By Susan Krause
Washington File Staff Writer

Washington - Testifying at a Senate Finance Committee hearing March 29, Bush administration officials from three agencies presented a detailed picture of economic relations between the United States and China, emphasizing the complexity and importance of the relationship, the intensity of bilateral engagement and areas where adjustments are necessary.

Deputy U.S. Trade Representative (USTR) Karan Bhatia, Under Secretary of the Treasury for International Affairs Timothy Adams and Under Secretary of Commerce for International Trade Franklin Lavin offered perspectives from their agencies on what Adams described as "maybe the single most important economic relationship of the 21st century."

The hearing took place as the Bush administration prepares for the opening of the 17th session of the U.S.-China Joint Commission on Commerce and Trade (JCCT) on April 11.  The JCCT, a government-to-government consultative mechanism chaired by USTR Rob Portman, Secretary of Commerce Carlos Gutierrez and Chinese Vice Premier Wu Yi, provides a forum to resolve trade concerns and promote bilateral commercial opportunities.

Nine days later, on April 20, China's President Hu Jintao will arrive in Washington for an official visit.

USTR SAYS ADJUSTMENTS NECESSARY AS RELATIONS ENTER NEW PHASE

Bhatia told the committee that his office just had completed an interagency "top-to-bottom" review of U.S. trade policy with China and said the bilateral relationship is entering a new phase that will require greater accountability from China and greater enforcement by the United States.  (See related article.)

China has moved far beyond its isolation of 30 years ago and its debut as a member of the World Trade Organization in 2001, Bhatia said, adding that the country has emerged as a major international force with a significant economic and political clout.

"We have a complicated task as we seek to achieve the dual objectives of solving specific, immediate problems - resorting to more muscular enforcement mechanisms where necessary - and encouraging the long-term transformation of China into a more rules-based, open economy," he said.

Although the United States and China benefit enormously from their bilateral economic relationship, Bhatia said, the perception on the U.S. side is that China's focus on export-led growth and development of domestic industries is not balanced in areas such as fulfilling commitments to open markets and protection of intellectual property rights (IPR). 

In its review, Bhatia said, USTR recommended a series of adjustments in priorities and application of resources, including greater focus on China's WTO compliance, more active policy planning and stronger coordination within the executive branch and between the executive and legislative branches of the U.S. government.

USTR also has identified "key objectives" the U.S. government should pursue, such as better enforcement of U.S. trade laws and promoting exports of U.S. products, he said.

TREASURY IS FOCUSING ON THREE "PILLARS"

Adams identified three "pillars," or areas, where China must act to eliminate distortions and imbalances:  exchange rate reform, a shift from investment- and export-led growth to a more consumption-based economy and financial sector reform. The under secretary acknowledged mixed results in those areas.

The Chinese government's July 2005 decision to adopt a new exchange-rate mechanism has made the currency more flexible and responsive to market signals, he said, but he described China’s approach to date as “far too cautious."  He added the yuan has appreciated by only 3.2 percent since the change, and "day-to-day fluctuation has been severely constrained."

China's excessive accumulation of foreign reserves has continued, with its reserves now almost six times greater than what economists recommend.  The Chinese government also is lagging in adopting policies to increase domestic demand and create more balanced growth, the under secretary said.

Domestic consumption in China is estimated at only 47 percent of the country's gross domestic product, he said, much lower than consumption rates in India, Japan and Korea during comparable periods of growth. 

To boost consumption, China has emphasized rural development and increasing disposable income levels for the rural poor - but that is not enough, Adams said, recommending that China increase domestic demand by encouraging state-owned enterprises to pay dividends and increasing enrollments in public pension and health insurance systems.

Financial-sector reform also has failed to meet expectations, Adams said.  Despite notable progress in banking reform and capital market development, China's bloated and inefficient state-dominated structure largely remains in place, he said.

"[S]tock markets are still too often viewed as a way to keep inefficient state enterprises afloat rather than as a way to channel capital to the most competitive firms and sectors and a way to transfer control to more productive owners," he said.  The state still controls banking, he added, and the weakness of the bond market forces business to rely on inefficient state-controlled lenders for capital.

Adams said the Treasury Department has several priorities for modernizing China's financial system and capital markets, such as seeking the elimination of ownership caps on foreign investment stakes, pushing for continued privatization of state-owned enterprises and encouraging Chinese regulators to implement improvements in risk management, accounting and financial reporting.

COMMERCE DEPARTMENT SAYS TOUGH ENFORCEMENT NECESSARY

Commerce’s Lavin said the United States continues to face significant barriers in its trade relationship with China.

The Commerce Department is "committed to vigorously combating … unfair trade practices" such as dumping and subsidies, Lavin said.  The department currently has 58 anti-dumping orders in effect with a total trade value of more than $5 billion, he told the committee.  These cover Chinese imports in categories ranging from consumer goods to steel, agricultural products, seafood and chemicals.  The department also has increased its engagement on subsidy concerns such as industrial policies and price controls, he added.

"We believe that this tough-minded approach to enforcement led to successful textile negotiations with the Chinese last year," Lavin said, referring to a bilateral agreement that the two countries signed in November 2005.  "We will continue to use our tools aggressively when needed."  (See related article.)

Although China's tariffs were reduced following its accession to the WTO, a wide range of nontariff barriers remain, Lavin said, citing discriminatory regulations and technical standards, lack of transparency and weak enforcement of laws.

These practices might benefit some in China, but they harm others, Lavin said, citing how Chinese regulations block U.S. telecommunications firms from aiding development of China's rural areas.

"Ultimately, for the mutual benefit of both our countries, open markets are essential," Lavin concluded.  "We will continue to work with our Chinese counterparts to achieve this goal."

The full texts of prepared statements from Bhatia (PDF, 11 pages), Adams (PDF, 6 pages) and Lavin (PDF, 6 pages) are available on the Senate Finance Committee Web site.

For additional information on U.S. policy, see The United States and China and Trade and Economics.