June 23,2005

Baucus Hearing Statement: ''U.S. - China Economic Relations''

Statement of U.S. Senator Max Baucus
United States Senate Finance Committee Hearing
“U.S. - China Economic Relations"

Thank you, Mr. Chairman, for calling this hearing. It is difficult to overstate the
importance of our economic relationship with China.

China has been an economic power for 5,000 years. From ancient times, merchants
traveled the Silk Road carrying grapes, cotton, and pomegranates from Europe to trade for silk
from China. Marco Polo took that road and wrote of a China whose economy dwarfed that of
Europe. And China literally invented paper money, making modern economies possible.

China has become a main driver of the world economy again. The last century of
economic isolation and turmoil – a century of foreign occupation, civil war, the disastrous Great
Leap Forward, and the Cultural Revolution – now seems to have been a relatively short blip in
China’s long history.

Some in the United States fear China, and seek to close off U.S.-China trade in response.
Others see opportunity in China, and advocate increasing U.S.-China trade at almost any cost.

I have long believed that we should engage China with our eyes wide open. That is why
I led the charge to grant China permanent normal trade relations. That is why I strongly
supported China’s accession to the World Trade Organization. And that is why I continue to
support an active and robust economic relationship with China.

Engagement with China has largely been a success. Between 1999 and 2004, U.S.
exports to China increased nearly 10 times faster than U.S. exports to the rest of the world.
Montana’s exports to China were 15 times greater at the end of that period than they were at the

That is good news. But a rising China poses a competitive challenge. Chinese
companies are becoming world players. Just yesterday, a Chinese state-owned oil company,
CNOOC, launched an unsolicited bid to acquire Unocal. CNOOC is challenging Chevron for
control of Unocal, a 115-year old California-based oil and gas company.

China’s competitive challenge makes Americans nervous — from Wall Street to Main
Street. Americans are nervous about China’s effect on the American economy, on American
jobs, and on the American way of life.

Yet, in the face of this challenge, the administration has no plan. They have no plan to
make sure that China plays by the rules. They have no plan to deal with countries that play
around with currency values. They have no plan to address our gaping trade deficit. And they
have no plan to maintain America’s role as the most competitive economy on earth.

Is it any wonder why America’s mood on trade and globalization has soured? Since the
administration has not offered solutions on how to deal with a rising China, let me give you some
of mine.

First, we have to make sure that China lives up to its trade commitments. That should be
at the heart of our trade policy. There are many enforcement problems in China. Piracy rates for
intellectual property like movies and software top 90 percent. That translates into an estimated
loss of $2.5 to $3.8 billion to U.S. innovators. Agricultural trade continues to face opaque and
discriminatory barriers that keep out quality products from states like Montana and Iowa.
So is the administration using all its resources to tackle these problems? No. It’s too
busy negotiating economically meaningless free trade agreements with tiny economies.

We need to refocus USTR on enforcement. To do so, I intend to introduce a bill that will
create a new Trade Prosecutor at USTR. This bill will also give Congress a far greater role in
shaping USTR’s trade enforcement priorities with China and other countries.

Second, we must reduce our huge trade and current account deficits. Our 2004 current
account deficit was $665 billion — 6.4 percent of our economy. And we are on track to post a
$780 billion current account deficit this year.

Why is this important? A current account deficit means that we spend more than we
earn. Because our deficit is so big, we have to borrow $2.1 billion a day to cover our shortfall.
$2.1 billion a day. And until we act, that number will just keep growing.

What is the administration’s plan? Again, they have none. They call borrowing $2.1
billion a day as a “sign of strength.” “Strength” is not the first word that comes to mind. Our
current account deficit is a problem. We must address it.

China is part of the problem. It keeps its currency — the RMB — pegged to the dollar.
The undervalued RMB, keeps China’s exports cheap, and, as a consequence, exacerbates our
current account deficit. An undervalued RMB is bad for our economy and bad for the world

But I believe focusing so heavily only on Chinese currency revaluation is a mistake.
Revaluation by China alone will not make our trade or current account deficit vanish. Japan,
Korea, and other Asian countries also depress the value of their currencies. And there are deeper
domestic problems that fuel our current account deficit than currency valuations.

So what do we do? First, we should get our trading partners to the table to forge a
solution that gets China — as well as Japan, Korea, and other Asian economies — to end
currency interventions. A large, diversified economy like China should not be playing games
with currency values. We also need to help foster growth in the sluggish economies of Europe
and Japan.

Second, we have to recognize that our economic problems begin at home. Our problems
are not simply that Europe grows too little or that Asians save too much, as the administration
likes to claim.

In truth, our economy has become less able to handle the challenge posed by a rising
China. We need to get our national house in order, and we need to do so now. It is time to stop
talking about reducing our budget deficit. We need to take steps to do so now.

I’m tired of just talking about how we’re losing our competitive edge. We need to take
steps now to improve basic education, train more scientists and engineers, increase research, and
rein in health care costs.

There’s not a CEO I meet with who doesn’t say that rising health care costs is a top
concern. And I’d be surprised if that’s not true of every member of this committee. What is the
administration’s plan? Again, they have none.

These are things that America must do to confront that challenge of a rising China. And
these are things that America must do for its own sake. We should continue to deepen our trade
relationship with a growing and more competitive China. But we should ensure that China plays
by the rules. And we should also ensure that America’s economy and America’s workers are the
best that they can be.

I look forward to hearing from the witnesses on these important issues.

# # #