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Jose Fernandez, “Fostering a Rules-Based System in the US-China Economic Relationship,” August 3, 2012

Fernandez is Assistant Secretary of State for Economic and Business Affairs. He spoke to the American Chamber of Commerce in Hong Kong.
August 3, 2012


Jose W. Fernandez
Assistant Secretary, Bureau of Economic and Business Affairs
American Chamber of Commerce
Hong Kong

I. Introduction and Roadmap

Thank you very much. It’s great to be here today.

A long time ago, I wrote a travel article about Hong Kong in a travel magazine that you will be happy to hear is now defunct. Two things stood out to me then, the juxtaposition of Western and Asian cultures in Hong Kong, and the energy that makes my hometown of New York City feel like a country town. While a lot has changed dramatically here since my first visit, these two things have remained constant throughout the decades. Hong Kong is truly Asia’s World City and sits as a symbol of prosperity in a region rich in trade, innovation, and ideas.

As Secretary of State Hillary Clinton said here in Hong Kong almost exactly a year ago, “increasingly, economic progress depends on strong diplomatic ties and diplomatic progress depends on strong economic ties.” This is why Hong Kong is so vital. Its history and geography make it inevitably a bridge between East and West, and its diplomatic and economic importance to the United States cannot be overstated. It is inspiring how companies here from all around the globe compete in a transparent system, subject to good governance, rule of law, freedom of the press, an independent judiciary, and a vibrant civil society.

This open, competitive system has served the U.S.-Hong Kong economic relationship well. There are more than 1,300 U.S.-affiliated companies in Hong Kong, and AmCham Hong Kong is one of the most active chambers in Asia. We are grateful for all the energetic work of the AmCham members here. We very much value your leadership, expertise, and contributions to global economic growth, as well as the role you play in bringing American businesses to Hong Kong and Asia. In no small part because of your efforts, today Hong Kong is the United States’ 10th largest export market for goods. It is also our 7th largest market for agricultural products. In fact, in the past two years, U.S. exports to Hong Kong grew the fastest—at 73 percent—among all of our top 20 export markets.

II. U.S.-Hong Kong Economic Relationship and the Pivot to Asia

Secretary Clinton’s visit here last year and my visit now are part of a broader and deeper economic relationship between the United States and the countries of the Asia-Pacific; a relationship that is key as we in the United States are pursuing our own economic recovery and growth. And as we look to promote recovery and growth at home in the United States, we also realize that we depend on our economic relations abroad.

In this part of the world, our involvement is nothing new. The United States has long been deeply engaged in developments in the Asia-Pacific region. Our contributions to regional security have played a role in creating the conditions that brought more people out of poverty faster than anywhere else in history. That engagement continues today. We know that the futures of the United States and the Asia-Pacific are inextricably linked. And as Secretary Clinton highlighted, we are not just a diplomatic or military power here. We are also an economic force. In 2010 alone, our exports to the Pacific Rim were $320 billion, supporting 850,000 American jobs.

III. U.S.-China Economic Relationship

Now we cannot talk about U.S. economic relations with Asia without discussing our economic relationship with China. China’s economic achievement in recent years is remarkable and is justifiably a source of pride as it has lifted hundreds of millions of people out of poverty, urbanized, and modernized. China is returning to the world stage in a big way, with millennia of experience as a global leader behind it.

The economic relationship between the United States and China provides significant benefits to both our nations, just as it does to Hong Kong. China has benefitted greatly from its integration into the global, rules-based trading system that the United States championed following the end of World War II. As the world’s second largest and fastest-growing major economy, China also offers huge opportunities for U.S. businesses, workers, farmers, and ranchers.

But as we work toward a system that both of our countries can compete in and prosper from, as our futures are ever-more linked, we need to address challenges to our common goals of prosperity and economic growth. We need to agree on the basic rules that apply to all countries in the international commercial arena. For our part, we are committed to expanding opportunities for U.S. companies to export to and do business in China. And this means that our policies pursue four basic objectives that I’d like to talk to you about today. These are (1) a strong commitment to protection and enforcement of intellectual property rights, (2) adherence to the full array of norms that govern international trade and finance, (3) the creation of a level playing field in which all companies can compete under the same rules, and (4) expanding mutual investment. I would like to touch on each of these four tenets individually before closing with the tools we have at our disposal to encourage progress.

(1) Intellectual Property Rights

Improving the protection and enforcement of intellectual property rights—or IPR—in China remains a top priority for the United States. In fact, I’d say no issue is more fundamental to maintaining a mutually beneficial trade relationship between both our countries, not just the U.S. China’s own innovators and creative industries seek, and would benefit greatly from, stronger IPR protection and enforcement. In addition, a strong intellectual property regime is critical to ensuring that safe products reach both U.S. and Chinese citizens. And of course, strong IPR protection standards and enforcement mechanisms, similar to those we have adopted under the World Trade Organization, are vital to bilateral trade and investment.

But leaving aside its importance to international trade generally, IPR observance is also critical to the U.S. economy and our recovery. And that’s why we are so adamant that this is an issue that needs to be addressed. According to a 2010 report on trade, Chinese intellectual property rights infringement and indigenous innovation policies largely block U.S. companies from China’s enormous government procurement opportunities, which I will discuss shortly. In 2009, these policies cost the U.S. economy nearly $50 billion in sales, royalties, or license fees. The report also found that if China raised its intellectual property rights standards to those of the United States, it could translate into well over 900,000 new jobs in U.S. intellectual property intensive firms. As you can see, the stakes for the United States in maintaining a rule-based system for IPR are extremely high.

But instead we face an issue that colors our economic relationship and that we need to overcome. Corporate spying or trade secret theft has led to a huge number of losses for U.S. companies operating in China in recent years. Companies doing business in biotechnology, telecommunications, and nanotechnology have had billions of dollars worth of technology stolen from servers and funneled to Chinese companies that use that technology without legal rights. One U.S. company was the victim of Chinese hackers who stole technology that cost $1 billion and 20 years to develop. Another company lost 40 percent of its value in a single day and 84 percent within five months, after theft of its technology came to light. This pattern does not just harm the individual companies; it discourages other companies from doing business in China. Ultimately, it hinders China’s ability to attract valuable technological investment.

A related concern for us is the high rates of online piracy, business software theft, and market access barriers that hinder consumers’ purchases of legitimate goods. For example, a recent report from the Business Software Alliance showed that the software piracy rate in China was 77%, at a cost to producers of nearly $9 billion, while in Hong Kong the rate was 43%, which was only slightly above the global average of 42%. We are also very concerned with the continued trend of policies indicating China’s willingness to encourage domestic or “indigenous” innovation at the expense of foreign innovation and technologies. Let’s be clear: piracy is a euphemism for theft, plain and simple.

Nevertheless, we also welcome positive steps China has taken in recent years. At last year’s Strategic and Economic Dialogue, for example, China agreed to strengthen its efforts to protect IPR in several areas. One of these was by intensifying efforts to ensure that Chinese government agencies at all levels use legitimate software. We are also very pleased to join China and 45 other countries in the signing of the World Intellectual Property Organization’s Audiovisual Performers Treaty, also known as the Beijing Treaty. This treaty will expand protections to both U.S. and Chinese performers.

(2) Norms and Government Procurement

A second basic objective of our policy is to insist that China adhere to the full array of norms and standards that govern international trade and finance. This includes fulfilling its commitment to join the WTO Government Procurement Agreement, or GPA. Government procurement represents one of the most rapidly expanding areas of opportunity for traders of goods and services. All around the world, governments are announcing programs to spend tens or even hundreds of billions of dollars on new infrastructure investments. In fact, in many countries the government typically is the biggest single buyer of goods and services, with the value of these government purchases worth, on average, 10 to 15 percent of a country's GDP. So government tenders are big business throughout the world, including the United States.

China committed to join the GPA during its accession to the WTO in 2001. It formally initiated negotiations in 2007 and submitted its most recent market access offer in November 2011. In this May’s U.S.-China Strategic and Economic Dialogue, China committed to submit a new and comprehensive revised offer that responds to the requests of all he GPA parties, before the end of the year.

The United States and other GPA parties are focused on ensuring that China’s offer is in line with coverage offered by other parties to this agreement. Opening one of the largest and fastest growing procurement markets would provide substantial opportunities for international suppliers, including those from Hong Kong, which is also a GPA party. In short, 11 years after China committed to joining the GPA, the time has come to fulfill that commitment.

(3) Insistence on Competitive Neutrality and a Level Playing Field

Third, we continue to press China’s state-owned enterprises to act more like commercial enterprises. If China wants to have state-owned enterprises, that is purely China’s own choice. But if those enterprises receive benefits that give them an artificial competitive advantage, then we have concerns, because we believe that the rules of economic engagement should apply equally to all companies, private or state-owned. No company should be given special benefits, such as subsidized export credit, discounted factory inputs like cheaper energy or land, below-market loan rates, or exemption from antitrust laws, unless all companies have access to those benefits. These benefits and preferential treatment distort the playing field for other companies.

And why do we care if the playing field is distorted? Because we want companies to win based on better performance, business practices, and innovation, not based on government support. History shows that when companies based on external assistance and not on their own merits, they often have unearned competitive advantages and ultimately this leads to inefficient, bloated, and uncompetitive firms. As Secretary Clinton stated recently, U.S. companies today have the best, most productive workers in the world. They have the best technology, the most talented innovators. And many of them are sitting on large cash reserves. They play in the most competitive markets and win. Yet they are still disadvantaged relative to certain foreign state-owned enterprises, because they have to pay taxes, dividends, rent, get loans at market rates, and still remain competitive in global markets.

Our strategy to meet the state capitalism challenge involves a deployment of a robust set of policy tools that will level the playing field and open markets for fair competition. We are working to implement free trade agreements, bilateral investment treaties, and WTO accession commitments. These policies will counter measures abroad that distort markets and limit market access and competition.

(4) Investment

Finally, mutual investment in both of our countries will allow us to balance the economic interests of what are—and will be for the foreseeable future—the two largest economies in the world. We want U.S. companies to expand their businesses to China and we want Chinese investment in the United States. We made good progress during the U.S.-China Investment Forum in Washington, DC in April, and we hope to continue that trend.

The United States consistently ranks at the top of most major indicators for its attractive business and investment climate. The FDI flow into the United States in 2010 was more than double the flow into any other country at nearly $230 billion. This number was nearly 50 percent greater than FDI flow in 2009. In order to continue this promising trend, President Obama launched SelectUSA in January 2011. SelectUSA coordinates government activities in order to complement the activities of our 50 states, which are the primary drivers of economic development, to attract investment to the United States. If you are interested in investing in the United States, we and SelectUSA can direct your queries to the different states’ economic development agencies, making sure you get connected to the right partners for your investment selection process.

We see a great opportunity for more investment from China and Hong Kong, which is why the U.S. Government designated both places as top markets for SelectUSA outreach. For example, from 2005 to 2010, China was America’s fastest-growing source of FDI at over 50 percent average growth per year. Meanwhile Hong Kong’s $4.3 billion of FDI in the United States is only slightly less than Mainland China’s $6 billion in FDI. One positive example of Mainland Chinese investment was Dalian Wangda Group’s decision in May this year to purchase America’s second-largest movie theater company – AMC theaters – for $2.6 billion. We want to continue this trend, and in that vein, I want to highlight the important Chinese Overseas Investment Summit in Hong Kong on August 22nd and 23rd. In particular, on the afternoon of August 23rd, AmCham and U.S. service providers will have dedicated sessions to discuss the nuts and bolts of investing in the United States.

Since I have been in Hong Kong I have heard much about the final point I would like to speak on. It is the Committee on Foreign Investment in the United States, or CFIUS. I often hear the misconception that CFIUS is some all-powerful organization determined to impede any foreign investment. This is obviously not true based on the numbers I just cited. CFIUS is simply an interagency committee of the U.S. government – of which I am a member – authorized to review mergers, acquisitions, and takeovers from foreign companies that could affect the national security of the United States. It does not cover new or greenfield investments in the United States. And by law CFIUS can only look at national security, not economic or other policies, and it must apply the same rules and clearance standards to all investors, regardless of country. Let me repeat, CFIUS only considers national security and does not consider economic or other policies, and it must apply the same rules and clearance standards to all investors, regardless of country. CFIUS regularly clears investments from both private and state-owned Chinese companies, often within a month. All of its rules are public and explained in detail.

Let me give a few facts. When a potential business deal is submitted to CFIUS the committee has 30 days to review the case, and can ask for a 45 day extension if needed. Of the thousands of foreign investments into the United States from 2008 to 2010, only 313 deals required CFIUS review. Of those only 16 required any form of mitigation or adjustment to be approved. CFIUS is transparent, limited in scope, and equally applied to all foreign investments. I wish all countries had such a focused and streamlined foreign direct investment process.

IV. Tools For Progress

This is certainly not the first time I am raising these four key issues—intellectual property rights, government procurement, a level playing field, and mutual investment. Fortunately, we have good vehicles for progress through steady and constructive engagement in all of these areas. One of these is the Strategic and Economic Dialogue I alluded to earlier. Our countries recently held the fourth Strategic and Economic Dialogue in Beijing in early May. The U.S. remains committed to a long-term investment in building mutual trust and understanding between China and the United States, and we see the S&ED as an important tool to achieve results.

And we need progress because while these problems aren’t new, they can’t continue forever. In May China made key commitments to (1) improving market access and leveling the playing field, (2) improving intellectual property rights enforcement and protection, (3) reducing trade secret misappropriation, and (4) committing to treating IPR owned or developed in the United States the same as IPR owned or developed in China. China also agreed to intensive discussions on the implementation of its commitment that technology transfer is to be decided by firms independently and not to be used by the Chinese government as a pre-condition for market access. We welcome these commitments and look forward to concrete steps in the right direction in the near future. They will go a long way in addressing the issue I’ve just discussed.

V. Conclusion

Using vehicles such as the Strategic and Economic Dialogue, we can work through our differences to strengthen our commonalities. Neither the United States nor China can fulfill its economic potential without the cooperation of the other. We are global partners, and in that partnership, all of you here in Hong Kong are indispensable players.

Thank you.

Click here to read Jose Fernandez's biography.