Statement of George David, Chairman and Chief Executive Officer
United Technologies Corporation, Hartford, Connecticut
and Member, Board of Directors, U.S.-China Business Council,
on behalf of the Business Coalition for U.S.-China Trade

Testimony Before the Subcommittee on Trade
of the House Committee on Ways and Means

Hearing on United States-China Trade Relations and the
Possible Accession of China to the World Trade Organization

June 8, 1999

Good afternoon. My name is George David. I am Chairman and Chief Executive Officer of United Technologies Corporation and a board member of the U.S.-China Business Council. I am also appearing today on behalf of the Business Coalition for U.S.-China Trade.

At UTC, we sell each year about a billion dollars of our products and services in China. Two hundred million of this total is exports from the United States, principally aerospace products, and these exports support some of the best jobs in America. We also employ 10,000 people in China, provide wages and working conditions there we can be proud of, and are consequently an effective force for change in that vitally important country and economy.

I know this group is substantially partial to pro-China trade arguments. You are also highly informed legislators on this subject. I propose to limit myself therefore mostly to facts about our company and our experiences in China, saving the rhetoric for the end of these remarks and with only a few words then.

I feel I am informed personally about China. I went there first in 1985, and have returned every year since and typically more than once. I am acquainted individually with a cross section of China's leadership and have negotiated business deals with Chinese counterparts, met countless employees in our ventures, and traveled widely throughout the country. My views reflect these personal experiences.

United Technologies Corporation is one of America's largest and most international companies. Fortune magazine ranks us number 21 among all industrial companies, and the United Nations identified us several years ago as one of only four American companies with more than 100,000 employees outside the United States. We are also a high technology company, with our subsidiaries including Pratt & Whitney (jet engines), Otis (elevators), Carrier (air conditioning), Sikorsky (helicopters), and Hamilton Standard (aerospace systems). We are also just about to complete our acquisition of Sundstrand Corporation, along with Hamilton Standard a premier aerospace systems provider.

Our history in China dates to 1900, when we shipped the first Otis elevators there. We provided Carrier de-humidification and cooling systems for industrial applications in China as early as the 1930s, and Pratt & Whitney's then piston engines to China also in the 1930's.

More recently, Pratt & Whitney's JT-3D engines powered the Boeing 707's delivered to China following President Nixon's visit in 1972, and today Pratt & Whitney powers more than a third of all large commercial aircraft in China.

We returned to China in 1984. Since then, we have formed 21 ventures, all of them UTC majority owned. These are the centerpieces of our $1 billion in sales there, and of the $200 million of exports accompanying and caused by this presence. Taking the Department of Commerce's recently revised figure of $65,000 per job, these exports equate to 3,000 U.S. jobs.

These exports are also of high value added products, and the 3,000 jobs are among the highest wage and best ones our country has anywhere. Our largest export category in fact is jet engines, with sales over the three years 1996-1998 totaling more than half a billion dollars. For reference, the hourly wage at Pratt & Whitney is $19.32 per hour, more than 40% above the average U.S. manufacturing wage of $13.66.

The second largest category is air conditioning. We are a manufacturer in China, because air conditioning equipment is physically large and typically doesn't ship economically. But the top of the line equipment comes from the United States, with these Carrier exports to China totaling almost $140 million over the same three years. A great example is the chiller equipment just replaced in the Great Hall of the People. It's Carrier for sure, manufactured in Syracuse, New York, and it's chlorine free and ozone friendly to boot. Carrier's wage rate in Syracuse is $18.16, again well above the average U.S. manufacturing wage.

It is also perfectly clear to us as an exporter and competitor in China that our local and joint venture presence is what got us the Great Hall of the People job. Without one, we don't have the other, and it is the foreign direct investment that comes first, always.

Otis exports to China too, and these exports again are made possible by its local joint venture presence there. The signature building in China is Shanghai's TV Tower, the third tallest in the world, and the elevators taking us to the top were built by Otis in Bloomington, Indiana. Otis' wage rate in Bloomington is $15.12, again well above the U.S. average.

The bottom line to these exports is great U.S. jobs at great wages.

We do build products and provide services in China that don't ship economically from the U.S. or that can't physically be done here. But in working directly in China, we are a powerful and effective force for change. I offer three points in support. First, our local joint ventures pay significantly more than competing and locally owned enterprises. For example, Hezhong Carrier in Shanghai, which we acquired in 1986 and which makes commercial air conditioning systems, employs more than 300 people at a rate twice the prevailing Shanghai level.

Second, we apply UTC's environment, health and safety standards uniformly across the world and specifically in China. These standards are set against U.S. law and regulation, and we flatly do not export dangerous or environmentally abusive work. One example that I am personally proud of is our company's dual redundancy standard for safety devices for presses, brakes and shears, and the more dangerous tools in factories. Not only is this UTC standard unusually high as compared to U.S. industry in general, it is also worldwide in its application and at a cost to us of about $50 million. To be specific to one of our China factories for a moment, I have shut down personally a non-compliant tool, and will do so again, anywhere, anytime.

A third program for which UTC has received recognition and even from President Clinton is our Employee Scholar Program. Today, almost 11,000 of our U.S. employees are in school and taking college and advance degree coursework, all entirely at our cost and with some special features, including a graduation award of UTC stock, that cause us to enroll three times the U.S. national average. But the point specific to China is that we extended this program worldwide a little over a year ago, and today 62 of our Chinese employees are in colleges and universities under this program. This is less than one percent of our China workforce and a small figure indeed as compared with our U.S. number of 15%, but it is a start and we can be confident of steady increases. And we have learned that educated employees are the best employees, and educated people are characteristically democratically inclined people, people open to change, people open to the ideals we as Americans hold dear.

In short, this is no race to the bottom.

Taking a broader view, I believe the Chinese experience over the last twenty years is different from that of many other countries, and remarkably so. The bottom line, and contrary to views held by many, is that China has been open indeed to foreign direct investment and to moving from a closed economy with little or no external trade to trade levels that as percentages of GDP already exceed our own. The society has also used this openness to fuel and continue reforms.

I don't for a minute believe this is starry eyed idealism, nor that the Chinese economy is as open as it must or will be. Instead, the hard statistics confirm that there has been progress, important progress, and it behooves observers and critics to recognize this. For foreign direct investment, China is already the second highest destination country, after only our own. Inflows there have averaged $44 billion annually over the last three years, and the cumulative total since 1979 is $269 billion. Note please that I use the more conservative definition of funds expended as compared with funds contracted. This compares with Japan at $50 billion cumulatively over all time, a hardly noticeable excess over the Chinese annual rate. Rough estimates are that these Chinese foreign direct investments now support a million jobs, and inside this total, American investment support 200,000 jobs. The point is that we want the Chinese to embrace a change agenda and an open markets and democratic agenda, and there can be no better way than showing them how Western systems work, right inside their own markets and country.

On trade, there has also been important progress, although the large bilateral deficit between our two nations remains a difficult problem, and one that must be corrected. But let's not lose sight, in the controversy over the deficit, of one fundamental point. The first is that China has moved from an essentially wholly closed economy twenty years ago to today importing $140 billion annually, 14% of GDP and a level already higher than our own. Exports are higher, at $184 billion and 19% of GDP, and it is unfortunate that more than all of this surplus is concentrated on and reciprocally becomes our deficit with China. This is why there must be continuing market opening pressures from the U.S. side, and why significant further concessions are required from the Chinese. Yet from effectively zero to 14% over twenty years is no small accomplishment and worthy of recognition.

These trade and investment data make a key point, and I believe make it decisively. The Chinese have made progress and important progress on the opening agenda. At the same time, we and the Chinese must both recognize a long road ahead.

We need China in the WTO, and this Trade Subcommittee knows and supports this as much as any body in our Government. China is today a trillion dollar economy, the seventh largest in the world, and by many forecasts will be the third largest in the world within a decade or shortly thereafter. China has also made progress on liberalizing trade and investment, and will make significantly more under this WTO accession agreement. Following the line of UTC specifics to be helpful to you, I recite here the two principal points we understand to have been negotiated successfully by our Government's team to date.

First is the general Chinese external tariff reduction to a flat 9% rate, by the year 2005. For comparison, our elevators today face 38% tariffs as complete systems and 19% as component parts. Our air conditioning equipment faces tariffs varying by product category but typically in excess of 30%. The impacts will be fundamental for us, will increase our exports to China, and will augment those totals for great U.S. jobs I recited earlier.

Second is the reportedly agreed elimination of restrictions on trading and distribution rights. Carrier does have majority control of its joint venture distribution company and network in China. However, current regulations prohibit us from selling imported U.S. equipment and parts through this company and network, instead limiting us to Chinese manufactured products. This restriction elimination, which we understand to have been agreed already, covers distribution for all foreign investors in China, and will be a tremendous plus to U.S. exporters.

However, any recommendation to complete the China WTO accession agreement must be contingent upon our Government's satisfaction with this agreement, and with its containing the levels of Chinese concessions reported. The World Trade Organization is about rule and compliance with rules, and the Chinese as all other countries need to step up to these.

To come to the rhetoric, China is a critically important economy and country to our nation's future. Already the world's seventh largest economy, it may well become the third largest within the foreseeable future. America's exports to China today total $15 billion, are typically of America's highest value added products, and support 220,000 of our country's best jobs.

China has also already been remarkably open to foreign direct investment and to increasing trade. It has used these devices more than most other emerging societies to start and maintain the reform and open markets and open society agenda we as Americans so badly want.

Our WTO negotiators have reportedly succeeded in securing unprecedented concessions in the WTO accession agreement, and, if the specific reports are accurate, this is certainly the case for the products we as UTC know best.

Finally, history shows that windows of opportunity are rare, and that when presented they are to be treasured and seized. Just because of the current events and environment, this is the opportunity. Along with so many others, I urge us to seize it, approving a WTO accession agreement and granting permanent NTR if the Chinese concessions are even close to those reported, and alternatively and at the barest minimum extending NTR for a further year.