Hearing on The China-WTO Agreement and Financial Services


Prepared Testimony the Honorable Lawrence Summers
Secretary of the Treasury


9:00 a.m., Tuesday, May 9, 2000


Chairman Gramm, Ranking Member Sarbanes, and Members of the Committee, I thank you for the opportunity to testify today on what I believe to be the most important issue that Congress will face this year: the decision to grant China Permanent Normal Trade Relations, or PNTR.

Last fall, the United States signed a bilateral agreement with China to bring it into the World Trade Organization, on strong terms that will open its markets to American exports. After China completes its agreements with other countries, and completes the multilateral part of the negotiation, it will join the WTO. But for us to enjoy the full benefits of the market opening that we negotiated, we must first grant China the same permanent normal trading status that we have already granted to every other country with which we share the benefits of the WTO.

The legislation presently before Congress 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 1999 bilateral agreement. In fact, the terms can only get better, as we benefit from all further concessions China makes to other countries.

I will discuss in a few moments the concrete commercial advantages for the United States of passing this bill. I believe they are enormous. Moreover, the agreement with China is a one-way street. China opens its markets to an unprecedented degree, while in return the United States simply maintains its current market access policies.

It is also important to keep in mind what granting PNTR to China is not:

This vote is not about whether China will enter the WTO: it will become a member either way.

It is not about whether Chinese producers will have access to our market: they will continue to be able to sell their goods in the United States whether or not Congress passes PNTR.

It is not about whether we approve or disapprove of China's human rights record: we will continue to pursue improvements at the United Nations Human Rights Commission and other fora, either way.

It is not about China's policies toward the environment: we will continue to work with China to improve its capacity to protect China's environment and national resources, either way.

It is not about China's policies toward Taiwan or other strategic issues that concern us: we will continue to press for peaceful resolution of differences between the PRC and Taiwan, and to urge China to respect global norms of conduct in nuclear nonproliferation and other areas, either way.

It is difficult to discern any disadvantage to the United States in passing this legislation. We will continue to press our full agenda with China regardless of how Congress votes. And China will open its markets to other members of the WTO when it joins the system, regardless of how Congress votes.

There are, however, three crucial advantages to the United States in passing this bill, which I would like to focus on today:

First, there are the direct and commercial benefits of the market opening agreement that we concluded last fall.

Second, there are the economic and broader benefits to the United States of promoting economic and social change in China.

Third, there is the ultimate enhancement of America's national security interests that comes from integrating China more closely with the community of nations.

I. The Commercial Benefits to the United States of Granting PNTR

First, the economic and commercial benefits of granting PNTR are significant and all on the side of US businesses and workers. By passing PNTR, we will be agreeing to continue to grant China the same access to our markets that its producers currently enjoy. What we will get in return - as a result of the agreement we concluded last fall - is unprecedented new access to what could ultimately become the largest market in the world.

I might note that it is evidence of the compelling nature of these benefits that economists reflecting the full diversity of academic opinion have been united in their support for the Administration's approach. On April 25, 138 economists, including 13 Nobel Laureates, released a joint letter to the American people strongly supporting China's accession to the WTO on the terms that we negotiated last fall. It has sometimes been remarked that asking five economists a question will generate ten different answers. On this issue there has been only one answer: that welcoming China into the global economic system is right for the American economy and for the global economy.

The scope of this new access is impressive, with reductions in tariff and non-tariff barriers on industrial and agricultural goods and the elimination or reduction of barriers to American service providers:

Chinese tariffs on industrial and agricultural goods will fall by 50 percent or more in the space of five years, along with sharp cuts in non-tariff barriers to U.S. exports. For example:

- Industrial tariffs on U.S. products will fall from an average of approximately 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 US priority goods. The role of state trading companies will be progressively reduced, allowing for more market-based trade. This improved access is expected to result in an increase of $2 billion a year in our agricultural exports to China by 2005, 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.

- 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.

- China will also eliminate or sharply reduce a wide range of crucial 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. 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 restrictions in a broad range of services, including in financial services and other key sectors where the United States is more competitive.

- China has agreed to liberalize international trading rights, and wholesale and retail distribution services throughout China in three years for most products. Instead of having to produce in China or import and sell through a state-sponsored middleman, American businesses will win the right to distribute goods directly - goods that are made here at home.

- In telecommunications, China has agreed to allow direct foreign investment for the first time. 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 the information technology and telecommunications sectors comes at the same time as the powerful revolution in information and communications technology is just beginning in China. American high technology exports to China grew 500 percent between 1990 and 1998 alone.

In view of the responsibilities of this Committee and the prominence of financial services during the negotiations, let me elaborate somewhat on this particular component of China's bilateral accession agreement.

When implemented, our firms will benefit from commitments in banking, non-bank automobile financing, and financial information and advisory services. In banking, for example, China will allow foreign institutions to establish either as direct branches or 100% owned subsidiaries without any numerical or geographic limitations. This particular commitment is comparable to what OECD countries have agreed to and is superior to the GATS commitments of almost all current developing country members of the WTO. Given the developing nature of China's regulatory framework, full access will not be immediate or come in a single step, but some commitments will take effect upon accession to the WTO and it will all be in place within five years.

China agreed to such sweeping commitments in these areas because China will benefit from our firms' presence, too. Chinese depositors and borrowers will benefit from more efficient financial intermediation and credit allocation. Chinese financial institutions will learn the best international practices from our firms in such key areas to China as credit risk management. World class merger and acquisition advisory services will permit efficient corporate restructuring.

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 the geographic scope of operations for foreign firms. In non-life insurance, wholly foreign owned subsidiaries would be allowed two years after accession.

Their commitments for foreign securities firms are not as sweeping, but constitute real liberalization from current practice and are a reasonable start in view of China's situation.

China's capital market is small in relation to the economy and the government is just now drafting law and regulations to govern it. And looking forward, China, in the context of our bilateral Joint Economic Committee, has agreed to consult with our experts on capital market development issues, including the role of foreign financial services providers.

In addition to this new access to China's markets, we will benefit from unprecedented special safeguards and protections to defend American workers and farmers from import surges, unfair pricing, and abusive investment practices. No agreement on WTO accession has ever contained stronger measures.

Notably:

A "China-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.

Requirements that China 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, combined with Chinese commitments to open up trading and distribution rights, these protections will allow American companies to export products made at home by American workers to China, rather than being 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.

II. America's Stake in Promoting Successful Market Reform in China

There are also crucial indirect advantages for the United States in China's WTO membership in that it will both support the cause of market reform within China - and provide an effective rule-based framework for future Chinese reforms to take place.

China has come a long way since the beginnings of market reforms a little over 20 years ago. Its economy has grown by more than 350 percent in real terms. It has risen to being the 10th largest trading nation. And the number of Chinese with access to a television has risen one hundred-fold, to one billion.

This transformation has brought enormous benefits for the Chinese people. But it has also unleashed new forces for change in the Chinese economy and society more broadly, forces that the authorities fear they will ultimately be unable to control. As a result, there are powerful voices within China today in favor of halting, or even reversing, the process of economic reforms - and all that reform implies.

By supporting China's decision to sign this agreement and enter the WTO:

We can strengthen the hand of those who favor the reform path, and make it more difficult for China to turn back the clock.

We can also support the establishment of a rules-based framework for continued economic reform in China that can support faster growth in productivity and wages in China - and thus higher demand for our products in the future - and provide a catalyst for broader changes that will help to promote core American interests and values. As competition and integration proceed, China will need to become more market-based; more protective of personal and commercial freedoms, and more open to the free flow of information and ideas.

The potential economic and broader benefits of supporting the forces of Chinese reform are evident when we consider the impact on China's growing technology sector. 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. Last year the number of Chinese Internet users quadrupled, from 2 million to 9 million. And this year, it should more than double, to 20 million.

No amount of censorship or monitoring can completely control this explosion of information.

WTO membership will not only open Chinese markets, but will also provide China's people with an unprecedented opening to the outside world. As the President has said: consider how much the Internet has changed America, which is already an open society, then imagine how much it could change China.

Already, in the wake of the agreement last fall, there are clear signs of renewed commitment to reform at the highest levels of the Chinese leadership, a commitment that is expressly linked to the need to prepare the economy for tougher competition from the outside world.

The government has stepped up efforts to promote the development of private firms, the most dynamic sector of China's economy, by eliminating heavy deposit requirements and other regulations which discriminate against them and allowing them to list themselves on the stock market for the first time.

People's Bank of China Governor Dai has pledged to intensify efforts to clean up bad loans within the banking sector and to enhance competition among banks by permitting more flexible interest rates. A regulatory overhaul is underway to level the playing field between foreign and domestic firms in line with WTO commitments.

As the Wall Street Journal reported, even parts of the economy that the Chinese consider strategically important are being opened up to the private sector, with individual investors already dominating the Chinese Internet industry and being allowed take ownership stakes in domestic banks for the first time.

The need for reform of China's financial sector is particularly urgent. Well-functioning financial markets can make the difference between getting a country's savings into high-return investments -- versus tying up those precious resources in moribund state-owned enterprises. China's large state banks direct about two-thirds of their loans to state-owned enterprises which in turn produce only about one third of China's industrial output. Bank staff lacks the skills and the necessary financial information to assess the creditworthiness of their clients.

The Chinese government has taken some promising initial steps toward reform, including the reorganization of the central bank along regional lines to reduce local political pressure on supervisors, and the creation of RTC-style asset management companies to deal with non-performing loans. But China faces significant challenges going forward in cleaning up the large stock of bad loans and putting Chinese banks on a sound commercial footing. China's commitments to opening the financial sector to foreign will help lock in reforms, as banks accelerate internal restructuring and reform in order to become competitive. Foreign banks can also be a source of capital, technology and best practices for domestic banks as they seek to reform.

We recognize that the kind of changes that we seek to support in China will not happen overnight. In the meantime, the United States will remain continuously vigilant on human rights abuses in China, and we will continue to express forcefully our disapproval when such abuses occur. The Administration already engages the Chinese on this issue through bilateral channels, monitors the situation continuously and issues annual reports.

We are, however, convinced that we will have much more positive influence over China's behavior if we are actively engaged with China, rather than trying to isolate it. And I might note that a large number of prominent activists in this area have the same view. 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."

Dai Qing, a Chinese environmentalist and former prisoner in China, wrote recently that she believed that: "permanent normal trade status, with its implications of openness and fairness, is among the most powerful means of promoting freedom in China."

A Chinese dissident, Ren Wanding, a leader of the 1978 Democracy Wall Movement, sees Chinese entry into the WTO as "a new beginning."

III. The Broader National Interest In Supporting Greater Integration of China

Finally, a policy of welcoming China into the community of nations - rather than being a voice that keeps China out, even when it commits to live by the rules - is a policy that supports our deepest national security interests and values.

Ever since the rise of Assyria and Sparta, emerging economic strength and major changes in the economic balance of power have raised the specter of war and conquest. In this century alone we have seen two World Wars that followed closely on the emergence of major new economic powers. And the pace of economic change in China over the past 20 years - and indeed through much of Asia - is literally unprecedented in history, with standards of living for hundreds of millions of people quadrupling or more in a single generation.

This has so far been achieved with the minimum of conflict, despite the pervasive rivalries between the peoples of Asian nations, is a reflection of the progress that has been made across the region toward openness and integration. And it speaks to the success of postwar international institutions in helping to cement that progress. But if the next quarter century in Asia is to be as successful as the last, it will be crucial that China use its emerging power in a constructive way, that it fits into the global economic system, and that it continues to maintain economic growth and stability.

As President Clinton has said, "if we have learned anything in the last few years, it is that rapidly changing, insecure nations can pose as a great a challenge to the United States as strong and confident ones." Our long-term strategy must be to encourage the right kind of success in China: to help it grow into a strong, prosperous and open society; to come together not fall apart; and to become part of institutions that promote our deepest values and interests and can build mutual trust. And we have a much greater chance of having a positive influence if we welcome it into the broader global system.

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, workers' rights and environmental protection.

We believe that in a 21st century global economy, China will increasingly have to recognize that, to maintain stability and growth at home, it must meet, rather than stifle, the growing demands of its people for openness and accountability. 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.

This is not a policy based on mutual affection. As I said at the beginning, we can and will continue to express our differences with China both forthrightly and consistently. 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.

IV. Concluding Remarks

Mr. Chairman, I have emphasized today three key reasons: the commercial benefits to the US of this agreement; America's deep economic and broader interest in China's continuing evolution; and our deep national interest in a more stable and peaceful global system. This is why we believe granting China PNTR to be enormously in America's core interests.

One of the issues at stake is whether the United States will be seen as embracing the opportunities of the global economy - or turning our back. Granting PNTR to China, rather than rejecting it, will be an important step forward for the open global trading system, which has contributed enormously to the longest-lasting economic expansion in our history. This system, and our commitment to it, have provided an important "safety valve" for the economic pressures generated by our rapid growth. A vote against PNTR will in effect amount to a vote against our commitment to this system.

At the same time, as important as PNTR is, we recognize that it is but one piece in a much larger mosaic as we consider the kind of China we would like to see - and the kind of global economic system that we want to create. The President has called it "the challenge of the millennial generation...to create a world trading system, attuned both to the pace and scope of a new global economy and to the enduring values which give direction and meaning to our lives." If we want this new global economy to work, we have to make sure it works for people. And we have to make sure it works to support our deep values.

This imperative will continue to guide our international economic policy more broadly - in areas ranging from our support for international efforts to address environmental problems, to support for core labor standards. And it can and must continue to guide our broader policy toward China in the months and years ahead.

In this context, let me say that the Administration believes that the proposals being developed by Members of Congress are constructive, address issues of major importance, and we welcome further dialogue on these proposals among Members on both sides of the aisle.

For example:

We agree that it is a priority for the United States to press for improvement of China's human rights, religious freedoms, labor rights and the rule of law. Finding alternatives to the annual NTR renewal process, such as a Commission, to keep a spotlight on these issues makes sense.

We agree as well that it is important to have a vigorous program, both within the USG and within the WTO, to monitor China's implementation of its WTO commitments and to ensure China lives up to them. And we must have adequate resources to accomplish this.

Finally, we agree that we must make clear the rules and procedures this and future Administrations will employ to implement the strong import safeguard protections we negotiated.

The Administration could not, of course, accept anything that would in any way condition PNTR. However, we are committed to working with Congress to address these concerns, and are receptive to ideas that make good substantive sense and can garner broad bipartisan support.

Mr. Chairman, granting PNTR to China represents but one of the aspect of the relationship with China that we will be pursuing in the years ahead - and one piece of the global economic system we would like to build. It will, however, be an exceptionally important piece - one that is fundamentally supportive of our broader long-term economic and broader national interests.

Indeed, with due respect to all the other issues we work on, I believe this is the only vote that Congress will take this year that is likely to appear in a prominent way in history books 25 or 50 years from now. I look forward to working with this Committee and the Senate as we work toward the best result on this crucial issue. Thank you.


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