[Senate Hearing 106-634]
[From the U.S. Government Publishing Office]
S. Hrg. 106-634
CHINA IN THE WTO: WHAT WILL IT MEAN FOR THE U.S. HIGH TECHNOLOGY
SECTOR?
=======================================================================
JOINT HEARING
BEFORE THE
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC
POLICY, EXPORT AND TRADE PROMOTION
AND THE
SUBCOMMITTEE ON EAST ASIAN AND PACIFIC AFFAIRS
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
APRIL 6, 2000
__________
Printed for the use of the Committee on Foreign Relations
Available via the World Wide Web: http://www.access.gpo.gov/congress/
senate
U.S GOVERNMENT PRINTING OFFICE
66-498 CC WASHINGTON : 2000
COMMITTEE ON FOREIGN RELATIONS
JESSE HELMS, North Carolina, Chairman
RICHARD G. LUGAR, Indiana JOSEPH R. BIDEN, Jr., Delaware
CHUCK HAGEL, Nebraska PAUL S. SARBANES, Maryland
GORDON H. SMITH, Oregon CHRISTOPHER J. DODD, Connecticut
ROD GRAMS, Minnesota JOHN F. KERRY, Massachusetts
SAM BROWNBACK, Kansas RUSSELL D. FEINGOLD, Wisconsin
CRAIG THOMAS, Wyoming PAUL D. WELLSTONE, Minnesota
JOHN ASHCROFT, Missouri BARBARA BOXER, California
BILL FRIST, Tennessee ROBERT G. TORRICELLI, New Jersey
LINCOLN D. CHAFEE, Rhode Island
Stephen E. Biegun, Staff Director
Edwin K. Hall, Minority Staff Director
------
SUBCOMMITTEE ON INTERNATIONAL ECONOMIC POLICY,
EXPORT AND TRADE PROMOTION
CHUCK HAGEL, Nebraska, Chairman
CRAIG THOMAS, Wyoming PAUL S. SARBANES, Maryland
BILL FRIST, Tennessee JOHN F. KERRY, Massachusetts
RICHARD G. LUGAR, Indiana BARBARA BOXER, California
------
SUBCOMMITTEE ON EAST ASIAN AND PACIFIC AFFAIRS
CRAIG THOMAS, Wyoming, Chairman
JESSE HELMS, North Carolina JOHN F. KERRY, Massachusetts
CHUCK HAGEL, Nebraska RUSSELL D. FEINGOLD, Wisconsin
GORDON H. SMITH, Oregon PAUL D. WELLSTONE, Minnesota
LINCOLN D. CHAFEE, Rhode Island ROBERT G. TORRICELLI, New Jersey
(ii)
C O N T E N T S
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Page
Carlucci, Hon. Frank, chairman of the board of directors, Nortel
Networks, Washington, DC....................................... 21
Prepared statement........................................... 23
Eizenstat, Hon. Stuart E., Deputy Secretary of the Treasury, U.S.
Department of the Treasury, Washington, DC..................... 5
Prepared statement........................................... 9
Thomas, Hon. Craig, U.S. Senator from Wyoming, prepared statement 4
Younts, Richard, executive vice president and senior advisor to
the CEO, Office on Asia Pacific Affairs, Motorola Inc., Austin,
TX............................................................. 26
Prepared statement........................................... 28
(iii)
CHINA IN THE WTO: WHAT WILL IT MEAN FOR THE U.S. HIGH TECHNOLOGY
SECTOR?
----------
THURSDAY, APRIL 6, 2000
U.S. Senate,
Subcommittee on International Economic
Policy, Export and Trade Promotion
Subcommittee on East Asian and Pacific Affairs,
Committee on Foreign Relations,
Washington, DC.
The subcommittees met jointly, pursuant to notice, at 10:02
a.m., in room SD-419, Dirksen Senate Office Building, Hon.
Chuck Hagel and Hon. Craig Thomas, presiding.
Present: Senators Hagel and Thomas.
Senator Hagel. Good morning. Today's hearing is our second
joint hearing with the Subcommittee on East Asian and Pacific
Affairs. This hearing will focus on what China's accession into
the World Trade Organization might mean for the United States'
high-tech industry.
On our first panel we welcome Deputy Secretary of the
Treasury, Stuart Eizenstat. Mr. Eizenstat was sworn in as the
office's Deputy Secretary in July 1999. Previous to becoming
Deputy Secretary, he served as Under Secretary of State for
Economic, Business, and Agricultural Affairs, and Under
Secretary of Commerce for the International Trade
Administration.
While he was with the State Department, he was the State
Department's senior economic official. He advised Secretary
Albright on international economic policy, and led the work on
issues ranging from trade negotiations to bilateral relations
with major international partners.
Welcome, Mr. Secretary. It is always good to have you with
us.
Secretary Eizenstat. Thank you, Mr. Chairman, Senator
Thomas. Thank you very much.
Senator Hagel. I am going to introduce the second panel as
well, Mr. Secretary, and then explain a little bit about our
vote predicament before I ask Senator Thomas to offer his
thoughts.
On the second panel we will hear from two distinguished
private-sector witnesses. Although our first witness, the
Honorable Frank Carlucci, has been a significant utility player
across the broad spectrum of private and public life, one of
the preeminent public servants of our time, Frank Carlucci is
now chairman of the board of directors of Nortel Networks, a
major multinational telecommunications firm. He is also a
chairman and partner in the Carlisle Group, a Washington-based
merchant bank, and is a member of the board of several
multinational companies.
Mr. Carlucci has served with distinction with the United
States Government. He served as Secretary of Defense from 1987
to 1989, as National Security Advisor in 1987, as Deputy
Secretary of Defense from 1980 to 1982, Deputy Director of
Central Intelligence from 1978 to 1980, and was Ambassador to
Portugal from 1975 to 1978.
I understand that Secretary Carlucci has just returned, as
a matter of fact, this weekend, from a trip to China, where he
met with the Chinese President, and also was in Taiwan, where
he met with President Lee and President-elect Chen, so we
obviously look forward to hearing Secretary Carlucci's
thoughts.
Between Eizenstat and Carlucci, I think we have essentially
covered all Cabinet positions in the U.S. Government.
Our third witness today, Mr. Rick Younts, will be the
second member of the private-sector panel. Mr. Younts is
executive vice president and senior advisor to the CEO for
Asian Affairs at Motorola.
Mr. Younts has been with Motorola since 1967. He has held
many positions with the company, including president of Nippon
Motorola in Japan. He was named executive vice president and
president of the Asia Pacific region in 1997, and became senior
advisor to the chief executive officer for Asian affairs in
1998. He has extensive business experience in the Asia Pacific
region.
I understand that he, too, has just returned from China, so
he will have some fresh insights as well. So welcome, Mr.
Younts.
Let me make a brief statement, then I will ask my friend
and colleague, Senator Thomas, to make his opening statement.
Today's hearing, as I mentioned at the opening, will focus
primarily on China's accession to the World Trade Organization
and what opportunities and challenges this may present to the
U.S. high-tech industry.
The United States and China signed a bilateral trade
agreement last November as part of China's WTO accession
process. China has yet to sign bilateral agreements with the
European Union and a handful of other countries. Once that
process is complete, China's accession protocol and the working
party report will be issued, and China will be ready to accede
to the WTO.
The U.S. Congress will soon face a vote on whether to grant
China permanent normal trade relations, [PNTR]. On Tuesday, the
House leadership announced that the House will hold a vote on
PNTR the week of May 22. The Senate leadership has not yet
scheduled a vote.
The PNTR vote, in my opinion, will be one of the most
important votes of this Congress. It is more a question of
whether we want our businesses, our farmers, and our workers to
enjoy the benefits of the U.S.-China bilateral trade agreement
that we negotiated last November.
One of the most important international issues facing us
today is how America will deal with the development of China as
a new world power. We must engage China, but with our eyes wide
open, and with a clear understanding of the limitations, the
dangers, the realities, and certainly the possibilities of this
relationship. To do otherwise would be unwise.
We must not allow the United States to become economically
and geopolitically isolated from the world's largest and
fastest growing market. But more important for the long term,
failing to engage China might encourage it to move along a path
contrary to America's interest in Asia. This is something we
must avoid.
Granting China PNTR is clearly in the best interest of our
country. China's entry into the World Trade Organization is
inevitable. It will happen. World Trade Organization membership
will force the Chinese Government to implement far-reaching
domestic economic reforms and strengthen the rule of law. This
is the China that we must encourage.
The accession agreements that China has negotiated for WTO
entry contain wide-reaching market access provisions. America
must grant PNTR to China to enjoy the benefits of these
provisions. American businesses and agricultural producers will
be able to compete in every segment of the Chinese market for
goods and services, which we already accord to China in our own
market. We give up nothing, and we gain everything.
If we fail to grant PNTR to China, our European and
Japanese competitors will rush to fill the vacuum. We must not
lock ourselves out.
As Congress moves closer to voting on this issue, it is my
hope that our witnesses today will help shed some light on what
China's accession to the WTO might mean for our high-technology
industry if we grant China PNTR. I also would like to hear our
witnesses' views on what it would mean for the high-technology
sector in America if China accedes to the WTO and the U.S.
Congress does not grant PNTR to China.
Again, I welcome our witnesses.
Before I ask Senator Thomas, who is chairman of the East
Asian and Pacific Affairs Subcommittee of the Foreign Relations
Committee, to share with us his thoughts, we have scheduled, at
least as of 10 minutes ago, a series of two votes, beginning at
10:30.
So what we will do is get some opening statements, then we
will have to call a brief recess to the hearing, and we will go
vote and come back with much dispatch and high anticipation.
Like I said, this was 10 minutes ago. It has been moved to
10:40 now. So, Mr. Secretary, you have even more time than
originally allotted. So we will do the best we can with what we
have, where we are.
That is an old Teddy Roosevelt saying, Mr. Chairman.
Now, my friend and colleague, the chairman of the East
Asian and Pacific Affairs Subcommittee, Senator Thomas.
Senator Thomas. Thank you. Good morning to you. I am
pleased to participate together in this hearing this morning. I
think it is important that we talk about the imports/exports
trade as well as general foreign policy as we deal with these
kinds of issues.
It is no surprise, and you have already heard this, that I
fully support China's accession to the WTO and the normal
trading relationship. I think there are three reasons why we
should do this, and without being a little duplicative here,
but first of all, lots of folks, I think, in this country do
not realize that we are the ones that are going to benefit.
I happened to be in China last year before the Premier was
on his way over here to make the arrangements, and we talked a
great deal about it. Some great things have been done in
agriculture, for example. All we have to do is implement those.
So we are the ones that gain. We are already providing those
kinds of things, as the chairman indicated.
Of course, we will have to be very careful that there is,
in fact, the dismantling of tariffs, the non-tariff barriers
that we have in the past, intellectual kinds of things, and so
on, so it will not be difficult.
Second, I think entry into the WTO will have sort of a
soothing effect on our whole relationship, and that will be
good. It seems to me that many of the problems that we
experience over in that part of the world are problems that are
going to take time to resolve; and if we can simply hold sort
of a steady course of that over time, maybe even a generational
change, why, things will change a great deal. Of course, the
trade deficit is of great concern to us, and it continues to
grow. We need to do something about that.
The third thing, and the thing that I feel very strongly
about, is there are many things that are done in China that
lots of people here do not agree with. They are certainly
different than what we would do. We would like to see those
changed, but I think the better way to do that is to open up
with China, let them move into a new world of markets, a new
world of more individual freedom. You can see that on the south
China coast now. So we will do that.
So in any event, I am glad to here. High tech is one of the
factors. I am also very much interested in agriculture, which
is equally as important.
So thank you, Mr. Chairman, for sharing this, and I look
forward to the testimony.
Prepared Statement of Senator Craig Thomas
Good morning. I am pleased to be participating in this joint
hearing between our two subcommittees today. I'll keep my statement
brief so that we can get to our witnesses.
It will come as no surprise to the people in this hearing room
today that I fully support China's accession into the WTO. I do so for
three reasons. First, although there are some Members of Congress who
appear not to grasp this basic fact, giving China permanent NTR status
pursuant to the WTO regime is not a gift to the PRC. Rather, the
agreement requires China to dismantle its present system of tariff and
non-tariff barriers which prevent the entry of a whole range on U.S.
goods and services into that country. We are the true beneficiaries in
this deal.
Second, getting China into the WTO will have a soothing effect on
our relations. A major irritant in our bilateral relationship over the
last several years has been disagreements with China over its inability
to live up to its trade agreements with us. In joining the WTO, China
will be multilateralizing any such disagreements. In addition, the
trade deficit--another source of friction--will decrease since we will
be able to export more goods and services to the PRC once tariffs and
other barriers are lowered.
Third, by drawing China further into the family of nations, I
believe we speed the process of opening it up to world economic,
democratic, and human rights norms.
This is, of course, not the first Senate hearing on some aspect of
the WTO agreement, nor will it be the last. But it is the first, I
believe, to focus on its effects on the U.S. high technology, sector.
It is a fitting topic, since clearly high tech is presently the fastest
growing sector of our economy and promises to continue to be for the
next several decades.
Senator Hagel. Chairman Thomas, thank you.
Secretary Eizenstat, thank you again for appearing, and we
are always grateful to have you with us.
STATEMENT OF STUART E. EIZENSTAT, DEPUTY SECRETARY OF THE
TREASURY, U.S. DEPARTMENT OF THE TREASURY, WASHINGTON, DC
Secretary Eizenstat. Thank you, Mr. Chairman, and thank
you, Chairman Thomas.
China's accession into the WTO is in the fundamental
interests of American security and reform. It is a decision of
historic dimensions, and the legislation which we forwarded to
Congress to grant PNTR to China once it has completed its
accession makes sure its WTO accession is on terms at least as
good as those in our bilateral agreement, which we concluded in
November.
In fact, Mr. Chairman, you mentioned the EU negotiations.
As other countries complete their bilaterals, the terms can
only get better, as we will benefit from all further
concessions that China makes to other countries.
I would like to divide my testimony into four parts: The
commercial benefits of accession, our stake in market reforms
in China, the broader strategic case for accession, and then
specific answering of critiques.
There are no sectors that will benefit more from China's
accession than our high-tech telecommunications sector, as well
as our agricultural sector.
First, on the commercial benefits: The case is
overwhelming. We make no commercial concessions. China makes
them all. This is, frankly, the most one-sided agreement that I
have ever been a part of on behalf of the United States.
We will get unprecedented new access to China's markets for
exports of American goods and services. Their tariffs on
industrial and agricultural goods will fall by 50 percent or
more in a space of 5 years. Tariffs on a broad range of
agricultural goods will fall by roughly one-half, with even
larger cuts for priority agricultural products in the United
States. The role of state trading companies will be
progressively reduced, allowing for more market-based trade.
China is committed to eliminating agricultural export
subsidies which displace American exports to third-country
markets and reducing domestic agricultural subsidies, which
also destroy trade.
China's commitments, however, go way beyond tariff cuts, to
include the elimination of sharp reduction in a wide range of
non-tariff barriers. For example, American exporters will be
able to import directly from China themselves, distribute
within China, and offer after-sales service in ways they could
not do before.
China will phaseout a wide range of restrictions and a
broad range of services. For example, in banking, China has
accepted full market access for branches and subsidiaries of
foreign institutions, and in insurance, the Chinese market will
also be progressively more open.
Some of China's biggest reductions in barriers come in the
high-tech sector. This is a sector, Mr. Chairman, where China's
demand will be explosive over the coming 2 years. Indeed, China
may become the world's second-largest personal computer market
by the end of this year, the third largest semi-conductor
market by the end of next year. In 1999 alone, the number of
Chinese Internet users quadrupled to 9 million, and by the end
of this year may reach 20 million.
China will participate fully in the information technology
agreement, eliminating all tariffs on computers, semi-
conductors, and other high-tech products by 2005. This is
obviously a market where the United States is highly
competitive.
In telecommunications, China has agreed for the first time
to allow direct foreign investment. It will also participate in
the basic telecommunications agreement, thereby accepting pro-
competition principles such as independent regulatory authority
and interconnection rights without discrimination.
The Chinese market for a broad range of computer, Internet,
and software services, will for the first time, be open to
American companies, either through joint ventures or direct
service.
Again, the opening of these sectors comes at a time of a
powerful revolution in information and communications
technology just beginning in China. There is an enormous
potential, not just for increased American exports, but for the
freer flow of information.
Our own high-tech exports to China grew by 500 percent
between 1990 and 1998, and that is without the kind of
extensive market opening that they are granting through the WTO
agreement. No amount of censorship or monitoring can completely
control the explosion in information which this opening in
telecommunications and high tech will provide.
In addition to this new access to China's markets, we will
benefit from unprecedented provisions to protect American
workers and farmers from import surges, unfair trading, and
abusive investment practices, such as offsets or forced
technology transfers. There is no agreement that we have ever
negotiated on WTO accession that has contained stronger
measures.
For example, there is a product-specific safeguard that
would allow us to take measures focused directly on China in
case of any import surge, including in the high-tech area, that
threatens a particular industry. The agreement has very strong
anti-dumping provisions, which would allow us for 15 years to
treat China as a non-market economy.
China is required to eliminate barriers to U.S. companies
that cost American jobs, including technology transfer,
mandated offsets, local content requirements, and other
practices that were intended to drain jobs and technology away
from the U.S.
Indeed, I think in some respects, Senator Thomas and
Senator Hagel, that the commitment that China has made to open
up trading and distribution rights will be among the most
important in protecting American workers.
The reason is that companies will no longer be forced to
set up factories in China or go through Chinese Government-
approved middlemen to sell their products. They can make them
here in the United States. They can export them, using our own
distribution networks.
We also are preparing for the most intensive and extensive
enforcement and compliance effort ever mounted for a single
trade agreement. The President has requested, for example, an
additional $22 million for enforcement and compliance in this
year's budget. And for the first time, China's compliance will
be subject to multilateral enforcement under the WTO dispute
settlement mechanism, which will force China to comply with WTO
rulings, including cases we might bring, or be subject to trade
sanctions.
The bottom line of this agreement is more U.S. exports to
China, leading to more high-paying jobs for American workers.
The second point is our stake in promoting successful
market reforms. The WTO accession provides a powerful impetus
for China's economic reforms at a critical juncture in its
economic history. It will strengthen the hand of economic
reformers in China and help lock in their reform path.
For economic, strategic, and humanitarian reasons, we have
an enormous stake in the successful continuation of China's
economic reforms. China will be locking into place with their
accession a more rapid progress of market opening and reform,
and submitting themselves to global rules-based systems.
In my meetings with U.S. business representatives in
Shanghai and Beijing, when I asked them what was the single
most important thing the U.S. Government could do to help, they
said it was to promote the rule of law. WTO accession is the
most powerful way of advancing this objective. It will serve as
a catalyst for broader changes that will help promote core
American interests and values, and it will serve to promote the
cause of human rights, worker rights, and religious freedom.
Obviously, this will not happen overnight. In the meantime,
the U.S. will remain continually vigilant on human rights
abuses in China, and we will continue to express our
disapproval forcefully whenever rights are abused in China, as
we are doing this very moment, in the Human Rights Commission.
Some Members of Congress have considered the annual review
of China's PNTR status as a useful opportunity to review the
human rights situation in that country. We are committed to
working with Congress to address concerns over granting PNTR,
including opportunities to review China's human rights and
religious freedoms record.
I can assure you that we will work with Congress on this
issue and consider constructive ideas that can garner broad and
bipartisan support.
My third point is the broader strategic case for supporting
integration of China. PNTR advances our broader national
interests by promoting a more responsible and constructive role
for the Chinese state, both at home and abroad.
No one can know, of course, where China will be in 10 or 20
years. China will determine that. But what we can know is that
they are more likely to be responsible reformists if they are
integrated into the world economy.
WTO membership will not only open Chinese markets. It will
provide China's people with unprecedented openings to the
outside world. Through greater international integration,
improved telecommunications, and wider Internet access, the
Chinese people will be empowered as never before.
If the Internet has changed America, which is already an
open society, imagine how much it can change China. The more
open China is, the more likely it is to play a constructive
role in the world.
We have a vital stake strategically in China's continued
economic progress and reform. Stagnation and disintegration
would threaten their stability.
Last, permit me to answer some of the critics. First, some
say, ``Well, we have a 1979 agreement. Is that not enough?''
But I was in the Carter White House during the negotiations of
that 1979 agreement, and I can tell you, it falls far short of
providing anything like the full benefits we will get in this
agreement if China accedes.
The best we could do at that time in 1979 was a short
three-page document, providing only limited rights and
obligations. Relying on that agreement alone would deprive us
of virtually all the commitments that China has made in this
agreement.
Second, some opponents ask, ``Are we not abandoning or
turning our back on old friends in Taiwan by granting China
PNTR?'' The answer is no. This in no way affects our
commitments to Taiwan or our ability to back them up. Indeed,
Taiwan itself wants to see China in the WTO.
Taiwan is, itself, poised to join the WTO, and a
combination of Taiwan and PRC accession would create strong
opportunities for Taiwan to increase its economic ties with the
PRC.
A third critique is that opponents say, ``Will we not lose
leverage over China on human rights by seeming to reward them
despite their record?'' Fundamentally, we will have a much more
positive influence over China's behavior--and I think, Senator
Thomas, this is precisely the point you were making--if we are
actually actively engaged with China, rather than trying to
isolate it. This is not a reward for China. We are advancing
our own national interests and values.
Indeed, many human rights advocates have spoken out
convincingly in favor of WTO accession, for example, Martin
Lee, the leader of the Democratic Party of Hong Kong, and other
leading dissidents on the Mainland.
Some opponents also ask, ``Well, can we not get the same
benefits by just granting China the annual extension?'' The
answer is no. GATT Article I requires that all WTO members
grant each other any advantage, favor, privilege, or immunity
provided to other countries immediately and unconditionally.
This requires permanent NTR at the time China joins the WTO.
We cannot grant PNTR through an annual periodic renewal
process and ensure that we will get the full benefits of
China's accession commitments. Indeed, what we would be doing
is, frankly, turning those benefits over to our Asian and
European competitors.
Some opponents also ask, ``How about China's compliance
record? How do we know they will comply?'' Well, the WTO
agreement is different from our bilateral agreements in two
important respects. The obligations that China has accepted are
far more specific in detail, and it is enforceable through the
WTO dispute resolution process.
Indeed, we found that in areas where we have bilateral
agreements which are specific, like intellectual property
protection, they are doing much better. China has implemented
its bilateral agreements most successfully when its obligations
are concrete, specific, and open to monitoring, and that is
precisely what the situation will be under the WTO.
China will be subject to the WTO's multilateral review and
dispute resolution mechanisms. If they abide by panel
decisions, and implement agreements, fine. If they do not, as
the EU has not done, for example, with beef and bananas, we
will retaliate, which we have the right to do under the WTO.
Some opponents also ask, ``Why do we think this agreement
will increase U.S. exports?'' China currently has high barriers
to our exports. The improved access we will gain will lead, we
believe, to a $2 billion-a-year increase in our agricultural
exports, according to USDA estimates. And a recent study by
Goldman Sachs estimates that U.S. exports in general to China
by 2005, with this agreement, will increase by at least two-
thirds.
Some opponents also ask, ``If the agreement is so one-
sided, what does China get from it? How can it be in the
interest of both China and the U.S. at the same time?'' The
answer is that China knows that it must ensure prosperity for
12 million new workers coming into their market every year, and
they cannot do it by maintaining the status quo.
The WTO accession gives them an impetus to the kind of
economic reform they need to support their reform, and that
reform is in our interests as well.
Some opponents also ask, ``Will not China's accession lead
to more job losses in America?'' It is absolutely the opposite.
How can it, when there is no increased access for China's
imports to the U.S. market, which is already open to them? We
already have a $69 billion deficit. What we are getting is
access to their market.
Indeed, the unprecedented protections against import surges
and dumping will provide effective recourse in those cases
where China's trade practices could threaten U.S. jobs.
For all of these reasons, we think that it is critically
important that China be granted PNTR so that accession can
occur at the earliest possible date.
Thank you very much.
[The prepared statement of Secretary Eizenstat follows:]
Prepared Statement of Hon. Stuart E. Eizenstat
``the case for permanent normal trade relations with china''
Introduction
Chairman Hagel, Chairman Thomas, Ranking Member Sarbanes, Ranking
Member Kerry, and Members of the Committee, I thank you for the
opportunity to testify today on perhaps the most important
international economic issue facing this Congress. As you know, the
President has made it one of his highest priorities this year to work
with Congress to grant China permanent Normal Trade Relations, commonly
known as PNTR.
When the President submitted legislation to Congress for PNTR, he
argued that the choice is clear--China's accession to the WTO is in the
fundamental interest of American security and reform in China. The
economic, political, and strategic implications of this decision give
it historic dimensions.
This legislation enables the United States to grant PNTR to China
once it has completed its accession, provided that it is on terms at
least as good as those in our bilateral agreement concluded in November
1999. In fact, the terms can only get better, as we benefit from all
further concessions China makes to other countries.
It is important to keep in mind that the agreement we concluded
with China is a straight gain. Commercially, the agreement is one-sided
in our favor, in that China opens its markets to an unprecedented
degree while the United States simply maintains its current market
access policies. There is no down-side, only an up side for American
exporters, farmers, and workers.
It is also important to keep in mind what granting PNTR to China is
not:
--It is not about whether China will enter the WTO, which can happen
in any case.
--It is not about whether Chinese producers will have access to our
market. Our market is already open to China, which enjoys the
same access as nearly everyone else. Not granting PNTR will not
revoke this access.
--It is not an endorsement of China's record on human rights or
workers rights. We will still express our disagreements
forcefully, including in the UN and other international fora,
with or without PNTR.
--And it is not about China's policies toward Taiwan or other
strategic issues that concern us. We will continue to protect
our strategic interests, with or without PNTR, and nothing in
the WTO hampers our ability to do this.
Passing PNTR merely ensures that we reap the full benefits of our
bilateral agreement with China and its accession to the WTO. There are
three crucial advantages to the United States in passing PNTR. Let me
address each one in order.
i. the commercial benefits to the united states of granting pntr
First, the economic case for China WTO accession is overwhelmingly
compelling. The commercial benefits of granting PNTR are significant
and all one-sided for the United States. We make no commercial
concessions; China makes them all.
We would get unprecedented new access to China's market for exports
of American goods and services, with benefits for American workers,
farmers and companies. The scope of this new access is impressive, in
tariff reductions on industrial and agricultural goods, reduction in
barriers to American service providers, and especially in high-tech
goods and services:
Chinese tariffs on industrial and agricultural goods will
fall by 50 percent or more in the space of five years. For
example:
--Industrial tariffs on U.S. products will fall from an average of
25 percent in 1997 to 9.4 percent in 2005.
--In the automobile sector, tariffs will fall from 80-100 percent
to 25 percent by mid-2006, with the largest cuts in the
first years after WTO accession. Quotas on autos will be
phased out. And American auto companies will be allowed to
provide auto financing for the first time.
--Tariffs on the broad range of agricultural goods will fall by
roughly one half, with larger cuts for U.S. priority goods.
The role of state trading companies will be progressively
reduced, allowing for more market-based trade. This
improved access will eventually result in an increase of $2
billion a year in our agricultural exports to China,
according to USDA estimates. In addition, China has
committed to eliminate agricultural export subsidies, which
displace American exports to third country markets, and to
reduce domestic agricultural subsidies, which also distort
trade.
--Chinese commitments go way beyond tariff cuts to include the
elimination or sharp reduction in a wide range of non-
tariff barriers. For example, American exporters will be
able to import directly into China themselves, distribute
within China, and offer after-sale service in ways they
never could before. While it is hard to estimate the effect
of lowering these barriers, many observers think that they
are critical to competing effectively in China and are at
least as important as the tariff cuts. With these rights,
U.S. firms and farmers will be better able to sell
American-made products directly to Chinese consumers.
China would phase out a wide range of restrictions in a
broad range of services. For example:
--China has agreed to liberalize wholesale and retail distribution
services throughout China in three years.
--In banking, China has accepted full market access for branches
and subsidiaries of foreign institutions, to be phased in
progressively over five years.
--In insurance, the Chinese market will also be progressively
opened over five years, with the elimination of limits on
the number of licenses for foreign firms and geographic
scope of operations for foreign firms. In non-life
insurance, wholly foreign owned subsidiaries will be
allowed two years after accession.
Some of the biggest Chinese reduction in barriers come in
the high-tech sectors. For example:
--China will participate fully in the Information Technology
Agreement (ITA), eliminating all tariffs by 2005 on
computers, semi-conductors and other high-tech products--
markets in which the U.S. is highly competitive.
--In telecommunications, China has agreed for the first time to
allow direct foreign investment. It will also participate
in the Basic Telecommunications Agreement, accepting pro-
competition principles such as an independent regulatory
authority and interconnection rights.
--The Chinese market for a wide range of computer, internet and
software services will be opened to American companies,
either through Joint Ventures or direct service.
The opening of these sectors comes at the same time as the powerful
revolution in information and communications technology is just
beginning in China. There is an enormous potential for both
increased American exports and the freer flow of information.
American high technology exports to China grew 500 percent
between 1990 and 1998.
China's telecommunications market is the world's fastest growing.
By the end of this year, some analysts predict that China will
become the world's second largest market in both
telecommunications and personal computers. And last year, the
number of Chinese Internet users quadrupled, from 2 million to
9 million. This year, it should more than double, to 20
million. No amount of censorship or monitoring can completely
control this explosion of information. The President has
compared it to trying to nail Jello to a wall.
In addition to this new access to China's markets, we will benefit
from unprecedented provisions to protect American workers and farmers
from import surges, unfair pricing, and abusive investment practices
such as offsets or forced technology transfer. No agreement on WTO
accession has ever contained stronger measures:
A ``product-specific'' safeguard that allows us to take
measures focused directly on China in case of an import surge
that threatens a particular industry. This protection, which
remains in effect for 12 years after accession, provides
stronger and more targeted relief than our current Section 201
law.
Strong anti-dumping protections. The agreement includes a
provision recognizing that the U.S. may employ special methods,
designed for non-market economies, to counteract dumping by
Chinese exporters for 15 years after its accession.
Requiring China to eliminate barriers to U.S. companies that
cost American jobs. For the first time, Americans will have the
means, accepted under the WTO rules, to combat such measures as
forced technology transfer, mandated offsets, local content
requirements and other practices intended to drain jobs and
technology away from the U.S. Moreover, Chinese commitments to
open up trading and distribution rights will allow American
companies to export to China products made at home by American
workers, rather than seeing companies forced to set up
factories in China or go through Chinese government approved
middlemen in order to sell products there.
We are already preparing for the most intensive enforcement and
compliance effort ever mounted for a single trade agreement. The
President has requested an additional $22 million for new enforcement
and compliance efforts, which will focus in large part on China. The
Administration's aggressive monitoring and enforcement efforts will
include the private sector, other WTO partners, and Congress. For the
first time, China's compliance will be subject to multilateral
enforcement under the WTO dispute settlement mechanism--which will
force China to comply with WTO rulings or be subject to trade
sanctions. We want to work closely with Congress on this important
issue.
The bottom line of this agreement is more U.S. exports to China,
leading to more, high-paying jobs for American workers. All we have to
do is vote PNTR, so we can get the full benefits of the agreement, just
as our competitors will.
ii. america's stake in promoting successful market reform in china
Second, WTO accession provides a powerful impetus for China's
economic reforms at a critical juncture. It strengthens the hand of
economic reformers in China and helps lock in their reform path. For
economic, strategic, and humanitarian reasons, we have an enormous
stake in the successful continuation of China's economic reforms.
China has come a long way since the beginnings of market reforms
two decades ago. Yet China has already reaped the easy gains of its
reforms to date and now faces the complex challenges of reforming its
bloated state-owned enterprise sector and restructuring its troubled
banks. Economic growth is slowing, but the labor force is increasing
even faster.
But, as the President has said, the Chinese authorities face a
dilemma: they realize that closer integration with the global economy
risks unleashing forces that they cannot control. Opening China more
fully to the revolution in communications and technology will provide
ordinary Chinese with unprecedented freedom and access to information.
But if China tries to shut its people off from international
competition, integration, and information, it will not be able to
attract the investment and know-how to build a modern economy and
deliver rising living standards and stability for its 1.3 billion
people.
Reformers at the highest levels of the Chinese government appear to
be embracing the WTO's impetus for change through initiatives to
prepare for the new competition. The central bank is preparing for
opening the banking sector. And the government is opening parts of the
economy previously considered strategically important to international
and private investors, with individuals already dominating the Chinese
Internet industry and also being allowed to take ownership stakes in
domestic banks for the first time.
With WTO accession, China is locking into place a more rapid
process of market opening and reform of its economy, and submitting
itself to a global rules-based system. In my meetings with U.S.
business representatives in Shanghai and Beijing, they told me the most
important thing the U.S. government could do to help them was to
promote the rule of law in China. WTO accession is the most powerful
way of advancing this objective.
We have an enormous national stake in supporting China's decision
for WTO accession and greater integration:
It helps support faster growth in pioductivity and wages in
China, leads to higher living standards for Chinese workers,
and promotes higher demand for our products.
It serves as a catalyst for broader changes that will help
to promote core American interests and values. To thrive as a
WTO member, China will need to become more market-based; more
respectful of personal and commercial freedoms; and more open
to the free flow of information and ideas.
China's accession to the WTO will serve to promote the
causes of human rights, workers' rights, and religious freedom,
laying the groundwork for progress in the future. WTO
membership will further the development of the rule of law and
the opening of China, which will advance our core values.
This will not happen overnight, however. In the meantime, the
United States will remain continuously vigilant on human rights abuses
in China, and we will continue to express our disapproval forcefully
whenever rights are abused in China. The Administration already
monitors the situation continuously and issues an annual report. We
also will make continuing use of the UN and other international fora,
working with countries that share our core values. But let's keep in
mind that we have much more positive influence over China's behavior if
we are actively engaged with China, rather than trying to isolate it.
Of course, we understand that Congress is concerned about these
issues. Some Members of Congress have considered the annual review of
China's NTR status a useful opportunity to review the human rights
situation in that country, even though the connection is arguably
tenuous. The Administration is committed to working with Congress to
address concerns over granting PNTR, including opportunities to review
China's rights record. I can assure you that we will work with Congress
on this issue, considering constructive ideas that could garner broad,
bipartisan support.
iii. the broader national strategic case for supporting greater
integration of china
Third, and finally, PNTR advances our broader national interests by
promoting a more responsible and constructive role for the Chinese
state, both at home and abroad.
We cannot know where China will be in 20 years, or even 10 years,
what its economy will be like, how it will treat its people, what its
role in Asia and the world will be like. China will determine that. But
we do know that they are more likely to be a responsible, reformist
power if they are more integrated into the world economy.
A policy of welcoming China into the community of nations--rather
than being a voice that keeps China out, even when it offers to live by
the rules--is a policy that supports our deepest national security
interests.
WTO membership will not only open Chinese markets, but will also
provide China's people with an unprecedented opening to the outside
world. For example, accelerating the information revolution, through
greater international integration, improved telecommunications and
wider internet access, can only help empower the Chinese people. As the
President has pointed out, if the Internet has changed America, which
is already an open society, imagine how much it could change China. The
more open China is, the more likely it will play a positive role in the
world.
By learning to play by the rules, both internationally and
domestically, China will strengthen the rule of law, which will enable
it to become a more reliable partner and a fairer society. It can even
lay the groundwork for protection of core values in China, such as
human rights, religious freedom, and workers rights.
We also have a vital strategic stake in China's continued economic
progress and reform. Stagnation and disintegration would threaten
China's stability. If we have learned anything in the last few years,
from events in Russia and elsewhere, it is that the weaknesses of great
nations can pose as big a challenge to the United States as their
strengths.
We must not seek to cut China off from the economic and broader
forces that are most likely to change it in the right direction. As the
President has said, simply bringing China into the WTO does not
guarantee that its government will take a responsible, constructive
course. But it will lead the authorities to confront that choice
sooner, and it will make stronger and more visible the imperative to
make the right choice.
And that, along with the compelling commercial benefits and the
need to support economic reform, is the imperative for us to make the
right choice on PNTR and fully welcome China into the WTO.
iv. answering the critics
Opponents of PNTR and China's accession to the WTO have raised some
important questions, which I would like to take the opportunity to
address:
Some opponents ask--Why do we need PNTR? Isn't the 1979 agreement
enough?
I was in the Carter White House during the negotiation of
the 1979 Agreement, and I can tell you that it falls far short
of providing us with the full benefits of China joining the
WTO, based on our November 1999 agreement with them. Although
it was the best we could do at the time, the 1979 Agreement is
a short, three-page document that provides for only limited
rights and obligations, largely with respect to the treatment
of goods for import.
Reliance on the 1979 Agreement would deprive the United
States of: virtually all market access provisions negotiated in
November for services; meaningful market access for goods; key
elements necessary to safeguard American workers from import
surges ana unfair trade from China; and special rules and vital
enforcement rights like access to WTO dispute settlement.
Some opponents ask--Are we not abandoning or turning our back on old
friends in Taiwan by granting China PNTR and letting it into the WTO?
China PNTR and WTO accession in no way affects our
commitments to Taiwan or our ability to back them up. In fact,
Taiwan itself wants to see China in the WTO.
Taiwan is also poised to join the WTO. A combination of
Taiwan and PRC accessions to the WTO will create opportunities
for Taiwan to increase its economic ties with the PRC, build
trust and confidence through expanded trade and investment, and
lower barriers to freer flow of ideas between the two sides of
the Strait.
Some opponents ask--Don't we lose leverage over the Chinese on human
rights by granting PNTR and appearing to reward them despite their
human rights record?
Fundamentally, we have much more positive influence over
China's behavior if we are actively engaged with China, rather
than trying to isolate it. This is true in a number of ways,
including strengthening of the rule of law, providing freer
access to information, and creating more economic freedom. We
are not granting PNTR to reward China, but because it advances
our national interests and values.
Many human rights advocates have spoken out convincingly in
favor, of WTO accession. For example, Martin Lee, the leader of
the Democracy Party of Hong Kong, has said, ``The participation
of China in the WTO would not only have economic and political
benefits, but would also serve to bolster those who understand
that the country must embrace the rule of law.'' A Chinese
dissident, Ren Wanding, a leader of the 1978 Democracy Wall
Movement, sees it as ``a new beginning.''
Some opponents ask--Can't we just continue to grant China NTR status
annually?
The answer is no. GATT Article I requires that all WTO
members grant each other ``any advantage, favor, privilege or
immunity'' provided to other countries ``immediately and
unconditionally.'' This requires permanent NTR at the time
China joins the WTO. We cannot grant NTR through an annual or
periodic renewal process and ensure that we get the full
benefits of China's accession commitments. Our Asian, European
and other competitors would reap the benefits, however.
Even if this were a WTO-consistent option, which it is not,
one must consider the uncertainty for American farmers,
businesses, and workers that would have committed resources to,
developing customers in China. The possibility that within a
certain period, the access on which they based their business
plans would be withdrawn could frustrate any meaningful
opportunities.
Some opponents ask--China has never followed through on past
commitments--why would they do anything different now? Are there
concrete examples of successful compliance and enforcement with past
agreements?
The WTO agreement is different from our bilateral agreements
in two important respects--the obligations that China has
accepted are far more specific and detailed, and it is
enforceable through the WTO dispute settlement process. The
Administration will aggressively monitor and enforce this
agreement, using WTO dispute settlement and the WTO's
monitoring mechanism.
We will commit the necessary resources to ensure Chinese
compliance, and we are seeking new resources for the FY 2001
budget. Under President Clinton's proposal, the United States
would dramatically increase the resources of agencies that
monitor and ensure our trading partners' compliance with trade
agreements.
China's record of compliance is admittedly somewhat mixed.
But vigorous enforcement of our bilateral agreements with China
has resulted in significant improvements in intellectual
property (IP) protection. Before our IP agreements in 1992 and
1995 and the enforcement action in 1996, China was one of the
world's largest IP pirates. Today, China has improved its legal
framework--and it has substantially eliminated the illegal
production and export of pirated music and video CDs and CD-
ROMs.
Generally, China has implemented its agreements most
satisfactorily when its obligations were concrete, specific,
and open to monitoring. Previous bilateral agreements have not
adequately dealt with the range of barriers and trade-
restrictive practices our exporters face in China. The November
1999 bilateral agreement has far more specificity in terms of
well-defined commitments than we were able to achjeve in
earlier agreements.
China's commitments are subject to the WTO's multilateral
review and dispute settlement mechanism. The U.S. monitoring
and enforcement efforts will be complemented and enhanced by
the 134 other WTO Members with a common interest in seeing
China's market opened.
Some opponents ask--Why do we think this agreement will increase U.S.
exports? Why should China be any different from Japan, which is in the
WTO and where we still have difficulty distributing our goods and
providing services?
China currently has high barriers to U.S. export. In our
November agreement, China made broad commitments to eliminate
both tariff and non-tariff barriers to American exports. On
U.S. priority agricultural products, for example, tariffs will
drop from an average of 31 percent to 14 percent by 2005. This
improved access will eventually result in an increase of $2
billion a year in our agricultural exports to China, according
to USDA estimates. Industrial tariffs on U.S. products will
fall from an average of 24.6 percent in 1997 to an average of
9.4 percent by 2005. A study by Goldman Sachs estimated that
U.S. exports to China could increase by at least two-thirds by
2005.
But China's commitments extend well beyond tariff
reductions. For effective access, American companies, farmers
and workers need the ability to export, import and distribute
goods and services in China--these rights are currently denied,
but they will be permitted under the agreement. It was in part
because of our experience with Japan that we sought to ensure
strong commitments on these trading and distribution rights.
Some opponents ask--If the agreement is so one-sided, what does China
get from it? How can it be in the interests of China and the U.S. at
the same time?
In the last 20 years, China has made remarkable progress,
but it faces daunting problems as well. China's economic growth
has slowed just when it needs to create more jobs and maintain
support for economic reform. For all the progress of China's
reforms, private enterprise still accounts for less than one-
third of its GDP. In other words, China cannot maintain
stability or ensure prosperity by maintaining the status quo.
The U.S. shares a common interest with those in China's
leadership who support reform. Continuing stability and
economic growth in China supports America's security and
economic interests.
Some opponents ask--Won't China WTO accession just lead to more job
losses in America?
China's accession to the WTO will lead to increases in U.S.
exports, creating more high-paying jobs. But there will be no
increased access for Chinese imports to the U.S. market, which
might raise concerns over job losses. In fact, the
unprecedented protections against import surges and dumping
will provide effective recourse in those cases where Chinese
trade practices might threaten job losses.
China's commitments will also make it easier for our
businesses to make their products with U.S. workers in America
and sell their products themselves in China. New investment
rules will prevent Chinese practices designed to force foreign
companies to move production to China, like forced technology
transfer or requirements for local content.
Thank you for the opportunity to present the compelling case for
China's accession to the World Trade Organization and granting it
Permanent Normal Trade Relations status. I look forward to working with
this Committee and the Senate on this issue, and I would be happy to
answer any questions that you may have.
Senator Hagel. Mr. Secretary, thank you.
What Chairman Thomas and I will do is each take 7 minutes.
I think that will get us close to a time when we will be
serious about getting over to vote, if that is all right with
you, Mr. Secretary.
I would like to go back to a couple of points that you
made. On the issue of permanent normal trade relations, which,
as we all know, and we have talked about, the Congress will
deal with in the next few weeks' votes, there has been some
talk, speculation, that there may well be some conditions
offered to permanent normal trade relations, maybe
environmental, maybe labor, maybe other. Could you give us the
administration's position on PNTR with conditions?
Secretary Eizenstat. Yes. It is critically important to us
and, indeed, it is the obligation that we would have under WTO
and GATT requirements, that China's accession be unconditional.
That is, not conditioned on annual reviews, not conditioned on
any specific substantive area.
Now, we know that there are a number of interests in the
Congress on both sides of the aisle in religious freedom and
human rights. We are entering into discussions with Members on
both sides of the aisle on how to maintain continuing oversight
on China's religious freedom and human rights records, but
without making that a condition of PNTR.
So these dialogs are continuing, but it is critically
important--and I want to make it absolutely clear--that we
cannot condition PNTR.
Senator Hagel. Thank you. On a more specific area, as we
know, the Chinese Government has not allowed its citizens free
access to information generally, Internet, cable television,
air waves.
With the accession of China to the WTO, and if we are able
to pass permanent normal trading relations with China, do you
think this would improve the situation, where the citizens of
China would have access, would be freed up, would be given a
new sense to participate in viewing other points of view
through the media, through the Internet?
Secretary Eizenstat. There is no question that that would
be the case. There is no amount of censorship, however powerful
it may be, that can completely control the explosion in
information which will be available if PNTR is granted and
China accedes.
The amount of access to information over the Internet, the
degree to which China will open itself up to foreign investment
in telecommunications, is quite astounding. We will, therefore,
be able, for example, to have 50 percent foreign equity share
participation in electronic mail, voice mail, Internet, on-line
information, data base retrieval, 49 percent foreign equity
shares for mobile voice and data services.
Geographic restrictions will be eliminated. They will adopt
norms for telecommunications regulation, which assure non-
discriminatory interconnection rights. So there is no question,
even though they may try to do so, that censorship would be
like, as President Clinton said, trying to tack Jell-O onto a
wall.
If I may also just give a personal anecdote: When I was in
China and talking with some of our American business
representatives there, IBM, and others, I asked them in terms
of employing Chinese workers, ``Do they have access to the same
kind of E-mail and Internet service that you have to have for
American employees in connection with IBM and other factories
around the world,'' and they said, ``Of course. It is the only
way that that can happen.''
So the dialog between Chinese engineers, Chinese
scientists, and American engineers and scientists across the
Pacific will exponentially increase.
One last point: I mentioned the explosive growth in
personal computers and the Internet. We expect literally by the
end of this year that China could be the second largest market
for personal computers, and the growth in the Internet is
staggering. Last year, it quadrupled. This year, we expect it
to at least double. That kind of geometric increase is going to
increase the ability of the Chinese to access information and
to empower the Chinese people.
Senator Hagel. Do you believe this would also apply to
radio and television broadcasts, allowing access to more
information?
Secretary Eizenstat. Yes. Absolutely.
Senator Hagel. We have heard a rather joyous and positive
outlook this morning so far on PNTR, WTO accession for the
Chinese, from Senator Thomas, from me, from you. Tell us where
the problems are.
Secretary Eizenstat. Well, I tried to lay out seven or
eight critiques that people have made, to rebut each one of
them.
There are some who say, for example, that somehow this is
going to give an endorsement to China's human rights record.
Nothing could be further from the case. We will continue to
speak loudly and forcefully about their human rights
violations, but this will give us an extra hook, by more
engagement, to begin to change their conduct, to open China to
new ideas. So that is one issue.
The second, some suggest somehow this will hurt Taiwan.
Again, quite the contrary. Taiwan itself wants to see both
itself and China in. So that is a second rebuttal.
I have tried, again, to suggest in all of these areas that
we think the critiques are not well founded. The last, most
basic critique is that somehow this is going to negatively
affect U.S. jobs. This cannot happen. It cannot happen, because
we are already running a $70 billion trade deficit with China.
There is nothing in this agreement which in any way gives
China any additional market access to the United States that
they do not already enjoy. It is not a NAFTA agreement. China
gets nothing from this agreement more than they already have.
On the other hand, we get the opportunity to access a
market that has been largely closed. We have only about $14
billion in exports to China. They have $82 billion in exports
to us. Again, it is estimated by Goldman Sachs that our exports
could nearly double in 5 years.
The distribution rights also help American workers, because
no longer will U.S. companies have to, as a condition of doing
business there, move a plant there, engage a middle man,
transfer technology, deal with offsets. They will be able to
manufacture in the United States using U.S. jobs, and export to
China.
Senator Hagel. Thank you.
Senator Thomas.
Senator Thomas. Thank you.
Mr. Secretary, I think--of course, we have heard a lot
about it, but today in the paper it talked about the transfer
of some information that has to do with defense, Lockheed, in
this instance.
As we expand the use of technology and exporting it, what
are we going to do to protect ourselves with respect to the
military use of this kind of information?
Secretary Eizenstat. We have very strict rules under the
Arms Export Control Act to make sure that we do nothing that
gives China any additional advantage in the missile or high-
tech area with respect to its military.
The fact that we have already cited companies like Loral,
and that just yesterday the State Department charged Lockheed
with violating the Arms Export Control Act, shows that we have
our thumb on this issue, that we are constantly looking to make
sure that we do not relax our export controls in ways that
would give China a military advantage.
Senator Thomas. Well, apparently, your thumb was not on it
entirely, if that has already happened.
Secretary Eizenstat. Well, we often cannot prevent things
in advance. What we can do is immediately try to respond----
Senator Thomas. Mr. Secretary----
Secretary Eizenstat [continuing]. To them, but certainly--
--
Senator Thomas [continuing]. If you cannot do it in
advance, then it is already gone.
Secretary Eizenstat. We have very strict licensing
requirements through the Commerce Department and through an
interagency procedure, and if a company violates those
licensing requirements, we certainly step down hard. But we do
have preventive licensing.
You cannot export anything that would help their missiles
or space launch, and their military, without getting specific
licenses, and that license is granted only after an interagency
review.
Senator Thomas. My understanding is----
Secretary Eizenstat. It includes defense----
Senator Thomas [continuing]. That that is going on right
now in the Senate, is that the Defense Department does not have
a role in that, nor the intelligence agencies, and so on, that
it is----
Secretary Eizenstat. Well, there is a role. There is a
question----
Senator Thomas. May I finish, please?
Secretary Eizenstat. I am sorry. Yes, please.
Senator Thomas. And that that is the controversy that goes
on. And do you expect to change that?
Secretary Eizenstat. Well, we always are looking for ways,
Senator, to try to improve our licensing procedures. There is a
new agency process in which Defense does have a role. Commerce
does grant the licenses, but there is an interagency review,
and we will continue to make sure we try to strengthen that
process.
Senator Thomas. I think that is one of the things that will
probably be more open. In terms of investment, you talked about
more investment. Will there be some requirements for joint
ownership, or a certain percentage of domestic ownership with
respect to investments by U.S. companies?
Secretary Eizenstat. In the telecommunications sector,
Senator, there are requirements for 50 percent foreign equity
ownership, and no more, in certain value-added
telecommunications services. But in other areas, like banking,
insurance, there are no such requirements.
Now, basically, in telecommunications there is a
prohibition of any foreign investment. So going up to 50
percent is a major, major improvement.
But in most areas--and this is, I think, one of the great
advantages of this agreement--you do not have to joint venture
with a Chinese company; you do not have to use a Chinese
middleman, or a state-owned enterprise to distribute your
products, as you do now. And this will give U.S. companies the
ability to manufacture here and export there, which is now not
permitted.
Senator Thomas. I see.
Secretary Eizenstat. Also, there currently are very strict
technology transfer and offset requirements for any business in
China. These will be eliminated as well.
Senator Thomas. One of the difficulties we have had over
time in Japan was the enforcement, and you mentioned that,
about more money there, but we have had agreements, and we have
had hearings, and the enforcers said, ``Well, we just were not
able to.''
The evidence was that many of those agreements had not been
enforced. Do you foresee that being a problem with these kinds
of agreements that are made here?
Secretary Eizenstat. You are correct that China does have a
mixed record in terms of implementing bilateral agreements, but
if I may respond in two ways. First, we have found that the
more specific the obligation, the more likely they are to abide
by it. This agreement is extremely specific.
Second, we do not simply have to rely on a bilateral
assurance here. We will have 134 countries who will have an
interest in China is abiding by its agreements. We can bring,
and we will bring--as we do against the European Union and
others, if there is a violation of their obligation--we will
bring a case to the WTO panel.
The WTO panel has binding control over that case, and can
force China to comply. If China does not, we have the right,
under the WTO, to exact 100-percent tariffs, up to the level of
the damage that may be caused by non-compliance.
Senator Thomas. Japan is a member of the WTO, are they not?
Secretary Eizenstat. Sir?
Senator Thomas. Japan is a member of the WTO.
Secretary Eizenstat. Yes.
Senator Thomas. Have we brought any actions on their
enforcement?
Secretary Eizenstat. We have brought actions against the
EU. I am not sure how many cases we have brought against Japan.
I think there have been some.
Senator Thomas. Maybe. You mentioned, I think, that some of
these things would take place immediately. My understanding is,
for instance, on anti-dumping, it takes 15 years to implement
that.
Secretary Eizenstat. No, sir; it is actually the opposite.
We will have, uniquely for China, the right to enforce our
anti-dumping laws for 15 years by treating them as a non-market
economy. So it actually gives us a stronger hand for import
surges or for unfair pricing, and they can be treated as a----
Senator Thomas. The provision remains for 15 years.
Secretary Eizenstat. That is correct.
Senator Thomas. It does not take 15 years to----
Secretary Eizenstat. That is correct. We can treat them--
and this was one of the most contentious issues, Senator. They
wanted to be treated as a market economy. Treating them as a
non-market economy gives us a much greater control in terms of
very tough anti-dumping procedures, and they, in the end,
allowed us to do that for 15 years.
You mentioned again the Japan case. The biggest case we
brought against Japan in WTO was the Kodak case.
Senator Thomas. I see.
Thank you.
Senator Hagel. Senator Thomas, thank you.
Mr. Secretary, we are going to dash off and vote. We have
two votes back to back. We are running the clock down here, so
we could get as much time with you. I do not know what your
schedule is, but if it would be possible for you to stay, I
have a couple more questions, and the committee would
appreciate it very much, if that is possible.
Secretary Eizenstat. I would be happy to.
Senator Hagel. Thank you.
The committee will then stand in recess until we vote.
[Recess: 10:43 a.m.--11:15 a.m.]
Senator Hagel. Ladies and gentlemen, thank you for your
indulgence in allowing democracy's wheels to keep moving
forward. We are grateful. Senator Thomas is now at another
meeting, and is going to try to get back.
But so as not to hold our distinguished Deputy Secretary
any longer, let me ask Secretary Eizenstat: In the context of
your testimony this morning and the issues we are talking about
today--and you are particularly well-positioned to analyze this
for us--Taiwan, China, the geopolitical and economic
relationship across the Strait, WTO accession for each, and our
relationship, would you broaden this out for us, and give us
some sense of how you think the consequences may play out if we
go forward and move favorably on PNTR?
Secretary Eizenstat. Yes, sir. First, on the security side,
we are carrying out our responsibility under the Taiwan
Relations Act to provide defensive military equipment to
Taiwan. That responsibility is unchanged and will remain
unchanged.
We have an interest in a peaceful resolution of the
differences between China and Taiwan. That remains our
position, and it will be our position. WTO accession does not
affect that.
Second, we believe that Taiwan wants to see China in the
WTO. Taiwan is, itself, poised to join the WTO, and a
combination of Taiwan and PRC accession would create
opportunities for Taiwan to increase its economic influence in
the PRC, to build trust and confidence through expanded trade
and investment, and to lower barriers to freer flow of ideas
between the two sides of the Strait.
In terms of the process, we have completed our negotiations
with Taiwan for accession, and essentially other countries have
also resolved their bilateral differences. So Taiwan is poised
to join.
We anticipate that when the working parties on Taiwan and
China accession reach a consensus on their respective accession
packages, the WTO General Council would then approve both
packages and invite both to become WTO members at the same
meeting of the General Council. So neither could block the
other's accession under that provision, and we would anticipate
both coming in at the same time.
Senator Hagel. Thank you. Let me ask a question that you
referenced in your testimony regarding the balance of payment
that we have currently with China. Would you range out for us
and give us some assessment of what you believe the
expectations should be, realistically, moving that balance of
payment deficit down over the next few years, if China, in
fact, accedes to the WTO, and we pass permanent normal trading
relations with China?
Secretary Eizenstat. Yes, sir. Of course, balance of
payments with any country bilaterally depends on a whole host
of issues. One of the reasons that we have a large trading
balance is that we have a particular appetite for the consumer
goods sector in which China is very strong, areas like toys.
It is important to recognize, however, that if China were
not exporting those products we would be getting them from
other places in Asia, and actually our level of exports from
China and Asia in those areas has remained constant for a good
while.
Second, what one can say with complete confidence is that
on the export side of that trade deficit there is simply no
question that there should be a very significant increase under
the agreement. The reason is that the USDA, the Department of
Agriculture, estimates that we will have $2 billion in
additional agricultural exports annually by 2005, because of
the marked increase in U.S. agricultural exports to China,
particularly in areas that are important to us, like pork and
grains.
In addition, it has been estimated by Goldman Sachs, in a
study that the Congressional Research Service has noticed, that
by 2005, they anticipate that the $13 billion to $14 billion in
U.S. exports to China could grow to on the order of $27 billion
to $28 billion. Merrill Lynch and others have also done studies
indicating a substantial increase in trade.
So I think what we can say with some real confidence is
that our exports to China will increase very substantially, and
that China gets no greater rights to access our market than
they already have.
Senator Hagel. Mr. Secretary, again, we are grateful,
especially that you would take a little extra time with us. It
is always good to have you up here.
Secretary Eizenstat. Thank you.
Senator Hagel. So thank you very much for what you are
doing for our country as well.
Secretary Eizenstat. Thank you.
Senator Hagel. Thank you.
If we could have the second panel, Secretary Carlucci and
Mr. Younts. Gentlemen, welcome.
Mr. Secretary, it is good to see you again. We are grateful
to both of you for sharing some of your thoughts with us this
morning.
Secretary Carlucci, we will begin with you.
STATEMENT OF HON. FRANK CARLUCCI, CHAIRMAN OF THE BOARD OF
DIRECTORS, NORTEL NETWORKS, WASHINGTON, DC
Mr. Carlucci. Thank you, Mr. Chairman. I would like to
submit my entire testimony for the record.
Senator Hagel. It will be submitted.
Mr. Carlucci. I will summarize it. I am here, as you
indicated earlier, in my capacity as chairman of the board of
Nortel Networks, the world's largest supplier of digital
network solutions, and a broad diversified developer of high-
capacity switching and optics technology. We employ
approximately 60,000 people, 35,000 of whom are in the United
States.
While our operations in China were officially launched in
1993, our first sale dates back to 1972. We employ
approximately 2,000 people in China. Our long history there has
given us a strong understanding of the obstacles foreign
companies face in succeeding in China's marketplace.
Nortel's experience and my own dealings with China led me
to conclude that the United States should support PNTR and
membership in the WTO for China. I firmly believe that bringing
China into the global world-based system would bring positive
economic change, protect our Nation's security interests, and
lead to social reforms that benefit Chinese citizens.
You have already heard the specific arguments about the
critical need to grant China PNTR, and I am not going to repeat
them; however, I would underscore a point that Stu made, that
the agreement requires no concessions from the U.S.
China must make deep and fundamental reforms that reach the
core of every aspect of its economy. The question arises of:
Why did China do this? During my recent visit there, they
emphasized to me time and again, including the President, that
they intend to enter into the new economy. They know that there
is a price that must be paid to do this, and they are willing
to accept that price.
Nortel Networks and the U.S. high-tech industry stand to
gain tremendously from China's accession into the WTO. As has
been mentioned, it is the world's fastest growing telecomm
market. Internet subscribers have more than quadrupled, and are
expected to reach an astounding 20 million by the end of this
year.
At present, China's state-owned enterprises hold the
majority of high-tech business in China. The Congress now holds
the key to unlocking that market and opening it up to American
business. Permanent normal trade relations with China will
allow U.S. high-tech business unprecedented access to Chinese
markets.
By 2005, our products will no longer be subject to tariffs
averaging 13 percent. Immediately upon accession, China will
remove burdensome import quotas. China will no longer impose
technology transfer requirements, and we will, as a result,
have greater protection for our proprietary products.
Those changes will allow the high-tech industry to export
products directly to the U.S., rather than being forced to set
up manufacturing facilities in China, and use a Chinese
middleman, as we have to do now. This means increased jobs in
the U.S.
In one of the breakthroughs--you mentioned this as well--
China has agreed to sign onto the WTO basic telecommunications
agreement. With this signature, the U.S. high-tech industry
will finally gain access to the Chinese public telecomm network
that will be regulated by an independent regulatory authority.
I might say, I had a discussion with the ministry that is
going to handle the regulation, and they are wrestling right
now with how they will handle that regulatory responsibility.
Increased competition in the telecomm industry means increased
business for us.
WTO membership will be a powerful positive and legally
mandated force for dramatic social change in China. Since the
U.S. engaged with China over 20 years ago, U.S. companies have
improved wages and working conditions in China by providing
high-paying jobs and promoting entrepreneurship in a manner
state-owned enterprises never viewed as necessary.
In November, Chinese negotiators agreed for the first time
to allow American companies to play a central role in building
Chinese information infrastructure. By making this concession,
China is committed to an open Internet environment that allows
its citizens more communication with each other and increased
access to the world beyond China's borders.
This moves China closer to a concept I have tried to
promote throughout my career: Communication is the best
mechanism for generating change in a country that has a history
of repressing free speech.
Three years ago, ten former secretaries of defense,
including myself, sent this letter to President Clinton
reaffirming our view that renewing most-favored nation trading
status for China will promote the U.S. national security
interests. In that letter, we recognized that the most
promising way to reach the goal of a stable China is for the
U.S. to continue to build a relationship of mutual engagement
with China. That statement is truer today than ever before.
If we deny PNTR, China will interpret it as the adoption of
a policy of confrontation, and will exercise its legal right
under the WTO to bar U.S. companies from reaping the benefits
of its WTO accession. In turn, U.S. companies would be unable
to compete against foreign competitors and enjoy the benefits
of China's WTO accession.
Denying PNTR for China will only irreversibly damage our
oftentimes fragile relationship with our fourth largest trading
partner. The policy of engagement with China is our best line
of defense against this grave consequence.
Stu spoke about supporting Taiwan for China's entry into
the WTO. I spent 4 days in Taiwan last week in my capacity as
chairman of the U.S.-ROC Business Council. I met with the
President-elect, with the current leadership, and with the
business leadership.
The support for China's entry into the WTO is widespread.
It stems from the fact that Taiwan is--it will depend on how
you look at it--either the first or second largest investor in
mainland China. According to the mainland Chinese, Taiwan has
some $22 billion in paid-in investment in mainland China, and
the total investment that is on the books is some $44 billion.
They understand--the Taiwanese understand that it is better
to have the PRC play by the rules of the game, and that it is
in their interest to have the PRC open up their society that
will help promote a cross-Strait dialog.
As Stu indicated, it will also facilitate the entry of
Taiwan into the WTO, and Taiwan has already met all the
requirements. Conversely, if there is a confrontation with
China on this issue, it will simply complicate relations
between China and Taiwan.
The bottom line is that granting PNTR to China will
guarantee U.S. companies access to China on our terms. Denying
PNTR will place the terms of our access in China's hands.
Congress must now decide which alternative is best. From an
economic and business perspective, it is an open-and-shut case.
We hope you make the right decision.
Thank you for inviting me to appear. I would be happy to
answer any questions you might have, Mr. Chairman.
Senator Hagel. Secretary Carlucci, thank you.
[The prepared statement of Mr. Carlucci follows:]
Prepared Statement of Hon. Frank Carlucci
Mr. Chairman, and distinguished Members of the Committee. Thank you
for inviting me here today to present the high-tech industry
perspective. I am here today in my capacity as Chairman of the Board of
Nortel Networks. I am also Chairman of the Board of the Carlyle Group.
From 1987 to 1989, I was the Secretary of Defense and previously served
as President Reagan's National Security Advisor in 1987 and was
intimately involved with the shaping of the U.S.' unique and often
complicated relations with foreign nations, including China.
You invited me to speak today about granting permanent normal trade
relations to China--the most contentious trade debate to hit Congress
in the last two decades.
Nortel Networks is one of the worlds largest suppliers of digital
network solutions. It is the most broadly diversified developer of high
capacity switching and optics technology. We are at the heart of the
Internet. Over 75 percent of all Internet traffic in North America and
more than half in Europe travels over Nortel Networks' backbone. We
have a presence in over 150 countries where we work with customers to
build and deliver communications and IP (Internet Protocol)--optimized
products and networks or what we call ``Unified Networks.'' No other
company in the world can deliver global applications and services that
merge new and existing networking elements and technologies into a
seamless open network. We have over 35,000 employees in the U.S. out of
75,000 globally.
nortel networks: a long history in china
In China, we employ approximately 2,000 citizens and pay some of
the highest wages in China. While Nortel Networks China was officially
launched in 1993, our first sale there dates back to 1972. Our business
operations include R&D, manufacturing, sales and service in the
People's Republic of China, Hong Kong and Taiwan. We participate in
four joint ventures in China and partner with the Beijing University of
Posts and Telecommunications in the operation of one of Nortel
Networks' global R&D centers.
This long history of doing business in China has given us a strong
understanding of the obstacles foreign companies must navigate to
succeed in China's marketplace. Our most recent win--providing China's
second largest telecommunications carrier with product solutions that
will bring a new, high-performance Internet to thousands of users--is
one of many we have had over the years. So it has been worth the
effort.
We witnessed the slow but meaningful reforms that have taken place
in China over the past twenty years. These Nortel Networks experiences
and my own dealings with China have led me to conclude that the United
States must support PNTR and membership in the WTO for China. I firmly
believe that bringing China into the global rules-based system will
bring positive economic change, protect our national security interests
and lead to social reforms that benefit Chinese citizens.
without pntr, the u.s. economy loses
Current Chinese law requires the intimate involvement of a Chinese
middleman in every import or export activity conducted by American and
other foreign companies. This severely limits our ability to engage
with and export to China, particularly now when high-tech companies
must act at webspeed. As negotiated in the U.S.-China WTO accession
agreement, China will phase out the mandatory middleman practice over a
three-year period beginning upon its accession.
While I am certain you have already heard the arguments from
industry about the critical need to grant China PNTR, I believe a few
warrant repeating because they illustrate how profoundly WTO accession
will impact American industry's ability to do business in China:
While the agreement does not require concessions from the
U.S., China must make deep and fundamental reforms that reach
the core of every aspect of its economy. I learned on my trip
to China last week that they understand this and accept it.
They are most anxious to enter the new economy and will pay the
price.
Unilateral concessions will eliminate barriers prohibiting
the free export of U.S. goods and services in virtually every
industry sector.
The U.S. will gain unprecedented access to a market of more
than one billion people.
And China's accession will provide the U.S. with stronger
protection against China's unfair trade practices through a
safeguard that provides penalties against damaging import
surges.
Considering its immediate and potential impact on the American
economy, supporting China's WTO membership should be a top priority.
According to the Institute for International Economics' conservative
estimates, passage of China's WTO entry will result in an immediate
increase in U.S. exports of $3.1 billion. While we cannot ignore the
fact that U.S. exports to China have grown throughout the past twenty
years from nothing to over $14 billion annually, China's WTO accession
is the best cure for the U.S.-China trade deficit.
According to Commerce Department figures, the U.S. imported a
tremendous $71.2 billion from China in 1998 but exported a meager $14.3
billion in the same year. That's a 5:1 ratio--in China's favor.
With the WTO agreement, that ratio will shrink.
A vote against PNTR for China will prevent this from happening. If
we deny China PNTR, WTO rules allow China the right to legally prohibit
U.S. access to the very benefits Republican and Democratic
Administrations have worked to achieve for over thirteen years. Under
this scenario, the U.S. economy--not the Chinese--will suffer the
consequences.
china's high-tech industry: a golden opportunity
Nortel Networks and the U.S. high-tech industry stand to gain
tremendously from China's accession to the WTO. China is the world's
fastest growing telecom market. In fact, its cellular market is
expected to be second only to the U.S. by the end of this year. China's
telecommunications equipment market, valued at $19 billion last year,
is anticipated to grow 20-40 percent annually. Internet subscribers in
China have more than quadrupled and are expected to reach an astounding
20 million by the end of the year. At present, China's state-owned
enterprises represent the majority of business in China, but Congress
holds the key to unlocking that market and opening it up to American
business.
Permanent normal trade relations with China will allow U.S.
high-tech businesses unprecedented access to Chinese markets.
By 2005, our products will no longer be subject to tariffs
averaging 13 percent and, immediately upon accession, China
will remove burdensome import quotas.
China will no longer impose technology transfer requirements and we
will, as a result, have greater protection for our proprietary
products. Those changes will allow the high-tech industry to:
Export products directly from the U.S. rather than being
forced to set up manufacturing facilities in China. This means
increased jobs in the U.S.
Enjoy national treatment and no longer be faced with anti-
competitive ``buy China'' requirements.
And, one of the greatest breakthroughs--China has agreed to
sign onto the WTO Basic Telecommunications Agreement. With this
signature, the U.S. high-tech industry will finally gain access
to China's public telecom network that will be regulated by an
independent regulatory authority. Increased competition means
increased business for us.
It is no secret that America's information technology industry is
the catalyst for the tremendous economic growth the U.S. is witnessing.
We are the largest manufacturing sector in the U.S. and we have fueled
44 percent of our domestic economic growth since 1994. Our employees
have profited from our success. IT workers earn an average of 77
percent more than the average American worker.
We have created positive and unparalleled change here at home and
we should not be denied the opportunity to do the same in China.
wto membership will be a positive force of change in china
WTO membership will be a powerful, positive and legally mandated
force for dramatic change in China. Since the U.S. re-engaged with
China over twenty years ago, U.S. companies have improved wages and
working conditions in China by providing high-paying jobs and promoting
entrepreneurship in a manner state-owned enterprises never viewed as
necessary.
In November, Chinese negotiators agreed for the first time to allow
American companies to play a central role in building China's
information infrastructure. By making this concession, China has
committed to an open Internet environment that allows its citizens more
communication with each other and increased access to the world beyond
China's border. This moves China closer to a concept I have promoted
throughout my career--communication is the best mechanism for
generating tangible change in a country that has a history of
repressing free speech.
Building bridges of communication always forges social, political
and economic reforms.
The changes will be felt in other areas as well. The business
climate in China will go through a renaissance.
China's concessions will bring an unprecedented level of
competition in China. Most significantly, China's state-owned
enterprises will compete on commercial terms. As it has done in all
market-oriented economies, increased foreign competition and investment
will foster lower prices and technological innovation, and will
contribute to significant increases in wages and living standards.
conclusion: engagement is our best line of defense in china
Three years ago, ten former Secretaries of Defense, including
myself, sent this letter to President Clinton reaffirming our view that
renewing most favored nation trading status for China will promote the
U.S.' national security interests. In that letter, we recognized that
while there are ``several thorny and disturbing issues in the
complicated [bilateral] relationship, . . . the most promising way to
reach the goal of a stable China is for the U.S. to continue to build a
relationship of mutual engagement with China.'' That statement is truer
today than ever before.
Our two countries have had their differences and we will continue
to differ. Engagement, however, has enabled us to pursue our national
security interests by building relationships between our militaries and
governments. Regular meetings over the years have increased our
understanding of one another's military strategies, cultures and
politics.
Congress has voted in favor of engagement with China for twenty
years. This year, we have the opportunity to give industry a more
predictable climate in which to operate, and assuage industry concern's
that Congress will pull the plug on our bilateral relationship. Denying
PNTR for China will irreversibly damage our often times fragile
relationship with our fourth largest trading partner.
China will interpret our denial of PNTR as the adoption of a policy
of confrontation and will exercise its legal right under the WTO to bar
U.S. companies from reaping the benefits of its WTO accession. In turn,
the presence of U.S. companies in China will stagnate and we will be
unable to compete against our competitors who enjoy the benefits of
China's WTO accession. A policy of engagement with China is our best
line of defense against this grave consequence.
I strongly believe that PNTR and China's WTO accession will help
the Chinese people gain increased access to communications tools like
the Internet. These tools cannot be controlled and they will help
connect the Chinese people to the rest of the world like never before.
If the U.S. is to play any kind of role in this transformation, we must
grant PNTR for China.
Granting PNTR to China will guarantee U.S. companies access to
China on our terms; denying PNTR will place the terms of our access in
China's hands.
Congress must decide which alternative to choose. From an economic
and business perspective, it's an open and shut case. We hope you make
the right decision.
Thank you for inviting me to appear before you. I would be pleased
to answer your questions.
Senator Hagel. Mr. Younts.
STATEMENT OF RICHARD YOUNTS, EXECUTIVE VICE PRESIDENT AND
SENIOR ADVISOR TO THE CEO, OFFICE ON ASIA PACIFIC AFFAIRS,
MOTOROLA, INC., AUSTIN, TX
Mr. Younts. Thank you, Mr. Chairman. It is a pleasure to be
here this morning representing Motorola.
I am here today to add Motorola's voice to the chorus of
support for the passage of permanent normal trade relations for
China. I have spent the better part of my professional career
building Motorola's businesses in the Asia-Pacific region,
first in Japan, and then in the rest of the region.
For the past 10 years, I have been building our business in
China. I am proud to say that we are the largest American
investor in China, and one of the, if not the most, successful
companies operating in China.
We derive more than $3 billion a year in sales from our
China operations, and have exported from the United States to
China about $5 billion over the last 5 years. So as you can
tell, from Motorola, the China market is here and now.
I will not dwell on the merits of the U.S.-China agreement.
That is because it goes without saying that for most American
companies, including Motorola, this is a great deal. The
concessions are unilateral, and they are real. They include
trading rights, distribution rights, trims, trips, elimination
of import licensing and quota; in short, an open market.
This is the best trade deal we have ever negotiated. It
provides genuine market excess for American goods and services,
and effective enforcement measures to ensure compliance.
As I explain in my written statement, the agreement is
especially important for American high-tech industries. I do
not believe there is an issue before Congress this year that is
more critical to the future and to our competitiveness.
I just returned from China, spent 3 weeks there, and in the
last couple of days had a series of meetings on Capitol Hill
discussing the importance of PNTR. I would like to use my time
today to address some of the arguments against PNTR, and I
believe they fall into four categories.
The first issue is jobs. We have heard all the arguments
advanced by opponents of PNTR that the simple fact is that the
failure to pass PNTR will have pronounced negative impact on
American jobs. Why? Because the deal is about market access to
China. It is not about market access to the United States.
Make no mistake, China will join the WTO regardless of how
Congress votes; and if Congress does not pass PNTR by that
time, it will place American firms that sell and operate in
China at risk. U.S. exports to China will fall at the cost of
American jobs, and we and other American companies will see the
benefits of expanded trade accrue to our foreign competitors.
On the positive side, approval of PNTR would expand U.S.
exports, and that means U.S. jobs.
The second issue we hear is that of enforcement. Critics of
China's accession argue that while it may be a great deal on
paper, and it is, China does not and will not live up to their
trade commitments. I do not believe this is a valid reason to
oppose PNTR or China's accession to the WTO.
The WTO gives us an opportunity for the first time to
enforce a trade agreement with China, and for once, we will not
stand alone and put U.S. exports at risk, and when we press a
complaint with China, we will have the backup of 134 other
nations.
A third issue involves Taiwan and national security. I am a
businessman, not an expert on foreign policy or national
security, but I would like to point out that the President-
elect of Taiwan, as was mentioned by Frank, has made it clear
in statements, that he supports PNTR for China and China's
accession for WTO. If Taiwan sees this as a good thing for
their national security and economic interests, I do not see
this as a problem.
Plus, Congress always reserves the right to rescind PNTR
and take other actions to safeguard our national security
interests, if circumstances warrant.
Finally, I would like to address the human rights issue. I
have worked in China for 10 years now, and I believe in my
heart and in my head that Motorola, through its commercial
engagement with China, has been a powerful and positive force
for change. We have contributed in no small way to the process
of reforming and transforming China. We do not only export
American goods to China; we export American values.
Our presence there sets important examples for the American
way and our commitment to core principles, help promote a more
open, responsible government, and a more open society. Those
profound implications not only promote our commercial
interests, but America's broad international interests.
As one who has been there, I can attest: China is changing.
I have seen it for the last 10 years, and I saw it when I was
there last week. I see evidence of it every time I visit. No
doubt, there are significant problems that remain, but further
progress is best achieved through economic engagement, covered
by established rules of global trade.
I urge the Congress to recognize PNTR for what it is, an
invitation to create new opportunities for American workers,
for farmers, and for companies.
To the extent that human rights, the environment, or
national security concerns enter the debate, America's leverage
is only enhanced, not weakened, by congressional approval of
PNTR.
It is not a question of rewarding China for policies that
we find troublesome or even objectionable. It does not ignore
the fact that U.S.-China relations remain very complicated,
fraught with controversy that require constant attention, but
these issues do not justify refusal by Congress to seize the
benefit accorded by PNTR and WTO.
We must remain cognizant of the problems that divide our
two countries and exploit the promise of expanded commercial
relations under global rules of trade as a way to address and
resolve these differences.
In closing, PNTR status is not a blanket endorsement of
China's behavior. It is one of the most effective ways we can
advance America's economic objectives and influence development
inside China.
At its core, however, is an issue of American jobs. PNTR
costs us nothing. The failure to pass PNTR costs us much. We
urge Congress to cast a vote that in every way supports the
American workers, the American economy, and America's global
interests by approving PNTR status for China.
Thank you, Mr. Chairman.
Senator Hagel. Mr. Younts, thank you.
[The prepared statement of Mr. Younts follows:]
Prepared Statement of Rick Younts
Chairmen Chuck Hagel and Craig Thomas, Senators John Kerry and Paul
Sarbanes, Members of the Committee, thank you for this opportunity to
appear before you and add Motorola's voice to the many others that have
been raised in recognition of the importance of China's accession to
the World Trade Organization (WTO). On behalf of our 130,000 employees,
I urge swift approval of Permanent Normal Trade Relations (PNTR) status
with China. This historic step would be good for Motorola and good for
America. Approval of PNTR would institutionalize a trade relationship
that Congress has ratified on an annual basis for the last 20 years.
PNTR also would unlock enormous possibilities in China for U.S. high-
technology companies. As Motorola Chairman and CEO Chris Galvin
testified in February before the Senate Finance Committee:
No issue currently before Congress will have a greater impact
on the high-tech community, and America's ability to compete in
the New Economy, than China's accession to the WTO and the
market opening that brings.
I intend to use this forum to address some of the arguments
advanced by critics or opponents of PNTR. But before turning to what
this issue is not about, let's be very clear about what it is about:
American jobs. Today more than ever, American companies are looking to
global markets for growth and competitive edge. In the New Economy,
national borders and trade barriers give way to economic interaction
and open markets. Though this transition is still under way, and its
progress neither quick nor easy, this is the future--and where we and
others will look to strengthen America's role in the global marketplace
and create new opportunities that support American jobs. Permit me to
reinforce what others have said: a failure to approve PNTR cedes those
job-creating opportunities to America's foreign competitors. It also
denies us the substantial benefits that China's accession to the WTO
would have for America's economic and security interests.
motorola's history in china
I believe that Motorola is uniquely positioned to comment on doing
business in China and the judgment Congress has been asked to render on
PNTR. We speak not only of hopes for the future, but from years of
practical experience marked by commercial success that has helped
encourage economic reform and create a better standard of living for
China's people.
Make no mistake: We have pursued our strategy of engagement in
China with ``eyes wide open.'' Our experience as the leading U.S.
investor in China has not been without its challenges, whether related
to China's economic transition or the periodic ups and downs of our
overall bilateral political relationship. But I can report to you today
that our decision in 1986 to establish a commercial presence in China
has been an unqualified success for Motorola, our employees and the
many American companies that support our operations there.
Motorola operates the largest wholly foreign-owned subsidiary in
China, and we have another seven joint ventures in the country. Our
U.S. exports to China amount to approximately $500 million a year, and
sales from our China operations have been running about $3 billion a
year, or around 10 percent of our total global sales.
What has this meant beyond the balance sheet? A great deal that
goes to the very heart of concerns some have raised in the debate over
PNTR and WTO accession for China. Motorola has served as a force for
positive change in China. We have contributed in no small way to a
process that is reforming and transforming China. We export not only
American products to China, but American values. Our presence there
sets an important example of the American way. Through uncompromising
integrity and best practices in the conduct of our business, Motorola
demonstrates how China can cope with various contemporary challenges:
creating a work environment that promotes creativity and harmony;
balancing individual or corporate interests against the interests of
society; and seeking efficiency while providing employees with an ever
better standard of living.
In doing so, Motorola does not attempt to assume a missionary role.
But in China as throughout the world, we work to assure that our
business activities reflect concern for all of our stakeholders, and
that they maintain the highest standards in respect for the individual,
responsibility to the consumer, protection of the environment, and
support for open and fair markets.
The products of this commitment to core principles are evident:
We contribute to a more open and accountable government,
through steadfast policies forbidding conflicts of interest and
improper influence over bureaucratic regulators.
We promote a cleaner environment by consistently exceeding
PRC environmental requirements.
Through constant training from the top to the bottom of the
corporation, we enable our employees to exercise their own
judgment and to be innovative in their work.
We promote personal responsibility by standing behind our
products in the marketplace and providing unconditional
guarantees to the customers.
By providing a work environment with standards of
cleanliness, performance, remuneration, and fairness well
beyond those offered by almost any Chinese company, we have
helped raise the expectations of our Chinese employees, who
then become more assertive as employees and, perhaps, as
citizens.
Our support for educational and career development programs
helps prepare men and women who, exposed to our values and
experience, will have key roles in the continuing economic and
social transformation we all want to see in China. That has
profound implications not only for our commercial interests,
but America's broad international interests.
effecting change in china
China is changing. I see new evidence of that every time I visit
the country. There is lively, open debate about capitalism, market
reforms, police brutality, the rights of the accused, and the role of
human rights in a socialist economy. No one questions the fact that
significant problems remain. But I have witnessed laudable advances
that can be further encouraged only through continued economic
engagement governed by established rules of global trade. Motorola's
activities in China have been guided by the firm belief that our role
is not to render judgment of China's policies from the sidelines, but
to be an active participant in the complicated process of modernization
and hope we can bring the best of what we have learned at home to our
operations overseas.
I am attaching for the record (Attachment 1), a commentary that was
published in the Wall Street Journal by Michael Santoro, a professor of
business ethics at Rutgers University. Professor Santoro concludes that
fostering further economic and political liberalization within China is
most effectively achieved not through campaigning good business
practice Professor Santoro said in his testimony last month before your
colleagues on the Senate Finance Committee:
Ratifying the World Trade Organization agreement with China
and granting it permanent normal trading relations advances
America's interest in promoting human rights and democratic
values. . . . As China opens itself more and more to the
outside world, its society will inevitably change as a result
of the contacts with foreigners. Indeed business people
constitute by far the single most important foreign source of
social change within China . . . [and] many of these changes
have important positive implications for democracy and human
rights. Granting China PNTR will accelerate these social
changes. Ultimately these social changes will pose a formidable
challenge to China's government, as profound contradictions
emerge between the Communist Party's authoritarian rule and
China's increasingly free economy and society being created by
private enterprise and the free market.''
The issue of human rights remains a major point of contention in
U.S.-China affairs. It is a concern shared by all of us and one that
will require continued attention at the government-to-government level.
But experience tells that that those most troubled by human rights
should be among those most supportive of the expanded commercial
relationship that would result from China's WTO accession and
implementation of the many concessions China made in the bilateral
market-access agreement that would flow from approval of PNTR.
pntr: good for american workers and american high-tech
In recent years, we have seen encouraging progress by China in
removing various impediments common to global commerce. China has
fostered protection for intellectual property, reductions in tariff and
non-tariff barriers to trade, and the expansion of a legal and
regulatory regime that governs commercial activity. At the same time,
we know as well as anyone that problems remain and continued progress
in trade liberalization and market reform must be made. Fortunately,
Congress can make that happen--but only if it acts as soon as possible
to realize the untold benefits represented by PNTR.
It is nothing short of essential that the world's most populous
nation be brought under the umbrella of the organization that sets and
enforces the rules of global trade. Congress can decide whether that
happens with the participation of the U.S. or without it. And we should
be clear that this is the choice. China will join the WTO, but American
firms and workers will reap the benefits of China's market-opening
moves only if Congress approves PNTR and we agree to treat China no
worse than we treat any other WTO member.
The bilateral agreement reached in November is comprehensive in its
scope, providing substantially greater market access for U.S. goods,
and services, lower tariffs, and broad trading and distribution rights,
for nearly every sector of the U.S. economy. This is especially true
for American high-tech. American high-tech firms across the board--
manufacturers of semiconductors and semiconductor equipment and
materials, computers, electronics, software and telecommunications
equipment, as well as U.S. internet companies and telecom service
providers--have much to gain from the commitments that China made last
fall and now rest in Congress' hands.
Several people have asked us why Motorola is so adamant about the
need for WTO accession when it has achieved so much in China without
it. The answer is simple. For all we have accomplished in China to
date, PNTR and WTO accession are key to vast new opportunities that can
make Motorola an even stronger global competitor, to the undeniable
benefit of our American employees, suppliers, shareholders and the
communities where they live and work.
I am attaching (Attachment 2) our own comprehensive analysis of the
benefits contained in the bilateral market-access agreement negotiated
last fall. Of particular interest:
Enhanced market access: Accomplished through the application
of national treatment to imported goods, tariff reductions, the
phase-out of non-tariff trade barriers--such as import
licensing and quotas--and the extension of trading and
distribution rights to all foreign and domestic firms. Tariff
rates on information technology equipment such as cellular
phones (currently 12 percent) and batteries (18 percent) will
fall to zero. Existing import quotas and licensing requirements
currently applied to telecom equipment will be phased out, and
the right to engage in importing and exporting will be extended
to all foreign and Chinese enterprises.
Investment in telecommunications services: Rules permitting
increased foreign investment and management of telecom services
in China will accelerate the development of one of the world's
largest and fastest-growing telecom markets, creating new
opportunities for equipment manufacturers and service
providers.
Greater transparency: Reduced uncertainty in U.S.-China
trade, through greater clarity in government regulation, the
formal binding of China's tariff schedule, and creation of a
process for effective multilateral dispute resolution.
Accelerated transformation to a market economy: Locking in
and promoting further reforms that will accelerate China's
transformation from a non-market to a market economy.
In short, while Motorola is proud of what it has achieved to date
in China, that may a slice of what is possible under the more open,
transparent, enforceable and reform-oriented trade regime that would
come from China's accession to WTO.
in summary: pntr an invitation to new opportunities
We urge Congress to recognize PNTR for what it is: an invitation to
create new opportunities for American workers, farmers and companies,
and a positive force for change in China. To the extent that human
rights, environmental or national security considerations enter this
debate, progress on those issues--and others--is only enhanced, not
weakened, by the leverage America stands to gain with congressional
approval of PNTR. This is not a question of ``rewarding'' China for
policies we may find troublesome or objectionable. It neither ignores
nor glosses over the fact that the U.S.-China relationship remains a
complicated one--fraught with controversies and requiring constant
diplomatic stewardship. Nothing provided a more vivid reminder of that
ongoing reality than the recent tension that surrounded the elections
in Taiwan. Legitimate concerns over continued irritants to U.S.-China
relations do not justify a refusal by Congress to seize the benefits
accorded by PNTR. We must remain cognizant of the problems that divide
our two countries and exploit the promise of expanded commercial
relations--under global rules of fair trade--as a way to address and
resolve our differences.
In short, PNTR status is not a blanket endorsement of China's
policies. Quite to the contrary, it is one of the most best tools we
have at our disposal to advance America's economic and security
objectives and influence developments inside China. At its core,
however, this issue is about jobs. American jobs. PNTR costs us
nothing. A failure to pass PNTR costs us much. We urge Congress to cast
a vote that in every way supports American workers, the American
economy and America's broad global interests by approving PNTR status
for China.
[Attachments].
Attachment 1
[From the Wall Street Journal: Managers Journal, June 29, 1998]
Promoting Human Rights in China Is Good Business
(By Michael A. Santoro)
Contrary to what you may have heard, multinationals doing business
in China can help foster democracy and human rights there.Indeed, by
pursuing their own self-interests effectively, companies help the
people of China. In fact, it is the best-run and most successful
companies that make the biggest impact.
The most obvious contribution foreign companies make is economic.
Generally speaking, they pay better than domestic companies, helping to
reduce poverty and create a middle class with power and interests
independent of the state.
But there are other, more subtle ways in which companies can help
improve China's situation. According to research I've conducted with
foreign managers and Chinese workers, foreign enterprises impart a
wealth of formal and informal learning about values and behavior that
can help to build and sustain democracy and foster support for
individual rights.
One way foreign companies make a decisive difference is simply by
pursuing a policy that all good firms should be practicing at home
anyway--namely hiring and promoting on the basis of merit. In Chinese
companies, the best jobs typically go to those with the best guanxi, or
connections. A typical anecdote: A Chinese woman working for an
American investment bank in Shanghai told me that when she graduated
from university she had wanted to work for a Chinese commercial bank,
but her parents didn't have powerful connections. Now she is happy that
her promotions will be based upon her performance.
The reasons why foreign managers generally hire and fire on merit
is obvious to Westerners: They must answer to owners who care first and
foremost about the bottom line. By doing so, they foster what in China
is a radical notion--that individual merit should be rewarded. This
sense of the value of the individual and of fairness is intrinsic to
capitalism. It is, at the same time, an essential characteristic of a
culture that respects human rights. In other words, by simply doing
what comes naturally, well-run firms can foster human rights.
Another modern corporate practice that helps China's development is
teamwork. Companies like Wall's, the ice cream subsidiary of Britain's
Unilever PLC, understand that their commercial success depends upon
teamwork, initiative and the sharing of information. Wall's general
manager for China, Duncan Garood, is concerned about market share and
profits, not politics. Recently he dispatched a team to cut the costs
of a particular product. To accomplish this, the workers had to put
their heads together and think creatively. Again teamwork, initiative
and the sharing of information are hallmarks of a democratic culture.
By teaching these skills, foreign companies are helping put in place
values and practices that in the long run help foster democracy.
The companies with the deepest commitment to China have set up
elaborate training programs for their workers. One U.S.-based
manufacturing company with more than 750 workers in Asia sends each of
its employees through a training program coordinated from Hong Kong but
conducted by locals in the local language. Listening to the company's
regional director of training and education explain the training
program, one can grasp right away how the training can have a political
dimension: ``We change a lot and we change very quickly. We don't do
things the same every time. We improve. We're not focused on the past.
We value open and direct communication.'' Open communication and
receptivity to change are ideas that can't be confined to the workplace
once they're out there.
The German-based chemical giant BASF, which employs more than 2,000
people in China, has set up a management development center at
Shanghai's elite Jiao Tong University. Seeking to teach ``leadership
and communication,'' the BASF program calls for its local executives to
``share their thoughts, insights and experiences in a distinctly
proactive way.'' This emphasis on leadership and communication is in
marked contrast to the management style prevailing in Chinese state-
owned enterprises, where, as the old Chinese proverb goes, the nail
that sticks up will be hammered down.
Such training does not take place only in China. Many foreign
companies send their top employees on tours of their headquarters to
develop better communication, or for MBA training at top schools.
One must be careful not to overstate the impact that foreign
companies can have on the development of democracy in China. It will be
interesting to see, for example, whether state-owned enterprises will
adopt state-of-the-art management techniques successfully to meet
foreign competition. The spill-over effects of business activity on
political and social change in China are limited initially to the
people who work for multinationals and those who associate with them.
Still, the potential is great. As Ken Grant of Hong Kong-based Market
Access puts it: ``Who's to say what the impact will be when a couple of
guys are talking over beer after work and comparing their experiences
of working in a state-owned company with those in a foreign company?''
[From the Wall Street Journal Asian and Europe Editions, June 1 & 12,
1998]
Doing Good While Doing Well in China
(By Michael A. Santoro)
Contrary to what you may have heard, multinationals doing business
in China can help foster democracy and human rights. But here is the
best part: It is by pursuing their own self-interests effectively that
companies do good. In fact, it is the best-run and most successful
companies that make the biggest impact.
The most obvious contribution foreign companies make is purely
economic, of course. Generally speaking, they pay better than domestic
companies, helping to create a middle class with power and interests
independent of the state. The reduction of poverty alone is a step in
the right direction in terms of human rights.
But there are other, more subtle ways in which companies can help
improve China's situation. According to research I've conducted with
foreign managers and Chinese workers, there is a wealth of formal and
informal learning at foreign enterprises about values and behaviors
that can help to build and sustain democracy, and foster support for
the rights of the individual.
One way foreign companies make a decisive difference is simply by
pursuing a policy that all good firms should be practicing at home
anyway, namely hiring and promoting on the basis of merit. Sadly, among
Chinese companies, this is seldom the case; the best jobs often go to
those with the best connections, or guanxi. In a typical anecdote, a
Chinese woman working for an American investment bank in Shanghai told
me that when she graduated from university she had wanted to work for a
Chinese commercial bank, but her parents ``didn't have powerful
connections.'' Now she is happy that her promotions will be based upon
her abilities rather than how well she gets along with her boss.
The reasons why foreign firms generally tend to hire and fire on
merit is that they must answer to owners who care first and foremost
about the bottom line, so they simply cannot afford such a personal
style. If they don't pay for performance, they will soon go out of
business. By doing so, they foster the radical notion--radical at least
in China and some other places around the globe--that individual merit
matters and should be rewarded.
This sense of the value of the individual and of fairness is
intrinsic to capitalism. It is, at the same time, an essential
characteristic of a culture which respects human rights. In other
words, by simply doing what comes naturally, well-run firms can make a
positive human-rights contribution.
Another modern corporate practice that helps China's development is
teamwork. Companies like Wall's, the ice cream subsidiary of U.K.-based
Unilever, well understand that their commercial success depends upon
teamwork, information-sharing, and initiative.
Wall's general manager for China, Duncan Garood, is a businessman
concerned about market share and profits, not politics. Recently he
dispatched a cross-functional team to cut the costs of a particular
product whose costs, he thought, were getting out of line. He was
rewarded with a 10% cost reduction without loss of quality.
To accomplish Mr. Garood's assignment, Wall's workers had to put
their heads together and think creatively about re-engineering the
product. These are, of course, the trendiest ideas in modern management
science. Any firm not practicing them isn't likely to be competitive
for very long. Again, though, teamwork, information-sharing and
initiative are also the hallmarks of a democratic culture. By teaching
these skills, foreign companies are helping to put in place values and
practices which in the long run help to sustain a democracy.
The firms with the deepest commitment to China, in fact, have set
up elaborate training programs for their workers. One U.S.-based
manufacturing company with more than 750 workers in Asia sends each of
its employees through a training program coordinated from Hong Kong but
conducted by local trainers in the local language. Listening to the
company's regional director of training and education explain the
training program, one can grasp right away how the training can have a
political dimension: ``We change a lot and we change very quickly. We
don't do things the same every time. We improve. We're not focused on
the past. We value open and direct communication.'' Open communication
and receptivity to change are ideas that can't be confined to the
workplace once they're out there. Not for too long, anyway.
German-based chemical giant BASF, which employs over 2,000 people
in China, has set up a Management Development Center at Shanghai's
elite Jiao Tong University. Seeking, among other things, to teach
``leadership and communication,'' the BASF program calls for its local
executives to ``share their thoughts, insights and experiences in a
distinctly proactive way.'' This emphasis on leadership and proactive
communication is, again, in marked contrast to the management style
prevailing in Chinese state-owned enterprise where, as the old Chinese
proverb goes, the nail that sticks up will be hammered down. The
training, incidentally, does not take place only in China. Many foreign
companies send their top employees on tours of headquarters to develop
better communication, or for MBA training at top schools.
One must be careful not to overstate the impact that foreign
companies can have on the development of democracy in China. It will be
interesting to see, for example, whether state-owned enterprises will
adopt state-of-the-art management techniques successfully to meet
foreign competition. The spillover effects of business activity on
political and social change in China are limited initially to the
people who work for cutting-edge multinationals and those who associate
with them. Still, the potential is great. As Ken Grant of Hong Kong-
based Market Access puts it, ``Who's to say what the impact will be
when a couple of guys are talking over beer after work and comparing
their experiences of working in a state-owned company with those in a
foreign company?''
Attachment 2
Motorola Statement on China's Accession to the WTO and PNTR--January,
2000
China's accession to the World Trade Organization is good for the
United States, the world, China, and Motorola.
The U.S. benefits by gaining better access to China's
markets for American manufactured goods, services, and
agricultural products.
The world benefits by applying the rules and obligations to
one of the largest trading nations.
China benefits by promoting and implementing economic,
legal, and regulatory reforms necessary to sustain and promote
further economic growth.
Motorola benefits through expanded market opportunities in
China.
Specific benefits to Motorola are:
Enhanced market access: Accomplished through the application
of national treatment to imported goods, tariff reductions, the
phase-out of non-tariff trade barriers--such as import
licensing and quotas--and the extension of trading and
distribution rights to all foreign and domestic firms. Tariff
rates on information technology equipment such as cellular
phones (currently 12 percent) and batteries (18 percent) will
fall to zero. Existing import quotas applied to telecom
equipment will be phased out, and the right to engage in
importing and exporting will be extended to all foreign and
Chinese enterprises.
Investment in telecommunications services: Rules permitting
increased foreign investment and management of telecom services
in China will accelerate the development of one of the world's
largest and fastest-growing telecom markets, creating new
opportunities for equipment manufacturers and service
providers.
Greater transparency: Reduced uncertainty in U.S.-China
trade, through greater clarity in government regulation, the
formal binding of China's tariff schedule, and creation of a
process for effective multilateral dispute resolution.
Accelerated transformation to a market economy: Locking in
and promoting further reforms that will accelerate China's
transformation from a non-market to a market economy.
Unconditional MFN is a cornerstone of the WTO. To secure the
benefits of China's WTO commitments, the United States must recognize
China as a full WTO Member by extending Permanent Normal Trade
Relations (PNTR). If the United States withholds PNTR, the benefits of
China's market-opening may go to our competitors in Europe and Japan,
while U.S. products and services are excluded.
Scorecard on Motorola's Priority WTO Issues
(January, 2000)
----------------------------------------------------------------------------------------------------------------
ISSUE OBJECTIVE CURRENT STATUS ASSESSMENT
----------------------------------------------------------------------------------------------------------------
Tariff Reduction................. Reduce and bind China has agreed to Very good in terms of
industrial tariffs, reduce and bind scope, rates and
Accession to Information industrial tariffs at timing. ITA commitments
Technology Agreement an average rate of 9.4% will assist in sales of
(ITA) upon WTO accession. (7.1% for priority Motorola telecom and
products). China has semiconductor
further agreed to ITA equipment. Motorola
with tariff reductions currently faces PRC
commencing upon WTO tariffs of 20% for
accession. Most ITA pagers, 18% for
tariffs will be batteries, and 12% for
eliminated by 2003, and cell phones. All will
all by 2005. fall to zero.
Trading and Distribution Rights.. The right to import and China has committed to Very good. Will promote
sell the full range of grant universal trading Motorola's ability to
Motorola products in and distribution rights sell the full family of
China (not just products to all foreign and Motorola products and
we make in China). To domestic firms within 3 provide after-sales
date, China has granted years of WTO accession. service with a ready
trading rights to a China has accepted a supply of imported
limited number of PRC broad definition of components.
firms. Foreign invested distribution rights to
enterprises have the cover all forms of
right to import, but distribution, including
only the inputs retail and wholesale,
necessary for their transportation,
manufacturing in logistics, and after-
country, and to export sale service.
only those products they
make in China.
National treatment for foreign Removal of ``bad local'' National treatment is a Good. Will help deal
goods and services. requirements and other non-negotiable WTO with ``buy local''
import substitution principle. policies used for
policies applied on cellular equipment, and
purchase of telecom to standardize safety
equipment. Imports inspections, and
currently subject to standards criteria.
separate inspection
regimes than same
products made in China.
Transparency..................... Increased transparency in China has committed to Good, but expect
rules and regulatory enforce only those continued problems at
structures, and rules that have been the local and
consistency in the published, and to provincial level.
enforcement of rules. establish procedures
for public comment.
China has further
committed to establish
procedures for judicial
review of
administrative actions
that implement the WTO
agreement.
----------------------------------------------------------------------------------------------------------------
Senator Hagel. Each of you represent companies that have
been very successful in China. You have done it right.
I would like each of you to address some of the
fundamentals on why you have been successful, why you have done
it right, how you have done it right. And maybe you could then
each talk a little about where the biggest challenges will come
from--that is based, of course, on your experience--as we move
forward and these things are put in place. I suspect we will
get a positive vote on this here in the Congress.
And what are the high-tech companies going to have to
really focus on, namely the concerns, issues, and challenges?
And then maybe round it out with your thoughts on what you
think will be the biggest difficulties China will have in
implementing their responsibilities as a member of the WTO.
So however you want to take all that, just have at it, Mr.
Secretary. We will begin with you.
Mr. Carlucci. Well, one of the reasons that we have been
able to grow in China is that we have been very careful to be
responsive to Chinese needs. They have placed heavy emphasis on
technology transfer. And in addition to four joint ventures, we
have two R&D centers in China which have helped them work
technology basically in the mobile phone area. We also are
trying to develop a new technology for them, CDMA, but they
have not yet decided whether they want to utilize that.
While we have been responsive to their technological needs,
we have also adhered very strictly to the values of our
company, the high standards, merit-based employment. We follow
the same environmental standards in China that we follow here
in the United States.
We have behaved in all respects like an American company,
and that has been a good thing. The Chinese really do want to
relate to the external world.
They have decided, they have made a commitment, as I had
mentioned earlier--this point was stressed to me--that they
want to enter what he called the ``new economy.'' So they have
made that commitment and are willing, as I said, to pay the
price to enter into the new economy. They know this is going to
be difficult.
I visited with several of the ministries that will be
implementing WTO regulations, and one minister said, ``There
will be both challenges and opportunities, but I think the
challenges are going to be greater than the opportunities.''
Well, that represents his personal point of view, but there has
been a commitment at the top to do it.
It is going to mean a large shift in their mentality, away
from state-owned enterprises, into a market economy. My own
view is--and Rick has had more experience than I have in
China--but the Chinese, at the working level, will take very
readily to a market economy.
The shift in mentality is going to have to be at the
political level, but I think that shift is happening, and PNTR
will accelerate that shift.
Senator Hagel. Thank you.
Mr. Younts.
Mr. Younts. Yes, Mr. Chairman. First, the question about
success in China. Motorola entered China in 1992 on a contract
that was signed with the Chinese in late 1991. We entered China
as a wholly owned company. Still 85 to 90 percent of our sales
in China come from our wholly owned activity. The majority of
our technology is transferred through that organization.
We do have eight joint ventures across China in various
parts of our manufacturing process, several R&D facilities, all
of which are wholly owned by Motorola. Today, we have 10,000
employees working in Tianjin and Beijing.
All elements of our operations have been installed in
China, and like Frank said, we operate as an American company
in China. All of our values are transferred to China, are
expected to be lived up to by Chinese employees. The two major
ones are constant respect for people and uncompromising
integrity.
We teach that to all of our people, to our suppliers, and
to our distribution channels; therefore, my comment earlier
about making a change in some fundamental beliefs in China. We
have used that base of capability to serve the Chinese market
in telecommunications, semi-conductor, two-way equipment, and
other types of technology.
We continue to grow quite rapidly. I mentioned that about
10 percent of our corporate revenue for 1999 came out of our
Chinese operations, and we expect that, with PNTR, to continue
to grow as the market would open.
The most difficult thing that I see, and it was mentioned
by Frank, that China has to face is state owned enterprise
[SOE] reform. At one time, they had about 370,000 SOE's, most
of which were not competitive internal, much less external. And
if China opens to the outside world, it is going to obviously
put a lot of pressure on these SOE's to either perform or to go
bankrupt.
The Chinese have been reforming the SOE's for a number of
years now. I believe they are down now to about 70,000 SOE's
that are still on the books, and those are being combined with
each other to try to make them strong enough to survive, and
other parts of a reform program are going on.
Obviously, I think that is going to be potentially a big
issue, unless managed correctly. Unless reform is pulled off,
it could create dramatic social issues, unemployment and other
types of social issues for the Chinese. I see that as their
biggest issue.
Senator Hagel. Mr. Younts, just a footnote in history: I
arrived in Beijing on New Year's Day of 1984 with a Motorola
cellular telephone specialist at my side. These were in the
days, as Frank knows, when I had a real job, and did not have
the high honor of being a Government employee, as I do now.
I had a cellular telephone company that my partners and I
put together, and I formed an international company, it was not
much of one, but we called it an international company. Back in
1982 and 1983, when my partners and I got into this business of
cellular telephony, most people thought it had something to do
with your health.
So I had a Motorola specialist with me, and we spent 10
days all over China on trains and planes. It was a most
enlightening experience for me, for many reasons, but I was
interested when you said you had formed your company in 1991,
1990 or 1991--it is not that I am taking credit for bringing
Motorola to China, but it does tell a little story of how long
it takes to break into that orbit, and how long it took. I
suspect, in relative terms, it was a rather quick entry,
considering.
But I remember, as we would go into the various Chinese
telecommunications entities--and I do not think there were any
private sponsored organizations at that time--we would have
sometimes 50 Chinese engineers that would be reading over that
Motorola pamphlet. And being the crafty, agile marketers that
we were, we had thought ahead and actually had that translated
into Chinese, although somehow we brought the Saudi Arabian
brochures with us, but those were minor problems.
I thought at the time how interested the Chinese were in
understanding the potential of what this was. And I suspect one
of the first things I learned about this was, as I did in Latin
America for the next few years and other places, is when you
have a technology, it is kind of like D-day on June 6. It
probably was not good to be on that first wave at Normandy. You
would far prefer to be on the third wave, stepping over those
who had gone down before you.
We were on the first wave, so we were never very
successful, but I watched Motorola develop over the years. What
Frank's company has done, and it is instructive, because--as I
asked the question, ``why have you been successful and other
companies have not''--and what you said was very important for
all companies to listen to.
And the bottom line is: You focused on their needs. And
when we talked over there in 1984, that was what we came away
with as well. It is a pretty basic tenet of marketing--focus on
their needs, and eventually you can break into the market.
So not that I have added or contributed to the dialog that
is going with that story, but I have learned a lot from that 10
days in China, and I have been back many times since.
Let me ask your opinion, both of you, concerning what
Chairman Thomas brought up this morning, that is the Lockheed
issue, which is an extension of the Loral/Hughes problem.
Where do you break it down? How can you stop these
components from getting into the hands of perceived bad guys,
or real bad guys?
You know we have been struggling up here trying to re-
authorize our Export Administration Act. We have not re-
authorized that since 1994, and we are having difficulty again
for many reasons. One of the things that I think concerns many
of us, and each of you have touched on it this morning, is that
the world is changing at such a phenomenal rate, we cannot keep
up with it through Government policy.
I fear that in the process of us attempting to ensure, as
much as we can, national security, we might, in fact, be
screwing it down so tightly that we may well end up hurting
terribly our high-tech industry, satellites being just one
component of that. So I would be interested in each of your
thoughts on that general issue.
What are we not doing right? What should we be doing now
that we are not doing?
Mr. Carlucci. Well, in the area of information technology,
dual-use technology, it is extraordinarily difficult in today's
world to control exports.
The administration has just eased up a bit on its
requirements on computer technology, and I think that is a
desirable thing. If you go too far, you do restrict the ability
of American companies to compete. On the other hand, if they
are too loose, it is inimical to our national security
interests. So you have to strike a balance.
I think Secretary Eizenstat emphasized the point that the
administration intends to continue to enforce the export
control regulations. There is certainly nothing in PNTR that
would enhance the likelihood of technology transfer. On the
contrary, PNTR removes the mandated technology transfer that
China has insisted upon so far.
We are now at liberty to move some of that technology back
to the United States, and export from the United States, should
we choose to do so. So I think while it is an important, and it
is an important issue, it is not relevant to PNTR. PNTR would
not affect technology transfer one way or another.
Senator Hagel. Do you have any advice outside of the PNTR
dynamic on this issue, Frank?
Mr. Carlucci. No. Mr. Chairman, I have been out of
Government now for 12 years or so, and my wisdom on those kinds
of subjects is dwindling very fast.
I can say from my own experience that it is an
extraordinarily difficult issue that has gotten more difficult
with the passage of time. In an information society, it is
perhaps the single most difficult issue that we face in dealing
with countries overseas.
Senator Hagel. Thank you.
Mr. Younts.
Mr. Younts. Well, unlike Frank, I have not had the wisdom
to dwindle in this area, but we have had two experiences of
late through Motorola. One was the transfer of a technology for
satellite launches on the iridium system that were licensed by
Commerce, and approved by DOD, and actually monitored by DOD
onsite.
And we felt that process was fair to us, and did, in fact,
protect the technology that was of concern to both Defense and
Commerce. So our belief is that that system worked pretty well,
although it had been flawed since that time.
Recently, semi-conductor technology transfer to China also
became an issue. We have had that process licensed now through
Commerce, and again approved by the Department of Defense on
semi-conductor processing technologies. That is being
coordinated well, and we think the process seems to work both
in our favor as well as protecting the technology. But this
comes from a business guy, not an expert in this area.
Senator Hagel. You each have just returned from China and
Taiwan. Frank, I think you were in both, is that right?
Mr. Carlucci. That is correct.
Senator Hagel. And Mr. Younts, you went to Taiwan.
Mr. Younts. Just in PRC.
Senator Hagel. I would be interested in each of your
thoughts on what you perceive to be the Chinese expectations
regarding what they will get out of joining the WTO, and out of
permanent normal trade relations with the United States? What
do they believe? What are their expectations on this?
Mr. Carlucci. My experience was that it was the single-most
discussed topic in China. They are very keen on entry into the
WTO, perhaps, as I said earlier, best expressed to me by the
President of China when he said they were going to enter into
the new economy. They see it as their opening to the world.
They see it as their opportunity to develop their country much
faster, and they see it as an opportunity to deal with some of
the complicated issues that they face.
My sense is that they are very much committed to the WTO
process, recognizing that it is going to entail sacrifices,
particularly as far as the SOE's are concerned, but it can be
boiled down to one sentence: They want to be part of the world,
and they do not want to live any more in isolation. They made
that decision, and they are going to live with it.
Senator Hagel. Mr. Younts.
Mr. Younts. I think that is really two basic gets for
China. It is, in fact, a continuation of something that Deng
Xiaoping started in 1978, with an open market economy push for
China, which has been re-endorsed in the MPC meetings that were
held last month in China. So it is a continuation of that
process, and a major step in that direction, because it opens
China now to the world, and makes them part of the world
trading community.
I think there is also a face issue, that China is ready to
be a full member of the world, and wants to take their rightful
position as one of the world leaders, and this gives them that
opportunity.
As Frank said, I think they are ready for the down side, as
well as the up side. I was there right after the announcement
was made. And most of the ministries, if not all, went into a
one- or 2-week closed session to figure out what they had to do
to get compliant in their own areas, a very strong process of
reviewing all of their procedures and processes to make sure
that they would be compliant by the time WTO was ready to be
offered and assessed by China.
So I think those are the primary gets for China, and I do
not see any down sides at all for the U.S.
Senator Hagel. Thank you. Let me ask each of you one more
question. This was brought up directly and tangentially this
morning in some of the testimony.
From what I understand, part of the breakdown with the
European Union and the Chinese has centered around, to some
extent, the percentage of foreign ownership of
telecommunications firms. How did each of your companies deal
with that and get around that issue?
Mr. Carlucci. Well, it does not really apply to us, because
we are a manufacturer. It deals with the telephone service
companies, so we have not been part of that negotiating
process. We would benefit by increased competition, as China
adheres to the WTO agreement on telecommunications as a
manufacturer, but we are not--we do not get into the service
business.
Senator Hagel. But, Frank, why do you think that this has
been a particularly big problem for the Europeans? Obviously,
we would all like to have a 51 percent controlling interest in
everything, but there is a phase-in to this, and I have been a
little surprised that they have allowed this to get somewhat
out of the box. Are there any other thoughts you have on this?
Mr. Carlucci. Well, at the risk of sounding cynical, I
think they would have to have a better agreement than we
negotiated when they focused on this particular aspect. My own
sense is that our companies can perfectly well live with the 50
percent requirement.
Senator Hagel. Thank you.
Mr. Younts.
Mr. Younts. We are also an equipment supplier, so it does
not directly apply. It is my sensing that all American
companies who are, are happy with the agreement that we have,
and would be satisfied if the Europeans get 51 percent, that we
would also get that deal, as was stated by the Secretary this
morning. So it is really not a lose situation for us at all.
Senator Hagel. Is that a general area that you had to deal
with in any way when you first negotiated your entry into the
Chinese market, and established your manufacturing bases there?
Mr. Carlucci. Not in our case.
Mr. Younts. There was an issue in China in the early
nineties that most joint ventures, and maybe Frank can address
it as well, that required many of the ministries to have
Chinese majority ownership. All of our joint ventures, we have
majority ownership, and we have control of the board. So that
was an issue we went into. Those were some very long
negotiations, but that was an issue that we would not
relinquish.
I think that is changing today, where China is becoming
more flexible, because they are finding they have to in order
to be able to get the kinds of partners that they are looking
for.
Mr. Carlucci. We, too, went through joint ventures. I
thought you were referring to the service industry, the 50-
percent requirement.
We established joint ventures. You are required to
establish joint ventures. Now, with PNTR, assuming it passes,
that requirement will no longer exist, so it allows more
latitude to export directly from the United States.
Senator Hagel. Since you both represent manufacturing
companies, how big a problem was technology transfer when you
were negotiating your deals with China?
Mr. Carlucci. The Chinese insist on that. It is a big issue
with them, and it is a question of how much technology do you
want to transfer prudently? We have fortunately been successful
in doing that.
Senator Hagel. Mr. Younts.
Mr. Younts. Well, we are wholly owned. Activity for a
number, and all the technology that we transferred initially,
was into our wholly owned activities. So once we started doing
joint ventures, one of the concerns that we had, and the reason
we asked for more than the controlling majority ownership was a
technology issue, but it was also a business control issue.
Technology is a very broad area, so we have transferred
technology to those joint ventures in ways of manufacturing
technologies and manufacturing processes, and management
skills, and so forth.
But in terms of technologies that would be a problem for
national security, or that type of thing, that has not been the
issue, and the technology that China really needs these days to
be competitive in the world market and those markets that they
are in is really on the low end of the technology spectrum.
Senator Hagel. Gentlemen, would either one of you like to
present any last parting word?
Mr. Carlucci. Just that we hope that the Congress passes
PNTR. I think it is terribly important. I think it is one of
the more important issues that I have seen in my career with
government and business.
Let me echo what Rick said and what Stu said: This is a
very one-sided agreement. I have seldom seen an agreement in my
long career that has redounded so much to the benefit of the
United States as the agreement that our STR negotiated, and I
think PNTR is absolutely essential for the future of our
relationships with China.
Senator Hagel. Frank, thank you.
Mr. Younts.
Mr. Younts. A personal comment to your early trip: I would
like to inform you that China will surpass Japan as the second
largest cellular market in the world this year. We expect that
there will be approximately 75 million users in China by the
end of the year 2000, and that continues to grow, to push the
U.S. as one of the world's leading cellular marketplaces.
Another factor, in the year 2002, cellular will outstrip wire
line as the primary use for telephone service.
The other issue came up this morning about the Internet. We
are starting to see many companies put out wireless Web access
devices into China, and that is starting to occur this year,
and that will become one of the primary factors in the Web
access marketplace. So we think that is going to help
significantly.
In closing, just to say, as Frank said, that PNTR is
extremely important and whatever you Mr. Chairman can do to
push that both in the Senate and the House, we would sure
appreciate it.
Senator Hagel. Well, again, this committee is grateful for
your contributions. We appreciate it very much.
We will leave the record open for a couple of days.
Secretary Eizenstat is going to furnish some additional answers
to questions I think some of my colleagues want as well, and if
you have any additional comments, we would insert those into
the record.
Finally, I appreciate the fact that Motorola has finally
associated itself with some successful crack marketers to get
into China, and I applaud that. Not all of us have a Frank
Carlucci.
Thank you all very much.
[Whereupon, at 12:02 p.m., the hearing was adjourned.]
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