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Committee on Financial Services

United States House of Representatives

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CURRENCY
Committee on Banking
and Financial Services

James A. Leach, Chairman

For Immediate Release:
Thursday, May 11, 2000 Brookly McLaughlin at 226-0471

Opening Statement of
Representative James A. Leach
Chairman, Committee on Banking and Financial Services
Permanent Normal Trade Relations with China
May 11, 2000

On behalf of the Committee, I would like to welcome Secretary Summers, Ambassador Barshefsky, and our distinguished second panel of witnesses. I understand that Ambassador Barshefsky must leave at 11 and therefore to allow as many Members as possible to question the Trade Representative, it is my intent to restrict opening statements to the Chairman and Ranking Member, and in addition to quickly summarize my comments.

The purpose of today’s hearing is to examine an issue of seminal importance for the national interests of the United States: the case for Permanent Normal Trade Relations (PNTR) with China. While we hope to hear testimony on the broad commercial benefits to the U.S. of granting PNTR, the Committee expects to give particular emphasis on the impact of PNTR and China's prospective membership in the World Trade Organization on the U.S. financial services industry. As Members are aware, a House floor vote on PNTR for China is scheduled for the week of May 22nd.

There can be little doubt that this is the most consequential foreign policy legislation upon which this Congress has been asked to address in the new millennium. Impressively, the vast majority of Members appear united on the principle that it is in the interests of the United States to develop a credible strategy for integrating China into the world economy as a responsible power that accepts international political and trading norms. What is at issue is means, not ends; that is, whether granting PNTR advances U.S. interests and values in modern China.

In my judgement, approving PNTR for China is in the enlightened self-interest of the people of the United States and of China. It promotes our economic well being by opening Chinese markets to American goods and services. It advances our interest in a rules-based international trading system by helping to "lock-in" Chinese reforms, economic restructuring, and a commitment to orderly globalization. China's accession to the WTO, in turn, also paves the way for a long-overdue entry by a democratic Taiwan into the global trading body.

China's entry into the WTO, coupled with permanent normal trade relations, opens up substantial commercial advantages to the United States. With market-opening commitments in agriculture, banking and financial services, telecommunications and a panoply of other industries, Americans and other exporters will have much greater access to a market that reflects fully one-fifth of the world's population. Credible estimates suggest that the market-opening concessions that would accompany PNTR would boost U.S. exports to China by around $3 billion or close to a 15% increase in current U.S. exports to China.

Indeed, the math is on our side. While we frequently have 3 to 5 percent tariffs on Chinese goods coming into our country, they just as frequently have 30 to 50 percent tariffs on American goods shipped to China. This agreement negligibly effects America’s tariff structure, but dramatically reduces Chinese levies, down in most instances to the single digit level.

This committee has jurisdiction over certain macro-economic issues as well as the financial services industry in particular. With regard to commercial products, China maintains unfairly high tariffs, which this PNTR approach is designed to reduce. With regard to financial services, China maintains arbitrary non-tariff barriers, which this PNTR approach is designed to dismantle. Reduction in Chinese tariffs and non-tariff barriers is self-apparently in the U.S. national interest. Not insignificantly, commerce follows finance. If we fail to pass PNTR, China will simply import fewer manufactured goods and farm products from the U.S. It will be German, French and Japanese banks which will enter China and, by so doing, facilitate exports from the companies they serve in their own countries. America will remain an import haven, but opportunities for building export jobs here at home will be denied to American workers.

Here I would emphasize a fatal flaw of failing to approve PNTR -- it would leave the U.S. unable to apply WTO rules and obligations on the Chinese government, including standards of openness and reciprocity as well as mechanisms for dispute resolution. In other words, American farmers, workers and consumers would be denied the market-opening and rules-based trade benefits that China will grant to our European and Japanese competitors when it joins the WTO.

In this regard, it must be stressed that although our economic ties to China have grown rapidly in recent years, so too has the size of our trade deficit. It is time American leaders make the fundamental point that normal trade relations are all about reciprocity. A billion dollar a week trade deficit is politically and economically unsustainable, particularly if China’s market is closed to American products or biased to foreign firms.

The best way for countries to have good sustainable political relations is to have reciprocal open markets, and the best way to achieve reciprocity in trade is to get politics out of economics and competition into the market.

Balanced and mutually beneficial trade is a cornerstone of good Sino-American relations. Likewise, unbalanced trade contains the smoldering prospect of social rupture. Hence, little is more in the U.S. interest than to promote reform and liberalization of China's economic, trade, and investment regimes and to bind China to the rules of international commerce.

For some, the PNTR issue has come to symbolize concerns about globalization and the increased integration of the world economy through trade flows, capital flows, and high-speed information technology. While angst exists in some segments of the American public, as in all publics, about competition and globalization, the historical record affirms that market systems based on free trade and the rule of law lead to higher standards of living than systems based on political isolation or economic autarky.

Protectionism is particularly harmful in the credit, securities, and savings industries because the general economy is dependent on each. In the U.S. today approximately one-fourth of banking assets and one-third of commercial loans are made by foreign entities. While some may be startled by these statistics, in general Americans consider foreign financial competition good for the nation’s economy and believe it would be even more so in developing countries such as China, which need to build a financial system that can allocate capital on a market basis. Hence, one the most beneficial and far-reaching aspects of our bilateral WTO accession agreement is China's commitment to undertake the progressive dismantling of barriers to foreign investment in its financial services industry.

More broadly, Beijing's commitment to the rules and obligations of a WTO-based framework should help support China's transition to a modern market economy based on the rule of law. As the world's most populous nation, China's successful management of economic and social reform is very much in the interest of the U.S. and the broader global economy. Joining the WTO binds China to a set of rules, which limits the ability of government officials to capriciously change market rules to advance personal or vested interests. This will help Chinese reformers lay the basis for a rule-based economy that is the best hope for controlling pervasive official corruption. In this context, it deserves stressing that government centered, managed trade provides fertile ground for corrupt practices. On the other hand, free trade under the rule of law is an economic framework where social corruption has a more difficult time flourishing.

Many Americans, including Members of Congress, are vexed by the human rights record of China and are concerned by the pace of economic and political change in China. On the other hand, experience teaches that the political system that best fits economic free enterprise is reflected in democratic political institutions of, by, and for the people. Advancing freely associated economic ties with the West under the rubric of internationally accepted trade rules has one principal political side effect: it builds bridges to democracy. Quixotic attempts to isolate China economically run the great risk of assuring oppression and causing intemperate international actions.

In any regard, Chinese society is changing far more rapidly than most Americans realize. The late Deng Xiaoping underscored the new Chinese pragmatism with his cat and mice metaphor, and by promoting "socialism with Chinese characteristics." Twenty years of ad hoc, pragmatic economic reforms have moved China from the chaos of the Cultural Revolution to unprecedented economic development and largely peaceful social change, quadrupling the standard of living and laying the foundation for systemic reforms. Indeed, despite indefensible examples of continued political repression, against groups like the Falun Gong and liberal intellectuals, China may be changing as rapidly as any other country in the world. While a communist style political apparatus remains ensconced at the top of Chinese society, at local government levels experiments with democratic elections are occurring and at the individual and family levels free speech has become increasingly the norm. In sharp contrast with the period of Mao’s Cultural Revolution there is little question that China has become a far more open society than it was just a generation ago when Deng inaugurated his period of "opening and reform."

Nonetheless, China’s economic and social system cannot develop to its fullest unless the rule of law and its associated rights - including freedom of speech and of the press, due process for disputes over contractual obligations, and a judiciary that efficiently and fairly adjudicates disputes - are made central tenets of Chinese life. As the development of a modern market economy impacts on politics, Beijing's leaders can be expected to recognize the incompatibility of free enterprise and an authoritarian political system. Instability is simply too easily unleashed in society when governments fail to provide safeguards for individual rights and fail to erect political institutions adaptable to change and accountable to the people.

Lastly, establishing permanent normal trade will help foster a stable, mutually beneficial Sino-American relationship, a bilateral relationship that is of profound importance to the future of peace and prosperity not just in Asia, but for the world.

From a historical perspective free trade is a natural extension of the open door policy that hallmarked American involvement in China at the end of the 19th century. Rejecting PNTR would effectively drive a stake through the heart of our economic ties with China and place in grave jeopardy the future of our relationship with one-fifth of the world’s population.

Whether the 21st century is peaceful and whether it is prosperous will most of all depend on whether the world’s most populous country can live with itself and become open to the world in a fair and respectful manner. How the United States, its allies, and the international system responds to the complexities and challenges of modern China is also one of the central foreign policy challenges of our time.

Failure to approve PNTR would not be responsive to that challenge. It would not effectively address our legitimate concerns on human rights, nonproliferation, relations across the Taiwan straits, or trade. On the contrary, rejection of PNTR would go back on our open door tradition and suggest that China and the United States can not maintain cooperative relations. It would be a vote with destabilizing consequences for the region and beyond.

Ironically, in this seminal foreign policy vote, the president’s political opposition is generally supportive of the president’s initiative. The majority of Republican’s consider PNTR to be key to

peace, stability, and prosperity in the 21st century. It would be tragic, and I might say unprecedented in the post World War II era in any Western democracy, if the administration’s own party becomes responsible for driving a stake into a bipartisan, bi-institutional foreign policy.

This meeting of the Committee has been called to provide the administration opportunities to lead. I hope you are successful.

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