appears to be in the process of changing its mind about that unilaterally, and they’ve accepted a countervailing duty case against China.  Ryan-Hunter would make that a statutory requirement that those laws could be passed.  And there’s no waiver in Ryan-Hunter, which is another reason why it’s probably the toughest of this lot. 

The third one is the Davis-English bill, which is HR1229, which deals only with the subsidy question, and it provides explicitly for the application of the subsidies law to non-market economies.  And it provides that that country’s status; i.e., its status as a non-market economy, which is the status China has, cannot be changed without congressional approval.  There’s no sign that the Congress intends to change it.  I’m sorry, there’s no sign of the Commerce Department intends to change it, but (unintelligible) sure what Davis-English does is say they can’t without giving Congress a chance to vote on that.

And then the final bill, which in some ways is the most interesting one is the Dodd-Shelby Bill, S1677, which was – as you might imagine from Dodd-Shelby very carefully drafted to end up at the Banking Committee and not the Finance Committee.  And the result of that is it doesn’t contain any trade law changes that the other bills address because, if it did, it would go to a different committee.  It does have the same fundamental requirement that the secretary of the treasury has to make a judgment, in this case whether a foreign currency is being manipulated.  The standard is a little bit different Baucus-Grassley, but you have the idea. 

If he so determines, the secretary has 30 days to adopt a proposal to counter the manipulated currency, begin bilateral negotiations, use the U.S. voice at the IMF to request them to pursue an effective balance and payments adjustment, and to eliminate the unfair competitive advantage that the manipulation, in this case, leads to.  If, after 300 days, there has been no adjustment – I assume that means satisfactory adjustment – then the secretary has to pursue action under the WTO.  

As I said, at some point, we think – I think some of your – Congressman Levin will introduce his own bill and that will be number five.  And since committees usually mark up the bills from their chairman, that’s probably the one that you’ll see moving forward. 

Now, from the standpoint of the bilateral relationship with China, the Chinese are going to complain about all these vociferously.  They always do.  And one of the mistakes we make in dealing with them is, thinking back 20 years, is we assume that just because we’re behaving like they’re the Japanese that they’re going to behave like they’re the Japanese, and they’re not.  They’re not the Japanese, and they’re not only likely to complain, they’re likely to retaliate, quite possibly in excess of the real harm these bills are going to do, because one of the dirty little secrets about these bills is they’re not going to have much of an effect, and that’s where I want to go next. 

Although they will make the bilateral relationship worse because the Chinese are going to get very agitated, the reality is that they won’t make much difference because they rely fundamentally on trade law changes that are particularized; that is, you can make all the changes you want on the dumping rules and all the changes you want on the subsidies rules, but at the end of the day that doesn’t matter if somebody files a complaint under those statutes.  Those complaints are particularized.  It’s as specific case against a specific company or companies.  It involves specific products.  And the American party has to prove that it’s been injured by this action, which is no small challenge.  The International Trade Commission, which makes those judgments, over 30 years finds affirmatively at the end of the day in about half of the cases.  So it’s not a low bar. 

Only after you pass all those bars are actual duties imposed and they’re only the particular imports that were the subject of the case.  So you’re not talking about a widespread macroeconomic impact even if these legal changes are made, and you’re talking about an impact that’s not going to occur for some time anyway.

The shortest possible route to a duty in any of these cases is about a year, and in most cases it’s more likely 18 months, so we’ve got a fairly long period of time before anything happens, regardless. 

Will any of these actions achieve their articulated purpose; i.e., acceleration of Chinese revaluation?  Possibly.  Unlikely, I think.  The Treasury’s had extensive conversations with the Chinese for three years on that subject.  I think if you – I’m sure a lot of you have heard Secretary Paulson talk about this, and he sums it up very well.  They know what they’re supposed to do.  The Chinese have lots of economists and they’re not dummies.  They know what is in the interest of their economy.  And as he points out, the problem is not directional.  It’s (unintelligible).  And he has this wonderful description: “We wanted them to do this much in this amount of time.  They want to do this much in this amount of time.  There’s not really an argument about what it is that needs to be done.  It’s an argument over how far and how fast.”  And the truth is the (unintelligible) pushing 9 percent, which is not nothing, but not enough.  And here we are and it probably isn’t going to go up a lot faster.  I think the last three months have been – you’ve seen considerable acceleration. 

Keep in mind even if it did go up, you run into the point that Jeff made much more cogently than I was going to, which is that my data is about 75 percent of the value of Chinese exports come from components that have been imported into China, and so the effect of any appreciation is diminished by that fact.  It’s also diminished by the Phillips Curve, which is the convention of economic analysis that prescribes an 18-month ride before you see any macroeconomic effect anyway.  My economists tell me that thanks to globalization it’s not 18 months anymore.  It’s shorter, but even so there’s a lag effect that’s not going to produce an immediate change. 

If you really wanted to have an impact on the bilateral trade relationship, you would focus on what Jeff closed with, in my judgment, which is the product safety thing, which is not only food, but also tires and consumer products.  If the American consumer decides for whatever reason that China’s products are unsafe, unhealthy, ungreen, depending upon your criteria, and stops buying them or starts asking his retailer, “I want the one that’s made in Bangladesh” or “I want the one that’s made here” or “I want the one that’s made anywhere other than there,” they have a much bigger problem than anything that’s going to be caused by anything that the Congress can realistically do, which is why I think they’re attempting to take the problem very seriously.  If you look at (unintelligible) jumped on this right away.  Unfortunately, they take it seriously in the only way they know how, which is to shoot a bunch of people.  And as Jeff and Jeremy have explained, that’s not going to be sufficient to do the job, even if they keep shooting people. 

And there’s a third reason besides the two they’ve mentioned that it’s not going to be sufficient to do the job.  And this is something that I think we need to do more research on, but my theory is that one of the problems – they’ve got an enormous governance problem there.  It’s not rule of law society to begin with.  And it is currently a society where – that the party has ensconced itself without a lot of legitimacy and is (grooming?) itself through its economic record and through repression of the population.  But at the end of the day it is inherently and inevitably, I think, a corrupt system.  The cadre survive by doing favors and they justify their existence by doing favors to the people in their communities. 

That makes corruption and the opportunity to be corrupt not an isolated case of a rare person here and a rare person there, where if you weed them out and dispose of them one way another you’ll replace him with somebody honest.  You’ve got a system that fundamentally creates the problem and not the individuals that are in it.  And as long as you have the system, you’re going to have the problem.  What they have to wrestle with, and they may understand, but have not been able to wrestle with successfully is they cannot solve that problem without undermining the rationale for their existence as a government.  And that’s not something they’re going to do. 

And so I’m pessimistic about their ability to address these health and safety problems over the long term because I don’t think they can do it without creating a lot of political pressures that are going to be very unwelcome that then may lead to consumer choice.  Here, people vote with their wallets, although a final point I would say – if you look at polls, “Buy America” gets a lot of support and a lot of votes out here all the time in opinion, but they’re all from people who buy at Wal-Mart.  The American public doesn’t act and speak with the same voice on these issues.  So there may be an awful lot of outrage, but people might still end up buying that sort of thing. 

I think in the interest of time, I’ll stop and we’ll go to whatever comes next.

MR. HAFT:  Thank you very much. 

(Applause.) 

I know we’re on the heels of 1:30.  We’re going to open it up briefly for questions.  I just wanted to pick up very briefly on a couple of points that were made.  In terms of what we’ve seen with the FAA in regulating China’s airwaves, the United States has played a large role in helping China put the systems in place and maybe that’s a role that the U.S. could play positively in helping China modernize some of these systems that both Bader and Reinsch mentioned. 

But one further statistic that sort of bounced out was the 200-percent growth in trade between China and Taiwan.  As we’re talking about perils in trade today, does the amount of trade between China and Taiwan, and given that they are top trading partners of each other, impact the security situation between China and Taiwan and with United States in that triangle?  If I could ask that briefly, and then we’ll open it up to questions.

MR. REINSCH:  On a lot of points, I think it does have a positive impact.  It’s not a dispositive entirely.  I mean, the historians talk about Germany, France, UK, Europe before World War I, the degree of globalization was very pronounced – degree of mutual economic independence – interdependence, very high, yet they managed to go to war.  Taiwan and China – I think it creates a lot of advocates on both sides for stability and for peace, and I think that’s a good thing.  So I think it’s helpful, but not certain. 

Just quickly on the “can we help them” side,  I think – you know, there’s a lot of interaction, as I understand it, between the FDA and USDA and a lot of help that they’ve been providing, but I think the problems run beyond the regulators.  I’m not sure that regulating – the interaction between the regulators is really the core of the solution. 

MR. HAFT:  I think U.S. business actually on the front lines is monitoring the products on the floor before they get into a container is part of the solutions as well.  I know I’m staring to see that now.