1998 Congressional Hearings
Special Weapons
Nuclear, Chemical, Biological and Missile



TESTIMONY OF DR. THOMAS J. DUESTERBERG ON
CHINA TRADE POLICY


Subcommittee on Telecommunications, Trade and
Consumer Protection


Committee on Commerce
U.S. House of Representatives


May 14, 1998




Mr. Chairman, my name is Thomas Duesterberg. I am a Senior Fellow at the Hudson Institute. The views expressed here today are my own and should not be construed as those of the Hudson Institute.

I will focus my testimony today on China's bid to enter the World Trade Organization (WTO). The terms and conditions of its entry represent one of the most important decisions facing United States trade policy in the next few years. When President Clinton visits China this June, some expect the two presidents to announce either an agreement or a timetable for an agreement on China entering the WTO. Based on what is known today about the state of negotiations between China, the U.S. and other WTO members, I do not believe a quick resolution of this negotiation is in U.S. economic interests, nor would it enhance the credibility of the WTO. If China enters the WTO on the concessionary terms it seeks, it would irreparably harm the ability of the U. S. suppliers to gain adequate access to one-fourth of the world's population, and contribute to the growing popular distrust of the WTO. I would therefore urge the Committee to exercise its oversight over U.S. trade policy and work to ensure that any agreement at a minimum meets the tests outlined in Chairman Bliley's letter of October 30, 1997 to President Clinton on this subject.

There are many reasons for caution regarding the accession of China into the WTO. In the first place, China is a huge and fast-growing economy. When calculated in terms of purchasing power parity, the Chinese economy is estimated to be over $3.3 trillion dollars. Its annual exports are over $260 billion, and have grown annually by 30% or more in recent years. Its economy has been growing at double digit rates throughout the 1990s and by last fall had accumulated foreign exchange reserves of over $134 billion, a factor allowing it to escape the currency crisis which has gripped much of Asia.

Despite the dynamism of the Chinese economy, Chinese authorities have maintained a relatively tight grip on the economy, especially with respect to the participation of foreigners in it. In contrast to other large, dynamic developing countries such as Brazil, Argentina and Mexico, China has maintained a sizable current account surplus by controlling access to its domestic markets. Although it has taken many steps to liberalize access to its markets and accept foreign investment in recent years, it still retains enough controls to require 16 single spaced pages of the annual report on Foreign Trade Barriers published by the office of the U.S. Trade Representative (USTR) to catalogue them. Emblematic of the problem is the growth of the U.S. trade deficit with China by over 50% since 1995. The bilateral deficit in goods reached almost $50 billion last year, offset only slightly by a $1 billion surplus in services. U.S. exports have grown by less than 10% since 1995, despite growth of over 25% in the Chinese economy. In recent years China has also had a sizable surplus in its trade with Europe and Japan, and has increased its exports to developing countries in Asia and elsewhere. On a per capita basis, the Chinese import less from the U.S. than much poorer countries like Indonesia, more than 50 times less than South Korea, and 100 times less than Taiwan.

Given the size and the dynamism of the Chinese economy and given the long tradition of state control of the economy which will take years -- even with the best of intentions -- to unwind, it is important to ensure that the accession agreement with China be comprehensive and rigorous. The U.S. itself has a history of problems with access to the Chinese market in areas like agriculture, telecommunications, electrical equipment, government procurement products depending on intellectual property protection, and financial services, to name just a few. There is no firmly established and enforceable system of contract and commercial law, Chinese laws tend to be arbitrary and opaque, tariffs on U.S. goods remain high, and both imports and exports all too frequently require licenses and inspections which are not governed by fair, uniform and transparent rules.

In recent years, the Chinese have made real progress in many of these problem areas, and the U.S. Trade Representatives and other U.S. negotiators have been effective in working with the Chinese to win at least verbal commitment to many WTO standards. Some tariffs have been lowered, foreign investment rules have been eased, a regime of intellectual property protection has been established, and the principles of transparency and national treatment have made progress. Unfortunately, for every step forward there seems to be a step back. For example, even though the average tariff rate in China has been lowered in recent years from 42% to 17%, tariffs on products like chemicals and motor vehicles, where the U.S. has a competitive industry, have remained prohibitively high. Or, our 1992 Market Access Agreement called for elimination of import licensing requirements, but the Chinese have since instituted an "automatic registration" requirement on about 400 products of interest to U.S. exporters. Thus new rules are all too frequently created to offset the impact of liberalization measures. China also maintains a variety of informal but effective protection mechanisms. The Chinese have blocked wheat imports from the Pacific Northwest by claims of a "TCK Smut" fungus that most other countries do not worry about, and citrus fruits from the U.S. have been blocked for years because of fear of the Mediterranean fruit fly.

Of greater concern is the inability, or outright indifference of the Chinese to enforce the agreements to which they have given their sovereign assurance. It took several iterations over the past six years to get an acceptable IPR agreement with the Chinese, and specialized training for Chinese jurists and law enforcement officials so that they could implement it. And yet, according to the latest USTR report of Foreign Trade Barriers, piracy of software remains "widespread" in China. The report also adds that: "While China has closed pirate CD production lines, the government recently sold some of the seized machinery to other factories;" and, finally: "Trademark piracy appears to be on the increase." The 1992 Market Access Agreement required the Chinese to take the seemingly simple step of publishing all laws and regulations affecting imports and exports, yet it has failed to do so. Most egregiously, China has not published any laws or regulations regarding the huge government procurement sector. Given the recent statements of the Prime Minister regarding a $750 million infrastructure development program, this total lack of transparency is a serious impediment for the American capital goods industry, including our highly competitive computer and telecommunications sectors. In recent years, additionally, the Chinese have frequently circumvented the textile import quotas reached in bilateral negotiations.

China is clearly interested in acquiring high technology products to bolster both its economy and its national defense strategy. With this in mind, it is extremely troublesome that China appears willing to circumvent or ignore both international agreements and private contracts, some pursuant to U.S. export control laws designed to limit the spread of dual use technology. According to the New York Times, an advanced, computer driven metalworking tool exported to China as part of a deal to produce McDonnell-Douglas civilian aircraft in 1994, was almost immediately diverted to a military jet and missile production facility. This probably constituted a direct and serious violation of our export control laws and indicates the duplicitousness of Chinese authorities. More recently, a dispute has arisen over the transfer of missile guidance technology to China as part of the agreement to allow satellite launches by China of U.S. communications satellites. As reported by the New York Times, this transfer may have violated the agreement reached with the U.S. company and the Chinese to prevent the transfer of such sensitive technology. Although the investigation of these transfers has not yet definitively proven that laws were violated, the transfers did damage to U.S. security interests.

Such transfers of military technology are of even greater concern given the record of China in the proliferation of weapons of mass destruction to states such as Iran, Pakistan and North Korea. Policy makers around the world received a rude wake up call this week in the form of five nuclear weapon tests by India. Indian officials offered the explanation that the tests, in violation of non-proliferation and nuclear testing agreements, were necessary due to the growing threat from China and Pakistan. In turn, our willingness to allow Chinese, North Korean and Pakistani access to missile and nuclear technology heightened the fears of the Indians. As former Defense Department official Henry Sokolski argued yesterday in The New York Times: "We must recognize that the case of India is related to those of China and North Korea: our catering to both these nations' demands for military-related technology--whether it be for missile or nuclear goods--is a prescription for more proliferation."

The history of non-compliance with agreements must be addressed in a straightforward and frank manner if we are to have enough confidence to sign a major accord with the Chinese on their participation in the WTO. This committee could play a constructive oversight role in these matters. The current administration often appears more motivated to reach accommodation with the Chinese than to resolve these violations of agreements. In the case of the transfers of militarily-sensitive technology there is a clear conflict of interest with the investigations by the administration of the violations of export control rules. Further compromising the investigations are allegations of favoritism toward financial supporters of the administration. By exercising its legitimate oversight authority, this committee and others would play a useful role in ensuring that all questions are answered in a satisfactory way. Congressional oversight can also help build confidence in the negotiation process and eventually in the WTO itself.

Absent such oversight from Congress, there appears to be some chance of an early agreement on WTO accession. The President has advanced his trip to Beijing by several months, and in recent weeks the pace of high level visits to China by officials from USTR, Treasury, Agriculture and Commerce has quickened. The Chinese Vice Minister for Trade, Mr. Sun, recently told a Washington audience that China fully expected to be "rewarded" for refraining from devaluing the yuan during the Asian financial crisis. The reward he mentioned was early conclusion of the WTO accession agreement and granting of permanent MFN. No doubt we will witness large new contracts for China to buy American products in the next month as another incentive to reach a trade agreement. Thus a certain "summit fever" may develop when the President spends a very long week in China and both sides want to show major progress on economic issues.

Mr. Chairman, it would be a major mistake from which it will take us years to recover if we were to reach agreement in the near future on WTO accession for China. The fact that China is so dependent on export markets, nearly 20% of its GDP is exported according to some experts, and so dependent on the U.S. market, which represents about 25% of its exports, gives us considerable leverage in our negotiations with the Chinese. We must use that leverage wisely and effectively, and not sacrifice it to the enthusiasm of what may be a temporary calm in the relationship.

What is known of the current state of negotiations on WTO accession, additionally, gives little hope that a satisfactory agreement can be reached quickly. The Chinese have yet to make a serious offer on financial services, or telecommunications, two areas of paramount concern. China continues to insist on special protection for key industries as a developing country, and has not given broad assurance of national treatment and transparency as pillars of the agreement. Fair treatment for agriculture requires resolution of the TCK Smut and citrus issues, while little interest on the part of the Chinese in addressing these issues is apparent. China must also address in a more rigorous way questions of government procurement and IPR protection, and build confidence that it will not use non-tariff barriers, investment restrictions and other non-traditional measures to blunt the inpact of trade liberalization.

As the oversight committees interact with the U. S. Trade Representative and others during the negotiation process, they might also explore the efforts of the administration to coordinate its policy and its negotiating strategy with our allies in Europe and Japan. All too often in the past the U. S. has been unable to convince its allies to take a firm stand in support of its trade negotiation positions, and the U. S. is left to bear the consequences of its principled positions. Frequently, the Chinese have exploited perceived differences between the U. S. and its allied by rewarding those more compliant with its position through commercial contracts. Congress could play a constructive role and send a message to our allies and to the Chinese by urging our negotiators to coordinate their position with our European and Japanese friends.

Unfortunately, Mr. Chairman, the record of China in fully implementing agreements and contracts is not one that compels confidence. In the best of circumstances, it will take considerable time for a large country with a tradition of local autonomy to unburden itself of the shackles of a command and control economy and build one based on the rule of law. Added onto this problem is the doubt that springs from a history of non-compliance with major international agreements. We would do well, then, to recall President Reagan's admonition on agreements with the Soviet Union; "Trust but Verify." We must take whatever time is necessary to get a solid agreement on WTO accession with China and build the necessary confidence it will be implemented before we give away the leverage we have at the current time. Congress can play a constructive role in ensuring that any agreement is based on realism and protection of national interest, and that hope does not triumph over experience.