U.S.-China Economic and Security Review Commission, "Field Investigation on China's Impact on the U.S. Manufacturing Base," January 30, 2004

Friday, January 30, 2004
Blatt Building, Room 101  
State House Capitol Complex Pendleton and Assembly Streets
Columbia, South Carolina

DEAR SENATOR STEVENS AND SPEAKER HASTERT:

On behalf of the U.S.-China Economic and Security Review Commission, we are pleased to transmit the record of our field investigation in Columbia, South Carolina on January 30, 2004. This field investigation titled, ‘‘China’s Impact on the U.S. Manufacturing Base,’’ gave the Commission the opportunity to examine the real, on-the-ground impacts of fast increasing Chinese imports and off-shore transfers by U.S. firms on the U.S. manufacturing base.

This investigation revealed the extent of the difficulties faced by America’s manufacturers, workers and communities in the face of manufacturing competition from China and the urgent need for action to deal with them. The location was vital to the message. According to U.S. Department of Labor statistics, between November 2002 and November 2003, Columbia, South Carolina lost 12,000 jobs, which represents a 4 percent decrease, the largest percentage of jobs lost that year for any metropolitan area in the United States. The State of South Carolina lost 2.6 percent of its jobs over that same time period, the largest percent decrease of any State. In the manufacturing sector, South Carolina has lost 63,000 jobs, a nearly 20 percent decline over the past three years.

Representing bipartisan Congressional concerns about this matter, Senators Ernest F. Hollings (D–SC) and Lindsey O. Graham (R–SC) took part in the proceedings and expressed to the Commission their views regarding what they believed to be China’s unfair trade policies, particularly its artificially undervalued currency, as well as export subsidies, dumping, and other WTO-inconsistent practices. Panelists representing South Carolina’s manufacturing industries—including textile, apparel, steel and plastics—gave vivid descriptions of the bottom line challenges they face from such Chinese competition.

Unfair Chinese Trade Policies

China’s continued rapid growth in manufacturing, U.S. companies’ willingness to move production abroad in order to cut costs, often referred to as offshore outsourcing, and China’s policies aimed at encouraging growth and investment in its manufacturing base were discussed in depth at this investigation. In assessing causes of the worsening U.S. trade deficit and loss of U.S. manufacturing jobs, participants pointed to China’s lack of labor and environmental standards, rampant infringement of intellectual property rights, state subsidization of its state-owned industries through preferential tax treatment, access to capital, and other benefits, and its record of lagging compliance with many important commitments under its WTO accession agreement. These factors have undermined the competitiveness of U.S. manufacturing firms in South Carolina and elsewhere in our country.

Overall, many of the hearing participants were exceedingly critical of the U.S.’ trade strategy and policies. Many claimed that policies aimed at promoting free trade were in fact encouraging the transfer of manufacturing and research and development to China to the detriment of the U.S. economy.

Industry Specific Considerations

Steel: Over the last three years South Carolina’s steel and metals industry has experienced a dramatic decline. Between November 2000 and November 2003, South Carolina’s primary metals and fabricated metals industries lost a combined 7,300 jobs, representing contractions of 20 percent and 18.6 percent, respectively. According to the U.S. Department of Commerce, between 2000 and 2002, South Carolina’s exports of primary metal manufactures fell from just over $126 million to approximately $76 million.

Panelists representing U.S. steel firms described the effect of competition from China on their industry. They noted that China’s steel industry—which benefits from extensive capital subsidies from China’s state-owned banks—has grown 10 percent in the last 12 months resulting in soaring demand for scrap steel and other inputs. One particularly ominous concern expressed by hearing panelists is that a slow down in the Chinese economy could reduce its domestic demand for steel and lead to dumping of subsidized Chinese steel in U.S. markets, resulting in further price pressures on U.S. steel producers.

Textiles and Apparel: The U.S. textile and apparel industries have suffered dramatically since China entered the WTO in 2001. Over 50 American textile plants closed in 2003, resulting in the loss of 49,000 jobs. One out of every four U.S. textile jobs that existed in January 2001 no longer exists. South Carolina’s textile industry has suffered significant losses. In 2003, 4,000 textile workers in South Carolina lost their jobs. This was second only to North Carolina—whose textile industry lost 13,600 jobs.

Textile manufacturers and union representatives expressed deep-seated concern that the expiration of the Multifiber Arrangement on January 1, 2005 would allow China to capture a vast percentage of the U.S. market and decimate the remaining U.S. textile industry, which still employs 630,000 people. Participants also alerted the Commission that new trade agreements, such as the Central American Free Trade Agreement (CAFTA), provide an opportunity for the transshipment of Chinese textiles through third country ports, which would undermine the China specific textile safeguards imposed by the U.S. against a range of Chinese goods in December.

To guard against surges of Chinese textile imports from subsidized state-owned factories, the U.S. negotiated a special textile safeguard as part of China’s WTO accession agreement that allows the U.S. and other WTO members to impose restrictions on Chinese textile imports when they pose ‘‘a significant cause of material injury, or threat of material injury to the domestic industry.’’ Although China entered the WTO in January 2002, the U.S. Government did not publish procedures to implement this safeguard until May 2003, and first used this provision in November 2003 when the Bush Administration announced the imposition of textile safeguards on select categories of knit fabric, dressing gowns, robes and bras imported from China. These year-long restraints became official on December 23, 2003. The Commission believes the U.S. Government has not been aggressive enough in using this textile safeguard.

Based on the record of this hearing and the Commission’s other work on these issues to date, we present the following preliminary recommendations to the Congress for consideration. The Commission will continue to develop these recommendations and provide additional guidance in our annual Report to the Congress.

Preliminary Recommendations:

• The United States Trade Representative and the Department of Commerce should immediately undertake a comprehensive investigation of China’s system of government subsidies for manufacturing, including tax incentives, preferential access to credit and capital from state-owned financial institutions, subsidized utilities, and investment conditions requiring technology transfers. USTR and Commerce should provide the results of this investigation in a report that lays out specific steps the U.S. Government can take to address these practices through U.S. trade laws, WTO rights and by utilizing special safeguards China agreed to as part of its WTO accession commitments.
• The U.S. tax code should be restructured to eliminate incentives for U.S. businesses, particularly manufacturing, but also services and high technology companies, to shift production, services, research and technology abroad. Tax incentives which reward relocation abroad should be removed from the tax code as soon as possible.
• USTR should press for provisions during the Doha Round that allow for increased penalties on firms that have been found in violation of anti-dumping laws on multiple occasions.
• The Administration should undertake a comprehensive review and reformation of the government’s trade enforcement infrastructure in light of the limited efforts that have been directed at enforcing our trade laws. Such review should include consideration of a proposal by Senator Hollings (D–SC) at our hearing to establish an Assistant Attorney General for International Trade Enforcement in the Department of Justice to enhance our capacity to enforce our trade laws. Moreover, the U.S. Government needs to place a renewed emphasis on enforcement of international labor standards and appropriate environmental standards.
• If we experience new surges of imports that threaten the U.S. steel industry, the United States should claim a national security exemption under Article XXI of the WTO for the steel industry because of its importance to our military manufacturing sector and our national security.
• The United States should work with other interested WTO members to convene an emergency session of the WTO governing body to extend the Multifiber Arrangement at least through 2008 to provide additional time for impacted industries.
• The U.S. Government should more fully and effectively make use of the Section 421 China-specific safeguard and the China textile safeguard available to WTO members. These were important provisions negotiated into China’s WTO accession agreement and intended to provide relief for domestic industries hit with surges of imports from China.
• The leadership and appropriate Committees of Congress should convene a summit of leaders of the textile industry, its workers and their representatives, impacted communities and others to help define the crisis in the domestic textile and apparel industry as it related to trade with China and to define a plan of action to help address predatory trade practices and ensure that domestic capabilities exist to meet our Nation’s economic and national security needs in this important area. As part of that effort, the Summit should:
  • Review recently completed free trade agreements and those under negotiation so as to avoid loopholes such as that present in the Central American Free Trade Agreement (CAFTA) that grant the Chinese textile industry the opportunity to circumvent American safeguard and tariff provisions.
  • Examine Customs Service efforts to monitor and inspect shipments of textile and apparel imports to ensure that the law is being appropriately enforced and determine what increases in resources are necessary to protect the rights and interests of the industry and its workers.

Community Impacts

The Commission heard powerful testimony on the extent to which trade-related economic dislocations have impacted many South Carolina manufacturing communities. The Commission was told that the significant loss of jobs in South Carolina due to import competition and off-shoring had resulted in externalities such as the erosion of the local tax base in many communities and the accompanying decline of law enforcement, infrastructure, and health services and had a debilitating impact on families and quality of life.

Preliminary Recommendations:

• U.S. trade policies have contributed to current high levels of unemployment. The Administration should authorize another unemployment insurance extension in an attempt to provide unemployed workers with a greater amount of time with which to locate employment.
• A new type of education program should be enacted for long-term and effective adjustment to the employment impacts of outsourcing and relocation abroad. Further, a series of Federal and local training programs in coordination with private U.S. firms aimed at tailoring education to meet future needs should be developed.
• The Congress should fund information sessions and a public awareness campaign to inform laid off workers about existing and newly established programs such as Trade Adjustment Assistance (TAA). Petitions for TAA eligibility should be processed expeditiously.

Thank you for your consideration of our recommendations. In addition to the above findings we commend you to also review the record of our September 25, 2003 hearing on China’s investment, industrial, and exchange rate policies, our February 5, 2004 hearing on China’s WTO compliance and a February 12–13, 2004 field investigation in San Diego on U.S.-China high-technology trade. We hope you will find all of these proceedings helpful as the Congress continues its assessment of the implications of China’s growing role in global trade and manufacturing.

Sincerely,

Roger W. Robinson, Jr.
Chairman

C. Richard D’Amato
Vice Chairman

OPENING REMARKS
OPENING STATEMENT BY COMMISSIONER GEORGE BECKER
OPENING STATEMENT BY CHAIRMAN ROGER W. ROBINSON, JR.

Congressional Perspectives
Senator Ernest F. Hollings (D-SC)
Senator Lindsey Graham (R-SC)
Congressman James Clyburn (D-SC)

Panel I: Textiles/Apparel
Norman H. Chapman, Executive Vice President Inman Mills
Sarah Y. Friedman, Executive Director of the SEAMS Association
Larry Crolley, President  of Craig Industries
Harris L. Raynor, Regional Director of the Southern Region, Vice President Union of Needletrades, Industrial and Textile Employees
Smyth McKissick, Alice Manufacturing, Representing the American Textile Manufacturing Institute

Panel II: Steel
Bob Johns, Marketing Director, Nucor Corp.
Timothy J. Dillon Sr. Vice President, Commercial Georgetown Steel Company LLC
Larry Murray, United Steelworkers of America (USWA)

Panel III: Trends in Trade and South Carolina Manufacturing
Lewis F. Gossett, President, South Carolina Manufacturers Alliance (SCMA)
Donna DeWitt, President, South Carolina AFL-CIO
Kenneth Riley, President, International Longshoremen's Association, Local 1422
Jon T. McClure, Founder, President and CEO, ISO Poly Films.
Mr. J. Richard Dillard, Jr. Director of Public Affairs, Milliken & Company

Panel IV: Community Impact
Jack Hutchison, Economic Development Coordinator, Georgetown County Economic Development Commission
Allen Burns, Director of Planning and Development, Georgetown County Economic Development Commission
Evans Tindal, Director of Operations, Cheraw Yarns Mill
State Senator Larry Martin(R-SC)

Additional Material Supplied
Daniel R. Dimicco, VICE CHAIRMAN, PRESIDENT and CHIEF EXECUTIVE OFFICER, Nucor Corporation U.S. Rep. John M. Spratt, Jr
How Furniture and Cabinet Manufacturers Compare: by Urs Buehlmann, Matthew Bumgardner, Al Schuler & Rich Christianson
Identifying Future Competitive Business Strategies for the U.S. Residential Wood Furniture Industry: Albert Schuler & Urs Buehlmann
How Can the U.S. Wood Products Industry Compete? by Urs Buehlmann, Matthew Bumgardner, Al Schuler & Rich Christianson