Statement of the Honorable Nancy Pelosi, M.C., California

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

Mr. Chairman, Ranking Member Levin, and Members of the Subcommittee, thank you for the opportunity to testify today. Once again, I am appearing before you to discuss U.S.-China trade, and once again, I wish that I could report that the Clinton-Bush China policy was working. Sadly, I cannot. Another year has passed and U.S.-China policy has not made trade fairer, people freer or the world safer.

All of the issues of concern in the U.S.-China relationship deserve and need a full public airing. As this hearing is on trade, I will focus my remarks on that topic. It is interesting that many name changes have been made along the way in the status quo China policy in order to try to make that policy more palatable. The Administration has moved from so-called "constructive engagement," to so-called "strategic partnership" to, most recently, so-called "principled, purposeful engagement....with our eyes wide open, without illusions." The problem is, the underlying policy remains the same.

This Committee itself has helped with the name change process, changing "Most Favored Nation" (MFN) status to "Normal Trade Relations" (NTR), begging the question of what normal trade relations are or should be. Is trade with China "normal" when the U.S. trade deficit with China is surging every year, to a projected $67 BILLION in 1999? Is it "normal" that China continues to maintain barriers to U.S. goods and services entering the Chinese market, including high tariffs; pervasive non-tariff barriers; non-transparent barriers; non-transparent trade rules and regulations; restrictions on trading and distribution rights; restrictive government procurement practices; and restrictions on investment? Is it "normal" that China continues to pirate U.S. intellectual property, costing U.S. firms an estimated $2.6 BILLION in lost sales in 1998 (according to the International Intellectual Property Alliance) and that China continues to utilize forced labor for production of exports to the United States, in violation of U.S. law?

For ten years, advocates of unconditional MFN have argued that economic reform would lead to political reform in China and that U.S. exports to China would increase. Political reform has not happened in China. And, the increase in U.S. exports to China as a proportion of total U.S. exports has been so small as to be practically insignificant. According to the Congressional Research Service, in 1989, U.S. exports to China in 1989 were 1.65% of U.S. exports worldwide. In 1998, U.S. exports to China totaled only 2.1% of U.S. exports worldwide.

The overall numbers of the U.S.-China trade relationship have gotten worse every year (see Chart I). For the first quarter of 1999, the U.S. deficit with China was $13.6 billion, up 18% over the same three-month period last year. 1999's first quarter deficit alone is already larger than the U.S. trade deficit with China for the entire year of 1991.

Of even greater concern in the 1999 first quarter numbers is the stunning fact that U.S. exports to China were down 15% from the same period in 1998, while imports from China increased by 10% this year over last year. In the first quarter of this year, the U.S. exported more to Canada, Japan, Taiwan, Belgium, and Singapore than to China. We also exported more to both Korea, which is recovering from an economic crisis, and to Brazil, which is still struggling with one, than we did to China (see Chart II).

The most strenuous advocates of unconditional "Normal Trade Relations" with China are the handful of companies with access to China's market -- the "exporting elite" -- or those companies that are using China's vast pool of cheap labor as a platform for production of goods exported back into the United States. I am neither surprised nor overwhelmed by the lobbying efforts of these companies to preserve NTR for China. They perceive that those activities are in their interests -- and the Chinese government rewards them for their efforts. The question for us today should be, who is looking out for American workers?

This year's debate about U.S.-China trade may be the most important one Congress will have. China's possible accession to the World Trade Organization (WTO) and Congressional action on permanent NTR should engender a comprehensive consideration of U.S.-China relations. Some will argue that the way to break down China's barriers to U.S. products and services is through China's accession to the WTO. They may be right. However, if China's accession is not done carefully and on commercially meaningful terms, it could destroy the WTO and hurt the entire global trading system.

There is, unfortunately, little evidence in the U.S. experience with the Chinese government over at least the last ten years which indicates that it will honor the commitments that it makes in either a bilateral or multilateral forum. Any possible WTO agreement must be viewed against the background of the pattern of the Chinese government either signing agreements, not complying with them and requiring the renegotiation of the commitment which it had already made; or simply signing agreements and ignoring them. There is ample evidence of this practice in the areas of trade, proliferation and human rights. In addition, enforcement of existing agreements remains a serious problem. Merely a few examples follow:

On trade:

Market Access

• In 1992, then-U.S.T.R. Carla Hills negotiated a Market Access Memorandum of Understanding. Because of Chinese non-compliance, and only after extensive talks, the MOU was renegotiated in 1994. The agreement has still not been fully implemented, and according to the "1999 Trade Policy Agenda and 1998 Annual Report of the President of the United States on the Trade Agreements Program," (submitted to Congress March 9, 1999) "While China has phased-out formal measures, such as quotas and licenses, non-uniform application of trade rules, import substitution policies and use of sanitary and phytosanitary standards to restrict imports remain serious problems."

Intellectual Property Rights

• The Administration's "1999 Trade Policy Agenda" mentioned above documents the tortured history on China's many agreements on IPR, including a 1992 MOU. Lack of Chinese compliance led to a Special 301 investigation and to the 1995 IPR Enforcement Agreement. Lack of Chinese compliance led the USTR to issue sanctions target lists, legislation was introduced, and in June 1996, the U.S. and China signed yet another accord, "outlining the steps China took to implement the 1995 Agreement and to provide more detailed market access guidelines." To date, according to the 1999 Trade Agenda, "Chinese enforcement of copyrights and trademarks is still uneven from province to province. Of particular concern is the significant level of unauthorized use of software by both private enterprises and government ministries." (emphasis added)

Prison Labor

• Concerns about the export of forced labor products into the United States, in violation of U.S. law, resulted in a 1992 Memorandum of Understanding between the U.S. and China in which China agreed that it would not export such goods to the U.S. and would allow visits by U.S. officials to suspect sites. Lack of compliance forced Secretary Bentsen to renegotiate the MOU in 1994. The Chinese have still not complied, and, according to the State Department's Annual Country Report on Human Rights, "...cooperation overall has been inadequate. In 1998 U.S. Customs unsuccessfully pursued eight standing requests....In all the cases, the Ministry of Justice refused the request, ignored it, or simply denied the allegations made without further elaboration."

On Proliferation:

Examples of China not abiding by non-proliferation agreements are legion, including:

• The Chinese government's agreement with Secretary Baker to abide by the Missile Technology Control Regime (MTCR), then transfer of M-11 missile technology to Pakistan in violation of the MTCR.
• China acceded to the NPT in March 1992. Serious concerns persist about China's compliance, in light of its nuclear cooperation with Pakistan and Iran. Many analysts believe that China's transfers to those countries violates the spirit, if not the letter of the NPT.
• The Chinese government committed to the Clinton Administration to stop providing cruise missiles or WMD technology to Iran. Recent reports raise serious questions about whether the Chinese government is fulfilling this commitment.
• Questions also persist about China's compliance with the Biological and Chemical Weapons Conventions, with the Administration's own Arms Control and Disarmament Agency reporting in 1997 that, "there are strong indications that China probably maintains its offensive program, " and concluding that, "in the years after its accession to the BWC, China was not in compliance with its BWC obligations and that it is highly probable that it remains noncompliant with these obligations."

On Human Rights:

Again, agreements signed and not honored abound. Here are the most recent ones.

• In March 1998 in order to head off action against its human rights abuses by the U.N. Human Rights Commission, the Chinese government said that it would sign the International Covenant on Civil and Political Rights (ICCPR). It then put off signing the Covenant until October 5. The ICCPR, which has not yet been ratified by the Chinese government, pledges governments to respect basic freedoms including free association, expression, assembly and religion. In the months following the signing, the Chinese government has not honored its commitment and has instead embarked on a severe crackdown on the very freedoms it pledged to uphold in the ICCPR.
• In October of 1997, the Chinese government signed the International Covenant on Economic, Social and Cultural Rights, and has since taken no steps to ratify it.

China's compliance with a well-conceived, commercially acceptable and enforceable WTO agreement would be a marked improvement over China's wholesale violations of international trade practices. However, with an economy as large as China's and China's pattern of refusing to play by the rules, a WTO agreement that is not enforceable will wreak havoc on the international trade regime.

Last week, the international community observed the tenth anniversary of the Tiananmen Square massacre. As I participated in events to mark this sad occasion, I was struck again by the short-sightedness of the choices that the Bush and Clinton Administrations and the Congress have made, ignoring the promotion of democratic reform in China for a handful of business deals. Some argue that trade should be separated from all other considerations, including human rights. I do not agree and I will be, once again, opposing the annual renewal of NTR for China. We should note, of course, that the Chinese government has never hesitated to link trade with other issues, most recently suspending the WTO talks because of outrage over the bombing of their embassy in Belgrade.

While we disagree on some issues in the U.S.-China trade relationship, I think we should all be able to agree that, for the sake of the U.S. economy and U.S. workers, as well as U.S. businesses, the Congress must fully consider the details of any deal which the Administration might reach with the Chinese government on WTO accession. China's accession to the WTO is too important to be rushed. Congress should consider the annual renewal of MFN/NTR separately from any proposal to provide permanent MFN/NTR. And, in light of China's history of non-compliance with multilateral and bilateral agreements, Congress should insist on a period of at least one year in which China must implement its accession commitments before permanent NTR is adopted. Finally, before we move forward with permanent NTR for China, we must develop alternative mechanisms to ensure enforcement of China's commitments and to preserve Congress' annual opportunity to review the state of the U.S.-China relationship.

Thank you, Mr. Chairman, for this opportunity to testify today.

U. S. Merchandise Trade with China:
1988-1998
($millions)