Sen. Evan Bayh, "Trade Imbalance with China," May 23, 2007

This is a timely hearing. The Strategic Economic Dialogue just concluded today. Secretary Paulson called me last week to discuss the agenda for the dialogue and the subject of the hearing today. He is a good man and is dealing with what some would say are legacy problems. I would characterize these problems as a legacy of neglect on some of these essential issues. We are making some progress, but to answer the question of whether we are making the kind of progress needed in a timely manner, my answer would be obvious: no.

Steps by China, so far, have been largely cosmetic and symbolic and the pace of change is glacial, and I use that term in the pre-global warming context. It has been so slow, and in fact, nothing of consequence has been accomplished in any meaningful timeframe. I would like to quote John Maynard Keynes who said that in the long run, we’re all dead. At this rate, we will be before the imbalances that have been allowed to build are rectified.

It is becoming increasingly obvious that some form of benchmarks for specific actions and specific consequences for failing to meet those benchmarks are needed. For many years, China has said the right things, and we appreciate that; but they have not followed through and done the right things. How long will we accept rhetoric as a substitute for action?

Ultimately it is a matter of credibility both ours and theirs. When we repeatedly acquiesce to Chinese actions that are harmful to the United States, why should China take us seriously? The answer is that they really don’t. When we repeatedly don’t fulfill promises to change their behavior, why should we believe them? Increasingly, we should not.

I wish we didn’t have this friction in our relationship. I want good relations with China. It is probably the most important bilateral relationship that we will have over the next fifty years. China is a powerful nation with a rich history and culture and bright prospects for the future. As much as I want good relations with China, I know that this can not be achieved by ignoring the well-being of the United States. For good relations to exist they must be mutually beneficial and sustainable.

China is concerned about its domestic stability. This is a real and legitimate concern. The number of dislocated workers and China’s rapid urbanization pose the risk of unrest, which is real. But in promoting stability at home, China cannot export lower growth and instability to the United States in ways that are artificial. No nation would accept such a force, nor should we.

For example, Chinese policy benefits U.S. consumers, but hurts American producers. That is not a decision for them to make but a decision for the United States of America to make. They cannot expect unfettered access to American markets while denying access to their own, particularly in the financial services sector. Nor can they turn a blind eye to rampant intellectual property theft.

Currency manipulation, which is an artificial distortion of trade, has had very harmful impacts on our balance of trade. One member of the panel today estimates that the Chinese currency is undervalued by as much as 40%. Most experts would agree that this overvaluation is increasing rather than stabilizing or decreasing.

The proposed expansion of the trading ban is a marginal action at best, and almost meaningless given the fact that the current ban has never been fully implemented. This results in a loss of sales and jobs. It is estimated that our domestic manufacturing sector loses 31 billion dollars annually simply because the Chinese manipulate their currency. Other estimates project that the manipulation of the Chinese currency costs the American economy 500 billion a year, which translates into 5.3 million jobs. Regardless of the precise nature of these statistics, it is clear that this is having a negative impact on our economy, and this is something that should concern all Americans.

Market access exacerbates this imbalance. Not only does China promote exports it artificially restrains access to its domestic market, as well. This is contrary to its obligation under the WTO. China continues to discriminate against U.S. firms, particularly in the financial services sector. The global economy will not function very well if we but from other countries, including China, when they have a competitive or comparative advantage, but when we have a competitive or comparative advantage they shut us out. That is the current situation. With rights must come responsibilities. I voted for China’s accession to the WTO because I thought it was a good idea to have China subject to the law, but too often, they have chosen to flaunt the law and manipulate market forces to achieve artificial economic advantages. This is not what anyone had in mind.

The current situation poses great risks to the United States. Economically, the situation is unsustainable. The current account imbalance, about 6% of our GDP last year, continues to grow. Most people believe it will ultimately correct either gradually or abruptly. The longer we let the situation continue, the greater the chances of a severe correction with substantially higher interest rates and slower growth for the American economy.

There are national security implications for this deteriorating situation. Interdependence is one thing and a positive aspect of globalization, but excessive dependency is another matter. We are on the cusp of becoming excessively dependent on China. This raises the possibility, however remote, of coercion. We are approaching a point at which China could possibly threaten the United States with negative economic consequences if we do not agree to accede to its demands or wishes. No great nation can allow itself to be placed in such a position. We have also seen the futility of dialogue. Endless conversations are not enough if they are not followed up with actions. China sees the status quo as in its interests, and will not change its behavior if it does not see a cost- benefit calculation change.

To put it another way, if all we do is complain, why would they change? Action in some reasonable timeframe is needed, undertaken cooperatively with China if we can, and unilaterally if we must. That is the subject of today’s hearing. Thank you.