What does a trade deficit signal to economic analysts multiple choice question?

[House Hearing, 108 Congress] [From the U.S. Government Printing Office] S. Hrg. 102-000 deg. THE EFFECT OF FOREIGN CURRENCY MANIPULATION ON SMALL MANUFACTURERS AND EXPORTERS ======================================================================= HEARING before the COMMITTEE ON SMALL BUSINESS HOUSE OF REPRESENTATIVES ONE HUNDRED EIGHTH CONGRESS FIRST SESSION __________ WASHINGTON, DC, JUNE 25, 2003 __________ Serial No. 108-21 __________ Printed for the use of the Committee on Small Business Available via the World Wide Web: http://www.access.gpo.gov/congress/ house ______ 92-726 U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2003 ____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512�091800 Fax: (202) 512�092250 Mail: Stop SSOP, Washington, DC 20402�090001 COMMITTEE ON SMALL BUSINESS DONALD A. MANZULLO, Illinois, Chairman ROSCOE BARTLETT, Maryland, Vice NYDIA VELAZQUEZ, New York Chairman JUANITA MILLENDER-McDONALD, SUE KELLY, New York California STEVE CHABOT, Ohio TOM UDALL, New Mexico PATRICK J. TOOMEY, Pennsylvania FRANK BALLANCE, North Carolina JIM DeMINT, South Carolina DONNA CHRISTENSEN, Virgin Islands SAM GRAVES, Missouri DANNY DAVIS, Illinois EDWARD SCHROCK, Virginia CHARLES GONZALEZ, Texas TODD AKIN, Missouri GRACE NAPOLITANO, California SHELLEY MOORE CAPITO, West Virginia ANIBAL ACEVEDO-VILA, Puerto Rico BILL SHUSTER, Pennsylvania ED CASE, Hawaii MARILYN MUSGRAVE, Colorado MADELEINE BORDALLO, Guam TRENT FRANKS, Arizona DENISE MAJETTE, Georgia JIM GERLACH, Pennsylvania JIM MARSHALL, Georgia JEB BRADLEY, New Hampshire MICHAEL MICHAUD, Maine BOB BEAUPREZ, Colorado LINDA SANCHEZ, California CHRIS CHOCOLA, Indiana ENI FALEOMAVAEGA, American Samoa STEVE KING, Iowa BRAD MILLER, North Carolina THADDEUS McCOTTER, Michigan J. Matthew Szymanski, Chief of Staff and Chief Counsel Phil Eskeland, Policy Director Michael Day, Minority Staff Director (ii) C O N T E N T S ---------- Witnesses Page Bergsten, Fred, Institute for International Economics............ 4 Blecker, Robert A., American University.......................... 6 Yagle, Steve, Reliable Machine Company........................... 8 Bender, Jay, National Association of Manufacturers............... 10 Jones, George III, American Forest & Paper Association........... 12 Tashjian, Edward M., American Furniture Manufacturers Association 14 Freedenberg, Dr. Paul, The Association for Manufacturing Technology..................................................... 16 Johnson, Cass, American Textile Manufacturers Institute.......... 18 Appendix Opening statements: Manzullo, Hon. Donald A...................................... 30 Prepared statements: Bergsten, Fred............................................... 33 Blecker, Robert A............................................ 40 Yagle, Steve................................................. 72 Bender, Jay.................................................. 74 Jones, George III............................................ 79 Tashjian, Edward M........................................... 84 Freedenberg, Dr. Paul........................................ 90 Johnson, Cass................................................ 98 (iii) THE EFFECT OF FOREIGN CURRENCY MANIPULATION ON SMALL MANUFACTURERS AND EXPORTERS ---------- WEDNESDAY, JUNE 25, 2003 House of Representatives, Committee on Small Business Washington, D.C. The Committee met, pursuant to call, at 2:09 p.m. in Room 2360, Rayburn House Office Building, Hon. Donald Manzullo [Chairman of the Committee] presiding. Present: Representatives Manzullo, Chabot, Graves, Schrock, Beauprez, McCotter, Velazquez, Napolitano, Bordallo, Majette and Sanchez. Chairman Manzullo. Good afternoon, and welcome to this hearing of the Committee on Small Business. Especially welcome to those who have come some distance to participate and attend this hearing. Last June, we looked at the effect the overvalued dollar had on our manufacturers and exporters. A year later the dollar has declined measurably, but not significantly against Asian currencies. We do appreciate Treasury Secretary Snow's redefinition of a strong dollar. It has immensely helped many manufacturers as they compete with Europe and Canada. The currency overvaluation problem remains primarily with most of Asia. The U.S. manufacturing base was the hardest hit by this recession. The U.S. has lost over 2.7 million manufacturing jobs. For 34 straight months, the United States has lost manufacturing jobs. In the past 12 months, it has averaged 53,000 manufacturing jobs per month. I want you to think about that. The 16th District of Illinois, which I represent, has been severely hurt by the downturn in manufacturing. Plants have been closed. People have been put out of work. Ingersoll Milling & Machine Company has been the latest company in Rockford to declare bankruptcy. During this period, our Asian trading partners have implemented a strategy of currency undervaluation in order to gain a competitive advantage for their experts by making them cheaper. It is estimated that the actions by China, Taiwan, South Korea and Japan have essentially given their exporters a 20 to 40 percent reduction. This in turn acts as a tax by the same percentage on U.S. manufacturers and exporters. Since 1949, the Chinese government has kept its currency pegged at 8.21 yuan to the dollar. I am sorry. Since 1994. China has experienced economic growth, gains in productivity, a large export sector and increased foreign investment, all factors that would cause its currency to appreciate if it were allowed to freely move. It is estimated by many economists that the yuan is undervalued by as much as 40 percent. Japan has systematically intervened in the currency markets to reduce the value of their yuan. Manipulation of exchange rates for the purpose of achieving an unfair competitive advantage is illegal under international protocols. This manipulation of the currency market costs U.S. jobs. Trade is vitally important to this country and was part of the reason for the economic expansion of the 1990s. It is also critically important to the small business sector. Small businesses export their goods overseas, and currency manipulation has squeezed their profit margins from those least able to absorb it. The competitiveness abroad has dramatically decreased because of currency fluctuations and exchange rates that affect their prices. The impact has not just been felt abroad. The overvalued dollar has caused the U.S. to be flooded with cheap imports. Import penetration has caused domestic manufacturers to lose market share against foreign products that have a temporary price advantage. The effect of this interference is to artificially inflate the dollar in a blatant attempt to manipulate the market. The market needs to be determined at a currency rate value. Government intervention only skews the market and invites artificial rates that are not reflective of reality. We need to insure that U.S. firms have a level playing field in the global market and not be at a competitive disadvantage. [Mr. Manzullo's statement may be found in the appendix.] Chairman Manzullo. I now yield for an opening statement by my good friend and colleague, the Ranking Member, Mrs. Velazquez of New York. Ms. Velazquez. Thank you, Mr. Chairman. Today, the increasing number of imports/exports crossing over our borders illustrate the dominance of the international trade market in the global economy. While many factors affect our ability to participate in the new global economy, exchange rates play a crucial role. The value of the country's dollar determines its competitiveness within the international market. A weak dollar can make a nation's products cheaper in foreign markets and foreign products more expensive domestically, therefore, benefiting exporters. Just the opposite is true for the strong dollar. Products become more expensive abroad, and foreign products are cheaper domestically. Unfortunately, U.S. manufacturers have recently been suffering from these effects, therefore making it more difficult for the U.S. to successfully compete in markets overseas. Sadly, over 2,000,000 manufacturing jobs have been lost over the last few years, and U.S. exports across the Atlantic have fallen by $17.6 billion, accounting for half of the total decline in exports. On top of this, our manufacturers are struggling with a huge surge in imports, and U.S. economists predict the market share for market share for imports to increase even further in 2003. The effects have been detrimental to U.S. exporters and small business. Small business dominates the international commerce, accounting for 97 percent of all U.S. exporters. The U.S. manufacturing sector and exporters are the ones who bear the brunt of the nation's overvalued dollar. While the dollar has, fortunately, begun to weaken among most major currencies, it still has not depreciated as much as it should have. One of the major contributors to this problem has been the exchange rate policies of some of our trading partners who manipulate currency for competitive purposes. Among these countries are China and Japan. China's current fixed rate has created significant hardships for U.S. manufacturers and exporters. Despite China's substantial economic growth, its exchange rate remains the same as it did when it was set in 1995. Many economists estimate that China's currency is undervalued by 40 percent. This has contributed to our nation's large trade deficit and the relocation of thousands of U.S. jobs to foreign countries. In addition, Japan, who operates on the floating exchange rate, frequently intervenes in the foreign exchange markets, weakening Japan's yen against the U.S. dollar. The exchange rate practices of these two countries has put U.S. manufacturers and exporters at a clear disadvantage. However, while pointing out that these policies are creating hardship for their success, many U.S. corporations are relocating affiliates to these countries in order to take advantage of the low costs. By using these foreign locations versus U.S. exports to deliver the products to foreign markets and setting up export facilities in China, these businesses play into the growing trade deficit. This results in the loss of U.S. jobs. It is fair to say that they may be contributing to the problem, too. As the foreign trade market continues to grow and expand, it is crucial that we do all we can to protect our nation's exporters and manufacturers. Actions such as Secretary Snow's recent support for the market based floating exchange rate for China are a step in the right direction. We must continue to engage these countries in an effort to prevent them from manipulating these policies. The U.S. cannot afford to lose out on the benefits of the new global economy, but our manufacturers cannot afford to continue carrying the weight of these unfair policies. The prosperity and success of not only the U.S., but also of its trading partners, depend on fair policies that seek to balance the needs of our country with our leading role in the world economy. Thank you, Mr. Chairman. [Ms. Velazquez's statement may be found in the appendix.] Chairman Manzullo. Thank you. Before we get to our witnesses, we welcome the newest Member of the Small Business Committee, Thaddeus McCotter from Michigan. Thaddeus, why not take 90 seconds and tell us about yourself. You can get your name out in 90 seconds. Mr. McCotter. Yes. Thaddeus McCotter, Michigan 11. Mr. Chairman, Members of the Committee, I say to you the same thing I said to my wife on our twelfth wedding anniversary. I am just happy to be here. Thank you. Chairman Manzullo. And we are glad that you are here. That is pretty brief. The rules are there is a light in the middle of the table, and when it is green you are fine, when it is yellow you are on thin ice, and when it is red you have fallen through the ice. We will ask if you could follow that. You do not have to read word for word. The statements of all the witnesses will be made part of the record. Anybody else who wants to make a statement made part of the record here are the rules. It cannot exceed two pages in single type. It has to be at least 10 point type. No attachments or anything because these are printed at government expense. If you want to have anything put into the record just get it to our staff, and we will be all set here. Staff will take care of it. Our first witness is Fred Bergsten, Director, Institute for International Economics. We look forward to your testimony. You might have to pull that mike up a little bit closer there. STATEMENT OF FRED BERGSTEN, DIRECTOR, INSTITUTE FOR INTERNATIONAL ECONOMICS Mr. Bergsten. Thank you, Mr. Chairman. I thought my comparative advantage, since you have lots of experts that will tell you about the plight of small business with the dollar, is to lay out the overall situation and suggest some policy changes that might help deal with them. The facts first. From 1995 until about 16 months ago, the dollar rose by a trade weighted average of 35 to 50 percent, depending what index you used. The rule of thumb is that every one percent rise in the average exchange rate of the dollar leads to an increase in our trade deficit of about $10 billion with a two-year lag, so a rise of 40 percent or so in the dollar explains the great bulk of our existing trade and current account deficits of $500 billion and rising rapidly. This, incidentally, comes on top of a net foreign debt position of the United States that has already hit $3 trillion and is rising very rapidly. To finance our current account deficit and our own foreign investments, we have to import $4 billion of foreign capital every working day. It is clearly a unsustainable situation. Fact two. As a result, I believe, the dollar has, therefore, begun to come down as you mentioned. Over the last 16 or 17 months, it has come down, but by a trade weighted average of only 10 to 20 percent depending on again what index you use, so the run up of the previous six and a half year bull market in the dollar, the reversal has only accounted to something like one-third to at most one-half of the earlier run up. There have been no noticeable adverse effects of that dollar decline on the U.S. Inflation is at very low levels. Interest rates are at 50 year lows. It has been very smooth, very gradual, very orderly, i.e., those who feared a decline of the dollar have nothing to worry about. However, as I say, it has only gone one-third to one-half of the previous run up. Now, at my institute we do extensive analysis of all this, and we have concluded that the U.S. current account deficit, to be sustainable, would have to be cut in about half from where it is now. Instead of $500 billion to $600 billion, $250 billion to $300 billion. That is still a big deficit. We think that would be sustainable, but that would require a decline of the dollar of 25 to 30 percent from where it started, again leading to the conclusion that it has only come down by about one-half what is needed. I want to leave you with conclusion number one. The current account deficit needs to be cut in half. The dollar exchange rate is moving in the right direction, but it has only gone about halfway. The other crucial point is that the decline of the dollar so far has been very unbalanced. The dollar has come down 30 to 40 percent against the euro, only 15 percent against the yen, zero against the Chinese renminbi, so it has been quite unbalanced, and one could expect the Europeans to start screaming, and rightly so, if that pattern continued in the second half of the dollar decline. My punch line, therefore, is that not only does the dollar have to go down another 10 or 15 percent on average, but the composition needs to change. It needs to come down particularly against the Asian currencies of which the two most important are the Japanese yen and the Chinese renminbi. Now the problem with Japan, as you mentioned, is that they are resisting the necessary adjustment very vigorously. They put, depending how you define it, $33 billion to $43 billion of intervention into the market in the month of May alone to keep the yen from rising further and contributing to the adjustment. I asked one of my close Japanese friends, the former Vice Minister of Finance, ``Mr. Yen,'' Eisuke Sakakibara, last week where he thought the yen would be in the absence of that intervention. He said at least 10 yen higher, 10 percent higher, closer to 100, which is the eventual level that I think it needs to rise to. There is a lot of debate as to whether this Japanese intervention is effective. Mr. Yen thinks it has been. I think it has been. I would leave that for you. Secretary Snow has been very clear. Every statement he has made indicates the exchange rate should be set by the market. The huge Japanese intervention obviously distorts that, so my suggestion to the Secretary is that he should tell the Japanese that in the future for every dollar they buy to keep the dollar strong he should tell them he will sell a dollar to offset it, to neutralize the intervention's effect and thereby to revert the exchange rate outcome to the market, which is his stated policy. There is even a theory called the theory of the second best in economics that says when there is one governmental distortion that distorts a market a second governmental intervention to offset that is theoretically called for and justified, so I would suggest offsetting U.S. intervention to make sure the rate is set by the market. I believe, frankly, that if we let the Japanese know we were contemplating that they would cease and desist, the yen would rise, and that part of the adjustment would be supported. The second big issue is the Chinese currency. Chairman Manzullo. You have a red light there, Fred. Mr. Bergsten. Can I give you one more minute? Chairman Manzullo. Okay. Mr. Bergsten. The Chinese peg to the dollar is important not only because it averts adjustment vis-a-vis China itself, but because I believe it blocks currency adjustment in the rest of Asia. The reason is that all the Asian countries fear competition from China above everything else, but if the Chinese currency is riding the dollar down as the dollar declines, China is becoming even more competitive, worsening the situation and making it even harder for Korea, Taiwan, even Japan, to let their currencies go up and accept adjustment against those, so the Chinese fix is of crucial importance not just for China, but for the whole region. Therefore, Secretary Snow again has said the right thing. China should let the currency appreciate. I believe that is crucial. That should be the second key pillar of our policy going forward to achieve both the rest of the needed adjustment and do so in a balanced and, therefore, much more feasible way. Thank you. Chairman Manzullo. Thank you. [Mr. Bergsten's statement may be found in the appendix.] Chairman Manzullo. Our next witness is Dr. Robert Blecker, Professor of Economics at my alma mater, American University, and a research associate at the Economic Policy Institute. You did not know that, did you? Mr. Blecker. No, I did not. Chairman Manzullo. Yes. Are you not impressed? Mr. Blecker. It is good to be before your Committee. Chairman Manzullo. There you are. Good to be here. We look forward to your testimony. STATEMENT OF ROBERT A. BLECKER, PROFESSOR OF ECONOMICS, AMERICAN UNIVERSITY, AND RESEARCH ASSOCIATE, ECONOMIC POLICY INSTITUTE Mr. Blecker. Thank you very much, Mr. Chairman and Members of the Committee. I do appreciate the invitation to testify here. Chairman Manzullo. Could you pull the mike closer to you? Mr. Blecker. I do appreciate the invitation to testify here this afternoon. Mr. Chairman, there has been much attention in the last few months to the falling value of the dollar. However, while attention has been focused on the dollar's fall relative to the euro and a few other major currencies, less attention has been paid to the fact that the dollar has fallen much less or not at all compared with many other currencies of our other important trading partners. Especially, the dollar has not fallen nearly as much relative to the Japanese yen and has a fixed or managed exchange rate with the Chinese renminbi, the Taiwanese dollar and certain other Asian currencies due to the currency manipulation practiced by their governments. As a result, the dollar has not fallen nearly enough overall to undo the damage caused by its overvaluation for the past several years. According to my statistical estimates, the rise in the dollar up to 2002 caused the following damage: First, a loss of three-quarters of a million U.S. manufacturing jobs; second, a decline in profits on U.S. manufacturing operations of about $100 billion per year; and, third, a reduction in capital expenditures at U.S. manufacturing plants of over $40 billion at an annual rate and, second, as Fred Bergsten has already testified, a major contribution to the enormous U.S. trade deficit. Although my statistical analysis does not distinguish U.S. manufacturing businesses by size, I believe that small businesses are likely to be disproportionately hurt by the overvalued dollar because small businesses tend to be less multinational in scope and, hence, have less of an ability to produce or source products overseas. If small businesses do shift production or outsource abroad as they are often forced to in this currency environment, the result is still a loss of American jobs that can devastate local communities. Furthermore, the fact that the high dollar has led American manufacturers to cut back their investment spending portends slower growth and reduced technological innovation in these industries in the future. For all these reasons, the recent decline in the dollar to a more reasonable level relative to the euro, the British pound, the Canadian dollar and a few other currencies gives a ray of hope for the U.S. manufacturing sector to begin a recovery. However, this ray of hope is significantly dimmed by the partial nature of the dollar's decline to date. The countries that have let their currencies rise the most, chiefly the Europeans and Canadians, account for less than half of U.S. trade overall and much less than half of our trade deficit. Even in regard to those currencies, the dollar has lost only part of the value it gained between 1995 and 2002. However, the situation is worse with Japan and other East Asian countries that actively manipulate their currency values, yet account for more than half of the U.S. trade deficit. The dollar has fallen only about 12 percent versus the yen since February 2002, compared with about 27 percent versus the euro. China, Taiwan and many other developing nations maintain pegged exchange rates, thus preventing their currencies from rising to market determined levels. The major East Asian countries have amassed reserves of well over $1 trillion U.S. dollars in their efforts to keep their own currencies undervalued and maintain artificial competitive advantages in the U.S. market. Such intervention has grown in intensity in the past few months as the dollar has fallen relative to the other currencies. In response to these policies, the United States needs to take strong measures to pressure our leading trading partners in East Asia to abandon their currency manipulation and allow their currencies to rise to market levels. The Secretary of the Treasury should use his authority under U.S. law to investigate foreign currency manipulation and negotiate with trading partners that obtain chronic trade surpluses with us by undervaluing their currencies. I believe we also need to make the maintenance of realistic equilibrium exchange rates a condition for trade liberalization and market opening agreements. I would urge that all future trade agreements include prohibitions on currency manipulation and that this issue be given a priority role in future trade negotiations such as in the WTO and proposed FTAA. Of course, the United States should not be indifferent to the fact that rising currency values can threaten economic prosperity in other countries, but the right solution to this problem is to encourage our trading partners to stimulate their own domestic economies rather than to keep the dollar overvalued and let them achieve export led growth at our expense. Thank you very much, and I would be happy to answer any questions. Chairman Manzullo. Thank you. [Mr. Blecker's statement may be found in the appendix.] Chairman Manzullo. Our next witness is Steve Yagle. Steve is president of Reliable Machine. He is my constituent and comes from Rockford, Illinois. I have known him since he was about 14 or 15. He has grown up. Steve represents the Rockford Area Chamber of Commerce Manufacturing Council and the 250 manufacturers that are part of the Chamber's membership, as well as the 1,200 manufacturers in the four county region of Winnebago, Boone, Ogle and Stephenson Counties in northwest Illinois. We look forward to your testimony. STATEMENT OF STEVE YAGLE, PRESIDENT, RELIABLE MACHINE COMPANY Mr. Yagle. Thank you, Mr. Chairman and Members of this distinguished Committee. I am pleased to be here to testify before you today, and I thank you for the opportunity to discuss issues relating to trade with Asia. I applaud your efforts to gather information and data regarding currency valuation. Again, my name is Steve Yagle. I am president of Reliable Machine Company in Rockford, Illinois. We employ 50 hardworking individuals, and we consider ourselves a neighborhood manufacturer. I am here today representing the Rockford Area Chamber of Commerce, which I am the chairman of the Manufacturing Council, and 250 manufacturers that are part of the Chamber's membership, as well as 1,200 manufacturers in the four-county region of Winnebago, Boone, Ogle and Stephenson Counties in north-central Illinois. Even as we battle to reduce our costs and to keep our skilled employment base, we are faced with challenges from our global competitors. Today, I am here to discuss the effect of Asia's practice of currency valuation and its effect on manufacturers in our region. The Chinese Government manipulates the value of its currency to maintain a trade advantage over American companies. This artificially lowers the prices of Chinese goods in the U.S., allowing foreign competitors an unfair advantage in the U.S. market. This practice has placed Rockford area manufacturers at a serious disadvantage, and unless these trends are reversed more damage will be done to the livelihoods of the Rockford area working families and to the nation's economy. From 1998 through 2002, the Rockford area lost more than 8,000 manufacturing jobs. Currently, the City of Rockford unemployment rate exceeds 10 percent, while the rate in Illinois is 6.2 percent, and the U.S. rate is 5.5 percent. Our region can no longer afford to continue losing manufacturing jobs. An Illinois Manufacturing Extension Center study reported that over 60 percent of those surveyed are experiencing competition from China and have lost market share. Moreover, 46 percent of all Respondents said they expected competition from China to reduce their sales by an average of about 16 percent in 2003, with more losses expected in the next few years. All are losing sales overseas or find they can no longer compete against Chinese imports into the U.S. market. Many of the manufacturers are reducing their work forces. Others say they will close their plants. Bill Orman, who is the president of Rockford Fastener, a long-time family business, predicts large numbers of small and mid-size Rockford area manufacturers will be closing down permanently due to foreign competition as orders in his industry have shrunk from millions of pieces per order to 50,000 to 60,000 pieces. Rockford Products, another fastener manufacturer, is sourcing some parts from Asia to remain competitive. These parts were once manufactured in Rockford. In fact, the Rockford area was once the largest geographic area for fastener manufacturing in the world. Today, China holds that distinction. My own business was affected when a business opportunity worth up to $750,000 annually, which would have created jobs in my factory, tax revenue for local, state and federal governments, vanished as a big box retailer decided to source product in China instead of Rockford and Wisconsin. My company will survive. My potential customer, a father and son business of 30 years, will most likely be bankrupt by the end of this year. I have a question. As manufacturing jobs continue to disappear, what is going to take their place? Also, weakness in the manufacturing sector hurts the service sector. The loss of high paying manufacturing jobs translates into lower sales for businesses of all types. Wealth is created when we manufacture goods. United States manufacturers are the most efficient on the globe. We offer world class benefits to our employees. We invest in the newest and best safety features. We are responsible to our environment, and we take responsibility for the products that we produce. What we are asking for is a level playing field with fair trade. Manufacturers in the Rockford area can compete in price, quality, on time delivery and service with any competitor in the world. As you consider the situation that American manufacturers face, please consider these options. We must enforce International Monetary Fund articles of agreement that explicitly prohibit currency manipulation; number two, impose tariffs on those countries that utilize currency manipulation to gain advantage in the U.S. marketplace; Number three, institute tax credits for domestic production, both for those who produce and for those who purchase from U.S. domestic manufacturers; and, number four, establish a U.S. national policy that recognizes that manufacturing is crucial for the maintenance and potential growth of our work force and manufacturing business sector. Thank you very much for allowing me to speak today. [Mr. Yagle's statement may be found in the appendix.] Chairman Manzullo. Thank you, Steve, for coming here. I understand you have a meeting and may have to leave here prior to the Committee adjourning. If that is the case, you can just excuse yourself and leave any time you want. Mr. Yagle. Thank you, Mr. Chairman. Chairman Manzullo. You are welcome. Our next witness is Jay Bender. Jay is speaking on behalf of the National Association of Manufacturers. He is also the president of Falcon Plastics, Inc. We look forward to your testimony. STATEMENT OF JAY BENDER, PRESIDENT, FALCON PLASTICS, INC., NATIONAL ASSOCIATION OF MANUFACTURERS Mr. Bender. Good afternoon, Mr. Chairman and Members of the Committee. Thank you for allowing me to be here today. My name is Jay Bender, and I am president of Falcon Plastics, a manufacturer of custom plastic molded components, assemblies and tooling located in Brookings, South Dakota. I am pleased to discuss the effect of foreign currency manipulation, especially the undervalued Chinese currency. I am also pleased to be speaking on behalf of the National Association of Manufacturers, the NAM, which represents 14,000 members, including 10,000 small and medium sized companies. Falcon Plastics has been in business for 28 years. The company was founded by my father, Don Bender, in 1975. We employ 200 people and have three production facilities, two in South Dakota and one in Tennessee. We sell custom molded plastic products to the agricultural, appliance, automotive, business machine, electronics and medical industries. We have shipped our products to 28 states and export around the world. We can and do work hard to stay competitive by incorporating up-to-date equipment and production methods, but we cannot compete when the deck is stacked against us. The situation in American manufacturing today is serious and in some sectors critical. Over the past several years, American manufacturing has lost almost 2.5 million. Mr. Chairman stated 2.7 million. Falcon Plastics has gone from 300 people to just 200 people. Mr. Chairman, let me stress that. We have lost one-third of our work force. At the same time, imports from China have surged, and the U.S. trade deficit with China has ballooned to over $100 billion. The NAM projects that if our trade deficit with China continues its 20 year trend, in five years it will exceed $300 billion. This problem must be addressed or American manufacturing will lose more jobs, and pressures to retreat from our global trade commitments will become irresistible. We have many strengths in America. We are innovative. We have some of the best workers in the world. We have the benefit of a free and open society in which to do business. We cannot compete when the currency of a major trading partner like China is so undervalued that it produces an overwhelming competitive advantage. The NAM has seen estimates that China's currency is up to 50 percent undervalued. How do we know their currency is undervalued? Economic institutes, the World Bank and brokerage houses have all come out with estimates, but this one is my favorite. The Economist magazine's Big Mac index has been a pretty good indicator. Since 1986, economists have been using a comparison of the price of Big Macs around the world to gauge if currencies are at their market level. This has been among the most accurate currency indicator for about 20 years. According to the Big Mac index, the Chinese yuan is undervalued by, with all due respect to the golden arches, a whopping 56 percent. Let me illustrate what is happening. One of my top customers recently got bids from a Chinese producer that were 26 percent lower than mine. My customer is going to stay with us for now because we are able to customize our orders and make quick deliveries, but I am not sure how long that is going to last. If the yuan were 20 to 30 percent higher, this would solve my pricing problem, and I could hold onto my customers. The move to a realistic exchange rate could make a huge difference for my company. Until that happens, I see my customers purchasing more and more offshore, especially from China. These products here tell another story. We mold each of the halves of these fishing lure bodies, and we also mold the packaging that they fit into. Our customer is a large producer of fishing lures. They decorate them and then attach the hooks to complete the lure. They have made the decision to move all of this production to China because they can save 50 percent over the cost of producing it here in the U.S. Generally, fishing lures are made by small, family-owned companies, but they will not be for long with a 50 percent price difference. If China did not deliberately undervalue its currency, many of these family businesses might be saved. The situation as it currently exists is just unfair. Does anyone believe that with all the growth in Chinese production increased productivity, product quality and exports the yuan is not worth any more now than it was in 1994? There are other factors as well. I can produce a particular mold for one of my former customers for $25,000. That is a very competitive price. They purchase a similar Chinese mold for under $3,000. For that particular mold, 20 percent of my price is materials and components sourced on the world market. These numbers tell me that something here just does not add up. Something is wrong. Our government must ensure that China is not subsidizing or dumping its products, which it is obliged not to do now that it is a member of the WTO. In addition to obtaining reform of China's currency practices, we ask Congress to look closer to home to address rising production costs. These are issues addressed in the NAM strategy for manufacturing growth and renewal, and they are essential to the health of U.S. manufacturing. They include the runaway cost of litigation, energy and health care----. Chairman Manzullo. How are you doing? How are you doing on time? Mr. Bender. Almost done. Chairman Manzullo. All right. Mr. Bender. Almost done. Costly and productive environmental and legal regulations and a badly-in-need-of- overhaul tax system. If Congress fixes these problems, manufacturing costs will go down, and we will see fewer companies moving their production to China and foreign countries. Mr. Chairman and Members of the Committee, some of the best jobs in South Dakota are in manufacturing. At Falcon Plastics we provide a safe working environment with good health and retirement benefits for our employees. We understand that we make adjustments to operate in a global environment or that we must make adjustments, and we are prepared to compete, but we must have a level playing field. We do not have five or 10 years. We need your help now. Thank you very much, and I look forward to your question. [Mr. Bender's statement may be found in the appendix.] Chairman Manzullo. Thank you. Did you wish to make that Big Mac a part of the record? Mr. Bender. Everyone thought it was my lunch. Chairman Manzullo. There it is. Mr. Bender. I have a good customer in Rockford, by the way, as well, Anderson Packaging, Inc. Chairman Manzullo. That is great. That is great. Our next witness is George Jones, III. That is a pretty famous name. Did you leave your guitar outside? Mr. Jones. I do not sing. Chairman Manzullo. You do not sing. Okay. If you could pull your mike up close to you, Mr. Jones. Mr. Jones. Great. Chairman Manzullo. Mr. Jones is president of Seaman Paper Company of Massachusetts and is speaking on behalf of the American Forest & Paper Association. We look forward to your testimony. STATEMENT OF GEORGE JONES, III, PRESIDENT, SEAMAN PAPER COMPANY OF MASSACHUSETTS, INC., AMERICAN FOREST & PAPER ASSOCIATION Mr. Jones. Thank you very much. Before I start, I would like to thank all of you for caring enough to hold this hearing. It means a lot to us. Mr. Chairman, my name is George Jones. I am the third generation owner of a 57-year-old business that manufactures decorative and industrial tissue paper. My company, Seaman Paper Company of Massachusetts, Inc., and its affiliates have approximately 500 employees, and we are the major employer in our area. Our products include resale tissue purchased in stores for gift wrap, retail packaging tissue used by stores to package customer purchases, crepe streamers and waxed paper for floral and food service applications. We are a traditional, American- built, family-owned business. For more than 50 years we have enjoyed relative prosperity and success, but today we are facing the most severe threat to our existence in our company's history: Chinese imports. I am here today testifying on behalf of the American Forest & Paper Association, AF&PA. AF&PA and its members have a long history of support for free and fair trade policies. Our trade policy agenda has been driven by the belief that our country's abundant fiber resources, skilled labor force and access to capital provide the U.S. forest and paper industry with the comparative advantage to compete in the global marketplace. However, this ostensible comparative advantage has been undermined in recent years by unfair exchange rate policies and other Chinese Government trade practices. While China's paper and paperboard consumption jumped between 1997 and 2002, the corresponding growth for U.S. exports did not materialize. In fact, exports to China of several important paper categories have stagnated or declined because of a substantial buildup in Chinese paper and paperboard production capacity. In contrast, China's paper and paperboard exports, including converted products, greatly benefited from an artificially weak currency. Likewise, China has become a major consumer and producer of wood products. Why have U.S. producers lost ground rather than gained ground with the Chinese market over the past five years? The Chinese Government has intentionally kept the value of its currency abnormally low to create a competitive advantage for their products at the expense of U.S. produced goods. The Chinese Central Bank maintains the yuan's value at an exchange rate of 8.28 to the dollar by regularly intervening in foreign exchange markets. This has been done through the accumulation of large foreign exchange reserves since the mid 1990s. Some estimates suggest that China's currency is about 40 percent lower than it would be if it had been allowed to float in line with market forces. This has the effect of a 40 percent tax on U.S. exports to China and a similar tax on U.S. manufacturers competing in the U.S. domestic market against Chinese imports. What is the on-the-ground impact of the Chinese Government policies in communities across the country? I can tell you firsthand that it has meant the loss of significant U.S. sales for my company, $5 million in annual sales since year 2000 and growing. It has meant that I have had to lay off employees and curtail production while we have tried to replace the lost business. Some of my U.S. competitors have not been so fortunate. In the last two years, several U.S. paper mills have either closed or are barely holding onto their businesses. This means a loss of employment, frequently in small, rural communities, and a loss of tax revenue to the towns where these companies have been located. Unfortunately, this story is being repeated in product after product, including wood and paper products. My written testimony has specific recommendations for action, but I need to emphasize that if something is not done quickly many small businesses will not survive. Let me tell you firsthand that the perception is that the Chinese cost advantage is based solely on labor costs. The reality is that labor costs alone cannot explain the full cost advantage in our product lines. In the past 10 years, we have invested heavily in state-of- the-art converting equipment, which has reduced our labor cost by 90 percent for this product and 50 percent for this product, yet the Chinese imports are priced at or below our variable costs. There is no investment or other management tool that we can use to offset this Chinese cost advantage. If you do not act and help to create a level playing field, then our long-term fate is sealed. Please help us to preserve these American jobs. Thank you very much. [Mr. Jones's statement may be found in the appendix.] Chairman Manzullo. Thank you for your testimony. Our next witness is Edward---- Mr. Tashjian. Tashjian. Chairman Manzullo [continuing]. Tashjian. Okay. I was talking to your congressman, Cass Ballenger. Mr. Tashjian. Super guy. Chairman Manzullo. He really is. I invited him to come to our hearing for the opportunity to introduce you personally, but he said that he just was not able to make it. Let me announce that on the table before we break there is going to be a report that has been compiled by Congressman Gary Miller's daughter, who is working on her Master's at one of the schools in the Research Triangle. It is a great report on the case goods imported from China that demonstrates that case goods both in household and in commercial furniture are now 30 percent of U.S. market share and growing. It is a great report. It is only about 14 or 16 pages. Is it there yet, Phil? It is already on the table, and I would invite the panel and the members that have come here to the hearing to take a copy of that report with them. Tashjian? Mr. Tashjian. Tashjian. It is an Armenian name. Chairman Manzullo. Ed has come here from Hickory, North Carolina, as vice president of marketing for Century Furniture Industries, and we look forward to your testimony. STATEMENT OF EDWARD M. TASHJIAN, VICE PRESIDENT OF MARKETING, CENTURY FURNITURE, AMERICAN FURNITURE MANUFACTURERS ASSOCIATION Mr. Tashjian. Thank you. Thank you very much, Mr. Chairman and Members of the Committee. Thank you for the opportunity to testify. Chairman Manzullo. Could you pull the mike closer to you? You might want to pull it down just a little bit. Mr. Tashjian. How is that? Chairman Manzullo. That is fine. Mr. Tashjian. I am Ed Tashjian, and I am the vice president of marketing for Century Furniture, a high end residential furniture manufacturer located in Hickory, North Carolina. It is an honor to appear before you today, and I have great personal admiration for this body, as well as an enormous appreciation for the time, talent and energy each of you dedicate to public service. You do a great job not just on this issue, but on every issue. At the outset, let me make it clear that unlike my colleagues at the end of the table, Dr. Blecker and Dr. Bergsten, I am not a trained economist. I am not an expert on world trade and international monetary policy. I am here today as an advocate for the 156,000 men and women who make up America's residential furniture manufacturing industry to present a small business point of view on the impact of currency manipulation and to ask you to use your common sense and good judgment to do what is in the best interest of this country. Clearly, this is a complex subject both technically and ideologically, and there are no easy answers. At the end of my testimony, however, I hope you will conclude that the term fair trade means the enforcement of U.S. laws and international trading rules and that the continued loss of furniture manufacturing jobs to the Far East does not serve the best interests of the United States. This hearing could not have come at a more opportune time. Thanks to the perseverance of lawmakers like you who care about domestic manufacturing, the issue of currency manipulation is now receiving the attention it deserves. Secretary Snow's comments last week in support of a more fairly valued yuan and his belief that China is prepared to move in that direction are positive signs that the Administration is beginning to understand how this issue impacts domestic manufacturers like us who are already having a difficult time competing. If you go into any high end furniture retail store today, you will find that roughly comparable residential wood furniture that is manufactured in China costs anywhere from one-third to one-half of furniture manufactured in the United States. The result is a lack of competitiveness and a loss of nearly one-quarter of the domestic furniture manufacturing jobs in the last three years. As devastating as these statistics are, these figures understate the magnitude of the impact of these losses on communities like Hickory because declines in furniture production have a serious ripple effect, hurting firms that supply textiles, hardware and a range of services to our industry. There are few things more disheartening than to pick up a local newspaper and read about another plant closing. In my view, there are five key factors that contribute to this substantial pricing variance at retail, and I mention these five to add fuel to the fire that George was talking about that, you know, currency manipulation is just one of these things, and it is the dominant one, as you will see. The first one is low wages, and I agree with George that everybody believes that the advantage the Chinese has is predominantly low wages. For a comparable worker in China, they earn 45 cents an hour, while his counterpart in the U.S. earns $12.75 an hour. To put that in perspective, the Chinese worker makes 1/28th as much as the American worker. The second are intellectual property rights violations. Foreign products have a much lower development cost because they are almost always based on American designs. The U.S. must press China to vigorously enforce its IPR related commitments as a new member of the World Trade Organization. Third are lower operating costs. Many Pacific Rim competitors have no EPA, no OSHA requirements, which dramatically reduce operating costs. Now, please understand that I strongly support providing our employees with an impeccable work environment. In fact, Century goes to such great lengths to have a safe and comfortable environment that in our chair plant we have gone 1,000,000 hours without a lost time accident, which is the equivalent of an individual worker working for 500 years without a lost time accident. It is very important, and we work towards that. Fourth, what enters into this are lower health care costs. I am not an expert on foreign health care, but I can tell you that better than eight cents of every dollar, every revenue dollar, goes towards health care at my company. The expense of this has doubled over the past five years. In fact, we spend more on health care than we spend on lumber, fabric and leather. Fifth, and most importantly, is currency manipulation. By pegging the yuan to the dollar, an exporting nation like China has in effect undervalued its currency by as much as 30 to 50 percent. This is tantamount, as everybody here has said today, to a 30 to 50 percent tariff on U.S. products in our own marketplace. That is terrible. It is like two Olympic sprinters competing in a 100 meter dash, but one gets to start at the 40 meter mark. It is unfair. Of these five factors, currency manipulation is by far the most serious. Many of our foreign competitors have an advantage when it comes to cheap labor, less stringent regulations and significantly lower operating costs, but the cost variance in the marketplace of products made in these countries is nowhere near what it is in countries like China where the currency is pegged. The WTO and the IMF have stated that such currency manipulation done to gain an unfair competitive advantage is illegal in the global trading system. Therefore, it is vitally important that U.S. trade authorities monitor and enforce China's obligations in this area and insure that the timetables for action embodied by the WTO agreement are met. Free trade must also be fair trade and legal trade, and I would encourage this panel, as well as the Administration, to stand firm on the pursuit of fair valuation. Century Furniture appreciates all this Committee has done to focus attention on the plight of manufacturing in the U.S., and we hope that you will remain engaged on this important issue. Thank you. [Mr. Tashjian's statement may be found in the appendix.] Chairman Manzullo. Thank you for your testimony. Our next witness is a good friend, Dr. Paul Freedenberg, testifying on behalf of the Association for Manufacturing Technology. We look forward to your testimony. TESTIMONY OF PAUL FREEDENBERG, VICE PRESIDENT, GOVERNMENT RELATIONS DIRECTOR, ASSOCIATION FOR MANUFACTURING TECHNOLOGY Mr. Freedenberg. Thank you. Good afternoon. My name is Dr. Paul Freedenberg. I am Vice President, Government Relations, for AMT, the Association for Manufacturing Technology. Today I will be testifying on behalf of AMT, a 100-year-old trade association that represents approximately 350 machine tool builders and related product firms throughout the United States. It should be cause for great concern that the machine tool industry is experiencing the worst conditions in its domestic market in a half a century. Orders are off more than 60 percent since their peak in 1997. Import penetration has increased more than 40 percent in the past four years due in large part to an overvalued dollar, which has only recently receded from its dizzying heights in relation to the European currency. More than 30 machine tool companies have closed their doors in the past 18 months. Most recently, we have seen the bankruptcy of Ingersoll Milling, one of the oldest and most technologically advanced companies in the industry and one of your oldest and most distinguished constituents, Mr. Chairman. I guess one could conclude that if Ingersoll could fail, anyone in the machine tool industry is vulnerable. Today, I will focus on a core problem that all of U.S. industry confronts. That problem is Chinese currency manipulation. For more than a year, AMT has been part of the Coalition for a Sound Dollar, and as part of this coalition we have expressed our great concern regarding the Chinese Government's strategy of undervaluing their currency in order to garner exports and foreign investment. Last year, our nation's bilateral trade deficit with China exceeded $103 billion, the largest bilateral deficit in the world. Based on the four months of 2003, that deficit is headed for more than $120 billion this year. It is a deficit and a trend that any economist will tell you is unsustainable, yet it has continued to grow at this pace for the past decade. Indeed, China is accumulating foreign currency reserves, mostly U.S. dollars, at a rate of approximately $6 billion per month. This is an uneven trading arrangement, and it is directly related to the distortion and the value of the two nations' currencies. It is obvious that China's economic strategy over the past decade has been to keep the value of its currency low, boosting its exports and holding down imports. While many have observed that this is a highly successful strategy, another way of looking at it is that this is a shrewd method of exporting unemployment. For those who will tell you that China's trade surplus is self-correcting I would point out that the United States imports from China have been growing at more than twice the rate of U.S. exports to China. Underlying all of this is the currency imbalance, and if you get rid of that currency imbalance you would more than double the offset getting rid of all of the tariffs that China imposes on U.S. goods. I would point out that both Article 15 of the WTO and Article 4 of the International Monetary Fund prohibit the use of currency manipulation as a method of gaining unfair trade advantage. The IMF defines such manipulation as large scale and protracted intervention in one direction to gain an unfair trade advantage. The WTO prohibits currency intervention that would frustrate the intention of the provisions of the WTO agreement. An unfair trade case against China could be brought in either forum. Parenthetically, I believe that these very same Chinese currency practices are also challengeable under Section 301 of the Trade Act, but for any of this to occur the U.S. Government has to have the political will to take these actions. This unfair currency issue is the responsibility of the Secretary of the Treasury. It is my hope that Secretary John Snow will at the very least enter into discussions with his Chinese counterparts at the earliest possible opportunity with the objective of achieving a more reasonably priced yuan. Initially, this issue need not be the subject of a formal trade action, but Secretary Snow should not hesitate to initiate one or more of the actions I have discussed if the Chinese are unresponsive. There is really no alternative to the immediate initiation of such discussions or ultimate trade actions if the discussions should prove fruitless. Either this debilitating trade distortion must be eliminated or we will see many industrial sectors faced with very unattractive alternatives-- the prospect of losing their markets entirely or the alternative of being forced to relocate in China as the only opportunity for survival. Thank you, Mr. Chairman. [Mr. Freedenberg's statement may be found in the appendix.] Chairman Manzullo. Thank you for your testimony. Our next witness is Mr. Cass Johnson speaking on behalf of the American Textile Manufacturers Institute. Mr. Johnson, we look forward to your testimony. STATEMENT OF CASS JOHNSON, SENIOR VICE PRESIDENT, AMERICAN TEXTILE MANUFACTURERS INSTITUTE Mr. Johnson. Thank you. Thank you, Mr. Chairman, Members of the Committee. Thank you for this opportunity to speak about the terrible damage that Asian currency manipulation is doing to the U.S. textile sector, one of this country's largest manufacturing employers. There is not a more important issue facing manufacturing today, and you and your colleagues are to be highly commended for holding these hearings. My name is Cass Johnson. I am a senior vice president at the American Textile Manufacturers Institute and have worked in the textile area for 13 years. As such, I can describe what can happen to a great manufacturing industry when our government does not deal forcibly with important issues such as this one. By way of background, in 1994, China cut the value of the renminbi by more than 40 percent. Forty percent is a number we have been hearing a lot today. The not too surprising response came three years later when China's most direct competitors, other Asian nations, saw their own economies collapse and their own currencies losing an average of 40 percent. Three years later, the U.S. manufacturing sector slid into recession, taking the U.S. economy with it. There is an important chain of events here. First, China cuts the value of the renminbi by about 40 percent. Next, the currencies of its Asian competitors are devalued by about 40 percent, and then finally U.S. manufacturing suffers its worst recession since the Great Depression. In the textile sector, the effect has been nothing short of devastating. As China and other Asian currencies have been devalued, prices for textile and apparel products from these countries have fallen by as much as 38 percent. With U.S. profit margins below five percent, a 38 percent drop by your competitor pretty much puts you out of business. As a result, since 1997 we have closed more than 200 textile plants in the United States and lost more than 210,000 textile jobs. It is the worst bloodletting for this industry since the Great Depression. In fact, I can give you a whole list of companies that made it through the Great Depression, but have not survived the last years. Let me emphasize that these were not antiquated mills using outdated equipment. On the contrary, we have been shutting down modern, highly productive textile plants and all too often shipping their state-of-the-art weaving looms and spinning frames to China. While U.S. manufacturing and the U.S. textile industry are obviously affected by many issues, one fact stands out. During this time, Asian governments, in particular China, spent over $1 trillion to keep their currencies undervalued and their exports to the U.S. strong. What is most tragic about this is that it could and should have been prevented. What Korea, Taiwan, Japan and China, among others, are doing with their currencies is out and out illegal. One way purchases of currency with a purpose of gaining an export advantage are specifically prohibited under both IMF and WTO rule. Not only that; these actions are also clearly against the President's own stated policy that free markets, not export oriented Asian governments, should determine exchange rates. Not only that; these actions clearly are doing enormous damage. An excellent study by Ernie Preeg from the Manufacturers Alliance concluded that 1.5 million manufacturing jobs have been lost during the last two years because of illegal Asian currency manipulation. Influential news organizations from around the world--the Economist, the New York Times, the Wall Street Journal, the Financial Times; the Financial Times had a story yesterday on this--all agree that Asian currency manipulation of this magnitude is not only bad for the United States, but it is also destabilizing for the entire world economy. One might have expected that all this evidence, all this breaking of international rules and, most importantly, all these terrible job losses might have provoked some serious action by our government. In fact, many of us from the manufacturing sector, a number of them at the table here today, have spent the last year and a half trying desperately, and I want to underline desperately, to get the U.S. Government to act. We have gone to USTR and to Commerce and to State on multiple occasions. Surely there are few issues that have a bigger trade, economic and international impact than this one. Each time we have been turned away with the proviso we cannot talk about this. Only Treasury can. Well, we have been repeatedly to Treasury, and the problem with Treasury is that you feel this is some far away story that they do not want to bother about much. In fact, according to the Treasury Department's semi-annual report to Congress, currency manipulation is not even happening. According to Treasury, those $1 trillion in Asian central banks do not really count for anything at all. Those 2.3 million lost manufacturing jobs? According to Treasury, illegal Asian currency manipulation did not have a thing to do with it. On the one hand we are confronted with very aggressive Asian governments that are breaking international rules going against stated U.S. policy and along the way throwing millions of hardworking Americans out of their jobs at a time when our economy can least afford it. On the other hand, we have a U.S. Government that cannot even talk about this issue except to refer the matter to Treasury, which officially says currency manipulation does not exist. That is one reason why our industry is so grateful that you and the other Members of the Committee are highlighting this issue. Action cannot come a moment too soon. Thank you, and I would be happy to answer any questions. [Mr. Johnson's statement may be found in the appendix.] Chairman Manzullo. Thank you very much for that excellent testimony. The $500 billion or so trade deficit is more than that. Let me give you an example. If this item is exported and it costs $100 million--a government hammer? That is about what it costs. [Laughter.] Chairman Manzullo. It goes down on the trade merchandise balance sheet as plus $100 million, even though it could contain $99 million worth of foreign parts. Before the NAFTA tariffs were completed, at least we had the bonded material and had an idea of what was coming back in terms of a reimport. Now we have something similar on the 62.5 percent content in automobiles. You have to wonder. The stock market is going up in value. Sales are increasing. The only jobs that are being created are overseas. This is indeed a recovery, if you want to call it that, with a continuous decrease in the loss of jobs, and the problem is the fact that this city does not understand it. I have been talking about manufacturing for 11 years because Rockford is a city that has a huge industrial base. It is about a 25 percent industrial base. Nearby McHenry County, until a few years ago, had an astonishing 36 percent industrial base. Most cities are 14 percent. Rockford led the nation in unemployment in 1982 at 24.9 percent where we lost 100 factories and 10,000 highly skilled jobs. I am looking, Dr. Freedenberg, at page 6 of your testimony that talks about remedies. I think it is time to send a missile across the bow of the Administration. I think perhaps it is time that we send a letter saying that Congress perhaps should not entertain any more free trade agreements until the Administration begins to enforce some of the remedies that you have set forth on page 6. What do you think about that? Mr. Freedenberg. I did not come here to advocate protectionism or to stop the trade negotiations, but I think you will see that Congress--I think you are a good reflection of sentiment. Support will be lost for free trade if we continue in this situation with the distortion that has existed with Asian currencies. Chairman Manzullo. I mean, this is not free trade. Mr. Freedenberg. It does not amount to that. Chairman Manzullo. Why did Treasury come out with the statement that there was no distortion? Mr. Johnson, you talked about that report. I was astonished when I saw it also. Mr. Johnson. We have asked them that question. How can you not find distortion when literally everyone else is finding it, when other banks are finding it, when financial analysts are finding it? Chairman Manzullo. When McDonald's is finding it. Mr. Johnson. When McDonald's is finding it. Chairman Manzullo. Right. Mr. Johnson. The requirement to look for it, as I understand it, was put in in the 1980s when this problem emerged before and Treasury was ignoring the issue. They say well, we do not really know what the definition of distortion is. Chairman Manzullo. That is interesting. Dr. Bergsten, in the midst of your testimony you had talked, and maybe I did not understand it, about imposing some type of a surcharge on those countries that send items here when the currency is being manipulated. Mr. Bergsten. No, Mr. Chairman. I did not talk about a trade surcharge. I talked----. Chairman Manzullo. That is a new word for tariff, I thought. Mr. Bergsten. No. It has been used. Remember, President Nixon put on a 15 percent surcharge---- Chairman Manzullo. We will find a new word then. Mr. Bergsten [continuing]. For all U.S. imports in 1971 for exactly this reason when the dollar was overvalued. Under those rules of the game, then you actually had to negotiate the devaluation of the dollar. He and John Connally put on an import surcharge to speed that negotiation. It was rough, but it worked. No. What I suggested was something directly in the exchange market. Japan was my case where they are clearly intervening hugely to block the currency adjustment that the market is trying to provoke. I suggested our Treasury should counter their intervention dollar for dollar. In fact, I suggested something even less Draconian; that the Secretary simply tell the Japanese that he was prepared to match their intervention dollar for dollar. I am quite confident that would be sufficient for them to cease and desist. I do not think we would actually have to do it, but if we got serious and threatened that counterintervention I am quite confident that would resolve the Japanese part of the problem. The Chinese problem is more complicated. Everybody here has been beating up on China, starting with myself, but let me make one point on the other side of the debate. We have all noted that China has pegged to the dollar. Indeed, it did so from 1994 when it unified its exchange rates and did that big devaluation. Remember, since that time, as I testified and as you know, the dollar actually rose by 35 to 50 percent against the trade weighted average of currencies we deal with. That means China rode the dollar up for six and a half years, hurting their competitive position. Now, the fact that they have done so well and piled up so many reserves and attracted so much investment actually shows just how competitive they are because they did it despite riding the dollar up, but the point is for a long time the average exchange of the renminbi actually appreciated sharply in value. It has ridden the dollar down for the last 17 months, and I think we have to take strong action to get them to stop doing that, but in fact they did go the other way for a prolonged period of time. With China, the issue is to get them to stop pegging to the dollar. In fact, it is in China's interest. They claim they do it to get a ``stable'' exchange rate, but that does not lead to a stable exchange rate. The dollar fluctuates wildly against the euro, the yen, every other currency in the world. The Chinese peg to the dollar. They get dollar stability, but it is a minority of their trade, less than a third. They would get more stable exchange rates if they actually pegged to a basket of currency and let their exchange rate move, so it is even in their interest. That one is more complicated. They are following another IMF rule that says any country can set its own exchange rate system, which in their case is to peg to the dollar which is perfectly legitimate. Hong Kong does it. Argentina did it, unfortunately, until recently. The issue is the price. Since the price is clearly undervalued--we have all testified to that extent--pressure does need to be brought on China to move the rate up. They could appreciate in one step. They could let it float up. There are any number of ways to do it, but that is the issue. Chairman Manzullo. I saw an article in the Wall Street Journal last week that a lot of our U.S. multinational corporations that are manufacturing in China want to keep that peg, which I think is pretty bad, in order to keep the currency at an artificial rate. Mrs. Velazquez? Ms. Velazquez. Thank you, Mr. Chairman. Dr. Blecker, as Asian countries' dollar holdings have been growing, so have their investment of these dollars in the safest dollar denominated assets that they can find--U.S. Treasury and agency securities. Asian central banks now hold more than $1 trillion of U.S. Treasuries alone. What has been the effect on the United States' economy of these large scale purchases of U.S. government debt? Mr. Blecker. Well, the consequences are that it accounts for a large part of the estimated damage to the manufacturing sector that I spoke of earlier. These countries, if we combine the Asian developing countries led by China and Japan, account for the majority of our trade deficit, and they would account for the majority of the estimated damage to the manufacturing sector I cited, which was a $100 billion a year loss of profits for these American manufacturers, a $40 billion a year loss of investment spending, and, in my estimates, which are underestimates compared to some other people's, I had three-quarters of a million jobs lost. To make it proportional, something on the order of 60 percent of that is probably due to those countries. Ms. Velazquez. What would happen if these countries liquidated the security holdings? Mr. Blecker. Well, in terms of the effect in financial markets, I do not know how big that would be, but it would start to correct some of this currency imbalance. Ms. Velazquez. Yes? Mr. Bergsten. Could I just add to that? The direct effect of that big investment of foreign dollar holdings into treasuries has been to keep U.S. interest rates much lower than they would otherwise have been. Mr. Blecker. Right. Mr. Bergsten. That has been the argument, particularly in the previous Treasury Department, for the so-called strong dollar; that the influx of foreign investment of their export earnings has had a favorable effect on our financial markets. There is no denying that. On your second question, if there was for some reason a massive withdrawal of foreign assets from the U.S. security markets, it would have a noticeable impact driving down the prices of Treasuries and, therefore, driving up their interest rate. That is always the horror story in this field, as a former Undersecretary of the Treasury. If the dollar ever went into a free fall or a collapse, you would have a significant risk of inflation pressure picking up and interest rates rising. Now, I was careful to say in my statement that there is absolutely no sign of any of that over the last year and a half of dollar correction. It has been gradual and orderly. Indeed, I think it has been the perfect time to do it because we are at a low inflation/low interest rate environment. We know the dollar has to come down. Not only does the dollar need to come down. It needs to come down now because this is the right time to do it. Having said that, there is always the risk. If the gradual, orderly decline became a free fall, it could be trouble. Ms. Velazquez. Thank you. Thank you. Mr. Bender, by pursuing weak dollar policies, we run the risk of generating inflationary pressures that could lead to higher interest rates. Should we pursue a weaker dollar even if it leads to higher capital costs for businesses, or do you believe that near term deflationary pressures are enough to upset any inflationary pressures that result from the weaker dollar? Mr. Bender. It sounds like an economist question. Ms. Velazquez. If any of the others----. Mr. Bender. Well, I guess I could just make some comments. Right now, the interest rates are lower than we have ever seen, and certainly I am enjoying that right now. Unfortunately, for the past several years my business has been in an overcapacity situation so low interest rates really are not helping me as far as going out and purchasing new equipment or financing new capital, which I think has been one of the big issues in our U.S. economy that manufacturers have been in an overcapacity situation. There is no need to go out and invest. Ms. Velazquez. Dr. Blecker? Mr. Blecker. Thank you. Until we have the disastrous scenario that Fred Bergsten just painted of the free fall and the huge hike in interest rates, which I agree is unlikely, I think any realistic rise in interest rates and capital costs would be much smaller than the savings from correcting the current competitive disadvantages that you have heard about here. These kind of disadvantages are on the order of 30 or 40 percent. If we are talking about interest rates going up a few percent, even five percent, it would pale by comparison. There are a lot of studies that have been done of business investment in the United States, and the best studies--I would particularly commend to you Barry Bosworth's book from the Brookings Institution in 1993--show relatively little (and what we call in economics statistically insignificant) effect of interest rates and capital costs on business investment, whereas the demand factor, how much customers are purchasing from companies and what their market looks like, is really the driving factor in investment. If these companies' business picks up because they are no longer selling at a huge, competitive disadvantage vis-a-vis these countries, they will be able to invest, even if capital costs are a little higher. The higher revenue, the demand growth and competitive situation will more than compensate. Ms. Velazquez. Thank you. Mr. Jones. Could I add a real life example to that too, please? Ms. Velazquez. Sure. Mr. Jones. Your question is would you rather have low interest rates or sales, and I think the answer is we would rather have the sales. For years, we thought that this was all a labor thing. We invested very heavily in labor saving equipment. Now we have a machine that would put us in a competitive position on this product which is sitting idle right now because the sales went over to China. Ms. Velazquez. Thank you, Mr. Chairman. Chairman Manzullo. What is that product, Mr. Jones? Mr. Jones. These are crepe streamers for parties. Chairman Manzullo. Okay. The next questioner would be Congressman Schrock, who has an interesting alma mater. Mr. Schrock. Yes. I also am a graduate of American University. Chairman Manzullo. Are you not amazed that you can turn out a couple of conservatives like this in light of the reputation there? Mr. Blecker. We have a very diverse campus. Chairman Manzullo. There you are. Mr. Schrock. In spite of American, I still came out a conservative. Chairman Manzullo. Is that right? Mr. Schrock. Yes, that is right. No. It was a great experience. It really was. Thank you all for testifying today. Each of the stories you told was very interesting. This Chairman is the one who has really peaked my interest in the loss of manufacturing jobs, and I guess all through my life I have seen it. When I was growing up in Middletown, Ohio, Armco Steel Corporation was a massive company founded by one of my neighbors, Charles H. Hook. It is now owned by the Japanese and slowly, but surely, going away. My closest friend in college lived in Aliquippa, Pennsylvania, which was the steel Mecca of America. It is gone. When I was a student at the senior officer course at the Naval War College in Newport, Rhode Island, my wife loved to go to the outlets in Fall River, Massachusetts, where they made clothing. That is all gone now. It has all gone overseas, and it continues to get worse and worse and worse. I guess I just do not know where we stop this. All we are looking for is a level playing field. I think Mr. Bender said that. Mr. Tashjian said--by the way, my uncle worked for Century Furniture for 30 years in Hickory, so I know your company very well. You talk about lost time accidents. The Chinese do not care. Mr. Tashjian. Right. Mr. Schrock. They do not have safety laws. They do not have labor laws. If somebody gets hurt, injured or killed, they just take one of their one billion people and stick them in that hole, and they do not worry about that. We do. We are a compassionate society who cares about that sort of thing. Because of that, I think we are at a terrible disadvantage. How we balance that, how we correct that, is a total mystery to me. Mr. Johnson, I think your comment was one of the most fascinating in your testimony. You said one-way purchases of currency with the purpose of gaining an export advantage is clearly illegal under both IMF and WTO rules, and they do it and do it and do it. What do we do about it? What are we doing about it? I do not know. Mr. Johnson. Nothing, right? Mr. Schrock. Nothing. Mr. Johnson. It is Treasury's purview. Mr. Schrock. But whose feet should be held to the fire on this? Commerce's? Mr. Johnson. Treasury. Mr. Schrock. Treasury, I mean. Treasury, yes. Mr. Johnson. You know, I think all the other agencies are sympathetic because this is causing problems for them in trade negotiations and international agreements and whatever. They sent us to Treasury. We talked to Treasury, and nothing seems to happen. Mr. Schrock. What is their excuse why it is not happening? Mr. Johnson. They do not believe it is happening. Mr. Schrock. They do not believe it is happening. It is unfortunate. The Secretary was invited to come here today. Is that right? He was out of the country. Chairman Manzullo. He would have come, but he is out of the country. Mr. Schrock. He is out of the country. Yes. Mr. Johnson. Can I say about Secretary Snow? He is the first one that has had positive words on this. Mr. Schrock. Great. Yes. Mr. Johnson. I will tell you, at the staff level my experience of them is that this is an issue they do not want to embrace. Mr. Schrock. Sure, because it might jeopardize their jobs, and they are in there to keep themselves employed. They do not care how they do it. It is costing us. Mr. Johnson. I think there is a serious impediment there. Mr. Schrock. Yes. Mr. Blecker was the first one that talked about the currency manipulation, and I am going to ask all of you. I do not know the answer to this. I am not an economist, so I do not know. How do you recommend we pressure East Asia, for instance, to abandon their currency manipulation? Clearly, I think we ought to be able to do something about it. I do not know what. If we can, then this body up here from the people who sit from that desk back ought to be able to try to accomplish this and make it happen. Yes, sir, Doctor? Mr. Bergsten. Well, Mr. Schrock, I would say again that I think the most direct and, therefore, appropriate route is to respond directly to their currency intervention in the currency market. I have suggested that we could tell the countries involved--in the first instance Japan, but the same approach could be taken to China--that if they continue to distort the market, which runs directly counter to Secretary Snow's pronouncement of U.S. policy that we will simply offset that directly. We can intervene infinitely if we wish by selling dollars. We produce dollars. We have no constraint on what we can do in that market. Mr. Schrock. Do you perceive Secretary Snow wishes to do that? Mr. Bergsten. He has made very clear to the Japanese, both publicly and I believe privately, that he strongly disapproves of their intervention policy. He has publicly rebuked it and indicated that they should let the rate be set by the market. I actually think it is confrontational from the Japanese side that they have not only continued, but accelerated their intervention since he has said that. In May alone, they intervened to the tune of $43 billion in the exchange market. As I mentioned, and it is not my comment. It is the comment of the former top Japanese official in this area. The yen would be 10 percent stronger today in the absence thereof. I think that is the direction. You can make all sorts of efforts in the trade policy area. You can talk about import surcharges. These would have all sorts of negative effects on our own economy in terms of raising cost, prices, all of that. It is a monetary problem. I think it should be dealt with in the monetary area. Several people have mentioned that the rules of the International Monetary Fund do provide for this kind of response. U.S. law provides for this kind of response. The U.S. Treasury has been asleep at the switch. The IMF has been asleep at the switch, and I will add, as I said in my statement, the G-7 has been asleep at the switch. The people that should really be with us in leaning on the Asian countries to let their exchange rates move up are the Europeans because if the Asian currencies do not move up, the whole decline of the dollar occurs against the euro, and the Europeans take a hit to their competitive position. With a little U.S. effort, it need not be a unilateral move. The Europeans would surely support us strongly. It could be a G-7 initiative as a whole to go to China, which is not in the G-7, or to Japan within the G-7 to make this approach. Things like this have been done before. I mentioned the Nixon shocks. That was to achieve a sharp decline in the value of the dollar in a somewhat similar situation. Secretary Jim Baker, in 1985, in the Plaza agreement, got the G-7 to agree to drive down the dollar in exactly these circumstances. The dollar dropped by 50 percent over the next two years to correct the huge overvaluation, which actually drove the U.S. from being the world's biggest creditor country to the world's biggest debtor country in the middle of the 1980s. This has been faced before. The problem is that the responses have only come when a real crisis emerged. In the case of the Nixon Administration, foreigners were selling dollars for gold. There was a real threat to our convertibility. We closed the gold window and negotiated a devaluation with the help of an import surcharge. In the middle 1980s, Secretary Baker, because the Congress was threatening to go hugely protectionist at the time, and you may remember that. Mr. Schrock. I do. Mr. Bergsten. He got the G-7 countries to agree to bring the dollar down sharply. It worked. By 1990-1991, our current account deficit was largely eliminated, so it worked. The problem is the Treasury of the day for the reasons mentioned, because they do not want to take aggressive actions in this area for various reasons, wait until it is very late in the day. Lots of jobs have been lost. Lots of damage has been caused. The issue here is to move sooner rather than later. Eventually they will have to do it. Just to be clear, their hope now is that this market driven decline of the dollar over the last year and a half will continue in the gradual, orderly way I have suggested. They are hoping that their calls on Japan and China to let their rates join the process will suffice. Maybe they will, but there is no sign to that yet. The issue is to make sure what has begun to happen, very hopefully so, will continue and, as I say, about double what we have had so far. Chairman Manzullo. Thank you. Mr. Schrock. Mr. Chairman, I know my time has expired. Let me just say what I hear the doctor saying is that this Chairman, the Members of this Committee, need to get the Treasury officials up here and put their feet to the fire and say get this fixed because if not we are going to lose more manufacturing jobs. That will not make you happy, and it will not make me happy. Chairman Manzullo. The core problem is that very few people in this city understand the nature of manufacturing. There are a lot of people that believe that we could lose our entire manufacturing base, and it does not mean anything. Mr. Schrock. I know. Chairman Manzullo. That is the big problem. Mr. Schrock. And what I understand is we do not have manufacturing anymore. Chairman Manzullo. Dr. Freedenberg? Mr. Freedenberg. If I could add just one thing? Mr. Schrock. Well, not like we used to. Mr. Freedenberg. In the 1980s when I was a trade official, I asked Secretary Baldridge what kind of leverage we had. He said our counterparts in Asia can add. They know which direction the surplus in the deficit is. They know who is the richest. Therefore, we have all the leverage we need. I return to what I said in my testimony. We just have to have the political will to apply it. It is not like we do not have it. We are the most powerful there is and the richest there is. It is a matter of whether you want to do it, and that is the question; not whether you have the leverage when you want it. Chairman Manzullo. I can guarantee you if it involved jobs around the Beltway that the city would understand what is going on. Somebody who lost 11,000 manufacturing jobs in one day, Grace Napolitano had the opportunity to visit her district last September in a tremendous hearing. You are still at what, 11 percent unemployment? Ms. Napolitano. It is 10. Chairman Manzullo. It is 10 percent. Ms. Napolitano. We are 10. We dropped one, but still thank you for being with us. Thank you. You will find that this Committee has done a lot in bringing some of the issues that affect all business. I am particularly proud because those that are sitting on this Committee understand your pain. We cannot get the Administration to move, to look at small business, to look at the effects on small business, what is happening, and to assist small business. I hear you. Forget economy. I know very little about it, but I can tell you that in my district----. Chairman Manzullo. Mrs. Napolitano, could you suspend for just a second? Ms. Napolitano. I yield to you. Chairman Manzullo. Please either be quiet, or I will have the police remove all of you. [Applause.] Ms. Napolitano. That is our Chairman for you. Thank you, sir. You understand that I actually started a small manufacturing task force in my district because there is, and mine is a small district in terms of manufacturing, in terms of industry and commercialism, but there is such a need, such a cry for my businesses, that there needs to have something happen. I have heard the same argument from them that I have heard from you. I am listening to Mr. Blecker and Mr. Bergsten. Both of you have indicated that there needs to be some credible action taken by the agencies themselves to be able to effectively control because that is what it is going to take is some control. Unless we can just continue having hearings--I have a ton of questions I would love to ask, but that is not going to make this any better. It is not going to stop the bleeding of our businesses, the businesses that are going under because they cannot get competitiveness when they have their trade partners abroad say well, I can get it from another country at half the price or at least undercut what their bare minimum is, given the constraints we have. They have subsidies from the government. They have all kinds of other assistance, and we are not helping our business. You will hear the same thing over and over again. We want to be able to bring that to the front, to be able to move the agenda to help small business, but this is a Committee. We do not have the ability to tell the Administration. It is you, the business people, who need to stand up on your two hind legs-- sorry about that--and get to them and tell them that you are the ones who are going under. You are providing the jobs in this country for the economy in this country for us to be able to get out of the slump. Without them getting your push, your work, and my suggestion is become a unified group with other small business. Talk about it. Go and visit. Go talk. Go e-mail. The message we have sent has been heard, but you, the business people, have got to come and say vocally, strongly, openly, publicly, that you are going to go under, and so are those hundreds of thousands of jobs that we are hoping are going to come back to this country within a very short while. Thank you, Mr. Chair. Chairman Manzullo. Did you have any further questions, Ms. Velazquez? Ms. Velazquez. No, Mr. Chairman. Chairman Manzullo. We want to thank you all for coming. It is a little bit noisy outside. You know, if they were talking down the dollar they could go at 10 decibels more, and it would not bother me one bit. We enjoyed the testimony very much. As I said, all of your statements will be made a part of the record. This Committee is adjourned. 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