May 23, 2007

Statement of Chairman Dodd on Conclusion of the Strategic Economic Dialogue and Banking Subcommittee Hearing on U.S.-China Economic Relations

One of the very first actions that I undertook as Chairman-elect of the Banking Committee in December 2006 was to write a letter with then-Chairman Shelby to the Treasury Secretary on the occasion of the first Strategic Economic Dialogue (“SED”). In January 2007, I chaired a hearing with Secretary Paulson on exchange rates and the SED. At that hearing, Treasury Secretary Paulson testified that the SED is the “best chance to get some progress [on the currency issue].” The second session of the SED concluded in Washington this morning and I am eager to learn more about any progress made on both the currency and market access issues that the hearing today will address. The issues of exchange rates and market access represent two significant hurdles in the U.S.-China economic relationship. China is a source of tremendous opportunity for the United States, but also a source of new challenges that must be overcome in order to reach the full potential of our economic relationship. Foremost among these challenges is the need to level the playing field for American firms doing business in China and for American workers and companies producing goods for sale at home and abroad. Currently, the trade of goods and services is tilted to advantage Chinese firms because of ongoing Chinese government intervention to keep the yuan undervalued and China’s discriminatory treatment of American and other non-Chinese financial services firms. The most recent Commerce Department data shows that the bilateral trade deficit increased from $47 billion in the first quarter of 2006 to $57 billion in the first quarter of this year, accounting for over thirty percent of the overall U.S. trade deficit. These numbers have very real consequences in terms of our nation’s manufacturing base and the communities in which manufacturing firms are based. Nearly 22 percent of manufacturing jobs have been lost in my home state of Connecticut over the last ten years. Over the past six years alone, our nation has experienced the loss of three million manufacturing jobs. To be sure, China’s undervalued currency is not the sole, or even predominant, cause of this loss of American manufacturing jobs. But just as surely, China’s devaluation of its currency is, in my view, a major contributor to the loss of U.S. manufacturing jobs and our bilateral trade deficit. Federal Reserve Chairman Ben Bernanke said as much last December when he referred to “the effective subsidy that an undervalued currency provides for Chinese firms that focus on exporting.” While China benefits from this export subsidy, they also enjoy open access to investment in America’s markets. Over the weekend, the Chinese government announced its purchase of a 10 percent stake in the U.S. private equity firm, Blackstone. Far from being protectionist, this transaction demonstrates the openness of the American public and the American markets to foreign investment. Unfortunately, U.S. financial services firms are not afforded the same open treatment in China’s markets. For too long, U.S. financial services firms have been denied the open access that our country provides for Chinese firms in the United States. I welcome today’s announcement from the SED on financial sector reform which will resume the previous practice of licensing foreign securities companies, raise the quota for Qualified Institutional Investors (“QFIIs”), permit foreign banks to offer domestic currency credit cards, and improve the application and licensing process for insurance companies. However, significant discriminatory policies remain that protect China’s financial sector from foreign competition. For example, today’s announcement does not address China’s restrictions on foreign bank branches’ ability to offer full domestic currency services to Chinese individuals, including restrictions on domestic currency loans and deposits. China also restricts the operating structures under which foreign firms do business, limiting activities to branch offices instead of subsidiaries, and limiting the geographic reach of foreign firms. Because of these ongoing restrictions, only one American bank is fully incorporated in China. China also limits the foreign equity stake in state-owned banks to 25 percent, imposes unequal capital requirements on foreign banks, and maintains an onerous application and approval process for a range of financial services operations. These policies hinder the ability of U.S. firms to compete in China and to expand their market presence among a consumer population in need of financial services, products, and expertise. I urge the Administration to continue to use all tools available to eliminate unfair trade advantages resulting from China's discriminatory policies. My hope is that American firms in China will soon experience the type of fair treatment and open access that the United States provides to the Chinese. As Steve Bartlett, president of the Financial Services Roundtable recently stated, “if the Chinese government is allowed to invest in Blackstone, the Chinese people should be allowed to invest in Merrill Lynch or Raymond James.” Simply put, American workers and businesses are being forced to compete on tilted terrain, and our government must take action to level the playing field. Last week, Senator Shelby, who as Chairman of this Committee conducted vigilant oversight and numerous hearings on exchange rates, and I wrote a letter to Treasury Secretary Paulson urging him to take the necessary steps that will bring an end to the unfair currency practices and market access barriers that are contributing to the trade deficit and damaging the competitive position of American workers and businesses. Adequately addressing these unfair trade practices may require steps beyond diplomacy and the Strategic Economic Dialogue, as Secretary Paulson’s colleagues in the Department of Commerce and the Office of the United States Trade Representative have recently demonstrated. I believe that one such step should include citing China for currency manipulation in the upcoming International Economic and Exchange Rate Policy Report, which was due to this Committee on April 15th. This report is the only mechanism currently in place for the United States to publicly monitor and remedy unfair trade advantages resulting from currency manipulation. Under a law passed by this Committee nearly two decades ago, the Treasury Department has a statutory obligation to use this reporting mechanism. The American public relies on the Treasury to ensure that countries who manipulate their currencies “regularly and promptly adjust the rate of exchange…to eliminate the unfair trade advantage.” Given Treasury’s current approach on currency manipulation, I look forward to learning from today’s witnesses and others about additional strategies and options the United States should consider to better address the unfair trade advantage resulting from China’s currency and discriminatory market access policies.