Programs & Events

Remarks by Ambassador Karan K. Bhatia

Deputy United States Trade Representative

Liaoning University

Shenyang, China

October 25, 2006

As Delivered

Introduction

Thank you very much for that warm welcome President Cheng. It’s a pleasure to be here in Shenyang today.  I want to thank Liaoning University for inviting me to talk to you.  It is my first trip to northeastern China, and I am pleased to see that so many young people like yourselves are interested in the economic relationship between the United States and China.  It’s clearly an extremely important one, and we all have to take great care to ensure that it remains a successful partnership.

In my brief time here, I have observed that the city of Shenyang and Liaoning Province are places of many contrasts.  There is great development and change underway, which, for example, take advantage of the deep water port in Dalian, and the work ethic of your industrial base.  At the same time you bear heavy economic revitalization and environmental challenges, like many U.S. cities in the northern and eastern parts of the United States.  Our countries are both large, and therefore have many experiences worthy of sharing on dealing with different challenges simultaneously.  The good news is that our societies are creative, vibrant and energetic.  Like the Nike slogan – we “Just Do It.”

I am truly pleased and honored to have this opportunity to speak to such a distinguished group of students and scholars.  Among you are future leaders of government, academia and industry.  Often, when I visit Beijing, I have had the pleasure to meet with the former mayor of Dalian and your former provincial governor, now Minister of Commerce Bo Xilai.  He has indicated that he is ready to work with the United States to resolve some of the trade problems that crop up between our two countries.  And he demonstrated his personal commitment to the multilateral trading system by hosting a WTO ministerial meeting in Dalian last year at which he played an important role in pressing for the elimination of agricultural export subsidies. 

As you go on with your careers, I hope that your energy, expertise and ideas will support continued market-oriented development in this important province and across China.  China’s continued participation in the international rules-based trading system as a key stakeholder and China’s economic relations with the United States are lynchpins for peace, prosperity and more freedom and democracy in the world. You have a high responsibility. 

Today, I would like to talk with you about the importance of the U.S.-China trade relationship in the bilateral and multilateral contexts, about what spurs innovation and entrepreneurship, and about steps our governments can take to resolves the challenges that we confront.  

U.S.-China Trade Relations:  Bilaterally and in the WTO

The growing trade relationship between the United States and China marks the convergence of two great economic forces:  the United States, the largest economy in the world and a leading proponent of trade liberalization, and China – the focal point of one of the great economic transformations in history.  Indeed, the United States and China, together with other Asian countries, are the twin engines of global economic growth today in large part because we have embraced more open trade and market principles.

The dramatic growth of China’s economy is the result of a historic transformation of which you all should be very proud.  Beginning in the late 1970s, your leadership’s decisions to introduce market-oriented economic reforms and encourage export-led growth have helped to create the conditions for economic opportunity that you currently enjoy.

The impact of these reforms has been impressive.  China’s annual growth rate has exceeded nine percent for over 20 years – it’s often been ten percent or more, and during this period - the lifetimes of many of you in this room - your country has achieved a 500 percent increase in GDP and nearly 400 million people have been lifted out of poverty.  Since 1990, over $500 billion in foreign direct investment has flowed into China, creating millions of jobs as well as know-how.

In 1978, China accounted for less than one percent of the world’s economy and its total trade was about $21 billion.  Today, China is the second largest economy in the world in terms of purchasing power.  It accounts for four percent of global economic activity with foreign trade over $1.1 trillion annually.  It has become globally competitive in sectors that, less than a generation ago, it barely competed in.

These changes have been dramatically reflected in the U.S.-China economic relationship as well.  In 1981, U.S. trade with China amounted to $5.5 billion.  U.S. exports were in the neighborhood of $3.6 billion, more than half of which were agricultural products, while Chinese exports to the U.S. amounted to $1.9 billion, over half of which were simple manufactures.  China constituted the United States’ 16th largest export market, but only its 27th largest supplier of imports, ranking behind countries like Malaysia, Indonesia, Australia and South Africa.  There was virtually no U.S. direct investment in China, nor any Chinese investment flows into the United States.  Given those numbers, it is not surprising that trade was not exactly the defining issue in our relationship with China in 1981.

Fast forward twenty-four years - longer than the lifespans of most of you students here today. The tally for U.S. trade with China in 2005 amounts to about $285 billion – more than 50 times the amount of bilateral trade in 1981. U.S. exports to China for 2005 reached about $42 billion.  Our exports today are substantially more diverse: agriculture last year accounted for about one-eighth of our goods exports, with the rest of our goods exports led by machinery, aircraft, and optical, photographic and medical equipment.  Chinese exports to the United States were in the neighborhood of $245 billion.  China’s exports to the United States today consist of a broad range of manufactures, representing China’s strengths as a final point of assembly for companies in Asia and elsewhere, as well as by traditional, simple manufactures such as apparel, footwear, and toys.

China has grown on a country basis from our 16th to our 4th largest goods export market – trailing only Canada, Mexico, and Japan – and has become our second largest supplier of imports, behind only Canada.  And in the area of direct investment, the stock of U.S. investment in China in 2004 – the most recent year for which data is available – reached an impressive $15.4 billion.

Both countries have benefited from this growth in trade and investment.  U.S. consumers today have access to an enormous range of Chinese-made goods at competitive prices, and U.S. companies have enhanced their global competitiveness through their access to China’s manufacturing base. And China has fueled its economic development through access to the U.S. market.

Let me take a moment and underscore the importance of the work of the WTO’s Doha Round of trade negotiations.  Although the talks are currently in suspension, the United States is committed to achieving success on Doha and is working actively to find the breakthrough that will enable the negotiations to resume.  Many of our trading partners, including China, share our belief that success on Doha is needed.  The multilateral trading system needs it.  The global economy needs it.  Opening new markets is at the heart of the Doha Development Agenda.  This is true in all areas -- agriculture, industrial goods, and services. That’s the economic promise of Doha – to open new markets and generate economic growth through new trade flows, particularly for developing countries. 

China’s decision to accede to the WTO in 2001 was courageous and the extensive liberalization undertaken as part of that process has benefited China greatly.  With  its success in harnessing trade in the service of development and poverty reduction, and its  commanding position in the global trading system among the world’s largest emerging economies, China is particularly well place to be a leader making Doha a success.  As key global powerhouses, both the United States and China have a special responsibility to continue to strengthen the rules-based multilateral trading system and work to integrate all developing countries into the global economy through progressive liberalization.  We believe that unblocking the impasse will only be possible with vigorous and positive Chinese leadership towards a market-opening outcome. 

For Liaoning Province, a successful multilateral round would bring sizeable benefits.  The Province’s history is rooted in heavy industry and you are working hard to reform state-owned enterprises and replace them with a vibrant private sector.  If, for example, foreign companies could invest in and provide more types of services in China and have a greater ability to acquire companies and conduct activities in sectors now under state control, this would create the kinds of new jobs that could speed domestic reforms and move the Province toward a more knowledge-based economy.  Yet China has not been active in the WTO services negotiations, and has taken recent steps toward introducing industrial policies that unfairly favor domestic companies and retain unneeded and uneconomic state controls.  

It is a challenge to reform capital-intensive industries.  We have experienced a great deal of this in the United States.  Bethlehem Steel was once an icon of U.S. heavy industry.  Today Bethlehem, Pennsylvania is a growing high-tech center.  Protectionism isn’t a successful antidote for economic woes, and government subsidies that distort markets cannot substitute for the good business judgment of private entrepreneurs.  China, for example, was a net importer of steel in 2003.  But by encouraging the non-economic production of steel, China is forecast to produce 117 million tons of excess steel in 2006, which exceeds the entire steel production of either Japan, the world’s second biggest producer, or the United States.  There is concern around the world that the laws of supply and demand have been side-stepped, and this overhang will have implications, including trade frictions with other countries, that are not in China interests or in the interests of others.

Similarly, China as a whole, and Liaoning Province in particular, could benefit from greater openness to foreign environmental goods and services.  Researchers have found that “[c]ountries which trade more environmental goods have less pollution or consume energy more efficiently.”[1]  By reducing the prices of these technologies through, for example, the substantial reduction or elimination of import tariffs and non-tariff barriers, China could take concrete and effective action to improve access to products vital for combating pollution, reducing greenhouse gas emissions and meeting sustainable development goals.  China, as a major producer and exporter of environmental goods in its own right, can benefit from global liberalization in this sector.  Increased market access for cleaner technologies would be a “win-win” outcome for Chinese job creation and for a cleaner China and a cleaner world.  We would urge China to be supportive of initiatives to improve the environment through trade measures.  Why not?  There are tremendous benefits to be garnered.

China’s leaders are also prioritizing the importance of an innovative, technologically advanced society.  President Hu Jintao has stated that the harmonious society he strives to create in China will “strike a fine balance between reform, development and stability.”  The prospects for achieving this will heavily depend on China’s stronger recognition of the essential quality of the human genius as embodied in the intellectual property that citizens create.  This starts, for example, by explaining to students, like yourselves, that copying textbooks isn’t acceptable or legal and then holding you accountable for your actions.  It then allows individuals the freedom to create and be rewarded for their ideas.  An innovative society stems from less government, not more.  And it can’t be bought with subsidies, and it can’t thrive where corruption or rampant IP infringing activity flourishes.  

Last week there was an encouraging development.  The World Intellectual Property Organization reported that in 2004, China rose to fifth place in patent applications in the world.  Applications by Chinese citizens jumped six-fold from 1995, and foreigners’ applications increased by seven-fold.

You’ve probably all heard of the Apple I-Pod, and some of you may have one.   The company’s CEO, Steve Jobs, puts it this way, “Innovation has nothing to do with how many R&D dollars you have.  When Apple came up with the Mac, IBM was spending at least 100 times more on R&D.  It’s not about the money.  It’s about the people you have, how you’re led, and how much you get it.”  Probably the most important cornerstones the government can provide are an education system that rewards ideas whether the government agrees with them or not, and a legal system that protects them.  Albert Einstein once said, “If at first, the idea is not absurd, then there is no hope for it.” 

So how does a society do this – and what does international trade and economic policy have to do with it?  Well, trade agreements, such as those in the WTO, bilateral free trade agreements, APEC and the OECD, have provisions on what is required for a government to be transparent, so that all people – citizens and foreigners alike – can understand the rules of the game to do business there.  These rules must then be enforced without regard to nationality, so that all can create on an equal basis and receive the same protections.  In China we have seen a growing acceptance of the importance of transparency in government activities and rule-making.  And indeed China has accepted some international obligations in this regard.  But in reality these are first generation commitments that need to go further.  China could unilaterally take steps to ensure that the public is notified of draft regulations and has the opportunity to provide comments. China could also support more advanced commitments on transparency in WTO agreements and in its free trade agreements.  China could also take steps to institute other rule of law attributes that are vital to the creation of an innovative society, such as the creation of and independent, open court system, that would ensure intellectual and other property rights are protected, contracts are properly enforced and ensure that individuals have the freedom to think and speak creatively.  All of these steps would improve China’s prospects of achieving the goal of an innovative society.  This would be good for China, and good for the world.

Perceptions matter, though.  And there is a growing tendency in the United States and elsewhere to view China’s growing economic footprint as out of sync with the pace of its efforts to improve the rule of law and to foster democratic reforms.  China’s increasing signs of mercantilism, and policies that seek to direct markets rather than open them, will not sustain China’s growth, and will do damage to the prospects for sustaining an open international trade and economic system.  As a responsible global stakeholder, China must reject the voices that seek to pursue a closed development model and lift up those who understand that a more open economy will have the greatest positive impact on China itself.  Doing so will strengthen the U.S.-China relationship and the multilateral trading system.

Addressing Challenges in the Relationship

As trade policymakers, it is critical to try to see the relationship from each other’s perspective.

From China’s perspective, I think that many of your policymakers believe that the United States does not appreciate the breadth and depth of changes that China has made to open its economy to the world.  When the world urges them to do more … faster … they point out that the Chinese economy has undergone dramatic change in the span of just 25 years – reforming not only the domestic economy, but passing hundreds of laws and regulations that have increasingly opened the Chinese economy to foreign companies.  I believe that my Chinese interlocutors also are concerned that the United States does not appreciate the challenges that China continues to face – in meeting aggressive economic growth targets, and in pushing forward change through a complex bureaucracy.

I do not discount these perspectives.  China has made substantial reforms, and deserves credit for those reforms.  As part of its WTO accession, China has lowered its tariffs on a wide range of goods from an average of 25 percent to an average of seven percent; most import license requirements have been eliminated; companies have been granted trading rights and allowed to engage in distribution; and new opportunities have been created for many companies in the service sector. And we do need to appreciate that change is difficult – it takes hard work and political courage. One of the things that you – as Chinese students – can to help share here is to share your perspectives on this with your American counterparts.

From the U.S. perspective, many Americans, for example, do not believe that China is competing fairly when rampant counterfeiting and copyright infringement cost businesses billions of dollars each year.  The movie, music, publishing, software and electronic entertainment industries are areas in which the United States is especially competitive, and China’s weak enforcement of copyright laws has a disproportionately heavy impact on our sales to China.  In addition to the problem of the widespread availability of fake DVDs and CDs, China only allows 20 foreign films to be shown each year…and there are only 3000 screens in China where films are shown.  By contrast, Chinese films have open access to the U.S. market, and for example, the Chinese film Heros debuted at #1 in its opening weekend, grossing US $18 million (roughly $8,800 per screen), which was second highest opening weekend ever for a foreign language film.  Its nearly $54 million total North American box office gross makes it the fourth highest-grossing foreign language film in North American box office history. 

What can we do to ensure that the economic benefits of the relationship are protected – and the potential gains are achieved?

Earlier this year, the U.S. Trade Representative’s Office released a “Top to Bottom Review” of U.S.-China Trade Policy.  The review concludes that the U.S. trade relationship with China is entering into a new phase. After a twenty-year period in which US policy was focused on getting China into the WTO and then on China’s implementation of its accession commitments, U.S. policy must now be readjusted to deal with China as a mature trading partner. There is a list of important issues on which we believe the U.S. and Chinese governments need to make more progress. These include: protection for intellectual property rights, market access issues related to telecommunications, financial services, healthcare and direct sales; subsidies and structural issues, in sectors such as the steel industry; standards; labor; environmental protection; and transparency and the rule of law. We believe that progress in these areas will benefit China as well.

That is why it is so important we take advantage of opportunities through institutions such as the bilateral U.S.-China Joint Commission on Commerce and Trade, and recently created Strategic Economic Dialogue that U.S. Treasury Secretary Paulson, together with other U.S. cabinet officials, will lead on the U.S. side.  Through positive outcomes in these fora we will be able to demonstrate that we are making progress towards a U.S.-China relationship that has greater equity, durability, and balance of opportunities.

The Bush Administration is committed to using cooperative bilateral mechanisms to the fullest extent possible to resolve bilateral trade and economic issues.  However, given China’s relatively recent accession to the WTO and our rapidly growing economic ties, it is natural that we will have a large number of issues on which we have differences. Those that we fail to resolve through bilateral consultations may need to be addressed through other means, including WTO dispute settlement proceedings.  In our Top-to-Bottom review, we indicate that we need to strengthen our efforts to ensure that China complies with its international obligations – which will benefit not only U.S. companies and workers, but also China.
 
There are those who have asked me whether a more vigorous enforcement effort will upset the bilateral relationship, or even lead to a trade war?  My answer is no. Trade wars arise when you don’t have dispute settlement mechanisms.  An active dispute agenda should not strain our relationship with China, any more than disputes with other major trading partners strain those relationships.  I would look at it this way -- active participation in dispute settlement is reflective of active and mature engagement in the world economy and in building and maintaining the multilateral trading system.

For example, since the year 2000, the EC has been involved in 58 disputes, and the United States has been involved in 94 disputes.  Since 2000, Brazil has been involved in 22 disputes, and Korea and India have both been involved in 13 disputes.  In many ways, China has been an anomaly in terms of its isolation from the WTO dispute settlement process.  China, the growing economic colossus of Asia, has been a defendant in exactly two WTO cases and a complainant in only one, for a total of 3 WTO disputes. 

In 2004, the United States challenged China’s imposition of a discriminatory semiconductor value-added tax.  We were able to settle the case at an early stage.  In March of this year, we joined with the European Union and Canada in challenging China’s discriminatory regulations on auto parts.  The regulations encourage auto manufacturers in China to use Chinese parts at the expense of parts from the United States and elsewhere.  Bedrock principles of the WTO have long-precluded this type of discrimination.  We discussed our concerns for over a year with China before filing the case, but China was not able to fix this issue.  So we, together with the EU and Canada, have sought the assistance of the WTO in resolving this issue.   

I mentioned the concerns we have with China’s slow-going efforts to enforce intellectual property laws against infringers.  One problem we have is that many pirates and counterfeiters know for certain that they face no threat of going to jail.  This is due to provisions in China’s criminal law that establish high volume and value thresholds for criminal prosecution.  These thresholds effectively create a safe harbor for pirates and counterfeiters.  For example, a retailer can offer hundreds of copies of pirated and counterfeit goods for sale with absolute confidence that he will not be criminally liable if the goods in his possession do not add up to exceed the high threshold.  Even large operators can escape criminal liability simply by not keeping detailed records that would be needed for the police to prove that the thresholds are met.  This is especially frustrating in cases where there is powerful evidence of commercial infringement, such as the seizure of a well-worn production mold bearing an infringing brand, or seizure of thousands of infringing components.

For the past few years we have been in discussions with Chinese officials to point out that the WTO TRIPS Agreement requires the availability of criminal sanctions for all commercial-scale counterfeiting and piracy, and have urged changes to China’s thresholds which prevent criminal liability against so many acts of infringement.  Unfortunately, China has not seen fit to change its laws and other measures to meet its international obligations, and to remedy what is a cornerstone irritant in our bilateral trade relationship.  This being the case, the United States may well be left with no choice but to file another WTO dispute settlement action against China in the very near term.

We should remember that the WTO dispute settlement procedures were actually intended to de-politicize disputes.  Resorting to a quasi-judicial forum to resolve legal disputes, as we do in WTO dispute settlement – is just another tool to address difficult trade issues not a weapon in a trade war.  Making use of this mechanism that all WTO members have agreed to ought not get in the way of on-going cooperation on economic, diplomatic, security or any other issues.

Trade frictions arise even among the closest of partners.  In a mature international relationship, those frictions are dealt with on their own terms, while the broader relationship continues to flourish.  What is important is that we use all of the bilateral and multilateral means available to solve problems on our bilateral trade agenda.

Conclusion

I am realistic about the challenges we face.  China’s growing impact on the United States and the rest of the global economy means that it is now being held to a higher standard – that of a mature trading nation.  Entering this new phase of our relationship requires that we approach our bilateral dialogue with even greater ambition about the progress we must make on bilateral issues.  China should also embrace the new responsibilities it has as a leading player in the international economy. But I am optimistic about the U.S.-China relationship.  China’s economic development is making remarkable progress, as I have witnessed first hand in Liaoning Province. Our economies are growing increasingly interdependent every day.  We meet more frequently with our Chinese counterparts and I believe that both sides understand the importance of making this relationship work.  Above all, we want China to succeed.  

The United States has played a constructive role in supporting China’s integration into the global economy and in its accession to the WTO.  We will continue to do so.  We look forward to overcoming new challenges and creating even stronger commercial and political ties in the years to come.   If this is to be the Pacific century, both China and the United States, as Pacific economic powers, will play important roles.  We are firm in the belief that, if China continues on its course of economic reform and liberalization, all the world’s trading nations will benefit from China’s transformation. I hope that each of you here aspires to be a part of this historic process.  Thank you.