The U.S.-China Relationship: The Truth Behind the Rhetoric
Asia Society CEO Forum Luncheon

Thomas J. Donohue
President and CEO, U.S. Chamber of Commerce

New York, February 26, 2004

U.S.-ASIAN-PACIFIC RELATIONSHIP

Ambassador Platt, thank you for your kind words and for the important work that the Asia Society does to promote understanding and cooperation between America and Asia. Following last night’s dinner, I’m pleased to have this opportunity to continue a discussion on the importance of strengthening the U.S.-Asia economic relationship.

The Asia-Pacific region is tremendously important to the U.S. Chamber because many of our members are interested in doing business there—or already are and want to do more.

And with good reason. The economies of Asia today look much different than those of the late 1990s, when the currency crisis in the region convinced many U.S. businesses that it was a better bet to invest their dollars in Europe, Latin America, or anywhere but Asia.

Today, U.S. businesses are encouraged by an Asian economy that is opening up to the rest of the world, growing at a healthy rate, and helping to lead the global economy back from the downturn at the beginning of the decade.

As our own economy improves, the United States and Asia are presented with a great opportunity to grow and create jobs and to demonstrate leadership in the world economy.

The Chamber helps facilitate the growth of commercial ties between U.S. and Asian companies in several different ways.

Our Asia Department helps companies compete in Asia by identifying opportunities and challenges, facilitating contacts with senior officials, and presenting business views to lawmakers and regulators.

In fact, the Chamber’s Senior Vice President, Chamber staff, and 15 leading U.S. companies recently returned from a week-long mission to Beijing and Shanghai. I’ll talk about the issues they addressed in a moment.

The Chamber also operates an Asia Task Force comprised of more than 300 companies and associations, whose engagement in Asia’s many diverse markets is supported by 21 American Chambers of Commerce scattered across the Asia-Pacific.

And finally, the Chamber runs bilateral business councils such as the U.S.-Korea Business Council, the U.S.-India Business Council, and the Hong Kong-U.S. Business Council—all of which are important vehicles for serious commercial activity and policy advocacy in those markets.

These business contacts are paving the way for stronger trade ties between the U.S. and Asian countries. Have you noticed where the U.S. government is focusing its attention these days when it comes to forging new bilateral trade deals? In Asia.

Following last year’s successful free trade agreement with Singapore, the U.S. just came to an agreement with Australia and launched negotiations with Thailand.

And certainly, as the U.S. looks to bolster its bilateral relations, we must also continue to encourage intra-regional free trade talks that will create market-opening dynamics benefiting all of the Asia-Pacific.

U.S.-CHINA RELATIONSHIP

Almost any conversation about Asia inevitably veers toward China because of its potential to completely reshape the competitive balance in Asia and, indeed, throughout the world.

Here in the U.S., there is talk about China on the presidential campaign trail, in the boardroom, and in union halls. So that is why I would like to focus my remarks today on China and what it represents to the U.S. and our competitiveness.

There is no doubt that China's enormous domestic market, abundant labor supply, manufacturing prowess, and significant cost advantages have fundamentally improved its own economy—8.3% growth last year—changed its relationship with the U.S., and even changed the way in which business is done globally.

The China genie is out of the bottle, and there’s no putting him back—nor would we want to even if we could.

China is looking to U.S. companies to help fulfill its huge growth demands—in energy, infrastructure, aviation, medical improvements, and other areas.

U.S. firms operating in China report strong sales and financial performance from their operations there. Last year, in a survey by the American Chambers of Commerce in Beijing and Shanghai, three-quarters of responding businesses reported that their China operations were profitable, and nearly three-quarters said that China profit margins equaled or exceeded the company’s world profit margins.

With the great focus on Chinese exports into the U.S. market, it’s important to remember that Sino-foreign joint ventures or wholly foreign-owned enterprises contribute to roughly 65 percent of China’s total exports, and more than half of its exports involve the processing of imported material or parts, where profits flow to foreign companies.

Tremendous growth in China and in other Asian countries like India has triggered fundamental realignments in global production patterns and trade flows—and energized opponents of globalization, the bilateral relationship, and China’s WTO accession.

China’s currency peg, the use of outsourcing by American companies, and the large trade deficit are convenient arguments for those who are eager to blame China for our economic challenges and who would like to see our commercial relationship with China rolled back.

In a presidential election year, these arguments are getting lots of ink and airtime. I’ve appeared on several national news media shows to address these issues, and I’m sure I’ll do lots more as the general election approaches.

Two Focal Points: Outsourcing and China’s Currency

Today, I’d like to discuss two issues that are focal points in the debate over China and globalization—the phenomenon of outsourcing and the Chinese currency regime—and a third—China’s WTO accession—that has overarching implications for our relationship.

In an election year, you can always count on the candidates to jump on a politically charged issue that will grab headlines and resonate with a targeted group of voters. Unfortunately, often times it’s a complicated issue boiled down to soundbites.

This year, that issue is outsourcing, and you need only look at the reaction to remarks made by the Chairman of the President’s Council of Economic Advisors a couple of weeks ago to understand just how politically charged this issue is.

What he intended to say but maybe did not articulate clearly was that offshore outsourcing provides our businesses with the flexibility, quality, and fiscal control they need to stay competitive.

Outsourcing has always been a component of the global economy, but it’s grabbed the public’s attention now because the number and types of jobs being sourced overseas are increasing as the exchange of people, products, capital, and ideas sweep the globe with gathering speed.

But outsourcing does not travel on a one-way road.

Consider that Indian and Chinese entrepreneurs alone head 29% of Silicon Valley’s technology businesses…or that foreign automobile makers such as Honda, Toyota, Nissan, Mercedes Benz, and BMW produce cars here despite lower wages abroad…or that 6.4 million U.S. jobs are created by foreign multinational companies operating in the U.S.

Yes, U.S. manufacturing jobs have disappeared…but not to China or anywhere else. In fact, since 1995, China itself has experienced a net loss in manufacturing jobs! So where have the U.S. manufacturing jobs gone? You can credit tremendous increases in American productivity.
Here’s just one example that continues to amaze…25 years ago it took GM about 500,000 workers to make 5 million cars and trucks. Today it takes fewer than 150,000 workers to make that same number of vehicles.

It is true that some U.S. service jobs have been outsourced, and we will likely see more move overseas in the years ahead.

But the worst-case outsourcing scenarios predict that just 2% of our workforce will be affected in the next 15 years – a figure that certainly should not be discounted, but one which cannot be characterized as a crisis in a $10 trillion economy that generates 2.2 million new jobs every year.

In return for those jobs, U.S. firms achieve greater profits and cost savings, which are passed onto consumers in the form of lower prices and to shareholders in the form of increased dividends and higher stock prices.

And increased earnings from outsourcing are reinvested in the United States, creating the next wave of high-tech industries and jobs here at home.

In fact, a highly regarded study by the McKinsey Global Institute finds that for every dollar of expenditure that is sent offshore, an additional $1.42 is created in wealth. More importantly, the study estimates that $1.12 of this additional value accrues to the United States.

Offshore outsourcing also creates new customers abroad, as new and higher paying jobs overseas mean increased purchasing power of workers in those countries.

We’re going to hear a lot more about outsourcing this election year.

To redefine the debate, the Chamber is leading a coalition to examine this phenomenon and to ensure that the full story is told.
The other issue that has attracted attention of late is China's currency, which some suggest is pegged to the U.S. dollar at an artificially low exchange rate, thus preventing U.S. goods and services from being more competitive with Chinese goods and services and helping to drive our trade deficit with China – which was over $120 billion last year.

Let’s be clear. We believe that currency exchange rates are best left to market forces – and movement in that direction by a number of countries, including China, would be helpful. But as I’ve discussed this issue, including with Chinese Premier Wen last fall, I’ve emphasized that we should be taking an evolutionary, not a revolutionary course.

A dramatic shift in the exchange rate could produce unintended consequences, particularly in light of China’s fragile banking system.

China’s progress with banking sector reform and the easing of capital controls would certainly encourage a more flexible economic system and underpin China’s overall reform efforts.

But those in my country who believe that revaluing a currency will single-handedly close a trade gap or rejuvenate manufacturing have little evidence to back up their position. Nothing in trade, economics, or life is that simple!

In seeking to address the trade deficit and to generate more U.S. jobs, the way forward is not to develop measures to constrain Chinese imports, but to make sure we expand U.S. exports to a more open Chinese market. Premier Wen himself has made this point and I intend to hold him to it!

THE REAL ISSUE – WTO COMPLIANCE

The trade deficit, the impact of an undervalued Chinese currency, and the challenges created by Chinese import competition are all real issues and require continued U.S. engagement with China. Central to these issues and to the overarching relationship is China’s ability to follow through with its WTO obligations. Absent more progress toward fulfilling its WTO commitments, concerns about China will only rise.

Implementation of China’s WTO obligations was always understood to be difficult, and American businesses have never assumed that it would be a short or smooth ride. In some respects, China’s implementation efforts have been impressive, and the rapid growth in two-way trade and investment into China reflects this.

But partial implementation is not what China promised or what the international community and American business can accept.
The U.S. Chamber led the fight to secure permanent normal trade relations with China and to support China’s WTO entry because we saw the opportunity to convert the market’s great potential into present-day, tangible opportunities for U.S. business. We believed China’s WTO entry would facilitate the country’s movement toward a market-based economy based on the rule of law.

One message delivered by the Chamber-led delegation to China earlier this month is the need to see greater transparency across China’s system.

American companies want to consistently have the opportunity to comment in advance on draft regulations and laws so that the ultimate product is clear and does not leave significant discretion over interpretation to Chinese regulators.

The Chamber’s delegation also emphasized the need for China to devote far greater efforts to the enforcement of intellectual property rights (IPR). China’s IPR laws and regulations are significantly improved, but enforcement remains weak. We want to see a reduction in the threshold that determines whether the violation is considered a criminal offense and the establishment of penalties that are tough enough to have a deterrent effect.

The U.S. Chamber has launched a major anti-counterfeiting and anti-intellectual property theft initiative that will educate consumers, businesses and governments on how these threats kill jobs and economic growth, imperil the health and safety of consumers, and fund the activities of terrorist organizations.

Our campaign will have both a domestic and international component, and clearly China ranks at or near the top of the list of countries of concern overseas.

Our message to China is straightforward: Its companies, too, are the victims of IP theft and its efforts to promote innovation, attract knowledge-based industries, and secure continued flows of foreign investment will depend on a successful approach to this issue.

Conclusion

Ladies and gentlemen, the U.S.-China relationship is at a critical phase in its history, and our business and government leaders are faced with some momentous decisions.

Do we engage China in constructive dialogue, or do we try to get our point across through confrontation, isolation, and trade barriers? Do we encourage China’s development and its full participation in the global economy, or do we try to slow its growth out of irrational fears about our own competitiveness?

In this time of challenge and opportunity for the global economy and in U.S.-China relations, the business community must lead the way. Lead the way to a renewed commitment to open markets, a more transparent system based on the rule of law, and business environments in both countries where companies—no matter what their nationality—can grow and prosper.

The American business community is ready and willing to work with China to have a constructive dialogue on all of these issues, and we hope our elected officials do the same.

With a strong effort, we can silence our critics and create a better understanding of the wide-ranging benefits of the U.S. commercial relationship with China.

Thank you very much.