[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PNTR: OPENING THE WORLD'S BIGGEST POTENTIAL MARKET TO AMERICAN
FINANCIAL SERVICES COMPETITION
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
FINANCE AND HAZARDOUS MATERIALS
of the
COMMITTEE ON COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
MAY 23, 2000
__________
Serial No. 106-102
__________
Printed for the use of the Committee on Commerce
U.S. GOVERNMENT PRINTING OFFICE
64-766CC WASHINGTON : 2000
COMMITTEE ON COMMERCE
TOM BLILEY, Virginia, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana JOHN D. DINGELL, Michigan
MICHAEL G. OXLEY, Ohio HENRY A. WAXMAN, California
MICHAEL BILIRAKIS, Florida EDWARD J. MARKEY, Massachusetts
JOE BARTON, Texas RALPH M. HALL, Texas
FRED UPTON, Michigan RICK BOUCHER, Virginia
CLIFF STEARNS, Florida EDOLPHUS TOWNS, New York
PAUL E. GILLMOR, Ohio FRANK PALLONE, Jr., New Jersey
Vice Chairman SHERROD BROWN, Ohio
JAMES C. GREENWOOD, Pennsylvania BART GORDON, Tennessee
CHRISTOPHER COX, California PETER DEUTSCH, Florida
NATHAN DEAL, Georgia BOBBY L. RUSH, Illinois
STEVE LARGENT, Oklahoma ANNA G. ESHOO, California
RICHARD BURR, North Carolina RON KLINK, Pennsylvania
BRIAN P. BILBRAY, California BART STUPAK, Michigan
ED WHITFIELD, Kentucky ELIOT L. ENGEL, New York
GREG GANSKE, Iowa TOM SAWYER, Ohio
CHARLIE NORWOOD, Georgia ALBERT R. WYNN, Maryland
TOM A. COBURN, Oklahoma GENE GREEN, Texas
RICK LAZIO, New York KAREN McCARTHY, Missouri
BARBARA CUBIN, Wyoming TED STRICKLAND, Ohio
JAMES E. ROGAN, California DIANA DeGETTE, Colorado
JOHN SHIMKUS, Illinois THOMAS M. BARRETT, Wisconsin
HEATHER WILSON, New Mexico BILL LUTHER, Minnesota
JOHN B. SHADEGG, Arizona LOIS CAPPS, California
CHARLES W. ``CHIP'' PICKERING,
Mississippi
VITO FOSSELLA, New York
ROY BLUNT, Missouri
ED BRYANT, Tennessee
ROBERT L. EHRLICH, Jr., Maryland
James E. Derderian, Chief of Staff
James D. Barnette, General Counsel
Reid P.F. Stuntz, Minority Staff Director and Chief Counsel
______
Subcommittee on Finance and Hazardous Materials
MICHAEL G. OXLEY, Ohio, Chairman
W.J. ``BILLY'' TAUZIN, Louisiana EDOLPHUS TOWNS, New York
Vice Chairman PETER DEUTSCH, Florida
PAUL E. GILLMOR, Ohio BART STUPAK, Michigan
JAMES C. GREENWOOD, Pennsylvania ELIOT L. ENGEL, New York
CHRISTOPHER COX, California DIANA DeGETTE, Colorado
STEVE LARGENT, Oklahoma THOMAS M. BARRETT, Wisconsin
BRIAN P. BILBRAY, California BILL LUTHER, Minnesota
GREG GANSKE, Iowa LOIS CAPPS, California
RICK LAZIO, New York EDWARD J. MARKEY, Massachusetts
JOHN SHIMKUS, Illinois RALPH M. HALL, Texas
HEATHER WILSON, New Mexico FRANK PALLONE, Jr., New Jersey
JOHN B. SHADEGG, Arizona BOBBY L. RUSH, Illinois
VITO FOSSELLA, New York JOHN D. DINGELL, Michigan,
ROY BLUNT, Missouri (Ex Officio)
ROBERT L. EHRLICH, Jr., Maryland
TOM BLILEY, Virginia,
(Ex Officio)
(ii)
C O N T E N T S
__________
Page
Testimony of:
Mastel, Greg, Director, Global Economic Policy Project, New
America Foundation......................................... 46
Newhouse, Stephan F., Managing Director, Member of the
Management Committee, Morgan Stanley Dean Witter........... 4
Valko, Cynthia Y., Executive Vice President, New York Life
International, Inc......................................... 34
Watkins, Jesse J., Managing Director, Herbert L. Jamison &
Co., LLC, on behalf of the Council of Insurance Agents and
Brokers.................................................... 37
Whittaker, James S., Director, International Public Policy,
Hewlett-Packard Company.................................... 8
Yingling, Edward L., Deputy Executive Vice President,
Executive Director of Government Relations, American
Bankers Association........................................ 41
(iii)
PNTR: OPENING THE WORLD'S BIGGEST POTENTIAL MARKET TO AMERICAN
FINANCIAL SERVICES COMPETITION
----------
TUESDAY, MAY 23, 2000
House of Representatives,
Committee on Commerce,
Subcommittee on Finance and Hazardous Materials,
Washington, DC.
The subcommittee met, pursuant to notice, at 2:40 p.m., in
room 2123, Rayburn House Office Building, Hon. Michael G. Oxley
(chairman) presiding.
Members present: Representatives Oxley, Shimkus, Towns,
Barrett, Luther, and Rush.
Staff present: Robert Gordon, majority counsel; Linda
Dallas Rich, majority counsel; Robert Simison, legislative
clerk; Shannon Vildostequi, professional staff; Brian
McCullough, professional staff; Consuela Washington, minority
counsel; and Bruce Gwinn, minority professional staff.
Mr. Oxley. The subcommittee will come to order. This week
we will be called upon to vote on a pivotal issue. Many have
called the vote on granting permanent normal trade relations
with China the most significant vote before Congress in
decades. In casting this vote, we will be choosing whether
economic integration or economic isolation is most likely to
foster democracy and capitalism in China. There is much to be
desired of China's Democratic and economic record. The
momentous legacy still permeates the country through State
controls and social and economic life. Nevertheless, the last
20 years show a pattern of China moving toward a market
economy.
Progress has been slow, and at times, frustrating. But the
fact remains that China has become significantly more
Democratic and capitalistic than it was in 1978, thanks mostly
to the reforms of Deng Xiaoping. As a single remaining
superpower, the United States, in its support of China's WTO
accession, is critical to integrating China into our global
free markets and rule of law.
While a negative vote for PNTR will not prevent China's
accession to the WTO, it will put the United States businesses
and workers at an overwhelmingly competitive disadvantage
versus our competitors in Asia, Latin America and Europe. A
negative vote means that only the United States will be denied
the benefits, and protections of China's accession to the WTO
will confer on all other WTO member countries.
China's accession to the WTO will facilitate the shift of
economic power from state-owned enterprises to private sector
market participants. An economic prosperity increases pressure
for greater democracy. As Federal Reserve Board chairman Alan
Greenspan recently observed, history has demonstrated that
implicit in any removal of power from central planners and
broadening of market mechanisms, as would occur under WTO, is a
more general spread of rights to individuals. In fact, we have
just witnessed this unfolding of democracy in South Korea and
Taiwan over the last two decades, as they have integrated with
international free markets. WTO accession will not only benefit
China, essentially it will translate into greater global
harmony.
Free trade is more likely to foster cooperation than
hostility. As China's global interdependency grows, so will its
compliance with international protocols. This is precisely why
Taiwan supports China's accession into the WTO. For WTO
members, including the United States, China's WTO accession
means increase access to the world's largest potential market.
That translates to new opportunities and new jobs for American
businesses and workers. With an aging population of 1.3 billion
people, the potential opportunities for American financial
services and providers are quite dramatic.
It has been estimated that under the full benefits of
China's WTO related market opening, our annual exports to that
country would grow between $8 and $10 billion by the year 2005.
In fact, the financial services agreement to which China agreed
in the WTO negotiations represents the largest single trade
agreement in history. It covers $60 trillion in banking,
insurance and securities transactions each year. Furthermore,
this trade agreement represents unilateral gain by American
workers and businesses. China has offered major concessions in
return for WTO membership, while the United States has agreed
only to preserve its existing market access without any new
concessions.
For example, China has unilaterally provided for greater
U.S. market access in telecommunications and financial services
and has agreed to phaseout numerous import quotas, licensing
and ownership requirements and geographic restrictions, and
just last week, the European Union reached agreement with China
as WTO negotiations gained further concessions. Those benefits
will accrue to all WTO members, including the United States, if
and only if we approve PNTR tomorrow.
In addition to the opportunities a successful PNTR vote
offers American companies and workers, a successful PNTR vote
provides our companies and workers with protection in the form
of the WTO dispute resolution system. The U.S. will be able to
use that dispute resolution system to protect its rights with
the support and pressure from 114 other WTO member countries
who have similar interests in forcing open China's markets.
We must remember that China's WTO accession does not hinge
upon this week's PNTR vote. WTO members will reap the benefits
of China's accession, regardless of the congressional vote on
PNTR. If the Congress votes for PNTR, we will share in those
benefits; if we vote against it, we will not. This is a chance
we should not pass up. Extending PNTR to China is not only good
economic policy, it is a good way to influence political
reform. It will be much easier to influence Chinese reform as a
trading partner than as the only WTO member that refuses to
extend PNTR to China.
Today we will hear from representatives of the finance,
insurance and high-tech industries. They offer a vital
perspective on how PNTR will impact our Nation's economy, our
businesses, and our workers. I thank them all for their
testimony. I look forward to hearing what each of you has to
say.
That ends the opening statement by the chair. I am pleased
now to recognize the gentleman from New York, the ranking
member, Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman. The
subcommittee will consider the facts regarding the PNTR for
China. This hearing is very important to the American public,
particularly as it relates to the future of millions of
American jobs. Some say it will improve our financial services
industry, which is very important to my home State of New York,
and I know that Ms. Cynthia Valko will testify in support of
this viewpoint later on behalf of New York Life.
I would still say if we believe that the export of
financial services will be enhanced when we are still waiting
for the government of China to honor its agreements with New
York Life, Chubb Insurance, and Metropolitan Life, which are
all New York companies. We also must question China's unfair
labor practices, disrespect for fundamental human rights, and
their tax and threats against Taiwan.
Mr. Chairman, I am concerned about who will enforce the
agreement between our two countries. I am also concerned about
which enforcement method will be used to ensure that our
agreement hold when our companies are not treated fairly by
China. The most important question, though, I have, Mr.
Chairman, is who will stop our jobs from going overseas to
China?
For all of the above reasons, Mr. Chairman, I am opposed to
PNTR for China. However, I will be pleased to hear the
different views of our witnesses this afternoon. Thank you very
much for holding the hearing.
Mr. Oxley. I thank the gentleman. His time has expired.
[Additional statement submitted for the record follows:]
Prepared Statement of Hon. Tom Bliley, Chairman, Committee on Commerce
On the heels of the comprehensive market access agreement reached
with China last fall, Congress will be considering legislation this
week to provide permanent status to normal trade relations with China.
The agreement that the EU just reached with China last week makes
China's accession to the WTO a virtual certainty. The question before
us now is not whether China will join the WTO, but whether the United
States will enjoy the benefits of the agreement we reached with China
last fall. And whether the U.S. will have the same market access rights
as our Japanese and European competitors.
The Chinese market agreements are sweeping in their scope, and
present significant new opportunities for American businesses. That
translates into more good jobs for American workers. The financial
services agreement alone covers sixty trillion dollars in potential
transactions each year. With a population of 1.2 billion people and
very little available in the way of financial services, the Chinese
market for insurance, banking, and securities is vast. But right now,
without PNTR, American companies have virtually zero access to China's
market.
The concessions to which China agreed in the high tech sector are
also significant to U.S. companies--both high tech and financial
companies. The convergence of finance and technology has changed the
way our own financial markets work today. As the functions of finance
become increasingly immersed in e-commerce and digital automation, the
software and hardware that high-tech companies produce is becoming the
backbone of the financial markets. These dramatic changes improve the
lives of Americans, as well as consumers abroad.
There is much work to be done to improve the rights, and the lives,
of Chinese citizens. I strongly believe that by opening markets between
the United States and China, we will be better able to achieve those
goals. I look forward to the testimony of our witnesses today.
Mr. Oxley. Now we will turn to our distinguished panel. Let
me introduce them beginning with Mr. Newhouse on my right. Mr.
Stephan F. Newhouse managing director, member of the management
committee, Morgan Stanley Dean Witter. Mr. James S. Whittaker,
director of international public policy from Hewlett-Packard
Company. Did I see you on C-SPAN this morning?
Mr. Whittaker. You did.
Mr. Oxley. Very good. This will be a lot friendlier. Ms.
Cynthia Y. Valko, executive vice president of New York Life.
Mr. Jesse J. Watkins, managing director, Herbert L. Jamison &
Company LLC, from West Orange, New Jersey, on behalf of the
Council of Insurance Agents and Brokers. Mr. Edward L.
Yingling, no stranger to this subcommittee, deputy executive
vice president, executive director of government relations with
American Bankers Association, and Mr. Greg Mastel, director,
Global Economic Policy Project, New America Foundation here in
Washington.
Gentlemen and lady, thank you all for being with us, and we
will begin with Mr. Newhouse. Let me ask if you could all try
to stay to the 5-minute rule. We can facilitate this. I know
Mr. Newhouse has to return to New York. We would love to be
able to get through the testimony and then have an opportunity
for members to ask questions to all of you. With that, I
recognize Mr. Newhouse.
STATEMENTS OF STEPHAN F. NEWHOUSE, MANAGING DIRECTOR, MEMBER
OF THE MANAGEMENT COMMITTEE, MORGAN STANLEY DEAN WITTER; JAMES
S. WHITTAKER, DIRECTOR, INTERNATIONAL PUBLIC POLICY, HEWLETT-
PACKARD COMPANY; CYNTHIA Y. VALKO, EXECUTIVE VICE PRESIDENT,
NEW YORK LIFE INTERNATIONAL, INC.; JESSE J. WATKINS, MANAGING
DIRECTOR, HERBERT L. JAMISON & CO., LLC, ON BEHALF OF THE
COUNCIL OF INSURANCE AGENTS AND BROKERS; EDWARD L. YINGLING,
DEPUTY EXECUTIVE VICE PRESIDENT, EXECUTIVE DIRECTOR OF
GOVERNMENT RELATIONS, AMERICAN BANKERS ASSOCIATION; AND GREG
MASTEL, DIRECTOR, GLOBAL ECONOMIC POLICY PROJECT, NEW AMERICA
FOUNDATION
Mr. Newhouse. Thank you, Mr. Chairman. Good afternoon.
Again, thank you, Mr. Chairman, and good afternoon to you and
members of the subcommittee. My name is Steve Newhouse. I am
managing director and vice chairman of the Institutional
Securities and Investment Banking Group at Morgan Stanley Dean
Witter and Company.
Morgan Stanley Dean Witter is one of the largest global
financial services firms and maintains leading market positions
in each of its three business segments, securities, asset
management, and credit services. The company provides its
products and services to a large and diversified group of
clients and customers, including corporations, governments,
financial institutions, and individuals.
We support with enthusiasm your decision to hold these
hearings to consider the implications for America's financial
services industry of granting permanent normal trading
relations to China. We are honored to have been invited to
testify and to share with you Morgan Stanley Dean Witter's
views on this timely and critical public policy issue. Without
a doubt, granting permanent normal trading relations or PNTR to
China is the single most important international trade issue to
be considered by the 106th Congress and by this administration.
Morgan Stanley Dean Witter has over 560 offices operating
in 25 countries through the world. We have been active in China
for almost two decades. We have offices in Beijing, Shanghai
and Hong Kong. In 1995, Morgan Stanley Dean Witter became the
first foreign investment bank to participate in a domestic
joint venture investment bank in China. So we know firsthand
that the continued opening of the foreign markets to U.S. goods
and services has been and continues to be an essential driver
of this country's economic growth and success.
China, the world's fifth largest market and the U.S.'s
fourth largest trading partner, stands ready to join the
biggest block of trading nations in the world, the World Trade
Organization. In order to do so, it has agreed to open its
markets wider than ever before, making unprecedented unilateral
concessions that will dramatically increase U.S. exports of
goods and services. Both President Jiang Zemin, and more
particularly the Premier Zhu Rongji, have put their personal
and political credibility on the line for WTO membership. They
have done so in the belief that economic openness and reform
are the only answers to the economic challenges faced by China
over the next decade.
This commitment to gain WTO membership was underscored last
Friday by additional concessions made by the Chinese to reach
agreement with the European Union on the issue of China's
entrance into the WTO. Parenthetically, that historic agreement
with a group of trading partners, which is, in the aggregate,
larger than the United States, makes an optimal bilateral trade
relationship between China and that country even more
imperative.
We believe the United States must not miss this historic
opportunity to embrace the commitments China has made and to
welcome it fully into the world trading system on a most
favored nation basis. The historic agreement reached by U.S.
and Chinese negotiators in November 1999 is, as you are aware,
both deep and broad-based, covering both the goods and services
sectors. For the securities industry, the commitments from
China, including minority ownership in local securities firms
and asset management firms, creates a strong platform for
continued development of China's capital markets. The
commitments also importantly include grandfathering all of our
existing activities and investments in that market place.
The opportunities for financial services firms in China are
enormous and will become even greater once China joins the WTO.
For example, over the next decade, the financial resources
required to be invested in improvements to China's
communications and transportation infrastructure and energy-
related capital equipment are estimated to be over $1 trillion.
The intermediation of both the domestic and international
capital flows required to fill these requirements is one of the
major business objectives of the next decade for U.S. financial
services firms as well as for our competitors around the globe.
Herein lies the challenge: For if Congress fails to grant
PNTR to China, when China enters the WTO, American firms will
be deprived of the benefits of China's commitments in all
sectors, even while other countries reap those benefits. With
PNTR, U.S. firms, including financial services firms, will be
able to enter and expand in China on the same terms as our
international competitors.
At its core, bringing China into the WTO increases China's
ties with the international community. And when U.S. companies
establish operations in China, they bring with them the best
practices that they have observed around the world. Our own
experience as a partner in China's first domestic joint venture
investment bank, China International Capital Corporation,
provides us with a unique perspective on China's development
and with a unique opportunity to assist in the development of
China's economy and its capital markets. We are engaged in a
number of dialogs in China across a wide variety of businesses,
energy, technology, telecommunications, and banking, to name a
few. We have been profoundly impressed with the high level of
progress China has made and by its consistent commitment to
reforming its economy.
We believe economic stability in China during the Asian
financial crisis significantly contributed to the turnaround in
the regional economies and contributed to the global economic
recovery. We believe China is deeply committed to developing
its capital markets and to becoming an even greater participant
in the global economy. We believe that the trade agreement
reached by the U.S. and Chinese negotiators in November is a
demonstration of that commitment. Finally, we believe the
agreement will play a significant role in advancing the
restructuring that is the linchpin of economic reform in China.
Let me close with a personal observation. In my 25 years in
international finance, I have spent a great deal of time
working with emerging economies and emerging democracies. I
have become convinced that the economic and financial reform
and political and social reform are inextricably tied together.
They are two sides of the same coin. Once a country accepts as
an imperative the need to join the global economy, it has to
make an implicit decision about a number of non-economic
issues. It must embrace the rule of law or its trading partners
will decline to enter into long-term commercial agreements with
it. It must open its lines of communication and make
transparent its disclosures about itself or capital will not
flow across its borders and it must educate its people with the
breadth and depth not needed in a closed economy, if they are
to compete in a global one.
We urge you to support permanent normal trade relationship
status with China because we believe it is in the best interest
of the United States, the global economies and the world
trading system.
Thank you very much for this opportunity to testify.
[The prepared statement of Stephan F. Newhouse follows:]
Prepared Statement of Stephan F. Newhouse, Managing Director & Vice
Chairman, Morgan Stanley Dean Witter & Co.
Mr. Chairman and Members of the Committee. Good afternoon. I am
Stephan Newhouse, Managing Director and Vice Chairman of Institutional
Securities and Investment Banking Group of Morgan Stanley Dean Witter &
Co.
Morgan Stanley Dean Witter & Co. (the ``Company'') is a global
financial services firm that maintains leading market positions in each
of its three business segments--Securities, Asset Management and Credit
Services. The Company provides its products and services to a large and
diversified group of clients and customers, including corporations,
governments, financial institutions and individuals.
We support with enthusiasm your decision to hold these hearings to
consider the implications for America's financial services industry of
granting Permanent Normal Trading Relations to China. We are honored to
have been invited to testify and to share with you Morgan Stanley Dean
Witter's views on this timely and critical public policy issue. Without
a doubt, granting Permanent Normal Trading Relations--or PNTR--to China
is the single most important international trade issue to be considered
by the 106th Congress and by this Administration.
Morgan Stanley Dean Witter has over 560 offices operating in 25
countries. We have been active in China for almost two decades. We have
offices in Beijing, Shanghai and Hong Kong. In 1995, Morgan Stanley
Dean Witter became the first investment bank firm to participate in a
domestic joint venture investment bank in China. We know that the
continued opening of foreign markets to U.S. goods and services has
been and continues to be an essential driver of this country's economic
growth and success.
China, the world's fifth largest market and the U.S.'s fourth
largest trading partner, stands ready to join the biggest block of
trading nations in the world--the World Trade Organization. In order to
do so, it has agreed to open its markets wider than ever before, making
unprecedented unilateral concessions that will dramatically increase
U.S. exports of goods and services. Both President Jiang Zemin and more
particularly the Premier Zhu Rongi, have both put their personal and
political credibility on the line for WTO membership. They have done so
in the belief that economic openness and reform are the only answers to
the economic challenges faced by China over the next decade. This
commitment to gain WTO membership was underscored last Friday, by
additional concessions made by the Chinese to reach agreement with the
European Union on the issue of China's entrance into the WTO.
Parenthetically, that historic agreement with a group of trading
partners, which is in the aggregate larger than the United States,
makes an optimal bilateral trade relationship between China and this
country even more imperative. We believe the United States must not
miss this historic opportunity to embrace the commitments China has
made and to welcome it fully into the world trading system on a most
favored nation basis.
The historic agreement reached by U.S. and Chinese negotiators in
November 1999 is, as you are aware, both deep and broad-based, covering
both the goods and the services sectors. For the securities industry
the commitments from China--including minority ownership in local
securities firms and asset management firms--create a strong platform
for continued development of China's capital markets. The commitments
also, importantly, include grandfathering of existing activities and
investments.
The opportunities for financial services firms in China are
enormous and will become even greater once China joins the WTO. For
example, over the next decade, the financial resources required to be
invested in improvements to China's communications and transportation
infrastructure and energy-related capital equipment are estimated to be
over $1 trillion. The intermediation of both the domestic and
international capital flows required to fill these requirements is one
of the major business objectives of the next decade for U.S. financial
services firms as well for our competitors around the globe.
Herein lies the challenge. For if Congress fails to grant PNTR to
China, when China enters the WTO, American firms will be deprived of
the benefits of China's commitments in all sectors, even while other
countries reap those benefits. With PNTR, U.S. firms, including
financial services firms, will be able to enter--and expand--in China
on the same terms as our international competitors.
At its core, bringing China into the WTO increases China's ties
with the international community. And when U.S. companies establish
operations in China they bring with them the best practices that they
observe around the world.
Our own experience as a partner in China's first domestic joint
venture investment bank, China International Capital Corporation
Limited (CICC), provides us with a unique perspective on China's
development and with a unique opportunity to assist in the development
of China's economy and its capital markets. We are engaged in a number
of dialogues in China across a wide variety of businesses--energy,
technology, telecommunications and banking, to name a few. We have been
profoundly impressed with the high level of progress made by China and
by its consistent commitment to reforming its economy.
We believe economic stability in China during the Asian financial
crisis significantly contributed to the turnaround in the regional
economies and contributed to the global economic recovery. We believe
China is deeply committed to developing its capital markets and to
becoming an even greater participant in the global economy. We believe
the trade agreement reached by US and Chinese negotiators in November
is a demonstration of that commitment. Finally we believe the agreement
will play a significant role in advancing the restructuring that is the
linchpin of economic reform in China.
Let me close with a personal observation. In my 25 years in
international finance, I have spent a great deal of time working with
emerging economies and emerging democracies, I have become convinced
that economic and financial reform and political and social reform are
inextricably tied together. They are two-sides of the same coin. Once a
country accepts as an imperative the need to join the global economy it
has made an implicit decision about a number of noneconomic issues. It
must embrace the rule of law or its trading partners will decline to
enter into long term commercial agreements. It must open its lines of
communication and make transparent its disclosures about itself or
capital will not flow across its borders. And, it must educate its
people with a breadth and depth not needed in a closed economy if they
are to compete in an open global one.
We urge you to support Permanent Normal Trade Relations Status for
China because we believe it is in the best interests of the United
States, the global economy and the world trading system.
Thank you again for this opportunity to testify. I will be pleased
to answer whatever questions you have or to provide additional
information for the hearing record.
Mr. Oxley. Thank you.
Mr. Whittaker?
STATEMENT OF JAMES S. WHITTAKER
Mr. Whittaker. Chairman Oxley, members of the subcommittee,
good afternoon. My name is Jim Whittaker and I am director of
international public policy with Hewlett Packard Company. I am
testifying before you today as chairman of the U.S. High-Tech
Industry Coalition on China. The Coalition is comprised of 13
high technology trade associations, which represents U.S.
manufacturers of semiconductors, computers, electronics
software, telecommunications equipment as well as U.S. service
providers and Internet companies.
U.S. China bilateral WTO accession agreement that
Ambassador Barshefsky negotiated is a solid win for the U.S.
high-tech industry. Under that agreement, China is committed to
eliminate tariff and non-tariff barriers to trade, remove
regulatory hurdles and investment restrictions on foreign
firms. As a result, U.S. high-tech industries are poised to
expand sales and exports to this rapidly growing market to
increase high wage American jobs, and to maintain our
technological leadership and competitiveness in international
markets.
However, in order for industry to reap these benefits,
congressional approval of PNTR is necessary. For this reason,
we believe that establishing permanent normal trade relations
with China is the most important vote that Congress will make
in support of American high-tech industry this year.
A few quick words about our industry. The high-tech sector
is a strong and important contributor to the U.S. economy. It
is the largest manufacturing sector in the U.S. employing 5
million Americans last year. It is our Nation's top
manufacturing exporter with 25 percent of total exports, and
its employees earn 82 percent higher than the average private
sector worker.
Over the next few years, China is expected to become one of
the largest high technology markets in the world. According to
International Data Corporation figures, annual growth rates for
many segments of the high-tech sector will be 20 to 40 percent
annually. Indeed, China's semiconductor and cell phone markets
are projected to be the world's second largest by 2003, with a
PC market projected to be number two in the world next year.
More than 20 million Chinese will be on-line next year, and we
expect that to go as high as 35 million in the following year.
Given these opportunities and the strong terms of the
bilateral agreement, China's WTO accession will provide
significant opportunities and benefits to the high-tech
industry, including increased exports and related jobs.
I would like to just take a few minutes to highlight a few
of the changes that will help us the most. One, China has
agreed to adopt the information technology agreement, which
eliminates tariffs altogether on an array of IT and telecom
products by the year 2005.
Two, China will, for the first time, permit American and
other foreign companies to directly import and export products.
It will also, for the first time, agree to permit us to
distribute directly our products and provide after-sales
service repair and maintenance.
Three, China will immediately become subject to the TRIPs
agreement on intellectual property protection. We believe that
the TRIPs agreement is the best vehicle available to us to
combat piracy of intellectual property and to support improved
IT by Chinese's governmental authorities.
Four, China has agreed to implement the TRIMS agreement
upon accession. This means that it will not condition
investment approvals, import licenses, or any other import
approval on performance requirements of any kind, including
local content requirements, technology transfer, or
requirements to conduct R&D in China.
Five, China has agreed that it will ensure that state-owned
and state-invested enterprises will make purchases and sales
based solely on commercial considerations providing U.S. firms
with the opportunity to compete on nondiscriminatory terms and
conditions.
Six, China agreed, for the first time, to open its telecom
market to foreign service providers. In the important area of
value-added services, including Internet services, China has
agreed to allow up to 50 percent foreign ownership 2 years
after accession. In addition, China agreed to sign on to the
WTO BTA agreement and committed to a set of regulatory
principals contained in the so-called reference paper to the
BTA.
And finally, in the area of antidumping, the bilateral
agreement enables the U.S. to maintain strong protections
against dumping for 15 years. Since China's economy is not
fully market-oriented yet, it is critical that the United
States maintain its ability to utilize its existing non-market
economy and methodology in the application of antidumping laws.
In conclusion, the American high-tech industry has been the
forefront of U.S. economic expansion and technological
leadership. Ambassador Barshefsky was able to obtain an
historic market opening package. We would hate to see these
advantages to our foreign competition. Granting China PNTR
coupled with significant market reforms in China embodied in
its WTO commitments will ensure our industry is able to
participate fully in this critical market.
Along with many of America's leaders across the political
spectrum, we believe that engagement, not isolation, will lead
to improved economic and social conditions in China. The terms
for China's accession in the WTO will help China to continue on
its path of economic reform, which we believe will lead to
positive changes in many areas. Already, American high-tech
businesses are having a positive impact on China by bringing
our best practices in the areas of human resource,
environmental and business management to China.
For these reasons, we support the establishment of PNTR
with China and are urging Congress to pass H.R. 4444.
Thank you, Mr. Chairman.
[The prepared statement of James S. Whittaker follows:]
Prepared Statement of James S. Whittaker, Director, Imternational
Public Policy, Hewlett-Packard Company, on Behalf of U.S. High-Tech
Industry Coalition on China
Chairman Oxley, members of the Subcommittee, good afternoon. My
name is Jim Whittaker, and I am Director of International Public Policy
with Hewlett-Packard Company. I have the honor of testifying before you
today as the Chairman of the U.S. High-Tech Industry Coalition on
China.
The High-Tech Coalition on China is comprised of thirteen high-
technology trade associations, which work together on our highest
priority public policy issue this year--China's accession to the World
Trade Organization (WTO). The coalition represents U.S. manufacturers
of semiconductors and semiconductor equipment and materials, computers,
electronics, software, and telecommunications equipment, as well as
U.S. service providers and Internet companies. A list of coalition
members is attached.
The U.S.-China bilateral WTO accession agreement reached on
November 15, 1999 is a solid win for U.S. high-technology industries.
In that agreement, China committed to comprehensive reform of its
economy, and to eliminate tariff and non-tariff barriers to trade,
regulatory requirements and investment restrictions. As a result of
this historic step, U.S. high-tech industries are poised to expand
exports to this rapidly growing market, increase high-wage American
jobs, and continue our technological leadership and competitiveness in
international markets.
For our industry to reap the benefits of these market opening
concessions that China has made, however, Congressional approval of
permanent normal trade relations (PNTR) with China is necessary.
IMPACT OF U.S. HIGH-TECHNOLOGY INDUSTRY ON THE U.S. ECONOMY
The high-tech sector is a strong and important contributor to the
U.S. economy. According to the American Electronics Association data
from Cyberstates 4.0, the high-tech industry is the largest
manufacturing sector in the United States, employing 5 million
Americans in 1999. This was twice as many as in auto manufacturing and
services, and far exceeds the one million workers in the chemical
manufacturing industry. The high-tech industry added over 1.2 million
jobs to the U.S. economy between 1993 and 1999, a 32 percent increase.
In addition, the high-tech industry also provides its employees
with salaries 82 percent higher than the average private sector wage.
In 1998, the average high-tech wage was nearly $58,000 a year, while
the average private sector wage was almost $32,000. While high-tech
wages increased 29 percent, private sector wages grew only 8 percent
between 1993 and 1998.
Federal Reserve Chairman, Alan Greenspan, recently reported that
the high-tech sector has been responsible for nearly half of U.S.
domestic GDP growth since 1994. Please see the attached chart.
In 1998, American high technology companies lead all other
industries in private-sector expenditures on research and development
(R&D). High-tech companies performed $55 billion in R&D--a 63 percent
more than in 1993. Total industrial R&D amounted to $145 billion in
1998, a 53 percent increase since 1993.
The high-tech industry is our nation's the top manufacturing
exporter. In 1999, the high-tech sector exported $181 billion. High-
tech exports comprised 25 percent of total U.S. exports in 1999. Based
on U.S. Commerce Department data, China represented the 14th largest
high-tech export market in 1999, with high-tech exports exceeding $3.3
billion--a 121 percent increase since 1993.
OPPORTUNITIES IN THE CHINESE MARKET
In the next decade, China is expected to become one of the largest
markets in the world. According to International Data Corporation
figures, annual growth rates for many high-tech products are increasing
20 to 40 percent. The following provides an overview of the Chinese
market for some of the key high-tech sectors.
Semiconductors and Semiconductor Equipment and Materials
The current semiconductor market in China is estimated to be up to
$8 billion per year. Some analysts expect it to become the third
largest semiconductor market by 2001 (ahead of Germany, but behind
Japan and the United States) and the second largest by 2010. The
current semiconductor equipment and materials market in China is
estimated to be over $1 billion per year and is projected to reach
almost $4 billion in 2003.
Computers
The market in China for computers is expanding rapidly, averaging
37 percent growth per year for the past three years. The Chinese market
will continue to grow--International Data Corporation predicts that by
2001, China will be the second largest PC market after the US and
Japan. More than 120 million Chinese citizens plan on buying a computer
in the next two years.
Software
China's software market is growing at 28 percent a year. High
growth rates will continue as Internet use in China continues to climb
and piracy rates decrease. The Internet is projected to reach an
estimated 20 million people in China by the end of 2000.
Telecommunications
China's market for cellular telecommunications is growing at a
tremendous rate. By the end of 1999, China boasted approximately 40
million cellular subscribers, bringing it closer to its target of
becoming the world's second largest cellular market with approximately
60 million subscribers. Only the cellular market of the United States
is projected to be larger than China's by the end of this year. With
the market potential for 3rd generation mobile communications also
taken into consideration, China promises market opportunities for years
to come.
Internet
More than 9 million Chinese are already on-line, and in the next
few years China is expected to become one of the largest Internet
markets in the world. This growing market offers tremendous commercial
opportunities to U.S. firms. By participating in this market, U.S.
Internet service and content providers can make sure that vital social
services--such as education, communications and telemedicine--are
delivered across the Internet. We can also lay the groundwork for e-
commerce and the economic growth, productivity and jobs it will
generate.
BENEFITS OF CHINA'S WTO ACCESSION
As the China accession negotiations began in earnest, the High-Tech
Industry Coalition on China set forth its objectives for our U.S.
negotiators. The package that they have come back with meets those
objectives.
Under the terms of the November 1999 bilateral agreement, China's
WTO accession would provide significant opportunities and benefits to
U.S. high-tech industries. A summary of some of these key benefits
follows.
Information Technology Agreement: China has agreed to
adopt the Information Technology Agreement (ITA), which eliminates
tariffs on products such as computers, telecommunications equipment,
semiconductors, semiconductor manufacturing equipment, computer
equipment and other high technology products. China has agreed to
eliminate nearly all of its IT tariffs (which currently average 13%) by
2003, and the remainder by 2005.
The benefits to U.S. high-tech industries are clear: duty-free
entry of U.S. products should result in increased exports, sales and
market share of U.S. products. In addition, American high-tech
companies producing in China will have access to lower cost inputs.
Finally, China's adoption of the ITA will help to combat smuggling,
since the incentive for the creation a black market to circumvent
tariff barriers will be removed.
Trading and Distribution Rights: China will, for the first
time, permit American and other foreign companies to directly import
and export products--so-called trading rights. China has also, for the
first time, agreed to permit American and other foreign companies to
directly distribute their products, including wholesale and retail and
after-sale service, repair, maintenance, and transport.
For American high-tech industries, the right to provide direct
service is essential to control quality and ensure the authenticity of
the spare parts being delivered. Indeed, in other important overseas
markets, American firms increasingly are using quality service as a
strategic weapon against foreign competitors to win customers and grow
market share. The inability to deal directly with end-users is a
particular problem in the semiconductor industry, where the design and
development of application-specific chips requires extensive contact
between semiconductor producers and the ultimate end-users of the
chips.
Since China has agreed that all restrictions on trading and
distribution rights will be eliminated three years after accession for
most sectors, the benefit will be the ability for our industries to
quickly excel in China's rapidly growing, competitive information
technology market.
Investment Restrictions: China has agreed to implement the
WTO Trade-Related Investment Measures (TRIMS) Agreement upon accession.
This means China will eliminate and cease enforcing trade and foreign
exchange balancing requirements. China will also eliminate and cease
enforcing local content requirements, and refuse to enforce contracts
imposing these requirements. China will guarantee that laws or
regulations to the transfer of technology or other know-how will be
consistent with WTO obligations to protect intellectual property rights
and trade-related investment measures.
China has also agreed that, upon accession, it will not condition
investment approvals, import licenses, or any other import approval
process on performance requirements of any kind, including: local
content requirements, offsets, transfer of technology, or requirements
to conduct research and development in China.
These provisions will help protect American firms against efforts
by some Chinese officials to force the transfer of U.S. commercial
technology to Chinese firms, which has been a significant issue for
U.S. high-tech companies seeking market access or the right to invest
in China.
State-Owned and State-Invested Enterprises: China has
agreed that it will ensure that state-owned and state-invested
enterprises will make purchases and sales based solely on commercial
considerations, providing U.S. firms with the opportunity to compete
for sales and purchases on non-discriminatory terms and conditions.
This is an important point for U.S. high-tech industries, since state-
owned and state-invested enterprises currently control a significant
share of domestic and international trade in commercial high-tech goods
in China.
Telecommunications Services: Included in China's
concessions in the telecom sector, China agreed to open its telecom
market to foreign service providers according to the following
schedule:
Phase-in of foreign participation in paging/value-added
services in two years, allowing up to 50 percent ownership by
foreign investors;
Phase-in of foreign participation in mobile/cellular services
over five years, allowing up to 49 percent ownership by foreign
investors;
Phase-in of foreign participation in fixed line/international
long distance services over six years, allowing up to 49
percent ownership by foreign investors.
In addition, China agreed to sign onto the WTO Agreement on Basic
Telecommunications Services (BTA). The BTA commits participating
countries to open their telecom services markets. China has committed
to a set of regulatory principles contained in the so-called Reference
Paper to the BTA, and has therefore made specific commitments to open
up its telecom services markets. These include providing access to the
public telecom networks of incumbent suppliers under non-discriminatory
terms and at cost-oriented rates. China also agreed to technology-
neutral scheduling, meaning technology choices are made as commercial
decisions, rather than government mandate.
The Ministry of Information Industry (MII) is preparing China for
competition from foreign service providers after China's accession to
the WTO. To meet this goal, China's second telecom carrier, China
Unicom, is slated to buildout an additional national cellular network
in 2000 based on Code Division Multiple Access (CDMA) technology. This
development is very positive for U.S. telecom equipment manufacturers,
as they are the world's leading suppliers of this technology. In
addition, China introduced a new service provider into the market in
1999, China Netcom (CNC). This new company will focus on the provision
of Internet Protocol (IP) telephony, allowing more efficient use of
bandwidth on the Chinese networks.
Intellectual Property: By joining the WTO, China will
become subject to the Agreement on Trade Related Aspects of
Intellectual Property (TRIPs). Moreover, China has agreed to be subject
to all TRIPs obligations upon accession, without any transition period.
The TRIPs agreement is the best vehicle available to high-tech
industries to combat piracy of intellectual property and to create a
healthy environment for the development of information technology in
China.
Industry experts estimate that 95 percent of the business
applications software used in China was pirated in 1998 (the last year
for which data is available), depriving the software industry of nearly
$1.2 billion in licensing revenue. If China were to bring its legal
system into compliance with the standards in the TRIPs Agreement, the
U.S. software industry should be much more able to enforce its rights
in Chinese courts and administrative tribunals. However, the United
States will be unable to ensure Chinese compliance with the TRIPs
Agreement absent the grant of PNTR to China.
Antidumping: The bilateral agreement enables the United
States to maintain strong protections against dumping. Since China's
economy is not fully market-oriented, it is critical that the United
States maintains its ability to utilize its existing non-market economy
methodology in the application of U.S. antidumping laws. The United
States and China have agreed that the United States may maintain this
current methodology for 15 years after the date of China's accession to
the WTO.
PNTR IS NECESSARY FOR THE U.S. TO BENEFIT FROM CHINA'S WTO ACCESSION
The United States must approve permanent normal trade relations
(PNTR) status for China in order for U.S. firms to receive the benefits
of China's accession to the World Trade Organization (WTO). If China
accedes to the WTO and the U.S. Congress does not pass legislation
granting China PNTR, it is expected that the Administration would
invoke its right of ``non-application'' under Article XIII of the WTO
Agreement, as has been done with respect to other countries subject to
the Jackson-Vanik Amendment. This would be done at the time China
formally accedes to the WTO. Even though China would become a WTO
member, the United States would not treat China as a WTO member.
Moreover, China would not be required to treat the United States as a
WTO member.
Without PNTR, an historic opportunity would be jeopardized for U.S.
companies and their workers. The terms of the landmark U.S.-China
bilateral agreement concluded in November and all other terms of
China's WTO accession package would not apply to U.S.-China trade and
investment, except to the extent that existing bilateral agreements
make the WTO agreement terms binding between the two countries.
While the United States would receive some modest benefits, such as
tariff cuts, under the terms of the 1980 bilateral agreement between
the United States and China, many of the hard-fought concessions by the
Chinese are not covered by this agreement. For example, China's
agreement to eliminate forced technology transfer and investment
requirements would not be extended to the United States. Nothing in the
1980 agreement requires the Chinese government to ensure that its
state-owned and state-invested enterprises make their purchases solely
on commercial terms, while China agreed to this commitment in the WTO
accession agreement. Without PNTR, U.S. companies would not benefit
from China's agreements to allow distribution rights for foreign
companies and to allow investment in telecom and Internet services.
Additionally, the United States would not have access to the WTO
dispute settlement process to enforce intellectual property and other
rights in the case of any noncompliance by China.
ANNUAL NTR EXTENSION IS NOT SUFFICIENT
Article I of the General Agreement on Tariffs and Trade (GATT)
requires that WTO members provide ``unconditional'' MFN treatment to
other WTO members. This principle is a cornerstone of the WTO and an
open global trading system.
Some have argued that the United States can meet this unconditional
MFN obligation, and thus be entitled to China's WTO concessions, as
long as Congress renews NTR on a continual basis. But under the
Jackson-Vanik Amendment to the Trade Act of 1974, China's MFN status is
tied to annual Presidential findings or waivers regarding freedom of
emigration, which can be overridden by Congress through a joint
resolution of disapproval. Continued annual renewal of China's NTR
status would violate WTO rules because it would be conditional (on
freedom of emigration per the Jackson-Vanik Amendment) and
discriminatory (requiring procedures for China that are not applied to
other WTO members). Approval for permanent NTR is necessary to meet the
WTO's unconditional MFN obligation.
CONCLUSION
The American high-tech industry has been at the forefront of U.S.
economic expansion and technological leadership. Granting China PNTR,
coupled with the significant market reforms in China embodied in its
WTO commitments, will enable our industry to expand its market presence
and business opportunities in this critical market.
Moreover, access to American commercial information technology
enables people worldwide to improve business efficiency across all
sectors, enhance educational and social opportunities, and connect with
one another. Improved market access for U.S. commercial information
technology in China will help to advance economic and social reform in
China. A timely congressional vote granting PNTR to China is a critical
and necessary step toward securing this goal.
U.S. High-Tech Industry Coalition on China
American Electronics Association; Business Software Alliance;
Computer Systems Policy Project; Computing Technology Industry
Association; Consumer Electronics Association; Electronic Industries
Alliance; Information Technology Industry Council; National Venture
Capital Association; Semiconductor Industry Association; Semiconductor
Equipment & Materials International; Software & Information Industry
Association; Telecommunications Industry Association; and United States
Information Technology Office.
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Mr. Oxley. Thank you.
Ms. Valko.
STATEMENT OF CYNTHIA Y. VALKO
Ms. Valko. Thank you, Mr. Chairman. I am grateful for the
opportunity to offer New York Life International's perspective
on the implications of China's impending membership into the
WTO. As chair of the International Life Insurance Committee of
the American Council of Life Insurers, I work closely with the
colleagues throughout our industry to promote a China agreement
that addresses our most pressing commercial priorities in that
market. We have much to be enthusiastic about in the agreement
negotiated by U.S. Trade Representative Barshefsky's team.
At the outset, I would like to cite a few key examples of
how the WTO agreement really offers a whole new basis for our
industry's access in the China market. The provisions I am
about to summarize represent the results of the WTO agreement
negotiated between the U.S. and China, which we have studied in
detail. The EU concluded its own agreement with China last week
and while details are still emerging, we are hearing that that
agreement may have achieved some additional enhancements for
life insurance, particularly in terms of phase-in periods for a
number of Chinese commitments.
Because China's final WTO package will be based on the best
offers on the table, the benefits to the U.S. can only get
better as a result of any enhancements achieved as part of the
EU agreement. Today, the ability of our company and many others
to obtain a license to sell life insurance in China is governed
by a process that is unpredictable, non-transparent and
frequently politicized. Under the WTO agreement, China has
committed to granting licenses based on clear-cut factors
without easily manipulated economic needs, tests or
quantitative limits on licenses. Today, American life insurers
face geographic restrictions determining which Chinese cities
are open for business to their activities.
Under the WTO agreement, these restrictions will be
eliminated fully within 3 years of China's accession, and a
specified list of cities will be fully opened even sooner.
Today, foreign life insurance firms operating in China are not
allowed to offer the full range in financial products. Under
the WTO agreement, companies like ours will be able to sell
health products within 4 years of China's accession and pension
group and annuity products within 5 years. Today, foreign
insurers in China are limited in their form of ownership and
restricted in their choice of joint venture partners.
Under the WTO agreement, we will be able to select a
Chinese partner of our choice immediately upon China's WTO
accession with a provision for 50 percent share in equity.
In short, these commitments represent a clear statement of
the political will of China's leaders to open China's financial
services markets to greater competition. In essence, China's
political leaders are giving the country's regulators and
bureaucrats some extremely significant marching orders and
that, in the final analysis, is what really matters in this
agreement. The significance of China's commitments is
particularly striking in light of the tremendous potential of
the Chinese market for life insurance. Although China has more
than one fifth of the world's population, it currently accounts
for less than .2 of a percent of the world's life insurance
market. Clearly, there is an immense room to grow.
The agreement offers us the possibility to participate in
that growth. China's market liberalization steps will
accelerate a process of awareness about life insurance. As
China's huge population ages, the sheer number of elderly is
stretching the traditional system beyond the breaking point.
Recognizing this, individual Chinese are increasingly moving to
assure their long-term social security by investing in life
insurance and pension products. The WTO agreement will
accelerate that trend.
So the terms of the agreement are clearly good for U.S.
providers of life insurance and related products, but the
financial services dimensions of the agreement will also
contribute to a process of positive societal change in China.
We know from experience that competitive and transparently
regulated financial services systems are at the very core of
the entrepreneurship and economic freedom. New York Life very
much looks forward to being a part of that process.
Mr. Chairman, China's participation in the World Trade
Organization is truly a momentous development. By approving
PNTR, Congress can send a strong signal that it recognizes
those benefits, for the citizens of both China and the United
States, of China's decision to play by global trade rules.
Thank you very much for your attention and for inviting me here
today.
[The prepared statement of Cynthia Y. Valko follows:]
Prepared Statement of Cynthia Y. Valko, Executive Vice President, New
York Life International, Inc. and Chairperson, International Life
Insurance Committee, American Council of Life Insurers
Mr. Chairman, members of the Committee, I'm grateful for the
opportunity to offer New York Life International's perspective on
China's impending membership in the WTO, and the implications for an
American life insurance company like ours. As Chair of the
International Life Insurance Committee of the American Council of Life
Insurers (ACLI), I've worked closely with colleagues throughout our
industry to promote a China agreement that addresses our most pressing
commercial priorities in that market. I'm glad to report that we have
much to be enthusiastic about in the far-reaching agreement negotiated
by U.S. Trade Representative Charlene Barshefsky's team.
In the life insurance and pension products sector, the agreement
truly shifts the basis for foreign companies' participation in the
Chinese market. I'd like to cite a few key examples of how the
agreement negotiated by the United States will improve our prospects in
China.
I should note that last week's agreement between the European Union
and China appears to encompass a number of elements which improve upon
the deal negotiated by the U.S. team, particularly with respect to
accelerated phase-ins of Chinese market-opening commitments. Details on
the EU-China deal are still trickling out, so I will focus today on the
provisions of the U.S. agreement, which we've had a chance to study.
But I want to stress that our deal can only get better because of what
the EU has negotiated. Because China's final WTO package will be based
on the ``best'' offers on the table, American insurance companies will
benefit from any enhancements that the European Union has in fact
achieved.
Today, the ability of our company and many others to obtain a
license to sell life insurance in China is governed by a regulatory
process that is unpredictable, non-transparent, and frequently
politicized. Under the WTO agreement, China has committed to granting
licenses based on clear-cut qualification factors, and without easily-
manipulated economic ``needs tests'' or quantitative limits on
licenses.
Today, American life insurers face geographic restrictions
determining which Chinese cities are ``open for business'' to their
activities. Under the WTO agreement, these access restrictions will be
eliminated fully within three years of China's accession, and a
specified list of cities will be fully opened even before that period
expires.
Today, foreign life insurance firms operating in China are not
allowed to offer the full range of financial products. Under the WTO
agreement, companies like ours will be able to sell health products
within four years of China's accession, and pension, group, and
annuities products within five years.
Today, foreign insurers in China are limited in their form of
ownership and restricted in their choice of joint venture partner.
Under the WTO agreement, we'll be able to select a Chinese partner of
our choice immediately upon China's WTO accession, with a provision for
a 50 percent share in equity.
China's commitments in the life insurance sector represent a clear
statement of the political will of China's leaders to open China's
financial services market to greater competition. In the process, these
reforms will significantly enhance the ability of China's citizens to
control their financial destinies. By sending this political signal,
and by committing China to fundamental reforms through binding WTO
obligations, China's leaders are giving the country's regulators and
bureaucrats some extremely significant marching orders. And that, in
the final analysis, is what really matters in this agreement.
The significance of these commitments is particularly striking when
one considers the future of the Chinese market for life insurance,
pension products and other personal financial services. Although China
has more than one-fifth of the world's population, it currently
accounts for less than two-tenths of a percent of the world's life
insurance market. Even though the Chinese have one of the highest
individual savings rates in Asia, China spends less on all forms of
insurance than 28 U.S. states.
This disparity between China's size and its currently
underdeveloped insurance market can be summed up in a single word:
potential. The market-opening commitments contained in China's WTO
agreement are likely to lead to volume increases that exceed 300
percent--more than $4.8 billion.
China's market liberalization steps will accelerate a process of
awareness about life insurance and other personal financial management
tools that is already underway in China, by virtue of changing
attitudes about personal finance. As we have seen so clearly in the
Eastern European region, doubts about the solvency of state-run pension
systems are increasing the demand for privately-held pensions,
annuities and life insurance.
In China, this dynamic is particularly relevant in connection with
emerging strains on the traditional rural system of old age support. As
China's huge population ages, the sheer number of elderly will stretch
the traditional rural system beyond the breaking point. Recognizing
this, individual Chinese are increasingly moving to assure their long-
term social security by investing in life insurance, pension products,
and other personal financial instruments. The WTO agreement will
accelerate that trend, and will allow U.S. companies to participate
more fully in it.
So the terms of the agreement are clearly very good for U.S.
providers of life insurance and related financial products. But I think
it is important to stress that the financial services dimensions of the
agreement will also contribute to a process of positive societal change
in China.
As members of the Committee are well aware, one of the key debating
points regarding PNTR centers around the degree to which China's
membership in the WTO, and its associated economic and trade
liberalization commitments, will advance the development of a more
stable and democratic China. We have to be careful in this argument. I
think it is unwise to portray WTO membership as a sort of ``silver
bullet'' that will rapidly transform Chinese society in a way that
addresses many U.S. policy concerns. There are no quick fixes to these
problems, and we should not pretend that the WTO will provide such a
fix.
But I do believe that U.S. goals can be achieved most effectively
and most quickly by granting China PNTR status, bringing it into the
WTO and integrating its economy more deeply with that of the rest of
the world. Moreover, I'm convinced that the financial services
dimensions of China's WTO package speak eloquently to the power of WTO
accession to foster positive economic and social change in China.
We have seen over and over in the ``newly industrializing''
countries that competitive, dynamic, and transparently-regulated
financial services systems are at the very core of entrepreneurship and
economic freedom. A mature and competitive financial services market
creates stable pools for investment in infrastructure, housing, and
other critical needs. Such a market also provides people with a larger
set of options about managing their financial destinies and long-term
well-being. I am convinced that the Chinese negotiators knew exactly
what they were doing in offering such far-reaching ``concessions'' in
the financial services area, because those very ``concessions'' are in
fact critical to the development of strong social safety nets and
individual prosperity in China.
The investments that millions of Chinese make in an expanding array
of personal financial instruments will be translated into a stronger
financial foundation for the country as a whole. And just as the
insurance industry in the United States has enabled some of this
country's most significant investments in infrastructure and productive
enterprises, the expansion of China's financial services market will
reinforce the entrepreneurial spirit that is already at work creating a
``new China.'' New York Life very much looks forward to being part of
that process.
The bottom line is that China's participation in the World Trade
Organization is a truly momentous development in that country's
evolution towards greater economic reform and political freedoms.
Congress, by approving PNTR, can send a strong signal that it
recognizes the benefits--for the citizens of both China and the United
States--of China's decision to play by global trade rules.
Thank you for your attention, and for inviting me to appear today.
Mr. Oxley. Thank you.
Mr. Watkins?
STATEMENT OF JESSE J. WATKINS
Mr. Watkins. I am here as managing director of my company
which is in New York, now that is New York and New Jersey. I am
representing the Council of Insurance Agents and Brokers, which
represent the Nation's largest commercial agents and brokers
for property and casualty insurance. I am also a director of
the U.S. China Foundation, which seeks to foster greater
economic and cultural relationships with our neighbors in the
east.
At the outset, I want to thank Chairman Oxley and
Congressman Towns for the great support you have given to us in
our quest to open Chinese markets to foreign brokers. As you
know, insurance brokerage dropped off of the table during early
negotiations with the United States. In the Oxley-Towns letter
to the Chinese Ambassador in Washington back in March, you
strongly urged the Chinese Government to include this sector in
the final Chinese agreement, which was reached with the
European Union.
I was in Hamburg, Germany last week at a meeting of the
International Insurance Brokers Association, and I am delighted
to report that the Chinese did concede to allow insurance
brokers into their agreement. Now that the EU has obtained this
new important concession from the Chinese, all brokers,
including Americans, will be beneficiary. The leadership of
this subcommittee has made an important difference in achieving
this victory and we appreciate it. Even without this
concession, though, our association strongly believes that
China should be part of the WTO. In the past year, I personally
have had an opportunity to travel to China to discuss the need
for promoting access for international insurance brokerages to
their market.
Unlike some of the other firms, my work has not been
focused singly on building a presence of my firm in the Chinese
marketplace. Instead, I have been working with the Chinese to
bring professionals to the U.S. to train them here so that they
can build an effective industry in China.
Ultimately, we hope to build the same kind of cooperative
environment with the Chinese that we have built with Europe. We
stand to benefit to the extent that the Chinese ultimately will
have needs for property casualty insurance products that need
to be serviced both here in the United States and those
products which our clients need to be serviced locally in
China. I am pleased to join the delegation from the U.S. China
Foundation to begin this effort to extend economic and cultural
ties to China. The extent of my activities have been largely
educational, and I believe strongly we must encourage trade
with China.
It is a simple issue. The Chinese are isolated, they can't
be educated. Active engagement in China in the trade's sphere
is an essential link to bringing economic prosperity and
economic freedom to China. Along the way, the prospects are
limitless for American firms to engage in these exciting
opportunities. It is difficult to argue that China's entry into
the mainstream of the world trading system would not result in
many positive benefits for the Chinese people. Distribution of
the economic rewards throughout a society lead to greater
political stability and ultimately a more Democratic process.
History has shown that a country is more likely to move toward
democracy when it has its own self-interest.
Membership in the WTO is clearly in China's interest today.
We are suggesting that China's inclusion can lead to greater
cooperation, and as a result, our ability to influence human
rights and other crucial issues will increase significantly.
This I know from personal contact.
We cannot ignore the benefits to American business. China
is one fifth of the world's population, and an on-tap potential
for U.S. businesses, many of which have already established
offices in China. The financial service industry is the crest
of the Chinese expansion. The three pillars of banking,
insurance and securities are essential if that expansion is to
continue, but those sectors must have access to the market and
be able to operate in a competitive environment with clear
rules and regulations.
The proposed structure would provide this to U.S.
businesses. We are joining in the view of the World Federation
of Insurance Intermediaries who are meeting today in Lisbon, in
which the Council is also participating. If your vote this week
fails, our efforts to change China in a positive way will
cease. Again, Mr. Chairman, thank you for your work in advance
of the cause and we appreciate the opportunity to testify
today.
[The prepared statement of Jesse J. Watkins follows:]
Prepared Statement of Jesse J. Watkins, Managing Director, Herbert L.
Jamison & Co. LLC
This statement is submitted on behalf of the members of The Council
of Insurance Agents & Brokers (``The Council''). The Council is a
national trade association founded in 1913 as the National Association
of Casualty and Surety Agents. Since 1913, The Council of Insurance
Agents & Brokers has provided industry leadership while representing
the largest, most productive and most profitable commercial insurance
agencies and brokerage firms in the U.S., and around the globe. Council
members operate in over 3,000 locations and place nearly 80%--well over
$100 billion--of the U.S. commercial property/casualty premiums. In
addition, Council members specialize in a wide range of insurance
products and risk management services for business, industry,
government and the public. Council members, who operate nationally and
internationally, also administer billions of dollars in employee
benefits.
Good afternoon, Mr. Chairman and members of the committee. I am
Jesse Watkins, managing director of Herbert L. Jamison & Co. LLC,
headquartered in West Orange, NJ, with offices in New York. I have been
an insurance broker at Jamison since 1968, and I have been engaged in
all aspects of our firm's business, which includes a full array of
property/casualty products and employee benefits, with a focus on
professional liability. Like many other insurance agencies and
brokerage firms, our business is conducted on a national scale;
additionally, we place business in international markets, and likewise
receive the business of many companies that are headquartered offshore.
I also serve as a member of the Board of Directors of the Council of
Insurance Agents and Brokers.
At the outset, the Council would like to thank Chairman Oxley and
Congressman Towns for the great support that they have given to us in
our quest to open Chinese markets to foreign brokers. In their March 28
letter to the Chinese Ambassador Li Zhaoxing, Chairman Oxley and
Congressman Towns expressed the importance of intermediaries. ``We
believe it is critically important that intermediaries be included
along China's commitments for entry to the World Trade Organization,''
they said. The letter went on to urge the Chinese government to include
this sector in the final EU/China agreement.
The Council is very appreciative of these efforts and has made
access to the Chinese insurance markets one of its highest priorities.
Indeed, in the past year, I personally have had an opportunity to
travel to China on two occasions to discuss the need for promoting
access for international insurance brokerages to their markets. Unlike
some other firms, my work has not been focused singularly on building a
presence for my firm in the Chinese marketplace. Instead, I'm working
to bring Chinese professionals to the U.S. and to help train them to
work effectively in this industry. Ultimately, we hope to build the
same kind of cooperative environment with the Chinese that we have
already built with European firms. We stand to benefit to the extent
that the Chinese ultimately will have needs for property/casualty
insurance products that need to be serviced in the United States.
I've been pleased to join with delegations from the U.S.-China
Foundation to begin this effort to extend economic and cultural ties to
China. To the extent that my activities have been largely educational
to date, I have strong views in support of China's entry into the World
Trade Organization. It is a simple issue. If the Chinese are isolated,
they can't be educated. Active engagement of China in the trade sphere
is an essential link in bringing economic prosperity and economic
freedom to the Chinese. Along the way, the prospects are limitless for
American firms to engage in these exciting opportunities.
Last week, I attended meetings of international insurance brokers
in Europe, and I'm very excited to bring the news that the European
Union successfully has persuaded the Chinese to include insurance
brokerage as a part of their negotiated agreement on WTO entry. As you
know, insurance brokerage ``dropped off the table'' during earlier
negotiations with the United States. Now that the EU has obtained this
new and important concession from the Chinese, all brokers--including
American-based firms--will be the beneficiaries.
As noted at the outset, the crucial assistance of Chairman Oxley
and Congressman Towns helped to make this Chinese concession a reality.
Both of these leaders wrote to the Chinese ambassador in Washington,
strongly urging the Chinese government to include intermediaries in the
agreement with the EU. This pressure was also brought to the attention
of our European counterparts, and helped create the environment in
which insurance brokerage remained a priority of negotiators. We are
extremely grateful for this important assistance, which came at a
perfect time in the negotiations.
Even had this development not occurred, however, it is important to
note that we would have strongly supported China's entry into the WTO.
It has long been recognized that liberalization of trade is critical to
economic growth and stability. When markets are opened and allowed to
operate freely, society benefits from the prosperity created by a
vigorous economy. Businesses flourish, jobs are created and living
standards rise.
It is difficult to argue that China's entry into the mainstream of
the world trading system would not result in many of these positive
benefits for the Chinese people. Furthermore, distribution of the
economic rewards throughout a society can lead to greater political
stability and ultimately a more democratic process. Most Americans, I
think, agree that such stability can be most readily accomplished
through an open and competitive marketplace.
We are not suggesting that we should ignore China's many problems--
the most visible of which are human rights issues. And we are not
suggesting that by mainstreaming China that it would transform itself
into a thriving democratic society overnight. Rather, history has shown
that a country is more likely to move towards democracy when it is in
its interest to do so. And membership in the WTO is clearly in China's
interest today. We are suggesting that China's inclusion in the WTO can
lead to greater cooperation and as a result our ability to influence
human rights and other critical issues will increase significantly.
Nor can we ignore the economic benefits to American businesses.
China has one-fifth of the world's population and the untapped
potential of that market is vast. U.S. businesses are expanding at a
rapid pace and many are establishing offices in China, offering
services and products to the Chinese people and local businesses that
are beginning to flourish in many areas of the country.
The financial services industry is on the crest of the Chinese
expansion. The three pillars of a competitive market--banking,
insurance and securities--are essential if that expansion is to
continue. But those sectors must have access to the market and be able
to operate in a competitive environment with clear rules and
regulations that are not subject to the arbitrary whims of the
government. The WTO structure provides stability for US businesses
operating abroad.
With the financial sector, a liberalized insurance market can play
a key role in enhancing such growth. The lowering of trade barriers to
enhance the operation of foreign-based insurance agents and brokers is
integral to this process.
When barriers to foreign professional insurance intermediaries are
lowered, benefits flow to all parts of the economy. One of the primary
beneficiaries is the insurance consumer. A healthy insurance
distribution system provides consumers with a greater array of choice
in insurance products and services. This in turn, allows commerce to
flourish and the economy to grow.
In the 1950s, the manufacturing and service industries of the
Western industrialized economies began to globalize and their insurance
service providers began to globalize alongside their customers.
Initially, the geographic expansion of insurance carriers and
intermediaries was undertaken to ensure that the new risks associated
with their clients' geographic expansion were identified and managed
effectively. This first stage of globalization not only improved the
lot of those engaged in cross-border endeavors, but it also provided
the host countries with the economic benefits of goods and services,
now manufactured locally, along with opportunities for local vendors to
form partnerships with foreign-based concerns and the creation of new
jobs to staff a modernizing economy.
The second stage in this process, from which much of the world
today is deriving benefits, involves providing insurance and risk
management services to indigenous or local businesses, especially those
enterprises poised for growth and expansion beyond the borders of their
home countries.
The process in which international intermediaries cultivate the
business of home-grown companies is a crucial one for the China market.
If unimpeded, this process transforms the relationship between
developed and developing countries from one of producer-to-market to
the more egalitarian one of competing producers. As the developing
economies take shape, openness to foreign insurance intermediaries can
make the difference between a country being included or excluded from
the world economy. The benefits of global trading are not possible
without liberalized trade in both insurance underwriting and
distribution.
The need for insurance is clear and becomes more so with the
increasing complexity of modern life. Without protection against the
risk of expanding into unfamiliar territory, there would be few risk-
takers and correspondingly little economic growth. Insurance earns its
place in the business world by its ability to make certain risks worth
taking, i.e. by transferring some of it to a third party formed
expressly to assume a portion of a company's overall risk burden.
The contribution of insurance intermediaries may be less widely
recognized, but is no less significant. The indispensable function of
agents and brokers is to guide companies in this search for the most
cost-effective way of managing risk. Agents and brokers help companies
find as much protection as they need, at the lowest price possible and
the best terms available.
Their contribution includes not just transferring risk to insurers,
but evaluating and implementing other means of funding for potential
losses (such as captive insurance companies and other forms of self-
insurance), providing services aimed at preventing losses in the first
place (safety and other loss control programs), and providing services
to minimize the cost of losses that do occur.
International intermediaries do not simply procure products and
services; linking their insurance and financial expertise with their
expertise in client industries, they are true market innovators.
Because of their close relationship with clients, they can often
identify the need for a new product and may even create a suitable
product before the underwriters themselves can do so.
The natural development from pure insurance intermediaries to
partners with clients in ``enterprise risk-management'' has been
evolving. The process in countries with newly-privatized economies or
newly-liberalized financial sectors is bound to be much faster as
lessons learned over the years can be applied as needed.
The foreign offices of international intermediaries are largely
staffed and often headed by local inhabitants, whose knowledge of the
local legal and economic conditions, as well as social and cultural
mores, is indispensable. If you look at the overall geographic spread
of intermediary networks, along with the make-up of their professional
service teams, its clear that intermediation as a service, beyond
simple placement of insurance, has become a worldwide commodity--a
staple of modern economic development serving the interests of all
involved.
What is of benefit to the client is the combination of local
service and international access offered. Through an international
network, intermediaries can get the best possible deal for clients
because of their ability to tap into the worldwide insurance
marketplace. The more markets intermediaries can access for risk
capital, the better it is for the buyer. Intermediaries can ``shop
around'' to get clients the most protection for the least cost.
Intermediaries also bring to bear considerable experience and
expertise that helps clients in selecting markets that are both
financially strong and well capitalized. Since the goal is not just
growth, but safe growth for clients, the ability to draw on information
about markets around the globe is key. Partnerships between local and
foreign insurers, or local and foreign intermediaries, can instantly
give the domestic insurance community critical international links.
When intermediary operations are sufficiently liberalized, those
producing goods and services can take advantage of the more competitive
financial atmosphere, making the most of their risk management budgets.
The effect of such a combination is to further propel economic growth
in all quarters.
Finally, liberalization of insurance intermediaries is a necessary
complement to similar action in the insurance and reinsurance arenas.
We recognize the importance of the US-China agreement reached last
November to American interests and the financial services industry. It
provides broad access to the Chinese market for banks, insurers and
reinsurers. The initial failure of the US-China agreement to include
insurance intermediaries was disappointing, because an offer made by
the Chinese last April would have eliminated many of the geographic and
other restrictions on foreign insurance intermediaries. Under current
rules, intermediaries can only obtain a general business license in
China, which places stringent restrictions on what they can do and
where they can operate. Furthermore, they can be subjected to the whims
of the government at any time. What is given can be taken away. It is
therefore important that intermediaries have the same rights and
protections that others in the financial services sector will receive
once China accedes to the WTO. Had the Chinese not made the concession
last week to allow intermediaries access to their markets, China would
have denied insurance consumers the full benefits of a liberalized
insurance marketplace.
We are very pleased that the Chinese are now demonstrating their
commitment to full market liberalization by providing intermediaries
with the same level of access granted to insurance companies. Insurance
companies and intermediaries work closely together and it is difficult
to imagine a viable system that allows insurers broad access to
consumers, but denies their agents and brokers the ability to
distribute those products.
We are joined in this view by the World Federation of Insurance
Intermediaries, an organization representing over 500,000 professional
insurance agents and brokers around the world, which is meeting this
week in Lisbon with representatives from our organization. If the vote
in the House of Representatives fails this week, it will be a severe
blow to all of the participants in this international organization.
We understand the economic interests at hand in this debate and the
value of bringing China into the fold of the trading fraternity.
China's market provides enormous economic opportunities for US
businesses and opens China to the benefits of goods and services that
can only lead to a higher standard of living, greater internal
stability and cooperation. The Council is on record for supporting
market liberalization of economies around the world and will continue
to do so. Again, Chairman Oxley, we appreciate your and Congressman
Towns' continued support.
We appreciate the opportunity to express our comments today.
Mr. Oxley. Thank you.
Mr. Yingling.
STATEMENT OF EDWARD L. YINGLING
Mr. Yingling. I want to thank you, Mr. Chairman, for
holding this very important hearing. Our economy and our
financial institutions are the envy of the world, but to
sustain our growth, we must continue to look for opportunities
to open markets to U.S. firms. Providing China with PNTR status
is just such an opportunity. It will help to assure that China
will adhere to international economic rules, treat businesses
operating in the country fairly, and provide American
businesses, particularly small and medium-size firms, greater
access to the world's largest emerging market.
I would like to emphasize three points. First, granting
PNTR status to China will promote stronger economic growth.
Chinese firms already have open access to U.S. markets, but up
until now, U.S. firms have found it difficult to reach Chinese
consumers. With 1.2 billion people in China and GDP growth
exceeding 10 percent per year over the last decade, the
potential export market for U.S. companies is extraordinary.
Reducing barriers to trade and opening markets will increase
U.S. exports, create new jobs to support this increase, and
help sustain our current economic expansion.
Mr. Chairman, your State of Ohio is a good example. As you
know, Ohio is already a significant exporter of goods and
services to China. According to one recent study, Ohio exports
to China in 1998 exceeded $500 million. The possibility for
further exports from Ohio and all other States, particularly
given the infrastructure needs that China faces, are
substantial.
A second point granting PNTR will create new opportunities
for banks and financial service providers. The financial
services industry is one area in which the U.S. leads the
world. U.S. banking, securities and insurance firms are the
most innovative and strongest in the world. Opening foreign
markets to financial services enables us to leverage these
advantages leading to more U.S. jobs.
In addition, and this is an important point, a local
presence in China by U.S. financial firms will help other U.S.
firms take advantage of new opportunities. PNTR will mean a
major presence by U.S. financial institutions on the ground in
China and U.S. financial institutions, say, for a small
business in Ohio, can help pave the way. They can provide the
advice on how you get into that new market, how you get the
financing, how you get through the export controls and the
import controls, and that type of thing. If we give that up to
financial institutions from other countries, their first
priority is going to be to help small and medium-size firms in
their country, not U.S. firms.
So having U.S. financial firms on the ground in China is a
big advantage to all U.S. firms. A special word is in order
about agriculture. The ABA has many members which are small
community banks in agricultural areas. We have studied, in
depth, the challenges that small rural communities face. To
ensure the survival of these communities, we must solidify
increased agricultural exports. We saw the other side of that
coin a couple of years ago when Asia had its economic problems
and the agriculture sector went right into the tank. Passage of
PNTR for China will help small rural communities and their
community banks.
Our third and final point is granting PNTR will keep the
U.S. on a level competitive playing field with our European and
Asian competitors. Today, there are over 54 foreign banks with
a presence in China. Delaying adoption of PNTR will harm U.S.
banks as European and Japanese banks seize the opportunity to
gain market share at U.S. banks' expense. Such a situation will
not only hurt U.S. financial firms in China, it will give our
financial services competitors a stronger, broader base from
which to compete throughout the world.
It doesn't just hurt us in China. It will hurt us
throughout the world. In other words, failure to pass PNTR for
China will hurt our competitive position, not just in China,
but everywhere, because our competitors will have a stronger
worldwide base than we will.
Thank you for the opportunity to present the views of the
ABA.
[The prepared statement of Edward L. Yingling follows:]
Prepared Statement of Edward L. Yingling on Behalf of the American
Bankers Association
Mr. Chairman, I am Edward Yingling, Deputy Executive Vice President
and Executive Director of Government Relations for the American Bankers
Association (ABA). ABA brings together all elements of the banking
community to best represent the interests of this rapidly changing
industry. Its membership--which includes community, regional, and money
center banks and holding companies, as well as savings institutions,
trust companies, and savings banks--makes ABA the largest banking trade
association in the country.
I want to thank you, Mr. Chairman, for holding this very important
hearing. The financial services industry in the United States has been
central to the economic expansion that we have enjoyed over the last
decade. Our economy and our financial institutions are the envy of the
world. To sustain our preeminence, we must continue to look for
opportunities to open markets to U.S. firms. Providing China with
permanent normal trade relation (PNTR) status is just such an
opportunity. It will help to assure that China will adhere to the
international economic rules, will treat businesses operating in the
country fairly, and will provide American businesses--particularly
small- and medium-sized firms--greater access to the world's largest
emerging market. Not only will it stimulate economic growth in the
U.S., but it will certainly boost economic growth in China and create a
base for economic and social reform.
In my statement today, I would like to emphasize three points:
Granting PNTR will promote stronger economic growth in both
countries;
Granting PNTR will create new opportunities for banks and
financial service providers; and
Granting PNTR will keep the U.S. on a level competitive
playing field with our European and Asian competitors.
I would like to touch briefly on each of these points in my
statement today.
GRANTING PNTR WILL PROMOTE STRONGER ECONOMIC GROWTH IN THE U.S. AND CHINA
Granting PNTR is in the best interests of both the U.S. and China.
Chinese firms already have open access to US markets, but up until now
U.S. firms have found it very difficult, in some cases impossible, to
reach Chinese consumers. The historic trade agreement reached in
November of last year, which paved the way to China's entry in to the
World Trade Organization (WTO), was an important step in opening
Chinese markets to U.S. goods and services.
The potential economic benefits are striking. With 1.2 billion
people and GDP growth exceeding 10 percent per year over the past
decade, the potential export market for U.S. companies is extraordinary
(see Figure 1). In spite of current restrictions, China has become
America's fourth largest trading partner, with total trade exceeding
$95 billion in 1999 (see Figure 2). The Congressional Research Service
projects that U.S. exports to China will grow as much as $13 billion
annually over the next 5 years, supporting as many as 200,000 jobs in
the U.S.
The reduction in tariffs will help both large and small firms. For
example, Chinese tariffs on industrial and agricultural goods will fall
by 50 percent or more over five years. This will substantially boost
the potential market for U.S. exports. In fact, the United States
Department of Agriculture estimates that improved access to China will
increase agricultural exports by $2 billion per year by 2005 and will
account for over one-third of US agricultural exports over the next
decade. Moreover, China has committed to eliminating agricultural
export and domestic subsidies, which have displaced U.S. exports in
other foreign markets.
[GRAPHIC] [TIFF OMITTED] T4766.020
The elimination of tariffs by 2005 on computers, semi-conductors
and other high-tech products will also significantly boost the
potential exports for the U.S. high-tech sector. There is no doubt that
this sector has been a driving force behind the economic performance in
the U.S. over the last five years. Exports to China from this sector
have already grown rapidly over this period. The opening of new
markets, under fair competitive rules, will help sustain this
competitive advantage of U.S. firms.
Mr. Chairman, your state of Ohio is already a significant exporter
of goods and services to China and can serve as an example of what is
at stake. According to the Massachusetts Institute of Social and
Economic Research, Ohio exports to China in 1998 exceeded $260 million.
Including goods from the U.S. going through Hong Kong to China, as well
as exports from other states that pass to China through Ohio ports,
adds another $256 million to the Ohio export total, according to K.C.
Fung and Lawrence Lau.1 The possibilities for further
exports from key Ohio industries such as industrial machinery,
computers, instruments, fabricated metal products, electronic and
electric equipment, and chemicals are substantial--particularly given
the new infrastructure requirements that will face China over the next
decade.
---------------------------------------------------------------------------
\1\ Fung, K.C. and Lau, Lawrence, ``New Estimates of the United
States-China Bilateral Trade Balances,'' March 1999, pg 9. It is
estimated that over 40 percent of U.S. goods exported to Hong Kong are
then shipped to China.
---------------------------------------------------------------------------
Importantly, China is also reducing non-tariff barriers. For
example, U.S. exporters will be able to reach Chinese consumers
directly, and provide services in ways that could not have been done
before. By increasing competition and eliminating the required use of
middlemen, Chinese consumers will enjoy lower-priced and higher-quality
goods and services.
The net effect of reducing barriers to trade and opening markets is
that exports from the U.S. and elsewhere will increase substantially.
China's trade now accounts for 3 percent of world trade. Given the
potential size of the market, there is plenty of opportunity for
companies around the world to market and sell products to Chinese
consumers. The result will be increased economic growth in China, as
well as economic growth and new jobs in the exporting countries.
GRANTING PNTR WILL CREATE NEW OPPORTUNITIES FOR BANKS AND FINANCIAL
SERVICE PROVIDERS
The financial services sector is a key component of U.S. economic
growth and development (see Figure 3). The opening of China's markets
to financial firms presents tremendous opportunities for U.S. banks and
financial firms and will add to U.S. economic growth.
In this context, it is important to stress that the arena of
financial services is one in which the United State clearly leads the
world. In banking, securities, insurance, and other aspects of
financial services, U.S. firms are generally regarded as the most
innovative and the strongest. Opening foreign markets to our financial
services firms enables us to expand these advantages, which of course
lead, to more jobs in the U.S. In addition, to the degree U.S.
financial institutions can set up local offices and come to know local
economies, other U.S. firms will benefit, as the financial firms can
provide advice on how to compete in those local economies. In other
words, as China opens up, competitive strength of U.S. financial
service companies will help promote not only financial service jobs in
the U.S., but jobs in other sectors as well.
Due to market restrictions, investment and lending in China has
been limited. For example, direct investment in China lags far behind
other countries (see Figure 4). According to Goldman Sachs, China's
domestic banking market is $1.1 trillion in deposits and $1 trillion in
loans. As of June 1999, deposits and loans had grown 20 percent and 16
percent, respectively.
[GRAPHIC] [TIFF OMITTED] T4766.021
U.S. banks will have full market access by 2005 after China's
accession into the WTO. This means that U.S. banks will be allowed to
engage in all transactions that Chinese banks conduct today, including
engaging in local-currency transactions with Chinese companies (within
two years) and retail banking transactions with Chinese consumers
(within five years). Moreover, all limits on geographic expansion
within China will be lifted within five years. China will allow foreign
institutions to establish direct branches or be allowed 100 percent
ownership in subsidiaries without any numerical or geographic
limitations. This is on par with what OECD countries have agreed to and
is superior to commitments by most other developing countries. Foreign
financial firms will also be allowed to acquire equity stakes (with
limitations) in Chinese fund management companies and underwrite
domestic securities.
Products that U.S. banks would likely offer include foreign
exchange, hedging, local-currency-based project finance and interbank
transactions, syndicated lending, and cash management for large
corporations. Chinese financial consumers will also benefit as consumer
credit markets become more efficient and more readily available. One of
the largest financing needs will be for infrastructure and
telecommunication improvements, estimated to be $1 trillion. China's
private and public sectors cannot finance this alone; foreign sources
of funding will be required.
Equally important is that the best practices of U.S. banking
institutions will be exported to China. This will lead to more
effective risk management, transparency of financial balance sheets and
appropriate allocation and utilization of capital and credit.
Changes will also occur in insurance and securities markets as
others on this panel will testify. Relative to the size of the economy,
capital markets are small. This fact does suggest substantial growth
potential. However, major steps will be required to complete a modern
regulatory and legal framework.
Not only are there direct benefits from providing financial
products and services in China, but there are many indirect benefits
from U.S. banks as well. For example, U.S. banks provide export
credits, trade finance and foreign exchange products to U.S. companies.
They also lend to exporting companies such as the agricultural sector.
In fact, it has been estimated that 80 percent of all exports to those
with in China are produced by small to mid-sized firms. These
companies, of course, rely on local bank financing for production and
inventory control.
A special word is in order about agriculture. The ABA has many
members which are small community banks in agricultural areas. We have
studied in depth the challenges small rural communities face. Many
believe the most important thing that could be done to ensure the
survival of such communities is to solidify and increase agricultural
exports. Clearly we saw the impact of the Asian economic crisis a few
years ago on these communities. China is obviously a huge market for
U.S. agriculture. As is the case with financial services, agriculture
is an arena in which U.S. producers shine. Passage of PNTR for China
will help small rural communities and their community banks.
There are of course many challenges ahead, and the difficulties
they present should not be underestimated. These include the promotion
of private sector firms, the need to clean up bad loans and enhance
competition among banks, and the need to develop well-functioning
financial markets. As China's economic wealth increases, however, these
changes should occur, as will the demand for more financial services.
granting pntr will keep the u.s. on a level competitive playing field
with our european and asian competitors
It is important to keep in mind that China will receive the
benefits of greater trade regardless of whether the U.S. takes this
important step. China's accession to the WTO is near certain. The
critical question, therefore, is whether U.S. banking and financial
services firms (as well as firms in other sectors) will be allowed to
benefit from the opening of China's markets.
As indicated above, China will face major infrastructure,
telecommunications and energy needs requiring significant foreign
capital and financing. Modernizing its economy requires a significant
capital investment. With the PNTR, U.S. banking institutions will be
able to provide new products and services. But the competition for
these markets will be intense. Today there are over 50 foreign banks
with a presence in China. Delaying adoption of PNTR will harm U.S.
banks as European and Japanese banks seize the opportunity to gain
market share at U.S. banks expense. Such a situation would not only
hurt U.S. firms in China, it would give our competitors a stronger,
broader base from which to compete throughout the world. U.S. financial
services companies must be allowed to maintain our preeminent status by
opening markets for our products and services.
Mr. Oxley. Thank you.
And our final witness, Mr. Mastel.
STATEMENT OF GREG MASTEL
Mr. Mastel. Thank you, Mr. Chairman. My name is Greg
Mastel. I am the director of the Global Economic Policy Project
of the New America Foundation. I am happy to be here today
before the subcommittee. I want to testify today regarding the
granting of PNTR status to China and China's membership in the
World Trade Organization. I plan to focus my remarks on the WTO
accession agreement with China and its record of keeping trade
commitments and the ability of the WTO to cope with China.
On paper, many have mentioned the WTO accession agreement
negotiated between the United States and China has many
positive features. The recent bilateral WTO accession agreement
between the EU and China in which all WTO members will benefit
appears to further strengthen the ultimate WTO accession terms
with China. However, the key question remains: Will China make
good on its promises? Ultimately, the WTO is a trade agreement.
It has a detailed process for enforcing compliance, but as the
ongoing conflict between the United States and Europe on
several agricultural issues demonstrates, that process has a
number of flaws and implementation of promises and dispute
settlement panel decisions is far from automatic.
The best indicator of China's willingness and ability to
implement the promises it has made in the WTO context is its
record in implementing other trade agreements. In the last
decade, the United States and China have concluded a number of
major trade agreements covering topics from protection of
intellectual property to textile imports.
A detailed record of China's compliance with these
agreements is included in a recent article I wrote for the
Weekly Standard, which I asked to be included in the record of
the hearing. The conclusion that can easily be drawn from the
Chinese trade history is that China has a poor record of
keeping its trade promises that is has made to the United
States. Every major trade agreement the United States and China
have struck has been dogged by repeated instances of Chinese
noncompliance, and at times, open violation of the terms of the
agreement.
China's supporters often point to several understandings
struck on intellectual property as evidence of China's
willingness to keep its trade commitments. Without question,
the United States has invested a much greater effort in
enforcing agreements on this topic than any other. In most
areas, the United States has not seriously challenged China's
agreement violations. With regard to intellectual property
piracy, however, the United States has formally threatened to
impose trade sanctions on China on at least three occasions to
force China to live up to its bilateral agreements on the
topic.
As a result of this pressure, there is evidence that China
has made an effort to curb piracy. As any informed observer
would concede, however, piracy of intellectual property, often
directly involving Chinese Government ministries, the People's
Liberation Army, or the relatives of China's leaders, remains a
widespread problem in China. In fact, industry estimates of the
piracy problem in China are that piracy rates are over 90
percent in most categories, and that total losses are actually
higher than they were in 1995 when the Clinton administration
began intense efforts to enforce the agreement. Moreover, the
progress that has been made is the direct result of repeated
threats of sanctions by the United States. Without these
threats, China is likely to have made little progress in
fulfilling its negotiated promises.
Often observers seem to assume that the WTO will
automatically be able to improve China's compliance with its
trade agreements. There is simply no basis for this assumption.
The WTO has the potential strengths over bilateral
understandings of obligating China to meet a wider array of
commitments and bringing some multilateral pressure to bear on
China to reform its trade policies.
Unquestionably, these are positive features, but the WTO is
not well suited to policing China. The WTO is the ultimate
rules-based, market-oriented organization. The fundamental
problem is that China is neither a rules-based country nor a
fully market-oriented economy, the ultimate square peg in a
round hole.
Given the arbitrary and non-transparent manner in which
Chinese ministries often make trade policy, it is difficult to
even determine exactly what Chinese trade policy is in some
areas, let alone actually win a WTO dispute settlement panel
finding against China. As a result, the WTO is likely to suffer
from exactly the same type of compliance problems in China that
have plagued bilateral trade agreements, and the United States
will have given up its option to impose bilateral trade
sanctions on China to enforce the agreements. At some point
China, should become a WTO member.
In a perfect world, it may be wise to keep China outside
the WTO for a few years to allow its legal system to mature and
the economic reform process to advance further. But policy is
not made in a perfect world. I am cautiously willing to support
China's WTO's membership, provided the United States invest
time and effort to enforce the agreement. Congress could play
an important role in ensuring the necessary time and energy is
devoted to enforcement.
In general, the Congress has taken more interest in
enforcing trade governments than various administrations. In
the case of the Clinton administration, much critical work is
taking place in the last days of the administration at a time
when many administration officials seem eager, perhaps too
eager to complete China's WTO accession and convince Congress
to vote for PNTR.
PNTR is the Congress' major point of leverage vis-a-vis the
administration in China. It will be wise, in my opinion, for
the Congress to withhold its final vote on PNTR until the WTO
accession process is complete. Failing that, Congress should at
least insist that the final WTO accession protocol pay
particular attention to enforcement issues and pass legislation
to ensure regular U.S. efforts focused on enforcement.
Thank you, Mr. Chairman.
[The prepared statement of Greg Mastel follows:]
Prepared Statement of Greg Mastel, Director, Global Economic Policy
Project, New America Foundation
Mr. Chairman and Members of the Subcommittee, my name is Greg
Mastel and I am Director of the Global Economic Policy Project at the
New America Foundation.
I appreciate the opportunity to testify today before the Committee
regarding the prospect of granting Permanent Normal Trade Relations
status to China and China's membership in the World Trade Organization
(WTO).
I plan to focus my remarks on the WTO accession agreement with
China, China's record of keeping trade commitments, and the ability of
the WTO to cope with China.
THE WTO ACCESSION AGREEMENT
On paper, the WTO accession agreement negotiated between the United
States and China has many positive features. The recent bilateral WTO
accession agreement between the EU and China--from which all WTO
members will benefit--appears to further strengthen the ultimate WTO
accession agreement with China.
However, the key question will remain: ``Will China make good on
its promises?''
Ultimately, the WTO is a trade agreement. It has a detailed process
for enforcing compliance, but as the ongoing conflict between the
United States and Europe on several agricultural issues demonstrates,
that process has a number of flaws and implementation of promises and
dispute settlement panel findings is far from automatic.
The best indicator of China's willingness and ability to implement
the promises it has made in the WTO context is its record in
implementing other trade agreements.
In the last decade, the United States and China have concluded a
number of major trade agreements covering topics from protection of
intellectual property to textile imports. A detailed record of China's
compliance with these agreements is included in a recent article I
wrote for the Weekly Standard, which is attached.
The conclusion that can immediately be drawn from the record is
that China has a poor record of keeping the trade promises it has made
to the United States. Every major trade agreement the United States and
China have struck has been dogged by repeated instances of Chinese non-
compliance and, at times, open violation of the terms of the agreement.
China's supporters often point to the several understandings struck
on intellectual property as evidence of China's willingness to keep its
trade commitments.
Without question, the United States has invested a much greater
effort in enforcing agreements on this topic than any other. In most
other areas, the United States has not seriously challenged China's
agreement violations. With regard to intellectual property piracy,
however, the United States has formally threatened to impose trade
sanctions on China on at least three occasions to force China to live
up to bilateral agreements on the topic.
As a result of this pressure, there is evidence that China has made
an effort to curb piracy. As any informed observer would concede,
however, piracy of intellectual property--often directly involving
Chinese government ministries, the People's Liberation Army, or the
relatives of China's leaders--remains a widespread problem in China.
In fact, industry estimates of the piracy problem in China are that
piracy rates continue at over 90 percent in most categories and that
total losses are actually higher than they were in 1995 when the
Clinton administration began intense efforts to enforce the agreement.
Moreover, the progress that has been made is the direct result of
repeated threats of sanctions by the United States. Without these
threats, China is likely to have made little progress in fulfilling its
negotiated promises.
THE WTO AND CHINA
Often, observers seem to assume that the WTO will automatically be
able to improve China's compliance with its trade agreements. There is
no basis for this assumption.
The WTO has the potential strengths over bilateral understandings
of obligating China to meet a wider array of commitments and bringing
some multilateral pressure on China to reform its trade policies.
Unquestionably, these are positive features, but the WTO is not
well suited to policing China.
The WTO is the ultimate rules-based, market-oriented organization.
The fundamental problem is that China is neither a rules-based country,
nor a fully market-oriented economy.
Given the arbitrary and non-transparent manner in which Chinese
ministries often make trade policy, it may be difficult to even
determine exactly what Chinese trade policy is in some areas, let alone
actually win a WTO dispute settlement panel finding against China.
As a result, the WTO is likely to suffer from exactly the same type
of compliance problems in China that have plagued bilateral trade
agreements with China. And the United States will have given up its
option to impose bilateral trade sanctions on China to enforce the
agreements.
CONGRESS'S ROLE
At some point, China should become a WTO member. In a perfect
world, it may be wise to keep China outside the WTO for a few years to
allow its legal system to mature and its economic reform process to
advance further.
But policy is not made in a perfect world.
I am cautiously willing to support China's WTO membership provided
the United States invests time and effort to enforce the agreement.
Congress could play an important role in assuring that necessary
time and energy is devoted to enforcement. In general, the Congress has
taken more interest in enforcing trade agreements than various
administrations.
In the case of the Clinton administration, much critical work is
taking place in the last days of the administration, at a time when
many administration officials seem eager--perhaps too eager--to
complete China's WTO accession and convince Congress to vote for PNTR.
PNTR is the Congress' major point of leverage vis-a-vis the
administration and China. It would be wise for the Congress to withhold
its final vote on PNTR until the WTO accession process is complete.
Failing that, Congress should insist that the final WTO accession
protocol pay particular attention to the enforcement issue and pass
legislation to ensure regular U.S. efforts focused on enforcement.
Thank you, Mr. Chairman.
[GRAPHIC] [TIFF OMITTED] T4766.022
[GRAPHIC] [TIFF OMITTED] T4766.023
[GRAPHIC] [TIFF OMITTED] T4766.024
Mr. Oxley. Thank you. Thanks to all of our panel. Let me
begin with my questions before yielding to my friend from New
York. Let me ask Mr. Newhouse, you mentioned that Morgan
Stanley has been in China for over two decades. Are there other
comparable American companies, securities firms that are broker
dealers and investment houses that are in China as well?
Mr. Newhouse. I would have to say not comparable, in that
there has been only one license granted for a joint venture
investment bank, and that was the Morgan Stanley and CICC. It
is currently contemplated there will be a number of additional,
and this would have happened with or without a WTO quite
frankly, a number of additional joint venture licenses granted
within the next 12 to 18 months. Setting that aside, the
opportunity exists currently for virtually all international
financial intermediaries to intermediate, create between China
and in the global financial markets. In other words, to operate
as underwriters and distributors for external financings done
by Chinese enterprises and by the government. So many of us
compete in the global markets. Currently there is only one
joint venture investment bank that is domestic.
Mr. Oxley. What about European firms or other firms from,
say, South Korea or Japan? Are they entrenched in China?
Mr. Newhouse. Currently they are on the same status as the
U.S. firms, but it is clear, as I said, with the momentum to
import, if you will, transfer technology that with membership
in WTO, China will be asking other international financial
firms to embark in joint ventures for this technology transfer
with Chinese firms. Obviously, this country's failure to grant
normalized trade relationships would disqualify us from that.
So I would say if this bill were not passed, you would see
joint ventures that occur over the next 12 to 18 months. As I
said, there will be several involving partners not from the
United States, but solely from Europe and Japan.
Mr. Oxley. Mr. Whittaker, you mentioned there are 20
million Chinese on-line currently; is that correct?
Mr. Whittaker. That should be by the end of this year, yes.
Mr. Oxley. By the end of this year. How would that compare
to the number of Americans on-line?
Mr. Whittaker. I don't know for sure, 22 million now.
Mr. Oxley. So they are pretty close to us right now.
Mr. Whittaker. Growing very, very rapidly.
Mr. Oxley. Frankly, I was struck by the phone calls that
you got this morning. It pulled me away from Sportscenter. That
is how fascinating it was. It was interesting because I was
struck by the lack of information that most of the callers had,
and frankly it was real scary. I thought you did a good job of
handling it, but it was obvious that there were a lot of folks
that didn't have a whole lot of information in that regard.
They probably don't have a really firm grasp of what is really
going on in China. Was that your impression?
Mr. Whittaker. That was my impression. It is obviously an
emotional issue. There are any number of reasons why you might
not like China or have the wrong impression of what is going on
or have the wrong impression of this agreement, and that
certainly came out this morning.
Mr. Oxley. A lot of the critics of the PNTR say, well why
should we reward China for, and then fill in the blank,
whatever this particular transgression is, and the labor unions
are talking about not giving China a blank check, whatever that
means. But when I look at the agreement, all the concessions
are on the side of the Chinese. We are not giving up anything,
and they are basically making muck at opening concession in
virtually every area. They are going from 100 percent on
automobiles down to 25 percent immediately on the farm
products, opening up markets for financial services that we are
talking about today, and it boggles my mind to think that
somehow we are doing them a favor by passing PNTR. Yet that is
the kind of rhetoric we hear around these halls virtually every
day lately. It is mind boggling.
Anyone else have any comment on that?
Mr. Newhouse. I do. I would make this observation. The
Chinese are also very aware of that fact. From their
perspective, there is no economic reason why the United States
would fail to pass this status for them because, in fact, all
the benefits are to the United States.
Mr. Oxley. Where is the largest opposition in China to this
agreement?
Mr. Newhouse. Basically, in those who want to keep the
markets close, for example, the telecommunications industry,
who wants to allow almost no investment. As you know, when
Premier Zhu Rongji went home after his first attempt to
negotiate an agreement here, the conservative powers over there
made life very difficult for him. From the Chinese perspective,
if there is no economic reason for us to oppose this agreement,
the only reason for opposition must be some kind of basic
hostility to China, and that is their attitude toward what this
vote means. If there is no reason for us to do it for
economics, we must be doing it for some other reason.
Mr. Oxley. Anybody else?
Mr. Mastel. If I could take issue with the statement a
little bit. I support PNTR, as I said, in my testimony. But it
simply is not true that the U.S. gives up nothing in the
agreement. There are two major things the U.S. gives up. By
making China a WTO member, we phaseout the textile restrictions
faster than we otherwise would. That means China gets more
access to the U.S. textile market than it otherwise would if it
remained outside. Most importantly, the reason that China began
this whole effort to enter the WTO was to get some assurance
that it would be free from the threat of U.S. Unilateral
sanctions as we threaten every year to withdraw them within, as
we have threatened a number of times to impose sanctions on
them.
Those are pretty good reasons. Those are pretty compelling
reasons on China's behalf. I think it still makes sense to
grant PNTR, but it is not true we don't give up anything in the
debate.
Mr. Oxley. Give me one example of how yearly votes on most
favored nation has somehow changed attitudes or behavior on the
part of the Chinese.
Mr. Mastel. I didn't say it has changed attitudes or
behavior on the part of the Chinese. I think, in fact, the
annual threat ran out of credibility about 5 or 6 years ago,
but the threat of sanctions has made a difference. In fact, the
sanctions on intellectual property, as I explained in my
testimony, is one of the important factors to push China toward
better enforcement. The threats have some impact on China. That
is, as I said, the whole reason that China began to go down the
road for WTO membership was to get some assurance it would not
be threatened by unilateral sanctions. They are not a bunch of
rues. They have done a pretty good job of negotiating the
agreement that achieves that goal for them. The U.S. Achieves
many things, as you pointed out, but China gets some things,
too.
Mr. Oxley. It is obvious that China is going to join the
WTO whether we vote tomorrow on PNTR or not; is that correct?
Mr. Mastel. I think it is very likely, yes.
Mr. Oxley. As a matter of fact, this administration has
made it clear they would not oppose China entry into the WTO,
and after the European deal last week, it is pretty clear that
they will join the WTO. The real issue is whether we are going
to take yes for an answer in regard to all of these
concessions. That is basically the issue. I have run over time.
Let me recognize my friend from New York, Mr. Towns.
Mr. Towns. Thank you very much, Mr. Chairman. Let me begin
with you, Mr. Mastel. I am concerned about, it was your
characterization of China in its failure to comply with
commitments that it has made in the past. I note that you say
China has failed even to make public its laws and regulations
that pertain to foreign trade. What does this say about what
our expectations should be that China will comply this time
around, with its commitments to--would they actually file the
agreement? What makes us think that this would happen? Is there
any tiff here?
Mr. Mastel. I think we should have some doubt. I was really
struck today in testimony. I have done a number of these panels
in the last couple of months that all the witnesses today cited
the benefits of China's WTO accession. They seem not even to
conflict the possibility that China would not fulfill its
commitments. The reality is, every single agreement we struck
with China in the last 10 years, I know intellectual property,
on market access, on textiles, on prison labor, have all had
serious compliance problems.
In fact, as we should expect, insurance would say we should
suspect, if anything, China will not fulfill its commitments.
WTO has a different enforcement scheme than bilateral
agreements do, and it is a very well regulated process that
relies upon the rule of law and transparent processes. None of
those things really exist in China right now. There is no
reliable rule of law. Many regulations are kind of made sub-
rosa through administrative guidance. It is hard to know what
the policy is in China.
I support, as I said, WTO membership for China, but let's
be honest here. It is going to be a very long struggle to bring
China into compliance, and it is a very difficult one. WTO is
not a magical solution. It will take at least a decade,
probably more, to really bring China in compliance. That should
be the fundamental challenge the U.S. is facing now. That
should be the real issue, I think, as opposed to talking about
some of the side issues.
Mr. Towns. You agree with that, Mr. Watkins?
Mr. Watkins. I would say there is no question that having
gone and met with many of the governmental officials in China
and the provinces that there will be compliance is not
automatic. Compliance really, in most cases, is similar to our
States here. It is difficult. The Providence runs their areas,
and the central government makes policy. I do know from
institutions I have had that the central government has been
continually making efforts to impose compliance with a number
of the policies that they have agreed to. There is no question
it will take time.
My own personal feeling is in dealing with this, there will
be more competition within China to gain investment in their
local area, that that is their concern, local area, and to do
those things that are necessary in the local area, to gain the
investment. The more we can do that, the more they will deal
with that, and they will, I know in dealing with local areas,
they will do things to achieve investment that they feel is
necessary for compliance.
It will not be overnight. There is no question in my mind,
but there is a desire, one, for investment, and two, to do
those things necessary to gain investment. If that means
complying in many areas on a local basis, I think that can be
achieved, but you have to educate them and have to work with
them.
Mr. Towns. Why wouldn't the annual review get us there
faster? Going year by year?
Mr. Watkins. I really can't go into that totally, because
it really would be speculative on my part. You have to
understand China is 56 ethnic groups.
Mr. Towns. Sounds like my district.
Mr. Watkins. Or Jersey City, right? I sell to those groups,
too. It is a tough sale. But in those areas, the control of the
central government is enforceable up to certain levels, but
there is a lot of freedom on a local level in the provinces
just to maintain that control. Now, I think it really is
educational, and I do know from talking to local officials,
there is more pressure for compliance from the central
government. Whether it is achievable in all cases, I couldn't
answer that.
Mr. Towns. Yes, Ms. Valko.
Ms. Valko. Congressman, I would just like to reiterate a
little bit of what Mr. Watkins said. I don't think China
getting accession into WTO is going to be the silver bullet, as
we say, to create compliance with everything all at once. If I
can speak from the life insurance industry perspective from
where New York Life comes from, today, right now, getting a
license in that country is extremely unpredictable, is
extremely non-transparent, and what the WTO agreement will do
is start to give us some clear-cut factors as to how they
identify and how companies can get licenses. And it will not be
easily manipulated, politically done, as it has been in the
past, and I think that is one step in the right direction,
particularly from the life insurance side.
Mr. Towns. Thank you, Ms. Valko. Yes?
Mr. Newhouse. Congressman, I am always more comfortable
depending on enlightened self-interest than altruism for
compliance with agreements. The facts are that China and
China's leadership needs global openness for its economy if it
is going to sustain the kind of growth rates, 8 to 9 percent,
that are required for China to absorb its growing work force.
So they are committed to the requirement to open their economic
activity to globalization. That will not happen without the
rule of law. Governments may enter into agreements where
compliance is an issue, but businessmen don't.
So without the rule of law developing in China, the
objectives that this global openness of economy that have been
set forth by the government will not take place. Once this
happens, I think you can be confident that the rule of law, the
clarity of the regulations, will become a fact of life.
Otherwise, the objectives won't be met.
Mr. Towns. Mr. Whittaker?
Mr. Whittaker. If I might, Congressman Towns, our view
really is that the multilateral mechanism using 135 countries,
with all its imperfections and difficulties and challenges, is
far preferable to a unilateral sanction approach over the long
run. I certainly agree that we all need to be vigilant, and
actually our industry is gearing up programs to be able to work
with Chinese Government officials, U.S. Government officials,
and in the WTO, to address these kinds of issues which are a
challenge, and we understand that and we are not naive in that
sense.
But I think, as Mr. Newhouse said, ultimately what is
really going to make things change is the commitment on the
part of the Chinese Government to transform their economy. It
is in their own best interest to make it work, their own
economy, and it is also in their best interest to make sure
that they behave and act responsibly in the WTO scheme.
Mr. Towns. Thank you very much. Thank you, Mr. Chairman.
Mr. Oxley. The gentleman's time has expired. Let me just
close with a couple of questions, if I may, and we will release
this panel as I know the gentleman from New York has to go
back. Let's assume for a moment that we don't do the right
thing tomorrow and we don't pass PNTR. This is a very close
vote, one of the closest votes I have been involved in since I
have been in Congress, and it could literally could go either
way. But let's say we, for some reason, we don't do that. Let
me ask each one of you how you view that in terms of where you
stand with your current and potential competitors in the
Chinese market, where are they, who are they, and what effect
would you have?
Mr. Newhouse. As I suggested before, the short run, the
competitive impact will be that clearly the Chinese response
would be to grant concessions, and the joint venture licenses
to non-U.S. firms. But I think more importantly, from our
perspective, you can divide the world in a lot of different
ways. Our firm chooses to divide it by latitude, if you will.
Europe, the Americas, and Asia and the Pacific rim. In Europe,
with the end of the cold war and with the reform of the Eastern
European economies and the Soviet Union, that is on track. In
North America and Latin America, Latin America particularly,
with the progress Mexico is making that is on track, if you
will, from our perspective as a global investment bank.
In Asia, China is the question mark. If China goes one way,
that third leg, if you will, of our global investment banking
and securities strategy, we will prosper. If it goes the other
way, the opposite could be true. I think that, in my view, this
vote and this stance taken by the United States will have a
significant impact on the development of relationships between
China and the west or in the U.S.
Mr. Whittaker. A couple of comments. One is I think
rejection of PNTR would certainly hurt the prospects of the
reformers in China, those entrepreneurs, those political groups
that want to transform the Chinese economy. I think it would be
a statement that the U.S. for some reason, is not part of this.
I do believe that we would, as an industry, face
competition from Europe, Korea, Japan, Taiwan, any number of
locations, very tough competition, and we would expect to be
put at a disadvantage. Not only because we wouldn't get some of
the advantages that would come from our being part of the WTO
agreement with China, but also because I think our issues of
reliability, questions that our Chinese customers would have
about, are we a reliable supplier under these circumstances,
and all of this would have a negative impact on us, and it
would impact our ability to get the benefits to generate the
exports and jobs here in the United States.
Ms. Valko. We believe from the insurance industry, and
certainly from New York Life, that without PNTR, and China
remains closed to American insurers, it is very clear that the
Europeans will end up getting licenses. In the past, what has
happened is the Europeans have gotten doled out one license,
and an American company has gotten one license in any given
year. And it is very clear that if we do not end up voting for
PNTR, that we are going to be at a clear disadvantage from the
United States perspective of getting licenses in that country.
Our Europeans, the Japanese the Canadians, are going to be
the ones that get the licenses granted, and quite frankly, we
feel that we would ultimately be locked out from that
marketplace to do life insurance.
Mr. Watkins. European brokers service, European industry.
Europe would have the edge on us, and so therefore, U.S.
brokers would not be players at all.
Mr. Yingling. I think it is important, if you look at this
panel, to recognize you have high-tech and financial services
here, and if you were picking two industries where the U.S. has
a competitive leg up on the rest of the world, those would be
the two high-tech and financial services. I think they would be
more generally recognized in the high-tech area, but it is
really true in financial services. We are the best.
So we would be shooting ourselves in the foot. Clearly,
U.S. banks would be at a serious disadvantage, just as others
have talked about the advantage of the Europeans and the
Japanese in their sectors. That would be the case with banking.
But it wouldn't be just in China again. It would hurt us
throughout Asia. China is going to clearly be the economic base
of Asia over time, and it would hurt us worldwide because if
you are basically at a huge disadvantage and a huge country, it
is going to hurt you worldwide when you are trying to compete.
Again, I put in a plug for community banks here. We have
done a lot of work studying the future of rural communities,
and the key in the next few years is agriculture exports. We
are really at a crossroads in agriculture in this country, and
if we don't open up those markets for our agricultural exports
again in an area where we have a competitive advantage, our
rural communities are going to suffer, and community banks in
those rural communities are going to suffer.
Mr. Mastel. Again, not to be a contrarian today. I agree
with a lot of what was said. If we do imagine that the Congress
turned down PNTR, which I guess I think is unlikely, but if we
do imagine that, I think clearly reduction of--negative period
of U.S.-China relations and the Chinese would try to find ways
to have their ill feelings toward the U.S. known, but remember
also, the U.S. has something like a $70 billion trade deficit
with China. If the U.S. administration were willing to
aggressively use its bilateral leverage to make sure that China
didn't discriminate against U.S. companies, didn't grant
licenses to European companies, I think that would be a
powerful disincentive to China than embarking on a course of
trade retaliation. But again, unquestionably, there would be a
rough period in U.S.-China relations. I am not as certain as
some of the other panelists are that that would mean the U.S.
Would face direct retaliation. That is very difficult for the
Chinese to pull off, especially in the face of the U.S. Having
considerable resources on its own to counter those kind of
threats.
Mr. Oxley. Thank you. Mr. Rush, do you have any questions?
Well, that was good timing as we proceed to a floor vote.
Thank you all very much for your excellent testimony and the
subcommittee stands adjourned.
[Whereupon, at 3:50 p.m., the subcommittee was adjourned.]