[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 102-000 deg.
THE EFFECT OF FOREIGN CURRENCY MANIPULATION ON SMALL MANUFACTURERS AND
EXPORTERS
=======================================================================
HEARING
before the
COMMITTEE ON SMALL BUSINESS
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC, JUNE 25, 2003
__________
Serial No. 108-21
__________
Printed for the use of the Committee on Small Business
Available via the World Wide Web: http://www.access.gpo.gov/congress/
house
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COMMITTEE ON SMALL BUSINESS
DONALD A. MANZULLO, Illinois, Chairman
ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York
Chairman JUANITA MILLENDER-McDONALD,
SUE KELLY, New York California
STEVE CHABOT, Ohio TOM UDALL, New Mexico
PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina
JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands
SAM GRAVES, Missouri DANNY DAVIS, Illinois
EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas
TODD AKIN, Missouri GRACE NAPOLITANO, California
SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico
BILL SHUSTER, Pennsylvania ED CASE, Hawaii
MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam
TRENT FRANKS, Arizona DENISE MAJETTE, Georgia
JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia
JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine
BOB BEAUPREZ, Colorado LINDA SANCHEZ, California
CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa
STEVE KING, Iowa BRAD MILLER, North Carolina
THADDEUS McCOTTER, Michigan
J. Matthew Szymanski, Chief of Staff and Chief Counsel
Phil Eskeland, Policy Director
Michael Day, Minority Staff Director
(ii)
C O N T E N T S
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Witnesses
Page
Bergsten, Fred, Institute for International Economics............ 4
Blecker, Robert A., American University.......................... 6
Yagle, Steve, Reliable Machine Company........................... 8
Bender, Jay, National Association of Manufacturers............... 10
Jones, George III, American Forest & Paper Association........... 12
Tashjian, Edward M., American Furniture Manufacturers Association 14
Freedenberg, Dr. Paul, The Association for Manufacturing
Technology..................................................... 16
Johnson, Cass, American Textile Manufacturers Institute.......... 18
Appendix
Opening statements:
Manzullo, Hon. Donald A...................................... 30
Prepared statements:
Bergsten, Fred............................................... 33
Blecker, Robert A............................................ 40
Yagle, Steve................................................. 72
Bender, Jay.................................................. 74
Jones, George III............................................ 79
Tashjian, Edward M........................................... 84
Freedenberg, Dr. Paul........................................ 90
Johnson, Cass................................................ 98
(iii)
THE EFFECT OF FOREIGN CURRENCY MANIPULATION ON SMALL MANUFACTURERS AND
EXPORTERS
----------
WEDNESDAY, JUNE 25, 2003
House of Representatives,
Committee on Small Business
Washington, D.C.
The Committee met, pursuant to call, at 2:09 p.m. in Room
2360, Rayburn House Office Building, Hon. Donald Manzullo
[Chairman of the Committee] presiding.
Present: Representatives Manzullo, Chabot, Graves, Schrock,
Beauprez, McCotter, Velazquez, Napolitano, Bordallo, Majette
and Sanchez.
Chairman Manzullo. Good afternoon, and welcome to this
hearing of the Committee on Small Business. Especially welcome
to those who have come some distance to participate and attend
this hearing.
Last June, we looked at the effect the overvalued dollar
had on our manufacturers and exporters. A year later the dollar
has declined measurably, but not significantly against Asian
currencies. We do appreciate Treasury Secretary Snow's
redefinition of a strong dollar. It has immensely helped many
manufacturers as they compete with Europe and Canada.
The currency overvaluation problem remains primarily with
most of Asia. The U.S. manufacturing base was the hardest hit
by this recession. The U.S. has lost over 2.7 million
manufacturing jobs. For 34 straight months, the United States
has lost manufacturing jobs. In the past 12 months, it has
averaged 53,000 manufacturing jobs per month. I want you to
think about that.
The 16th District of Illinois, which I represent, has been
severely hurt by the downturn in manufacturing. Plants have
been closed. People have been put out of work. Ingersoll
Milling & Machine Company has been the latest company in
Rockford to declare bankruptcy.
During this period, our Asian trading partners have
implemented a strategy of currency undervaluation in order to
gain a competitive advantage for their experts by making them
cheaper. It is estimated that the actions by China, Taiwan,
South Korea and Japan have essentially given their exporters a
20 to 40 percent reduction. This in turn acts as a tax by the
same percentage on U.S. manufacturers and exporters.
Since 1949, the Chinese government has kept its currency
pegged at 8.21 yuan to the dollar. I am sorry. Since 1994.
China has experienced economic growth, gains in productivity, a
large export sector and increased foreign investment, all
factors that would cause its currency to appreciate if it were
allowed to freely move. It is estimated by many economists that
the yuan is undervalued by as much as 40 percent.
Japan has systematically intervened in the currency markets
to reduce the value of their yuan. Manipulation of exchange
rates for the purpose of achieving an unfair competitive
advantage is illegal under international protocols. This
manipulation of the currency market costs U.S. jobs.
Trade is vitally important to this country and was part of
the reason for the economic expansion of the 1990s. It is also
critically important to the small business sector. Small
businesses export their goods overseas, and currency
manipulation has squeezed their profit margins from those least
able to absorb it.
The competitiveness abroad has dramatically decreased
because of currency fluctuations and exchange rates that affect
their prices. The impact has not just been felt abroad. The
overvalued dollar has caused the U.S. to be flooded with cheap
imports. Import penetration has caused domestic manufacturers
to lose market share against foreign products that have a
temporary price advantage.
The effect of this interference is to artificially inflate
the dollar in a blatant attempt to manipulate the market. The
market needs to be determined at a currency rate value.
Government intervention only skews the market and invites
artificial rates that are not reflective of reality. We need to
insure that U.S. firms have a level playing field in the global
market and not be at a competitive disadvantage.
[Mr. Manzullo's statement may be found in the appendix.]
Chairman Manzullo. I now yield for an opening statement by
my good friend and colleague, the Ranking Member, Mrs.
Velazquez of New York.
Ms. Velazquez. Thank you, Mr. Chairman.
Today, the increasing number of imports/exports crossing
over our borders illustrate the dominance of the international
trade market in the global economy. While many factors affect
our ability to participate in the new global economy, exchange
rates play a crucial role. The value of the country's dollar
determines its competitiveness within the international market.
A weak dollar can make a nation's products cheaper in foreign
markets and foreign products more expensive domestically,
therefore, benefiting exporters.
Just the opposite is true for the strong dollar. Products
become more expensive abroad, and foreign products are cheaper
domestically. Unfortunately, U.S. manufacturers have recently
been suffering from these effects, therefore making it more
difficult for the U.S. to successfully compete in markets
overseas.
Sadly, over 2,000,000 manufacturing jobs have been lost
over the last few years, and U.S. exports across the Atlantic
have fallen by $17.6 billion, accounting for half of the total
decline in exports. On top of this, our manufacturers are
struggling with a huge surge in imports, and U.S. economists
predict the market share for market share for imports to
increase even further in 2003.
The effects have been detrimental to U.S. exporters and
small business. Small business dominates the international
commerce, accounting for 97 percent of all U.S. exporters. The
U.S. manufacturing sector and exporters are the ones who bear
the brunt of the nation's overvalued dollar. While the dollar
has, fortunately, begun to weaken among most major currencies,
it still has not depreciated as much as it should have.
One of the major contributors to this problem has been the
exchange rate policies of some of our trading partners who
manipulate currency for competitive purposes. Among these
countries are China and Japan. China's current fixed rate has
created significant hardships for U.S. manufacturers and
exporters. Despite China's substantial economic growth, its
exchange rate remains the same as it did when it was set in
1995.
Many economists estimate that China's currency is
undervalued by 40 percent. This has contributed to our nation's
large trade deficit and the relocation of thousands of U.S.
jobs to foreign countries. In addition, Japan, who operates on
the floating exchange rate, frequently intervenes in the
foreign exchange markets, weakening Japan's yen against the
U.S. dollar.
The exchange rate practices of these two countries has put
U.S. manufacturers and exporters at a clear disadvantage.
However, while pointing out that these policies are creating
hardship for their success, many U.S. corporations are
relocating affiliates to these countries in order to take
advantage of the low costs. By using these foreign locations
versus U.S. exports to deliver the products to foreign markets
and setting up export facilities in China, these businesses
play into the growing trade deficit. This results in the loss
of U.S. jobs. It is fair to say that they may be contributing
to the problem, too.
As the foreign trade market continues to grow and expand,
it is crucial that we do all we can to protect our nation's
exporters and manufacturers. Actions such as Secretary Snow's
recent support for the market based floating exchange rate for
China are a step in the right direction. We must continue to
engage these countries in an effort to prevent them from
manipulating these policies.
The U.S. cannot afford to lose out on the benefits of the
new global economy, but our manufacturers cannot afford to
continue carrying the weight of these unfair policies. The
prosperity and success of not only the U.S., but also of its
trading partners, depend on fair policies that seek to balance
the needs of our country with our leading role in the world
economy.
Thank you, Mr. Chairman.
[Ms. Velazquez's statement may be found in the appendix.]
Chairman Manzullo. Thank you. Before we get to our
witnesses, we welcome the newest Member of the Small Business
Committee, Thaddeus McCotter from Michigan.
Thaddeus, why not take 90 seconds and tell us about
yourself. You can get your name out in 90 seconds.
Mr. McCotter. Yes. Thaddeus McCotter, Michigan 11. Mr.
Chairman, Members of the Committee, I say to you the same thing
I said to my wife on our twelfth wedding anniversary. I am just
happy to be here. Thank you.
Chairman Manzullo. And we are glad that you are here. That
is pretty brief.
The rules are there is a light in the middle of the table,
and when it is green you are fine, when it is yellow you are on
thin ice, and when it is red you have fallen through the ice.
We will ask if you could follow that. You do not have to read
word for word. The statements of all the witnesses will be made
part of the record.
Anybody else who wants to make a statement made part of the
record here are the rules. It cannot exceed two pages in single
type. It has to be at least 10 point type. No attachments or
anything because these are printed at government expense. If
you want to have anything put into the record just get it to
our staff, and we will be all set here. Staff will take care of
it.
Our first witness is Fred Bergsten, Director, Institute for
International Economics. We look forward to your testimony.
You might have to pull that mike up a little bit closer
there.
STATEMENT OF FRED BERGSTEN, DIRECTOR, INSTITUTE FOR
INTERNATIONAL ECONOMICS
Mr. Bergsten. Thank you, Mr. Chairman. I thought my
comparative advantage, since you have lots of experts that will
tell you about the plight of small business with the dollar, is
to lay out the overall situation and suggest some policy
changes that might help deal with them.
The facts first. From 1995 until about 16 months ago, the
dollar rose by a trade weighted average of 35 to 50 percent,
depending what index you used. The rule of thumb is that every
one percent rise in the average exchange rate of the dollar
leads to an increase in our trade deficit of about $10 billion
with a two-year lag, so a rise of 40 percent or so in the
dollar explains the great bulk of our existing trade and
current account deficits of $500 billion and rising rapidly.
This, incidentally, comes on top of a net foreign debt
position of the United States that has already hit $3 trillion
and is rising very rapidly. To finance our current account
deficit and our own foreign investments, we have to import $4
billion of foreign capital every working day. It is clearly a
unsustainable situation.
Fact two. As a result, I believe, the dollar has,
therefore, begun to come down as you mentioned. Over the last
16 or 17 months, it has come down, but by a trade weighted
average of only 10 to 20 percent depending on again what index
you use, so the run up of the previous six and a half year bull
market in the dollar, the reversal has only accounted to
something like one-third to at most one-half of the earlier run
up.
There have been no noticeable adverse effects of that
dollar decline on the U.S. Inflation is at very low levels.
Interest rates are at 50 year lows. It has been very smooth,
very gradual, very orderly, i.e., those who feared a decline of
the dollar have nothing to worry about. However, as I say, it
has only gone one-third to one-half of the previous run up.
Now, at my institute we do extensive analysis of all this,
and we have concluded that the U.S. current account deficit, to
be sustainable, would have to be cut in about half from where
it is now. Instead of $500 billion to $600 billion, $250
billion to $300 billion. That is still a big deficit. We think
that would be sustainable, but that would require a decline of
the dollar of 25 to 30 percent from where it started, again
leading to the conclusion that it has only come down by about
one-half what is needed.
I want to leave you with conclusion number one. The current
account deficit needs to be cut in half. The dollar exchange
rate is moving in the right direction, but it has only gone
about halfway.
The other crucial point is that the decline of the dollar
so far has been very unbalanced. The dollar has come down 30 to
40 percent against the euro, only 15 percent against the yen,
zero against the Chinese renminbi, so it has been quite
unbalanced, and one could expect the Europeans to start
screaming, and rightly so, if that pattern continued in the
second half of the dollar decline.
My punch line, therefore, is that not only does the dollar
have to go down another 10 or 15 percent on average, but the
composition needs to change. It needs to come down particularly
against the Asian currencies of which the two most important
are the Japanese yen and the Chinese renminbi.
Now the problem with Japan, as you mentioned, is that they
are resisting the necessary adjustment very vigorously. They
put, depending how you define it, $33 billion to $43 billion of
intervention into the market in the month of May alone to keep
the yen from rising further and contributing to the adjustment.
I asked one of my close Japanese friends, the former Vice
Minister of Finance, ``Mr. Yen,'' Eisuke Sakakibara, last week
where he thought the yen would be in the absence of that
intervention. He said at least 10 yen higher, 10 percent
higher, closer to 100, which is the eventual level that I think
it needs to rise to. There is a lot of debate as to whether
this Japanese intervention is effective. Mr. Yen thinks it has
been. I think it has been. I would leave that for you.
Secretary Snow has been very clear. Every statement he has
made indicates the exchange rate should be set by the market.
The huge Japanese intervention obviously distorts that, so my
suggestion to the Secretary is that he should tell the Japanese
that in the future for every dollar they buy to keep the dollar
strong he should tell them he will sell a dollar to offset it,
to neutralize the intervention's effect and thereby to revert
the exchange rate outcome to the market, which is his stated
policy.
There is even a theory called the theory of the second best
in economics that says when there is one governmental
distortion that distorts a market a second governmental
intervention to offset that is theoretically called for and
justified, so I would suggest offsetting U.S. intervention to
make sure the rate is set by the market.
I believe, frankly, that if we let the Japanese know we
were contemplating that they would cease and desist, the yen
would rise, and that part of the adjustment would be supported.
The second big issue is the Chinese currency.
Chairman Manzullo. You have a red light there, Fred.
Mr. Bergsten. Can I give you one more minute?
Chairman Manzullo. Okay.
Mr. Bergsten. The Chinese peg to the dollar is important
not only because it averts adjustment vis-a-vis China itself,
but because I believe it blocks currency adjustment in the rest
of Asia.
The reason is that all the Asian countries fear competition
from China above everything else, but if the Chinese currency
is riding the dollar down as the dollar declines, China is
becoming even more competitive, worsening the situation and
making it even harder for Korea, Taiwan, even Japan, to let
their currencies go up and accept adjustment against those, so
the Chinese fix is of crucial importance not just for China,
but for the whole region.
Therefore, Secretary Snow again has said the right thing.
China should let the currency appreciate. I believe that is
crucial. That should be the second key pillar of our policy
going forward to achieve both the rest of the needed adjustment
and do so in a balanced and, therefore, much more feasible way.
Thank you.
Chairman Manzullo. Thank you.
[Mr. Bergsten's statement may be found in the appendix.]
Chairman Manzullo. Our next witness is Dr. Robert Blecker,
Professor of Economics at my alma mater, American University,
and a research associate at the Economic Policy Institute.
You did not know that, did you?
Mr. Blecker. No, I did not.
Chairman Manzullo. Yes. Are you not impressed?
Mr. Blecker. It is good to be before your Committee.
Chairman Manzullo. There you are. Good to be here. We look
forward to your testimony.
STATEMENT OF ROBERT A. BLECKER, PROFESSOR OF ECONOMICS,
AMERICAN UNIVERSITY, AND RESEARCH ASSOCIATE, ECONOMIC POLICY
INSTITUTE
Mr. Blecker. Thank you very much, Mr. Chairman and Members
of the Committee. I do appreciate the invitation to testify
here.
Chairman Manzullo. Could you pull the mike closer to you?
Mr. Blecker. I do appreciate the invitation to testify here
this afternoon.
Mr. Chairman, there has been much attention in the last few
months to the falling value of the dollar. However, while
attention has been focused on the dollar's fall relative to the
euro and a few other major currencies, less attention has been
paid to the fact that the dollar has fallen much less or not at
all compared with many other currencies of our other important
trading partners.
Especially, the dollar has not fallen nearly as much
relative to the Japanese yen and has a fixed or managed
exchange rate with the Chinese renminbi, the Taiwanese dollar
and certain other Asian currencies due to the currency
manipulation practiced by their governments. As a result, the
dollar has not fallen nearly enough overall to undo the damage
caused by its overvaluation for the past several years.
According to my statistical estimates, the rise in the
dollar up to 2002 caused the following damage: First, a loss of
three-quarters of a million U.S. manufacturing jobs; second, a
decline in profits on U.S. manufacturing operations of about
$100 billion per year; and, third, a reduction in capital
expenditures at U.S. manufacturing plants of over $40 billion
at an annual rate and, second, as Fred Bergsten has already
testified, a major contribution to the enormous U.S. trade
deficit.
Although my statistical analysis does not distinguish U.S.
manufacturing businesses by size, I believe that small
businesses are likely to be disproportionately hurt by the
overvalued dollar because small businesses tend to be less
multinational in scope and, hence, have less of an ability to
produce or source products overseas. If small businesses do
shift production or outsource abroad as they are often forced
to in this currency environment, the result is still a loss of
American jobs that can devastate local communities.
Furthermore, the fact that the high dollar has led American
manufacturers to cut back their investment spending portends
slower growth and reduced technological innovation in these
industries in the future.
For all these reasons, the recent decline in the dollar to
a more reasonable level relative to the euro, the British
pound, the Canadian dollar and a few other currencies gives a
ray of hope for the U.S. manufacturing sector to begin a
recovery. However, this ray of hope is significantly dimmed by
the partial nature of the dollar's decline to date.
The countries that have let their currencies rise the most,
chiefly the Europeans and Canadians, account for less than half
of U.S. trade overall and much less than half of our trade
deficit. Even in regard to those currencies, the dollar has
lost only part of the value it gained between 1995 and 2002.
However, the situation is worse with Japan and other East Asian
countries that actively manipulate their currency values, yet
account for more than half of the U.S. trade deficit.
The dollar has fallen only about 12 percent versus the yen
since February 2002, compared with about 27 percent versus the
euro. China, Taiwan and many other developing nations maintain
pegged exchange rates, thus preventing their currencies from
rising to market determined levels.
The major East Asian countries have amassed reserves of
well over $1 trillion U.S. dollars in their efforts to keep
their own currencies undervalued and maintain artificial
competitive advantages in the U.S. market. Such intervention
has grown in intensity in the past few months as the dollar has
fallen relative to the other currencies.
In response to these policies, the United States needs to
take strong measures to pressure our leading trading partners
in East Asia to abandon their currency manipulation and allow
their currencies to rise to market levels. The Secretary of the
Treasury should use his authority under U.S. law to investigate
foreign currency manipulation and negotiate with trading
partners that obtain chronic trade surpluses with us by
undervaluing their currencies.
I believe we also need to make the maintenance of realistic
equilibrium exchange rates a condition for trade liberalization
and market opening agreements. I would urge that all future
trade agreements include prohibitions on currency manipulation
and that this issue be given a priority role in future trade
negotiations such as in the WTO and proposed FTAA.
Of course, the United States should not be indifferent to
the fact that rising currency values can threaten economic
prosperity in other countries, but the right solution to this
problem is to encourage our trading partners to stimulate their
own domestic economies rather than to keep the dollar
overvalued and let them achieve export led growth at our
expense.
Thank you very much, and I would be happy to answer any
questions.
Chairman Manzullo. Thank you.
[Mr. Blecker's statement may be found in the appendix.]
Chairman Manzullo. Our next witness is Steve Yagle. Steve
is president of Reliable Machine. He is my constituent and
comes from Rockford, Illinois. I have known him since he was
about 14 or 15. He has grown up.
Steve represents the Rockford Area Chamber of Commerce
Manufacturing Council and the 250 manufacturers that are part
of the Chamber's membership, as well as the 1,200 manufacturers
in the four county region of Winnebago, Boone, Ogle and
Stephenson Counties in northwest Illinois. We look forward to
your testimony.
STATEMENT OF STEVE YAGLE, PRESIDENT, RELIABLE MACHINE COMPANY
Mr. Yagle. Thank you, Mr. Chairman and Members of this
distinguished Committee. I am pleased to be here to testify
before you today, and I thank you for the opportunity to
discuss issues relating to trade with Asia. I applaud your
efforts to gather information and data regarding currency
valuation.
Again, my name is Steve Yagle. I am president of Reliable
Machine Company in Rockford, Illinois. We employ 50 hardworking
individuals, and we consider ourselves a neighborhood
manufacturer. I am here today representing the Rockford Area
Chamber of Commerce, which I am the chairman of the
Manufacturing Council, and 250 manufacturers that are part of
the Chamber's membership, as well as 1,200 manufacturers in the
four-county region of Winnebago, Boone, Ogle and Stephenson
Counties in north-central Illinois.
Even as we battle to reduce our costs and to keep our
skilled employment base, we are faced with challenges from our
global competitors. Today, I am here to discuss the effect of
Asia's practice of currency valuation and its effect on
manufacturers in our region.
The Chinese Government manipulates the value of its
currency to maintain a trade advantage over American companies.
This artificially lowers the prices of Chinese goods in the
U.S., allowing foreign competitors an unfair advantage in the
U.S. market. This practice has placed Rockford area
manufacturers at a serious disadvantage, and unless these
trends are reversed more damage will be done to the livelihoods
of the Rockford area working families and to the nation's
economy.
From 1998 through 2002, the Rockford area lost more than
8,000 manufacturing jobs. Currently, the City of Rockford
unemployment rate exceeds 10 percent, while the rate in
Illinois is 6.2 percent, and the U.S. rate is 5.5 percent. Our
region can no longer afford to continue losing manufacturing
jobs.
An Illinois Manufacturing Extension Center study reported
that over 60 percent of those surveyed are experiencing
competition from China and have lost market share. Moreover, 46
percent of all Respondents said they expected competition from
China to reduce their sales by an average of about 16 percent
in 2003, with more losses expected in the next few years. All
are losing sales overseas or find they can no longer compete
against Chinese imports into the U.S. market.
Many of the manufacturers are reducing their work forces.
Others say they will close their plants. Bill Orman, who is the
president of Rockford Fastener, a long-time family business,
predicts large numbers of small and mid-size Rockford area
manufacturers will be closing down permanently due to foreign
competition as orders in his industry have shrunk from millions
of pieces per order to 50,000 to 60,000 pieces.
Rockford Products, another fastener manufacturer, is
sourcing some parts from Asia to remain competitive. These
parts were once manufactured in Rockford. In fact, the Rockford
area was once the largest geographic area for fastener
manufacturing in the world. Today, China holds that
distinction.
My own business was affected when a business opportunity
worth up to $750,000 annually, which would have created jobs in
my factory, tax revenue for local, state and federal
governments, vanished as a big box retailer decided to source
product in China instead of Rockford and Wisconsin. My company
will survive. My potential customer, a father and son business
of 30 years, will most likely be bankrupt by the end of this
year.
I have a question. As manufacturing jobs continue to
disappear, what is going to take their place?
Also, weakness in the manufacturing sector hurts the
service sector. The loss of high paying manufacturing jobs
translates into lower sales for businesses of all types. Wealth
is created when we manufacture goods. United States
manufacturers are the most efficient on the globe. We offer
world class benefits to our employees. We invest in the newest
and best safety features. We are responsible to our
environment, and we take responsibility for the products that
we produce.
What we are asking for is a level playing field with fair
trade. Manufacturers in the Rockford area can compete in price,
quality, on time delivery and service with any competitor in
the world.
As you consider the situation that American manufacturers
face, please consider these options. We must enforce
International Monetary Fund articles of agreement that
explicitly prohibit currency manipulation; number two, impose
tariffs on those countries that utilize currency manipulation
to gain advantage in the U.S. marketplace;
Number three, institute tax credits for domestic
production, both for those who produce and for those who
purchase from U.S. domestic manufacturers; and, number four,
establish a U.S. national policy that recognizes that
manufacturing is crucial for the maintenance and potential
growth of our work force and manufacturing business sector.
Thank you very much for allowing me to speak today.
[Mr. Yagle's statement may be found in the appendix.]
Chairman Manzullo. Thank you, Steve, for coming here. I
understand you have a meeting and may have to leave here prior
to the Committee adjourning. If that is the case, you can just
excuse yourself and leave any time you want.
Mr. Yagle. Thank you, Mr. Chairman.
Chairman Manzullo. You are welcome.
Our next witness is Jay Bender. Jay is speaking on behalf
of the National Association of Manufacturers. He is also the
president of Falcon Plastics, Inc. We look forward to your
testimony.
STATEMENT OF JAY BENDER, PRESIDENT, FALCON PLASTICS, INC.,
NATIONAL ASSOCIATION OF MANUFACTURERS
Mr. Bender. Good afternoon, Mr. Chairman and Members of the
Committee. Thank you for allowing me to be here today.
My name is Jay Bender, and I am president of Falcon
Plastics, a manufacturer of custom plastic molded components,
assemblies and tooling located in Brookings, South Dakota. I am
pleased to discuss the effect of foreign currency manipulation,
especially the undervalued Chinese currency.
I am also pleased to be speaking on behalf of the National
Association of Manufacturers, the NAM, which represents 14,000
members, including 10,000 small and medium sized companies.
Falcon Plastics has been in business for 28 years. The
company was founded by my father, Don Bender, in 1975. We
employ 200 people and have three production facilities, two in
South Dakota and one in Tennessee. We sell custom molded
plastic products to the agricultural, appliance, automotive,
business machine, electronics and medical industries. We have
shipped our products to 28 states and export around the world.
We can and do work hard to stay competitive by
incorporating up-to-date equipment and production methods, but
we cannot compete when the deck is stacked against us. The
situation in American manufacturing today is serious and in
some sectors critical. Over the past several years, American
manufacturing has lost almost 2.5 million. Mr. Chairman stated
2.7 million. Falcon Plastics has gone from 300 people to just
200 people.
Mr. Chairman, let me stress that. We have lost one-third of
our work force. At the same time, imports from China have
surged, and the U.S. trade deficit with China has ballooned to
over $100 billion. The NAM projects that if our trade deficit
with China continues its 20 year trend, in five years it will
exceed $300 billion.
This problem must be addressed or American manufacturing
will lose more jobs, and pressures to retreat from our global
trade commitments will become irresistible. We have many
strengths in America. We are innovative. We have some of the
best workers in the world. We have the benefit of a free and
open society in which to do business.
We cannot compete when the currency of a major trading
partner like China is so undervalued that it produces an
overwhelming competitive advantage. The NAM has seen estimates
that China's currency is up to 50 percent undervalued.
How do we know their currency is undervalued? Economic
institutes, the World Bank and brokerage houses have all come
out with estimates, but this one is my favorite. The Economist
magazine's Big Mac index has been a pretty good indicator.
Since 1986, economists have been using a comparison of the
price of Big Macs around the world to gauge if currencies are
at their market level. This has been among the most accurate
currency indicator for about 20 years. According to the Big Mac
index, the Chinese yuan is undervalued by, with all due respect
to the golden arches, a whopping 56 percent.
Let me illustrate what is happening. One of my top
customers recently got bids from a Chinese producer that were
26 percent lower than mine. My customer is going to stay with
us for now because we are able to customize our orders and make
quick deliveries, but I am not sure how long that is going to
last.
If the yuan were 20 to 30 percent higher, this would solve
my pricing problem, and I could hold onto my customers. The
move to a realistic exchange rate could make a huge difference
for my company. Until that happens, I see my customers
purchasing more and more offshore, especially from China.
These products here tell another story. We mold each of the
halves of these fishing lure bodies, and we also mold the
packaging that they fit into. Our customer is a large producer
of fishing lures. They decorate them and then attach the hooks
to complete the lure. They have made the decision to move all
of this production to China because they can save 50 percent
over the cost of producing it here in the U.S.
Generally, fishing lures are made by small, family-owned
companies, but they will not be for long with a 50 percent
price difference. If China did not deliberately undervalue its
currency, many of these family businesses might be saved.
The situation as it currently exists is just unfair. Does
anyone believe that with all the growth in Chinese production
increased productivity, product quality and exports the yuan is
not worth any more now than it was in 1994?
There are other factors as well. I can produce a particular
mold for one of my former customers for $25,000. That is a very
competitive price. They purchase a similar Chinese mold for
under $3,000. For that particular mold, 20 percent of my price
is materials and components sourced on the world market. These
numbers tell me that something here just does not add up.
Something is wrong.
Our government must ensure that China is not subsidizing or
dumping its products, which it is obliged not to do now that it
is a member of the WTO. In addition to obtaining reform of
China's currency practices, we ask Congress to look closer to
home to address rising production costs.
These are issues addressed in the NAM strategy for
manufacturing growth and renewal, and they are essential to the
health of U.S. manufacturing. They include the runaway cost of
litigation, energy and health care----.
Chairman Manzullo. How are you doing? How are you doing on
time?
Mr. Bender. Almost done.
Chairman Manzullo. All right.
Mr. Bender. Almost done. Costly and productive
environmental and legal regulations and a badly-in-need-of-
overhaul tax system.
If Congress fixes these problems, manufacturing costs will
go down, and we will see fewer companies moving their
production to China and foreign countries.
Mr. Chairman and Members of the Committee, some of the best
jobs in South Dakota are in manufacturing. At Falcon Plastics
we provide a safe working environment with good health and
retirement benefits for our employees. We understand that we
make adjustments to operate in a global environment or that we
must make adjustments, and we are prepared to compete, but we
must have a level playing field. We do not have five or 10
years. We need your help now.
Thank you very much, and I look forward to your question.
[Mr. Bender's statement may be found in the appendix.]
Chairman Manzullo. Thank you. Did you wish to make that Big
Mac a part of the record?
Mr. Bender. Everyone thought it was my lunch.
Chairman Manzullo. There it is.
Mr. Bender. I have a good customer in Rockford, by the way,
as well, Anderson Packaging, Inc.
Chairman Manzullo. That is great. That is great.
Our next witness is George Jones, III. That is a pretty
famous name. Did you leave your guitar outside?
Mr. Jones. I do not sing.
Chairman Manzullo. You do not sing. Okay. If you could pull
your mike up close to you, Mr. Jones.
Mr. Jones. Great.
Chairman Manzullo. Mr. Jones is president of Seaman Paper
Company of Massachusetts and is speaking on behalf of the
American Forest & Paper Association. We look forward to your
testimony.
STATEMENT OF GEORGE JONES, III, PRESIDENT, SEAMAN PAPER COMPANY
OF MASSACHUSETTS, INC., AMERICAN FOREST & PAPER ASSOCIATION
Mr. Jones. Thank you very much. Before I start, I would
like to thank all of you for caring enough to hold this
hearing. It means a lot to us.
Mr. Chairman, my name is George Jones. I am the third
generation owner of a 57-year-old business that manufactures
decorative and industrial tissue paper. My company, Seaman
Paper Company of Massachusetts, Inc., and its affiliates have
approximately 500 employees, and we are the major employer in
our area.
Our products include resale tissue purchased in stores for
gift wrap, retail packaging tissue used by stores to package
customer purchases, crepe streamers and waxed paper for floral
and food service applications. We are a traditional, American-
built, family-owned business. For more than 50 years we have
enjoyed relative prosperity and success, but today we are
facing the most severe threat to our existence in our company's
history: Chinese imports.
I am here today testifying on behalf of the American Forest
& Paper Association, AF&PA. AF&PA and its members have a long
history of support for free and fair trade policies. Our trade
policy agenda has been driven by the belief that our country's
abundant fiber resources, skilled labor force and access to
capital provide the U.S. forest and paper industry with the
comparative advantage to compete in the global marketplace.
However, this ostensible comparative advantage has been
undermined in recent years by unfair exchange rate policies and
other Chinese Government trade practices. While China's paper
and paperboard consumption jumped between 1997 and 2002, the
corresponding growth for U.S. exports did not materialize.
In fact, exports to China of several important paper
categories have stagnated or declined because of a substantial
buildup in Chinese paper and paperboard production capacity. In
contrast, China's paper and paperboard exports, including
converted products, greatly benefited from an artificially weak
currency. Likewise, China has become a major consumer and
producer of wood products.
Why have U.S. producers lost ground rather than gained
ground with the Chinese market over the past five years? The
Chinese Government has intentionally kept the value of its
currency abnormally low to create a competitive advantage for
their products at the expense of U.S. produced goods.
The Chinese Central Bank maintains the yuan's value at an
exchange rate of 8.28 to the dollar by regularly intervening in
foreign exchange markets. This has been done through the
accumulation of large foreign exchange reserves since the mid
1990s.
Some estimates suggest that China's currency is about 40
percent lower than it would be if it had been allowed to float
in line with market forces. This has the effect of a 40 percent
tax on U.S. exports to China and a similar tax on U.S.
manufacturers competing in the U.S. domestic market against
Chinese imports.
What is the on-the-ground impact of the Chinese Government
policies in communities across the country? I can tell you
firsthand that it has meant the loss of significant U.S. sales
for my company, $5 million in annual sales since year 2000 and
growing. It has meant that I have had to lay off employees and
curtail production while we have tried to replace the lost
business.
Some of my U.S. competitors have not been so fortunate. In
the last two years, several U.S. paper mills have either closed
or are barely holding onto their businesses. This means a loss
of employment, frequently in small, rural communities, and a
loss of tax revenue to the towns where these companies have
been located.
Unfortunately, this story is being repeated in product
after product, including wood and paper products. My written
testimony has specific recommendations for action, but I need
to emphasize that if something is not done quickly many small
businesses will not survive.
Let me tell you firsthand that the perception is that the
Chinese cost advantage is based solely on labor costs. The
reality is that labor costs alone cannot explain the full cost
advantage in our product lines.
In the past 10 years, we have invested heavily in state-of-
the-art converting equipment, which has reduced our labor cost
by 90 percent for this product and 50 percent for this product,
yet the Chinese imports are priced at or below our variable
costs. There is no investment or other management tool that we
can use to offset this Chinese cost advantage.
If you do not act and help to create a level playing field,
then our long-term fate is sealed. Please help us to preserve
these American jobs.
Thank you very much.
[Mr. Jones's statement may be found in the appendix.]
Chairman Manzullo. Thank you for your testimony.
Our next witness is Edward----
Mr. Tashjian. Tashjian.
Chairman Manzullo [continuing]. Tashjian. Okay. I was
talking to your congressman, Cass Ballenger.
Mr. Tashjian. Super guy.
Chairman Manzullo. He really is. I invited him to come to
our hearing for the opportunity to introduce you personally,
but he said that he just was not able to make it.
Let me announce that on the table before we break there is
going to be a report that has been compiled by Congressman Gary
Miller's daughter, who is working on her Master's at one of the
schools in the Research Triangle.
It is a great report on the case goods imported from China
that demonstrates that case goods both in household and in
commercial furniture are now 30 percent of U.S. market share
and growing. It is a great report. It is only about 14 or 16
pages.
Is it there yet, Phil? It is already on the table, and I
would invite the panel and the members that have come here to
the hearing to take a copy of that report with them.
Tashjian?
Mr. Tashjian. Tashjian. It is an Armenian name.
Chairman Manzullo. Ed has come here from Hickory, North
Carolina, as vice president of marketing for Century Furniture
Industries, and we look forward to your testimony.
STATEMENT OF EDWARD M. TASHJIAN, VICE PRESIDENT OF MARKETING,
CENTURY FURNITURE, AMERICAN FURNITURE MANUFACTURERS ASSOCIATION
Mr. Tashjian. Thank you. Thank you very much, Mr. Chairman
and Members of the Committee. Thank you for the opportunity to
testify.
Chairman Manzullo. Could you pull the mike closer to you?
You might want to pull it down just a little bit.
Mr. Tashjian. How is that?
Chairman Manzullo. That is fine.
Mr. Tashjian. I am Ed Tashjian, and I am the vice president
of marketing for Century Furniture, a high end residential
furniture manufacturer located in Hickory, North Carolina.
It is an honor to appear before you today, and I have great
personal admiration for this body, as well as an enormous
appreciation for the time, talent and energy each of you
dedicate to public service. You do a great job not just on this
issue, but on every issue.
At the outset, let me make it clear that unlike my
colleagues at the end of the table, Dr. Blecker and Dr.
Bergsten, I am not a trained economist. I am not an expert on
world trade and international monetary policy.
I am here today as an advocate for the 156,000 men and
women who make up America's residential furniture manufacturing
industry to present a small business point of view on the
impact of currency manipulation and to ask you to use your
common sense and good judgment to do what is in the best
interest of this country.
Clearly, this is a complex subject both technically and
ideologically, and there are no easy answers. At the end of my
testimony, however, I hope you will conclude that the term fair
trade means the enforcement of U.S. laws and international
trading rules and that the continued loss of furniture
manufacturing jobs to the Far East does not serve the best
interests of the United States.
This hearing could not have come at a more opportune time.
Thanks to the perseverance of lawmakers like you who care about
domestic manufacturing, the issue of currency manipulation is
now receiving the attention it deserves.
Secretary Snow's comments last week in support of a more
fairly valued yuan and his belief that China is prepared to
move in that direction are positive signs that the
Administration is beginning to understand how this issue
impacts domestic manufacturers like us who are already having a
difficult time competing.
If you go into any high end furniture retail store today,
you will find that roughly comparable residential wood
furniture that is manufactured in China costs anywhere from
one-third to one-half of furniture manufactured in the United
States. The result is a lack of competitiveness and a loss of
nearly one-quarter of the domestic furniture manufacturing jobs
in the last three years.
As devastating as these statistics are, these figures
understate the magnitude of the impact of these losses on
communities like Hickory because declines in furniture
production have a serious ripple effect, hurting firms that
supply textiles, hardware and a range of services to our
industry. There are few things more disheartening than to pick
up a local newspaper and read about another plant closing.
In my view, there are five key factors that contribute to
this substantial pricing variance at retail, and I mention
these five to add fuel to the fire that George was talking
about that, you know, currency manipulation is just one of
these things, and it is the dominant one, as you will see.
The first one is low wages, and I agree with George that
everybody believes that the advantage the Chinese has is
predominantly low wages. For a comparable worker in China, they
earn 45 cents an hour, while his counterpart in the U.S. earns
$12.75 an hour. To put that in perspective, the Chinese worker
makes 1/28th as much as the American worker.
The second are intellectual property rights violations.
Foreign products have a much lower development cost because
they are almost always based on American designs. The U.S. must
press China to vigorously enforce its IPR related commitments
as a new member of the World Trade Organization.
Third are lower operating costs. Many Pacific Rim
competitors have no EPA, no OSHA requirements, which
dramatically reduce operating costs. Now, please understand
that I strongly support providing our employees with an
impeccable work environment. In fact, Century goes to such
great lengths to have a safe and comfortable environment that
in our chair plant we have gone 1,000,000 hours without a lost
time accident, which is the equivalent of an individual worker
working for 500 years without a lost time accident. It is very
important, and we work towards that.
Fourth, what enters into this are lower health care costs.
I am not an expert on foreign health care, but I can tell you
that better than eight cents of every dollar, every revenue
dollar, goes towards health care at my company. The expense of
this has doubled over the past five years. In fact, we spend
more on health care than we spend on lumber, fabric and
leather.
Fifth, and most importantly, is currency manipulation. By
pegging the yuan to the dollar, an exporting nation like China
has in effect undervalued its currency by as much as 30 to 50
percent. This is tantamount, as everybody here has said today,
to a 30 to 50 percent tariff on U.S. products in our own
marketplace. That is terrible. It is like two Olympic sprinters
competing in a 100 meter dash, but one gets to start at the 40
meter mark. It is unfair.
Of these five factors, currency manipulation is by far the
most serious. Many of our foreign competitors have an advantage
when it comes to cheap labor, less stringent regulations and
significantly lower operating costs, but the cost variance in
the marketplace of products made in these countries is nowhere
near what it is in countries like China where the currency is
pegged.
The WTO and the IMF have stated that such currency
manipulation done to gain an unfair competitive advantage is
illegal in the global trading system. Therefore, it is vitally
important that U.S. trade authorities monitor and enforce
China's obligations in this area and insure that the timetables
for action embodied by the WTO agreement are met. Free trade
must also be fair trade and legal trade, and I would encourage
this panel, as well as the Administration, to stand firm on the
pursuit of fair valuation.
Century Furniture appreciates all this Committee has done
to focus attention on the plight of manufacturing in the U.S.,
and we hope that you will remain engaged on this important
issue.
Thank you.
[Mr. Tashjian's statement may be found in the appendix.]
Chairman Manzullo. Thank you for your testimony.
Our next witness is a good friend, Dr. Paul Freedenberg,
testifying on behalf of the Association for Manufacturing
Technology. We look forward to your testimony.
TESTIMONY OF PAUL FREEDENBERG, VICE PRESIDENT, GOVERNMENT
RELATIONS DIRECTOR, ASSOCIATION FOR MANUFACTURING TECHNOLOGY
Mr. Freedenberg. Thank you. Good afternoon. My name is Dr.
Paul Freedenberg. I am Vice President, Government Relations,
for AMT, the Association for Manufacturing Technology. Today I
will be testifying on behalf of AMT, a 100-year-old trade
association that represents approximately 350 machine tool
builders and related product firms throughout the United
States.
It should be cause for great concern that the machine tool
industry is experiencing the worst conditions in its domestic
market in a half a century. Orders are off more than 60 percent
since their peak in 1997. Import penetration has increased more
than 40 percent in the past four years due in large part to an
overvalued dollar, which has only recently receded from its
dizzying heights in relation to the European currency.
More than 30 machine tool companies have closed their doors
in the past 18 months. Most recently, we have seen the
bankruptcy of Ingersoll Milling, one of the oldest and most
technologically advanced companies in the industry and one of
your oldest and most distinguished constituents, Mr. Chairman.
I guess one could conclude that if Ingersoll could fail, anyone
in the machine tool industry is vulnerable.
Today, I will focus on a core problem that all of U.S.
industry confronts. That problem is Chinese currency
manipulation. For more than a year, AMT has been part of the
Coalition for a Sound Dollar, and as part of this coalition we
have expressed our great concern regarding the Chinese
Government's strategy of undervaluing their currency in order
to garner exports and foreign investment.
Last year, our nation's bilateral trade deficit with China
exceeded $103 billion, the largest bilateral deficit in the
world. Based on the four months of 2003, that deficit is headed
for more than $120 billion this year. It is a deficit and a
trend that any economist will tell you is unsustainable, yet it
has continued to grow at this pace for the past decade.
Indeed, China is accumulating foreign currency reserves,
mostly U.S. dollars, at a rate of approximately $6 billion per
month. This is an uneven trading arrangement, and it is
directly related to the distortion and the value of the two
nations' currencies.
It is obvious that China's economic strategy over the past
decade has been to keep the value of its currency low, boosting
its exports and holding down imports. While many have observed
that this is a highly successful strategy, another way of
looking at it is that this is a shrewd method of exporting
unemployment.
For those who will tell you that China's trade surplus is
self-correcting I would point out that the United States
imports from China have been growing at more than twice the
rate of U.S. exports to China. Underlying all of this is the
currency imbalance, and if you get rid of that currency
imbalance you would more than double the offset getting rid of
all of the tariffs that China imposes on U.S. goods.
I would point out that both Article 15 of the WTO and
Article 4 of the International Monetary Fund prohibit the use
of currency manipulation as a method of gaining unfair trade
advantage. The IMF defines such manipulation as large scale and
protracted intervention in one direction to gain an unfair
trade advantage. The WTO prohibits currency intervention that
would frustrate the intention of the provisions of the WTO
agreement. An unfair trade case against China could be brought
in either forum.
Parenthetically, I believe that these very same Chinese
currency practices are also challengeable under Section 301 of
the Trade Act, but for any of this to occur the U.S. Government
has to have the political will to take these actions. This
unfair currency issue is the responsibility of the Secretary of
the Treasury.
It is my hope that Secretary John Snow will at the very
least enter into discussions with his Chinese counterparts at
the earliest possible opportunity with the objective of
achieving a more reasonably priced yuan. Initially, this issue
need not be the subject of a formal trade action, but Secretary
Snow should not hesitate to initiate one or more of the actions
I have discussed if the Chinese are unresponsive.
There is really no alternative to the immediate initiation
of such discussions or ultimate trade actions if the
discussions should prove fruitless. Either this debilitating
trade distortion must be eliminated or we will see many
industrial sectors faced with very unattractive alternatives--
the prospect of losing their markets entirely or the
alternative of being forced to relocate in China as the only
opportunity for survival.
Thank you, Mr. Chairman.
[Mr. Freedenberg's statement may be found in the appendix.]
Chairman Manzullo. Thank you for your testimony.
Our next witness is Mr. Cass Johnson speaking on behalf of
the American Textile Manufacturers Institute. Mr. Johnson, we
look forward to your testimony.
STATEMENT OF CASS JOHNSON, SENIOR VICE PRESIDENT, AMERICAN
TEXTILE MANUFACTURERS INSTITUTE
Mr. Johnson. Thank you. Thank you, Mr. Chairman, Members of
the Committee. Thank you for this opportunity to speak about
the terrible damage that Asian currency manipulation is doing
to the U.S. textile sector, one of this country's largest
manufacturing employers. There is not a more important issue
facing manufacturing today, and you and your colleagues are to
be highly commended for holding these hearings.
My name is Cass Johnson. I am a senior vice president at
the American Textile Manufacturers Institute and have worked in
the textile area for 13 years. As such, I can describe what can
happen to a great manufacturing industry when our government
does not deal forcibly with important issues such as this one.
By way of background, in 1994, China cut the value of the
renminbi by more than 40 percent. Forty percent is a number we
have been hearing a lot today. The not too surprising response
came three years later when China's most direct competitors,
other Asian nations, saw their own economies collapse and their
own currencies losing an average of 40 percent. Three years
later, the U.S. manufacturing sector slid into recession,
taking the U.S. economy with it.
There is an important chain of events here. First, China
cuts the value of the renminbi by about 40 percent. Next, the
currencies of its Asian competitors are devalued by about 40
percent, and then finally U.S. manufacturing suffers its worst
recession since the Great Depression.
In the textile sector, the effect has been nothing short of
devastating. As China and other Asian currencies have been
devalued, prices for textile and apparel products from these
countries have fallen by as much as 38 percent. With U.S.
profit margins below five percent, a 38 percent drop by your
competitor pretty much puts you out of business.
As a result, since 1997 we have closed more than 200
textile plants in the United States and lost more than 210,000
textile jobs. It is the worst bloodletting for this industry
since the Great Depression. In fact, I can give you a whole
list of companies that made it through the Great Depression,
but have not survived the last years.
Let me emphasize that these were not antiquated mills using
outdated equipment. On the contrary, we have been shutting down
modern, highly productive textile plants and all too often
shipping their state-of-the-art weaving looms and spinning
frames to China.
While U.S. manufacturing and the U.S. textile industry are
obviously affected by many issues, one fact stands out. During
this time, Asian governments, in particular China, spent over
$1 trillion to keep their currencies undervalued and their
exports to the U.S. strong.
What is most tragic about this is that it could and should
have been prevented. What Korea, Taiwan, Japan and China, among
others, are doing with their currencies is out and out illegal.
One way purchases of currency with a purpose of gaining an
export advantage are specifically prohibited under both IMF and
WTO rule.
Not only that; these actions are also clearly against the
President's own stated policy that free markets, not export
oriented Asian governments, should determine exchange rates.
Not only that; these actions clearly are doing enormous damage.
An excellent study by Ernie Preeg from the Manufacturers
Alliance concluded that 1.5 million manufacturing jobs have
been lost during the last two years because of illegal Asian
currency manipulation.
Influential news organizations from around the world--the
Economist, the New York Times, the Wall Street Journal, the
Financial Times; the Financial Times had a story yesterday on
this--all agree that Asian currency manipulation of this
magnitude is not only bad for the United States, but it is also
destabilizing for the entire world economy.
One might have expected that all this evidence, all this
breaking of international rules and, most importantly, all
these terrible job losses might have provoked some serious
action by our government. In fact, many of us from the
manufacturing sector, a number of them at the table here today,
have spent the last year and a half trying desperately, and I
want to underline desperately, to get the U.S. Government to
act.
We have gone to USTR and to Commerce and to State on
multiple occasions. Surely there are few issues that have a
bigger trade, economic and international impact than this one.
Each time we have been turned away with the proviso we cannot
talk about this. Only Treasury can.
Well, we have been repeatedly to Treasury, and the problem
with Treasury is that you feel this is some far away story that
they do not want to bother about much. In fact, according to
the Treasury Department's semi-annual report to Congress,
currency manipulation is not even happening.
According to Treasury, those $1 trillion in Asian central
banks do not really count for anything at all. Those 2.3
million lost manufacturing jobs? According to Treasury, illegal
Asian currency manipulation did not have a thing to do with it.
On the one hand we are confronted with very aggressive
Asian governments that are breaking international rules going
against stated U.S. policy and along the way throwing millions
of hardworking Americans out of their jobs at a time when our
economy can least afford it. On the other hand, we have a U.S.
Government that cannot even talk about this issue except to
refer the matter to Treasury, which officially says currency
manipulation does not exist.
That is one reason why our industry is so grateful that you
and the other Members of the Committee are highlighting this
issue. Action cannot come a moment too soon.
Thank you, and I would be happy to answer any questions.
[Mr. Johnson's statement may be found in the appendix.]
Chairman Manzullo. Thank you very much for that excellent
testimony.
The $500 billion or so trade deficit is more than that. Let
me give you an example. If this item is exported and it costs
$100 million--a government hammer? That is about what it costs.
[Laughter.]
Chairman Manzullo. It goes down on the trade merchandise
balance sheet as plus $100 million, even though it could
contain $99 million worth of foreign parts. Before the NAFTA
tariffs were completed, at least we had the bonded material and
had an idea of what was coming back in terms of a reimport. Now
we have something similar on the 62.5 percent content in
automobiles.
You have to wonder. The stock market is going up in value.
Sales are increasing. The only jobs that are being created are
overseas. This is indeed a recovery, if you want to call it
that, with a continuous decrease in the loss of jobs, and the
problem is the fact that this city does not understand it.
I have been talking about manufacturing for 11 years
because Rockford is a city that has a huge industrial base. It
is about a 25 percent industrial base. Nearby McHenry County,
until a few years ago, had an astonishing 36 percent industrial
base. Most cities are 14 percent. Rockford led the nation in
unemployment in 1982 at 24.9 percent where we lost 100
factories and 10,000 highly skilled jobs.
I am looking, Dr. Freedenberg, at page 6 of your testimony
that talks about remedies. I think it is time to send a missile
across the bow of the Administration. I think perhaps it is
time that we send a letter saying that Congress perhaps should
not entertain any more free trade agreements until the
Administration begins to enforce some of the remedies that you
have set forth on page 6.
What do you think about that?
Mr. Freedenberg. I did not come here to advocate
protectionism or to stop the trade negotiations, but I think
you will see that Congress--I think you are a good reflection
of sentiment.
Support will be lost for free trade if we continue in this
situation with the distortion that has existed with Asian
currencies.
Chairman Manzullo. I mean, this is not free trade.
Mr. Freedenberg. It does not amount to that.
Chairman Manzullo. Why did Treasury come out with the
statement that there was no distortion?
Mr. Johnson, you talked about that report. I was astonished
when I saw it also.
Mr. Johnson. We have asked them that question. How can you
not find distortion when literally everyone else is finding it,
when other banks are finding it, when financial analysts are
finding it?
Chairman Manzullo. When McDonald's is finding it.
Mr. Johnson. When McDonald's is finding it.
Chairman Manzullo. Right.
Mr. Johnson. The requirement to look for it, as I
understand it, was put in in the 1980s when this problem
emerged before and Treasury was ignoring the issue. They say
well, we do not really know what the definition of distortion
is.
Chairman Manzullo. That is interesting.
Dr. Bergsten, in the midst of your testimony you had
talked, and maybe I did not understand it, about imposing some
type of a surcharge on those countries that send items here
when the currency is being manipulated.
Mr. Bergsten. No, Mr. Chairman. I did not talk about a
trade surcharge. I talked----.
Chairman Manzullo. That is a new word for tariff, I
thought.
Mr. Bergsten. No. It has been used. Remember, President
Nixon put on a 15 percent surcharge----
Chairman Manzullo. We will find a new word then.
Mr. Bergsten [continuing]. For all U.S. imports in 1971 for
exactly this reason when the dollar was overvalued. Under those
rules of the game, then you actually had to negotiate the
devaluation of the dollar. He and John Connally put on an
import surcharge to speed that negotiation. It was rough, but
it worked.
No. What I suggested was something directly in the exchange
market. Japan was my case where they are clearly intervening
hugely to block the currency adjustment that the market is
trying to provoke. I suggested our Treasury should counter
their intervention dollar for dollar.
In fact, I suggested something even less Draconian; that
the Secretary simply tell the Japanese that he was prepared to
match their intervention dollar for dollar. I am quite
confident that would be sufficient for them to cease and
desist. I do not think we would actually have to do it, but if
we got serious and threatened that counterintervention I am
quite confident that would resolve the Japanese part of the
problem.
The Chinese problem is more complicated. Everybody here has
been beating up on China, starting with myself, but let me make
one point on the other side of the debate. We have all noted
that China has pegged to the dollar. Indeed, it did so from
1994 when it unified its exchange rates and did that big
devaluation.
Remember, since that time, as I testified and as you know,
the dollar actually rose by 35 to 50 percent against the trade
weighted average of currencies we deal with. That means China
rode the dollar up for six and a half years, hurting their
competitive position.
Now, the fact that they have done so well and piled up so
many reserves and attracted so much investment actually shows
just how competitive they are because they did it despite
riding the dollar up, but the point is for a long time the
average exchange of the renminbi actually appreciated sharply
in value. It has ridden the dollar down for the last 17 months,
and I think we have to take strong action to get them to stop
doing that, but in fact they did go the other way for a
prolonged period of time.
With China, the issue is to get them to stop pegging to the
dollar. In fact, it is in China's interest. They claim they do
it to get a ``stable'' exchange rate, but that does not lead to
a stable exchange rate. The dollar fluctuates wildly against
the euro, the yen, every other currency in the world.
The Chinese peg to the dollar. They get dollar stability,
but it is a minority of their trade, less than a third. They
would get more stable exchange rates if they actually pegged to
a basket of currency and let their exchange rate move, so it is
even in their interest. That one is more complicated.
They are following another IMF rule that says any country
can set its own exchange rate system, which in their case is to
peg to the dollar which is perfectly legitimate. Hong Kong does
it. Argentina did it, unfortunately, until recently. The issue
is the price.
Since the price is clearly undervalued--we have all
testified to that extent--pressure does need to be brought on
China to move the rate up. They could appreciate in one step.
They could let it float up. There are any number of ways to do
it, but that is the issue.
Chairman Manzullo. I saw an article in the Wall Street
Journal last week that a lot of our U.S. multinational
corporations that are manufacturing in China want to keep that
peg, which I think is pretty bad, in order to keep the currency
at an artificial rate.
Mrs. Velazquez?
Ms. Velazquez. Thank you, Mr. Chairman.
Dr. Blecker, as Asian countries' dollar holdings have been
growing, so have their investment of these dollars in the
safest dollar denominated assets that they can find--U.S.
Treasury and agency securities. Asian central banks now hold
more than $1 trillion of U.S. Treasuries alone.
What has been the effect on the United States' economy of
these large scale purchases of U.S. government debt?
Mr. Blecker. Well, the consequences are that it accounts
for a large part of the estimated damage to the manufacturing
sector that I spoke of earlier.
These countries, if we combine the Asian developing
countries led by China and Japan, account for the majority of
our trade deficit, and they would account for the majority of
the estimated damage to the manufacturing sector I cited, which
was a $100 billion a year loss of profits for these American
manufacturers, a $40 billion a year loss of investment
spending, and, in my estimates, which are underestimates
compared to some other people's, I had three-quarters of a
million jobs lost. To make it proportional, something on the
order of 60 percent of that is probably due to those countries.
Ms. Velazquez. What would happen if these countries
liquidated the security holdings?
Mr. Blecker. Well, in terms of the effect in financial
markets, I do not know how big that would be, but it would
start to correct some of this currency imbalance.
Ms. Velazquez. Yes?
Mr. Bergsten. Could I just add to that? The direct effect
of that big investment of foreign dollar holdings into
treasuries has been to keep U.S. interest rates much lower than
they would otherwise have been.
Mr. Blecker. Right.
Mr. Bergsten. That has been the argument, particularly in
the previous Treasury Department, for the so-called strong
dollar; that the influx of foreign investment of their export
earnings has had a favorable effect on our financial markets.
There is no denying that.
On your second question, if there was for some reason a
massive withdrawal of foreign assets from the U.S. security
markets, it would have a noticeable impact driving down the
prices of Treasuries and, therefore, driving up their interest
rate. That is always the horror story in this field, as a
former Undersecretary of the Treasury.
If the dollar ever went into a free fall or a collapse, you
would have a significant risk of inflation pressure picking up
and interest rates rising. Now, I was careful to say in my
statement that there is absolutely no sign of any of that over
the last year and a half of dollar correction. It has been
gradual and orderly.
Indeed, I think it has been the perfect time to do it
because we are at a low inflation/low interest rate
environment. We know the dollar has to come down. Not only does
the dollar need to come down. It needs to come down now because
this is the right time to do it.
Having said that, there is always the risk. If the gradual,
orderly decline became a free fall, it could be trouble.
Ms. Velazquez. Thank you. Thank you.
Mr. Bender, by pursuing weak dollar policies, we run the
risk of generating inflationary pressures that could lead to
higher interest rates. Should we pursue a weaker dollar even if
it leads to higher capital costs for businesses, or do you
believe that near term deflationary pressures are enough to
upset any inflationary pressures that result from the weaker
dollar?
Mr. Bender. It sounds like an economist question.
Ms. Velazquez. If any of the others----.
Mr. Bender. Well, I guess I could just make some comments.
Right now, the interest rates are lower than we have ever seen,
and certainly I am enjoying that right now.
Unfortunately, for the past several years my business has
been in an overcapacity situation so low interest rates really
are not helping me as far as going out and purchasing new
equipment or financing new capital, which I think has been one
of the big issues in our U.S. economy that manufacturers have
been in an overcapacity situation. There is no need to go out
and invest.
Ms. Velazquez. Dr. Blecker?
Mr. Blecker. Thank you. Until we have the disastrous
scenario that Fred Bergsten just painted of the free fall and
the huge hike in interest rates, which I agree is unlikely, I
think any realistic rise in interest rates and capital costs
would be much smaller than the savings from correcting the
current competitive disadvantages that you have heard about
here. These kind of disadvantages are on the order of 30 or 40
percent. If we are talking about interest rates going up a few
percent, even five percent, it would pale by comparison.
There are a lot of studies that have been done of business
investment in the United States, and the best studies--I would
particularly commend to you Barry Bosworth's book from the
Brookings Institution in 1993--show relatively little (and what
we call in economics statistically insignificant) effect of
interest rates and capital costs on business investment,
whereas the demand factor, how much customers are purchasing
from companies and what their market looks like, is really the
driving factor in investment.
If these companies' business picks up because they are no
longer selling at a huge, competitive disadvantage vis-a-vis
these countries, they will be able to invest, even if capital
costs are a little higher. The higher revenue, the demand
growth and competitive situation will more than compensate.
Ms. Velazquez. Thank you.
Mr. Jones. Could I add a real life example to that too,
please?
Ms. Velazquez. Sure.
Mr. Jones. Your question is would you rather have low
interest rates or sales, and I think the answer is we would
rather have the sales.
For years, we thought that this was all a labor thing. We
invested very heavily in labor saving equipment. Now we have a
machine that would put us in a competitive position on this
product which is sitting idle right now because the sales went
over to China.
Ms. Velazquez. Thank you, Mr. Chairman.
Chairman Manzullo. What is that product, Mr. Jones?
Mr. Jones. These are crepe streamers for parties.
Chairman Manzullo. Okay. The next questioner would be
Congressman Schrock, who has an interesting alma mater.
Mr. Schrock. Yes. I also am a graduate of American
University.
Chairman Manzullo. Are you not amazed that you can turn out
a couple of conservatives like this in light of the reputation
there?
Mr. Blecker. We have a very diverse campus.
Chairman Manzullo. There you are.
Mr. Schrock. In spite of American, I still came out a
conservative.
Chairman Manzullo. Is that right?
Mr. Schrock. Yes, that is right. No. It was a great
experience. It really was.
Thank you all for testifying today. Each of the stories you
told was very interesting. This Chairman is the one who has
really peaked my interest in the loss of manufacturing jobs,
and I guess all through my life I have seen it. When I was
growing up in Middletown, Ohio, Armco Steel Corporation was a
massive company founded by one of my neighbors, Charles H.
Hook. It is now owned by the Japanese and slowly, but surely,
going away.
My closest friend in college lived in Aliquippa,
Pennsylvania, which was the steel Mecca of America. It is gone.
When I was a student at the senior officer course at the Naval
War College in Newport, Rhode Island, my wife loved to go to
the outlets in Fall River, Massachusetts, where they made
clothing. That is all gone now. It has all gone overseas, and
it continues to get worse and worse and worse. I guess I just
do not know where we stop this.
All we are looking for is a level playing field. I think
Mr. Bender said that. Mr. Tashjian said--by the way, my uncle
worked for Century Furniture for 30 years in Hickory, so I know
your company very well. You talk about lost time accidents. The
Chinese do not care.
Mr. Tashjian. Right.
Mr. Schrock. They do not have safety laws. They do not have
labor laws. If somebody gets hurt, injured or killed, they just
take one of their one billion people and stick them in that
hole, and they do not worry about that. We do. We are a
compassionate society who cares about that sort of thing.
Because of that, I think we are at a terrible disadvantage. How
we balance that, how we correct that, is a total mystery to me.
Mr. Johnson, I think your comment was one of the most
fascinating in your testimony. You said one-way purchases of
currency with the purpose of gaining an export advantage is
clearly illegal under both IMF and WTO rules, and they do it
and do it and do it. What do we do about it? What are we doing
about it? I do not know.
Mr. Johnson. Nothing, right?
Mr. Schrock. Nothing.
Mr. Johnson. It is Treasury's purview.
Mr. Schrock. But whose feet should be held to the fire on
this? Commerce's?
Mr. Johnson. Treasury.
Mr. Schrock. Treasury, I mean. Treasury, yes.
Mr. Johnson. You know, I think all the other agencies are
sympathetic because this is causing problems for them in trade
negotiations and international agreements and whatever. They
sent us to Treasury. We talked to Treasury, and nothing seems
to happen.
Mr. Schrock. What is their excuse why it is not happening?
Mr. Johnson. They do not believe it is happening.
Mr. Schrock. They do not believe it is happening. It is
unfortunate.
The Secretary was invited to come here today. Is that
right? He was out of the country.
Chairman Manzullo. He would have come, but he is out of the
country.
Mr. Schrock. He is out of the country. Yes.
Mr. Johnson. Can I say about Secretary Snow? He is the
first one that has had positive words on this.
Mr. Schrock. Great. Yes.
Mr. Johnson. I will tell you, at the staff level my
experience of them is that this is an issue they do not want to
embrace.
Mr. Schrock. Sure, because it might jeopardize their jobs,
and they are in there to keep themselves employed. They do not
care how they do it. It is costing us.
Mr. Johnson. I think there is a serious impediment there.
Mr. Schrock. Yes. Mr. Blecker was the first one that talked
about the currency manipulation, and I am going to ask all of
you. I do not know the answer to this. I am not an economist,
so I do not know.
How do you recommend we pressure East Asia, for instance,
to abandon their currency manipulation? Clearly, I think we
ought to be able to do something about it. I do not know what.
If we can, then this body up here from the people who sit from
that desk back ought to be able to try to accomplish this and
make it happen.
Yes, sir, Doctor?
Mr. Bergsten. Well, Mr. Schrock, I would say again that I
think the most direct and, therefore, appropriate route is to
respond directly to their currency intervention in the currency
market.
I have suggested that we could tell the countries
involved--in the first instance Japan, but the same approach
could be taken to China--that if they continue to distort the
market, which runs directly counter to Secretary Snow's
pronouncement of U.S. policy that we will simply offset that
directly.
We can intervene infinitely if we wish by selling dollars.
We produce dollars. We have no constraint on what we can do in
that market.
Mr. Schrock. Do you perceive Secretary Snow wishes to do
that?
Mr. Bergsten. He has made very clear to the Japanese, both
publicly and I believe privately, that he strongly disapproves
of their intervention policy. He has publicly rebuked it and
indicated that they should let the rate be set by the market.
I actually think it is confrontational from the Japanese
side that they have not only continued, but accelerated their
intervention since he has said that. In May alone, they
intervened to the tune of $43 billion in the exchange market.
As I mentioned, and it is not my comment. It is the comment of
the former top Japanese official in this area. The yen would be
10 percent stronger today in the absence thereof.
I think that is the direction. You can make all sorts of
efforts in the trade policy area. You can talk about import
surcharges. These would have all sorts of negative effects on
our own economy in terms of raising cost, prices, all of that.
It is a monetary problem. I think it should be dealt with in
the monetary area.
Several people have mentioned that the rules of the
International Monetary Fund do provide for this kind of
response. U.S. law provides for this kind of response. The U.S.
Treasury has been asleep at the switch. The IMF has been asleep
at the switch, and I will add, as I said in my statement, the
G-7 has been asleep at the switch.
The people that should really be with us in leaning on the
Asian countries to let their exchange rates move up are the
Europeans because if the Asian currencies do not move up, the
whole decline of the dollar occurs against the euro, and the
Europeans take a hit to their competitive position. With a
little U.S. effort, it need not be a unilateral move. The
Europeans would surely support us strongly. It could be a G-7
initiative as a whole to go to China, which is not in the G-7,
or to Japan within the G-7 to make this approach. Things like
this have been done before.
I mentioned the Nixon shocks. That was to achieve a sharp
decline in the value of the dollar in a somewhat similar
situation. Secretary Jim Baker, in 1985, in the Plaza
agreement, got the G-7 to agree to drive down the dollar in
exactly these circumstances. The dollar dropped by 50 percent
over the next two years to correct the huge overvaluation,
which actually drove the U.S. from being the world's biggest
creditor country to the world's biggest debtor country in the
middle of the 1980s.
This has been faced before. The problem is that the
responses have only come when a real crisis emerged. In the
case of the Nixon Administration, foreigners were selling
dollars for gold. There was a real threat to our
convertibility. We closed the gold window and negotiated a
devaluation with the help of an import surcharge.
In the middle 1980s, Secretary Baker, because the Congress
was threatening to go hugely protectionist at the time, and you
may remember that.
Mr. Schrock. I do.
Mr. Bergsten. He got the G-7 countries to agree to bring
the dollar down sharply. It worked. By 1990-1991, our current
account deficit was largely eliminated, so it worked.
The problem is the Treasury of the day for the reasons
mentioned, because they do not want to take aggressive actions
in this area for various reasons, wait until it is very late in
the day. Lots of jobs have been lost. Lots of damage has been
caused. The issue here is to move sooner rather than later.
Eventually they will have to do it.
Just to be clear, their hope now is that this market driven
decline of the dollar over the last year and a half will
continue in the gradual, orderly way I have suggested. They are
hoping that their calls on Japan and China to let their rates
join the process will suffice. Maybe they will, but there is no
sign to that yet.
The issue is to make sure what has begun to happen, very
hopefully so, will continue and, as I say, about double what we
have had so far.
Chairman Manzullo. Thank you.
Mr. Schrock. Mr. Chairman, I know my time has expired. Let
me just say what I hear the doctor saying is that this
Chairman, the Members of this Committee, need to get the
Treasury officials up here and put their feet to the fire and
say get this fixed because if not we are going to lose more
manufacturing jobs. That will not make you happy, and it will
not make me happy.
Chairman Manzullo. The core problem is that very few people
in this city understand the nature of manufacturing. There are
a lot of people that believe that we could lose our entire
manufacturing base, and it does not mean anything.
Mr. Schrock. I know.
Chairman Manzullo. That is the big problem.
Mr. Schrock. And what I understand is we do not have
manufacturing anymore.
Chairman Manzullo. Dr. Freedenberg?
Mr. Freedenberg. If I could add just one thing?
Mr. Schrock. Well, not like we used to.
Mr. Freedenberg. In the 1980s when I was a trade official,
I asked Secretary Baldridge what kind of leverage we had. He
said our counterparts in Asia can add. They know which
direction the surplus in the deficit is. They know who is the
richest. Therefore, we have all the leverage we need.
I return to what I said in my testimony. We just have to
have the political will to apply it. It is not like we do not
have it. We are the most powerful there is and the richest
there is. It is a matter of whether you want to do it, and that
is the question; not whether you have the leverage when you
want it.
Chairman Manzullo. I can guarantee you if it involved jobs
around the Beltway that the city would understand what is going
on.
Somebody who lost 11,000 manufacturing jobs in one day,
Grace Napolitano had the opportunity to visit her district last
September in a tremendous hearing. You are still at what, 11
percent unemployment?
Ms. Napolitano. It is 10.
Chairman Manzullo. It is 10 percent.
Ms. Napolitano. We are 10. We dropped one, but still thank
you for being with us. Thank you.
You will find that this Committee has done a lot in
bringing some of the issues that affect all business. I am
particularly proud because those that are sitting on this
Committee understand your pain. We cannot get the
Administration to move, to look at small business, to look at
the effects on small business, what is happening, and to assist
small business. I hear you.
Forget economy. I know very little about it, but I can tell
you that in my district----.
Chairman Manzullo. Mrs. Napolitano, could you suspend for
just a second?
Ms. Napolitano. I yield to you.
Chairman Manzullo. Please either be quiet, or I will have
the police remove all of you.
[Applause.]
Ms. Napolitano. That is our Chairman for you. Thank you,
sir.
You understand that I actually started a small
manufacturing task force in my district because there is, and
mine is a small district in terms of manufacturing, in terms of
industry and commercialism, but there is such a need, such a
cry for my businesses, that there needs to have something
happen.
I have heard the same argument from them that I have heard
from you. I am listening to Mr. Blecker and Mr. Bergsten. Both
of you have indicated that there needs to be some credible
action taken by the agencies themselves to be able to
effectively control because that is what it is going to take is
some control.
Unless we can just continue having hearings--I have a ton
of questions I would love to ask, but that is not going to make
this any better. It is not going to stop the bleeding of our
businesses, the businesses that are going under because they
cannot get competitiveness when they have their trade partners
abroad say well, I can get it from another country at half the
price or at least undercut what their bare minimum is, given
the constraints we have. They have subsidies from the
government. They have all kinds of other assistance, and we are
not helping our business.
You will hear the same thing over and over again. We want
to be able to bring that to the front, to be able to move the
agenda to help small business, but this is a Committee. We do
not have the ability to tell the Administration. It is you, the
business people, who need to stand up on your two hind legs--
sorry about that--and get to them and tell them that you are
the ones who are going under.
You are providing the jobs in this country for the economy
in this country for us to be able to get out of the slump.
Without them getting your push, your work, and my suggestion is
become a unified group with other small business. Talk about
it. Go and visit. Go talk. Go e-mail.
The message we have sent has been heard, but you, the
business people, have got to come and say vocally, strongly,
openly, publicly, that you are going to go under, and so are
those hundreds of thousands of jobs that we are hoping are
going to come back to this country within a very short while.
Thank you, Mr. Chair.
Chairman Manzullo. Did you have any further questions, Ms.
Velazquez?
Ms. Velazquez. No, Mr. Chairman.
Chairman Manzullo. We want to thank you all for coming. It
is a little bit noisy outside. You know, if they were talking
down the dollar they could go at 10 decibels more, and it would
not bother me one bit.
We enjoyed the testimony very much. As I said, all of your
statements will be made a part of the record.
This Committee is adjourned.
[Whereupon, at 3:38 p.m. the Committee was adjourned.]
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