Statement of Harold McGraw III, President and Chief
Executive Officer
McGraw-Hill Companies, New York, N.Y.
on behalf of Emergency Committee for American 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
I. Introduction
My name is Terry McGraw, and I am President and Chief Executive Officer of The McGraw-Hill Companies. The McGraw-Hill Companies is a multi-media publishing and information company headquartered in New York City. We employ 16,500 people in over 40 states and 30 countries. We provide financial services through our global network of offices for Standard & Poor's, educational and professional publishing, and information and media services. McGraw-Hill's textbooks and multi-media learning materials are used in classrooms around the world and our publications--such as Business Week, the fastest growing business publication in Asia--appear on newsstands here at home and abroad.
As an information provider, the expansion of the global economy and the progress of technology are keys to our growth into the twenty-first century. The Chinese market is a good example of this. Our company currently has relatively modest business interests in China. But for us and many other U.S. companies, the potential for commercial opportunities in the Chinese market is significant. Maintaining stable bilateral commercial relations with China through continuation of its NTR status and broadening market access in China for U.S. goods and services through a strong WTO market-access agreement are important to ensure continued global economic expansion and greater opportunities for The McGraw-Hill Companies and other American companies in China.
I am appearing before the Trade Subcommittee today on behalf of the Emergency Committee for American Trade, an association of the heads of major American companies with global operations representing all principal sectors of the U.S. economy. The annual sales of ECAT member companies total over $1 trillion, and the companies employ approximately four million men and women. Building stable, bilateral commercial relations with China is a priority for ECAT member companies. In addition, ECAT and The McGraw-Hill Companies are strong supporters of the Business Coalition for U.S.-China Trade, an ad hoc group of America's leading companies and major associations working for China's accession to the WTO on strong market terms and congressional extension of permanent NTR treatment to China.
ECAT recognizes that current U.S.-China relations are severely strained by the weight of serious diplomatic and security issues. Times of trouble, however, can be times of great opportunity. As the United States seeks to deal with the difficulties in its relations with China, strong commercial links can continue to serve as the backbone which reinforces bilateral ties. ECAT commends the Chairman and members of this Committee who have expressed clearly and forcefully the importance of moving forward with commercial relations with China.
To strengthen bilateral commercial relations with China, we in ECAT believe that China's NTR treatment must remain uninterrupted while efforts are made to conclude negotiations as expeditiously as possible on the terms of China's WTO entry. At the same time, we must prepare the way for the extension of permanent NTR treatment to China if the United States is to finally enjoy the full fruits of China's WTO membership.
II. Importance of Maintaining China's NTR Status and the U.S. Policy of Engagement
The U.S. policy of engagement with China has contributed to the dramatic transformation of the Chinese economy over the past two decades. It has enabled significant growth in U.S. trade and investment in China, provided the basis for U.S.-China cooperation on efforts to alleviate the Asian financial crisis as well as on foreign policy and security issues, and spurred greater individual economic freedom, higher living standards, and greater access to outside information for the average Chinese citizen. Engagement has also supported the continued economic health of Hong Kong.
Maintaining China's NTR status is the cornerstone of the U.S. policy of engagement and the commercial, foreign policy, and security objectives that it supports. Interruption of China's NTR treatment would undermine these key objectives.
NTR treatment does not confer any special status on China. It simply means that we are agreeing not to discriminate against China's goods in favor of those of a third country. In return, China must agree to extend NTR treatment to the United States. NTR treatment is most-favored-nation status, a well-established principle under international law and the WTO rules. The United States grants NTR treatment to virtually all of its trading partners, with the exception of Afghanistan, Cuba, Laos, North Korea, and Vietnam. Therefore, the extension of NTR status to China simply confers what is normal trade status for the majority of U.S. trading partners.
The Contribution of China's NTR treatment to U.S. Trade and Investment
Since the normalization of U.S.-China relations two decades ago, U.S. exports to China have increased nearly 20 times, totaling $18 billion in 1998 and directly supporting over 200,000 American jobs in the manufacturing and agricultural sectors and indirectly supporting tens of thousands of additional U.S. jobs in retailing, distribution, and other sectors. During the same time period, U.S. investment in China has grown to roughly $21 billion. China is already the fourth largest market for U.S. agricultural exports, and the American agricultural community has called China its most important growth market for the 21st century.
There is also vast potential for further sales of U.S. services and manufactured goods in China over the next decade as its 1.2-billion-person economy expands and China spends more than $700 billion on infrastructure projects to support its growing population and commerce. A foothold in the China market is also key to expanding access to other Asia-Pacific markets that, in the long term, hold important potential for growth in U.S. trade and investment. Disrupting China's NTR treatment would jeopardize existing U.S. trade and investment in China and cut off opportunities for future growth.
The McGraw-Hill Companies sees significant growth opportunities in China for our information products and services. We want to provide Chinese workers and consumers with our educational and information products and services. The McGraw Hill Companies' subsidiary, Standard & Poor's, recently established a relationship with Xinhua Financial Consultancy, through which real-time international financial data and news is provided to the Chinese investment community. The McGraw Hill Companies' School Division is hosting a visit from a Chinese Ministry of Education delegation as we speak. The delegation is here to learn about the American system of teacher education. Through these and many other activities, we believe we can help the Chinese improve their standard of living and assure economic growth. We want the opportunity to continue and expand our activities in China.
China's NTR Treatment, U.S. Security Interests, and Efforts to Encourage Greater Economic Freedom and Openness in Chinese Society
The continuation of China's NTR treatment is critical to far more than just commercial interests. It is also essential to strengthening China's strategic cooperation and promoting greater openness in Chinese society. Our commercial ties with China have contributed to China's willingness to play a constructive role in encouraging North Korea to end its nuclear weapons program, brokering a peace agreement in Cambodia, and trying to halt the arms race between India and Pakistan. China is also playing a major role in restoring Asian financial stability by maintaining the value of its currency and contributing to IMF recovery packages for Asian economies. Withdrawal of China's NTR treatment would disrupt these vital areas of strategic cooperation and further weaken our already damaged diplomatic ties.
China's NTR status and the U.S. policy of engagement should also be maintained to help fuel the remarkable ongoing transformation of Chinese society that has occurred over the past 20 years. As China's internal markets have opened and foreign investment has increased, Chinese government control over the lives of average Chinese citizens has decreased. As a result, the Chinese people now enjoy higher living standards, greater economic freedom, and more access to outside information than ever before. The Chinese government is now actively encouraging private home ownership. Use of the Internet by average Chinese citizens is burgeoning with over 2 million Chinese Internet users, bringing an even greater flow of outside information and ideas into China. In addition, several hundred million Chinese have participated in village-level elections.
Despite this tremendous progress, Chinese society is not fully open and much work remains to be done. The Asian financial crisis and ongoing efforts to restructure China's state-owned enterprises have contributed to rising unemployment, civic disturbances, and, unfortunately, renewed government efforts to repress political dissent. We must continue to press China to respect the rule of law and to honor its commitments under the International Covenant on Civil and Political Rights which it recently signed. Engagement and continuation of China's NTR status provide the basis for continuing progress on these issues.
China's NTR Treatment and the Continued
Stability
of Hong Kong and Taiwan
Hong Kong remains a vitally important gateway to Mainland China, and trade with Mainland China is a fundamental part of its economy. Its economy is an ongoing positive influence on Mainland China. The continuation of China's NTR treatment is therefore critical to the health of Hong Kong's economy. Withdrawal of China's NTR treatment would decrease Hong Kong's trade by tens of billions of dollars, result in a loss of tens of thousands of jobs in Hong Kong, and destabilize its financial markets.
Maintaining China's NTR treatment is also an important part of supporting our nation's "One-China" policy, under which the United States formally recognizes the People's Republic of China, acknowledges that Taiwan is part of China, and maintains only unofficial commercial relations with Taiwan. This policy has enabled the United States to move forward with its commercial and political relationship with China while preserving commercial ties with Taiwan, which remains an important U.S. export market.
The "One-China" policy has also encouraged China and Taiwan to develop their trade and investment ties and to move toward renewal of their bilateral dialogue. Trade flows between China and Taiwan have grown to over $17 billion, and Taiwanese companies have invested over $35 billion in China over the last decade. The disruption of China's NTR status would undermine U.S. efforts to allow Taiwan to prosper as a vibrant democracy. It would also threaten Taiwan's efforts to join the WTO, as there is an informal understanding that Taiwan will not be admitted to the WTO until after China has acceded. If China's NTR status were withdrawn, it is unlikely that further progress could be made in our bilateral negotiations with China on its WTO accession, thereby stalling both China's and Taiwan's WTO membership indefinitely.
III. The United States Bilateral Trade Deficit with China Does Not Warrant Denial of China's NTR Status
While our bilateral trade deficit with China is of concern, it would only be exacerbated by the removal of China's NTR status. Denial of China's NTR treatment would result in the erection of additional barriers to U.S. goods and services in the form of high tariffs and other retaliatory measures that would lead to a worsening of the trade deficit. The best means to address our trade deficit with China is pursuing the removal of market access barriers in our bilateral negotiations with the Chinese on the terms of their WTO accession. Until negotiations are completed on China's WTO accession, we must stand firm in insisting that China adhere to its existing bilateral market access commitments.
It is also important, however, to put our bilateral trade deficit with China in perspective. The trade deficit reflects a shift in production of low-wage consumer products, such as footwear and toys, to China from economies such as Taiwan. A portion of the bilateral trade deficit is also due to U.S. unilateral sanctions against China, such as restrictions on the export of high-speed computers. In addition, although they are reported separately, a large portion of U.S. exports to Hong Kong, as much as 40 percent, is ultimately destined for China. Finally, alternative approaches to the Department of Commerce methodology used to compile trade data suggest that the China trade deficit may be one-third lower than indicated in official U.S. Government statistics.
IV. Securing China's WTO Membership and the Extension of Permanent NTR Status to China this Year
ECAT believes that the United States has a unique window of opportunity this year to move beyond annual NTR renewal to create a more stable commercial relationship with China. If an agreement is not reached on China's WTO accession in the near future, there is a real risk that a final agreement will be delayed for years. Of course, China must do its part and agree to resume the bilateral negotiations with the United States on WTO accession.
Benefits of China's WTO Membership
It is in the U. S. interest to bring China into the WTO on the basis of a commercially-acceptable protocol of accession. The McGraw-Hill Companies and other ECAT member companies cannot gain a secure foothold in the Chinese market until China is subject to WTO rules and dispute settlement. We cannot build a solid commercial foundation in China based on piecemeal enforcement of bilateral commitments through counterproductive unilateral sanctions. We must ensure that China abides by uniform multilateral rules, and we must be able to enforce those rules through WTO dispute settlement.
In our case, we will not be able to extend our information services and distribute our publications in China until existing foreign investment and distribution restrictions are liberalized and China agrees to abide by the WTO Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. Currently, our ability to do business in China is severely limited by restrictions on distribution rights and foreign investment. Piracy of our textbooks and educational materials is also a serious problem, as China accounted for the highest level of book piracy in the world last year, costing U.S. book publishers an estimated $125 million in lost sales.
China's WTO membership is also a critical part of fully integrating China into the global economy and encouraging China to play a more positive role in ensuring future global economic stability and growth, particularly in Asia. China's WTO membership would help to bolster China's commitment to maintaining the value of its currency, which has been key to restoring stability to Asian financial markets. China's WTO membership would be a significant vote of confidence in the multilateral trading system.
Securing China's WTO membership is also the best means to stem our rising trade deficit with China in that it would comprehensively address Chinese market access barriers. Achieving binding WTO market access commitments enforceable under WTO dispute settlement procedures is the way to deal with such barriers. The longer China's WTO accession is delayed, the more U.S. business opportunities are lost.
In addition, China's WTO membership will further structural reform in China through the fundamental changes in China's economic regime that will be required as part of the process of joining the WTO and accepting its obligations. This in turn will create a more open climate for trade and investment in China that will spur economic growth, create new jobs, and improve the living standards of average Chinese citizens.
Concluding WTO Bilateral Negotiations with China
This past April during the U.S. visit of Chinese Premier Zhu Rongji, the United States and China achieved major breakthroughs in bilateral market access negotiations on the terms of China's WTO entry which would dramatically open China's markets to American goods, services, and agriculture. The breakthroughs announced by the Administration in April will:
It is also important to note that China's market access concessions are one-way and do not require the United States to make any concessions in return.
The April negotiations have put the United States at the doorstep of a commercially-acceptable WTO protocol of accession with China. For The McGraw-Hill Companies, the WTO bilateral agreement being negotiated with China will mean that restrictions on market access to books, periodicals and magazines will be removed, restrictions on investment will be eased, and protection of our intellectual property rights will be improved. Most importantly, the United States will be able to enforce these commitments through binding WTO dispute settlement.
We cannot afford to lose this opportunity, and ECAT believes that both the U.S. and Chinese governments must redouble their efforts to resolve any outstanding issues to further open markets and to conclude a market access agreement.
Need to Extend Permanent NTR Treatment to China
The United States cannot take full advantage of the benefits of China's WTO membership and its market access commitments unless it extends permanent NTR treatment to China. Permanent NTR or MFN treatment is a core obligation under Article I of the GATT and the WTO. The Jackson-Vanik provisions of Title IV of the Trade Act of 1974 prohibit the United States from granting permanent MFN treatment to China. Once China is admitted to the WTO, if the United States extends WTO benefits to China, the Jackson-Vanik provisions could immediately be challenged by the Chinese as denying MFN treatment in violation of Article I. The United States has therefore taken the position that it would not apply WTO benefits to China until the Jackson-Vanik provisions have been amended to allow the permanent extension of NTR treatment to China.
ECAT urges the Congress to begin to consider extending permanent NTR treatment to China as soon as the bilateral negotiations on market access and the protocol of accession have been completed between the United States and China.
V. Conclusion
The continued extension of China's NTR status clearly advances our national interest. The McGraw-Hill Companies and other ECAT member companies believe that the United States should take advantage of the historic opportunity before us to conclude negotiations with China on a commercially-acceptable protocol of accession as expeditiously as possible. Based on such an agreement, The McGraw-Hill Companies and ECAT are committed to working with the members of this Committee and other members of Congress to build bipartisan support for the permanent extension of NTR treatment to China.
I appreciate the opportunity to appear before the Trade Subcommittee on behalf of ECAT.