February 03,2005

Speech of U.S. Senator Max Baucus at the U.S.-China Business Council

“The U.S.-China Relationship in 2005: Priorities and Predictions”


“I’m very happy to be here today to share my thoughts on China and the growing U.S.-China economic relationship.

The problem with giving a speech at the beginning of the New Year, and at the start of anew session, is that I am usually expected to make predictions for the year to come. Predictingthe future is a tricky business. I have found that after more than a quarter century in the Senate, Ihave been entrusted with many powers. Unfortunately, clairvoyance is not one of them.I believe we have much to look forward to, and many accomplishments we can celebrate.Let me begin by looking back at our achievements in 2004. I would then like to outline what Ibelieve should be the priorities for 2005 and beyond, both for the United States and for China.


Looking back, 2004 for China was yet another year packed with breathtaking economicprogress. The Chinese economy again expanded by over 9 percent, as it has each year for over adecade. Foreign direct investment, the engine of this growth, again hit record levels – over $60billion last year, making China the world’s principal destination for foreign investment two yearsrunning.

Everyone knows that China has become a major export power – nearly six percent of allexports last year were Chinese. But China is increasingly a major importer and an importantengine of global economic growth. Its growing middle class – now estimated at 230 millionpeople – purchases goods and services not only from Taiwan, Japan, and Korea, but also fromBrazil, Germany, and the United States.

Chinese companies are stepping up plans to expand their global footprint. The mosttalked about recent business deal is not some mega-merger between two Western giants. It isChinese PC-maker Lenovo’s $2 billion acquisition of the IBM PC business.

How did this banner year for China affect the United States? China is now our fifthlargest export market and our second largest source of imports. Both imports and exports aregrowing at twice the rate of world trade.

Three out of four U.S. firms doing business in China were profitable last year. That hasled twice as many companies as last year to plan an expansion of their Chinese operations. Arecent survey found that for nearly one-third of U.S. companies, China was their number onepriority. Half ranked China among their top three.

A recent poll found that American consumers by and large understand the positive impactChina has on the U.S. economy. They recognize that increased productivity in China improvestheir welfare by lowering the price of goods and making their dollars go further. U.S.-Chineserelations have improved to the point where many Americans view China as an ally, not anadversary.


I am confident that we can replicate the successes of 2004 and meet even more ambitiousgoals in 2005 and beyond. But first we must have a strong sense of our priorities and a clear ideaof the policies necessary to realize them. We should reinforce our current success in China,reengage in Asia to match growing Chinese economic and political clout, and retool our owneconomy to meet the challenges posed by an increasingly internationally competitive China.Reinforce Our Successes with China

First, we should reinforce our successes in China. The philosopher Simone Weil said:“The future is made of the same stuff as the present.” If your present is successful, yourambition is to make this true.

Our present successes should be part of our future with China. We can begin byreinforcing and even replicating successful channels of communication like the U.S.-China JointCommission on Commerce and Trade. As you no doubt recall, last year’s JCCT meeting wascritical in resolving a difficult issue involving China’s proposed wireless encryption standard.The JCCT should continue to unravel these knots in our bilateral relationship, and we shouldreinforce its formula of reconciling differences before they become disputes.

We should also reinforce our efforts to ensure China’s compliance with all of its WTOcommitments. On trading and distribution rights, on transparency, and above all on intellectualproperty – we should not be hesitant to enforce our rights.

That does not mean we can’t be creative or proactive in resolving potential disputes. Infact, creativity and forward thinking are critical for dealing with complex issues like technicalstandards and regulation and sanitary and phytosanitary issues. If we do it right, tomorrow’sdisputes should end up on today’s agenda.

Reengage Asia

Second, we should reengage Asia. In recent years, I believe the United States hasallowed Chinese power and influence to grow in Asia to the detriment of U.S. power andinfluence. A strong, healthy, and confident China is in everyone’s interest. But there is noreason why a stronger, more influential China should mean a weaker America.

How do we reengage Asia? We can begin by forging closer trading ties with Asiancountries on a bilateral, multilateral, and sectoral basis. Malaysia is the wealthiest Muslimnation in Asia and was among our top ten trading partners last year. It is well placed as aspringboard to other Asian markets, and its government is eager to forge closer economic tieswith the United States. In my view, it is a prime candidate for free trade negotiations.

Negotiations with Japan and Korea would be more difficult, but the potential benefits aregreater. Japan is the world’s second largest economy, and by far the largest in Asia. An FTAwould help U.S. companies finally penetrate the protected Japanese market and help pull Japan –once and for all – out of its economic doldrums.

Korea is the eleventh-largest economy in the world and our seventh largest tradingpartner. It is a huge market for U.S. products. Many U.S producers now face high hurdles toenter this market, but Korea finally appears serious about reforming its agricultural and othereconomic sectors. I understand that the United States and Korea have begun tentativediscussions on what a U.S.-Korea free trade agreement could entail. I applaud this effortwholeheartedly. It won’t be easy, but if we never try, we’ll never succeed.

Regional trade agreements also offer opportunities to forge closer ties with Asia. Oneready vehicle is the Asia Pacific Economic Cooperation group with its 21 member states,including China. APEC member economies comprise a third of the world's population andapproximately 60 percent of world production. In recent years, APEC summits have focusedmore on security than on trade. We should return APEC’s focus to its core economic mission,perhaps by accepting the challenge of negotiating an APEC-wide free trade agreement.

We should also pursue sectoral initiatives like the hugely successful InformationTechnology Agreement, which itself grew out of APEC. With Asia’s rapidly aging population, asectoral agreement to reduce tariffs and other barriers to trade in advanced medical equipmentseems a natural candidate. The potential benefits for patients as well as for medical equipmentmanufacturers seem irresistible.

Retool the U.S. Economy

Finally, it would be wrong to address our future with China without discussing thechallenges the future will inevitably bring. As China improves its efficiency and continues itscapital investments, U.S. companies and their workers will have to adjust to the increasedcompetition. America must retool its policies to meet this challenge.

How do we retool? We begin with education and training. For over forty years, thegovernment has been helping retrain trade-impacted workers from manufacturing companies andgiving them the skills they need to find new jobs through trade adjustment assistance. In 2002,we expanded eligibility to new categories of workers, created a new health coverage tax credit,and helped older workers with a new wage insurance benefit. Last year nearly 150,000 workerswere helped by these programs, but there is more we could do.

Service industries like computer programming or calling centers also face competitionfrom China and elsewhere, but service workers are not eligible for TAA. With over 80 percentof the U.S. economy comprised of service sector industries, I believe it is only a matter of timebefore we re-write TAA to add benefits for service workers.

Retooling also means investing in today’s ideas for tomorrow’s innovations. Multibilliondollar industries have sprung from federal research and development dollars – fiberoptics, radar, wireless communication, nanotechnology, ultrasound and even the internet were allmade possible with public sector funding.

This lesson is not lost on China. As a percentage of GDP, China is now the third largestspender on research and development – behind only the United States and Japan. In the UnitedStates, meanwhile, federal investment in the physical sciences and engineering, as a percentageof GDP, has actually declined by nearly one-third over the last two decades. We should reversethis trend. The money we spend will come back to us many times over in the creation of newjobs in new industries making products yet to be invented.

Retooling also means investing in basic education that will help unleash the creativity ofour citizens and helps prepare them for the jobs of the future. We’ve got our work cut out for us.A recent study ranked U.S. math students 24th out of 29 industrialized countries. We’ve simplygot to do better. In particular, we should adopt policies to promote the training of more scientistsand engineers. They play a critical role in the development of new jobs and new industries. Yetwe train only half as many engineers as Japan and Europe, and less than one third as many asChina.

Finally, retooling means adjusting our immigration policies to take account of post-9/11realities while still being sensitive to the needs of business. A U.S.-China Business Councilstudy last year noted that delays in processing visa applications for business travelers to theUnited States cost U.S. companies $30 billion between July 2002 and March 2004. We onCapitol Hill are hearing more and more about this issue, despite Administration claims that visaprocessing times are declining.

These three Rs – Reinforce, Reengage, Retool – should be key priorities for the UnitedStates in the upcoming year. My prediction is that as the competitive pressures from China’sdevelopment build in the United States, the chorus of those calling for changes like these willgrow ever louder. That will create the political will to make some of these badly neededadjustments. Now let me give you my impressions about the coming year priorities for China.


I see at least three important issues for China in 2005 – all crucial for growth, continuedforeign investment, and solidifying China’s place as a constructive partner in the world tradingsystem.

First – and most importantly – real action is necessary on intellectual property rightsenforcement. China must follow up its legislative changes increasing penalties for counterfeiterswith genuine and aggressive enforcement on its borders, in illegal factories, and in the infamousand abundant markets. Businesses operating in China point out continued – and often egregious– cases of piracy and counterfeiting. Nothing is safe from this theft, be it software, opticalmedia, clothing, roses, auto parts, even entire passenger cars, electrical switches, medicines, andprocessed foods.

I sense that we may have reached a tipping point on this issue. More articles areappearing in the press about IP violations in China. Business Week’s cover story this weekfocused on it. Many of my colleagues are asking more questions about it.The drumbeat for stronger IP rights is increasing within China, too, as more and moreinnovative Chinese companies seek to protect their investments. China simply cannot hope to bea modern economy unless it protects intellectual property. If China fails to establish adequateprotections, its high-value added manufacturing industries will ultimately falter, fail, or move tosafer shores.

Second, timely compliance with China’s WTO commitments is critical. Considerableproblems remain not only in enforcement of intellectual property rights, but also in the areas oftransparency, telecommunications, services, and taxation. Just yesterday, there were reports thatChina has delayed indefinitely adoption of the already overdue regulations governing foreignfundeddirect sales companies. Repeated failure to meet its obligations will hurt China’sreputation and entail significant political risk.

Third, China’s monetary policy must change. When China first pegged the RMB to thedollar in 1994, China was a relatively small player on the world stage. A peg may have madesense. But now that China is a true global economic power, the peg is distorting currency flowsand aggravating the U.S. current account deficit. I hear conflicting reports of China’s intentionsthis year. It is in China’s interest – both substantively and politically – as well as in the interestof the United States for China to revalue its currency.

Finally, I feel compelled to empha the link between prosperity and stability. Aboveall, trade and investment partners around the world want stability. I am heartened by theresumption of direct flights between Taipei and Beijing, and to read yesterday about China’sgesture in sending senior officials to Taipei for the funeral of Taiwanese politician Koo Chenfu.Further improvements in cross-straits tensions can only be an economic positive for China in thelong-term.


I am optimistic about the coming year. I am confident that focusing on these prioritieswill bring us into 2006 once again astounded by what the past year has witnessed.In closing, I would like to leave you with a challenge. Let this be the last year yourspeaker discusses merely the upcoming year with China. Let us challenge ourselves to viewour potential economic relationship with China in terms of decades and not merely years. Iguarantee you that’s how the Chinese are viewing their relationship with the United States.In 2005, let us think big on China. I am certain that if we do so, we will spend far lessenergy predicting the future and more energy shaping it.”