Mr. Chairman, Members of the Commission, I thank you for the opportunity to testify today on this very important topic on behalf of the thirteen million working men and women of the AFL-CIO. We applaud the Commission for holding this hearing and for the valuable work you have already done to bring urgent attention to this issue.

China’s industrial, investment, and exchange rate policies have had a profound impact on the bilateral trade between our countries, and hence on the health of our own manufacturing sector and economy, especially on jobs in the manufacturing sector.

I would like to focus most of my remarks today on two aspects of these policies, which have had very serious negative consequences for American workers: the Chinese government’s manipulation and undervaluation of its currency, and the government’s egregious and ongoing violation of the fundamental human rights of its workers. Finally, I will discuss some policy solutions that should be put in place to address these problems.

The U.S. bilateral trade deficit with China hit $103 billion last year, and is up 24 percent in the first seven months of this year compared to the same period last year. Meanwhile, the United States has lost  almost 3 million manufacturing jobs since 1998, including 431,000 so far this year. While many factors contributed to this devastating job loss, it is crucial for policymakers to focus their attention on policies that are feasible, quick, and will begin to ameliorate the job losses we have already experienced. Addressing the Chinese government’s flouting of its international obligations with respect to currency values and workers’ rights ought to be a top priority in this regard.

The Chinese yuan has been pegged to the dollar at a fixed exchange rate since 1996. Underlying economic conditions (relative inflation and growth rates, among other things) have changed during that time, leading to a severe misalignment of the exchange rate, which can only be maintained through the Chinese government’s massive accumulation of U.S. dollar reserves – now over $350 billion.

This is an inherently unstable and unsustainable situation. Both U.S. and Chinese policymakers should focus now on taking steps to address this situation, so that appropriate transitions can be put in place. This is necessary to avoid a more abrupt and severe crisis at a later date.

The Chinese government has clearly charted a development path predicated on export-led growth, with the U.S. consumer economy playing a starring role, as the primary purchaser of Chinese-made goods. While it is every government’s right and obligation to look out for the interests of its citizens, it must do so within the context of international rules and constraints.

WTO rules clearly prohibit currency manipulation to gain trade advantages inconsistent with GATT provisions. Article XV of GATT 1994, for example, provides that “Contracting parties shall not, by exchange action, frustrate the intent of provisions of this agreement” (emphasis added). Deliberate undervaluation of the yuan vis-à-vis the U.S. dollar also violates the principle of most-favored-nation treatment, as it targets one country’s currency, adversely impacting that country’s trade. Certainly, the enormous bilateral U.S. trade deficit with China relative to other countries is evidence of the uneven impact of China’s currency policies on its trading partners. Currency manipulation nullifies tariff concessions made through WTO processes and amounts to a de facto illegal subsidy of Chinese exports. China’s choice to artificially bolster its own manufacturing sector at the expense of the United States (and other countries indirectly) is therefore a violation of its obligations under the WTO.

As American University economist Robert Blecker wrote in a recent Economic Policy Institute briefing paper, “ [T]he sheer magnitude of the reserves accumulated by these East Asian countries, and the rapidity with which these reserves have increased in recent years, is prima facie evidence of efforts to keep their currencies undervalued and prevent their currencies from appreciating to exchange rates that would be conducive to more balanced trade relations with the United States. This is outright currency manipulation of a mercantilist nature, intended to maintain those countries’ trade surpluses with the United States, which by 2002 accounted for about 40% of the overall U.S. trade deficit” (“The Benefits of a Lower Dollar: How the high dollar has hurt U.S. manufacturing producers and why the dollar still needs to fall further,” EPI Briefing Paper, May 2003).

Professor Blecker estimates that the overvalued dollar (relative to all currencies) has resulted in about 740,000 lost jobs since 1995, as well as a loss of nearly $100 billion in annual profits and $40 billion in annual investment over the same period. Blecker does not break out the impact of the dollar-yuan relationship specifically.

Most estimates place the under-valuation of the yuan between 15 and 40 percent. A currency misalignment of this magnitude has enormous significance in the context of U.S.-China trade. While it is certainly not the only factor contributing to the massive U.S. trade deficit with China, it is a significant one, and one that ought to be addressed urgently. Many international trade negotiations focus on eliminating or phasing out tariff barriers much lower than this, and trumpeting the potential benefits of doing so. Just because China has other low-cost advantages over the United States is no reason for us to tolerate as much as a 40% distortion in relative prices.

The Chinese government must allow the yuan to reflect underlying economic and market forces. It must end the current peg and cease its accumulation of U.S. dollar reserves. While the Chinese government’s reluctance to take this action is perhaps understandable, the Bush Administration’s failure to act more forcefully in this regard is not.

We call on the Administration to use all tools at its disposal, including initiating a WTO case, to send a clear message to the Chinese government that the current situation is unacceptable and will not be tolerated. We applaud efforts in Congress to force action on this issue, as it is now clear that simple diplomacy and jawboning have utterly failed.

In addition to the unfair competitive advantage gained through currency manipulation, the Chinese government’s systematic repression of fundamental workers’ rights is a key contributor to the unfair advantage Chinese exports enjoy in the U.S. market. Chinese workers do not have the right to form or join an independent union (as the U.S. State Department has repeatedly reported in its annual human rights report), nor do they enjoy the political freedom to criticize, let alone change, their government.

Enforcement of wages, hours, and health and safety rules is lax or non-existent in many areas of the country, and forced and child labor are prevalent in some sectors. These abuses allow producers in China to operate in an environment free of independent unions, to pay illegally low wages, and to profit from the widespread violation of workers’ basic human rights. Together, these policies amount to a deliberate and artificial suppression of wages by the Chinese government. This exploitation impacts American workers, as well as those in other developing countries, and artificially lowers the price of Chinese exports in the U.S. market.

During 2001 and 2002, the number of labor disputes and protests in China rose significantly. In response, the Chinese government jailed a number of workers for demonstrating for their rights and cracked down on any organization that might support the beginnings of an independent trade union. The official labor union—the All China Federation of Trade Unions (ACFTU)—continued to discourage strikes and work stoppages, and to negotiate sweetheart deals with employers. 

In the face of these grave problems, the Bush Administration chose not to even raise the case of China before the UN Human Rights Commission in April of 2003, despite the United States’ regular practice of doing so previously. In addition, President Bush did not demand any specific improvements in human rights when he met with China’s President Hu in the summer of 2003. Instead, the Bush Administration has only engaged in “cooperative dialogue,”  a strategy that has not worked. Since deciding to pursue a dialogue instead of UN action or public pressure, Administration officials have noted “backsliding” and a “deterioration in human rights” in the country during 2003, including arrests of democracy activists, harsh sentences for labor organizers, and the suppression of independent media, church groups, and Tibetans.

Yesterday’s Wall Street Journal reported that the Chinese government has recently cracked down on free speech and political dissent, closing four Web sites and clamping down on foreign funding and organizations (Kathy Chen, “China Curbs Growing Debate over Politics,” Wall Street Journal, September 24, 2003). The government issued a document warning against “hostile forces,” urging increased vigilance against Chinese organizations’ use of foreign funding or cooperation with foreign experts and organizations. In August, the Chinese government attempted to halt debate on three topics, now labeled “not allowed”: political reform, constitutional amendments, and the reassessment of historical incidents (presumably referring to the 1989 crackdown on protesters in Tiananmen Square).

The Administration’s failure to take concrete actions on human rights and workers’ rights in China allows rampant violations to continue. Workers in China, the United States, and around the world pay the price for this inaction, while companies producing in China enjoy the profits.

In addition to inaction on China’s currency manipulation and workers’ rights violations, the Bush Administration has failed to enforce U.S. trade laws effectively with respect to China, denying American workers the trade relief they are entitled to under the law.

Rifts within the business community have contributed to the U.S. government’s passivity and failure to act to date. Companies that produce in China for the U.S. market, retailers, and importers clearly benefit from an undervalued Chinese currency, as well as from the abuse of workers’ rights.  Walmart, for example – alone responsible for almost $10 billion of the U.S. trade deficit with China – has openly supported current Chinese government policies with respect to the yuan. On the other hand, companies actually producing in the United States – whether for the domestic market or for export – face debilitating and unsustainable disadvantages from both currency manipulation and violation of workers’ rights in China.

American policymakers have a choice to make in trade relations with China. They can side with the importers and outsourcers, and stand by passively as China takes advantage of its WTO membership and access to the U.S. market, abusing its own workers and artificially undervaluing its currency in order to undercut American workers and domestic manufacturers. Or they can take a stand for American jobs and act now to ensure that China plays fair in the global economy.

Thank you for your attention and for the invitation to appear here today. I look forward to your questions.