January 10,2006

U.S. Senator Max Baucus (D-Mont.) Keynote Address before the U.S.-China Business Council - Beijing, China

“The Virtues of Trade”

Some 2,250 years ago, the philosopher Xun Zi extolled the virtues of China’s trade:“In the far north, there are fast horses and howling dogs; China acquiresand breeds them and puts them to work. In the far south, there are feathers, tusks,hides, pure copper, and cinnabar; China acquires them and uses them in itsmanufactures. In the far east, there are plants with purple dye, coarse hemp, fish,and salt; China acquires them for its food and clothing. In the far west, there areskins and colored yak’s tails; China acquires them for its needs.

“Thus the people living in the lake region have plenty of lumber, and thoseliving in the mountains have plenty of fish. The farmers do not have to carve orchisel, to fire or forge, and yet they have all the tools and utensils they need. Theartisans and merchants do not have to work the fields, and yet they have plenty ofvegetables and grain. . . . That is what is called a state of godlike order.”

Today, the virtues of China’s trade are as evident as ever. The commodities have changedin the last 2,250 years. But China’s commercial reach continues to the four points of thecompass.

From the north, China acquires iron, wood, and fuels from Russia. From the south, Chinaacquires nickel from Australia. From the west, China acquires chemicals, printingmachinery, and vehicles from Germany. And from the east, China acquires integratedcircuits, semiconductors, and computer parts from the United States, Japan, and Korea.

And, in turn, China sends computers, TVs, and sewing machines to Asia, Europe, and theUnited States. China sends auto parts to the U.S., Canada, Japan, Mexico, andincreasingly to Asia. And China sends textiles and shoes to the U.S. and Europe.

This burgeoning trade allows consumers in the U.S. and China alike to benefit fromplentiful supplies of goods. Freer trade generally has increased U.S. national income bynearly $1 trillion a year. Freer trade has increased the average U.S. household’s incomeby nearly $10,000 a year. Freer trade with China alone saves U.S. households $600 eachyear.

And the engine of freer trade helps drive the world’s economy. A week ago, the Chinesestate planning agency reported that China’s economy grew by 9.8 percent last year. Andthe latest numbers show that the U.S. economy grew by about 4 percent last year. Insome recent years, China and the United States have accounted for more than 40 percent— nearly half — of the entire world’s economic growth.

This economic growth has lifted millions out of poverty. It made more food, goods, andservices newly available to millions of people. And it has helped to contribute to worldstability and wellbeing.

I am a friend of freer trade. I stand before you today, a former Chairman — and Godwilling, a future Chairman — of the U.S. Senate Finance Committee, in large partbecause of my interest in international commerce.

And I am — and have long been — a friend of China. And my friendship with China andmy interest in international trade stretch back some 43 years ago.

It was 1963. Charles De Gaulle vetoed the United Kingdom’s entry into the EuropeanEconomic Community. The Kennedy Administration banned U.S. travel to Cuba. Kenyabecame independent.

I was a student at Stanford University. I wanted to learn more about other countries. But Idid not get as much out of Stanford’s tour of Paris as I had hoped. So I decided to travelaround the world. Among other places, I came to Hong Kong. I remember that first tripfondly to this day.

I credit that trip with my coming to work in the United States Government. That trip hada lot to do with why I became the Chairman and now the Ranking Minority Member ofthe Senate’s Finance Committee. I recognized then that this is one world. And it isgetting smaller. And we have all got to learn to live together. And no one nation has amonopoly on virtue or morality or religion. And so I decided that I wanted to go intopublic service. And I decided that I wanted to help people to get along.

In the 43 years since, I have continued to be a friend of U.S.-China relations. In the early1990s, I fought for the United States to end the process by which it annually reviewedChina’s Most Favored Nation trade status — what we now call Permanent Normal TradeRelations. Along with a handful of other Democrats, I signed a letter along withRepublican Leader Robert Dole to the first President Bush saying that we would supporthis veto of legislation to withdraw China’s Most Favored Nation status. And I worked tohelp defeat that legislation.

I was a Congressional Leader on China’s joining the World Trade Organization. I urgedthe first Bush Administration and the Clinton Administration to set an aggressive agendaand move forward. In that effort, I included a particular focus on key agriculture issues. Iremember discussing China with President Clinton in the private residence of the WhiteHouse. I told him that the United States had to treat China with the deference and respectdue another major power.

And I was a Congressional Leader on legislation to provide Permanent Normal TradeRelations to China in 2000.

In the course of this relationshsip, I have met with President Jiang Zemin and PremierZhu Rongji. And I am enjoying an excellent round of meetings with the currentadministration.

I am pleased that our relationship with China is maturing. I believe that when futurehistorians write about the 21 st century, they will write largely about the relationshipbetween China and the United States, and that relationship's effect on the rest of theworld. It is important that the United States and China be friends. Where we differ, weshould work constructively, in the right way. In the Analects of Confucius, the Mastersaid: “To attack a task from the wrong end can do nothing but harm.”

China is a dynamic world power. China will likely become the world’s largest economywithin a matter of some few decades. China’s influence in Asia and the world is on therise.

Now some in the United States may view ascendant China as a threat. Some may viewChina as a power that needs containment. And some may have argued that the UnitedStates must threaten to raise tariffs on China to get China to allow its currency to float.I believe that these voices call for us “to attack a task from the wrong end.” I believe thatthis course would “do nothing but harm.”

China is a sovereign country. China has its own interests, just like any other country. TheUnited States should not perceive China as a threat. Instead, the United States shouldrecognize China for what it is — a very large country trying to develop quickly, whilemaintaining social stability.

I do not believe that China has hostile intentions toward its neighbors. The leaders ofChina are astute enough to devote their time and energy to China’s internal challenges. Ibelieve that China has watched the post-war development of Japan, Germany, and Korea.I believe that China has drawn the conclusion that economic growth is the surest andmost durable path to power and prestige.

In September, Premier Wen gave a speech in which he said that China poses no threat toother countries. Premier Wen said that China has no intention to seek hegemony. InDecember, the Chinese government published a foreign policy white paper reiteratingthat China has no desire for confrontation. The paper cited China’s need for foreign tradeand peaceful international relations to continue to develop.

That white paper fits neatly with the argument that U.S. Deputy Secretary of StateZoellick made in New York City in September. Secretary Zoellick argued that Chinashould become more of a “stakeholder” in the international system. China has derivedmuch benefit from the international system. China should work to strengthen it. And Iassociate myself with Secretary Zoellick’s remarks.

Yes, there is some anti-China sentiment in Congress. But there are many of us inCongress who want to work for a more rational policy toward China. To achieve thatmore rational policy, China must recognize that it can help to shape America’sperceptions of China. And China can do this by taking steps that from my perspectivealso appear to be in China’s own self-interest.

I am not a protectionist. But I am also not an apologist. In the spirit of constructivefriendship, let me suggest several steps that China could take that would further its owninterests. At the same time, these steps would advance China’s relations with the UnitedStates.

China can take steps to reduce its trade deficit with the United States. China can movemore rapidly to revalue its currency to reflect its value on the market. China can furtheradvance financial services liberalization. China can foster greater domestic demand forgoods and services.

China needs to address intellectual property issues more aggressively. Piracy andcounterfeiting are at unacceptable levels. They must come down significantly.

China’s leaders must hear this all the time, from every American official who visits,elected or appointed. Let me explain why. China’s comparative advantage ininternational trade rests largely in its low labor costs. These make China a fiercecompetitor in the global marketplace. America finds its comparative advantage largely inits strong culture of innovation. And the way to capture the value of innovation is throughintellectual property.

China has taken some steps in the right direction. For instance, last July, it committed touse legitimate software in all government offices by the end of 2005 and in all state-ownedbusinesses by the end of 2006. This is a good move. It provides a concretebenchmark by which China can demonstrate progress in protecting intellectual propertyrights. But it is only a step. Much more work must be done on enforcement of intellectualproperty rights, and I hope to see more tangible progress soon.

There are also questions about China’s compliance with other WTO commitments. I urgeChina to continue its efforts to implement these obligations in a timely manner. Includedin those commitments, China needs to rely on sound science as the basis for animal andplant health measures. It should not restrict agricultural imports on non-science-basedgrounds. It should end its ban on imports of U.S. beef.

And I hope China will ensure that regulatory procedures do not undermine market accessin key services sectors, like telecommunications, distribution, and banking.

This is tough work for China. But it is also difficult for the United States. We need to doa better job of monitoring and enforcing China's trade commitments. To do so, I urge mygovernment to detail more trade experts to our embassy in Beijing -- dedicated to tradecompliance and enforcement.

China can also broaden democracy, moving up from local levels. China can reform itsjudiciary and increase respect for the rule of law. China can open its government andincrease freedom of the press.

Each of these steps will help China. Because of China’s new role in the world economy,it has an interest in having a more liberal economy with a more adaptable currency. It hasan interest in keeping trade imbalances from leading to precipitous rebalancing.

With its economy growing at rates in excess of 9 percent, further liberalization will beunlikely to cause disruption. And liberalization will yield benefits in added economicopportunity for the Chinese people. And China has shown signs that it understands thatits interests lie in greater liberalization.

China has taken some noteworthy steps in recent months to liberalize capital flows,strengthen its financial system, and move toward a market-based exchange rate regime.

Taken together, these reforms create positive momentum and encourage bolder action inthe future. China will benefit itself if it takes further steps along that road.

And when China takes such steps to further liberalize, it will help those of us in the U.S.Congress who wish to avoid pursuing relations with China “from the wrong end.” U.S.politics on China will become unmanageable if China’s trade deficit with the U.S.

continues to grow. All indications are that the deficit last year exceeded $200 billion.That is a 25 percent increase over the previous year. And that is nearly 30 percent of thetotal U.S. trade deficit.

I am not seeking to fix blame for the trade imbalance. The imbalance exists. And it is anirritant in U.S.-China relations. It is in China’s interests to make concrete progress inreducing the trade imbalance.

Otherwise, Washington may take measures to reduce the trade imbalance by reducingChinese exports to the United States. And that is an outcome in neither party’s interest.

That would be “attacking a task from the wrong end.”

China is a responsible power. China benefits from the peaceful economic system. Tryingto address challenges from the right end is what responsible powers do.

Let me acknowledge that the United States has steps that it must take, as well, to helpreduce the trade deficit. We must reduce our federal budget deficit. We must reduce thedrain that government borrowing puts on financial markets. I believe that the UnitedStates is again turning the corner on fiscal policy. And I will join in that effort.

Our two economies are linked. China is the United States’ third largest trading partner,after Canada and Mexico. Last year, China was our second largest source of imports. Lastyear, China was our fifth largest export market.

And as Secretary Zoellick said, China “does not seek to spread radical, anti-Americanideologies.” China “does not see itself in a twilight conflict against democracy around theglobe.” China “does not see itself in a death struggle with capitalism.” “And mostimportantly, China does not believe that its future depends on overturning thefundamental order of the international system. In fact, quite the reverse.”

China has benefited mightily from the world’s open, rules-based international economicsystem. The U.S. market is central to China’s continued success. And U.S. businesseslook to millions of Chinese consumers as an economic engine of this century.Seven U.S. presidents have now come to view positive relations with China as central toAmerican foreign policy. Generations of U.S. leaders have worked to help integrateChina as a full member of the international system.

We are economic partners. We share interests in a non-nuclear Korean peninsula. Weshare a common concern with radical terrorists. We share interests in lifting people out ofpoverty. And we share interests in combating global disease.

The alternative to cooperation is simply to “attack a task from the wrong end.” Thealternative to cooperation would “do nothing but harm.”

I can sum up the United States interest in China with a quote from another economicphilosopher, the late U.S. Senator from Montana, Mike Mansfield. Mike studied Asiabefore most did in America. And in World War II, in 1943, he said: “We must realize justhow much we need China, and we must not forget our future lies, in large part, in thePacific.”

I want to thank the U.S.-China Business Council and the AmCham China for thisopportunity to speak. Thank you for efforts to assist firms entering China to do business.Thank you for your efforts to advance the interests and needs of U.S. firms doingbusiness here. Thank you for your cooperation over the years. And thank you for yourcontinued good work on navigating U.S.-China trade policy.

Together, let us continue to work to ensure that the benefits of freer trade can beenjoyed by the people of both China and the United States. Let us help to ensure thatChina and the United States pursue our relationship from the right direction, asresponsible powers do. And let us work for our common future, together, on theOcean called “Pacific.”

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