Commerce, Trade and Consumer Protection Subcommittee of the House Energy and Commerce Committee - US-China Trade Panel I - Part 2
REP. STEARNS: The gentleman from Michigan, Mr. Upton.
REP. UPTON: Well, thank you, Mr. Chairman. And thank you again, Mr. Freeman, for being here this morning. We have coffee in the side room if you need a little bit.
I appreciate your statement and strongly underscore that the goal is to open markets overseas. But I have a lot of concerns. I look at a Congressional Research Service bulletin that was published just this last week and it says that China's restrictive trade and investment practices are a failure to provide adequate protection for intellectual property rights.
China has made significant progress in meeting its WTO obligations, but a number of major problems remain, especially in regards to agriculture, services, IPR protection, tax policies, trading rights, distribution, transparency of trade laws and regulations.
And in your formal written statement, and I quote on page two, you say, "By that score, China's WTO compliance record falls short of the mark."
As I look at the trade numbers, not only last year, '03, but '01 and '02, the trade deficit went from $83 billion to $103 billion to $124 billion in terms of the deficit. The amount, interesting to note, is that the increase in each of those years of Chinese exports here, increase from the previous year, exceeds our total imports or exports to China; not very promising numbers.
And I'd be curious to know, where do you think these numbers are going in '04 and '05? I've never been to China. Let me just make one other point before I hear your answer. I've never been to China, but the many people that I've talked to who have been there, many of which have urged me to go, have said it's not the first visit to China; it's the second, third and fourth so you can actually measure the progress of what China is doing.
And as I look at these numbers, I'm very alarmed, particularly as I read your statement in here of not complying with the WTO and other independent reports that share exactly the same information.
Where are we going in '04 and '05?
MR. FREEMAN: I haven't done any independent analysis, but I would be very surprised if we didn't continue to rise.
REP. UPTON: I'm sorry. Say that again.
MR. FREEMAN: I haven't done any independent analysis. I would be very surprised if the deficit didn't continue to rise. What we're attempting to do is to try to slow the growth of the increase.
One of the things about the rise in the deficit, though, is it's not simply a bilateral concern. A lot of what we've seen, frankly, in other markets is we've actually seen a decrease in our deficit with other markets, particularly in Asia, and to a lesser extent --
REP. UPTON: But isn't that, in large part, because of the currency manipulation, I mean, because the weakening of the dollar has helped us in exports, but, of course, we don't have that same measure for China because of their currency manipulation?
MR. FREEMAN: No, actually, I think what's happening is that China actually is right now itself running a trade deficit with the rest of the world. If you take us out of the equation, they're running a rather large trade deficit.
What's happening is frankly a lot of the countries that used to supply us with labor-intensive products are actually supplying through China, and then there's additional labor and value-added in China, and that's exported to us.
REP. UPTON: Let me just ask one quick question before my time expires, and that is, where are we in terms of progress in the currency manipulation? We've seen legislation introduced here. We had a test vote earlier this year. And do you see any movement by the Chinese with regard to this issue in the next couple of months?
MR. FREEMAN: Again, I think this is an area, as you know, where currency has always been the area that the president and the secretary of Treasury have unique oversight over. So this is an area where USTR doesn't traditionally comment. We have heard about the petition on Section 301 that's coming from people in the community, and we'll look forward to reviewing that when we see it.
REP. UPTON: Thank you. I yield back.
REP. STEARNS: The gentleman yields back. Mr. Strickland.
REP. STRICKLAND: Thank you, Mr. Chairman.
Mr. Freeman, I don't want to quibble over a word, but words are important. And I noticed that you said a little earlier that we should be working to make sure the playing field is made increasingly fair.
What I wish you had said is that we are working to make sure the playing field is fair. I think that's what we all want. We don't want this incremental, you know, maybe 10 years from now things will be better than they are.
And it seems that you and other members of the administration have a responsibility-to this country and to our workers and to our domestic industries-to absolutely insist that whatever rules there are that they are fairly implemented and fairly enforced.
Given the fact that we have this trade deficit with China, and the fact that you said that if our interaction with China was taken out of the equation that China would actually have a trade deficit, is this economic relationship that exists between our country and China more beneficial to China or more beneficial to us currently?
MR. FREEMAN: Well, I'm going to argue it's more beneficial to China certainly. We certainly benefit from the relationship, but when you have a $150 billion customer in the United States, that's a pretty big customer. That's a pretty big benefit. That's one of the reasons that we are so forceful and do believe we will make progress in some of our key trade concerns, because at the end of the day, when you have $150 billion cash, that gives you some leverage.
REP. STRICKLAND: So it seems to me that if this relationship is more significant currently to China than to us, that should give us leverage. China needs us as a trading partner desperately, and it seems that that ought to give our government-you, those you work with-the ability to exert some appropriate pressure on China to deal with things like environment, labor and all those kinds of things. And, quite frankly, I don't see that happening. Maybe it's happening quietly behind the scenes, you know, out of the public's view and scrutiny, but it seems to me that we give more than we get, and that's fairly constant.
Mr. Freeman, the National Association of Manufacturers has pointed out that under GATT Article 11 WTO members are not supposed to restrict exports, except for very narrowly prescribed reasons. But just recently it's come to our attention that China has placed restrictions on the export of coke, and that that is having a direct impact on our U.S. steel production, and exacerbating the shortage of steel products in this country. They are currently the largest exporter of coke to this country, but press and industry reports indicate that they plan to further reduce exports substantially this year, further limiting access to coke, and at the same time they are buying nearly every bit of scrap that they can get from this country.
I met in my district a few days ago with about 25 industry leaders who are terribly concerned. This is my question, and I only have a little time: Will you and your agency make it a priority during the upcoming April JCCT session to discuss these matters with China, both the coke and the scrap issue?
MR. FREEMAN: We do have a very active discussion with the Chinese right now on broad structural concerns, and that includes their use of export controls on-or restrictions on certain products, and their large purchases of scrap. One of the things that is striking to us-China is a huge net importer of steel products, and a huge consumer of steel products. One of the things we're concerned about is that they continue to build capacity to produce steel when there's enormous overcapacity in the global steel market. So there are certain things-China often says to us, Look, we're a market economy. We demand market economy status from the context of your antidumping laws. And we say, Well, if that's the case, then why are you doing things which don't seem to be a case of supply and demand? Why are you doing things that seem to be fairly government sponsored in nature? So it is an area of focus.
REP. STRICKLAND: Thank you, Mr. Chairman.
REP. STEARNS: The gentleman's time is expired. The gentleman from Idaho.
REP. OTTER: Thank you, Mr. Chairman. Mr. Freeman, in my opening remarks you heard me mention something about getting some folks on the team that had been part of the real world, and I want to apologize if I offended anybody that's presently on the team. But it seems to me that that would be reasonable expectation for us to have on people that are going to be negotiating our quote/unquote "economic lives" overseas to actually have-with overseas trading partners-to actually have somebody there that has worked in the real world. Do we have that on this team coming up for China now? Do you have anybody on there that's been in the entertainment business, actually had to make a paycheck or met a payroll from the entertainment industry?
MR. FREEMAN: What we have is the very strong advisory process where people from the entertainment industry, from a variety of other industries, tell us exactly what their priorities are. We have a very good line into what business really wants from us. So we really-we think that while they may not be at the table with us, we know exactly what their stance is.
REP. OTTER: I think that's good, but I've been on lots of advisory committees. I was on the World Bank, Ex-Im Bank advisory committee when I was the president of a large international agri- business company. And I know that there's a lot of difference on being on an advisory committee and in an advisory capacity and simply having an ad hoc position as opposed to actually having a seat at the table and where that foreign negotiator that I have driven a combine, so I know about the wheat. I have shot the Moody (ph). I have been part of that creative effort by the entertainment industry. And so I have something very personal here. This is not esoteric. This is not far-fetched. This is the real world that I want to deal in. I still believe that if you don't have somebody on that team you're anemic in your ability to really be able to challenge these people in all potential aspects.
I say again I have asked through the Department of Agriculture, through the USTR before, especially on ag products, for them to put somebody-put a farmer, put a rancher on that negotiating team with a vote just like everybody else has, with an ability to argue like everybody else has, and a person from out of a plant, from out of a bargaining unit. I don't know if you've ever negotiated with farmers or unions, but I'll tell you they're tough, and they've got a good product and they know what their product is worth. And I believe that's what we need on our teams when we meet foreign trading partners, is somebody tough at that table that knows what our product is worth.
So I would encourage you if you could to expand that team and get those kind of folks on it. Thank you, Mr. Chairman. I yield the balance of my time, which is gone.
REP. STEARNS: Mr. Brown, the gentleman from Ohio.
REP. BROWN: Thank you, Mr. Chairman. Again, thank you very much, Mr. Freeman. I was a little surprised by your comments that this trade arrangement is, quote, "more beneficial to China than to us." I've heard others in the administration say that we get all kinds of benefits, it's equally beneficial to both countries, and I appreciate your honesty, because it clearly is-I don't think it's more beneficial to Chinese workers, but it's more beneficial to the People's Liberation Army and more beneficial to the Chinese Communist Party, and more beneficial to U.S. investors as part of that trilogy, to coin a phrase maybe.
I want to talk about Jordan, and I appreciate Ms. Schakowsky's comments and others' about the Jordan trade agreement. Jordan was actually negotiated by President Clinton and passed in the year 2000, I believe. And the interesting thing about Jordan, it passed by a voice vote. I was in the hall, as many others were. There was not one dissenting vote. As I recall, it wasn't even a recorded vote, as a result. But Jordan was supported by people across the board, people that always vote for free trade agreements, people that always vote against free trade agreements, and everybody in between-in large part because it included strong environmental and labor standards, and the enforcement systems were similar to those available for the agreement's investment protections. As I said, it passed without dissent.
Now, the difference-when we talk about Chile and Singapore-Chile and Singapore appear to have labor and environmental standards, but they are not ILO, International Labor Organization standards. They are standards that are enforceable, but they are standards that only need to comply with their own labor standards. In other words, all they have to do is commit to enforcing their own labor standards, whether they are stronger or weaker than ILO standards. Now, the problem with that is, one, their standards already are weaker-and that's perhaps arguable. But, second, it's clear that investors from outside will put pressure on those countries, on those two parliaments or legislative bodies or countries to weaken their environmental standards and labor standards, and they can enforce weaker standards. So that's the problem with Chile and Singapore, and to equate Chile and Singapore with Jordan is a bit inaccurate.
Now, my question is this: Tom Donohue said-chairman or president of the Chamber of Commerce-talking about Jordan said: "Trade promotion authority should be unencumbered by requirements to advance unrelated labor, environmental, other social agenda objectives as part of trade negotiations." But a couple of weeks-three weeks ago, your boss, USTR Ambassador Zoellick, said, Because of the Jordan FTA, quote, "trade between the U.S. and Jordan has nearly tripled in only three years." Who is right? Is Zoellick right or is Donohue right? Not to speak ill of your boss, but --
MR. FREEMAN: I would never speak ill-my boss is always right, for the record, and I'm not a Jordan trade expert, so I will close with that.
REP. BROWN: Better than that. I-comment on-give me your thoughts on the-I mean, Jordan seems to be working with labor and environmental standards. Why is this administration not-well, I'll ask it this way then: Why are they not pushing for similar kinds of standards, ILO standards, not enforce-your-own standards in these other bilateral agreements?
REP. STEARNS: The gentleman's time is expired. Why don't you finish answering the question?
MR. FREEMAN: My strong sense is that this administration is very committed to the policy that was used to-in both Singapore and in Chile to include these as key elements of the trade agreement. My-I don't believe that those agreements have any weaker provisions than Jordan. I truly do not.
REP. STEARNS: And I thank the gentleman. The distinguished chairman of the full committee, Mr. Barton.
REP. BARTON: Thank you, Mr. Chairman. I would ask unanimous consent that my opening statement be in the record.
REP. STEARNS: By unanimous consent, so ordered.
REP. BARTON: I just have a few brief questions. Obviously the committee supports a trade relationship with China. But it certainly does appear to be one-sided, when there's a five-to-one imbalance between exports and imports. Is that something that concerns the U.S. Trade Rep, that we have such an imbalance, and that it appears to continue to be growing?
MR. FREEMAN: It absolutely concerns us, and not only just because of the raw number, but because of the impact of that imbalance on really the public psyche and the support for open markets. Really that number in and of itself is shocking. And when you have that kind of shocking number, it stimulates debate, it stimulates concern, and it really stimulates some of the real pressures that we feel to justify our trade policy.
That said, it's also a very useful tool when discussing with the Chinese the need for them to follow through on their WTO commitments, when we are able to say, Look, this trade imbalance really is a key part of our trade relationship. Unless you do something about opening your markets and following through on your market access commitments, we can't sustain support for this relationship in the long term. So it is a key part of our --
REP. BARTON: Well, when we had-you can correct me-I'm-my memory for statistics may be faulty. But back in the 1970s and 1980s we had a huge trade imbalance with Japan. It became a very large part of many of the presidential campaigns. And we don't yet see that with China, but the percentages are worse with China than they ever were with Japan. So I think a step-and I know that this has been raised at the highest levels between our administration and the Chinese officials, but the false valuation of the Chinese currency has got to be a contributing factor to this. What are the prospects of having the Chinese more correctly value their currency versus the rest of the world financial currencies?
MR. FREEMAN: Again I've got to take a cop-out on that, because it's the Treasury issue with respect to currency. Administration officials are not allowed to comment on currency valuations.
REP. BARTON: We won't tell anybody. (Laughter.)
MR. FREEMAN: All right, well then in that case. But on that score I think the president and the secretary of the Treasury have a very active engagement with the Chinese, and I think a very effective engagement with respect to discussing moves that the Chinese need to make and can make in order to move to a more liberalized market.
REP. BARTON: My time is about to expire. My final question is much more parochial and closer to home. I have a company in my district that's the most cost effective converter of scrap steel into new steel products, Chaperelle (ph) Steel. And the price of scrap steel is just skyrocketing, primarily because there's a huge demand for it in China. What, if anything, could we do about that?
MR. FREEMAN: We'd love to talk to them. I'll put it this way: We've had discussions with other scrap users in this country, and we're really trying to get a handle on this. So I'd really invite you or your constituent to give us a shout.
REP. BARTON: Thank you. Thank you, Mr. Chairman.
REP. STEARNS: Thank you. Mr. Stupak.
REP. BART STUPAK (D-MI): Thank you, Mr. Chairman. Sorry I was late. I ask unanimous consent to put my opening statement in the record.
REP. STEARNS: Unanimous consent, so ordered.
REP. STUPAK: Thank Mr. Freeman, you know, I've been sitting here-I was late-but listening to questions and all that. It seems like we're doing a lot of talking with China. Are we doing anything else? And every question has been, well, we're talking to them. And we've had trade agreements with them since 1979, and I don't know of one that they've honored yet. Are we going to do something other than just talk about it, or are we going to do something about it?
MR. FREEMAN: Well, we did just recently file the first WTO case that has ever been filed against China, so I think we are doing more than simply talking. Obviously the issue when you do have a trade agreement, you do have a bilateral arrangement, it's a lot easier to solve problems through discussion and dialogue, and we have made great progress. We've solved problems that allow record sales of soybeans into China. We've --
REP. STUPAK: When will those start?
MR. FREEMAN: What's that?
REP. STUPAK: When do those soybeans sales start?
MR. FREEMAN: We sold $2 billion of soybeans last year.
REP. STUPAK: You know, you look at it, $2 billion, okay-our deficit with them is $124 billion, and it gets bigger every year. So obviously the talking isn't working and we're not selling enough soybeans. And I just read recently here some reports that China is implementing an industrial policy that seeks to protect and support its domestic auto industry. So, how can the U.S. prevent China from implementing this policy that's been reported here in the United States that protects its domestic industry and restricts imports?
MR. FREEMAN: We actually think we're going to resolve that problem, so, whether it's through discussions --
REP. STUPAK: Have you even brought it up yet?
MR. FREEMAN: Absolutely.
REP. STUPAK: How are you going to resolve it?
MR. FREEMAN: My strong sense is that we we'll resolve it within very short order.
REP. STUPAK: No, how?
MR. FREEMAN: I think China will amend its policy to make it WTO compliant.
REP. STUPAK: And, if they don't?
MR. FREEMAN: If they don't, we'll-we'll take appropriate action.
REP. STUPAK: Such as?
MR. FREEMAN: If we need to take a WTO case, we shall do so.
REP. STUPAK: So, we've only had in-China's been in WTO now what about three years, and we've had one case so far, just recently filed?
MR. FREEMAN: That's correct.
REP. STUPAK: What about intellectual property rights? We've had this discussion for years in this committee, and it's now an $18 billion loss to our U.S. industry on piracy. And someone-the chairman mentioned the last election-I think the last election, we were going around about CDs or something, that China was stealing the CDs. That's almost four years ago, and every year again intellectual property theft goes up $18 billion. What's being done on that aspect, on that front?
MR. FREEMAN: Well, I hate to say we're talking to them again, but --
REP. STUPAK: Yeah, we're talking to them.
MR. FREEMAN: -- we're talking to them again. And we think we're making progress. The issue there is it's a whole-it's a lot to get your hand around. And it's a problem that's not going to go away tomorrow, despite whatever we do. So, we're going to keep pressing.
REP. STUPAK: Well, you're right, it's not going to go away tomorrow, and we've lost our manufacturing jobs basically to China, and they keep saying, the administration keeps saying, well, we've got to think better and we've got to have the new knowledge, or at least the new source of it, and yet we look at China, and our intellectual property rights are being stolen all the time. So, why would the American worker want to move from manufacturing to intellectual when it's being stolen all the time and we're not doing anything about it?
MR. FREEMAN: I think that's a-the issue is genuine. I think we are doing a lot about it. And --
REP. STUPAK: Besides talking, what else are we doing?
MR. FREEMAN: Well, my sense is, if they don't comply with their commitments, if they don't move to make their system more effective protect-to protect IPR, we'll take appropriate action.
REP. STUPAK: Which is, what, WTO again?
MR. FREEMAN: Presumably.
REP. STUPAK: How about this agreement on trade related aspects of intellectual property rights that they have signed but are violating? Is there any remedy in that agreement?
MR. FREEMAN: The issue there is whether-is whether their legal system is an effective-an effective system to enforce intellectual property rights. I would argue certainly that it is not effective. We've-we're talking to our industry, and I think you'll hear from some of them later today.
REP. STUPAK: Before we enter these trade agreements, shouldn't we make sure their courts and legal systems are in place to enforce agreements, or violations of regulations? Why do we enter into trade agreements, and then we try to help them with their courts, and help them with their value of their dollar? If we're going to do trade agreements, how come these things aren't in place before we approve these trade agreements?
MR. FREEMAN: Well, the courts that protect IPR in China are in place, and they were in place before they entered the WTO. The question is whether they are effective. And I think that's-that's something that, you know, we'd argue again that they're not.
REP. STUPAK: You know, the administration talks a lot about that in these agreements there ought to be criminal violations and criminal prosecution. Has there been any in China on intellectual property rights?
MR. FREEMAN: There has. Not what we'd like to see. And the issue there is not simply to get one or two criminal convictions or criminal prosecutions, but actually to see the number increase so that you have deterrence. And again, when the issue is there, the Chinese say, "Well, you know, how many criminal prosecutions do you want to take? How many IPR violators do you want us to throw in jail? We already have problems with you guys over human rights, and now you're telling us to throw more people in jail." It is a fairly cynical thing to say, but, you know, the point is that the number of IPR violators in China is so high that you need to start-you need to start small -- (inaudible) --
REP. STEARNS: The gentleman's time has expired.
REP. STUPAK: Maybe we should prosecute the government officials and then they would get done quicker.
REP. STEARNS: The gentleman's time has expired. Mr. Sullivan. Waives. Mr. Shimkus.
REP. JOHN SHIMKUS (R-IL): Oh, great. Perfect timing. I thank my roommate for the courtesy.
First of all, I've got a guest here, the Mayer (sp) family, with us-Brian, with his wife and niece, and daughter and son. And I-they're just ready to sneak out the door, all this scintillating testimony and questions. I think they want to see the Air and Space Museum. But, the reason why I-I'm glad they're here is that our debate really, and my good friend Mr. Stupak, it's not just about jobs today, but it's really about jobs in the future. And we see the young children there. And we do want a growing economy for the future. So, thank you for visiting with us. And now you're part of the official transcript of the committee hearing. And we'll get you a copy, but have a-have a great day as you visit Washington.
But one thing that gets lost in this debate, you know, that if we raise tariffs, we encourage manufacturing to move overseas. I mean, if we really get in a trade war, it just makes it easier for people to move. It's just another incentive for manufacturing to move. So, we want to have these negotiations, and we want the debate because want to lower tariffs. And as I understand it, Mr. Freeman, really, that's your job, is to help us get market access of U.S. products to China. And so we have some challenges in doing that.
Can you-there's three things-can you-can you talk about the-our fiscal debate as far as the-you're not going to mention that? Are we less competitive because we double-tax our manufacturers? You're going to weasel out of that one too?
REP. STEARNS: I encourage the gentleman that perhaps "weasel" is not the right word to --
REP. SHIMKUS: Oh, okay. Okay.
REP. STEARNS: -- to use a more --
REP. SHIMKUS: "Lying" may be a better --
REP. STEARNS: -- euphemistic word.
REP. SHIMKUS: All right. We're not going to talk about currency. We're not talking about double-taxation, and that's really our problem. Our nation's problem is we double-tax our manufacturers; most countries do not. They tax in the country in which the manufacture occurs, and so that's-we have to-problem there.
How about the-as I mentioned in my opening statement, the whole intellectual property realm? Can we get to a point where we employ the WTO system to address intellectual property?
MR. FREEMAN: I think we can. And I think we're coming closer to it. One of the issues that we've had in-in bringing a case on intellectual property in the past, WTO or otherwise, has been a lack of consensus within our creative industries about their-about bringing such a case. There really has been-one of the issues that chin has been able to utilize effectively and preventing us from taking strong action on different areas is our industries are over there, they are fearful of retaliation if they are perceived to be pressing the U.S. government to be taking action against China. So, in the area of intellectual property rights, there has been less than unanimity among our creative industries and our innovative industries about bringing action on WTO.
One of the things that's changing these days about-on the IPR front is a lot of companies, especially smaller manufacturing industries, enterprises that don't have any business with China are seeing their property ripped off and exported, so it's actually competing with them in different markets. And that's changing the playing field significantly for us in terms of our ability to say, "Hey, there's more than simply a case of us worrying about whether your industries are going to be retaliated against. We have genuine, home-town issues here that is going to require us, for principled as well as economic reasons, to take action."
REP. STEARNS: The gentleman's time has expired. The gentle lady from Missouri.
REP. KAREN MCCARTHY (D-MO): Thank you very much, Mr. Chairman, and thank you very much, Mr Freeman, for sharing your thoughts with us today.
I want to follow up on the-on the frustration our entertainment industry has with regard to what's going on in China. And I know Mr. Papovich and others will be visiting with us in the next panel but you won't be here to address the issues that they're raising that I've read about in their testimony, so I want to raise them now and get your thoughts on what America should be doing that it's obviously not doing.
You know, we make these trade agreements, the United States, and we call on China to provide criminal remedies against this piracy that's at 90 percent now in China. And China tells the United States it will, and it tells the WTO it will, and then it doesn't. And I wonder what you, as an individual, are doing and can do so that we get China to transfer this whole issue out of the administrative world and into a prosecution, criminal prosecution mold-you as an individual. And that we demand China make these changes-change from an administrative venue into one that is a prosecutor-oriented venue, and that's going to change-make-China has to change some laws and regulations to do that. And we need to demand that.
And then, the police don't engage in this whole process because it's so administrative. And so, you know, the investigation end in China is very weak. And, you know, we've got to tell China that they either have to have private organizations be allowed to gather the information about this piracy so it can be prosecuted, or undertake that criminal investigation themselves. It's-again, it's something that we do with other countries and other trade agreements. We need to demand it of China.
And then, I understand that the current law has such a high threshold of piracy before you can ever even begin an investigation, that, you know, all of a sudden there's this huge loss of profits and revenues before they even begin to take a look at it. I believe all of that should be something that you in your venue can negotiate. It's not working. You know, there's-the new WTO laws have no impact on what's going on.
These are our intellectual properties. These are our-these are ours, and-and yet they're being stolen from us. And it's not just the loss of revenue which is outrageous, it is in the insult to our creative community and our industry that supports them.
I'm going to stop, and I would like you to address the specifics of what is being recommended by those affected, and I'm listing from their testimony, and what you as an individual are doing about it.
MR. FREEMAN: Well, I just returned from a couple of days negotiating just on this issue. I-we're waiting to see what the final memorialization of-of those days will be. But I feel very good that some of the issues that you raised are going to be addressed prior to the Joint Commission on Commerce and Trade. Specifically on the issue of criminalized thresholds, specifically on the issue of the-the increased enforcement by judicial and prosecutorial authorities, what's happened now as well is that previously when we had discussions about this issue, we were forced to talk to trade policymakers, or intellectual property rights policy makers, people that were writing the laws. Now what's happened is that the police, customs authorities, and others have come into that dialogue, and we're actually starting to put in place dialogue between our customs authorities and theirs.
With respect to intellectual property rights, here's one of the central problems that we face. The central Chinese authorities are absolutely sincere, and I believe them, that they want to create an IPR enforcement regime that works with-for China, because it's in their economic interests to develop a innovative industry. China has to-I sat with somebody this past week who said, "You have to understand, China needs to give, to create 50,000 new jobs a day. We're not going to do that by going to these old line industries. We need new-new industries. We need to have our own innovative industries. We can't rely on ripping off other people's industries in order to produce these new jobs. We have to create our own brands, our own-we need IPR protection."
The problem is that once you get past that central government in Beijing, the interests start to get a little fuzzy. And down on the local level, the-the support for IPR enforcement starts to go away. We really need to see strong directives from the central government that say --
REP. MCCARTHY: I-I agree.
REP. STEARNS: The gentle lady's --
REP. MCCARTHY: How do you get the central government to do that, is my question.
REP. STEARNS: The gentle lady's time has expired. I'll let Mr. Freeman just wrap up.
MR. FREEMAN: I think we're getting there.
REP. MCCARTHY: I think I'd like a better answer. You know, I welcome-I would welcome, since my time has expired, that-those thoughts in writing at your convenience, because a 90 percent piracy rate and sincerity are not going to make the change that we need.
Thank you, Mr. Chairman.
REP. STEARNS: Thank the gentle lady. The gentle lady from California is recognized.
REP. MARY BONO (R-CA): Mr. Chairman, I believe Mr. Norwood was here before me.
REP. STEARNS: Mr. Norwood is not on the subcommittee. So --
REP. BONO: Thank you. I'm so sorry.
REP. STEARNS: -- so we take the members of the subcommittee first, and then as a-by unanimous consent we can let Mr. Norwood --
REP. BONO: I'm sorry. Forgive me for trying to act like I was the chairman, Mr. Chairman.
REP. STEARNS: Oh, no. That's okay.
REP. BONO: Just trying to be nice to Charlie Norwood.
Thank you, Mr. Freeman, for being here today. And, too, have the same concerns that Ms. McCarthy does, and all of my colleagues have expressed on piracy. The MPAA had testimony-they have an executive summary that's pretty much a wish list, which I appreciate. And they have a specific hope, and in this they say, "China should agree to a timetable to reduce piracy from its current market share of over 95 percent to less than 50 percent by the end of 2004." Is that a reasonable number? Other than just talking, can we actually achieve that number by the end of 2004?
MR. FREEMAN: That would be terrific. What we've tried to do is get China that they put in place certain metrics that would-bench- marking them to help them along. They haven't agreed to anything specific yet.
REP. BONO: All right. And then also, there are other barriers that are prohibiting American companies from entering the Chinese marketplace as well. And further in their executive summary they-they state this, the MPAA again-that they ask for a fixed timetable with removal of the various limits, restrictions, and structural distortions which hobble the ability of American companies to enter the marketplace and to compete fairly and effectively for market share.
For example, they say for theatrical expedition, they need to increase the number of films in which U.S. distributors may share in box office receipts. So, beyond piracy, the Chinese are not even allowing us to get in their-they-it's effectively-I don't know if you want to call it a trade barrier or what, but there are other mechanisms in place that are-that are keeping us from competing in what we do so well.
Can you address that a little bit, about how the entertainment industry is structured over there, keeping our companies out?
MR. FREEMAN: Yeah. I mean, we-we've spent a certain amount of time trying to push this issue and trying to get them to increase the number of films that, for example, that they'll allow in for a particular year. This is something that they negotiated with the WTO, a ceiling-or a floor, excuse me-a number that they would allow in per year. They've said they'll allow 20 films in per year. We said, "That's a floor. That's the minimum number you should allow. And you should feel free to allow in as many after that as you can."
They've said to us, "Oh, no, no, no. Our WTO commitment is very clear. It's 20 films. That's what we'll allow in." And we say, "We unilaterally in the United States increase market access all the time when it's in our interest. It's in your interest right now to do so with respect to that film limitation." And the response to that has not been as encouraging as I would hope.
REP. BONO: So they, in effect-this is an example of them encouraging piracy, because it's sort of a hypocrisy, heaven forbid, right?
MR. FREEMAN: I would agree that I think one of the problems is if you limit the number of legitimate product that comes into the marketplace and you have a certain amount of demand, that demand is going to be filled by counterfeit product.
What we've tried to stress is that linkage to the Chinese. So far they have been not as receptive to that argument as we believe they ought to be.
REP. BONO: I thank you. Also, changing gears a little bit, because my time-he's not paying attention; maybe I can go on really fast. Agriculture is my number one industry. China has long held different sanitary and phytosanitary regulations, not based on science. This affects my growers. Can you talk a little bit about the progress we're making in agriculture?
MR. FREEMAN: Yeah. I mean, there are a lot of limitations on products or standards, policies that prevent U.S. agricultural products from going to China. We don't think that they're science- based, so therefore they're not sanitary and phytosanitary issues to us. They're technical barriers to trade. So we address them on that basis, that there's no rationale for them and therefore they should be taken out.
We've made some good progress on SPS particularly with respect to soybeans again, but also with respect to certain other SPS issues. Nominally SPS issues are -- (inaudible). But we have a long way to go.
REP. BONO: Thank you very much.
REP. STEARNS: The gentlelady's time has expired.
REP. BONO: Thank you, Mr. Chairman.
REP. STEARNS: And we have one more remaining member of the committee, Mr. Whitfield, for your questions.
REP. ED WHITFIELD (R-KY): Mr. Chairman, thank you very much. And Mr. Freeman, welcome, and thank you for your testimony.
I was wondering if you would maybe just list four or five of the major commodities or items that we do export to China and the dollar amounts.
MR. FREEMAN: I'll have to get back to you with dollar amounts. I'm not good at that. But I will deliver that in writing, if I may. But the number one export, believe it or not, of United States to China is electrical machinery. We also have a variety of other machine parts and components that we export overseas. Agriculture is a very large export. The number one single product that we send to China, that we export to China, is soybeans.
REP. WHITFIELD: Soybeans? Okay.
MR. FREEMAN: We sell a lot of cotton these days too.
REP. WHITFIELD: Now, I missed your testimony, but I was wondering if you might just briefly explain the gist of the complaints that you recently filed with the WTO against China.
MR. FREEMAN: This is an area-we've actually been talking, again, with the Chinese for about 16 months on this issue trying to resolve it. It's a fairly discreet issue. What it is is China provides a rebate, a value-added tax paid, on semiconductors that are produced and/or designed within China.
So, therefore, if you export semiconductors to China, you pay a certain value-added tax, 17 percent, but you don't get the benefit of that rebate. If you design and build your chip in China, you get the benefit of that rebate.
This was clearly designed to encourage investment by semiconductor manufacturers in China, and it's been fairly successful. The issue really is that you are allowed to subsidize, within certain limits, industries in China or anywhere. You're allowed to subsidize certain industries or to have industrial policies which encourage development of certain industries.
You can't have discriminatory taxes. And what they've done is essentially, because of the way they're rebating the value-added tax, it's actually equivalent to charging a different tax on the semiconductor itself. So that's clearly, in our view, and in the view of certain other key WTO members, a violation of China's WTO commitments.
REP. WHITFIELD: So it's a discriminatory tax primarily, then. Now, what options are available to the trade representative's office when you view that they are engaged in unfair trade practices? What are the options available to you?
MR. FREEMAN: Again, it depends on what. If it's a market-access issue, a market-access concern, the ultimate process there is WTO enforcement. We do have a number of trade remedy laws and specific safeguards that we have available to us through both the WTO agreement and through China's specific accession package.
We have some fairly robust tools, and I don't think we're afraid to use them.
REP. WHITFIELD: And have you utilized any of them at this point?
MR. FREEMAN: We've utilized the special safeguard on certain textile categories. I think we had in one case-there's one category of textile industries or textile product where there was a 28,000 percent increase. And so what we've done is we've capped that, and there's a seven and a half percent growth for this year on that product. So it actually acts as sort of a speed bump on new Chinese imports to the U.S.
REP. WHITFIELD: I think my time has expired, Mr. Chairman.
REP. STEARNS: The gentleman's time has expired. And Mr. Norwood is recognized-he's not a member of the committee-by unanimous consent to allow him to ask some questions.
REP. CHARLES NORWOOD (R-GA): Thank you very much, Mr. Chairman. I'm grateful for that.
Mr. Freeman, you do understand these little gatherings aren't personal. But I want to tell you, I think your answers have been as poorly-constructed as anybody I've seen in a long time in not answering the question.
My attitude is that you want to just say as little as possible and get out of here as quick as possible. And that attitude stems from my thinking you're having a hard time justifying a trade policy that's five to one. And you know it's a problem just like I do.
Simple question: Is China cheating?
MR. FREEMAN: There are-yes, China is cheating on certain of its WTO commitments, in our view.
REP. NORWOOD: Well, would you consider them cheating in a lot of areas, not just with us but around the world?
MR. FREEMAN: Here's the problem. I often get asked, "Can you grade China's WTO-compliance to its WTO commitments?" And people say, "Well, it's" --
REP. NORWOOD: No, my question was, are they cheating in a lot of areas?
MR. FREEMAN: I think they're cheating in some key areas to us.
REP. NORWOOD: Intellectual property rights would be one. They're dumping all over the place would be two. Are all those things true?
MR. FREEMAN: There is dumping. There is cheating on intellectual property.
REP. NORWOOD: And you could name a lot more. And I could, too, if I had more than five minutes. Now, the question is, did I understand you right to say that we've had one case to the WTO --
MR. FREEMAN: That's correct.
REP. NORWOOD: -- which is where we solve these problems? And it is like pulling teeth to get you all to institute special-the safeguards; very hard to get your office to do any of that. It took us a year to do anything about the textile industry.
And all I'm saying is, if they are cheating and they're tearing us up, which they are-and if you travel in Georgia rather than China, I'd show you some-we can't live through this forever. And we can't wait on you all every time to maybe take something to the WTO and then wait another year maybe for the WTO to act. And all I want you to do is be concerned about that.
Now, the chairman asked you, I thought, a fair question. I asked somebody else in a hearing the other day the same question. Nobody answers. And it would seem to me you'd need to know the answer to this in order to help guide what is our trade policy, and that is, are simply we exporting more jobs to China than other countries are importing to America using our trade policy?
Now, nobody-Secretary Evans wouldn't answer that either. It looks like you need to know that question. Are we sending more jobs out of this country than other countries are sending to us to set up business here?
It's pretty clear to most of us who are out in the districts and out in the states every weekend, it's not a hard answer. But somehow or another, you all find it hard to figure that out.
One other question. How many trade agreements have you been involved or has Mr. Zoellick been involved in in the last three years? Just a rough number.
MR. FREEMAN: Six.
REP. NORWOOD: Can you name one where the United States of America got more benefit than who we made the trade with?
MR. FREEMAN: I'd argue that the benefits are equal, generally.
REP. NORWOOD: Well, they aren't. They generally aren't. Now, just name one where we came out ahead as the United States-at least ahead of what the other country did. You know, if we lower our tariffs 50 percent and somebody else lowers theirs 10 from 50 percent, we're not ahead. They've got a tariff.
I want you to take some time to think about what this country was founded on. You said open markets. Go back and look at that carefully. I think we funded the federal government for years with tariffs when we first started.
Secondly, you implied to this committee that "Oh, boy, we're shipping cotton to China." China had a drought last year, so we finally got to sell them some cotton. But that's the first time. Up until then, it had been the other way around.
Am I over?
REP. STEARNS: Yeah. The gentleman's time has expired.
REP. NORWOOD: I'm sorry.
REP. STEARNS: I think we've finished all the questions for you, Mr. Freeman. I'll just give you a quote from F. Scott Fitzgerald: "The test of a first-class mind is the ability to hold two opposing views at the same time and still retain the ability to function."
So you've been able to, I think, function very well. And I want to thank you very much for your time, and we appreciate your patience.