China's Emergence as an Economic Superpower

China's Emergence as an Economic Superpower and Its Implications for U.S. Business

E. Anthony Wayne, Assistant Secretary for Economic and Business Affairs
Remarks at The Executives' Club of Chicago, International Leadership
Conference
Hyatt Regency, Chicago, Illinois
May 25, 2005

Since the 19th century when ships of the Standard Oil Company sailed around Cape Horn carrying "oil for the lamps of China," those of us in the U.S. have been anticipating the day when China would emerge as a major economic power. Make no mistake about it - that day has finally arrived.

Last year, China became the United States' third-largest trade partner, behind only Canada and Mexico, and accounted for more than 13 percent of all U.S. imports. It has joined the United States as one of the world's largest energy consumers, and its rising oil consumption is already having a major impact on global markets. Its per capita income is above $1200, and the country is now solidly a 'middle income' developing country.

China's rise is not in dispute, but peoples' feelings about it run from admiration, to uneasiness, to suspicion and even hostility. At the State Department, we encounter all of these as we manage one of our most important bilateral relationships, and work to keep U.S. values and interests at the core of our relations. While I concentrate on the economic aspect of our relationship, it is important to recognize that our economic relations are affected by our shared history and many important non-economic issues.

Overall, the United States wants candid, constructive, and cooperative relations with China. In her March visit to Beijing, Secretary Rice described this well:

" the framework of a constructive relationship that recognizes fully the transformation that is going on in China, a remarkable transformation that people around the world are watching. I'm quite certain that we will be able to manage the many issues before us and we will be able to do so in a spirit of cooperation and respect for one and other."

Managing the relationship means staying engaged in all areas political and economic, bilateral and multilateral. We do not want disagreements in one area to block progress in another. We want to work to find solutions and to foster better understanding where divergent approaches exist. But we will stick to the principals and rules that have proven vital to America's successful international policies. Our economic engagement continues to grow in importance to our two countries and the world as a whole. Much good has come from this, but we also have more than our share of problems in the economic area.

Additionally, other vitally important topics also remain on our bilateral agenda. Let me note some of these:

On North Korea, we and China have many shared objectives, and China was instrumental earlier in helping to bring North Korea to the table for the Six Party Talks. We look to China to do more today to help us get the talks restarted.

We reiterate our support of Human Rights in China in every appropriate high-level meeting. We see some improvements, which led us to forgo a resolution in Geneva this year, and some disappointments: China released Uighur (We-Ger) activist Rebiya (Ree-be-ya) Kadeer (Kaa-dear), but many other prisoners of conscience remain incarcerated for the peaceful expression of their views.

Similarly, on Religious Freedom, China's record remains poor, despite some improvements over the past 25 years. Secretary Rice has designated China as a "country of particular concern" under the International Religious Freedom Act, which carries specific sanctions, such as barring China from consideration for certain types of aid.

On Taiwan, U.S. policy has contributed to stability for over twenty years. We found the anti-secession law passed recently by China's National People's Congress unhelpful and have said so. We applaud the positive steps taken early in 2005, such as visits by high-level party leaders from Taiwan to Beijing and some liberalized cross-Straits travel, but believe that it is important for China to engage the ruling governmental authorities in ways that resolve tensions in accord with the wishes of people on both sides of the Taiwan Strait.

Regionally And Multilaterally, we see China's increased engagement in trade with ASEAN, Australia, Korea and others as a natural evolution, but have made it clear that America, as a Pacific power, expects to play a role in new regional security and economic fora. We expect China to take a leadership role in ensuring the Doha trade round moves forward on key topics, such as agriculture and non-agricultural market access issues, especially in trade among developing world countries. As Secretary Rice said in a March 19 speech in Tokyo,

"America has reason to welcome the rise of a confident, peaceful and prosperous China. We want China as a global partner, able and willing to match its growing capabilities to its international responsibilities."

My job is to help manage the Trade and Economic Issues portion of the U.S.-China relationship, working with my colleagues in USTR, Commerce, and Treasury. Increasingly, China takes up more and more of my time and the time of my staff. Fears, legitimate complaints and misperceptions about our economic engagement with China are becoming the focal point for popular debate over our international economic agenda. That debate is playing itself out in the press and certainly on Capitol Hill.

By way of background, and repeating facts many of you know, in the more than 20 years since China began its process of internal economic reform, the volume of U.S. - China trade in goods and services has expanded dramatically. Since China joined the World Trade Organization in 2001, growth in China as a market for U.S. products has only accelerated -- in 2004, U.S. exports to China totaled $35 billion, nearly double the total for 2001. In fact, from 2001 to 2004, U.S. exports to China increased nearly eight times faster than U.S. exports to the rest of the world, and China rose from our ninth largest export market in 2001 to our fifth largest export market in 2004. During that same time, of course, China's exports to the United States (and to the rest of the world) have also exploded. In 2004, imports from China totaled $197 billion, nearly double the total for 2001, and China is now the United States' second largest supplier of imported goods and our third-largest trading partner. Our largest bilateral trade deficit is with China: $162 billion in 2004, and growing, up from $83 billion in 2001. China's 9%+ per year growth rate has propelled it to become the world's 2nd largest consumer of oil, largest producer of steel, and it is a major factor in the sustained rise in prices for a range of commodities as well as sea-borne freight rates.

As China's balance of payments surplus continues to grow and its foreign exchange reserves accumulate, attention is focusing more closely on China's Exchange Rate Policy. China has maintained a fixed exchange rate of approximately 8.28 yuan per dollar since 1995. The U.S. Treasury Department in its recent international currency report to Congress noted that the peg is highly distortionary and poses risks to the health of the Chinese economy as well as the economies of its neighbors. In releasing the report, Secretary Snow said:

"China's rigid currency regime is sowing the seeds for excess liquidity creation, asset price inflation, large speculative capital flows, and over-investment. It also poses risks to its neighbors, since their ability to follow more independent and anti-inflationary monetary policies is constrained by competitiveness considerations relative to China A more flexible system will also support economic stability, which we understand is of paramount concern to Chinese leadership. China's ten-year-long pegged currency regime may have contributed to stability in the past, but that is no longer the case today, as China has grown to be a more significant participant in global trade and financial flows."

Clearly, it is time for China to move on this issue now.

The Administration's overall approach is pro-growth and free trade-oriented: our strategy is not to restrict Chinese exports to the U.S., but rather to open China's markets to U.S. firms consistent with its WTO obligations. China has made considerable strides to comply with its WTO commitments. It has largely opened its agricultural market to foreign competition, is reducing its tariff rates annually on goods across the board, and is on track to allow full competition in the banking and insurance sector by December 2006. But efforts are far from complete. Big problems remain in areas that affect products and services where the U.S. has a competitive advantage IPR, services, agriculture, government procurement of software, transparency, direct selling and distribution, standards, and industrial policies. This Administration is working vigorously to address these problems, using the most effective tools at our disposal, including our trade remedy laws.

In its 2001 accession agreement to the WTO, China agreed to extensive, far-reaching commitments, and committed to implement a set of sweeping reforms that required it to lower trade barriers in virtually every sector of the economy. It pledged to provide national treatment and improved market access to goods and services imported from the United States and other WTO members, and to protect intellectual property rights (IPR). China also agreed to special rules regarding subsidies and the operation of state-owned enterprises. Implementation should be substantially completed if China fully adheres to the agreed schedule by December 11, 2007.

In response to a slowdown in WTO implementation in 2003, the Administration stepped up its efforts to engage China's senior leaders. In December 2003, President Bush and China's Premier, Wen Jiabao, agreed to undertake an intensive program of bilateral interaction with a view to resolving problems in the U.S.-China trade relationship. Premier Wen also committed to facilitate the increase of U.S. exports to China. The highly constructive Joint Commission on Commerce and Trade (JCCT) meeting in April 2004 exemplified this new approach. At that meeting, the two sides achieved resolution of no fewer than seven potential disputes over China's WTO compliance, ranging across a spectrum from wireless encryption standards to biotechnology.

When our discussions with China are not successful, we do not hesitate to use the full range of tools made available to us as a result of China's WTO accession. The United States filed, and was able to successfully resolve, the first-ever dispute settlement case brought against China at the WTO in the semiconductor VAT case in 2004, preserving for U.S. manufacturers a $2 billion export business to China. Similarly, we have used the special textile safeguard when appropriate, both in 2004 and this year. Chinese leaders do not like our use of this remedy, but it was something we all know they agreed to as part of their WTO accession.

I'd like to give special attention today to Intellectual Property Rights And China. This Administration and U.S. industry places the highest priority on stemming the tide of intellectual property rights (IPR) infringement in China. Counterfeiting and piracy in China is out of control: The International Intellectual Property Alliance, a group made up of copyright-dependent companies such as software makers, film companies and the recording industry, estimate IP-related losses in China of over 90% of the total market for copyrighted material. IP theft is probably hurting every single business represented here today to some degree.

On April 29, USTR released the results of its special "Out-of-Cycle Review", or OCR, of the IPR situation in China. While the review concluded that China has recently undertaken a number of serious efforts at the national level to address this situation, such as lowering the value thresholds that trigger criminal investigations and prosecutions, these steps have not significantly reduced IPR crime across China.

We will achieve measurable progress on IPR, make no mistake about it. At the same time, we understand this is a struggle that may take years to win.

We are taking a series of specific steps to improve the situation. As a result of the Out-Of-Cycle Review, we have elevated China to the "Priority Watch List" category under our trade law's "Special 301" international review of other nations' respect for IPR, and we will use consultations under the Trade Related Aspects of Intellectual Property (TRIPS) Agreement's transparency provisions to formally request specific evidence from China on the operation of its administrative IPR enforcement regime. Additionally, we will use this year's cabinet level Joint Commission on Commerce and Trade (likely to take place in July) to focus additional attention on this issue, including through the pursuit of clear benchmarks to ensure China's progress on IPR protection.

We will work closely with industry with an eye toward using all available WTO procedures to bring China into compliance with its TRIPS obligations if all other avenues are exhausted. But, to be frank, Your Cooperation Is Key affected companies, like yours, must be even more active in throwing light on the problem and providing us in the government the information we need to attack the problem. This means more cases in Chinese courts, more publicity about problem cases, and better, more company-specific examples of problems.

Supplementing these bilateral IPR efforts, the Administration has taken comprehensive action to block trade around the world in counterfeit and pirated goods through the Strategy Targeting Organized Piracy (STOP!) Program. This initiative began in October 2004, and aims to empower U.S. businesses to secure and enforce their intellectual property rights in overseas markets, to stop fakes at U.S. borders and expose international counterfeiters and pirates.

We believe that China should begin to take IP seriously not only to mollify foreign critics, like us, but for its own future growth. China would like its industries to move up the technological value-added ladder, and they are beginning to do so in computer technology, biotechnology and other fields. But this industrial transformation will face barriers if Chinese holders of patents, trademarks and copyrights cannot count on their intellectual property being protected. This trend is growing and is serious. An excellent example concerns a Shenzhen firm Gaoxinqi (Gaow-Sin-Kee). According to Hong Kong press accounts this firm was thriving in the telephone handset market, and was expanding internationally when orders suddenly came to a halt. After some investigation, it was determined that a Chinese rival was producing a carbon copy of its phone, down to the serial numbers. The company is suing in Chinese court, and the trial will take place soon, but the story is instructive. In 2002, patent registrations by Japanese and Korean firms alone outnumbered those by Chinese firms 40-to-1. We believe many in China are beginning to realize that this imbalance will not change rapidly unless China begins to respect IPR.

We have also seen a potentially troubling trend as some Chinese ministries have begun to promulgate Standards Policies that intentionally limit market access and aim to extract technology and intellectual property from foreign rights-holders. Many in U.S. industry see the objective of these policies as the support for development of Chinese industries that are higher up the economic value chain. The so-called "WAPI" (Wireless Authentication and Privacy Infrastructure) wireless encryption standard being promoted by China, along with the Chinese-specific wireless mobile handheld telephone "3rd Generation" standard are perhaps the most well-known standards issues. But there are a range of such concerns related to standards, China's draft anti-competition law and worrying moves to require patent-holders to 'pool' their patents to conform with future Chinese standards. We are watching this set of interrelated issues very closely. The Department of Commerce is assigning a standards officer to Embassy Beijing to help our government coordinate policy on this emerging, but very important issue.

One particular concern facing us now is China's recent proposal to implement Restrictive Government Procurement Policies for Software. China has identified software as the first sector in which to implement its 2002 Government Procurement Law, which clearly favors procurement from domestic firms. In November, 2004, China's Ministry of Information Industry and Ministry of Finance released an outline of the draft software regulations that would define "domestic software" very narrowly -- to qualify, a product would have to be made in China, the IPR would have to be held by a PRC person, and China-based development costs would have to comprise at least 50 percent of total development costs. If domestic products or services are not available under reasonable terms, the draft regulations would permit foreign software to be considered, but preference would be given to foreign firms that conduct yet-to-be defined levels of China-based research and development, investment, subcontracting, or taxable transactions. In March 2005, China released a more complete draft of the measures, which maintains many of these restrictive conditions.

These proposed Government Software Procurement regulations would put U.S. firms at a significant disadvantage in the Chinese market. In a country where piracy of computer software is rampant, government ministries together comprise, by far, the largest market for legitimate software. At last year's JCCT meeting, China committed that all government offices would use only legitimately purchased software. While China has taken steps to follow-through on that pledge, the procurement policy threatens to undercut its value to the United States and U.S. software producers. We have made clear to China, including at senior levels, our serious concern with the draft measures. This is the wrong policy for China to implement, given our $160+ billion trade deficit with China. We continue to raise this issue with Chinese officials at every opportunity, and it is a major element of our bilateral engagement. When China acceded to the WTO in 2001, it committed to initiate negotiations to join the WTO Government Procurement Agreement (GPA) as soon as possible. We have urged China to honor that commitment by beginning negotiations now to ensure that all U.S. firms can fairly compete in China's vast procurement market.

Another difficult area concerns distribution rights. While China has implemented its commitment to allow companies and individuals to import goods into China directly without having to use a middleman, China has been slow to permit our companies to freely Distribute those products within China at the wholesale and retail level. China should have published laws, regulations and explanatory guidance for foreign firms that wish to enter the Chinese distribution and logistics market by December 11, 2004. However, Chinese authorities have been slow in approving needed licenses to begin distribution. We understand only 150 have been approved under China's Ministry of Commerce's molasses-slow company-by-company review process, and thousands more foreign firms are hesitating to submit applications until the process is made more clear and comprehensible. Distribution is a key element under China's WTO commitments it will act as the gateway to smaller and medium sized U.S. firms without a presence in China to begin to export, not just the "big boys". The Administration has been pressing the Chinese authorities to clarify these procedures, but our patience is wearing thin. One segment of the distribution services sector Direct Selling is causing particular concern. China is considering restrictions that would make it difficult or impossible for U.S. direct selling companies to operate in China. We will raise our very serious concerns in this area at the JCCT.

China has taken steps to open its financial service sector in accordance with its WTO commitments, though China continues to impose excessive capitalization requirements and other limitations in some areas. China has permitted five foreign auto finance companies to extend auto loans, allowing GMAC and Ford Motor's financial unit to set up operations along with Toyota, Volkswagen and Daimler-Chrysler. 61 foreign banks and financial institutions have been approved to provide renminbi products and services to Chinese companies, and China has approved qualified foreign banks to enter the money markets to conduct inter-bank lending operations. Geographic restrictions have been lifted on foreign banks conducting renminbi business in five large provinces and in past year China has lowered capital requirements for bank branches and permitted foreign banks to open multiple bank branches each year.

In securities and equities, last year Goldman Sachs received approval to form and control a joint venture securities firm in China, the first and only of its kind. We would like to see market opening of securities firms expanded. China's stock market is mired in a prolonged slump for reasons largely related to poor management and business practices by its securities firms. Foreign competition and management practices would help considerably, enabling Chinese stock markets to become a more robust source of capital formation for Chinese businesses.

Finally, one overarching problem concerns Transparency. China's opaque regulatory process, overly burdensome licensing and operating requirements allow Chinese regulatory authorities to continue to frustrate efforts of U.S. providers of insurance, express delivery, telecommunications and other services to achieve their full market potential in China. While China's Ministry of Commerce has made laudable moves toward adopting WTO transparency norms, other ministries and agencies have lagged behind. The Administration remains committed to seeking improvements in this area, and we have specific suggestions concerning transparency that we believe will help foreign firms understand the Chinese market and work with the Chinese regulatory system.

Not every field is problematic. In a number of areas, U.S.-China cooperation is productive and expanding, and Energy is one such area. While press reports often identify China as the 'culprit' behind high world demand for petroleum -- and high gas prices here at home -- the reality is that demand growth in 2004 was strong in much of the world, including in both China and the U.S., and Chinese demand growth has slowed from 20% in 2004 to 5% in the first quarter of 2005. We have ongoing cooperative efforts with China across a broad range of energy issues, including Clean Coal, the establishment and management of a strategic petroleum reserve, the international partnership for the Hydrogen Economy, the Carbon Sequestration Leadership Forum, and the Methane to Markets Partnership. We at the Department of State have policy discussions with China on energy security issues, and the Department of Energy is about to embark on a high-level, broad energy policy dialogue with China.

Civil Aviation is another arena where we have seen mutually beneficial growth. It has been a year since we signed a civil aviation agreement with China that will result in a six-fold increase in passenger and freight delivery traffic over the next five years. This agreement is reducing costs for U.S. exports to China, permitting larger numbers of U.S. businessmen and women to conduct business in China and enabling greater levels of tourism to the U.S.

In conclusion, we want China to be a prosperous and responsible member of the international community. The U.S. is committed to building a durable relationship with China that allows us to co-operate in areas of mutual interest and creates a solid economic engagement that can form the basis of long-term global prosperity. We are increasingly able to address our differences in ways that avoid intractable disputes and promote resolution. Will there be bumps ahead in the road? Yes that's inevitable! That is why it is essential we continue to strengthen U.S.-China relations to absorb the bumps, economic and non-economic, and find solutions without damage to our shared interests.

Released on May 31, 2005

ENDS

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