Statement of Michael R. Bonsignore, Chief Executive Officer,
Honeywell International, Inc., Morristown, New Jersey,
on behalf of the U.S.-China Business Council, and the Business Roundtable

Testimony Before the House Committee on Ways and Means

Hearing on U.S.-Bilateral Trade Agreement and the Accession of China to the World Trade Organization

February 16, 2000

Good morning Chairman Archer, Congressman Rangel, members of the Committee, my distinguished colleagues on the panel, ladies and gentlemen. It is my pleasure and honor to have this opportunity to testify before this committee to share my perspective on the benefits of China's accession to the WTO and the recently concluded bilateral agreement between the United States and China.

I am Chief Executive Officer of Honeywell, a global diversified manufacturing and technology company. As you know, Honeywell and Allied Signal merged at the end of 1999 to form a great new organization with almost $25 billion in revenue, 120,000 employees worldwide and a presence in almost 100 countries. I am extremely optimistic about the future of this new enterprise - and very aware that much of our future growth and business opportunities will come from markets outside the United States - as it has in the past.

Today, Honeywell's business in China is approaching a half a billion dollars in revenue - a substantial portion of which is direct exports from the United States. On virtually every Boeing aircraft shipped to China, Honeywell's avionics, auxiliary power units, wheels and brakes are on board. We ship industrial process control instruments and systems to help modernize a wide range of Chinese industries - from pulp and paper to petrochemicals. We ship energy efficient lighting controls and energy management systems for Chinese buildings - hotels, offices, airports, schools and hospitals. We export amorphous metals to help improve the efficiency of transformers in China, and also specialty chemicals, polymers and electronic materials to support a wide range of Chinese manufacturing needs. Finally, we provide turbochargers for diesel and gas engines and truck air brake components for the automotive market.

We also have a wide range of business operations in China. The growth rate we are experiencing in the numerous markets we serve in China ranges between 10-25%. We are deeply committed to the China market and to the local communities in which we operate.

I am proud to be serving this year as Chairman of the U.S.-China Business Council. As you know, the Council was founded in 1973 and represents 250 leading American companies with business interests in China. I am also a member of The Business Roundtable's Trade & Investment Task Force. The Roundtable is an association of more than 200 CEOs of U.S. corporations that together employ more than 10 million people.

It is dedicated to examining public policy issues that affect the economy and developing positions that reflect sound economic and social principles.

I would like to address five points in my remarks to you today: (1) the commercial benefits of this agreement are comprehensive; (2) the United States' consistent policy of engagement with China is working and should continue; (3) U.S. business is a catalyst for positive change in China; (4) enforcement is essential; and (5) the United States must show leadership by taking concrete steps with China to improve labor, human rights and environmental conditions.

I. The Commercial Benefits of the WTO Deal Are Comprehensive

Because the overall commercial benefits have been amply addressed by Ambassador Barshefsky and no doubt will be addressed by many other representatives from a wide range of the American business and agricultural community, I will not go into them further here.

I have, however, attached to my written testimony a summary of the benefits that Honeywell specifically anticipates from the implementation of this agreement. I believe the benefits to Honeywell paint a picture of how significant China's concessions are when you put them all together and see how they work in the real-world.

II. Engagement Works

For more than two decades now, U.S. Presidents from both parties (Nixon, Ford, Carter, Reagan, Bush, and Clinton), who have widely divergent ideas on economic policy, foreign affairs, and social goals, have consistently determined that the best way to increase America's influence with China is through a policy of engagement. The four Presidential front-runners now are no different: Bush, Bradley, Gore, and McCain all support continuing our engagement with China by passing PNTR.

Our Presidents' support for engagement has been so consistent and bipartisan over the years because it works. Engagement simply means building our economic and political ties with China, bilaterally and multilaterally, so that we provide constant pressure for China to be a constructive and responsible member of the international community. Strengthening our economic ties strengthens our voice by giving China a vested interest in maintaining stable relations with us and addressing our concerns.

Engagement does not mean that we are ratifying all of China's policies or giving China any special treatment. I hear those phrases bandied about in the debate, and they couldn't be more wrong. This WTO deal gives China no special treatment. It simply brings China into the international trading system where China has to follow the same rules that everyone else follows, instead of leaving China outside the system where China gets to make its own rules.

Do we have more work to do? Absolutely. However, PNTR is not a ratification of China's troubling human rights record. We need to continue to press China to move toward an open and democratic society that protects individuals' freedom and that contributes to international peace and security. Bringing China into the WTO is a positive step in this direction. It opens up China's economy and society to the world, wider than ever before. And it binds China more firmly into the international community and the rule of law.

Opponents of PNTR would hold us back from realizing this future.

Let us take a moment to examine what a future without PNTR would look like. It's a picture without the United States in it. While the rest of the world is engaging in deeper economic ties with China through the WTO, the United States would be on the sidelines. Europe and Japan would be increasing their investments in China, increasing exports to China, and also increasing their imports from China. Now when human rights or other issues come up, which diplomats will China see first? Ours because we demand it? Or Europe's because they have new economic contacts, new investments, and new projects in China.

This isn't a matter of buying influence; it's a matter of building the relationships to get things done. Relationships are important everywhere, but especially in Asia. China is a proud country. Isolating them and threatening them into following our point of view is not an effective strategy to influence them. Obviously we're no weakling, and China knows that well. But if we want to have influence, we've got to be at the table. PNTR helps puts us there.

III. U.S. Business is a Catalyst for Positive Change in China

The commercial interests U.S. companies hold in China are well known. As I just stated, I believe the benefits of the WTO deal to U.S. business interests are increasingly well documented. What is perhaps not as well known or understood are the non-commercial benefits that accrue both to the U.S. and China through the engagement of U.S. business in China. I'd like to take a few moments to share with you something of the "untold story" of U.S. business in China.

The fact is that when U.S. companies export to and establish operations in China, they bring not only their products and services, but also their operating standards, their best business practices, their corporate values and their guiding principles. In so doing, U.S. companies act as a catalyst for positive change in China. Through the dissemination of a broad range of practices, U.S. companies set a positive example of corporate citizenship and contribute to the evolution of norms within Chinese society.

Indeed, many of these practices are increasingly being adopted by domestic enterprises in China.

v Did you know that U.S. companies are helping to lead the way for improved environmental, health and safety conditions in China by engaging in government-to-government initiatives, providing direct support to environmental NGOs, establishing U.S.-based internal company standards and practices, and introducing environmental technologies and industrial systems that minimize waste, control emissions, and enhance safety?

v Did you know that literally tens of thousands of Chinese citizens visit the United States each year as the U.S. parent company brings them over for a wide range of technical, managerial, financial, environmental, health and safety training and education? For many Chinese visitors these trips are not only their first visit to the United States, but their first time out of China. Extensive training and education is also provided by U.S. companies in China.

v Did you know that U.S. companies - through the voluntary contributions of U.S. employees and through their foundations - have provided millions of dollars to support flood relief and aid victims in China? Did you know that we build schools and health clinics, and that our own Chinese employees volunteer in these efforts? Did you know that we provide home ownership assistance programs to our employees and their families, offer scholarships, donate equipment and computers for training, teach classes at Universities, support rule of law initiatives and grassroots electoral reform programs, bring western arts and entertainment, and sponsor Little League teams in the communities in which we operate?

v Did you realize that in undertaking all of these activities, on our volition, we are complementing many of the policy aims that Congress and the Administration share toward China? We are, in fact, the major U.S. non-governmental organization effecting concrete change in China.

These examples and more have been documented by a number of U.S. companies in a report that is being released to Congress today. This report, entitled "Corporate Social Responsibility in China: Practices by U.S. Companies," was compiled and published under the leadership of The Business Roundtable. I commend it you as tangible evidence that U.S. companies do more than sell goods in China.

In supporting commercial engagement with China - by securing the benefits of the WTO deal through the extension of PNTR to China - Congress supports the ability of U.S. business to make a positive difference in China.

IV. Enforcement Is Essential

It is clear from the debate underway here in Washington that there is a substantial amount of concern regarding China's willingness to live up to its obligations under the WTO. Many assert that China's record on trade accords is mixed. That's true. We will need to be vigilant. As Ambassador Barshefsky has outlined in her remarks, monitoring, compliance and dispute settlement mechanisms are a built-in advantage of the WTO system.

In order to ensure compliance by China with its commitments, it is important to understand the extent of those commitments. I would tell you that the breadth of commitments that China has made in the WTO package is impressive. They represent the conviction of Chinese leadership that their future prosperity lies in moving to full-scale economic liberalization and engagement in multilateral institutions - not in the outmoded and unsuccessful model of isolationism, and a command and control economy populated by state-owned enterprises.

But the reforms and institutional changes implicit in changing China's economic model and system are formidable. The Chinese government is acutely conscious of these challenges - and of the cost that will be born in terms of unemployment, dislocations, failed enterprises, and the trial and error of institution and capacity building that accompanies the transformation from a central, planned economy to a transparent, market based economy.

For example, the national treatment provisions of the WTO accession package mean that China will have to revamp its national, provincial, and local regulatory structure to treat U.S. and other foreign participants in its markets no differently than Chinese companies. Doing so will require greater transparency in drafting, promulgating and implementing administrative rules governing virtually every sector of the economy.

The Chinese government has already begun a process of administrative law reform, with support from U.S. legal and academic institutions and experts, but this process inevitably will need to accelerate.

There are two ways to deal with these implementation challenges. First, when necessary there should be no hesitation by the U.S. government to invoke the WTO dispute settlement process. Second, we also need to realize that there are many opportunities to facilitate and improve China's compliance before trade disputes erupt. The greater the ability of China to comply quickly and effectively, the lower the risk that we end up in a situation where full blown trade disputes emerge.

In this regard, I strongly believe that part of our strategy in optimizing the benefits of China's accession to the WTO and ensuring that the system works, should be to provide technical and other assistance to China to help it reach, and to accelerate, the vigorous compliance that we expect.

V. The United States Must Show Leadership By Taking Concrete Steps with China to Improve Labor, Human Rights, and Environmental Conditions

We know that some of you are concerned that passing PNTR will be bad for labor, the environment and human rights. These are important issues. And PNTR will not adversely affect our ability to be a positive influence on China in these areas.

While trade is no quick fix to China's problems, it encourages China to move in the right direction. At its core, bringing China into the WTO increases China's ties with the international community. That is the best chance for bringing change to China: it exposes China to international standards and the rule of law, and it links China's prosperity to the international system.

We can't dictate policy to China; it's a sovereign country like us, and we don't respond well to other countries dictating how we cope with some of our problems. But through trade, we can expand the Chinese people's access to new information and increase their exposure to cultures from around the world. Over time, these indirect efforts have an impact.

The bottom line is that by building closer economic ties with China, the United States increases its leverage with China, and that helps us address these concerns. Isolating China doesn't get us any closer to meeting these concerns.

It is also important for the Congress to recognize that China has been taking constructive steps.

On labor, China's 1995 National Labor Law implemented a 40-hour workweek. That law also permits workers to bargain collectively. On the environment, China issued its first environmental protection law in 1979. Today, China's State Environmental Protection Agency has ministerial status, just as our EPA has cabinet status. In addition, over the last two decades, China has significantly lowered its energy intensity, which is its total energy consumption divided by GDP. China's energy intensity has dropped by over 55%, while U.S. energy intensity fell by only 25% during the same period.

We need to encourage them, and provide assistance where we can, to keep them moving in a positive direction.

Finally, we all need to be creative in identifying and capitalizing on opportunities to provide tools to help China meet its obligations and improve its labor, human rights, and environmental conditions.

As this Committee is well aware, the economic, social and political transformation that has been underway in Eastern Europe and the former Soviet Union since the collapse of the Berlin Wall continues to be an arduous journey for most of the countries involved. The relative success of these efforts, to date, is a function of multiple factors - including the United States' leadership in supporting those efforts.

As you know, the Congress established a number of constructive programs to support democratic and market-reform initiatives as these regions began their transformation process.

In November 1989, just weeks after the Berlin Wall fell, the U.S. Congress in a bold act of recognition of the daunting challenge facing the former Soviet satellite countries, passed the SEED Act - Support of Eastern European Democracy. In 1992, shortly after the dissolution of the Soviet Union, Congress passed the Freedom Support Act. These initiatives were aimed at helping these countries meet the wrenching adjustment challenges ahead of them. Since 1990 the United States has spent approximately $15 billion on this effort. Much of the funding in these programs went to support fiscal, financial, regulatory and legal reforms as well as to provide training and technical assistance.

These programs demonstrated U.S. leadership and commitment to democracy by providing concrete support to accelerate the economic, social and political transition in these countries. Now, Congress has the opportunity to demonstrate its commitment to China's economic, social and political transformation - by enacting permanent normal trade relations for China.

To further complement this achievement, Congress should also consider whether there are comparable initiatives that would build on the progress made in opening China up through trade.

For example, there is the so-called "rule of law initiative" on which the presidents of the United States and China symbolically embarked during the November 1997 and June 1998 summit meetings. As I'm sure you would agree, U.S.-China cooperation in the field of law is a valid, legitimate building block both of closer U.S.-China relations, and of a better world. Right now there is no significant U.S. funding to support this effort.

The business community is mindful of doing its part in this regard. As just one example, the U.S.-China Business Council in 1998 invited its member companies to make voluntary contributions to a new entity, the U.S.-China Legal Cooperation Fund. The Council's companies have contributed approximately $400,000 to the Fund, and we have since made 10 private-sector grants to worthy applicants from both the United States and China in the broad field of legal cooperation.

The United States also has a high level U.S.-China Forum on Sustainable Development that has an ambitious array of working groups which address a range of issues related to energy, environment, commercial cooperation, climate change and other topics, and that meet on a regular basis to talk about China's challenges. Yet, we do not extend the U.S.-Asia Environmental Partnership Program to China.

I believe that these types of initiatives, which provide technical and other practical assistance to China, are much more effective vehicles for making progress than denying PNTR to China.

Conclusion

As you consider whether to support PNTR, consider who it is we want to strengthen in China. The old-guard that opposes the WTO and wants to slow down economic reform? Or the reformers, who have staked their reputations on bringing China into the WTO? Failure to pass PNTR doesn't send the "strong message" that U.S. opponents of PNTR would have you believe. It doesn't tell China that the United States is getting tough on human rights, non-proliferation or other issues. Just the opposite. It says the United States isn't a player; we don't want to be at the table. And we don't stand by the agreement we made in November.

The bottom line is that turning down PNTR doesn't move us one inch closer to better human rights, environmental standards, or any other goals. It moves us a mile in the other direction. And it hurts our reputation worldwide. We should not be reverting to isolationism at a time when it is more important than ever to show leadership to the world.

I understand that at times it may seem easier to leave things as they are and just renew China's NTR annually, even at the price of passing up China's historic trade concessions. But I urge you to focus on one question: Is America better off under this deal or not? The answer is a resounding yes - we are better off. This agreement doesn't get us to the finish line, but it does move us farther along in the right direction. Yes, we're going to have challenges, and we're going to have to be vigilant to hold China to the agreement. And we're going to have to raise our voice against the Chinese policies we oppose.

In closing, let me say that the WTO deal can be evaluated on its economic merits alone and be judged a true win-win. But let me also underscore that clearly the WTO deal is not about economics alone. It's about expanding the ability of business to do good, while doing well in China. It's about strengthening a pillar of the bilateral relationship that in turn adds much needed stability to the foundation of this strategically important relationship. It's about seizing an important opportunity to work with China on a shared objective of accelerating and managing the transformation of China's economic system - with all the attendant social and political implications.

I thank you again, Mr. Chairman, for this opportunity to testify on an issue of great importance to us all. And I urge the Committee to take this broad view of the importance of the WTO deal - and lend its full and immediate support to securing PNTR for China this year.


The China WTO Accession Agreement and the Expected Benefits to Honeywell in China

The WTO accession for China is an invaluable negotiating vehicle through which to address a range of discriminatory trade practices, regulatory processes, trade barriers, lack of transparency, and other policies that limit US companies’ participation in the Chinese market.

The WTO deal as announced and summarized by USTR on November 15th contains a number of very important elements that will enhance Honeywell’s ability to trade with and do business in China. Honeywell will further review the terms of the Agreement once the full text is published.

Key Benefits

I. Trading and Distribution Rights. Restrictions on trading and distribution rights in the industrial sector will be progressively phased out over three (3) years. At present, China severely restricts trading rights (the right to import and export) and distribution (wholesaling, retailing, maintenance and repair, and transportation) by issuing very restrictive business licenses.

Because of the WTO agreement, Honeywell will have the ability to import directly anywhere into China, re-sell under its own name, and provide service, maintenance and repair support, and manage its own distribution process.

This is extremely important because in China today, foreign firms have no right to distribute products other than those they make in China, or to own or manage distribution networks. This will impact virtually every business unit of Honeywell– all of which serve the China market.

II. Tariffs. On high priority industrial products tariffs will be reduced to an average of 7.1% with the majority of cuts being achieved by 2003. Industrial tariffs overall will fall to an average of 9.4% by 2005.

The cumulative impact of these tariff cuts will have a significantly beneficial impact on Honeywell's cost structure in China.

III. Quotas and Licenses. WTO rules bar quotas and other quantitative restrictions, and China has agreed to eliminate these restrictions with phase-ins limited to five years.

Auto quotas will be phased out by 2005, and the quota ceiling will grow by 15% each year until the phase out. Again, this liberalization of the China auto market will be beneficial for the new company.

IV. Other Restrictions. China currently requires a "quid pro quo" for granting company access to its markets in the form of either minimum investment levels, specified technology transfer, or, local content requirements. Under the WTO agreement, all such limitations will be lifted.

The elimination of these requirements for obtaining an expanded business license will make it more efficient and cost-effective for Honeywell to support its operations and therefore enhance its competitiveness in China.

V. Services. China is among the most closed markets today to services exports anywhere in the world. However, its commitments on services are comparable to those of most WTO members.

They include commitments in all major service categories and reasonable transitions to eliminate most foreign equity restrictions. The liberalization will benefit Honeywell since it will provide us with greater choice and improved efficiencies in service sectors on which we rely to do business in China.

VI. Investment. China has agreed to implement the agreement on Trade-Related Investment Measures (TRIMS) of the WTO upon accession, and to cease enforcing trade and foreign exchange balancing requirements, local content requirements, and to refuse to enforce contracts imposing these requirements, unless they are consistent with WTO rules.

Honeywell has nine joint ventures and six manufacturing sites in China. We will enjoy greater protection of our investments and greater freedoms in operating these ventures due to these provisions in the WTO accession agreement.

VI. State-Owned/Invested Enterprises. Currently China's government has an unusually high degree of involvement in the economy and can exercise its own discretion toward the granting of contracts by state-owned enterprises.

Under the WTO agreement, state-owned enterprises will be required to make purchases solely on commercial considerations, such as price, quality, availability, and marketability. In addition, US firms will be allowed to compete for sales and purchases on non-discriminatory terms and conditions. USTR has clarified with the Chinese that the purchase of goods and services by these entities does not constitute government procurement, therefore these transactions will be subject to WTO rules.

Because state-owned and state-invested enterprises have a greater role in China’s economy than in any other major economy, this change we expect will materially benefit US companies like Honeywell.

With the advent of the WTO accession Chinese companies will need to invest more in upgrading and modernizing their manufacturing processes and facilities to become more competitive globally. As a leader in automation solutions, Honeywell provides systems and products for the hydrocarbon processing, chemical, pulp and paper process, and many other industries. These industries are of strategic importance to China. We expect that the WTO will in effect generate substantial business opportunities for Honeywell as there will be a tremendous need for China to promote energy efficiency practices and adopt automation and control technologies which are Honeywell’s core industrial and building control businesses.

December 1999