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House Committee Hearing Explores Priorities in U.S.-China Economic Relationship as USTR Targets Chinese Internet Restrictions

The House Ways and Means Committee held a hearing on 25 October to hear the views of the Obama administration on a range of issues that have caused friction in the U.S.-China economic relationship, including subsidies that distort competition, a lack of regulatory transparency, currency misalignment and a closed capital account, indigenous innovation policies, and the failure by Beijing to adequately protect U.S. intellectual property rights. The hearing was scheduled partly in an effort to temper the China currency debate by calling attention to other critical issues that may potentially be resolved through bi-lateral co-operation. Many of these issues are likely to be discussed during the upcoming meeting of the U.S.-China Joint Commission on Commerce and Trade to be held in Chengdu on 20-21 November.

Under Secretary of Treasury for International Affairs Lael Brainard and Deputy U.S. Trade Representative Demetrios Marantis both indicated the importance of using bi-lateral and multi-lateral channels to address the many issues that shape U.S.-China economic and trade affairs and highlighted the progress made under the Strategic and Economic Dialogue, the JCCT and multi-lateral mechanisms and organisations such as the G-20, the International Monetary Fund and the World Trade Organisation. U.S. priorities that have been addressed at these fora include IPR enforcement, problematic industrial and subsidies policies, agricultural policies that are not science-based, investment restrictions, the alleged undervaluation of the mainland Chinese currency, and an opaque legal and regulatory system and weak rule of law in the mainland.

The Obama administration has made significant advances using this results-oriented co-operative approach and has resorted to more vigorous trade enforcement actions in instances where bi-lateral dialogue has stalled or failed. According to Marantis, this includes the initiation of five WTO cases targeting “important systemic concerns about China’s economic and trade policies” as well as a safeguard action against certain mainland Chinese motor vehicle tyres. The United States has also actively enforced U.S. antidumping and countervailing duty law, issuing 15 CV duty orders and 22 AD duty orders since January 2009 on 22 different products imported from the mainland, including nine steel products, eight miscellaneous manufactured products, three chemical products, two textile and apparel products, and one metal product.

Brainard and Marantis believe that bi-lateral engagement combined with strong enforcement when warranted is not only more effective at achieving positive results than uni-lateral action but is also more likely to further U.S. economic objectives, including President Obama’s goal of doubling exports in five years and creating thousands of new export-related jobs. In fact, China’s strong economic recovery has led to growth in U.S. goods exports to the mainland of 32.2 percent to US$91.9 billion in 2010 and 18.6 percent to US$66.1 billion during January-August 2011. The administration clearly does not want to jeopardise future growth in U.S. exports even though the bi-lateral trade deficit continues to grow in absolute terms.

Brainard indicated with respect to the China currency issue that the mainland needs to “bring its exchange rate into alignment with market fundamentals” but highlighted the progress made since June 2010 when Beijing decided to resume the appreciation of the renminbi. The Chinese currency has appreciated about seven percent against the U.S. dollar since that time and about ten percent taking into account mainland China’s higher rate of inflation relative to U.S. inflation. The renminbi also appreciated nearly 40 percent against the greenback over the past five years in real terms but Brainard believes that the continued rapid pace of foreign reserve accumulation and the on-going decline in the share of mainland Chinese consumption in gross domestic product indicate that the real exchange rate of the renminbi remains misaligned and a faster pace of appreciation is required. U.S. officials have long contended that this alignment process will benefit both mainland China and the United States and will help Beijing achieve two critical objectives as it seeks to reduce the mainland’s excessive dependence on export growth and investment: combating inflation and shifting the composition of demand toward domestic consumption.

The administration has been looking for a number of ways to put pressure on Beijing to resolve several outstanding issues of concern to U.S. manufacturers. As previously reported, the Office of the U.S. Trade Representative recently submitted to the WTO information identifying nearly 200 subsidy programmes that mainland China has ostensibly failed to notify as well as 50 subsidy programmes in India that have not previously been notified. The USTR indicated in a press release that the fact that China has not notified its subsidy programmes in over five years represents a lack of transparency that “severely constrains the ability of WTO Members to ensure that each government is playing by the rules.” All WTO members are obligated to submit subsidy programme information on a regular basis to allow others to assess the nature and extent of those programmes. U.S. authorities believe that this obligation is particularly significant for countries like mainland China where the lack of regulatory transparency is especially acute.

The USTR is also taking advantage of WTO mechanisms to ascertain the trade impact of mainland Chinese policies that may block U.S. companies’ Web sites in the mainland. U.S. authorities believe that these restrictions create commercial barriers that may negatively impact U.S. companies, especially small and medium-sized businesses. Accordingly, the United States has submitted a request for information on this matter under paragraph 4 of Article III of the General Agreement on Trade in Services, which requires each WTO member to “respond promptly to all requests by any other Member for specific information on any of its measures of general application or international agreements within the meaning of paragraph 1 (of GATS Article III).”

The USTR is particularly concerned with the fact that Web sites of service suppliers based outside of mainland China are sometimes inaccessible in the mainland, which can prevent those companies from marketing products and supplying services to the mainland Chinese market. The USTR is therefore seeking information on the person or ministry responsible for determining if and when a foreign Web site should be blocked in mainland China, the guidelines and criteria for blocking access to foreign Web sites, the process for implementing a restriction on a Web site, and whether the blocking is implemented directly by the government or indirectly by Internet service providers and/or telecommunications companies.

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