U.S.-China Economic & Security Review Commission Commissioner George Becker Commissioner Michael Wessel Presentation to the AFL-CIO Las Vegas, Nevada March, 2005

Commission Mandate Established as part of Congressional PNTR deal. Monitors both “economic” and “national” security dimensions of US-China relationship. Defines national security as covering economic security as well. Reports annually to Congress (Unclassified and Classified).

Established as part of Congressional PNTR deal.

Monitors both “economic” and “national” security dimensions of US-China relationship.

Defines national security as covering economic security as well.

Reports annually to Congress (Unclassified and Classified).

Recent Commission Activities Since Jan 2004, held 11 public hearings in DC and around the country. Heard from senators, congressmen, business leaders, labor leaders, state & local government officials, academics and other experts, public at large. Economic hearings focused on China’s: WTO compliance Exchange rate policies Impact on the US manufacturing base Presence in global capital markets Impact on jobs and standard-of-living Released 2004 bi-partisan annual report.

Since Jan 2004, held 11 public hearings in DC and around the country.

Heard from senators, congressmen, business leaders, labor leaders, state & local government officials, academics and other experts, public at large.

Economic hearings focused on China’s:

WTO compliance

Exchange rate policies

Impact on the US manufacturing base

Presence in global capital markets

Impact on jobs and standard-of-living

Released 2004 bi-partisan annual report.

Commissioned Research McMillion Study: Trade flows highlighting deficit in Advanced Technology Product (ATP) Bronfenbrenner & Luce Study: Accelerating outsourcing and offshoring of jobs to China, India 406,000 jobs shifted out of US in 2004 Companies moving production offshore “tend to be large, publicly held, highly profitable and well established” EPI Study: 1.5 million jobs lost to China deficit since 1989–losses accelerating dramatically since PNTR EPI estimates that each $1 billion in trade deficits equals 12,400 jobs lost

McMillion Study: Trade flows highlighting deficit in Advanced Technology Product (ATP)

Bronfenbrenner & Luce Study: Accelerating outsourcing and offshoring of jobs to China, India

406,000 jobs shifted out of US in 2004

Companies moving production offshore “tend to be large, publicly held, highly profitable and well established”

EPI Study: 1.5 million jobs lost to China deficit since 1989–losses accelerating dramatically since PNTR

EPI estimates that each $1 billion in trade deficits equals 12,400 jobs lost

Key Commission Policy Findings The U.S.-China relationship has been mismanaged and as currently structured is doing short- and long-term damage to the US. Economy. Our relationship with China is of such scale that the course and character of globalization will be substantially influenced by how we manage it.

The U.S.-China relationship has been mismanaged and as currently structured is doing short- and long-term damage to the US. Economy.

Our relationship with China is of such scale that the course and character of globalization will be substantially influenced by how we manage it.

2004 overall goods trade deficit: $666.2 billion (  21.7% ) Deficit with China: $162 billion (  30.9% ) Overall ATP deficit: $37 billion (  38.1% ) ATP deficit with China: $36.3 billion (  72% ) “ Trade accounted for a huge drag on fourth-quarter growth, subtracting $49 billion, or 1.7 percentage points from GDP growth.” Business Week, January 28, 2005 Major Trade Developments in 2004

2004 overall goods trade deficit: $666.2 billion (  21.7% )

Deficit with China: $162 billion (  30.9% )

Overall ATP deficit: $37 billion (  38.1% )

ATP deficit with China: $36.3 billion (  72% )

“ Trade accounted for a huge drag on fourth-quarter growth, subtracting $49 billion, or 1.7 percentage points from GDP growth.” Business Week, January 28, 2005

2004 U.S. Trade Balance by Region Not Seasonally Adjusted Deficits with every region; China the largest Balance ($ billions) % of Total Total (census basis) - $666.2 100.0% North America - $110.8 16.6% Canada - $65.8 9.9% Mexico - $45.1 6.8% Western Europe - $114.1 17.1% Euro area - $82.9 12.4 % Pacific Rim - $282.5 42.4% Japan - $75.2 11.3% China - $162 24.3% OPEC - $71.9 10.8% Rest of the World - $86.9 13.0%

Import-Export Ratios: China is our most lopsided major manufacturing trade relationship Country 2001 2002 2003 2004 (Jan-Nov) China 5.32 5.66 5.36 5.67 Canada 1.33 1.30 1.32 1.35 Mexico 1.29 1.38 1.42 1.41 EU-15 1.38 1.57 1.63 1.62 Japan 2.20 2.20 2.27 2.38

Exchange Rates (FX per $) Other Countries Have Adjusted; China Has NOT Jan. 2, 2002 Feb. 17, 2005 % Change Euro 1.11 0.77 30.6% Japanese yen 132.02 102.59 20% Canadian dollar 1.60 1.23 23.1% Chinese yuan 8.28 8.28 0.0%

China Trade Deficit Factors Under-valuation (15-40%) of China’s currency As much as 40% “tax” on our exports to China 40% “subsidy” to their products coming here Unfair Chinese competition Denial of worker rights Failure to implement WTO obligations Creation of new trade barriers Subsidized credit – hundreds of billions of dollars of non-performing loans Dual pricing of energy, other subsidies Intellectual property rights violations Offsets, targeting of investment Corruption Domestic consumption spending boom Corporate America requiring pricing to the “China Price” Roughly 55% of U.S. imports from China come from foreign multinational firms operating in China

Under-valuation (15-40%) of China’s currency

As much as 40% “tax” on our exports to China

40% “subsidy” to their products coming here

Unfair Chinese competition

Denial of worker rights

Failure to implement WTO obligations

Creation of new trade barriers

Subsidized credit – hundreds of billions of dollars of non-performing loans

Dual pricing of energy, other subsidies

Intellectual property rights violations

Offsets, targeting of investment

Corruption

Domestic consumption spending boom

Corporate America requiring pricing to the “China Price”

Roughly 55% of U.S. imports from China come from foreign multinational firms operating in China

"The China Price" “ Even manufacturers that have weathered past import waves are being swamped by China's combo of low prices and high tech…”

Steel China’s dramatic growth is driving up the price of inputs. China is adding capacity year-after-year – has plans to become a net exporter of steel and independent of imports by 2010. Traditional steel exports to China will be forced to find other markets.

China’s dramatic growth is driving up the price of inputs.

China is adding capacity year-after-year – has plans to become a net exporter of steel and independent of imports by 2010.

Traditional steel exports to China will be forced to find other markets.

Autos and Auto Parts Defined as a “backbone” industry by China. Plans to become world’s largest auto producer in 5 years. Plans to export $100 billion in auto products by 2010. Plans to produce 6 million cars–up 20% from last year (will pass Germany as world’s 3rd largest auto producer). By 2007, capacity is expected to exceed demand by roughly 3 million cars a year – the equivalent of 15-20 average-sized auto plants. U.S. companies are investing billions in China. Delphi has invested $500 million, with 14 facilities and will soon open a research center with the most advanced technology Big Three teaching Chinese companies how to become world class producers–facing copy-cat production. Average auto worker in Shanghai makes roughly $1.50 an hour in wages and benefits – only about 5% of what a U.S. auto worker makes. Unlike Japan in the 1980s a good portion of the production in China is being done through joint ventures of the Big Three – they can ultimately send their product back here through their own distributors (Japan had to invest huge sums in dealerships and franchises to sell their products here).

Defined as a “backbone” industry by China.

Plans to become world’s largest auto producer in 5 years.

Plans to export $100 billion in auto products by 2010.

Plans to produce 6 million cars–up 20% from last year (will pass Germany as world’s 3rd largest auto producer).

By 2007, capacity is expected to exceed demand by roughly 3 million cars a year – the equivalent of 15-20 average-sized auto plants.

U.S. companies are investing billions in China.

Delphi has invested $500 million, with 14 facilities and will soon open a research center with the most advanced technology

Big Three teaching Chinese companies how to become world class producers–facing copy-cat production.

Average auto worker in Shanghai makes roughly $1.50 an hour in wages and benefits – only about 5% of what a U.S. auto worker makes.

Unlike Japan in the 1980s a good portion of the production in China is being done through joint ventures of the Big Three – they can ultimately send their product back here through their own distributors (Japan had to invest huge sums in dealerships and franchises to sell their products here).

Aerospace China has targeted the sector for development – wants to produce regional and large civil aircraft. Expanding its space program. China has been playing Airbus against Boeing – seeking to take as much offset production work for itself as possible. Surplus in large aircraft sales trade surplus continues to decline – 25% reduction from 2003 which was 30% down from the year before. China is becoming a major world class producer of aircraft parts and components. China exported 2 domestically-made regional airplanes and has signed export contracts for 20 more.

China has targeted the sector for development – wants to produce regional and large civil aircraft. Expanding its space program.

China has been playing Airbus against Boeing – seeking to take as much offset production work for itself as possible.

Surplus in large aircraft sales trade surplus continues to decline – 25% reduction from 2003 which was 30% down from the year before.

China is becoming a major world class producer of aircraft parts and components.

China exported 2 domestically-made regional airplanes and has signed export contracts for 20 more.

Communications In less than 10 years, U.S. global trade surplus in cell phones has turned into a $16.3 billion trade deficit. China has gone from trade balance in cell phones to world leader – surpassing Korea as the leading exporter to the U.S. China is becoming a major design center. In 2002 only 10% of handsets made in China were designed in house – expected to rise to 40% by 2008. China is beginning to drive product standards produce to their standards. Microsoft, IBM, Honeywell and 3com are among the long list of US companies doing work in China. IBM openly discussed how it’s “going to force its U.S. based employees to train their foreign replacements in China.”

In less than 10 years, U.S. global trade surplus in cell phones has turned into a $16.3 billion trade deficit.

China has gone from trade balance in cell phones to world leader – surpassing Korea as the leading exporter to the U.S.

China is becoming a major design center. In 2002 only 10% of handsets made in China were designed in house – expected to rise to 40% by 2008.

China is beginning to drive product standards produce to their standards.

Microsoft, IBM, Honeywell and 3com are among the long list of US companies doing work in China. IBM openly discussed how it’s “going to force its U.S. based employees to train their foreign replacements in China.”

Textiles and Apparel China now has quota free access to the US market (as well as that of other WTO members). China’s textile and apparel sector is stealing market share at a rapid and accelerating pace. Bush Administration was slow to use textile safeguard–taking 17 months to write the regulations. US Court of International Trade has blocked threat-based cases – a critical safeguard that was negotiated in China’s WTO accession agreement. Administration doesn’t collect some information critical to enforce our rights under the agreement.

China now has quota free access to the US market (as well as that of other WTO members).

China’s textile and apparel sector is stealing market share at a rapid and accelerating pace.

Bush Administration was slow to use textile safeguard–taking 17 months to write the regulations.

US Court of International Trade has blocked threat-based cases – a critical safeguard that was negotiated in China’s WTO accession agreement.

Administration doesn’t collect some information critical to enforce our rights under the agreement.

Intellectual Property Rights (IPR) China’s piracy of our IPR exceeds 90% by industry estimates and is getting worse every year. Tens of billions of dollars of profits are lost – and with them jobs and our standard of living. Piracy and counterfeiting extend well beyond software, movies and music to industrial products. China has signed 4 separate IPR agreements – when they fail to live up to their promises, the Administration simply accepts new promises and signs a new agreement. Bush Administration claims there aren’t enough facts to bring a case.

China’s piracy of our IPR exceeds 90% by industry estimates and is getting worse every year.

Tens of billions of dollars of profits are lost – and with them jobs and our standard of living.

Piracy and counterfeiting extend well beyond software, movies and music to industrial products.

China has signed 4 separate IPR agreements – when they fail to live up to their promises, the Administration simply accepts new promises and signs a new agreement.

Bush Administration claims there aren’t enough facts to bring a case.

Wal-Mart’s A Big Factor In 2004, Wal-Mart imported more than $18 billion from China – more than 10% of US trade deficit with China is now attributable to Wal-Mart. If Wal-Mart were a country, it would rank as China’s 8 th -biggest trading partner – putting it ahead of Russia, Australia and Canada. Wal-Mart is defining producer’s prices, driving production offshore and driving down wages here at home. Wal-Mart is reviewing plans to buy its own shipping terminals and container ships.

In 2004, Wal-Mart imported more than $18 billion from China – more than 10% of US trade deficit with China is now attributable to Wal-Mart.

If Wal-Mart were a country, it would rank as China’s 8 th -biggest trading partner – putting it ahead of Russia, Australia and Canada.

Wal-Mart is defining producer’s prices, driving production offshore and driving down wages here at home.

Wal-Mart is reviewing plans to buy its own shipping terminals and container ships.

China Is Beginning to “Buy American” Lenovo – connected to State Owned Company – wants to purchase PC division of IBM. US Government investigating national security risks. China purchase of Magnequench approved by US – producer of rare earth magnets used in guidance systems in smart bombs. Last year, China purchased more than 20 U.S. companies. China foreign exchange reserves have skyrocketed since 2000 rising from $165.5 billion to $610 billion at the end of 2004. These reserves may be used to engage in a buying spree of US assets or to influence U.S. policy.

Lenovo – connected to State Owned Company – wants to purchase PC division of IBM. US Government investigating national security risks.

China purchase of Magnequench approved by US – producer of rare earth magnets used in guidance systems in smart bombs.

Last year, China purchased more than 20 U.S. companies.

China foreign exchange reserves have skyrocketed since 2000 rising from $165.5 billion to $610 billion at the end of 2004. These reserves may be used to engage in a buying spree of US assets or to influence U.S. policy.

China’s Energy Needs Are Growing Dramatically Forty percent of new world oil demand is because of China. Unlike the US and most developed countries, China wants to own their resources directly. There is a direct link between their energy sources and their proliferation activities – Iran, Sudan, etc. China’s energy companies are discussing buying 49% of a Canadian pipeline. China may buy 1 million barrels a day of Canadian oil – out of 3 million bbd production. Chinese state-owned energy company rumored to be interested in buying Unocal – 9 th largest US energy company.

Forty percent of new world oil demand is because of China.

Unlike the US and most developed countries, China wants to own their resources directly.

There is a direct link between their energy sources and their proliferation activities – Iran, Sudan, etc.

China’s energy companies are discussing buying 49% of a Canadian pipeline. China may buy 1 million barrels a day of Canadian oil – out of 3 million bbd production.

Chinese state-owned energy company rumored to be interested in buying Unocal – 9 th largest US energy company.

China Is Resource Hungry in Other Areas Top export category from the Port of Seattle to China is scrap materials: Waste paper, scrap steel and timber. China bought iron ore mine in Minnesota. China trying to buy Canadian firm – Noranda – primary metals producer with operations in 38 countries. China refuses to export commodities like coking coal – in violation of WTO rules.

Top export category from the Port of Seattle to China is scrap materials: Waste paper, scrap steel and timber.

China bought iron ore mine in Minnesota.

China trying to buy Canadian firm – Noranda – primary metals producer with operations in 38 countries.

China refuses to export commodities like coking coal – in violation of WTO rules.

Communist China’s Continuing Human Rights Abuses “ The Government's human rights record remained poor, and the Government continued to commit numerous and serious abuses.” “ Abuses included instances of extrajudicial killings, torture and mistreatment of prisoners, forced confessions, arbitrary arrest and detention, lengthy incommunicado detention, and denial of due process.” “ The judiciary was not independent, and the lack of due process remained a serious problem. Government pressure made it difficult for Chinese lawyers to represent criminal defendants. A number of attorneys were detained for representing their clients actively.” 2003 Bush State Department Annual Human Rights Report:

“ The Government's human rights record remained poor, and the Government continued to commit numerous and serious abuses.”

“ Abuses included instances of extrajudicial killings, torture and mistreatment of prisoners, forced confessions, arbitrary arrest and detention, lengthy incommunicado detention, and denial of due process.”

“ The judiciary was not independent, and the lack of due process remained a serious problem. Government pressure made it difficult for Chinese lawyers to represent criminal defendants. A number of attorneys were detained for representing their clients actively.”

“ Over 250,000 persons were serving sentences, not subject to judicial review, in ‘reeducation-through-labor’ camps.” “ The Government severely restricted freedom of assembly and association and infringed on individuals' rights to privacy.” Every year since PNTR, China’s record has gotten worse. Communist China’s Continuing Human Rights Abuses 2003 Bush State Department Annual Human Rights Report:

“ Over 250,000 persons were serving sentences, not subject to judicial review, in ‘reeducation-through-labor’ camps.”

“ The Government severely restricted freedom of assembly and association and infringed on individuals' rights to privacy.”

Every year since PNTR, China’s record has gotten worse.

China Continues to Threaten Taiwan More than 650 missiles aimed across the Taiwan Straits. Chinese navy continues to build – within 5 years will have more than 20 modern attack submarines, including 6 nuclear-powered. US and Japan signed joint agreement in February 2005 that Taiwan is a “mutual security concern” and that security in the Taiwan Strait is a “common strategic objective.”

More than 650 missiles aimed across the Taiwan Straits.

Chinese navy continues to build – within 5 years will have more than 20 modern attack submarines, including 6 nuclear-powered.

US and Japan signed joint agreement in February 2005 that Taiwan is a “mutual security concern” and that security in the Taiwan Strait is a “common strategic objective.”

China Is a Serial Proliferator In December 2005, 8 Chinese companies are sanctioned for selling missile technology to Iran. Significant other sanctions have been imposed in the past, many of which are still in effect. China provides arms and support to Sudanese interests to protect their energy interests. Chinese assistance to Pakistan was essential to the development of their missile and nuclear programs. China has provided assistance to North Korea’s missile program, its space program and possibly its nuclear program either directly or indirectly through Pakistan.

In December 2005, 8 Chinese companies are sanctioned for selling missile technology to Iran.

Significant other sanctions have been imposed in the past, many of which are still in effect.

China provides arms and support to Sudanese interests to protect their energy interests.

Chinese assistance to Pakistan was essential to the development of their missile and nuclear programs.

China has provided assistance to North Korea’s missile program, its space program and possibly its nuclear program either directly or indirectly through Pakistan.

Perspective China is a communist nation. Their people do not elect their leaders. Raw use of power to maintain control. China has a clear plan for economic development–about to draft its 11 th Five Year Plan. China is acting in its national interest – we should be acting in ours.

China is a communist nation.

Their people do not elect their leaders.

Raw use of power to maintain control.

China has a clear plan for economic development–about to draft its 11 th Five Year Plan.

China is acting in its national interest – we should be acting in ours.

US-China Relationship is Different EU-15 with 90 million more people, ran an annualized trade deficit with China last year of roughly $100 billion. EU-15 had an annualized trade surplus with the U.S. in 2004 of about $90 billion. China had a trade surplus with the world of only $25.3 billion in 2003. While it has surpluses with the US, EU and Japan, it has deficits with most other countries.

EU-15 with 90 million more people, ran an annualized trade deficit with China last year of roughly $100 billion. EU-15 had an annualized trade surplus with the U.S. in 2004 of about $90 billion.

China had a trade surplus with the world of only $25.3 billion in 2003. While it has surpluses with the US, EU and Japan, it has deficits with most other countries.

What Can We Do?

Policy Recommendations – Trade Laws Make labor standards a core goal of US trade policy. Instruct USTR to report on China’s system of subsidies, discriminatory taxes, and market access denial. Protect our trade laws which the USTR has agreed to discuss in the Doha Round. Fund strengthened trade enforcement; bring actions in WTO. Act on ITC Section 421 case decisions. Help small & medium-sized companies bring trade cases. Restore budget on China trade enforcement which Bush eliminates for 2006.

Make labor standards a core goal of US trade policy.

Instruct USTR to report on China’s system of subsidies, discriminatory taxes, and market access denial.

Protect our trade laws which the USTR has agreed to discuss in the Doha Round.

Fund strengthened trade enforcement; bring actions in WTO.

Act on ITC Section 421 case decisions.

Help small & medium-sized companies bring trade cases.

Restore budget on China trade enforcement which Bush eliminates for 2006.

Strengthen 1988 Trade Act requiring Treasury Dept. to report on currency manipulation & take action. Take action against Chinese currency manipulation via IMF, WTO, and 301 case. Pressure other East Asian countries to cease currency manipulation. Policy Recommendations – Currency Manipulation

Strengthen 1988 Trade Act requiring Treasury Dept. to report on currency manipulation & take action.

Take action against Chinese currency manipulation via IMF, WTO, and 301 case.

Pressure other East Asian countries to cease currency manipulation.

Policy Recommendations – Intellectual Property Rights IPR is an issue for all sectors of our economy. Force Administration to take action – billions of dollars and hundreds of thousands of jobs are being lost every year . Have Congress initiate 301 action on IPR.

IPR is an issue for all sectors of our economy.

Force Administration to take action – billions of dollars and hundreds of thousands of jobs are being lost every year .

Have Congress initiate 301 action on IPR.

Making Policy Happen Frame the Issue: Link national security and economic security together. Educate people on threat China poses. Talk about leverage – 30% of China’s exports come to the U.S., only 4% of ours go there (with many only being “industrial tourists”). They’ve got more to lose. We don’t have to accept the status quo . Tools: We’re not using the tools we have (IMF, WTO, Section 421). We also need more tools (labor standards, non-performing loans, etc.). We need to activate the grass roots about the threat China poses. The election might be over, but the problem isn’t solved.

Frame the Issue:

Link national security and economic security together.

Educate people on threat China poses.

Talk about leverage – 30% of China’s exports come to the U.S., only 4% of ours go there (with many only being “industrial tourists”). They’ve got more to lose. We don’t have to accept the status quo .

Tools:

We’re not using the tools we have (IMF, WTO, Section 421).

We also need more tools (labor standards, non-performing loans, etc.).

We need to activate the grass roots about the threat China poses. The election might be over, but the problem isn’t solved.

Commission’s Future Activities Hearings that spotlight the administration’s policies & actions. Research & hearings on the effects of China’s policies on US employment & investment. Research & hearings on future of the defense industrial base. Elevate the debate on globalization & outsourcing. What does it mean for US workers when 2.5 billion people join the global labor market?

Hearings that spotlight the administration’s policies & actions.

Research & hearings on the effects of China’s policies on US employment & investment.

Research & hearings on future of the defense industrial base.

Elevate the debate on globalization & outsourcing. What does it mean for US workers when 2.5 billion people join the global labor market?

We Need To Learn How To Communicate Better There is a real threat!

We Need Your help We need your union to provide us with information on what jobs are being sent to China. We need to know what products are important to our national security, homeland security that your unions are involved in which are being offshored. We need your input on how we can best help you in framing the issues. AFL-CIO and the affiliated unions are the most powerful lobbying force in the U.S. – representing 13 million union households – now is the time for action.

We need your union to provide us with information on what jobs are being sent to China.

We need to know what products are important to our national security, homeland security that your unions are involved in which are being offshored.

We need your input on how we can best help you in framing the issues.

AFL-CIO and the affiliated unions are the most powerful lobbying force in the U.S. – representing 13 million union households – now is the time for action.