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Hearing of the Subcommittee on East Asian and Pacific Affairs - U.S.-China Relations: Status of Reforms in China - Part 2

Location: Washington, DC

MR. PIETER BOTTELIER: Thank you, Mr. Chairman, and thank you for inviting me to participate in this panel. I will limit my comments to the specifics in the AFL-CIO petition, and have not addressed the currency manipulation issue that you are interested in. Should you wish to address questions to me on that subject, I am ready to do so.


MR. BOTTELIER: Let me preface my comments by saying that I believe that job losses through plant relocation and outsourcing, certainly due to unfair trade practices, are an extremely serious issue for the U.S. And I also believe that we cannot take it for granted that every job loss will be automatically replaced, even in a growing economy. However, blaming U.S. job losses to any significant degree on China's alleged repression of workers rights is not going to get us very far. I do not believe that the repression of workers rights in China-and I do not deny all the facts-is a significant source of unfair cost advantage to many producers in China.

The petition's conclusions and measurement of job losses in the U.S. hinges critically on the estimate of the margin by which China's alleged persistent repression of workers rights depresses Chinese wages below the level that would otherwise prevail.

The petition estimates that Chinese wages would rise by 90 to 595 percent if there were no repression of workers rights in China, and I have at least three serious problems with that. First of all, the estimate of the underpayment 90 to 595 percent. One absurd implication of this estimate is that, if it were true, probably the majority of Chinese enterprises engaged in exports or even in local trade would have to disappear. These are margins so big they far exceed the capacity-or far exceed the profit margins of Chinese firms, which are typically very low. So the implication of this allegation is that somehow these Chinese workers that would then not be employed would be better off in other circumstances.

The second objection I have, Mr. Chairman, is that the petition assumes, without even questioning it-without even raising the issue, that all these alleged cost advantages generated by the suppression of workers rights are automatically passed on to the buyer: the buyer in the U.S. or the buyer elsewhere. That's an assumption that flies in the face, I would say, of logic. To the extent employers can succeed in pocketing that (rent ?) that they create that way themselves, they would certainly do so. There is no reason to assume that automatically all cost advantages would be passed on to the buyer, and that's the basis of the case.

The third point I wish to bring to your attention, Mr. Chairman, is that a share of Chinese exports to the U.S. is generated by U.S. companies located in China. There are no statistics on that. I personally estimate that somewhere between 12 and 15 percent of Chinese exports to the U.S. originate from U.S.-owned plants in China. Now, the petition doesn't mention that, but if the petition were to recognize that fact, it would have to allow-it implies that the suppression of workers' rights is equally conducted by U.S.-owned plants in China, and that the U.S. would somehow need the cooperation of the Chinese government to get U.S. companies in China to stop the suppression of those rights. That seems to be a rather absurd implication of the way the petition has been formulated.

Finally and perhaps somewhat philosophically, if I may, the petition does not really take into account China's relatively early stage of development-sometimes in economics called the Lewis Phase of industrialization-during that stage, a vast number of rural workers remain outside the modern economy. In this respect, China's current stage of labor market development is comparable to that of Britain in the Industrial Revolution and the U.S. in the 19th century. There were few, if any, workers rights in either country in those days. There is no reason to believe that free labor unions and the right to strike would improve average industrial wages in China today. The petition employs assumptions about the effect of independent unions and strike threats on wage levels that are not consistent with the present realities in China.

Finally, the estimates of the degree to which people are receiving less than they should in China are somewhat shaky and contradict, I think, other indicators. We know from all the statements and the statistics that the average standard of living in China, including the rural people but more particularly the urban people, is rising very fast. The world has never seen a population increase in living standards on such a vast scale so fast. This also leads to massive transfers of workers savings from the urban areas to the rural areas. Last year, according to the Chinese banking statistics, almost $40 billion of savings was transferred by urban migrant workers to their families in rural areas. That's almost 9 percent more than the year before. Clearly, that is a significant source of income that could not have been transferred if everybody is suppressed in their reward to pure survival level.

Another fact is that according to my information, whereas all cities have different standards for minimum wages-and these are not laws, these are standards-they are enforced to varying degrees. In some areas, for example in Shanghai, the minimum standard is 570 renminbi per month. All my contacts in Shanghai, and these include private companies, tell me that Shanghai is pretty effective in enforcing the standards there.

Another dimension I would like to mention, if you give me a second, is the suggestion that the under payment of Chinese workers is somehow supported or condoned or at least abetted by the Chinese government. This, I think, is a misstatement of the facts. It's clear that there are problems in China, particularly with regard to those migrants who enter the labor market for the first time. They have no negotiating power. But the average wages in China are in fact rising very rapidly. The abuses that do occur are recognized by the present government. Both the new prime minister Wen Jiabao and President Hu Jintao have repeatedly stated that they want to end these practices and have invested a lot of political capital in trying to redress that.

One final very brief comment on the so-called bondage of Chinese laborers through the hukou system, that is the internal passport system. I believe that the report is seriously out of date. It quotes sources many years ago. The hukou system in China is in fact on its way out. There is an official committee that is studying how it should be modified or abolished, and in some areas of China it has officially been abolished already on an experimental basis. I'd like to leave it at that, Mr. Chairman. I am ready to take your questions.

SEN. BROWNBACK: Thank you very much for the very thoughtful comments that you have put forward. The whole panel has been very good on an areas that I've had a lot of questions about, so I appreciate the tutorial from each of you.

Mr. Robinson, let me start with you on this. Do we know or do you know what percent of total foreign investment going to developing countries goes to China? In other words, of the whole global foreign direct investment-or maybe, Dr. Waldron, if you know this number? How much of it is pouring into China versus going to Honduras, other developing countries? Do we know that number?

MR. ROBINSON: I don't know the number, but I do seem to recall a news item a while ago saying that China had overtaken the United States as the most favored destination for investment. We can get that number, certainly.


MR. BOTTELIER: I don't know it, Mr. Chairman, precisely. But let me answer by saying (a) the number varies from year to year. China has come on extraordinarily strong as a recipient of FDI in the last few years and, as Mr. Robinson mentioned, exceeded the amount invested by the rest of the world in the United States last year, and this year probably. My guess is that the total amount of FDI flowing to developing countries-we have to distinguish between Europe, United States, Japan-that China would probably receive about a quarter-at least a quarter at the present time.

MS. LEE: It's a lot more than that.


MR. : Mr. Chairman-excuse me.

SEN. BROWNBACK: And I want to focus in on the developing countries because here's the thought that I'm working with on this: is that you've got a global economy that's clearly integrating very, very rapidly. I mean, it moves and it moves rapidly and capital moves. But that China has become such a great suction for foreign direct investment that it has significant impacts on that score throughout the developing world in quite a profound way.

MR. C. RICHARD D'AMATO: There's no question, Mr. Chairman, that China is exceeding the net inflow from developing countries because-for example, we're worried about Mexico ceding its textile advantage to the Chinese because of China's lower labor costs coming up. That if the multi fiber agreement does end on time this year, that the chances of most of the countries of Asia losing textile share to China will be apparent. So it looks like the inflow of FDI into China is exceeding, you know, most of that that is going to the rest of the developing world.

MR. ROBINSON: I would just chime in, Mr. Chairman, that the number is about $50 billion and that sucking sound you hear in your mind is real. This is the largest flow of foreign direct investment on the globe, I believe.

Now, what percentage it is of the developing world-we'll take a look at that and be back to you on it, but leave it to say that this has got to be having a deleterious effect on some of these other emerging market economies that you're I think getting to.

SEN. BROWNBACK: Well, I'm getting to that. And then plus I just-this is about two years ago I did a trip through India and China and I was just comparing between those two countries foreign direct investment, and India was a paltry amount relative to what China was. Now, I think India's has been growing substantially in the last couple of years, but it still has nothing in comparison with China. And then I've started to hear it now from Central American countries saying this thesis-you know, "Look, we engaged democracy and open societies 10/15 years ago and we aren't living any better today than we were 10 or 15 years ago. Why?" What's happening here-and it appears as if that, you know, while we were saying, "Yes, you should do that and you've got to open the society and create systems where you can grow," but that China is pulling so much of that in that we're just not seeing that spread much anywhere around the world.

MR. WALDRON: Well, I could just add, I think one of the things that troubles me the most about this is that China has what is euphemistically described as a disciplined workforce and she is competing with lots of countries, new democracies, where workers actually have rights. Now, the sad fact is that most investors are quite happy to have a disciplined workforce. They don't want strikes. They're quite happy if the Secret Police takes away somebody who's making trouble. They will supply all sorts of rationalizations, but the real point is that it's much easier to do business in a certain kind of dictatorship than it is in a democracy. Yet, it's overwhelmingly in the interests of the United States that we should support other democracies with trade, with investment and so forth. And I think that the administration and the government should think very, very seriously about how to do this.

One of my colleagues at Penn who is a law professor said that he expects within 10 or 15 years that the issue of workers rights will become an integral part of international trade law. And if that should happen then this very, very worrying issue would begin to be addressed. But I do think as an American that it is terrible to see countries that have made the sacrifices and taken the risks to become democratic and to give their workers rights then lose out in the competition for foreign capital to countries having these workforces which are basically under police supervision.

SEN. BROWNBACK: Mr. Bottelier, respond to that thought. I would ask what are your thoughts about that?

MR. BOTTELIER: May I preface that, Mr. Chairman, by just one more comment on these FDI numbers? I think it's important. China is, indeed, a huge absorber of FDI. Number one, the comment I would like to make that China now has also become a large source of outgoing FDI. It's the largest source amongst developing countries of outgoing FDI, that few people have focused on. Secondly, in the '80s and the early '90s, 60 to 70 percent of all the FDI going in China came from overseas Chinese, mainly Hong Kong, Taiwan, Thailand, Indonesia. Even today about half of the FDI going into China is from overseas Chinese. Furthermore, to qualify the numbers, it is estimated that perhaps 20 to 30 percent of the total FDI going into China is in fact Chinese money that is being recycled through Hong Kong or the United States in order to take advantage of certain privileges extended to foreign investment rather than domestic investment. So the number is --

SEN. BROWNBACK: Good-excellent point.

MR. BOTTELIER: -- a bit more-and finally, perhaps the most important point, if-a lot of FDI goes to China because the domestic financial intermediation in that country is still so undeveloped. Bank loans tend to be not easily available to private enterprises or non-state enterprises. Most of them still go to state enterprises and now increasingly mortgages. Once the domestic banking system and the stock exchanges and the bond markets develop, then you will see that there is much less need for foreign investment money to sustain the same level of investments. The FDI record levels partly reflect defective domestic financial intermediation.

SEN. BROWNBACK: Well, there are-respond to the comment about-that China's disciplined workforce is one that gives it an advantage over a democratized Central or South American workforce?

MR. BOTTELIER: Well, I think the discipline to which Mr. Robinson referred is probably an element, but less and less so. The Chinese labor force is, by Asian standards-East Asian standards and South Asian standards, a disciplined labor force in the sense that the people are well trained. Chinese workers are generally very literate, have relatively high health standard. This is a long tradition. Their life expectancy is higher than in most Asian countries, and the Chinese are an extraordinarily industrious people, an entrepreneurial people. I'm not an advocate for China here, but we should realize that there is more to China than cheap labor.

Another factor which is now beginning to play a significant role is the relationship between all these foreign investments located in China-it is the intra-China supply lines that allow newcomers to reduce their costs, not only because labor is good and cheap, but because everybody else is there. So intra-China supply lines between manufacturing industries allow cost advantages that other developing countries with far less foreign investments don't have.


MS. LEE: If I may just say I think it's really an insult to talk about workers in China as industrious and hardworking as opposed to oppressed. Of course they're industrious and hardworking. Of course they're good workers and they're smart and so on. But the reason that foreign investment floods to China is, you know, a combination of many factors, including other kinds of commercial advantages and so on, and a large marketplace and so on. But I think you cannot underplay the level of repression in China.

You said you don't challenge the facts that are in the petition that the State Department has documented and so on, and I just think it's really appalling to talk about the advantages of Chinese labor in terms of, you know, level of hard work. Workers in China are denied their basic human rights. They're not allowed to form unions. They're not allowed to even advocate for unions. They're not allowed in some cases to even ask for the wages that they're due, and they're treated abominably both by their employers and by their own government. And I challenge many of the arguments you make.

I'm surprised, Mr. Bottelier, to hear your critique and I guess I'm wondering what the implication is; whether you're saying that there's no wage advantage whatsoever that comes from the denial of workers the right of freedom of association, the failure to enforce minimum wage and hours of work and health and safety laws? Or are you saying that the particular estimate that we have is too high? We can talk about what the particular estimate is, but to say that there is no advantage whatsoever-there's no cost advantage I think threatens credibility because then you have to ask the question, why is it that companies don't pay decent wages? Why is it that the Chinese government by law prohibits unions from forming, prohibits workers from exercising their rights? And is there no economic advantage whatsoever to doing that? I find that very, very hard to believe and I'd be surprised if that's really the argument that you're making.

MR. WALDRON: Could I just second what Ms. Lee has said? I think that it's-I'm really ashamed when I hear American spokesmen or business spokesmen gloss over the fact that China is now one of the most repressive countries in the world, and their labor force is certainly under very close observation and supervision. And my own view is that we need something like the Sullivan Principles that we applied to South Africa to regulate the activities of American business there with respect to the treatment of labor. And I would add, of course, on another point that the activities of American business in facilitating the development of the Chinese military industrial complex have also been a very serious problem.

But to run through a list of how hard working, industrious, healthy and so forth the Chinese workers are, while suggesting that somehow they have no awareness that they are oppressed, is simply wrong. We all know any number of union leaders who have been arrested. We know that there is strong labor awareness. And we also know that the Chinese Secret Police cracks down on this very, very hard.

SEN. BROWNBACK: This is a tough topic.

Ms. Lee, let me ask you a question that I had a gentleman pose to me this morning, that if we-if the administration agrees with proceeding forward with the 301 case and hearing it, that we will not get support internationally in the developing world because the developing world-many people in the developing countries will say, "Well, that may be China now, but we're going to be next and it's about that we don't have the same worker wages or rights in our area as they do in the United States and so we're not going to support you on step one because we think we're step two or three down the road." How do you respond to that?

MS. LEE: Well, that's a really interesting question. I don't know the answer at the moment because we haven't had official conversations with governments of developing countries on this specific issue. What we have had is conversations with unions in developing countries around this issue. And the International Confederation of Free Trade Unions, which is the international body which we belong to, represents about 150 million workers worldwide, about two-thirds of whom are in developing countries, has come out very supportive of our workers right petition. And mostly what we hear from unions in developing countries is that they are terrified of trying to be in competition with China. They are very supportive of an action that would in fact challenge China to be more democratic, to respect basic ILO core labor standards, to bring its laws into compliance with international standards.

So certainly workers in developing countries have a keen understanding of the same exact kind of challenges that American workers are facing. They're losing their jobs to China because China is not a democracy, because China violates human rights. We'd like to see some of their governments. We certainly will be in contact-more specific contact with our union counterparts in developing countries, and also in industrialized countries, to see if we can get them to lobby their governments to support the petition.

SEN. BROWNBACK: Have any come forward yet to support --

MS. LEE: We haven't had --

SEN. BROWNBACK: -- any developing countries --

MS. LEE: -- that specific conversation yet at this time. But we expect that there will be some support internationally because even in Cancun at the last WTO ministerial meeting, many trade union representatives, including myself, met with some developing country governments, most of whom were fixated on the problem, the challenge of competing with China, particularly in 2005 when the textile and apparel quotas are scheduled to be lifted. And there were governments in Africa and the Caribbean that were very, very concerned what the competitive impact on them would be, and they were more interested in talking to us about workers rights provisions in the WTO than they've ever been in the past.

SEN. BROWNBACK: I haven't been a fan historically of labor agreements, labor as a part of trade agreements. I've always felt like these are things that should be separated. Yet, what I'm seeing develop is a constellation of issues particularly focused on China that just draws me increasingly concerned, so that I'm looking and casting about, saying, well, how else should we address this set of issues? And maybe it all works through. I'm hoping for that, that it all works on through. But I've been hoping for that for a number of years now and I haven't seen anything. And so that's why I'm wondering if we're going to have to take other actions that maybe previously have not been thought of for the issues of addressing China, but also for addressing equality and democratization issues around the world, that we're running into our own rhetoric in places that we ought to be able to stand up and say, "You do this and life does improve."

Mr. Bottelier, you present some very sound, I think, arguments on some of these things as well. I mean, like once you get a concentration in China, it tends to grow. When if you don't have that same concentration at places, it would have less ability to attract the capital. So I respect the thought and the fundamental economic forces. There are a set of very big issues here that are circling around China and much of it, I think, could be resolved if they would embrace democratization, if they would embrace human rights. And then, you know, guys like me and a lot of others kind of let up and say if that's the way the market is going to compete, it will compete and we're all going to compete fairly on it. It just doesn't seem like that's what's taking place. And then the product of our either policy decisions or lack of policy decisions then here grows, and its importance and our options lessen as the years move on forward. I think Mr. Robinson was saying we may have about 10 years to really influence China and its direction, and past that the engine has enough fuel on its own to do what it chooses to do at that point in time.

I want to thank you all for being here and for hanging in through this. I would invite each of you, if you have particular policy thoughts that you think we should be putting forward to implement some of the ideas that you're putting forward, to get them to us. Dr. Waldron, you mentioned the Sullivan Principles.

Mr. Robinson, I thought you really put your finger on the issues. I didn't hear with the same clarity, "Okay, do this, this and this," afterwards.

I think, Ms. Lee, I understand clearly your point of view is certify the case, it would be.

And, Mr. Bottelier, if you see items that we should move forward with, let us know as well. This is an area of growing concern policy wise. It's a growing concern politically across the country. The nation knows that we are heavily dependent upon China and we're getting cheap goods from there, but they don't like it.

MR. D'AMATO: Mr. Chairman, let me just --

SEN. BROWNBACK: (Cross talk) -- they don't particularly like that set up. And while the outsourcing issue is getting a lot of play as well, as it should, I think it needs some real good economic examination as to the actual outsourcing/in-sourcing issue. It reflects more of an internal deeper feeling that we're just too dependent upon a place that's just not structurally the way we think it should be, and not stable structurally when you're ruled by a small party elite that has ability to move rapidly and in unpredictable fashions, and that's a discomforting thing to many, many us.

MR. D'AMATO: I just wanted to say, Mr. Chairman, the commission will have its report for you in about a month, and it will have a lot of very specific recommendations and things we think the Congress ought to be doing to take a look at these issues and to move the executive branch as well down the road, because we do think that leverage is important here. The Chinese do respond to leverage, but the leverage has got to be strong, sustained and, like, if both branches --


MR. D'AMATO: Both branches and real, absolutely. And that's what's going to have to make the difference. But those are the recommendations that we'll be providing for you.

SEN. BROWNBACK: Yeah, it's not a jawboning process. This is-I mean, this is, okay, playing with real dollars here and real lives with it and you have to make it substantial and direct and felt for action to occur. Thank you all very much for attending. The hearing is adjourned.

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