[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
CHINA'S COMPLIANCE WITH THE WORLD TRADE ORGANIZATION AND INTERNATIONAL
TRADE RULES
=======================================================================
HEARING
before the
CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
JANUARY 15, 2014
__________
Printed for the use of the Congressional-Executive Commission on China
Available via the World Wide Web: http://www.cecc.gov
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Washington, DC 20402-0001
CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
LEGISLATIVE BRANCH COMMISSIONERS
Senate
House
SHERROD BROWN, Ohio, Chairman CHRIS SMITH, New Jersey,
MAX BAUCUS, Montana Cochairman
CARL LEVIN, Michigan FRANK WOLF, Virginia
DIANNE FEINSTEIN, California ROBERT PITTENGER, North Carolina
JEFF MERKLEY, Oregon MARK MEADOWS, North Carolina
TIM WALZ, Minnesota
EXECUTIVE BRANCH COMMISSIONERS
NISHA DESAI BISWAL, U.S. Department of State
Lawrence T. Liu, Staff Director
Paul B. Protic, Deputy Staff Director
(ii)
C O N T E N T S
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Statements
Page
Opening Statement of Hon. Sherrod Brown, a U.S. Senator from
Ohio; Chairman, Congressional-Executive Commission on China.... 1
Walz, Hon. Timothy, a U.S. Representative from Minnesota; Member,
Congressional-Executive Commission on China.................... 3
Meadows, Hon. Mark, a U.S. Representative from North Carolina;
Member, Congressional-Executive Commission on China............ 3
Sherman, Hon. Brad, a U.S. Representative from California........ 4
Horn, David, Executive Vice President and General Counsel, AK
Steel Holdings Corporation..................................... 5
Drake, Elizabeth, Partner, Stewart and Stewart................... 7
Lee, Thea Mei, Deputy Chief of Staff, American Federation of
Labor and Congress of Industrial Organizations................. 9
Webster, Timothy, Assistant Professor of Law, Director, East
Asian Legal Studies, Case Western Reserve University School of
Law............................................................ 11
APPENDIX
Prepared Statements
Horn, David...................................................... 34
Drake, Elizabeth J............................................... 40
Lee, Thea Mei.................................................... 48
Webster, Timothy................................................. 52
Brown, Hon. Sherrod.............................................. 54
Smith, Christopher............................................... 55
Levin, Carl, a U.S. Senator from Michigan; Member, Congressional-
Executive Commission on China.................................. 56
CHINA'S COMPLIANCE WITH THE WORLD
TRADE ORGANIZATION AND INTERNATIONAL TRADE RULES
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WEDNESDAY, JANUARY 15, 2014
Congressional-Executive
Commission on China,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:04
a.m., in Room 538, Dirksen Senate Office Building, Hon. Sherrod
Brown, Chairman, presiding.
Also Present: Senator Jeff Merkley and Representatives Mark
Meadows, Tim Walz, and Brad Sherman.
OPENING STATEMENT OF HON. SHERROD BROWN, A U.S. SENATOR FROM
OHIO; CHAIRMAN, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
Chairman Brown. We will begin. I know that Ms. Lee will be
here, because she has always been reliable in the past. But we
will get started and I will begin with an opening statement and
then call on the three House Members who have been leaders on
these China issues, some for many years and others more
recently, and thanks for their efforts here and their interest
in this Commission.
I would like to welcome everyone to this hearing on
``China's Compliance With the World Trade Organization's
International Trade Rules.''
I am calling on China to fully comply with WTO commitments
and fully and faithfully implement all of the WTO rulings
against it.
This Commission believes we have a special obligation, from
its creation after China PNTR [permanent normal trade
relations] more than a decade ago, a special obligation to
monitor China's WTO compliance by adhering to a rules-based
system to which they committed a decade-and-a-half ago.
With clear obligations, China can take its role in
supporting the global economic system, a system based upon
transparency, respect for property rights, and adherence to the
rule of law.
We admire China's rich history. These hearings in this
Commission help us appreciate the difficult and complex
challenges in a country so large and so complex, that is
growing so fast. We support the aspirations of the Chinese
people to make their country a safer and a cleaner and a more
prosperous nation in the family of nations.
We believe that fair trade policies and promotion of the
rule of law in China will not only benefit this nation, but
will also benefit the Chinese people and them as a nation,
also.
Last week, I applauded the announcement that Fuyao Glass
Industry Group, a Chinese producer of auto safety glass, will
redevelop and hire some--they are saying 800 jobs in the former
General Motors plant just up the road from Mr. Horn's home and
near Dayton, Ohio.
It is a great example of how fair trade can benefit both
sides by giving a Chinese company access to a highly skilled
workforce and, as I say, creating several hundred jobs in Ohio.
But to truly have a fair trading relationship that benefits
both sides, there needs to be a more level playing field. The
Chinese Government must do more to abide by its WTO
commitments, protect the rights of workers, and support a clean
environment.
The United States Trade Representative [USTR],
unfortunately, could not send a representative here today. They
released their 2013 report to Congress on China's WTO
compliance. Though it acknowledges some areas of improvement,
it paints a sobering picture of Chinese efforts to intervene in
the economy and to unfairly help Chinese businesses, despite
WTO commitments not to do so.
For example, China still has not agreed to the WTO
Government Procurement Agreement. By not doing so, our
businesses miss out on the opportunity to compete potentially
for $100 billion in government contracts every year.
China has agreed to submit another offer this year, but
progress has been frustratingly slow.
Another issue USTR noted in its report is China's
imposition of duties in retaliation for countries bringing WTO
cases against them.
In one of those cases involving grain-oriented electrical
steel, China not only lost in the WTO challenge, but now
appears not to be complying with the ruling. I applaud the USTR
announcement on Monday that it is now requesting China to enter
consultations in this case. One of those businesses impacted is
represented today by Mr. Horn, AK Steel, and he will tell us
about that case.
Finally, China's currency manipulation continues to harm
our workers and our economy. A December 12 report by the
Peterson Institute found that currency manipulation by foreign
governments costs the United States--wide estimates here--
between 1 million and 5 million jobs, increasing the U.S. trade
deficit from anywhere between $200 billion and $500 billion.
Our trade deficit in 2012, the last year we have full
measurement, broke $300 billion for the first time. It is
expected to do so again when the 2013 figures come out.
These trade deficits are unacceptable. They cost jobs in
places like Toledo, Akron, and towns and cities all over my
State and our country.
That is why I have introduced the currency--again, the
Currency Exchange Rate Oversight Reform Act. It passed
overwhelmingly bipartisanly in the Senate. I am hopeful that my
colleagues in Ohio will take that up--that we pass it again in
the Senate and my colleagues in the House will take it up and
move it forward.
Mr. Walz, thank you for joining us.
[The prepared statement of Chairman Brown appears in the
appendix.]
STATEMENT OF HON. TIM WALZ, A U.S. REPRESENTATIVE FROM
MINNESOTA; MEMBER, CONGRESSIONAL-EXECUTIVE COMMISSION ON CHINA
Representative Walz. Thank you to Senator Brown and thank
you for your longtime unwavering commitment to making sure that
fair trade is exactly what we say it is, that it is fair.
And thank you to the witnesses for taking the time and the
effort and for providing us the resources to make informed
decisions on this.
And as always, to the staff of this commission, their
commitment is second to none. Their professionalism is second
to none. And I was saying earlier I look very much forward to
what this commission produces, because it is important.
I would echo the Senator's words. We are here to make sure
that this relationship--all good relationships are based on
trust. They are based on fairness.
My constituents and workers in southern Minnesota are not
afraid to compete against anyone, but they are frustrated when
they compete in an unfair system that gives advantages one way
as opposed to making it fair, because when we compete fairly,
it improves the quality of products, it improves the quality of
trade, and it makes the relationship stronger.
So I would look forward to the hearing today. The WTO
regulations are in place for that very reason and why we do
trust, President Reagan was right--trust, but verify--and that
is what our job is here today.
So I yield back, Senator.
Chairman Brown. Mr. Meadows?
STATEMENT OF HON. MARK MEADOWS, A U.S. REPRESENTATIVE FROM
NORTH CAROLINA; MEMBER, CONGRESSIONAL-EXECUTIVE COMMISSION ON
CHINA
Representative Meadows. Thank you, Mr. Chairman. And thank
you for your words. As you opened up, you articulated it very
well.
From the witnesses what I hope to hear from each one of you
is the areas, indeed, where we are making some progress, but
maybe highlighting the three most problematic areas that you
see that we need to address, and if you could highlight those
for me, that would be great.
In addition to that, I can say that our trading partner,
China, is critical not only to the United States, but to China,
as well, and that is one that we need to work on and make sure
that it does have the foundation, as my colleague to my right
said, a foundation of mutual respect, but, also, trust.
So in doing that, when you have the rule of law and when
those laws or agreements are not followed, it is very
troubling.
So what we would like to see from each one of you is to
articulate that in the best form that you can.
As a member of the Foreign Affairs Committee, we have had
numerous hearings that were troubling, I guess, in terms of the
trajectory of where we are going with this, either the progress
that has been made or the lack thereof. And so I would like for
each one of you to comment on that.
Mr. Chairman, I will yield back.
Chairman Brown. I thank Mr. Meadows.
Mr. Sherman, welcome.
STATEMENT OF HON. BRAD SHERMAN, A U.S. REPRESENTATIVE FROM
CALIFORNIA
Representative Sherman. Thank you, Mr. Chair, for giving me
an opportunity to participate here today.
In determining whether China is playing fairly, one is
tempted to just look at the scoreboard, the balance of trade.
It is the most lopsided trading relationship in the history of
mammalian life.
But we are told instead we should be looking at the
individual plays on the field. The problem is the field is
shrouded, because the system we have adopted is based on the
idea of free market capitalism being practiced in every country
that is part of the WTO.
There is an assumption that capitalist businesspeople will
determine what is imported and that they will import anything
they can import at a profit, subject only to tariffs and other
published restrictions, which are enforced through an
independent judiciary that demands that businesses have the
freedom to import anything they want, subject only to clearly
written rules.
Is there anything in China that reminds us of that system?
In fact, if we look at the culture, law, politics of China, we
see state-owned enterprises. China does not need to publish
tariffs to affect their behavior. They own them.
Chinese Communist Party members and Chinese Government
officials are on the boards of other companies. So why look at
the statute books and the regulations to see how Beijing
influences companies?
And I think of myself, what if I were to get on the phone,
as a Congressman, and call a businessperson and tell them,
``Don't buy the Chinese product. Buy the American product,
because I think that's good for America.'' I would be laughed
at or there would be a press conference denouncing me for
trying to interfere with business.
Now, imagine a commissar in China makes an equivalent call.
The fact is when we asked whether China plays by the rules,
most of the field is hidden. All we see are the published rules
and the published tariff rates.
When we reduce or eliminate those rules that limit imports
to the United States or impose taxes on them, we give up
everything. When China alters its published law, it gives up
nothing.
The effect of the policy we have followed for the last
couple of decades is clear. You look at the scoreboard and you
see the most lopsided trading relationship.
We should demand not just fair trade, but balanced trade.
There is no way to look play-by-play when you cannot see the
field. We should demand that for every $1 of import, there is
$1 of export.
Until then, we have to be tough in enforcing the existing
rules.
I yield back.
Chairman Brown. Thank you, Mr. Sherman.
Again, thank you to the panel for joining us. I will
introduce each of you now and then we will begin the testimony,
starting with Mr. Horn.
David Horn is Executive Vice President, General Counsel,
and Secretary of AK Steel, which he joined in 2000. Prior to
that, he was a partner in the Cincinnati law firm of Frost
Brown Todd. He is an active member in his community, currently
serving as a member of the board and cochair of the Greater
Cincinnati Minority Counsel Program and the Mercy Health
Foundation.
Thank you, David, for joining us.
Elizabeth Drake is a partner at Stewart and Stewart. She
has broad experience in international trade laws, authored
articles on China's exchange rate policies, WTO rules on
balance of payment measures, and trade and labor rights.
She was previously an international policy analyst at the
AFL-CIO and served on the Labor Advisory Committee on Trade
Policy and Negotiations to the U.S. Trade Representative.
Welcome, Ms. Drake.
Thea Lee is Deputy Chief of Staff at the AFL-CIO. She
served as Policy Director and Chief International Economist.
Her research projects have included reports on the impact of
international trade on U.S. wage inequality.
She serves on the State Department Advisory Committee on
International Economic Policy and, also, on the Board of
Directors of the National Bureau of Economic Research.
Welcome, Ms. Lee.
Timothy Webster is Assistant Professor of Law and Director
of the East Asian Legal Studies Program at Case Western
University Law School in Cleveland. His research looks at the
intersection between East Asian and international law and has
appeared in the Columbia, Michigan, and Penn international law
journals.
He previously taught at Yale Law School. He recently
completed a paper titled ``Paper Compliance: How China
Implements WTO Decisions.''
Thank you, Mr. Webster, for joining us.
Mr. Horn, if you would begin.
STATEMENT OF DAVID HORN, EXECUTIVE VICE PRESIDENT AND GENERAL
COUNSEL, AK STEEL HOLDINGS CORPORATION
Mr. Horn. Good morning, Chairman Brown and other members of
the Commission. I appreciate the opportunity to participate in
today's hearing and to present the views of AK Steel regarding
China's failure to comply with its obligations as a member of
the World Trade Organization.
My name is David Horn. I am Executive Vice President,
General Counsel, and Secretary of AK Steel Corporation.
Headquartered in Westchester, Ohio, AK Steel is a leading
producer of flat-rolled, carbon, stainless, and electrical
steels.
China's adherence to its WTO commitments is extremely
important to AK Steel and its 6,100 employees. From AK Steel's
perspective, however, China has embraced the opportunities
offered by the WTO membership, but not the obligations.
China's failure to follow the rules has hurt AK Steel in
two very concrete ways. First, the Chinese Government has
heavily subsidized its steel industry. This has resulted in a
huge oversupply of steel products in the global market, which
depresses steel prices in the United States and foreign
markets.
Second, China continues to impose antidumping and
countervailing duty measures on AK Steel's exports of grain-
oriented electrical steel, which is referred to as GOES,
notwithstanding the fact that the WTO has found that these
duties are not justified and never should have been imposed.
Although the enormous subsidies provided to Chinese steel
producers are a significant concern, what I wish to focus on
this morning in the limited time I have available is the
unjustified imposition of duties on GOES from AK Steel.
China initiated antidumping and countervailing duty
investigations of GOES from the United States in June 2009. In
April 2010, China issued its final determination. China found
that the imports of GOES from the United States had been dumped
at prices below normal value and subsidized by the U.S.
Government.
It imposed duties of nearly 20 percent on imports from AK
Steel. More than half of this rate, approximately 12 percent,
was based on an adverse assumption that AK Steel sold all of
its products to the U.S. Government at a premium under the Buy
America Act. That was, of course, not true and there was no
evidence to support this clearly false assumption.
Nonetheless, AK Steel and the other producer of GOES have
been shut out of the Chinese GOES market as a result of these
duties.
Prior to the start of the investigation, U.S. GOES exports
to China totaled approximately $270 million annually. Today,
the value is well under $1 million.
AK Steel was pleased when the USTR filed a WTO complaint
against China in September 2010. We likewise were pleased in
June 2012 when a WTO dispute settlement panel first ruled that
China had violated its WTO obligations in numerous respects
when it imposed the duties on GOES.
China appealed certain aspects of that WTO panel's
findings, but China's claims were rejected by the WTO Appellate
Body in October 2012.
In short, the WTO has ruled that the duties imposed by
China on GOES from the United States were not justified and
should never have been imposed.
Despite that fact, duties have remained in place against
GOES for over 18 months since the panel first found them to be
inconsistent with China's international obligations and for
nearly 4 years since the duties were first improperly imposed.
Because China would not agree to a reasonable timeline for
coming into compliance with the WTO rulings, the United States
was forced to request arbitration to determine a reasonable
period of time for China to comply.
After the arbitrator rejected China's pleas for more time,
on July 31, 2013, China issued a revised final determination.
It lowered the duties, but it did not eliminate them. China's
revised determination attempting to comply with the WTO's
findings retains almost all of the errors of its original one.
Because of China's intransigence, USTR on Monday of this
week requested consultations regarding China's failure to come
into compliance with the WTO's ruling. USTR will seek a ruling
from a WTO compliance panel that China has failed to comply.
Unless China relents, the United States will then need to
request a WTO arbitrator to determine the amount of retaliation
that the United States is authorized to apply in terms of
higher tariffs on imports from China.
While all of this is going on, the GOES produced by AK
Steel remains shut out of the Chinese market.
AK Steel's experience shows that the WTO dispute settlement
system operates too slowly to provide effective relief,
especially where the losing party does everything it can to
prolong the process, as China is doing with GOES.
AK Steel very much appreciates the support it has received
from the U.S. Government in challenging China's flawed
antidumping and countervailing duty measures in the GOES case.
We would respectfully suggest, however, that more should be
done. For example, USTR should continue to aggressively pursue
other complaints against China's failure to follow the WTO
rules in applying antidumping and countervailing duties against
U.S. exports.
China has now lost several such cases and those defeats
make it more likely that the Chinese Government will bring its
practices into WTO compliance.
In order to allow USTR to do more, Congress should
appropriate more funds to USTR's WTO dispute settlement
function.
Although I know from personal experience that the USTR has
very talented lawyers, I understand that most of its WTO
litigators split their time among various responsibilities. It
would seem to me that if USTR had more lawyers dedicated to WTO
disputes, they would launch more cases and litigate more
expeditiously.
Finally, Congress should enact the Currency Exchange Rate
Oversight Reform Act of 2013, which would have the effect of
applying the countervailing duty law to currency manipulation.
Alternatively, Congress should attach provisions applying
the countervailing duty law to currency manipulation to any
Trade Promotion Authority bill passed by Congress.
Again, I thank you for this opportunity to testify.
Chairman Brown. Thank you, Mr. Horn.
Ms. Drake?
[The prepared statement of Mr. Horn appears in the
appendix.]
STATEMENT OF ELIZABETH DRAKE, PARTNER, STEWART AND STEWART
Ms. Drake. Chairman Brown, Commissioners, good morning. My
name is Elizabeth Drake and I am a partner at Stewart and
Stewart. I thank the Commission for the opportunity to appear
before you today.
In the 12 years since China joined the WTO, it has become
the world's largest exporter and our most important trading
partner. But this trading relationship is far from balanced.
Since 2001, our trade deficit with China has nearly
quadrupled. In 2013, China accounted for only 8 percent of our
exports, yet a full 46 percent of our trade deficit.
Part of the reason for these troubling trends is China's
continued violations of the rules it agreed to when it joined
the WTO. These violations include discrimination against
foreign goods and firms, localization requirements, export
restraints, investment restrictions, lax IPR protections,
abusive trade remedies, and a persistent lack of transparency.
Today I would like to highlight just four of these areas.
First, the tens of billions of dollars in prohibited export
credit subsidies that China provides to its exporters.
Second, discrimination by state-owned enterprises against
U.S. producers and products. Third, technology transfer, local
content, and export requirements imposed on investors in China.
And, fourth, massive subsidies to China's strategic and
emerging industries.
Our firm filed a 301 petition on behalf of the United
Steelworkers Union in 2010, highlighting a number of these
practices in the green technology sector and very much
appreciate all of the work that USTR has done to follow-up on
the allegations in that petition and resolve many of them.
However, we believe more can be done.
The first issue I would like to address is China's export
credit system. Export credits that do not comply with the OECD
[Organisation for Economic Co-operation and Development]
arrangement on export credits are prohibited under WTO rules.
China is now the world's largest export credit provider, by
far.
In 2012, China provided an estimated $100 billion in export
credits, three times what U.S. Ex-Im Bank was able to provide
to our own exporters.
Yet, China refuses to join the OECD arrangement and our own
Ex-Im Bank has found that China does not comply with the
arrangement in practice. Indeed, some reports indicate that
China's export credits may be available at rates as low as 2
percent, 1 percent, or even 0 percent.
Allowing these practices to continue poses a significant
threat to the competitiveness of our own exporters, who must
rely on an Ex-Im Bank that does follow the rules.
One obstacle to challenging these practices at the WTO is a
lack of transparency in China. However, I believe there is
enough public information to mount at least a prima facie case
that China's export credits are prohibited subsidies. The
burden would then shift to China to come forward and
demonstrate that the credits, in fact, comply with the OECD
rules.
I believe the credible threat of a WTO challenge provides
vital leverage to bring China's export credit system into
compliance.
With regard to the next two issues, discrimination by
state-owned enterprises and the imposition of technology
transfer, local content and export requirements on investors,
have long been a source of concern.
The United States expended significant negotiating capital
to get China to agree to rules prohibiting these practices and
these rules go above and beyond the normal rules in the WTO
agreement. Unfortunately, these additional rules have never
been enforced.
Examples of continued violations by China are many. I have
laid them out in my written testimony and would be happy to
answer any questions about those examples.
The United States has secured numerous commitments from
China to eliminate these practices over the years.
Unfortunately, USTR continues to express dissatisfaction with
China's compliance.
WTO challenges may be the only way to finally put an end to
these practices.
Finally, the United States should continue to closely
monitor the massive subsidies China is providing to its
strategic and emerging industries and we should not hesitate to
bring a WTO challenge if these subsidies cause harm to U.S.
producers and workers.
In 2010, China announced its aim to dramatically expand
seven strategic and emerging industries--energy saving and
environmental protection, new generation IT, biotech, high-end
equipment manufacturing, new or renewable energy, new
materials, and new energy vehicles.
China aims to be the world leader in each of these seven
industries by 2030. To meet this goal, it is reported that
China plans to invest $1.5 trillion in these industries over
just a few years. There is no way that China can meet these
goals without displacing foreign competitors. Such aggressive
distortion of international competition through government
subsidies is exactly what WTO rules are designed to prevent and
redress.
Bringing a case against these subsidies would be a fact-
intensive and resource-intensive exercise, but ensuring the
United States has a fair chance to compete in these seven key
sectors in the coming decades would be well worth the effort.
Thank you for the opportunity to testify. I look forward to
any questions you may have.
Chairman Brown. Thank you, Ms. Drake.
Ms. Lee, welcome.
[The prepared statement of Ms. Drake appears in the
appendix.]
STATEMENT OF THEA MEI LEE, DEPUTY CHIEF OF STAFF, AMERICAN
FEDERATION OF LABOR AND CONGRESS OF INDUSTRIAL ORGANIZATIONS
[AFL-CIO]
Ms. Lee. Good morning and thank you for the opportunity to
testify today on this very important issue that impacts our
members, but also impacts Chinese and American workers who are
not in unions.
I wanted to start by congratulating the Commission for its
excellent work over the last 13 years, particularly under the
current chairmanship, Senator Brown and Congressman Smith. I
think you have done a wonderful job of reminding our
government, the Congress and the Administration of the
interrelationship between our economic relationship with China
and some of the more important issues, like democracy, rule of
law, human rights, workers' rights, that do not get the
attention that they deserve in the national discussion that we
have been having.
Our bilateral dialogues focus too often on narrow
commercial concerns. But the concerns about workers' rights,
human rights, and rule of law are essential to American
workers, consumers, and businesses. It is impossible for us to
have a healthy economic relationship with China if we do not
address those fundamental concerns. That should be a part of
all of our bilateral U.S.-China economic dialogue. And we
believe that our government should seek more effective avenues
for raising these concerns within the multilateral framework of
the World Trade Organization [WTO] and other international
bodies.
When China joined the WTO more than 12 years ago, there
were several concerns raised. One is whether the WTO rules
themselves were adequate to protecting workers' rights and the
environment, promoting democracy and development, addressing
currency manipulation, and, in general, supporting U.S. jobs
and manufacturing.
The second question was, given the WTO rules, whether China
would comply with those commitments and if not, whether the WTO
enforcement mechanisms would be adequate.
The third question is whether the U.S. Government had the
will and/or the tools to use WTO mechanisms effectively to
protect the interests of American workers and domestic
producers, rather than just the interests of multinational
corporations.
And if we step back now, 12 years later, I would say that
the results are very disappointing. American workers and
domestic businesses are paying a high price every day for the
failures of WTO accession and WTO enforcement.
The rapid industrialization and export growth in China have
far outpaced the development of regulatory institutions, laws,
and enforcement capacity. Workers' rights, environmental
protections, and consumer safety did not naturally and
automatically improve, while foreign investment and exports
grew rapidly, I think more rapidly than many expected.
And as Congressman Sherman said, the imbalanced trade
relationship between China and the United States continues to
grow, to the point where our bilateral trade deficit with China
is more than two-thirds of our non-oil goods deficit with the
entire world.
If you look, in particular, at advanced technology
products, it really is striking. If you look at just that one
table in U.S. trade statistics, you will see that we had a $106
billion trade deficit in advanced technology products alone
with China. That is larger than our whole advanced technology
trade deficit with the world, which means that we have trade
surpluses in advanced technology products with most of our
trading partners, but we have a massive trade deficit with
China. That does highlight some of the areas that Elizabeth
Drake outlined in terms of the unfair practices and the uneven
playing field that leads to this kind of a dramatic imbalance
in an area where there should be a competitive advantage for
the United States.
In conclusion, I think that this Commission's proposal that
human rights and rule of law be integral to all trade and
economic discussions is important, particularly in the context
of the Strategic and Economic Dialogue with China.
I understand that the topic is not welcome. I understand,
and I hear this often from the U.S. Government, that the
Chinese Government does not want to have a conversation about
human rights or workers' rights or democracy. I think that
highlights all the more why this is important. It is a
foundational building block to everything about our economic
relationship with China. Everything that we hope to accomplish
vis-a-vis China--political stability, a reciprocal trade
relationship, an appropriate regulatory framework, and an
economic relationship that delivers good jobs for American
workers, as well as for Chinese workers--cannot be accomplished
if there is a lack of democracy and fundamental workers' rights
and human rights in China.
The second thing is action on currency. 2014 is the year
that the U.S. Government needs to take action. Congress should
take action, and the Administration should take action. We
totally support the Currency Exchange Rate Oversight Reform Act
that Chairman Brown mentioned, and it is time for Congress to
stop juggling ineffectually and tossing this bill back and
forth between the House and the Senate and the Administration.
Congress should stop pretending that this issue is being
resolved, because it is not.
And, particularly, in a year when our negotiations are
moving forward on the Trans-Pacific Partnership and the
bilateral investment treaty with China, it is essential that we
put these issues of human rights and workers' rights and
democracy back at the center of our U.S.-China dialogue.
Thank you so much for your attention. I look forward to
your questions.
Chairman Brown. Thank you, Ms. Lee.
Professor Webster, welcome.
[The prepared statement of Ms. Lee appears in the
appendix.]
STATEMENT OF TIMOTHY WEBSTER, ASSISTANT PROFESSOR OF LAW;
DIRECTOR, EAST ASIAN LEGAL STUDIES, CASE WESTERN RESERVE
UNIVERSITY SCHOOL OF LAW
Mr. Webster. Thank you. Chairman Brown, members of the
Commission, ladies and gentlemen, it is my pleasure and my
honor to speak with you here this morning.
I would like, in particular, to thank Lawrence Liu, the
staff director of the CECC for contacting me back in October
and for inviting me here today. And like others on this panel
have said already, I would like to congratulate the CECC on its
terrific work educating not only Congress, but, also, the
American people and, indeed, the world about issues that are
ongoing in China.
I frequently assign hearings and roundtables and other
testimony from this Commission to my class on Chinese law. So
you are also serving to educate the general public.
Now, throughout the United States, but particularly here in
Washington, as we have heard from the panel this morning, there
is a pervasive belief that China is an international trade
scofflaw. By manipulating its currency, subsidizing its
domestic industries, dumping goods in the United States, China
is seen as a scourge whose baleful influence harms us all.
My recent research, which will appear later this year in
the Michigan Journal of International Law attempts to temper
this view through empirical observation.
I have examined China's record of implementing the 10
decisions that have been rendered by the WTO's dispute
settlement body [DSB] over the past 10 years, and I find that
China has a strong, but increasingly imperfect, record of
implementing DSB decisions.
For reasons I will explain, I conclude that China is, at
base, a system maintainer, not a system challenger. Part of
using any system, whether it is the rules of civil procedure or
the rules of international trade or the rules of football, is
tactical manipulation. A smart lawyer, coach, or WTO member
will strategically deploy procedural rules to benefit his
client or to benefit his side to the greatest extent he can.
Of course, sometimes a member will break the rules, and
that, I think, is where China is moving and has been moving
over the past few years.
Now, in the first wave of cases, before 2007, China was
quick to settle WTO decisions and quick to, I would submit,
change its laws in accordance with DSB rulings. But after
gaining familiarity with the DSB procedures, China has become
an increasingly sophisticated WTO litigant and now more willing
to use DSB procedures to minimize the effects of adverse
rulings.
This is true both in the steel case that Mr. Horn talked
about and in other cases, as well. There are two ways of
thinking about this. First, China is willing to use the
internal procedures of the DSB to its own effect, and we can
talk about that, but, second, once decisions have actually been
rendered, China is not necessarily willing to implement those
decisions as quickly as it should.
That could include things like taking an appeal, as it does
when the case looks like it is going to really be difficult to
implement and buying itself maybe a year or two of time, or, as
I found in a couple of cases, just not changing the
inconsistent regulations at all.
So there are a couple of cases, and I talk about it in my
article and I talk about it in my testimony. And hearing from
Mr. Horn, as well, I wonder if we have not, in a sense, opened
the box up by not enforcing earlier decisions where
inconsistent regulations were found. We said, ``Okay, try it,
see if you can push the limit, see how far you can go.''
Now, I want to respond very briefly to what Congressman
Meadows said. What can we do about this? And, again, here, I
would echo some of the comments that Mr. Horn made. The United
States is usually the plaintiff in these cases. As a result, it
is perfectly well positioned to look at the enforcement piece.
The United States, I think, could push the dispute
settlement body to specify which laws, which regulations, which
provisions of the regulations need to be changed, need to be
amended, and by what time. Does China need to change all of
these regulations, some of them? What is the roadmap that China
needs to achieve full compliance or full implementation?
I also think the United States needs to focus on
enforcement. As I said before, there are several cases where
many, four to five or six or so, regulations continue to be in
effect even now, even though they were found three, four, five
years ago to be inconsistent with the WTO.
I think it is the United States' position to hold China's
feet to the fire in those couple of cases.
The final thing I would like to add is that I think the
United States also needs to live up to its end of the bargain.
The United States, of course, was the chief architect of the
World Trade Organization, the chief architect of the dispute
settlement body, and we have a special obligation to implement
WTO decisions, as well.
Last year, the Congressional Research Service published a
report that said there were either 12 or 13 cases that the
United States has yet to implement. So I think our failure to
implement cases that go back to the late 1990s and early 2000s
erodes confidence in the international trade regime. I think by
implementing them, we would gain moral authority when we try to
push other countries to do the same.
So I will stop my comments there. I look forward to your
questions, and I appreciate the time to come here today.
Thank you.
[The prepared statement of Mr. Webster appears in the
appendix.]
Chairman Brown. Thank you. Thank you all.
I will start with Mr. Webster. USTR, Mr. Webster, expressed
some cautious optimism, perhaps over what they have called far-
reaching economic reform pronouncements, including that the
market shall be decisive and dominant during the Communist
Party's third plenum last November.
What should we be looking for in the coming months to
determine whether China is, indeed, actually making real and
lasting change and achieving those goals?
What will we see? What should we be looking for to measure
that and to plan accordingly?
Mr. Webster. That is a great question. The language you are
citing is from the recent Chinese Government's Third Plenum of
the 18th Central Committee. And this is supposed to be the
roadmap of the future.
I think it is very difficult to know. It is a very abstract
phrasing. I think some of the things we have been talking
about, opening up market access to foreign competitors would be
one area where China has not been particularly transparent.
If we see that market-based mechanisms, meaning the best
bid as opposed to the best-positioned SOE [state-owned
enterprise], winning contracts in various industries would be
one index of that. Or if an SOE somehow defaulted on a payment,
we would see that Chinese banks are becoming stricter in their
lending, which would also indicate the application of market-
based principles.
But I think that is a great question and I wish I had a
better answer for you. That has certainly been the rhetoric of
China over the past three or four months. But how we can
actually measure that is anybody's guess.
Chairman Brown. Thank you.
Ms. Lee, is there more that we can do through the WTO or
through future trade negotiations in agreements with China to
address worker rights?
What kinds of provisions, labor provisions, would you like
to see in future agreements that, as we move forward, can help
workers in our country and, frankly, workers in other places?
Ms. Lee. That is an excellent question. We have talked a
lot about the lack of worker rights commitment within the WTO,
but it is also true that even within the WTO, in the Singapore
Declaration, for example, there is a commitment that the
members would respect, promote, and realize the international
core workers' rights as outlined by the ILO [International
Labour Organization]. There is certainly language in the WTO,
in Article 20(e) about prison labor. There is language about
measures that affect human or animal or plant life or health.
I think that the U.S. Government should be more aggressive
in testing the limits of the worker rights protections under
the WTO.
We have filed a case in the past and we may file a case in
the future, a Section 301 case that the U.S. Government would
take up and prosecute about whether the Chinese Government's
violation of workers' rights is, in fact, an unfair trading
practice. It hurts American workers, it hurts American
businesses, and it has a big economic impact on the United
States, and it is widespread. It is systematic. It is not one
factory with a child laborer working.
It is a systematic, economy-wide repression of the right of
freedom of association and the right to bargain collectively.
I think it would also help, as I said earlier, if the U.S.
Government put more focus on this issue in all of its strategic
and economic dialogues, in the joint talks that happen
regularly.
I always see the agendas for these talks and you see
intellectual property rights, you see market access, you see
subsidies, which are all important issues and we totally
support them. We would like to see workers' rights elevated in
every discussion that the U.S. Government has with the Chinese
Government, because it is so important.
In terms of what kinds of commitments, we are always
looking for enforceable commitments of the ILO core labor
rights, the freedom of association, right to organize and
bargain collectively, and the prohibitions against child labor,
forced labor, and discrimination in employment.
The key challenge for us in the international arena is how
do we make those commitments real, and how do we get the
resources to monitor and enforce? When we start with a country
like China, whose labor laws are so far out of compliance with
international labor standards, we need a much stronger kind of
dialogue that is focused on benchmarks and interim steps. It is
unrealistic to think that even if the U.S. Government were to
sign a bilateral free trade agreement with China tomorrow and
put the strongest worker rights measures into that trade
agreement, that that little worker rights chapter would be
sufficient to address the kinds of concerns and the kinds of
violations that we see in China.
So I think we have to start with a dialogue. We have to
start with raising this issue more consistently, and then we
could decide whether--if the United States is going to go ahead
and negotiate a bilateral investment treaty with China, the
issue of workers' rights needs to be confronted squarely and
head on in that forum.
Chairman Brown. Thank you.
Ms. Drake, this Commission is primarily charged with two
things--to deal with issues of human rights and economic
issues. And I want to shift to a human rights issue for a
moment with you.
This Commission did a roundtable just several weeks ago
with a number of journalists, all of whom had been threatened
visa denial to go back into China for the new year and have
access or have an ability to tell the story of what is
happening in China on a whole host of issues.
Perhaps in part because of the light that we shone on this,
perhaps for other reasons, too, the Chinese Government did end
up renewing visas for most reporters, but notably did not give
a visa to a New York Times reporter.
There were also the issues that came out in this roundtable
about China blocking U.S. Web sites.
My question is this: Is there a trade remedy either through
the WTO or some other avenue that could address this ongoing
problem? It is expected. I mean, we have no reason not to
expect it, if you will, because it is going to happen at the
end of the year again this year and the following year perhaps
not.
But if there is a proactive way we can deal with this, how
do we do this?
Ms. Drake. Thank you, Senator. That is an excellent
question and the Commission's work on this issue has been very
important.
First on the issue of the journalist visas. When China
acceded to the WTO, under the general agreement on trade and
services, it committed to allow free entry for senior employees
of foreign investors in China for three years, on three-year
terms.
And so the United States could try to look at that
commitment and see if there is a creative way to either seek
consultations with China under that commitment or even bring a
WTO dispute, but it would depend on whether or not these
journalists were considered senior employees of companies that
were actually invested in China.
So it's a limited commitment. It is not broad enough to
probably cover all of the journalists that we would want to be
sure are protected and are able to do their work in China.
On the Internet blocking issue, that is an extremely
interesting issue, and, actually, the United States has raised
it at the WTO. In 2011, the USTR submitted a series of
questions to the Chinese Government about its Internet-blocking
activities.
Again, under the context of the general agreement on trade
and services, under which China did make some commitments for
market access for U.S. companies, that could be an avenue for
challenging blocking. That blocks the ability of U.S. companies
to use the Internet and China to have their Web sites up in
China, et cetera.
But, again, that commitment is not complete. It does not
cover all kinds of Internet content providers. For example,
news services are a sector in which China did not make any
commitments under the GATT [General Agreement on Tariffs and
Trade].
So blocking the New York Times Web site or the Washington
Post Web site or what have you likely would not violate their
GATT's commitments, but maybe blocking another service provider
would if they made commitments in that area.
So the United States did a good job presenting a very full
set of questions to China at the WTO on these practices. China
made a partial response in 2012 and apparently they had
consultations then, but it is definitely an avenue that
deserves greater attention and more work.
Chairman Brown. Thank you.
Mr. Horn, first, thank you for your support on the currency
issues that you mentioned at the end of your testimony, both
freestanding legislation and as part of future trade
agreements.
I understand that your company, AK Steel, has filed trade
cases with the Commerce Department and the U.S. International
Trade Commission [ITC] against China and other countries for
allegedly dumping non-oriented electrical steel, in addition to
your testimony.
Are the various tools that the U.S. Government has at its
disposal enough to ensure a level playing field with China? And
if we need additional tools, what should they be? Give me your
thoughts.
Mr. Horn. Great question. I do not think that they are
enough. Certainly, we have been able to file the GOES and the
NOES trade cases, but they are very expensive to do. They
require a lot of data to be able to prepare them and get them
filed.
Sometimes it is not always available, the market data in
the foreign country and things like that. So first off, you
have an obstacle there. Beyond that, they only help us with
imports of those specific products into the United States from
the targeted countries.
There is also always the risk that countries will
circumvent whatever decision is made in terms of duties by
trying to send the product through another country or something
like that.
So there is a risk there. There needs to be strong
enforcement of the trade laws to make sure that there is not
circumvention.
Beyond that, it does not help us with our ability to
export, and what we have in the case of China is not only a
situation where they are exporting their goods to the United
States and lowering the prices here because of subsidized
product that we have a difficult time competing against, but we
also cannot compete in China now. We cannot sell our product
there. Trade cases here do not help us address that issue.
So I think there is more that can be done in both
directions.
Chairman Brown. Thank you.
Mr. Walz?
Representative Walz. Thank you, Chairman.
Thank you all, to the witnesses.
Just hitting on a couple of things. The one thing I would
say, too, is this issue of enforcement, I hear that again and
again and I think we all understand it.
I want to be very clear. We are going to vote on an omnibus
today that is going to be $4 million less, significantly less
than what was requested by USTR, specifically for interagency
trade enforcement and the Beijing side of it.
So you can go home and tell your people you saved money,
you cut the budget, and you underfunded the agency that
actually is enforcing this to return money back to the
Treasury.
So it is very frustrating to me, but I think that is our
responsibility to bring that to light.
A couple of things, and, Mr. Webster, I thought you brought
up a good point, too, and I think it is important for us
because this trade relationship is important and it needs to be
fair.
I think the point you brought out about the United States
upholding ours, whether it is upland cotton or whatever it is,
it is making sure that we are addressing those, and I think
that sends the message.
The question I have is, looking at China's organization on
the economy from the large state-owned enterprises, banks,
telecoms, the joint ventures, the carmakers and things, then
there is this talk about there is the private.
My question is, how private are they? My experience with
the Chinese, you have a lot of municipal investment through
joint venture or, I mean, venture capital that is actually
owned government-wise or whatever.
So this idea of how transparent or how much interference
there is, in your opinion of looking at this, is it deeper than
we think?
Mr. Webster. Again, it is difficult to track down who owns
what. I think in the late 1990s and early 2000s, there was a
growing private sector in China. But over the past 8 or 10
years, this has been supplanted by state-owned enterprises
across a wide range of important key industries, including the
ones that we have talked about today, automotive, steel,
telecom and so forth.
I guess the only response I would have is that, at least as
regards trade, the WTO itself only offers limited capacity to
dive into things like workers' rights, environmental rights,
things like that.
So we cannot see every bilateral problem involving China
through a trade lens. If we do, we are going to be disappointed
by the efficacy of what WTO or what international trade laws
can do.
That is a great question. Thank you.
Representative Walz. Very good.
Mr. Horn, again, thank you for your work. Two questions to
you. First of all, give me your overall impression of doing
business in China, as you see it. And then, second, could USTR
be more aggressive in helping out? Because this is a case,
again, as I said, with this budget, this seems to me to be one
of those cases that the private sector does not have the
ability nor the authority to do what WTO, USTR, and the Federal
Government does. And have they been aggressive enough in
helping you do that?
Mr. Horn. Thank you. Let me address the first part of that
question first, about doing business in China.
We are optimistic that once the duties ultimately are
eliminated on electrical steel, we will be able to get back
into China and do business there. But there is absolutely no
certainty of that.
We are very concerned about the political element of it and
the state-owned enterprises and whether they will be willing to
buy from us, even if there are no duties at some point.
So that is a significant concern to us. We have been locked
out now for about four years and have continued to try to
maintain the relationships and we will try to get back in
there, because it is an important part of the business to our
company.
But we are very concerned that it will be difficult for us
to do business in China given the importance that the Chinese
Government has placed on building its electrical steel industry
and not wanting us to go in there and compete against it.
So that is going to be a problem for us.
With regard to the USTR, we do appreciate the support they
have given us, but I think if they had more resources that they
could devote to cases, they could move the cases along more
expeditiously.
From time to time, there were delays between when things
occurred and when USTR was able to respond. So I do not fault
them for trying. They have a lot of things to do.
But if they had greater resources, I think they could have
responded more promptly in following up on things that needed
to be done in our case.
Representative Walz. Mr. Webster, what will be, in your
experience, in past history, what will be China's response to
the GOES? What will we see? Will we see token--trying to keep
these guys on the hook, trying to do that with no real effort
to actually do it, while, at the same time, beefing up and
supporting their domestic ability on the grain-oriented steel?
Is that a fair assumption of the way this will play out?
Mr. Webster. Yes. Again, another great question. This is
really the limit. I do not think China has fought a case this
hard as of yet. In an earlier decision that challenged China's
censorship regime, there was a lot of pushback. China failed to
implement the decision in a timely manner, but eventually it
did achieve full--or relatively full-- compliance.
I think with the steel industry being as important as it is
in China--and we have already seen and Mr. Horn has already
mentioned, there was a huge row over what a reasonable period
of time to implement this decision is.
Usually it takes 8 to 10 months to implement a WTO ruling.
But in the steel case, China and the United States first went
to arbitration to determine a reasonable period of time. Now
that period has ended, and the United States is still
dissatisfied by China's implementation. The United States is
now bringing an implementation action against China. This is
the first time a WTO member has brought an implementation
proceeding against China, so we will have to wait to see what
the result is. I am fairly confident that the United States
will win the proceeding, but less sure that China will actually
change its conduct. It levied the same anti-dumping duty again
after the reasonable period of time ended with no explanation
of how it arrived at the duty--which was the brunt of the
United States complaint to begin with.
It is up to the USTR or the United States to continue to
apply pressure. In the past, as I testified, the United States
has allowed China to get away with incomplete implementation. I
suspect this, too, will be another multiyear saga before full
implementation is realized.
Representative Walz. Very good.
And, Ms. Lee, I will just end quickly here with you on
this. Could you tell, from your perception, as this goes on and
you see Mr. Horn's dilemma, you heard about where we are, you
hear the experience, tell me how this affects American workers?
What does that do to an American worker trying to go to work,
work hard, do their thing, pay their bills, raise their family?
What happens to them in this?
Ms. Lee. This imbalanced and unfair economic relationship
with China is very present for American workers, particularly
in the manufacturing sector, but not just in manufacturing. It
affects engineers, as well, and other technicians.
But the idea that American workers are going to be in
direct competition with workers who lack basic fundamental
freedoms is devastating. It is undermining to an American
worker trying to keep his or her job, an American worker trying
to bargain decent wages and benefits, an American worker trying
to form a union at a mobile manufacturing plant.
So this is ever present. It is something we hear about
constantly from our members. They are faced with it every day.
They sit down at the bargaining table and the boss says to
them, ``Yeah, you want a raise. Yeah, you want health care, you
want a pension, you want safety equipment, you want a bathroom
break, whatever it is, we can go to China and we don't have to
worry about that. And not only that, but on top of it, we are
not going to worry so much about environmental protections, we
are not going to worry about consumer safety protections, and
all of those create enormous economic incentives for an
American company to move that production.
That is something that we face every day, and this is a
burning issue. This is an urgent issue for American workers.
Thank you, Congressman Walz.
Representative Walz. Thank you all. I yield back.
Chairman Brown. Senator Merkley?
Senator Merkley. Thank you. I appreciate all of your
insights and expertise being brought to bear on this topic and
have a lot of questions.
Ms. Drake, you listed a whole series of challenges in the
trade relationship: Currency manipulation, export subsidies,
tech transfer requirements, local content requirements, export
requirements for investing companies, subsidies to China's
strategic and emerging industries.
Probably those include some of the things that I often hear
about, including the low-cost bank loans, below-cost bank
loans, free land, people being thrown off their land and
provided the key, industry's intellectual property theft.
There is a long list. And then I hear Mr. Webster
summarizing and saying that China is a system maintainer, not a
system challenger.
So it is kind of a question for the two of you. I am not
sure if those are academic terms, Mr. Webster, coming from a
political science perspective, but it seemed like from your
introduction you were trying to diminish the normal impression
that we have of all these serious--this long list of serious
violations do significant harm to the United States, and you
listed things the United States could do to kind of make the
system work better.
I have a picture, from Ms. Drake's presentation, of gross
violations that have a huge impact on the United States, and
from your presentation, it is like, well, they stretch the
rules, occasionally break them, but the United States could
respond.
Are the two of you coming from dramatically different
positions or is it more a political science evaluation that you
are reaching?
Why do you not start, Mr. Webster, and I will ask Ms. Drake
to comment.
Mr. Webster. Thank you. Thanks for that question. I think
we may be talking about two different things.
If I understand Ms. Drake, she is talking about the entire
panoply of WTO agreements. Right? There were 20-some-odd
agreements that China has to adhere to, as all WTO members have
to adhere to, and she is saying, look, holistically, China is
X, Y, and Z.
I am looking at a very narrow subset of that; i.e., the
implementation of rulings by the WTO court and I am saying
insofar as we can look at rulings from the WTO court, we find
the following things.
There are cases that China has not fully implemented. But
so far we have not brought arbitration proceedings against
China to ensure implementation. This grain-oriented steel case
will be the first test of that.
But my point is simply looking at that narrow aspect of--
essentially looking at court rulings, if you like, China has a
fairly strong interest and a fairly strong--again, not perfect
and increasingly imperfect, but fairly strong record of
implementing WTO rulings as they have been handed down by the
DSB.
Senator Merkley. As I read your testimony, I think you have
it divided into two phases--an earlier phase where they are a
little bit more responsive and recent phases in which they have
been a lot less responsive.
I think about when U.S. Senators, a group of 10 of us, took
a trip to China and we were talking to the ambassador and his
economic team in regard to trade enforcement, and his basic
response was, ``Our top priority is getting China to cooperate
with us on sanctions on Iran.'' And that basic insight was,
well, we have other foreign policy considerations and we do not
want to upset the field by doing trade enforcement, and we kind
of see this rhythm in which we--we have a lot of priorities in
the world and kind of maintain the level playing field or more
level playing field maybe envisioned by the spirit and the
details of the law leaves a lot of room for China to
essentially flout and break that understanding.
In that regard, it makes sense that if you have a very low
wage, low labor law, low environmental law, low enforcement
state, that it is going to be cheaper to make things.
We have lost 5 million manufacturing jobs since 1998,
50,000 factories, and I think people across America are not so
convinced that this trade relationship is actually working to
the benefit of the United States.
Ms. Drake, can you comment on that?
Ms. Drake. Thank you so much. I really appreciate that
question. And I agree, I do not think that Mr. Webster and I
are in disagreement, I hope. It was because we were looking at
different things.
He was looking at compliance with the rulings that result
from disputes that have been brought. I was looking at the
disputes that have not been brought. And China's record of
compliance is a function of the disputes that have been
brought, most of which deal with, as his paper details, paper
compliance.
This regulation, per se, we can just read this regulation
and tell it does not comply with WTO rules. Okay. We will
withdraw that regulation or we will modify that regulation.
It is very different to bring a case that is based not just
on a facial violation, but an actual violation based on the
facts on the ground, and that is more of what the GOES case is
about, looking at how the government actually functions when it
is trying to--when it should be complying with its WTO
obligations, and there we have seen less compliance, as has
been discussed.
But what cases are brought, again, gets back to the issue
we were talking about, about what resources USTR has. It is
much, much easier to formulate a case based on a facial
violation that it is based on a very complicated fact pattern
on the ground in China about what provincial authorities may be
doing or what have you. And in order to bring those cases,
which I think are the most difficult, but also the most
important cases, USTR needs resources. They also should look at
how they interact with the private sector and attorneys for the
private sector.
While they are very responsive to attorneys and their
attorneys are excellent, it is very different when you see how
China does it. China will hire attorneys, often U.S. attorneys,
and have them in the room at WTO dispute panel meetings.
USTR never does that. They do not allow any outside
attorneys on its side of the case to come into the room. That
is a problem. That makes USTR's job harder.
They should also look at the question of a lot of U.S.
firms who may have problems in China and are invested in China,
and also have concerns about retaliation, about giving USTR
information that then leads back to the company.
We should all be looking at ways that we can protect those
companies and give them the confidence they need to actually
give us this information so we can mount the more difficult
cases that we need to bring.
Senator Merkley. Thank you very much. I want to try to get
in one last quick question, but I am basically out of time. So
brief question, brief answer.
In 2011, I proposed an amendment that would require USTR to
do a counter-notification on China, because China had not done
its notifications under WTO as required.
Within two weeks, USTR did put out a list of counter-
notifications, basically listing many of the things that China
does.
One of those pieces was a famous brand strategy and you
could see it all the way through. You can see it in the
vignettes that we hear stories of where in order to attract a
famous international brand, China would pre-build a factory and
say ``Come. See, we've already built the factory for you. Look,
we will give you these loans, below interest rate or even a net
negative interest rate. Look, we'll do this for you. Look,
we've lined up the labor. Look, we've done this.''
The whole theory behind it was if we can bring the leader
and their supply chain, then we will bring their competitors.
And so we can do massive subsidies in this setting as kind of a
lost leader, if you will.
Has that national brand strategy ever been challenged by
the United States in kind of a formal proceeding and is the
national brand strategy, with these massive subsidies to
particular companies, in compliance with WTO?
Ms. Drake. Part of the answer depends on whether it is an
export contingent subsidy or not. It is clearly a subsidy that
is harming U.S. industries and, therefore, even if it is not
export contingent, is actionable at the WTO.
Senator Merkley. So it is a yes and yes situation in that
regard.
Ms. Drake. Yes.
Senator Merkley. Which then makes it yes in violation.
Thank you.
Mr. Webster. And the final, yes, the United States did
bring a case against it and did win the case, and China has
more or less not fully, but to some extent, closed down that
famous brands project. So there was a case brought specifically
against that.
Senator Merkley. I will note they have still not resumed,
though, doing full notification as required under WTO nor have
we done counter-notifications since 2011.
Ms. Drake. And there have been some remaining benefits from
that program found in countervailing duty investigations.
Chairman Brown. Mr. Meadows?
Representative Meadows. Thank you, Mr. Chairman.
Thank each of you for your great testimony.
Ms. Drake, I am going to go to you. Your 17 pages of
testimony was very illuminating and is spot on.
But I want to follow up on one thing that you said in your
oral testimony. You talked about the export credits and about
the filing of either a lawsuit or a brief with regard to export
credits.
What agency or what person is the best position to do that?
And then it sounded like you were a little bit ambiguous about
the potential outcome of that. And so I would like you to
comment on that, if you would.
Ms. Drake. Thank you for the question.
The responsibility for bringing a WTO case, a WTO challenge
is with the Trade Representative's office. But this is a
sensitive issue that normally is more in Treasury's bailiwick.
Representative Meadows. Right.
Ms. Drake. And the United States, starting in 2012 through
the Strategic and Economic Dialogue and Treasury did launch
negotiations with China to try to come to an agreement on
guidelines to govern export credit financing.
Now, it was of some concern that they were not trying to
get China into the OECD arrangement, which exists, which raised
a concern that maybe this was going to be a lower bar for
China.
Those negotiations were supposed to conclude by this year.
The last public news about the status of the negotiations was
from the last Strategic and Economic Dialogue in 2013, where it
appeared they were focused just on sectoral issues, like ships
and medical equipment and not the universal problem that these
export credits pose.
So if the United States were to bring a case, it would
require action by USTR, but I am sure agreement within the
Administration, including the Treasury Department.
Representative Meadows. What is the expected outcome?
Because that is where I saw our hesitancy, well, we can do
that----
Ms. Drake. I think part of the hesitancy from USTR is the
lack of public information about the rates at which these
export credits are provided.
But to bring a WTO case, it is important to understand what
burdens each side bear. The United States only bears the burden
of showing that those rates are below market rates.
I believe, as I outlined in my testimony, there is more
than enough information to establish that.
It then becomes China's burden to establish that those
below market rates are nonetheless compliant with the OECD
arrangement. So it is China's burden to put forward the
information.
So if we really ever want to get this information, probably
a WTO dispute is the only way to get it, and I believe that we
would prevail in a dispute, but I understand there is some
hesitance because the United States cannot be 100 percent
certain what the record will show, because China does not
disclose that information.
Representative Meadows. So is it that uncertainty that is
the major impediment toward filing that or are there other
impediments at this point?
Ms. Drake. I think it is the lack of transparency, the
uncertainty, and the amount of work that would be needed. The
USTR has a lot of priorities and this has not risen to the top
of the pile.
Representative Meadows. So it becomes more of a funding and
a priority issue for USTR than anything else.
Ms. Drake. Right. A difficult case is harder to pursue than
a case that is open and shut.
Representative Meadows. Thank you.
Professor Webster, I want to come back to you, because you
were talking about some of the rules that get followed and the
appeals that slow down the process.
In the United States, they would call that doing a good job
and having good lawyers. And so I want to make sure that we
look at that in the proper context, because if, indeed, they
are following rules and there are guidelines and rules within
that, that is something that is very difficult to challenge is
really where they break the rules, and that is the nature of
this hearing today.
Help define that for me, if you would, because it seemed
like you characterized that a lot of that was just being
prudent with--playing within the confines and not breaking the
rules.
Mr. Webster. Thank you. I think that is right. When you
take an appeal, even if your appeal is not necessarily
meritorious, you are still working within the system and that
is why I have characterized at least their litigation
strategies as system-maintaining as opposed to system-
challenging.
Now, that said, there are cases, as I have outlined in my
paper and as I have outlined in my remarks today, where China
has not shown full compliance with those rulings, and those, I
think, are areas where the United States bears the burden of
holding China's feet to the fire and saying, ``Look, you need
to make sure this regulation is canceled.''
So in those instances, I would say China is perhaps
challenging the system or is working outside of the fairly
clear legal logic of the WTO.
That has happened in only two cases. So I am not prepared
to say that China is systematically challenging the WTO DSB
procedures, but there are cases and I think maybe with this
grain-oriented steel case, where we will see more of that in
the future as China becomes more familiar and understands how
it can manipulate the levers of international dispute
resolution.
Representative Meadows. Our lack of enforcement across the
board will only encourage more breaking of potential rules. We
find it wherever we may go. If a certain behavior is ignored,
it will be repeated over and over again.
So I guess my question to each one of you is how can we be
more effective. I have heard, one, funding for USTR, helping
them establish priorities that maybe have the most significant
effect in terms of commerce and human rights and employees.
What are some of the other areas that we can address or at
least try to highlight? Anybody want to comment? Ms. Lee?
Ms. Lee. Thank you so much. This is a really important
issue. One question is whether the very setup of the WTO
compliance is problematic in the sense that it is all complaint
driven. So it takes a lot of resources, as Mr. Horn and Ms.
Drake pointed out, to mount these cases, and there is a
fundamental lack of information.
In some of these cases that Ms. Drake talked about, you
have two problems, two recalcitrant members. One is the Chinese
Government. It is not in their interest to disclose what the
subsidies are, how they are distributed, or what they are. The
other is U.S. companies who, for various reasons, are fearful
of doing that.
So I think one piece might be more transparency. If we can
figure out, as Ms. Drake suggested, ways of encouraging more
transparency or using some of that budget for USTR to have more
investigative resources, I think that would be one piece.
Representative Meadows. And if the Chairman will indulge me
for just one second, I will close with this. I would like each
one of you, if you would, to submit for the record a comment on
this.
How can we--and it gets back to the most effective way you,
within your particular area that you testified on here today,
highlight that particular issue either within an agency or with
one area where we, from a legislative point of view, could
offer a legislative fix.
So if you could highlight that and submit that for the
record, I would greatly appreciate it.
Thank you, each one of you.
I apologize. I am going to have to step out for a South
Sudan hearing that I am late for, but I will yield back.
Chairman Brown. Thank you, Mr. Meadows.
Mr. Sherman?
Representative Sherman. Thank you.
Ms. Lee, I could not agree with you more that we need to
talk to the Chinese about international labor standards. But I
will point out, before the subcommittee I was then chair of,
the State Department I was able to get to admit that right to
work laws are a violation of international labor standards. So
we have some cleaning up to do at home.
One issue before us, when we see a violation or what we
perceive to be a violation of trade rules, is whether we
retaliate first and then bring the action to WTO or whether we
just file with WTO.
Ms. Drake, a number of us up here would like to see
immediate double-digit tariffs on all Chinese goods because of
their currency manipulation.
The Chinese would regard that tariff as a violation of WTO.
Do you think that if we were to take that action, they would
just file something with WTO and not retaliate in any way until
that long process was completed or would they--if we imposed
double-digit tariffs tomorrow, would they actually take some
physical action on the ground?
Ms. Drake. That is a very interesting question,
Congressman. Thank you.
If we took that action, I would not be surprised if China
itself felt that it could also take immediate action while it
was waiting for a WTO dispute to be resolved.
But I do think it is worth looking at history. The WTO,
since the founding, since the GATT, has allowed members to take
action when they are facing balance of payment difficulties,
and many countries have done so, including our own.
In 1971, when Nixon imposed a temporary import surcharge to
deal with what was then an alarming decline in our trade
balance, which would look absolutely wonderful to most of us if
it were our trade balance today.
It did not result in a GATT dispute, but the United States
did invoke those balance of payments provisions, saying this
was an emergency situation and something needed to be done,
and, as a result, got some concessions from Japan and other
countries on currency issues before a GATT dispute could
proceed.
There was a project done a couple of years ago where our
firm wrote a paper laying out this history and explaining the
legal justification for countries to take balance of payments
measures.
So it is not out of the realm of contemplation and, in
fact, the GATT members themselves agreed that countries have a
right to ensure that they have more balanced trade on a
temporary basis.
Representative Sherman. So we could impose double-digit
tariffs on Chinese goods either because they are a currency
manipulator, we could defend on that basis, we could defend on
the basis that you have just identified, that we have a
temporary balance of payments.
In any case, we could take action now. But when I look at
this chart you provided, where we see this lopsided trading
relationship, it is clear. It is not that they have got better
workers or better business people. They have got a better
government when it comes to fighting for the trade rights of
their citizens.
They would take immediate action when they think we have
violated WTO. And as we have heard in case after case here, and
Mr. Horn was very clear, we never take immediate action. We go
through the process and then after the company bringing the--
that suffered the problem is bankrupt, maybe by then the WTO
process will end.
Mr. Horn, have your colleagues in the business world or
business advisors or any of them said, ``Hey, you know, if you
come publicly testify to Congress, that is going to make it
tough for you to do business in China in the future? ''
Mr. Horn. We talked about that and concluded we needed to
do it, of course, or I would not be here. But there was some
concern, particularly if we identified particular customers or
companies, that that could make things even worse.
Representative Sherman. I represent the entertainment
industry and their preference is to accept whatever crumbs they
are given rather than to note that they are allowed to show a
limited number of pictures on a limited number of screens for a
very limited percentage of the box office.
They have asked me not to propose in their name, that we
have a limited number of toys or a limited number of shoes
imported from China sold at a limited number of stores.
Mr. Webster, your paper, by its terms, focuses only on
paper compliance. So if they paper comply, but they telephone
various businesspeople and say, ``Hey, don't buy the American
goods anyway,'' there is no way that is reflected. You would
have no source of information.
You are nodding, for the record.
Mr. Webster. Yes. Yes. So, yes, that is true. As I said
before, the WTO provides blunt tools by which to address
certain problems in international trade.
Representative Sherman. And it provides absolutely no tool
for dealing with the violations that are done under the table
as opposed to the top of the table.
Mr. Webster. That is correct.
Representative Sherman. And if you live in an under-the-
table country, you are going to run roughly a 4:1 trade surplus
with a country that plays entirely above the table.
Mr. Webster. If I might, sir, respond to your earlier
comment about going right to slapping on tariffs.
I might suggest that going through the process is
worthwhile because we are, after all, a rule-of-law country. We
want to set a good example to other countries, especially ones
that we hope will adhere to the rule of law. Otherwise, we
begin a race to the bottom.
Representative Sherman. We have been setting that example
and all the stuff takes place under the table. We have a 4:1
trade deficit. China has four times as much to lose if there is
a trade war as compared to us, and yet we cower behind this
theory that if we owe them money, we dare not upset them,
confusing international creditor relationships with domestic
creditor relationships.
I would point out, I fear my bank because they could take
my home if I did not pay them. Not true in international
creditor relationships, at least not since about 1910.
Does anyone else have a further comment?
[No Response.]
Representative Sherman. I yield back.
Chairman Brown. Thank you, Mr. Sherman.
Let me ask one more question of the panel. Mr. Meadows kind
of began that question and then Mr. Sherman followed up on it.
What suggestions do you have--and I want to ask this of all
four of you--what suggestions do you have to make this work
better?
Obviously, a better funded USTR. I talk to Ambassador
Froman pretty regularly. He never whines about it. We disagree
on TPA [Trade Promotion Authority], we disagree fundamentally
on a number of things, but I think that this Administration has
done a reasonably good job on enforcing trade rules, and we do
not fund them nearly enough to do it. That is pretty clear.
But the answer that Ms. Lee gave and then a number of you
sort of cited with Mr. Sherman's question--and so it is
enforcement dollars, it is transparency, and some other things.
But my question is this--just give me general thoughts on
how to make this work better.
What has really troubled me on trade enforcement, I watch
an industry in southwest Ohio, the coated paper industry,
pretty much just more or less go out of business because of
Chinese dumping of coated paper on industry. They did not
even--it did not exist in China until a decade-and-a-half ago.
They buy their wood pulp in Brazil. They ship it to China.
They mill it on the east coast of China. They ship it back to
the United States. They underprice our manufacturers, and it is
not moving diamonds around. I mean, it is wood pulp and it is
paper. It is heavy and it is dense and it is expensive to move
for $1 of sales. Yet, they are able to.
But my point that I should get to is that the problem is
that by the time this industry could go through our labyrinth
of rules and procedures--and I agree with Professor Webster,
absolutely, we want to be known as and be a country of the rule
of law, of course.
But by the time it takes for an industry to go to our
government and get action, so often, there is so much damage. I
mean, the damage, that Mr. Horn still cannot sell his grain-
directional steel into the Chinese market has done damage to
him. His company is vibrant enough and strong enough, it is not
close to putting him out of business, but some industries it
is.
So my question is this: How do we make this--the USTR says
it prefers to negotiate it. If that does not work, then it
takes action at WTO.
How do we make this--how do we just make this more
efficient that it does not take so long to go through this
process, follow the rule of law, but to go through this arduous
process in a way that is a little bit faster for American
companies and American workers to get redress and get
enforcement, ultimately. It is decisionmaking, then enforcement
after the decision is made.
Did you want to start, Mr. Horn?
Mr. Horn. It would seem to me that if there is a way to
more expeditiously impose the retaliatory tariffs, you are
going to go a long way toward getting compliance more quickly.
The problem we have is that while it is true that China has
used the rules to its advantage in terms of the delay, the fact
of the matter is it ignored the rules at the outset when it
issued tariffs without sufficient evidence, and without
providing that evidence to us.
There were a lot of places where China flouted the rules.
Once it issued the duties and we got before the WTO, yes, it is
true that they just took advantage of the rules. But now it has
dragged out over multiple years that we have had to fight
improperly imposed tariffs.
So the only, I think, way to put pressure on China is if we
can retaliate with tariffs that cost it business.
So somehow I think we have to be able to expedite that if
we are going to get China to really comply.
Chairman Brown. Thank you. And, also, address the issue on
the other end of--you know, we launch an investigation into all
of this, a very complex, complicated set of behaviors to figure
out subsidies that the Chinese might be paying, whether they
are dumping, whether they--whatever kinds of subsidies they are
doing.
Ms. Drake?
Ms. Drake. Thank you, Senator. Yes, absolutely, the trade
remedy process, which the private industry uses, can be costly
and can take a long time.
So in terms of resources, it is important not only that
USTR has sufficient resources, but also the Department of
Commerce, International Trade Commission, particularly the
Department of Commerce, which needs to investigate these
subsidies and often pays those intransigents from the Chinese
Government when it tries to do so.
A tool that we have not used in the trade remedy area is
self-initiation. The Administration has the ability to self-
initiate antidumping and countervailing duty cases, which would
take the burden off the industry to gather the information to
bring the case. But you would still need to show support in the
industry to comply with our law and with WTO rules.
But the Administration does have the ability to do this,
which would be especially useful in fragmented industries,
where it is very difficult to bring together all the players in
order to organize a case based simply on private sector
efforts.
This is something that we raised with the Administration,
particularly in the context of auto parts, where you have a lot
of small producers that are being harmed, but do not
necessarily have one or two or three big players that are able
to get together and take action.
So those are some of the things that would be helpful.
Chairman Brown. How much faster would that self-initiation
process be?
Ms. Drake. It would depend on the resources that the
government had to do it, and it can be very slow on the WTO
side, but if there was a concerted effort to get the Commerce
Department, the ITC, and USTR working together to gather the
information, they might be able to do it more quickly.
They could work with state and local governments, who would
have information about the industries that are being harmed in
their areas. They could work with the Labor Department on
employment data. But it would require, again, resources, which
seems to be the issue that we continue to come back to.
Chairman Brown. Thank you.
Ms. Lee?
Ms. Lee. I want to totally agree with Ms. Drake's last
point about self-initiation. This actually confronts a point
that maybe we have not talked about today. The lack of
resources for the labor movement, for unions, is a real
obstacle to bringing trade cases, even if we are aware of
unfair trade practices.
In the olden days, a couple of decades ago, it was more
common that labor and business would bring a trade case
together. That still happens in the steel industry and in a few
other places.
But too often now, the interests of American workers and
the interests of the companies they work for diverge, because
the companies are multinational. The companies may be producing
in China, and they may be importing into the United States.
Even if they have operations both in the United States and in
China or in other countries, they are often not willing to
bring a trade case, because they do not want to jeopardize
their relationship with the government where they have
production. For that reason, their economic interests are
mixed. They are benefiting from subsidies or from lack of
enforcement of labor and environment regulations, whereas
American workers do not benefit from that. We cannot outsource
ourselves. We need to make a living on American soil.
So I think the idea of self-initiation is a really
important way to bring together the interests of labor, small
businesses that are still located in the United States, and
state and local governments, and try to really remake our trade
policy in the interests of American jobs and American workers.
So I want to reinforce that. And just to make one more
general point about this issue: Slow dispute resolution and the
lack of transparency are very much to the advantage of a rule
breaker. In this case, it operates to the advantage of the
Chinese Government.
What we face here is that the scale of violation is so
great that the machinery of WTO dispute resolution is simply
inadequate. And so what we need is for our government to be
more aggressive, and more creative in bringing these kinds of
WTO violation cases. They need more resources to do it, because
they are facing a scale that is unprecedented.
In some of the areas like currency and workers' rights,
these are more difficult cases to bring, but it is very
important that they not shy away from them.
Thank you.
Chairman Brown. Thank you. Your point about self-initiation
and in light of some companies' varied interests, whether it is
intimidation in another country or it is production elsewhere,
in a number of countries.
We worked on a case brought by the Steelworkers that
ultimately the U.S. company won and the Steelworkers,
therefore, won, but the U.S. company did not petition with them
because they had a good bit of production in China and in the
United States. It was clear China was dumping this product, as
the ITC determined and there were countervailing duties
applied, but it took a long time and it probably would have
been done more quickly if the company had not had the sort of
dual interest there, which is increasingly likely, perhaps
inevitable in some cases.
Thank you.
Mr. Webster?
Mr. Webster. Thank you. First, as many of us have said
before, the international trade regime cannot handle
everything. So I think the first thing is to have realistic
expectations of what we can achieve through WTO litigation in
the first place.
Currency manipulation, workers' rights are going to be very
difficult to get through a WTO panel.
Second, as I have said, the rule of law is a slow,
laborious, and difficult process. Three, five years is a long
time and during that time, industries, such as Mr. Horn's, are
going to suffer, no doubt about it.
I wonder if it might be possible to allocate government
funds to help out these businesses while they suffer, while
there is ongoing litigation.
I think international trade does a lot of good things, but
in the various industries that it displaces, it does not
necessarily take account for or provide for people who are
adversely affected by international trade.
So we have lots of workers in Ohio, for example, who are
left without jobs because manufacturing has now been outsourced
to China.
Having programs to train those people would be helpful and
I think some kind of funding for industries that are currently
engaged in WTO litigation so they do not run out of business
might be something that the United States can do.
And although we have said it before, I think enforcement is
helpful. A, making sure that the violating regulations are
spelled out clearly for China; B, holding China's feet to the
fire to ensure that they change or modify all the regulations
that have been specified; and, C, as we said before, beefing up
the number of, say, Mandarin-speaking, Chinese-speaking
experts, Chinese law experts in the USTR may be another
suggestion to help improve enforcement.
Chairman Brown. Thank you.
Last question, Mr. Sherman.
Representative Sherman. I just have a comment, and that is
if we were to move forward with that currency manipulation,
impose the tariff now, that would generate the funds to help
industries. That would provide the funds for the staffing. But
most importantly, it would change the circumstance where China
can gain just by delaying--just by having so many infractions
above and below the table that the system cannot handle it, and
to watch companies and their competitors go out of business
through delay.
If we took that one step, we would solve all the problems
we are talking about here.
Chairman Brown. If not all of them, a significant number,
because it watches over currency, watches over all products
going in both directions. Mr. Horn would still have the problem
of their subsidies and tariffs, but it would make a big
difference.
Representative Sherman. It would put us in a position to
deal with all the problems we are talking about.
Chairman Brown. Thank you. I would also like, without
objection, to enter Cochairman Chris Smith's statement for the
record. No objection. So ordered.
Thanks to all of you for your testimony. It was very
helpful.
A special thanks to Mr. Liu and Ms. Ellerman from my staff
and from the Commission for their help, their really good work
on this hearing.
The Commission is adjourned. Thank you all.
[The prepared statement of Representative Smith appears in
the appendix.]
[Whereupon, at 11:32 a.m., the hearing was concluded.]
A P P E N D I X
=======================================================================
Prepared Statements
----------
Prepared Statement of David Horn
january 15, 2014
Introduction
Chairman Brown, Chairman Smith, and Members of the Commission, I
appreciate the opportunity to participate in today's hearing and to
present the views of AK Steel regarding China's failure to comply with
its obligations as a Member of the World Trade Organization (``WTO'').
My name is David Horn. I am Executive Vice President, General
Counsel, and Secretary of AK Steel Corporation. Headquartered in West
Chester, Ohio, AK Steel is a leading producer of flat-rolled carbon,
stainless and electrical steels, primarily for automotive,
infrastructure and manufacturing, construction and electrical power
generation and distribution markets. Through a wholly-owned subsidiary,
the company also produces tubular steel products for truck, automotive,
and other markets.
China's adherence to its WTO commitments is extremely important to
AK Steel and its 6,100 employees. The WTO system is intended to
encourage trade and investment, break down artificial trade barriers,
and promote efficiency and increase wealth for all. China was admitted
into the WTO system in 2001 based on its pledges to adhere to
international rules. Upon its accession, China obtained significantly
improved access to most of the world's markets, including the U.S.
market. WTO membership has paid off handsomely for China. For example,
China is now the world's largest exporter.
From AK Steel's perspective, China has embraced the opportunities
offered by WTO membership but not the obligations. China's compliance
with WTO rules is severely lacking, and AK Steel and its employees are
suffering as a result. China's failure to follow the rules has hurt AK
Steel in at two very concrete ways. First, the Chinese government's
subsidization of its steel industry has created a huge oversupply of
steel products in the global market, which depresses steel prices in
the United States and foreign markets. Second, China continues to
impose antidumping and countervailing duty measures on AK Steel's
exports of Grain Oriented Electrical Steel (``GOES'') notwithstanding
the fact that the WTO has found that these duties are not justified and
never should have been imposed.
I will discuss those two issues and conclude by offering a few
modest suggestions for addressing these problems.
China Subsidizes Its Steel Industry To An Unprecedented Degree
The Government of China has encouraged steel production from the
earliest days of the People's Republic. During the Great Leap Forward,
for example, Chairman Mao oversaw construction of millions of small,
backyard furnaces to smelt iron in rural areas. The Chinese government
invested billions upon billions in its efforts to build an industry
capable of dominating not only the Chinese market but also the global
market. There is no doubt that China has achieved its objective of
global dominance in steel. Six of the ten largest steel producers in
the world today are Chinese companies.\1\
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\1\ World Steel Association, ``World Steel in Figures 2013.''
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In 2000, the year before China's WTO accession, the country's
annual crude steel production was reported to be approximately 128
million metric tons,\2\ already the largest in the world. A U.S.
government report published in 2000 noted that although China's steel
industry was large, it suffered from structural problems. The report
stated, however, that the Government of China was working to address
these problems by fostering the development of bigger, more efficient
steel companies:
---------------------------------------------------------------------------
\2\ World Steel Association, ``Crude Steel Production, 1980-2012.''
[T]he Chinese government is undertaking a concerted effort to
upgrade key producers. Government planned and supported
investment projects will improve production techniques and
product quality. And a government-directed consolidation of the
industry will concentrate steel production around a small
number of large industrial conglomerates. The Chinese
government intends for these producers to enjoy the full
benefits of economies of scale and diversified business
operations.\3\
---------------------------------------------------------------------------
\3\ U.S. Department of Commerce, ``Global Steel Trade: Structural
Problems and Future Solutions'' (2000).
In the years that followed, government assistance flowed to China's
largest steel companies, and production continued to increase. From
2000 to 2005, steel production nearly trebled.\4\ Apparently not
satisfied, the Chinese government in 2005 promulgated an industrial
plan entitled the Iron and Steel Policy.\5\ This plan continued and
refined earlier policies promoting consolidation in the industry and
upgrading equipment and technology. Article 16 of the policy specified
that the Chinese government would support the industry directly through
``taxation, interest subsidies, and scientific research funds.'' It
also provided instructions for reorganizing existing steel producers
into more efficient, larger companies and called for discriminatory
treatment of foreign companies and technologies. Article 23, for
example, specified that foreign investors would not be ``allowed to
have a controlling share'' of a Chinese iron or steel company. The
Chinese government made clear that it would support the growth of its
steel industry and ensure that it remained Chinese.
---------------------------------------------------------------------------
\4\ World Steel Association, ``Crude Steel Production, 1980-2012.''
\5\ P.R.C. National Development and Reform Commission, ``Policies
for Development of Iron and Steel Industry'' (July 8, 2005).
---------------------------------------------------------------------------
China's 2005 steel policy had the desired effect. Chinese steel
production increased to more than 535 million metric tons in 2009--
almost half of global steel production.\6\ Not content, the Chinese
government issued another policy calling for additional government
support for ``backbone'' enterprises.\7\ This new plan continued
support through export rebatees, grants, and loans. In 2011 China
issued yet another industrial policy for the steel industry calling for
additional support to ``certain enterprises'' to help them attain
``strong competitiveness and influence in the international market.''
\8\
---------------------------------------------------------------------------
\6\ World Steel Association, ``Crude Steel Production, 1980-2012.''
\7\ P.R.C. State Council, ``Steel Adjustment and Revitalization
Plan'' (Mar. 23, 2009).
\8\ P.R.C. Ministry of Industry Information and Technology, ``Iron
and Steel Industry 12th Five Year Plan'' (Oct. 24, 2011).
---------------------------------------------------------------------------
The Chinese Government's sustained support has created an industry
bigger than either China or the world needs. In 2013 its steel industry
reportedly produced 780 million metric tons of steel,\9\ more than
seven times all U.S. production. Some reports have the number being
even higher. The vastness of the Chinese steel industry is difficult to
comprehend. Consider, for example, that after subtracting apparent
consumption from production,\10\ the Chinese steel industry has more
than 70 million tons of excess production. This volume exceeds steel
production in almost all other countries. In fact, the only countries
other than China producing more than 70 million tons of steel per year
are Japan, the United States, and India.\11\ China's industry is so
large that its excess production alone would qualify as the fifth
largest steel-producing country in the world.
---------------------------------------------------------------------------
\9\ ``China's Steel Output to Hit Record High in 2013--NDRC,''
Reuters (Aug. 2, 2013).
\10\ ``China Steel Demand Rebounding as Nation Adds Railways,
Cars,'' Bloomberg News (Mar. 13, 2013).
\11\ World Steel Association, ``Crude Steel Production, 1980-
2012.''
---------------------------------------------------------------------------
The opaqueness of China's governmental and economic systems makes
it difficult to find, let alone quantify, the subsidies that benefit
Chinese industry. China did not make its first subsidies notification
required by the WTO until 2006, five years after it joined.\12\ This
belated disclosure was grossly inadequate. It provided almost no
information on the amount of funds paid out under identified subsidy
programs and it offered no information at all about subsidies provided
by provincial and municipal authorities. It failed to disclose one-off
subsidies such as the government-directed gift of 51 percent of the
shares in the Ercheng Iron and Steel Group to another Chinese steel
producer in 2004.\13\ The recipient paid nothing for control of an
enterprise with three million tons of capacity. China's WTO
notification also ignored rampant debt-for equity swaps in which State-
Owned Banks forgave non-performing debt in exchange for often valueless
shares.\14\
---------------------------------------------------------------------------
\12\ See Office of the United States Trade Representative, ``United
States Details China and India Subsidy Programs in Submission to WTO''
(Oct. 2011).
\13\ See Citigroup Global Markets, ``China Steel Industry: Capacity
Continues to Grow, So Does Surplus'' (Feb. 21, 2006).
\14\ See generally Song and Liu, The Chinese Steel Industry's
Transformation (2012).
---------------------------------------------------------------------------
The information that is available indicates that the subsidies
provided to Chinese steel companies are substantial. In the first U.S.
countervailing duty investigation addressing a steel product from
China, the U.S. Department of Commerce found in 2008 that Chinese
producers of circular welded pipe were subsidized at rates ranging from
approximately 30 to 45 percent ad valorem.\15\ The countervailed
subsidy programs included export assistance grants, other types of
grants, and the provision of hot-rolled steel to pipe producers for
less than adequate remuneration.
---------------------------------------------------------------------------
\15\ Circular Welded Carbon Quality Steel Pipe from the People's
Republic of China: Final Affirmative Countervailing Duty Determination
and Final Affirmative Determination of Critical Circumstances, 73 Fed.
Reg. 31966 (June 5, 2008).
---------------------------------------------------------------------------
In a 2009 decision on oil country tubular goods (``OCTG'') from
China, the Department of Commerce found that the producers examined
were subsidized at rates ranging from approximately 10 to 16 percent ad
valorem.\16\ The subsidy programs included policy loans for OCTG
production; export financing; the provision of steel rounds for less
than adequate remuneration; grants from various government funds;
income tax breaks for companies with foreign investment and companies
with high technology; tax breaks for purchasing Chinese equipment;
accelerated depreciation; debt forgiveness for State-Owned Enterprises;
and the provision of electricity for less than adequate remuneration.
---------------------------------------------------------------------------
\16\ Certain Oil Country Tubular Goods from the People's Republic
of China: Final Affirmative Countervailing Duty Determination, 74 Fed.
Reg. 64045 (Dec. 7, 2009).
---------------------------------------------------------------------------
In 2013, the European Commission completed its first subsidies
investigation of a Chinese steel product. The Commission found that the
manufacture of organic coated steel products in China benefited from a
variety of subsidies including the provision for less than adequate
remuneration of land use rights, hot rolled steel, cold rolled steel,
electricity, and water; policy loans; debt for equity swaps; equity
infusions; tax breaks for research and development; tax concessions for
designated geographical regions; and a variety of grant program.\17\ As
it has in many U.S. cases, the Chinese Government declined to fully
participate in the investigation, forcing the Commission to base
several decisions on the facts available. The Commission found
countervailing duty rates ranging from 14 to 45 percent ad valorem.
---------------------------------------------------------------------------
\17\ Council Implementing Regulation (EU) No. 215/2013 imposing a
countervailing duty on imports of certain organic coated steel products
originating in the People's Republic of China (Mar. 11, 2013).
---------------------------------------------------------------------------
Researchers Usha and George Haley recently published a study
showing that, following WTO accession, the Chinese government has
provided financing for 20 percent of the expansion of the country's
manufacturing capacity, leading to ``massive excess global capacity,
increased exports, and depressed worldwide prices, and have hollowed
out other countries' industrial bases.'' \18\ The Haleys report that
the Chinese "subsidies took the form of free or low-cost loans;
artificially cheap raw materials, components, energy, and land, and
support for R&D and technology acquisitions." The Haleys calculate that
the Chinese steel industry received $27 billion in energy subsidies
alone between 2000 and 2007, which allowed Chinese steel companies to
sell their products for up to 25 percent less than comparable U.S. and
European products.\19\
---------------------------------------------------------------------------
\18\ Haley and Haley, ``How Chinese Subsidies Changed the World,''
Harvard Business Review (Apr. 25, 2013).
\19\ Id.
---------------------------------------------------------------------------
Toward the end of last year, AK Steel filed antidumping and
countervailing duty petitions against imports of GOES and non-oriented
electrical steel (``NOES'') from China. The evidence collected by AK
Steel in connection with these petitions indicates that Chinese
producers of electrical steel receive numerous subsidies. For example,
we cited China's Iron and Steel Industry 12th Five-Year Plan, which
covers 2011 through 2015, and designates electrical steel as a
``development priority'' for China. This plan instructs Chinese
government agencies to provide special treatment to ``leading specialty
steel enterprises'' and to ``strongly promote specialty steel
enterprises.'' The Iron & Steel Plan further requires that government
entities ``coordinate'' policies to this effect, ``including fiscal
policy, taxation policy, finance policy, trade policy, land policy,
energy saving policy, [and] environmental protection policy.'' The
Department of Commerce is now investigating some 30 different subsidy
programs appearing to benefit the production of GOES and NOES in China.
Another Chinese government program that benefits its steel
producers is currency undervaluation. Although the U.S. Department of
the Treasury has not named any country a currency manipulator in two
decades, and although the U.S. Department of Commerce has declined to
investigate whether currency undervaluation constitutes a
countervailable subsidy, the fact is that the Chinese government
manipulates the value of its currency, the Yuan. Although the Yuan has
been appreciating in recent years, the International Monetary Fund
reported in 2013 that the Yuan remains undervalued by up to 10
percent.\20\ This provides Chinese steel exporters with a significant
price advantage when selling their products overseas. AK Steel feels
this pressure every day. We feel it directly when China floods the U.S.
market with dumped and subsidized Chinese steel. We feel it indirectly
when China floods foreign markets with dumped and subsidized Chinese
steel and the manufacturers in those markets which cannot sell their
products domestically then come to the U.S. to sell their products
here, flooding the U.S. market with even more excess capacity and
driving prices even lower.
---------------------------------------------------------------------------
\20\ International Monetary Fund, ``2013 Pilot External Sector
Report--Individual Economy Assessments'' (Aug. 1, 2013).
---------------------------------------------------------------------------
It is well settled in economic theory that production subsidies
tend to expand output.\21\ As a result, there has been a tremendous
buildup of excess production in China. Chinese producers look to export
markets to sell their excess production. Estimates from the National
Development and Reform Commission, China's most important industrial
planning agency, indicate that in 2013 the country exported
approximately 61 million tons of steel.\22\ This amount is greater than
all of the steel produced in South Korea or Germany, which are the
world's sixth and seventh largest steel producing countries,
respectively.\23\
---------------------------------------------------------------------------
\21\ See generally World Trade Organization, ``World Trade Report
2006.''
\22\ ``China's Steel Output to Hit Record High in 2013 - NDRC,''
Reuters (Aug. 2, 2013).
\23\ World Steel Association, ``Crude Steel Production, 1980-
2012.''
---------------------------------------------------------------------------
China's overcapacity and overproduction are causing serious
problems for producers in other countries, including AK Steel. As
reported by the Wall Street Journal in May 2013, a ``surge in Chinese
steel production and a flood of exports are pressuring world-wide steel
prices.'' \24\ A May 2013 article in the industry publication Platts
quotes an industry observer as noting that "Overcapacity is ensuring
steel mills globally have `zero pricing power.' '' \25\
---------------------------------------------------------------------------
\24\ ``Surging Chinese Steel Exports Put Pressure on World
Prices,'' The Wall Street Journal (May 16, 2013).
\25\ Forster, ``Steel Prices, Raw Material Costs Out Of Sync,''
Platts (May 2013).
---------------------------------------------------------------------------
The unprecedented degree to which the Chinese steel industry is
subsidized means that Chinese companies are not playing according to
same market rules and principles as U.S. steel companies like AK Steel.
Large Chinese steel companies have access to virtually limitless low-
cost loans from government-owned banks. They continue to expand
production notwithstanding low prices, low profits, and mounting
inventories.\26\ In market economies, companies cannot rely on endless
supplies of money from the government and cannot ignore market
conditions and produce for the sake maintaining employment for extended
periods. These market rules do not apply in China, which increases
capacity year after year irrespective of market signals.\27\
---------------------------------------------------------------------------
\26\ A state-owned news agency reported in 2013 that data from the
China Iron and Steel Association indicated that the profit rate at
China's steel companies in the first half of 2013 was only 0.13
percent. ``Overcapacity sends China steel sector into Loss,'' Xinhua
(July 31, 2013).
\27\ In the years since China's WTO accession, data from the World
Steel Association show that China's steel production has increased
fourfold, whereas production in the United States has been steadily
declining.
---------------------------------------------------------------------------
China's mammoth steel industry also squeezes foreign competitors by
driving up costs for the raw materials used to make steel. China is,
for example, the world's largest purchaser of iron ore, accounting for
approximately 60 percent according to some reports. China's insatiable
demand for raw materials has driven up global prices for raw materials
while its overcapacity and overproduction have driven down prices for
finished products. The result is that, for many products, the margins
are either small or non-existent. This is not sustainable for market
economy steel companies which must earn a profit to survive.
This is the reality in which AK Steel exists: The Chinese
Government has heavily subsidized its industry in order to dominate the
world steel market. These subsidies are inconsistent with China's WTO
obligations and detrimental to the world trading system.
The WTO Ruled That China Violated Its WTO Obligations By Imposing
Antidumping and Countervailing Duties Against GOES From The United
States
AK Steel has also been harmed by China's use of trade remedies as a
sword instead of a shield. In the 2013 National Trade Estimate, the
Office of the United States Trade Representative (``USTR'') reported
that:
The United States and other WTO members have also expressed
serious concerns about China's evolving practice of launching
antidumping and countervailing duty investigations that appear
designed to discourage the United States or other trading
partners from the legitimate exercise of their rights under WTO
antidumping and countervailing duty rules and the trade remedy
provisions of China's accession protocol. This type of
retaliatory conduct is not typical of WTO members, and it may
have its roots in China's Foreign Trade Law and antidumping and
countervailing duty implementing regulations, which authorize
``corresponding countermeasures'' when China believes that a
trading partner has discriminatorily imposed antidumping or
countervailing duties against imports from China. Further, when
China has pursued investigations under these circumstances, it
appears that its regulatory authorities imposed duties
regardless of the strength of the underlying legal and factual
support.\28\
---------------------------------------------------------------------------
\28\ Office of the United States Trade Representative, ``2013
National Trade Estimate Report on Foreign Trade Barriers.''
AK Steel has first-hand experience with the punitive and arbitrary
nature of China's trade apparatus. China initiated antidumping and
countervailing duty investigations of GOES from the United States in
June 2009. Many of the subsidy programs China investigated had no basis
in reality, and the authority made multiple demands for substantial
volumes of confidential and irrelevant information, in an apparent
effort to make participating impossible.
In April, 2010 China issued its final determination. China found
that imports of GOES from the United States had been dumped at prices
below normal value and subsidized by the U.S. Government. China also
found that low-priced imports had injured the domestic industry and
that additional import duties were justified as a result. China imposed
antidumping duties of 7.8 percent and countervailing duties of 11.7
percent on GOES manufactured by AK Steel. Virtually the entire
countervailing duty rate was based on adverse assumptions that AK Steel
sold all of its production--not just GOES, but all of its products--to
the U.S. Government at a premium under the ``Buy America'' Act. There
was, of course, no evidence supporting this assumption, because it was
clearly false.
With a combined duty rate of nearly 20 percent, AK Steel was shut
out of the Chinese GOES market. The other U.S. producer of GOES, ATI,
faced an even higher combined duty of more than 30 percent. Prior to
the start of the investigation, U.S. GOES exports to China totaled more
than $270 million annually. Today the value is nearly zero.
AK Steel was pleased when USTR filed a WTO complaint against China
in September 2010, challenging many procedural and substantive flaws in
China's investigation and findings. In June 2012, a WTO dispute
settlement panel ruled in favor of the United States. It found that
China violated its WTO obligations in numerous respects by imposing
duties on imports of GOES from the United States. For example, the
Panel found that
China failed to require the Chinese petitioners to
provide adequate public summaries of the confidential portions
of their petition and thus impaired the ability of foreign
respondents, including AK Steel, to defend their interests.
China's finding that its domestic producers suffered
adverse price effects failed to reflect an objective
examination of the evidence and was not based on positive
evidence. For example, China found that the ``low prices'' of
imports forced down the Chinese producers' prices, when, in
fact, imports were priced higher than the Chinese producers'
prices.
China's finding that imports from the United States
were a cause of injury to the domestic industry failed to
reflect an objective examination of the evidence and was not
based on positive evidence. For example, China ignored the fact
that the huge increase in capacity resulting from a new Chinese
production facility created an oversupply of GOES in the
Chinese market, which caused the two Chinese producers to
aggressively compete on price and to lead market prices down.
Imports had nothing to do with this race to the bottom by the
Chinese producers.
China failed to disclose the ``essential facts'' on
which certain of its key findings were based.
China's assumption that all of AK Steel's sales
benefited from overpayments under the ``Buy America'' program
had no factual basis. The WTO Panel stated that on this issue
China's ``determination is particularly flawed in its treatment
of AK Steel.'' \29\
---------------------------------------------------------------------------
\29\ Panel Report, China--Countervailing and Anti-Dumping Duties on
Grain Oriented Flat-rolled Electrical Steel from the United States, WT/
DS414/R (circulated June 15, 2012).
China appealed certain aspects of the WTO panel's findings, but China's
claims were rejected by the WTO Appellate Body in October 2012.\30\
---------------------------------------------------------------------------
\30\ Appellate Body Report, China--Countervailing and Anti-Dumping
Duties on Grain Oriented Flat-rolled Electrical Steel from the United
States, WT/DS414/AB/R (adopted Oct. 18, 2012).
---------------------------------------------------------------------------
Under the relevant WTO Agreements, antidumping and countervailing
duties cannot be imposed without valid findings that dumped and/or
subsidized imports caused material injury to a domestic industry
producing a similar product. The WTO Panel and the Appellate Body ruled
that China's findings did not meet this standard. In particular, the
WTO found China failed to make a WTO-consistent finding that imports
either (1) had adverse price effects on Chinese producers or (2) were a
cause of material injury to the Chinese industry. As a result, no
duties should ever have been imposed.
China Has Refused To Comply With The WTO Rulings
Antidumping and countervailing duties have remained in place for
over 18 months since the WTO panel found them to be inconsistent with
China's international obligations--and for nearly four years since the
duties were improperly imposed. Following the USTR's victory before
both the WTO Panel and Appellate Body, China would not agree to a
reasonable timeline for coming into compliance with the WTO rulings.
The United States had to request a WTO arbitrator to determine a
reasonable period of time for China to comply.\31\
---------------------------------------------------------------------------
\31\ See Arbitration Report, Countervailing and Anti-dumping Duties
on Grain Oriented Flat-Rolled Electrical Steel from the United States--
Arb-2013-1/27.
---------------------------------------------------------------------------
After the arbitrator rejected China's pleas for more time to
comply, on July 31, 2013, China issued a revised final determination
lowering the punitive subsidy rate of approximately 12 percent for AK
Steel in the original decision to 3.4 percent. China did not, however,
remedy the serious flaws in its injury and causation findings that the
WTO had identified, and it continued to find that imports from the
United States were a cause of material injury to its domestic industry.
Thus, China has kept the duties in place notwithstanding the WTO's
rulings. China's revised determination attempting to comply with the
WTO's findings retains almost all of the errors in the original one.
Because of China's intransigence, USTR will next need to present
evidence and argument to explain why a WTO compliance panel should rule
that China has failed to comply with the WTO's earlier findings. The
United States will then need to request a WTO arbitrator to determine
the amount of retaliation that the United States is authorized to apply
in terms of higher tariffs on imports of China.
Observations And Conclusions
Based on AK Steel's experience, China is not complying with its WTO
commitments. From our perspective, the Chinese Government appears to
have become very skilled in taking advantage of the benefits of WTO
membership without accepting the corresponding obligations.
When the United States and other Members accepted China into the
WTO, they did so with expectations that China would comply with its WTO
commitments to eliminate subsidies, move from a state-controlled
economy to a market economy, and adhere to WTO rules in trade remedy
proceedings. Instead, subsidization and state capitalism remain not
only alive and well in China but appear to be expanding. The GOES case
demonstrates that China will ignore its international obligations when
applying duties to protect the industries it has chosen to support with
vast subsidies.
AK Steel's experience also shows that the WTO dispute settlement
system operates too slowly to provide effective relief, especially
where the losing party does everything it can to thwart and prolong the
process, as China is doing on GOES. In the GOES case, the panel ruled
against China in June 2012, and the Appellate Body affirmed that ruling
in October 2012. More than one year has passed, yet the duties remain
in place. The United States will need to prevail in several additional
time-consuming proceedings in order for AK Steel to regain the market
access that has been unjustifiably taken away by the Chinese
government.
What Should Be Done
AK Steel appreciates the support it has received from the U.S.
government in challenging China's flawed antidumping and countervailing
duty measures in the GOES case. We would respectfully suggest, however,
that more should be done.
USTR should aggressively pursue WTO complaints against China's
failure to follow the WTO rules in applying antidumping and
countervailing duties against U.S. exports. China has now lost several
such cases in a row, including several challenges by USTR and one by
the European Commission. The United States should encourage other WTO
Members adversely affected by China's trade remedy investigations to do
the same. As China loses more and more WTO cases, it is more likely
that the Chinese government will bring its practices into WTO
compliance.
In order to allow USTR to do more, Congress should appropriate more
funds to USTR's WTO dispute settlement function. USTR needs more
resources to bring more WTO complaints against China and to do so more
quickly. AK Steel fears that those charged with protecting America's
trade rights are being outgunned. The Chinese Government hires private
lawyers to litigate their WTO cases, many of whom are located here in
Washington, DC. These outside lawyers become members of China's
official WTO delegation, participate in the dispute, and speak for the
Government of China before WTO panels and the Appellate Body. USTR, on
the other hand, does not hire outside trade lawyers and does not allow
private industry's trade lawyers to observe, much less participate in,
the WTO hearings. Thus, USTR must largely rely on its own resources.
Although I know from personal experience that USTR has talented and
effective lawyers, I understand that most of its WTO litigators split
their time among various responsibilities, including negotiating trade
agreements. It would seem to me that if USTR had more lawyers dedicated
to WTO disputes, it could launch more cases and litigate them more
expeditiously and aggressively.
Finally, Congress should enact The Currency Exchange Rate Oversight
Reform Act of 2013, introduced by Senators Brown, Sessions, Schumer,
Burr, Stabenow, and Collins, which would have the effect of applying
the countervailing duty law to currency manipulation. Alternatively,
Congress should attach provisions applying the countervailing duty law
to currency manipulation to any Trade Promotion Authority bill passed
by the Congress.
Again, I thank you for this opportunity to testify.
______
Prepared Statement of Elizabeth J. Drake\1\
january 15, 2014
I. Introduction
Since China joined the WTO twelve years ago, it has become the
world's number one exporter and the most important U.S. trading
partner. Unfortunately, the growth in trade between the U.S. and China
has not been balanced. While annual U.S. exports to China grew by $101
billion from 2001 to 2013, annual U.S. imports from China rose by
nearly $337 billion, more than three times as much.\2\ As a result, our
trade deficit with China has nearly quadrupled since 2001. Even though
China only accounted for eight percent of our exports to the world in
2013, it accounted for 19 percent of our imports and a full 46 percent
of our trade deficit.\3\
---------------------------------------------------------------------------
\1\ Partner, Law Offices of Stewart and Stewart. This testimony is
submitted in the author's personal capacity and not on behalf of the
firm or its clients.
\2\ Import and export statistics are from USITC Dataweb. Imports
are general imports; exports are total exports. Imports and exports for
2013 estimated based on first eleven months of data.
\3\ Id.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Though China has reaped significant benefits from its accession to
the WTO, it continues to violate many of its WTO obligations both on
paper and in practice. Despite the rapid ascent of China as a major
trading nation, the Government of China has failed to assume the
responsibility and leadership necessary to fulfill its obligations as a
Member of the WTO. WTO-inconsistent policies that China continues to
pursue twelve years after accession include discrimination against
foreign goods and firms, localization requirements, prohibited export
subsidies and other massive trade-distorting subsidies, export
restraints, and the abuse of trade remedies not as a legitimate means
of correcting unfair trade but as a tool of retaliation and
intimidation. These policies give Chinese producers and exporters a
significant competitive advantage at the expense of producers and
workers in the U.S., distort trade flows and competition, thwart
innovation, and undermine the rules-based trading system.
While USTR and the Administration have made impressive efforts to
identify and redress such violations, more can be done. In order to
tackle these violations, particularly in the context of a Chinese legal
system that is not uniformly transparent, USTR needs more resources so
it can expand and intensify its excellent work. These resources are a
smart investment in our country's long-term competitiveness. For the
price of additional attorneys and experts at USTR, we can do more to
address tens of billions of dollars of WTO-illegal subsidies, blatant
discrimination by Chinese entities, and a growing trade deficit that
saps U.S. production, investment, and jobs. Indeed, the important
victories the U.S. has already won at the WTO when it has challenged
China's policies confirm how essential U.S. leadership is in holding
China accountable to the rules it has agreed to. We made significant
concessions when China joined the WTO; in return, it agreed to abide by
the rules. Yet if the rules are not fully and effectively enforced, the
sacrifices we made when China joined the WTO will have been in vain.
USTR recently reported on the broad array of areas in which China
has continued to fall short of its WTO commitments, including in areas
such as intellectual property rights protection, access for investors
and service providers, and transparency. This testimony highlights just
four areas in which China is failing to comply with its WTO
commitments. These are among the areas in which I believe U.S. industry
and workers would have the most to gain from greater enforcement
efforts by the U.S. They are: (1) billions of dollars in prohibited
export subsidies provided by the Export-Import Bank of China and the
China Development Bank; (2) discrimination by state-owned enterprises
against U.S. producers and products; (3) the imposition of technology
transfer, local content, and export requirements on companies investing
in China; and (4) trade-distorting subsidies being provided to China's
Strategic and Emerging Industries.
Finally, China's undervaluation of its currency also gives Chinese
exports a significant unfair advantage and directly harms U.S.
producers and workers. The U.S. should consider all available options
for addressing this distortion, including options at the IMF and WTO as
well as action under our trade remedy laws. These written comments are,
however, limited to the four areas listed above.
II. Selected Examples of China's Non-Compliance with its WTO
Commitments
A. Prohibited Export Credit Subsidies
Article 3 of the WTO Agreement on Subsidies and Countervailing
Measures prohibits WTO Members from providing subsidies that are
contingent, in law or in fact, whether solely or as one of several
other conditions, upon export performance.\4\ China committed to
eliminate all such prohibited export subsidies when it joined the
WTO.\5\ There is a safe harbor from this prohibition on export
subsidies for official export credits, but only if those export credits
comply with the terms of the OECD Arrangement on Export Credits.\6\
Export credits that do not comply with the terms of the OECD
Arrangement are prohibited under WTO rules. Though China has been
invited to join the OECD Arrangement, it has declined to do so. And,
even though China is now the world's largest provider of export credits
by far, it appears to be routinely flouting the terms of the OECD
Arrangement, significantly undermining its relevance and posing a
substantial threat to the competitiveness of U.S. exporters and their
workers.
---------------------------------------------------------------------------
\4\ Agreement on Subsidies and Countervailing Measures (SCM
Agreement), Article 3.
\5\ Protocol on the Accession of the People's Republic of China,
WT/L/432 (Nov. 10, 2011) at para.10.3; see also Report of the Working
Party on the Accession of China, WT/MIN(01)/3 (Nov. 10, 2011) at
para.para.167-168.
\6\ SCM Agreement, Annex I, item (k).
---------------------------------------------------------------------------
In 2012, the U.S. ExIm Bank estimates that the Export-Import Bank
of China (China ExIm) issued $45 billion in new medium- and long-term
export credits, almost one-and-a-half times the value of such credits
newly issued by the U.S. ExIm Bank in 2012.\7\ An additional $50
billion in export credits is estimated to have been provided by the
China Development Bank.\8\ In all, China provided over $3 in export
credits to Chinese firms for every dollar provided by the U.S. to its
exporters.
---------------------------------------------------------------------------
\7\ Export-Import Bank of the United States, Report to the U.S.
Congress on Export Credit Competition and the Export-Import Bank of the
United States (June 2013) at 18.
\8\ Id. at 143.
---------------------------------------------------------------------------
China ExIm explains that the purpose of its programs is to support
the export of Chinese products and improve their competitiveness in the
international market, and it describes the export seller's credit as a
loan with large amount, long maturity, and preferential interest
rate.\9\ While China ExIm reveals little information about the rates
that are charged under these programs, there are various second-hand
reports indicating that the terms of this financing are highly
concessional, with some sources citing rates as low as two, one, or
zero percent.\10\ This information has led the U.S. ExIm Bank to
conclude that China's export financing does not comply in practice with
the terms of the OECD Arrangement.\11\
---------------------------------------------------------------------------
\9\ See The Export-Import Bank of China, ``Introduction;'' The
Export-Import Bank of China, ``Export Seller's Credit.''
\10\ See, e.g., Ryan J. Orr and Jeremy R. Kennedy, ``Highlights of
recent trends in global infrastructure: new players and revised game
rules,'' Transnational Corporations, Vol. 17, No. 1 (April 2008) at
108-109; Deborah Brautigam, China's African Aid: Transatlantic
Challenges, the German Marshall Fund of the United States (April 2008)
at 25-26. See also Terence P. Stewart, et al., China's Support Programs
for Automobiles and Auto Parts under the 12th Five-Year Plan (Jan.
2012) at 60.
\11\ Export-Import Bank of the United States, Report to the U.S.
Congress on Export Credit Competition and the Export-Import Bank of the
United States (June 2013) at 18.
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To bring a successful WTO challenge to these subsidy programs, the
U.S. must make out a prima facie case that the Chinese government
provides export financing, that the financing is contingent on export
performance, and that the rates at which the financing is provided are
below market rates. Each of these elements seems relatively
straightforward to establish based on publicly available information.
While there is little transparency regarding the rates at which much of
China's export credits are provided, the People's Bank of China does
put out regular circulars indicating that at least one category of
export credits, for high- and new-technology products, is subject to a
rate that is lower than the Bank's own benchmark rate for
``commercial'' loans. According the China ExIm, such high- and new-tech
products account for more than a third of their export sellers' credit
disbursements.\12\ Once this prima facie case is made, the burden would
shift to China to come forward with sufficient information and argument
to demonstrate that its export credits nonetheless comply with the
terms of the OECD Arrangement and are thus not prohibited under WTO
rules.
---------------------------------------------------------------------------
\12\ China ExIm 2012 Annual Report at 15.
---------------------------------------------------------------------------
Instead of mounting a WTO challenge to China's export credits, the
U.S. has instead opted to pursue negotiations with China to regulate
its export financing activities. Rather than seeking China's accession
to the OECD Arrangement, however, the U.S. is negotiating with China to
agree to ``international guidelines'' for official export credits that,
while ``consistent with international best practices,'' also ``tak[e]
into account varying national interests and situations.'' \13\ The
description of the negotiations raises concerns that China is seeking
to avoid a WTO dispute by agreeing to guidelines that fall short of the
requirements of the OECD Arrangement, which would be a significant step
backward from the rules that have governed export financing for
decades.
---------------------------------------------------------------------------
\13\ U.S. Department of the Treasury, ``Joint U.S.-China Economic
Track Fact Sheet--Fourth Meeting of the U.S. China Strategic and
Economic Dialogue (S&ED),'' (May 4, 2012).
---------------------------------------------------------------------------
Yet even the modest goals of the negotiations may be too ambitious
for the U.S. and China to meet. While the negotiations originally
intended to result in agreement by 2014, no final agreement has been
announced to date. Moreover, the most recent public statements
regarding the negotiations suggest that any agreement may be limited to
certain sectoral guidelines, and not result in a universal set of rules
covering all export financing activity. In July of this year, the U.S.
and China explained that negotiations had begun in earnest on
guidelines for the ships and medical equipment sectors, and that such a
sectoral agreement was hoped for by 2014.\14\ While it is unknown how
much medical equipment is supported by China's export financing, ships
account for less than 11 percent of China's export sellers' credit
disbursements in 2012.\15\
---------------------------------------------------------------------------
\14\ U.S. Department of the Treasury, ``Joint U.S.-China Economic
Track Fact Sheet--Fifth Meeting of the U.S.-China Strategic and
Economic Dialogue'' (July 12, 2013).
\15\ China ExIm 2012 Annual Report at 15.
---------------------------------------------------------------------------
Moreover, in the midst of these negotiations, the Government of
China has repeatedly denied officials from the U.S. Department of
Commerce the ability to verify the amounts of export financing
benefitting Chinese producers in the context of countervailing duty
investigations on imports from China on an array of products, including
solar cells, wind towers, and shrimp.\16\ In one such instance, when
Commerce officials asked if they could query China ExIm's loan database
(a standard practice to verify the extent of government subsidies),
China ExIm officials refused, stating they could not permit Commerce to
view the database, that Commerce ``should trust them'' in this matter,
and that it would be ``nonsense'' for Commerce to view the database if
they did not trust their statements.\17\
---------------------------------------------------------------------------
\16\ See Memorandum from Mark Hoadley, Program Manager, AD/CVD
Operations, Office 6, ``Countervailing Duty Investigation of
Crystalline Silicon Photovoltaic Cells, Whether or Not Assembled Into
Modules, From the People's Republic of China: Verification of the
Questionnaire Responses Submitted by the Government of China'' (Aug.
15, 2012) at 16.
\17\ Id.
---------------------------------------------------------------------------
Absent greater cooperation and transparency from China regarding
its export financing programs, the U.S. should not hesitate to
challenge these prohibited export subsidies at the WTO. China is
already bound by WTO rules that prohibit export credits that do not
comply with OECD Arrangement, and permitting China to provide ever
greater sums of export subsidies in defiance of these rules serves only
to further undermine U.S. competitiveness and, as a result, production,
investment, and jobs here in the U.S.
B. Discrimination by State-Owned Enterprises
State-owned enterprises (SOEs) have had, and continue to have, a
dominant presence in the Chinese market, and the Government of China
has professed a policy of strengthening political control of SOEs and
consolidating their position in key sectors. During the negotiation of
China's accession to the WTO, Members voiced their concerns regarding
the role of the Chinese Government in the decisions and activities of
SOEs,\18\ and China agreed to a number of important disciplines on
their SOEs as a result.
---------------------------------------------------------------------------
\18\ Report of the Working Party on the Accession of China, WT/
MIN(01)/3 (Nov. 10, 2011) at para.44.
---------------------------------------------------------------------------
Article III:4 of the GATT prohibits discriminatory treatment of
imported goods--while there is a limited carve-out to this obligation
for government purchases of goods for governmental purposes, the
exception does not apply when SOEs procure goods for commercial
purposes. Nor is there any exemption for SOEs outside of the purchasing
context, such as in their negotiation of joint venture agreements.
National treatment obligations in the GATS have a similar scope, though
they only apply to sectors in which Members have made positive
commitments.
China made additional, specific commitments to respect the
principle of non-discrimination in SOE purchasing decisions. In its
Protocol of Accession and accompanying Working Party Report, China
agreed that SOEs shall make purchases based solely on commercial
considerations, that foreign enterprises will have an adequate
opportunity to compete for such contracts on a non-discriminatory
basis, that China will not influence, directly or indirectly, the
purchasing decisions of SOEs, and that SOEs' commercial purchases will
not be subject to government procurement exceptions.\19\ These
commitments apply to purchases of both goods and services, and they
appear to require non-discrimination not only for imports but also for
foreign-invested firms in China.
---------------------------------------------------------------------------
\19\ Report of the Working Party on the Accession of China, WT/
MIN(01)/3 (Nov. 10, 2011) at paras. 46, 47, 342; Accession of the
People's Republic of China, WT/L/432 (Nov. 23, 2011) at Sec. 1(2).
---------------------------------------------------------------------------
China appears to be in violation of these important commitments. In
the telecommunications sector, for example, China's big three state-
owned operators reportedly purchase under a government directive to buy
domestic components and equipment.\20\ The government's policy is
reflected in the telecom operators' discussion of their purchasing
arrangements. China Unicom, for example, purchases equipment through
contracts with its state-owned parent, and it warns investors that the
arrangement may not be in the best interests of shareholders.\21\ Under
the arrangement, the state-owned parent gets three percent of the
contract cost for purchases of domestic equipment but only one percent
of the contract cost for imported equipment,\22\ creating an incentive
for the parent company to procure equipment from domestic producers
even if it is more expensive than imported equipment.
---------------------------------------------------------------------------
\20\ USTR, 2011 National Trade Estimate Report on Foreign Trade
Barriers (March 2011) at 64.
\21\ China Unicom 2008 Form 20-F at 10.
\22\ China Unicom 2009 Form 20-F at 83.
---------------------------------------------------------------------------
Discrimination also appears in the form of domestic content and
localization provisions in Chinese SOEs' sourcing and joint venture
contracts. In the wind-energy sector, for example, the state-owned
producer Sinovel contracted to purchase wind turbine components from
American Superconductor for delivery from 2009 to 2011. The contract
set out a ``localization schedule'' under which converters which
American Superconductor had produced with foreign material would
instead be produced with Chinese materials.\23\ By 2010, American
Superconductor reported that it had successfully localized the supply
of components for its converters to China.\24\ More recently, as part
of an agreement to establish a joint-venture with a Chinese SOE to
produce trucks in China, Daimler similarly agreed to ``localize'' the
production of the truck engines to China.\25\
---------------------------------------------------------------------------
\23\ American Superconductor Corp. Form 8-K (June 5, 2008) at Ex.
10.1.
\24\ American Superconductor Corp. Form 10-Q (Aug. 5, 2010) at 18.
\25\ ``Germany's Daimler to Make Trucks in China,'' Agence France
Presse (Sept. 26, 2011); ``Final Approval Issued by Chinese
Authorities: Way Clear for Daimler's Truck Joint Venture with Foton,''
Daimler.com (Sept. 26, 2011).
---------------------------------------------------------------------------
The U.S. and other countries expended significant negotiating
effort and bargaining capital to secure accession commitments from
China regarding SOEs that go above and beyond the rules in the WTO
Agreements. The U.S. has continued to press China to honor these
commitments, and obtained promises of compliance in the context of the
Strategic and Economic Dialogue and other fora.\26\ Yet, after twelve
years and substantial evidence that these commitments have not been
honored, there has been no formal challenge to enforce the obligations
that China undertook. This lack of formal enforcement is particularly
problematic given current efforts to build upon these SOE disciplines
in new trade and investment agreements. While new and stronger rules
are certainly needed, the U.S. must also send a strong signal that the
existing rules will be effectively enforced.
---------------------------------------------------------------------------
\26\ See, e.g., USTR, 2013 Report to Congress on China's WTO
Compliance (Dec. 2013) at 70-71.
---------------------------------------------------------------------------
C. Technology Transfer and Other Investment Conditions
As part of its accession to the WTO, China committed to be bound by
the obligations contained in the Agreement on Trade-Related Investment
Measures (TRIMs Agreement). Pursuant to Article 2 of the TRIMs, Members
shall not apply any trade-related investment measure that is
inconsistent with the national treatment obligation or the elimination
of quantitative restrictions obligation contained in Articles III and
XI, respectively, of the GATT.\27\ The Annex to this provision provides
an illustrative list of trade-related investment measures that would be
inconsistent with Article 2, including measures that require an entity
to purchase or use domestic products or that limit an entity's
importation, purchase, or use of imported products based on the amount
of the entity's exports.\28\ In addition to complying with TRIMs, China
also committed in its Accession Protocol to, ``eliminate and cease to
enforce trade and foreign exchange balancing requirements, local
content and export or performance requirements made effective through
laws, regulations or other measures.'' \29\ Moreover, China agreed not
to enforce provisions of contracts imposing such requirements.\30\
China also agreed to ensure that any means for approving investments in
China not be conditioned on: ``whether competing domestic suppliers of
such products exist; or performance requirements of any kind, such as
local content, offsets, the transfer of technology, export performance
or the conduct of research and development in China.'' \31\
---------------------------------------------------------------------------
\27\ Agreement on Trade-Related Investment Measures Art. 2.1.
\28\ Id., Annex para. 1.
\29\ Protocol on the Accession of the People's Republic of China,
WT/L/432 (Nov. 10, 2011) at para.7.3.
\30\ Id.
\31\ Id.
---------------------------------------------------------------------------
While China has revised or eliminated some measures to conform with
these obligations, measures continue to remain in place that impose--
whether through formal requirements or ``encouragement''--local content
and export requirements, as well as technology transfer and research
and development requirements. As explained in the 2013 National Trade
Estimate Report on Foreign Trade Barriers:
some laws and regulations `encourage' exportation or the use of
local content. Moreover, according to U.S. companies, some
Chinese government officials, even in the absence of applicable
language in a law, regulation or agency rule, still consider
factors such as export performance and local content when
deciding whether to approve an investment or to recommend
approval of a loan from a Chinese policy bank . . . .\32\
---------------------------------------------------------------------------
\32\ USTR, 2013 National Trade Estimate Report on Foreign Trade
Barriers at 91.
Although such measures are inconsistent with China's WTO
obligations, policies tying foreign investment to export performance,
local content, technology transfer, and research and development
investments appear to continue to be present in a variety of industries
throughout China.
For example, a foreign tire company that started producing in China
in 2008 was required by its business license to commit to export all of
its production for the first five years of its operation.\33\
Additionally, the Catalogue Guiding Foreign Investment in Industry,
with the most recent update entering into force in January 2012, lists
industries that are encouraged, restricted, or permitted.\34\ As
explained in the most recent WTO Trade Policy Review of China,
``[f]oreign investment in the restricted category may be permitted,
subject to approval, if export sales are over 70% of total sales of the
product.'' \35\ Industries listed in the most recent catalogue as
``restricted'' include, inter alia, chemical raw material products
manufacturing, non-ferrous metal smelting and rolling processing, and
common and special purpose equipment manufacturing.\36\ The U.S. has
exerted substantial efforts to obtain revisions to the Catalogue and
other measures that restrict investment and thus provide leverage to
obtain export and local content commitments, as well as other
commitments from investors.\37\ However, in its most recent report on
China's WTO compliance, USTR notes its disappointment that China has
not always been responsive to these efforts.\38\
---------------------------------------------------------------------------
\33\ U.S. International Trade Commission, Certain Passenger Vehicle
and Light Truck Tires from China, Inv. No. TA-421-7, USITC Pub. 4085
(July 2009) at 34, n.190.
\34\ See Trade Policy Review Body, Trade Policy Review Report by
the Secretariat China, WT/TPR/S/26/Rev.1 (July 20, 2012) at para.45.
\35\ Id. at para.48.
\36\ Catalogue for the Guidance of Foreign Investment Industries
(amended in 2011), available at http://english.mofcom.gov.cn/article/
policyrelease/aaa/201203/20120308027837.shtml.
\37\ USTR, 2013 Report to Congress on China's WTO Compliance (Dec.
2013) at 80-81.
\38\ Id. at 81.
---------------------------------------------------------------------------
Moreover, as noted in The President's 2013 Trade Policy Agenda, the
United States and other WTO Members have ``continually reported that
some Chinese government officials, who typically retain a high degree
of discretion when reviewing investment applications, still considered
factors such as technology transfer and local content when reviewing
investment applications.'' \39\ In the area of technology transfer, for
example, such violations continue to persist due to provisions in
Chinese law and regulations that require that any technology provided
by a foreign investor as part of a joint venture agreement be
``advanced'' and be appropriate to help the venture compete (including
internationally); \40\ furthermore, all such technology transfer
agreements must be submitted for government approval.\41\ Various
foreign firms have been subject to localization or technology transfer
requirements in order to be able to invest in China and/or sell to
Chinese firms (particularly state-owned firms, as noted in Section
II.B, above).
---------------------------------------------------------------------------
\39\ U.S. Trade Representative, The President's 2013 Trade Policy
Agenda at 27.
\40\ Regulations for the Implementation of the Law on Sino-Foreign
Equity Ventures, art. 41 (July 22, 2001).
\41\ Id. at Arts. 3-4.
---------------------------------------------------------------------------
The automotive sector is one sector where these types of investment
conditions are evident. For example, China waives requirements that
foreign investors seeking to produce complete automobiles must enter
into joint ventures with majority Chinese ownership if the venture is
located in an export processing zone.\42\ China has also used
investment approval measures to access technology for new energy
vehicles (NEVs). In March 2011, the National Development and Reform
Commission issued a draft Catalogue Guiding Foreign Investment in
Industry that proposed a new limitation on foreign ownership in NEV
parts manufacturing facilities in China to no more than 50 percent.\43\
After repeated efforts by the U.S., China removed the 50 percent limit
for almost all of the key components of NEVs in the final version
issued in January 2012, but retained the restriction on NEV
batteries.\44\ This is a significant limitation on foreign ownership in
the NEV industry, because batteries are one of the critical components
of most NEVs. By requiring foreign investors to partner with domestic
firms, and by requiring domestic firms to have ``mastery'' over the
technology involved in such ventures, China ensures that any foreign
investor in the critical technology will be sharing that technology
with its Chinese joint venture partner. USTR notes that it remains
difficult to assess the extent to which China has implemented the
commitments it made to comply with its WTO commitments in the NEV
sector as far back as 2011.\45\
---------------------------------------------------------------------------
\42\ Policy on Development of Auto Industry (May 21, 2004) at
Article 49.
\43\ See USTR, 2013 National Trade Estimate Report on Foreign Trade
Barriers at 69. See also USTR, 2013 Report to Congress on China's WTO
Compliance (Dec. 2013) at 83-84.
\44\ Id.
\45\ USTR, 2013 Report to Congress on China's WTO Compliance (Dec.
2013) at 83.
---------------------------------------------------------------------------
Despite repeated requests from the U.S. to eliminate these WTO-
inconsistent policies, and repeated assurances from China that such
measures are not enforced, USTR continues to express its concern that
investment approvals in China are conditioned on export performance,
local content, technology transfer and research and development
investment requirements. All such requirements are explicitly
prohibited under terms the U.S. negotiated with China when it joined
the WTO. While some requirements appear to be imposed on an ad hoc or
informal basis, others are based in the provisions of Chinese law and
policies, and form a sufficient basis for challenge at the WTO. The
U.S. should work to develop the facts and arguments necessary to
challenge these harmful policies at the WTO and bring China into
compliance with its commitments.
D. Subsidies to Strategic and Emerging Industries
When China joined the WTO, it agreed not only to eliminate
prohibited subsidies such as export subsidies, but also to be subject
to WTO rules which make subsidies which are not prohibited actionable
if they cause serious prejudice to another Member. When a government
makes a financial contribution that is specific to an industry or
region, and that contribution confers a benefit, WTO rules permit other
Members to challenge those subsidies if they displace their exports,
cause lost sales, suppress or depress prices, or increase the
subsidizing country's share of world trade in the subsidized good.
Since 2006, the U.S. has investigated hundreds of subsidy programs
benefitting dozens of goods exported from China to the U.S., including,
among others, reduced tax rates for companies in preferred industries
and regions,\46\ \47\ preferential policy lending from state-owned
banks at below market rates at the central and provincial levels,\48\
the provision of electricity and key raw materials by SOEs for less
than adequate remuneration (LTAR),\49\ \50\ the provision of land by
central and local governments for LTAR,\51\ and numerous grant
programs.\52\ In response to the lack of transparency in China
regarding the broad array of subsidy programs it maintains, as well as
its failure to notify the WTO of these programs as required by WTO
rules, in 2011 the U.S. submitted a counter subsidy notification to the
WTO that covers hundreds of subsidy programs at the central and sub-
central levels of the Chinese government.\53\ These include export
subsidies and domestic content subsidies, as well as other injurious
subsidies.\54\ More than two years later, action to eliminate these
subsidies still has not occurred.
---------------------------------------------------------------------------
\46\ Light-Walled Rectangular Pipe and Tube From the People's
Republic of China: Final Results of the Expedited First Sunset Review
of the Countervailing Duty Order, 78 Fed. Reg. 48416 (Dep't Comm. Aug.
8, 2013), and accompanying Issues and Decision Memorandum at 6.
\47\ Certain Kitchen Appliance Shelving and Racks From the People's
Republic of China: Final Results of Countervailing Duty Administrative
Review; 2010, 78 Fed. Reg. 21594 (Dep't Comm. Apr. 11, 2013) and
accompanying Issues and Decision Memorandum (``KASR IDM'') at 7-8.
\48\ Drill Pipe From the People's Republic of China: Final Results
of Countervailing Duty Administrative Review; 2011, 78 Fed. Reg. 47275
(Dep't Comm. Aug. 5, 2013) and accompanying Issues and Decision
Memorandum at 11-13.
\49\ Id. at 13-14.
\50\ KASR IDM at 9-12.
\51\ Drawn Stainless Steel Sinks From the People's Republic of
China: Final Affirmative Countervailing Duty Determination, 78 Fed.
Reg. 13017 (Dep't Comm. Feb. 26, 2013) and accompanying Issues and
Decision Memorandum (``Steel Stinks IDM'') at 22-24.
\52\ KASR IDM at 13-14, 15; Steel Stinks IDM at 25-28.
\53\ See Subsidies--Request from the United States to China
Pursuant to Article 25.10 of the Agreement, G/SCM/Q2/CHN/42 (Oct. 11,
2011).
\54\ See id.
---------------------------------------------------------------------------
To date, however, the U.S. has only challenged prohibited subsidies
provided by China at the WTO--it has not taken any action to challenge
non-prohibited subsidies that are nonetheless causing harm to American
industries and workers both in the U.S. market and abroad. Instead,
industries seeking relief from such subsidy programs must file a
countervailing duty case and seek import duties to offset those
subsidies; even if relief is obtained, it only covers competition in
the U.S. market, not in China or third-country markets. While disputes
challenging actionable subsidies are fact-intensive and thus
complicated to pursue, providing companies and workers with only
partial relief through the domestic trade remedy system imposes major
long term costs on our ability to compete.
This ability to compete is particularly threatened in the seven
``Strategic and Emerging Industries'' (SEIs) in which China plans to
invest a reported $1.5 trillion dollars over the coming years. China's
12th Five-Year Plan for National Economic and Social Development (2011-
2015) identifies seven priority SEIs and aims to increase their
contribution to GDP from the current 2 percent level to 8 percent by
2015 and 15 percent by 2020.\55\ Achieving this goal would require the
sectors to grow more than seven times over in size over less than a
decade--a massive undertaking that could likely not be achieved without
displacing foreign competitors from the market. Indeed, the Government
of China's explicit goal is to displace global competitors in each of
the seven sectors; it aims to become a global leader in each of these
industries by 2030.\56\
---------------------------------------------------------------------------
\55\ China's 12th Five-Year Plan for National Economic and Social
Development at Chapter 10, translation available at http://
www.britishchamber.cn/content/chinas-twelfth-five-year-plan-2011-2015-
full-english-version.
\56\ Emerging Strategic Industries: Aggressive Growth Targets,
China Strategy, HSBC Global Research (October 19, 2010).
---------------------------------------------------------------------------
The seven SEIs are key industries that many countries will be
hoping to pursue in the coming years: (1) energy saving and
environmental protection; (2) new generation of information technology;
(3) biotechnology; (4) high-end equipment manufacturing; (5) new
energy; (6) new materials; (7) new energy vehicles.\57\ China's State
Council first identified these industries in its Decision on
Accelerating the Fostering and Development of New Strategic Industries
announced in 2010. China will provide SEIs with preferential policies,
incentives, and funds that media reports indicate could reach $1.5
trillion from 2011 to 2015.\58\
---------------------------------------------------------------------------
\57\ China's 12th Five-Year Plan for National Economic and Social
Development at Chapter 10, translation available at http://
www.britishchamber.cn/content/chinas-twelfth-five-year-plan-2011-2015-
full-english-version.
\58\ See Ping Gong and Jessica Wang, China's 12th Five-Year Plan:
An Overview (May 18, 2011).
---------------------------------------------------------------------------
In 2012, China issued three catalogues on SEIs development. Among
these, the Development Priorities of Key Generic Technologies and Key
Products in Strategic Emerging Industries issued by MIIT in July 2012
stands out because it identifies major research and development units
and major companies, as well as government policies and funds designed
to spur development in each category. However, only a small number of
companies listed have any foreign investment, as the list heavily
favors Chinese-invested firms, particularly state-owned enterprises and
national champions.\59\ MIIT further suggested that another catalogue
should be used by other Chinese government departments to ``issue
targeted supporting fiscal and taxation policies.'' \60\
---------------------------------------------------------------------------
\59\ USTR, 2013 National Trade Estimate Report on Foreign Trade
Barriers at 98.
\60\ Id.
---------------------------------------------------------------------------
The Chinese government has decided to dedicate a tremendous amount
of resources to help these industries develop and overtake global
competitors. If China succeeds, it will be because the subsidies it
provides to these industries enable them to take market share from
other producers, including industries in the U.S. The U.S. is closely
following the SEI program, and it has urged China to be more
transparent about subsidies provided to these industries.\61\ As part
of this monitoring, the U.S. should ensure that any negative impact the
SEI policy does have on U.S. producers and workers is quickly and
effectively redressed, including through WTO dispute settlement if
merited.
---------------------------------------------------------------------------
\61\ USTR, 2013 Report to Congress on China's WTO Compliance (Dec.
2013) at 46-47.
---------------------------------------------------------------------------
III. Conclusion
Holding China accountable to its WTO commitments should be one of
the very top trade priorities of the U.S. government. China is our
largest trading partner, and continued violations by China distort
trade and investment, contribute to a growing trade deficit, harm U.S.
producers and workers, and undermine innovation. USTR has made
significant strides in its China enforcement efforts in recent years,
and those efforts are paying off in successful WTO dispute settlement
outcomes and negotiated commitments obtained bilaterally from China. As
China's role in the world trading system continues to grow, however,
its responsible compliance with the rules of the road remains sorely
lacking. In the four areas identified in this testimony, there appear
to be meritorious WTO disputes that would affect billions of dollars in
subsidies, the development and safeguarding of critical technologies,
and industries that support thousands of American jobs. Additional
enforcement resources and intensified enforcement efforts would deliver
significant benefits to U.S. firms, workers, and communities.
______
Prepared Statement of Thea Mei Lee
january 15, 2014
Good morning, Chairman Brown and Chairman Smith, members of the
Commission. Thank you for inviting me to testify on behalf of the
twelve and a half million working women and men of the AFL-CIO on
China's compliance with its World Trade Organization (WTO) obligations
and how that record impacts American workers.
I would like to start by congratulating the Commission for its
excellent work over the past thirteen years, particularly under the
leadership of the current chairmen. It is essential that the U.S.
Congress and the White House pay attention to the breadth of issues
that affect our economic and national security relationship with China,
and the CECC has helped to bring needed attention to human rights,
democracy, and rule of law.
Too often, our bilateral dialogues focus solely on narrow
commercial concerns. As the CECC pointed out in its 2013 report,
though, workers' rights, human rights and rule of law issues are also
central to American workers, consumers and businesses. We urge that
these concerns be made an integral part of all bilateral U.S.-China
economic dialogues and that our government seek more effective avenues
for raising these concerns within the multilateral framework of the WTO
and other international bodies.
When China joined the WTO more than twelve years ago, the AFL-CIO
and many other organizations raised concerns about:
(1) whether WTO rules were adequate to protecting workers'
rights and the environment, promoting democracy and
development, addressing currency manipulation or supporting
U.S. jobs and manufacturing;
(2) whether China would comply with WTO commitments, and, if
not, whether WTO enforcement measures would be adequate;
(3) whether the U.S. government had the will and/or the tools
to use WTO mechanisms effectively to protect the interests of
American workers and domestic producers, rather than just the
interests of multinational corporations.
On all these fronts, after twelve years, the results have been
disappointing, and American workers and domestic businesses pay a high
price every day for these failures.
Rapid industrialization and export growth in China far outpaced the
development of regulatory institutions, laws, and enforcement capacity.
Workers' rights, environmental protections, and consumer safety did not
naturally and automatically improve, while foreign investment and
exports grew rapidly. WTO rules were ineffectual at addressing any of
these problems. While the Obama Administration has taken several
important and effective trade actions to protect U.S. interests, these
have not matched the scale of China's non-compliance.
In addition, other developing countries striving to protect
workers' rights and improve living standards have lost market share and
investment to China. The Chinese government's currency manipulation
continues to be a concern, and the U.S. government has failed to use
international trade tools effectively to counter this intervention. In
fact, the WTO's paralysis in the face of currency manipulation by China
and other countries highlights an enormous gap in international trade
rules. Finally, China's workers continue to see their most fundamental
rights routinely violated, worker insecurity and unrest continues to
grow, and the Chinese government continues to crack down on most forms
of dissent.
Trade Impact
Our trade deficit with China has almost quadrupled in nominal terms
since WTO accession--from $84 billion in 2001 to an estimated $320
billion in 2013. Robert Scott of the Economic Policy Institute has
estimated that the growth in the U.S. trade deficit with China between
2001 and 2011 displaced about 2.7 million American jobs.\1\ Our
imbalanced trade relationship with China has resulted in a huge
transfer of intellectual property as a result of Chinese intellectual
property theft, as well as forced technology transfers. The Chinese
government's continuing violation of its workers' fundamental labor
rights has limited not only the economic prospects of its own people,
but has diminished opportunities for American workers as well.
---------------------------------------------------------------------------
\1\ ``The China Toll: Growing U.S. trade deficit with China cost
more than 2.7 million jobs between 2001 and 2011, with job losses in
every state,'' Robert E. Scott, EPI Briefing Paper, Economic Policy
Institute, August 23, 2012 (available at: http://www.epi.org/
publication/bp345-china-growing-trade-deficit-cost/).
---------------------------------------------------------------------------
China's actions are continuing to distort global trade and
investment patterns and stymie our still weak recovery. The government
of China's failure to honor its WTO commitments has had dire
consequences for U.S. workers and the American economy, causing
businesses to shut their doors and leaving their former workers
unemployed.
Perhaps even more disturbing than the aggregate growth in the U.S.
trade imbalance with China is the composition of our imports and
exports. In 2013, we ran a trade deficit with China in advanced
technology products of $106 billion - up more than ninefold from less
than $12 billion in 2002 and $31 billion more than our overall ATP
deficit. In fact, we ran trade surpluses in ATP with most of our other
trading partners in 2013, and no other country had an imbalance larger
than $16 billion. This should raise many questions about the underlying
policies skewing this important trade balance.
Among the key issues that must be addressed are:
Currency
If China increased the value of its currency to the level it would
be if free market forces were able to prevail, the resulting growth in
the United States could create 2.25 million new U.S. jobs, according to
a 2011 EPI report.\2\ According to the report, if the value of the
Chinese currency, the yuan, and satellite currencies, such as those in
Hong Kong, Taiwan, Singapore, and Malaysia, were increased by 25
percent to 30 percent against the dollar, the U.S. gross domestic
product would grow as much as $285.7 billion, creating up to 2.25
million U.S. jobs. Creating that many jobs would reduce the U.S.
unemployment rate by at least one full percentage point. By labeling
China as a currency manipulator, and pursuing countervailing duties on
Chinese imports to offset the unfair advantage of the artificially low
value of the yuan if China failed to take immediate corrective action,
the Administration could address this problem in a WTO-consistent
manner. Brazil, another WTO member, has taken initial steps in this
area. However, it is one in which the U.S. should take the lead.
Addressing China's currency manipulation would likely be the single
most effective action the U.S. government could take with respect to
China's trade policy.
---------------------------------------------------------------------------
\2\ ``The Benefits of Revaluation: Full revaluation of the Chinese
yuan would increase U.S. GDP and employment, reduce the federal budget
deficit, and help workers in China and other Asian countries,'' Robert
E. Scott, EPI Briefing Paper, Economic Policy Institute, Jun. 17, 2011
(available at: http://www.epi.org/publication/revaluing--chinas--
currency--could--boost--us--economic--recovery/)
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Existing domestic and international law permits the U.S., alone or
in tandem with other nations through the WTO or IMF, to address this
manipulation as a prohibited subsidy. To the extent that the
Administration believes it does not, the Administration should support
the Currency Exchange Rate Oversight Reform Act.
Selective Use of Value Added Tax (VAT) Rebates
China continues to utilize selective rebates as a way to promote
exports of its products in a trade distorting manner. While the
original GATT allowed for a system of general rebates, the intent of
the GATT (and subsequent WTO) was to address the overall system of
indirect taxation and not to allow for the exclusion to be used in a
trade distorting manner. In the absence of an American VAT, the AFL-CIO
continues to believe that the U.S. should seek the elimination of the
exclusion of VAT rebates within the WTO to level the playing field, as
Congress has called for in the past. In the interim, the Administration
should seek to eliminate the ability of a country to engage in
selective rebating.
Export Restraints
The United States deserves substantial credit for the export
restraint case against China regarding raw materials, including
bauxite, coke, fluorspar, and other products, and for the follow-up
case regarding export restraints on 17 rare earth minerals, as well as
tungsten and molybdenum. The WTO's decision on the raw materials case
made clear that China is engaged in facial violations of its WTO
commitments. Despite the WTO's decision, China continues to limit the
export of more than 300 products with only 84 of those products
included in its first reserved schedule. China must bring its policies
into compliance with its commitments--to do otherwise injures U.S.
producers and their workers. As the U.S. considers further action, due
regard should be given to commodities on which existing AD/CVD orders
are in place or where similar domestic U.S. interests might be
adversely affected.
Auto Parts
The President's leadership in saving General Motors and Chrysler
has had an enormous positive effect on our economy, investment and,
most important, jobs. Action by the Administration to address China's
illegal duties on U.S. auto exports and its most recent request for
consultations on illegal export-contingent subsidies are deeply
appreciated. Nevertheless, as documents shared with the United State
Trade Representative (USTR) earlier this year clearly identify, there
are other practices and programs in place that are detrimental to auto
and auto parts makers producing here in the U.S. , as well as their
employees. Those items should continue to receive the highest priority
within the ITEC and action to address these policies must be pursued.
We reiterate that, as much as we appreciate an aggressive enforcement
strategy, in many cases, by the time a case is filed, permanent damage
has often been done to an industry and its workers. We continue to urge
a proactive approach and the creation and use of mechanisms that can
make effective changes as soon as WTO-inconsistent behavior is
recognized.
Prohibited Subsidies (Generally)
Article 3 of the WTO Agreement on Subsidies and Countervailing
Measures (SCM Agreement) prohibits WTO members from granting subsidies
that are contingent on export performance or on the use of domestic
over imported goods. China committed to eliminate all prohibited
subsidies when it joined the WTO--but it has not done so. Instead, it
has put a tremendous amount of energy into disguising its subsidy
programs or modifying them to be facially WTO-compliant. Illegal,
mercantilist subsidies (including currency manipulation discussed
above) have proliferated enormously, to the detriment of American
workers and businesses.
In June 2011 pursuant to a petition filed by the United
Steelworkers, the Administration was able to secure agreement (under
threat of WTO action) to end illegal subsidies in the wind energy
sector, but this success was hard fought, expensive, and left lost jobs
and reduced market share in its wake. Because China has repeatedly
failed to publish all its subsidies, as required by WTO rules, even
explicit, on-the-books subsidies can only be found at great expense.
Aside from such specific subsidy programs, China provides a number of
benefits to its exporters that are de facto dependent on export
performance, such as low-cost or free land, infrastructure, industrial
inputs, tax rebates, cash transfers disguised as loans, and below-
market export insurance. Due to this lack of transparency, we strongly
recommend that the U.S. investigate other critical sectors, including
aerospace, autos, electronics, and shipbuilding, for such hidden
subsidies.
The American labor movement simply does not have resources on its
own to pursue a Section 301 complaint against every Chinese violation
of its WTO commitments. Nor would such a strategy be effective in
protecting and promoting jobs: by the time a union collects enough
evidence to pursue a case effectively, thousands of workers may have
lost their jobs and the factories that employed them may have already
closed or moved overseas. Therefore, we urge the Administration to act
affirmatively to monitor and address prohibited Chinese subsidies in
their many forms.
National Treatment
Article III, Section 4 of the GATT 1994 requires WTO Members to
accord imported goods treatment no less favorable than that afforded to
domestic goods in respect of all laws or regulations affecting their
internal sale or use. Laws that condition the receipt of an advantage
on the use of domestic over imported goods--local content
requirements--are a classic example of a policy that violates this
Article. In paragraph 3(a) of its Protocol of Accession to the WTO,
China also agreed to accord foreign firms treatment no less favorable
than that accorded to domestic firms with respect to the procurement of
inputs and the conditions under which their goods are produced,
marketed, or sold. China violates these commitments on a regular basis
in a variety of sectors.
For example, the wind sector subsidy program challenged at the WTO
also violated the national treatment principle because it required
Chinese wind turbine manufacturers receiving grants under the program
to use key components made in China rather than imports. In July 2012,
the USTR won a WTO case challenging measures with respect to China
UnionPay, which has had a monopoly over the handling of domestic
currency payment card transactions. Such a policy clearly discriminates
against American and other non-Chinese financial services providers--
the win, though beneficial for the U.S. financial services sector,
illustrates the weakness of the piecemeal approach toward China's WTO
compliance. As China defends each new case, it has time to implement
alternate policies.
Given the USTR's long-standing recognition that China has failed
year after year to abide by its commitment to provide national
treatment for U.S. goods and services, we urge you to make clear that
continued discrimination will not be tolerated.
Market Access
China has never provided the kind of market access that it promised
when it joined the WTO. It has used a variety of mechanisms, including
obscure licensure and certification requirements and official supplier
lists, to ensure that its own firms dominate the market. As a result,
China imports almost no finished goods, thereby harming employment in
the United States and obligating American firms to conduct business
through joint ventures with Chinese partners.
Even financial services firms, loathe to take on China and thereby
risk losing what little access they do have to the vast Chinese market,
have urged the Administration to act forcefully to ensure China opens
its banking and insurance sectors. In 2009, the WTO ruled that China
unfairly restricted the ability of U.S. firms to sell DVDs, music,
books, software and other copyright-intensive material in its market
(not only restricting access, but building a market for counterfeit
goods). Despite this ruling, China continues today to restrict access
to films, music, books, and other entertainment, including certain
internet sites (particularly those that carry news and information).
Such restrictions harm our members and cost jobs in the United States.
China also continues to demand that U.S. manufacturers transfer
technology and production in return for market access. Industries like
aerospace, machine tools, and shipbuilding have been significantly
impacted by this market distorting mechanism.
Intellectual Property Rights
China's abject refusal to enforce intellectual property rights
(IPR) is a problem of long standing. From movie studios, to book
publishers, to software giants, American businesses--and those they
employ--are losing income every minute of every day. In 2010, at a
hearing before the House Ways and Means Committee, even the U.S.-China
Business Council, the trade organization for U.S. firms doing business
in China--not an organization with a strong record of challenging
China's policies--said:
``China's poor record of IPR protection influences what
products foreign companies are able to sell in China's market;
counterfeit products made in China often show up in other
markets as well. Only one-third of respondents in USCBC's most
recent survey of China's business environment say that the poor
IPR environment does not impact them. And, for companies in
certain sectors, like movies and software, the issue is without
doubt their top problem in China and needs to be addressed.''
(John Frisbie President, U.S.-China Business Council, Testimony
before House Ways and Means Committee, June 16, 2010)
Likewise, the Business Software Alliance reports that nearly four
out of every five computer programs installed on personal computers in
China in 2009 were being used illegally. U.S. firms cannot stay in
business and continue to employ hard-working Americans with an 80
percent theft rate. While China has initiated some reforms in this
area, the results have been incremental at best. More must be done.
China's violations of intellectual property rights are not limited
to copyrights, servicemarks, and trademarks. Increasingly, China is
engaging in theft of patents--including ``downstream dumping'' by
violating the patents involved in the manufacturing process. Law
enforcement officials have identified instances where the Chinese have
sought to pirate plans for proprietary production equipment--resulting
in dramatically lower costs of production. Today, China's IPR
violations threaten U.S. producers across the board. At all levels of
IPR, China's record is abysmal.
State-Owned Enterprises
Upon WTO accession, China agreed that it would ensure that state-
owned and state-supported enterprises (collectively, SOEs) would make
purchases and sales decisions based solely on commercial
considerations.\3\ It also agreed that it would not influence
commercial decisions except in a WTO consistent manner. This promise,
like so many others, has been broken. China's state-owned and state-
supported enterprises receive raw materials and other inputs at below
market rates, and have access to preferential debt and equity
financing, including soft ``loans'' from state-owned banks that do not
need to be repaid. Moreover, they are consistently operated in a manner
that gains them market share--rather than profits. A private enterprise
would not long remain in business if it failed to respond to the
market, but, because state resources prop them up, Chinese SOEs not
only can, but do. While losing money by selling goods at below market
prices, they force U.S. competitors out of business. The overcapacity
that China is intentionally pursuing in industries like glass and steel
will eventually be needed, once international competitors have all
folded.
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\3\ The AFL-CIO does not oppose SOEs per se and does not seek to
privatize them. However, especially given America's lack of a
comprehensive manufacturing strategy or adequate governmental support
for that sector, without strict disciplines on the behavior of SOEs,
U.S. workers and producers remain at risk from those entities.
---------------------------------------------------------------------------
Increased outward investment by Chinese SOEs is becoming a greater
issue every day. Several Chinese entities have already entered into or
announced transactions that could pose problems for U.S. producers and
their workers. Tianjin Pipe, a Chinese SOE, is investing $1 billion in
a Texas facility. However, we know little about its cost of capital and
whether it will operate on the basis of commercial concerns. So long as
China refuses to comply with its SOE commitments, U.S. workers remain
at risk.
We believe that the USTR should ensure that SOEs and any other
entities acting with state-delegated authority do not undermine the
competitiveness of private enterprise or the rights, pay, and benefits
available to their workers. Nor should these entities be allowed to
skew supply chains or engage in predatory practices in the U.S. or
third country markets, thereby destroying jobs for American workers.
Workers' Rights
While the WTO does not include specific commitments regarding
fundamental labor rights, they are important on their own merits and as
they relate to trade. Furthermore, the 1998 Singapore WTO Declaration
did commit WTO members to ``respect, promote, and realize'' the core
ILO standards as delineated in the ILO Declaration of Fundamental
Principles and Rights at Work. Nevertheless, the Chinese government
fails to guarantee these core labor standards. China shirks its duties
to its own people, as well as to the international community, by
failing to uphold fundamental labor rights for its citizens.
Multi-national employers and brands, their Chinese contractors, and
even Chinese employers outside international supply chains have
frequently adopted business models premised on this relative lack of
human rights and labor standards, for example, by failing to ensure
workplaces are free from child and forced labor or to abide by laws
with respect to wages, hours, and conditions of work. Taking advantage
of, and acquiescing to, the government's failure to enforce its own
labor laws or secure fundamental rights means firms operating in China,
whether in private hands or state-supported, operate with an unfair
advantage over U.S. competitors: it is not just that labor costs less
in China, it is that government practice aims ensure low costs and a
workforce that is officially limited in its ability to act collectively
to better its wages, benefits, and conditions of employment. Chinese
workers, seeing the failure of their own government to protect their
rights, have in recent years engaged in numerous wildcat strikes to
take back the rights and benefits their own government failures to
secure for them.
Given that the Bipartisan Trade Promotion Authority Act of 2002
included the goals, among others, ``to foster economic growth, raise
living standards, and promote full employment in the United States,''
and ``to promote respect for worker rights and the rights of children
consistent with core labor standards of the ILO,'' we urge the USTR to
address this issue in no uncertain terms. A violation of labor rights
anywhere is a violation of labor rights everywhere. China's current
labor policies hurt not only Chinese workers, but American workers who
must compete economically with forced and child labor; discriminatory
pay and conditions of employment; and a lack of opportunity to freely
associate and collectively bargain.
In sum, the AFL-CIO believes that the Chinese government's approach
to international trade and investment since its accession to the WTO
demonstrates that China was an inappropriate candidate for WTO
membership. China has shown little commitment to the rules-based
system. Its strategies have wreaked havoc on the American manufacturing
sector. Anything the U.S. can do to hold China accountable and to
ensure that American workers do not bear the brunt of this policy
mistake will be welcome.
______
Prepared Statement of Timothy Webster
january 15, 2014
Chairman Brown, Cochairman Smith, Members of the Commission, and
ladies and gentleman, it is my pleasure and honor to speak with you
this morning. I would like in particular to thank Lawrence Liu, Staff
Director of the Commission, for contacting me back in October, and
inviting me here today. His loyal service over the past eight years has
been an enormous asset, helping educate not only Members of Congress
and the Executive branch, but also the general public both in the
United States and around the world. I routinely assign testimony from
Commission roundtables and hearings to my law students at Case Western
Reserve.
Throughout the US, but especially here in Washington, there is a
pervasive belief that China is an international trade scofflaw. By
manipulating its currency, subsidizing domestic industries and dumping
goods in the US market, China is a scourge whose baleful influence
harms us all. My recent research, which will appear later this year in
the Michigan Journal of International Law, tries to temper this view
through empirical observation. Specifically, I have examined China's
record of implementing ten decisions rendered by the World Trade
Organization's Dispute Settlement Body (``DSB'') over the past decade.
I find that China has a strong, but increasingly imperfect, record
of implementing DSB decisions. For reasons I will explain, I conclude
that China is, at base, a system maintainer, not a system challenger.
Part of using any system--whether the rules of football or of civil
procedure--involves tactical manipulation. A smart lawyer, coach, or
WTO member strategically deploys procedural rules to benefit its side
to the greatest extent possible. Sometimes a member even breaks the
rules. That has been, I submit, China's experience with the DSB over
the past decade.
In the first wave of cases, concluded before 2007, China either
settled cases, or revised its domestic regulations to accord with WTO
rulings, relatively quickly. These cases involved minor adjustments to
subsidies, tax refunds, and financial incentives that China provided to
both state-owned enterprises and foreign-invested enterprises.
After gaining greater familiarity with WTO dispute settlement
procedures, China has become an increasingly sophisticated WTO
litigant. It is now more willing to use the DSB's procedures to
minimize the effects of unfavorable WTO rulings. In a series of cases
over the past five years, China has begun to test the limits of what is
possible, rather than conceding at the earliest stages.
This testing may include probing internal DSB procedures. For
example, China failed to submit a compliance report in one case, and
then explained that it was not bound to do so because the dispute was
resolved (DS 340). Likewise, as we know from our colleague in the steel
industry, China sought an unusually long period of time in which to
implement the electrical steel case decision (DS 414). China suggested
that it needed nineteen months, far in excess of the fifteen-month
ceiling suggested by WTO rules, whereas the US believed the number was
closer to four months. Unable to resolve this difference China and the
US submitted the issue to an arbitrator, who determined that eight and
a half months would be a ``reasonable period of time.''
But it also involves decisions, outcomes rendered by the DSB.
First, China has appealed unfavorable decisions, even when the appeal
lacks merit, presumably to postpone revising the offending regulation.
In so doing, China has bought itself a year or two of time before the
decision becomes final (DS 340, DS 363).
Second, China has failed to make the necessary changes to its legal
system within the prescribed ``reasonable period of time.'' In the
publications and entertainment case, which required major changes to
its censorship regime and film distribution system, China failed to
make all necessary changes within the 14-month period (DS 363).
Third, China has left in place many regulations that the DSB found
inconsistent with WTO disciplines. In the publications case just cited
(DS 363), a national regulation prohibiting foreign investment in news,
radio, television and internet services remains in effect. Indeed
local-level regulations, promulgated years after the DSB found the
measure inconsistent, cite this regulation, and bid local officials to
``earnestly and thoroughly implement'' it. The US and China signed a
Memorandum of Understanding in May 2012, though they disagree about its
significance. China believes it has achieved full implementation, while
the US views the MOU as significant progress, but not a final
resolution. Inconsistent regulations remain in effect in the financial
information services case as well (DS 373). One regulation in
particular continues to subject foreign service-providers to onerous
requirements not placed on domestic outfits.
In light of these shortcomings, what should the United States do?
First, since the US is usually the ``plaintiff'' in cases against
China, it is well positioned to guide the enforcement action. The US
could push the DSB to specify which laws and regulations must be
revised. As WTO panel may find a dozen or more Chinese regulations in
violation of WTO disciplines. Does China need to change all of them?
Some of them? It would be helpful to have a roadmap explaining how
China should implement the decision. I believe the US should bring
about greater clarity to the legal steps prescribed by the DSB.
Second, the US needs to focus on enforcement. My research shows
that many regulations remain in effect, even after the DSB found them
inconsistent. I would argue that China has an obligation to annul such
regulations, and that the US should apply pressure on China to ensure
their annulment. In addition, many local- or provincial-level
regulations reference these inconsistent national regulations. It is
possible, then, that inconsistent regulations emit an ``enforcement
afterglow'' at the local or provincial level.
Third, the US needs additional capacity. As I have argued in a
prior paper, China understands the US far better than the US
understands China. This is a systemic imbalance, to be addressed by
educating more Americans about China, its language, political culture,
and legal system. To be sure, the Commission plays a vital role in
disseminating sophisticated information about China, but it is not
enough. The narrower issue is the insufficient number of US trade
officials who speak and read Mandarin, understand the Chinese legal
system, and can monitor China's compliance efforts. US officials may
not know that inconsistent regulations remain in effect, or that they
are referenced by lower-level regulations after they have been
annulled. Accordingly, it is difficult to ascertain when China has
changed its laws and regulations, when it has not done so, and what the
overall effect of these implementation efforts is. I am pleased to note
that the Interagency Trade Enforcement Center (ITEC) is currently
looking to hire Mandarin-speaking trade analysts. I would urge even
more efforts if this type as well as the allocation of funds to hire
Chinese legal experts, and to train the next generation of trade
officials with China expertise.
Fourth, the US also needs to live up to its end of the bargain. A
recent study by the Congressional Research Service lists a dozen WTO
decisions that the US has not fully implemented. China frequently
raises these implementation failures when the DSB meets in Geneva. As
the chief architect of the WTO, and its dispute settlement procedures,
the US has a special obligation to implement WTO decisions. Our failure
to do so erodes confidence in the international trade regime we have
worked so hard to create and perpetuate. Implementing our obligations
would also give us additional moral authority when calling on other
states to implement theirs.
To sum up, China is now an active litigant in the world trade
system. It mounted the learning curve of WTO dispute resolution during
its first five years of membership, and now artfully deploys the
procedural mechanisms and features of the DSB. One could say that we
got what we asked for. By welcoming China into the WTO, the US now has
a forum in which to challenge the compatibility of China's domestic
regulations with the international trade law that the US helped write.
It was only a matter of time before China learned the rules of the
game. Now that it does, we can expect a savvier adversary in WTO
proceedings, one less likely to fold at the first threat of litigation,
and one that will use procedural tactics and other tools to challenge
our claims. We should also anticipate that China will not only annul
inconsistent regulations, as it has traditionally done, but also leave
a small subset of inconsistent regulations in place. The latter
problem, I believe, can be addressed by additional scrutiny from US
trade officials.
I thank you for your attention and look forward to your comments
and questions.
______
Prepared Statement of Hon. Sherrod Brown, a U.S. Senator From Ohio;
Chairman, Congressional-Executive Commission on China
january 15, 2014
I'd like to welcome everyone to this hearing on ``China's
Compliance with the World Trade Organization and International Trade
Rules.''
Today I am calling on China to fully comply with all of its World
Trade Organization commitments and fully and faithfully implement all
of the WTO rulings against it.
This Commission believes we have a special obligation to monitor
China's WTO compliance.
By adhering to a rules-based system, with clear obligations, China
can take its role in supporting the global economic system - a system
based upon transparency, respect for property rights, and adherence to
the rule of law.
We admire China's rich history, appreciate its difficult and
complex challenges, and support the aspirations of the Chinese people
to make their country a safer, cleaner, and more prosperous nation.
And we believe that fairer trading policies and the promotion of
the rule of law in China will not only benefit Americans, but the
Chinese people as well.
Just last week, I applauded the announcement that Fuyao Glass
Industry Group, a Chinese producer of auto safety glass, will redevelop
the former General Motors plant in Moraine, Ohio.
This is a great example of how fair trade can benefit both sides,
by giving a Chinese company access to our highly-skilled workforce and
creating up to 800 new jobs for Ohioans.
But to truly have a fair trading relationship that benefits both
sides, there must be a level playing field.
The Chinese government must do more to abide by its WTO
commitments, protect the rights of workers, and support a clean
environment.
The United States Trade Representative or USTR, which unfortunately
could not send a representative here today, just released its 2013
Report to Congress on China's WTO Compliance.
And though it acknowledges some areas of improvement, it paints a
sobering picture of the Chinese state's efforts to intervene in the
economy and unfairly help Chinese businesses, despite its WTO
commitments not to do so.
For example, China still has not agreed to the WTO Government
Procurement Agreement. By not doing so, our businesses miss out on the
opportunity to compete for potentially $100 billion in government
contracts every year. China has agreed to submit another offer this
year, but progress has been frustratingly slow.
Another issue USTR noted in its report is China's imposition of
duties in retaliation for countries bringing WTO cases against them.
In one of those cases involving grain-oriented electrical steel,
China not only lost in a WTO challenge, but now appears to not be
complying with the ruling.
I applaud the USTR's announcement on Monday that it is now
requesting China to enter consultations in this case. One of those
businesses impacted is AK Steel, and we are grateful that their General
Counsel, David Horn, is here today to tell us more about this case.
Finally, China's currency manipulation continues to harm our
workers and our economy.
A December 2012 report by the Peterson Institute of International
Economics found that currency manipulation by foreign governments cost
the U.S. between 1 million and 5 million jobs, increasing the U.S.
trade deficit by $200 billion to $500 billion per year.
In 2012, our trade deficit with China broke $300 billion for the
first time and is expected to do so again when the 2013 figures come
out.
These massive trade deficits are unacceptable and cost jobs in
places like Toledo, Akron, and towns and cities all over this country.
That's why I've reintroduced the Currency Exchange Rate Oversight
Reform Act of 2013 and urge members in both chambers to act swiftly on
this measure.
I want to thank our excellent panel of witnesses for being here. I
look forward to their thoughts on what more we in Congress and on this
Commission can do to ensure China complies with its WTO commitments.
______
Prepared Statement of Hon. Christopher Smith, a U.S. Representative
From New Jersey; Cochairman, Congressional-Executive Commission on
China
january 15, 2014
In 2001, China acceded to the World Trade Organization. At that
time China's economy was liberalizing. It was a vast and promising
market, and foreign businesses were eager to see the imposition of the
WTO's set of rules and principles bring some order to the Chinese
investment and legal systems. Some also hoped that bringing China into
the WTO would improve its record on human rights, though I and several
other members of this Commission were skeptical. This hearing will
revisit questions previously addressed by this Commission, namely, has
China honored its commitments as a member of the WTO? Has China
embraced human rights and the rule of law, as the optimists hoped?
Sadly, the answer is no. As this Commission's most recent Annual
Report documents, China continues to massively violate the most basic
human rights of its own people and to systematically undermine the rule
of law. Today, ethnic minorities are repressed. Freedom of religion is
denied to those who worship outside state-sanctioned institutions.
Believers are harassed, incarcerated, and tortured. The abuse of women
and the draconian repressive one-child policy which has involved
egregious abuses such as forced abortions and forced sterilizations
remains firmly in place. Those who stand up to the central government
and advocate for human rights are also detained and tortured.
It is not only the activists who suffer, but also their families
and loved ones as well. As 2010 Nobel Peace Prize winner Liu Xiaobo
continues to serve an 11-year prison sentence for peacefully advocating
for political reform, his wife, Liu Xia, is forced to endure the
extreme isolation of house arrest and is now reportedly experiencing
severe depression. Self-taught legal activist Chen Guangcheng's own
nephew languishes in prison while other members of Chen's family are
kept under surveillance and harassed. Last month I chaired a hearing of
the Subcommittee on Africa, Global Health, Global Human Rights, and
International Organizations that gave voices to five young women who
called upon the Chinese government to free their wrongfully imprisoned
fathers. The citizens of China deserve far better than leaders who use
such ugly methods to bolster their own political power.
As a member of the WTO, China has experienced tremendous economic
growth and become increasingly integrated into the global economy,
benefitting greatly in the process. So how is it doing on living up to
its obligations? Terribly. China agreed to abide by the WTO principles
of non-discrimination and transparency. However, U.S. companies are
still forced to compete with China's large state-owned sector that
benefits from unfair policies designed to favor Chinese producers.
U.S. exporters continue to face many barriers when trying to enter
the Chinese market. Some of these barriers are obvious, such as China's
indigenous innovation policy and restrictive investment regime. Others
are more subtle and difficult to substantiate, such as reports from
U.S. companies that Chinese officials sometimes require the transfer of
valuable technology to gain market access or investment approval. These
barriers represent blatant violations of WTO rules.
China's investment in the United States has sky-rocketed in the
past few years as Chinese companies invest in everything from real
estate projects to the pork producer Smithfield Foods. It, however,
remains difficult for U.S. companies to access the Chinese market.
China's multi-billion dollar government procurement market also remains
largely closed to U.S. bids, and the Chinese government has dragged its
feet on taking steps to open it.
China's record of protection of intellectual property rights, a
fundamental WTO obligation, is abysmal. Infringement of our companies'
IP leads to lost sales in China, the U.S., and other countries; lost
royalty payments; and damaged reputations. The United States government
and U.S. companies have been the victims of repeated and sustained
cyber-attacks by Chinese entities. In 2013, the Commission on the Theft
of American Intellectual Property reported that the U.S. loses hundreds
of billions of dollars in IP theft, and estimated that China accounts
for 50 to 80 percent of these losses.
Even China's internet censorship serves to keep American products
and services out of the Chinese market. Both the New York Times and
Bloomberg websites are blocked in China, reportedly resulting in the
loss of millions of dollars in revenue. In December, the Chinese
government delayed the visas of as many as two dozen foreign
journalists. This blatant attempt at intimidation not only threatened
these journalists' livelihoods, but also the closure of the China
bureaus of several U.S. media organizations.
The level playing field promised as part of China's WTO accession
has not been achieved. China has used the WTO as a tool to strike back
against other members who legitimately challenge China's imposition of
antidumping and countervailing duties. China has also become extremely
adept at appearing to comply with WTO decisions without addressing the
actual problems. This has caused great harm to U.S. companies, from
automobile and steel manufacturers to publishing houses and movie
studios.
In November 2013, the Chinese government once again released a plan
outlining how they reform their economy. Only time will tell if these
proposals will lead to meaningful reform. Until China's leaders are
truly committed to embracing the rule of law and fundamental human
rights, this plan, like those before it, will be full of nothing but
empty promises.
______
Prepared Statement of Hon. Carl Levin, a U.S. Senator From Michigan;
Member, Congressional-Executive Commission on China
january 15, 2014
I am pleased the CECC is holding this hearing on China's Compliance
with WTO and International Trade Rules. This is an important issue in
need of close monitoring given China's past poor record of compliance.
When Congress voted to grant China PNTR status upon its accession to
the WTO it established the CECC as part of that legislation precisely
to monitor China's progress in achieving its WTO commitments and in
transitioning to the rule of international law.
Twelve years after acceding to the WTO, there is broad consensus
that China has fallen far short in achieving the positive changes many
expected WTO membership would bring about regarding complying with the
international trade rules it committed to. In many ways, China
continues to play by its own rules in the global marketplace; setting
industrial policies to promote identified and favored domestic industry
sectors and heavily subsidizing state owned enterprises.
The following quote from USTR's 2013 Report on China's WTO
Compliance provides a succinct assessment of China's behavior as a WTO
member:
With the state leading China's economic development, the
Chinese government pursued new and more expansive industrial
policies, often designed to limit market access for imported
goods, foreign manufacturers and foreign service suppliers,
while offering substantial government guidance, resources and
regulatory support to Chinese industries, particularly ones
dominated by state-owned enterprises.
Especially troubling to me are China's lack of intellectual
property rights protections, failure to act against wide-spread
counterfeiting, and theft of American technology and trade secrets in
cyber space. As far back as 2011, the National Counterintelligence
Executive said in its annual report to Congress that ``Chinese actors
are the world's most active and persistent perpetrators of economic
espionage.'' USTR's Special 301 report stated that ``Obtaining
effective enforcement of IPR in China remains a central challenge, as
it has been for many years.'' The report continued ``This situation has
been made worse by cyber theft, as information suggests that actors
located in China have been engaged in sophisticated, targeted efforts
to steal [intellectual property] from U.S. corporate systems.''
Additional concerns include China's continued currency manipulation
which gives Chinese exports an unfair price advantage, its abusive use
of trade remedy laws for retaliatory purposes rather than for their
permitted use to respond to prohibited trade actions and anti-
competitive policies that favor China's domestic renewable energy
technology sector, China's automotive sector, and other domestic
sectors targeted for growth.
The United States must continue to hold China to its WTO
commitments and initiate WTO challenges where appropriate. Doing
anything less will continue to put American companies, workers and
farmers in the position of continuing to have to compete against the
resources of an entire country rather than individual companies.