Labor Advisory Committee Input for the Tenth WTO Transitional Review Mechanism for China

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1 August 12, 2011 Terry McCartin Deputy Assistant US Trade Representative for China Affairs th Street NW Washington, DC Re: Labor Advisory Committee Input for the Tenth WTO Transitional Review Mechanism for China Dear Mr. McCartin: I am writing on behalf of the members of the Labor Advisory Committee for Trade Negotiations and Trade Policy (LAC) in response to your request for comments and questions for the tenth and final annual Transitional Review Mechanism (TRM) for China, to be conducted at the World Trade Organization (WTO). The TRM provides for a comprehensive annual review of China s efforts to comply with its WTO commitments, both generally applicable WTO rules and those commitments embodied in China s WTO Accession Protocol. China has made at best only weak efforts to comply with its WTO commitments, and in many cases has gone to great lengths to shirk its responsibilities to its trading partners. China s failure to live up to its commitments has distorted global trade and economic relations, and, more importantly, has had dire consequences for US workers and the American economy, causing businesses to shut their doors and leaving their former workers unemployed. This failure to comply with its commitments, we believe, is not due to any lack of capacity far from it. Instead, it is part of a concerted, predatory, beggar-thy-neighbor strategy that has built up China s manufacturing sector across a wide spectrum of industries and intentionally damaged those sectors in the economies of its trading partners. China now has a significant trade surplus with the US in advanced technology products that demonstrates its manufacturing prowess and capabilities. Persuading China to uphold its WTO obligations is all the more important because, for a generation, US trade policy (in general, and with respect to China in particular) has hollowed out our manufacturing economy. Rather than grow the middle class, US trade policies have incentivized offshoring and contributed to the loss of millions of manufacturing jobs, undermining the bargaining power of US workers and contributing to wage stagnation. In place of wage-driven demand, our trading partners lend us back their dollars at low rates, fueling the credit-driven housing bubble that burst in These effects have been especially dire when it comes to China, where the intersection of US trade policy, which skews benefits toward transnational businesses rather than American families, and China s persistent and creative use of mercantilist and state-capitalist policies has

2 2 resulted in disaster for the American middle class. For instance, China is now the world s number one producer of steel, out-producing Japan, Russia, India, and the US combined. In the third quarter of 2008, even though world steel production decreased by 20 percent, Chinese production grew by 15 percent. Similarly, since 2003, China has doubled its glass production while the US trade deficit in glass with China has tripled. China has also been diversifying its export base to expand exports of higher value-added commodities, including computer and electronic products, aircraft, auto parts, and machinery. According to the report Manufacturing Insecurity, 1 the US Department of Defense can no longer obtain adequate amounts of armor plate steel, certain defense-specific integrated circuits, or night vision goggles from US suppliers facts which show the threat that China s approach to trade poses, not only to our economy and society, but also to our national security. It is unfortunate that the TRM lacks any specific mechanism to hold China accountable for its failure to live up to its WTO commitments. Throughout China s ten-year history of being a WTO member, that country has disregarded the rules and, in fact, failed to adequately respond even to the questions and review of the TRM process. Therefore, we urge the Administration, upon completion of this final TRM process, to call for Congressional hearings in the House and Senate focused on evaluating Chinese compliance with international trade norms and studying the balance of benefits of Chinese accession to the WTO for the American people. The hearings should be designed to determine whether, given Chinese recalcitrance, the US should condition continued participation in the WTO on any particular reforms to address these very serious issues. No responsible policy maker can say that China has lived up to its WTO commitments. In the paragraphs that follow, we provide details on some of the specific commitments China has failed to meet, and provide some suggested questions to ask, requests to make, and strategies to pursue. Prohibited Subsidies Article 3 of the WTO Agreement on Subsidies and Countervailing Measures ( SCM Agreement ) prohibits WTO members from granting subsidies that are contingent on export performance or on the use of domestic over imported goods. China committed to eliminate all prohibited subsidies when it joined the WTO but it has not done so. Instead, it has put a tremendous amount of energy into disguising its subsidy programs or modifying them to be facially WTO-compliant. Illegal, mercantilist subsidies have proliferated enormously, to the detriment of American workers and businesses. In June of this year, pursuant to a petition filed by the United Steelworkers, the Obama Administration was able to secure Chinese agreement (under threat of WTO action) to end illegal subsidies in the wind energy sector, but this success was hard fought, expensive, and left lost jobs and reduced market share in its wake. Because China has repeatedly failed to publish all its subsidies, as required by WTO rules, even explicit, on-the-books subsidies can only be found at great expense. Aside from such specific subsidy programs, China provides a number of benefits to its exporters that are de facto dependent on export performance, such as low-cost or free land, infrastructure, industrial inputs, tax rebates, cash transfers disguised as loans, and below-market 1 Prepared for the Industrial Union Council, AFL-CIO, by Joel S. Yudken, Ph.D., September 2010.

3 3 export insurance. Due to this lack of transparency, we strongly recommend that the US investigate other critical sectors, including aerospace, autos, electronics, and shipbuilding, for such hidden subsidies. Moreover, China continues to provide an illegal subsidy, in the form of an artificially undervalued currency, on all of its exports to the US. Economists from across the political spectrum agree that Chinese currency is undervalued and that this undervaluation makes Chinese goods artificially cheaper in foreign markets. In 2010, the Economic Policy Institute concluded that China s currency manipulation is a major cause of the escalating US trade deficit with China and the 2.4 million jobs lost or displaced to that nation from 2001 to More recently, in a report released in July, the International Monetary Fund (IMF) concluded that the Chinese yuan is undervalued by 3 to 23 percent (other economists estimate the undervaluation as high at 40 percent) and that China and other nations would benefit if China eliminated its currency interventions and allowed market-driven valuation of its currency. 3 Existing domestic and international law permits the US, alone or in tandem with other nations through the WTO or IMF, to address this manipulation as a prohibited subsidy. 4 The American labor movement simply does not have resources on its own to pursue a Section 301 complaint against every Chinese violation of its WTO commitments. Nor would such a strategy be effective in protecting and promoting jobs: by the time a union collects enough evidence to pursue a case effectively, thousands of workers may have lost their jobs and the factories that employed them may have literally packed up and moved overseas. Therefore, we urge the Administration to act affirmatively to monitor and address prohibited Chinese subsidies in their many forms. Questions to Pose: 1) What measures will China take to increase transparency in its programs to support domestic industry? 2) Will China provide an inventory of state-subsidized tax, financial, and insurance benefits over the last ten years to its exporting companies and identify the terms of those contracts? The previously-identified Section 301 case highlighted the subsidy value of these benefits which China has been providing. 3) Given that China has been reticent to identify its domestic subsidy programs, as required by the terms of its accession, will China update its filings and provide comprehensive backup documents to its WTO partners on each of the programs, ensuring it covers all existing subsidy programs? 4) Why has China not acceded to OECD guidelines for its Export-Import bank? (Ex- Im s recent Competitiveness Report raises serious concerns over the rapid growth of 2 Unfair China Trade Costs Local Jobs, EPI Briefing Paper #260, Robert E. Scott, Economic Policy Institute, March 23, People s Republic of China, 2011 Article IV Consultation, IMF Country Report No. 11/192, the International Monetary Fund, July On a related note, the AFL-CIO and many of its affiliate unions support immediate action on this issue by the Administration, regardless of the outcome of the TRM.

4 4 China s export credit agency and notes its lack of transparency. China s refusal to abide by these guidelines allows it to continue to provide WTO-inconsistent export subsidies.) 5) When will China agree to abide by the OECD guidelines for its Export-Import bank? 6) When will China revalue its currency to its true market value and will China commit to following the IMF recommendation that it allow its currency valuation to be market-driven? National Treatment Article III, Section 4 of the GATT 1994 requires WTO Members to accord imported goods treatment no less favorable than that afforded to domestic goods in respect of all laws or regulations affecting their internal sale or use. Laws that condition the receipt of an advantage on the use of domestic over imported goods local content requirements are a classic example of a policy that violates this Article. In paragraph 3(a) of its Protocol of Accession to the WTO, China also agreed to accord foreign firms treatment no less favorable than that accorded to domestic firms with respect to the procurement of inputs and the conditions under which their goods are produced, marketed, or sold. China violates these commitments on a regular basis in a variety of sectors. For example, the wind sector subsidy program mentioned above also violated the national treatment principle because it required Chinese wind turbine manufacturers receiving grants under the program to use key components made in China rather than imports. In a separate case, earlier this year, the United State Trade Representative (USTR) requested a WTO dispute settlement panel to deal with a series of measures (dating back to 2001) that provide a Chinese entity, China UnionPay, with a monopoly over the handling of domestic currency payment card transactions. Such a policy clearly discriminates against American and other non-chinese financial services providers. In November 2009, China announced a policy designed to provide advantages in its procurement market to companies that developed indigenous innovations. The foreign investor community immediately criticized this policy, arguing that it would shut them out of the market completely or at least require them to transfer their technologies to Chinese subsidiaries or partners. China quickly addressed these concerns, promising the policy was not designed to discriminate against foreign firms. If allowed to operate as announced, the policy would significantly abrogate China s obligation to treat foreign and domestic firms consistently. Unfortunately, it seems clear that the objectives of China s initial pronouncements are, in fact, being implemented by the government at the national and sub-national level. The USTR should consult with the private sector to identify specific instances of Chinese interventions in this area and request that China identify all actions it is taking, at all levels of government, and provide public assurances that it has abandoned these efforts and will sanction those entities which seek to pursue those policies. These incidents are just a few of numerous and repeated examples of failure to provide national treatment since China joined the WTO. Although some of the cases led to USTR action, many more went unaddressed or even unknown (due to transparency issues). In each case, American

5 5 businesses and their workers are placed at a severe disadvantage in what may someday be the world s most lucrative consumer market. Given the USTR s long-standing recognition that China has failed year after year to abide by its commitment to provide national treatment for US goods, services, and investors, we urge you to make clear to the Chinese delegation that continued discrimination will not be tolerated. The US Should Request: 1) A complete list, updated semi-annually, of any local or domestic content requirements imposed on state-owned enterprises or state-supported-enterprises, or in conjunction with any government-connected loan, grant, subsidy, tax-benefit, or any other financial benefit. 2) That China to commit to dismantling such policies and providing regular updates on such efforts at Strategic and Economic Dialogue summits. Market Access China has never provided the kind of market access that it promised when it joined the WTO. It has used a variety of mechanisms, including obscure licensure and certification requirements and official supplier lists, to ensure that its own firms dominate the market. As a result, China imports almost no finished goods, thereby harming employment in the United States and obligating American firms to conduct business through joint ventures with Chinese partners. Even financial services firms, loathe to take on China and thereby risk losing what little access they do have to the vast Chinese market, have urged the Administration to act forcefully to ensure China opens its banking and insurance sectors. In 2009, the WTO ruled that China unfairly restricted the ability of US firms to sell DVDs, music, books, software and other copyright-intensive material in its market (not only restricting access, but building a market for counterfeit goods). Despite this ruling, China continues today to restrict access to films, music, books and other entertainment, including certain internet sites (particularly those that carry news and information). Such restrictions harm our members and cost jobs in the US. China also continues to demand that US manufacturers transfer technology and production in return for market access. Industries like aerospace, machine tools, and shipbuilding have been significantly impacted by this market distorting mechanism. Questions to Pose: 1) When will China fully comply with all of its market access obligations and permit free import of goods not subject to discretionary licensing? 2) What assurances do we have that we can believe yet another promise, when prior promises have gone unfulfilled? 3) Will China agree to further monitoring of its market access commitments, despite the expiration of the ten-year TRM, in light of its past record of continued noncompliance?

6 6 4) When will China commit itself to eliminating its demand for the transfer of technology and production in return for market access? 5) Will China enter into separate obligations regarding aerospace? 6) Will China enter into separate obligations regarding autos? Intellectual Property Rights China s abject refusal to enforce intellectual property rights (IPR) is a problem of long standing. From movie studios, to book publishers, to software giants, American businesses and those they employ are losing income every minute of every day. Last year, at a hearing before the House Ways and Means Committee, even the US-China Business Council, the trade organization for US firms doing business in China not an organization with a strong record of challenging China s policies said China s poor record of IPR protection influences what products foreign companies are able to sell in China s market; counterfeit products made in China often show up in other markets as well. Only one-third of respondents in USCBC s most recent survey of China s business environment say that the poor IPR environment does not impact them. And, for companies in certain sectors, like movies and software, the issue is without doubt their top problem in China and needs to be addressed. (John Frisbie President, US-China Business Council, Testimony before House Ways and Means Committee, June 16, 2010) Likewise, the Business Software Alliance reports that nearly four out of every five computer programs installed on personal computers in China in 2009 were being used illegally. US firms cannot stay in business and continue to employ hard-working Americans with an 80 percent theft rate. While China has initiated some reforms in this area, the results have been incremental at best. More must be done. China s violations of intellectual property rights are not limited to copyrights, servicemarks, and trademarks. Increasingly, China is engaging in theft of patents including downstream dumping by violating the patents involved in the manufacturing process. Law enforcement officials have identified instances where the Chinese have sought to pirate plans for proprietary production equipment resulting in dramatically lower costs of production. At all levels of IPR, China s record is abysmal. Questions to Pose: 1) Will China share with us the effectiveness of its current measures against piracy in music, movie, television programming, and other forms of entertainment? 2) Will China agree to participate in, as part of the Strategic and Economic Dialogue, discussions leading to pilot programs designed to further combat intellectual property piracy? 3) Will China commit to a new census of software on computers in government offices (at every level) as well as in state-owned enterprises and allow US officials and industry participants to assist in such census?

7 7 4) Will China agree to remit payment to the owners of stolen/counterfeit/gray market IPR found during the census? 5) What continuing actions will China institute in order to address software theft in the public and private sectors? 6) What actions will China take to cooperate with US officials and industry in identifying the violation of patents in equipment utilized in the production process? State-Owned Enterprises Upon WTO accession, China agreed that it would ensure that state-owned and state-supported enterprises (collectively, SOEs) would make purchases and sales decisions based solely on commercial considerations. It also agreed that it would not influence commercial decisions except in a WTO consistent manner. This promise, like so many others, has been broken. China s state-owned and state-supported enterprises receive raw materials and other inputs at below market rates, and have access to preferential debt and equity financing, including soft loans from state-owned banks that do not need to be repaid. Moreover, they are consistently operated in a manner that gains them market share rather than profits. A private enterprise would not long remain in business if it failed to respond to the market, but, because they are propped up by state resources, Chinese SOEs not only can, but do. While losing money by selling goods at below market prices, they force US competitors out of business. The overcapacity that China is intentionally pursuing in industries like glass and steel will eventually be needed, once international competitors have all folded. A looming threat that of increased outward investment by Chinese SOEs is also on the horizon. US firms will increasingly face unfair direct competition in the US by Chinese SOEs operating here as they scour the globe for investment opportunities resulting from the huge cache of funds they have amassed from their protectionist and predatory policies. To date, such investment has taken the form of either asset stripping of distressed companies or toehold investments to ensure market access and has operated to maximize employment within China at the cost of employment in the target countries. We believe that the USTR should ensure that SOEs and any other entities acting with statedelegated authority do not undermine the competitiveness of private enterprise or the rights, pay, and benefits available to their workers. Nor should these players be allowed to skew supply chains or engage in predatory practices in the US or third country markets, thereby destroying jobs for American workers. Toward that end, we urge you to ask China to commit to further transparency in its statesupported sector. SOEs should have reporting requirements that necessitate operating in a transparent manner. They should fully cooperate with information the US Government may request with regard to their activities in their home market as well as with the US. In addition, Chinese SOEs investing in the US pose a significant risk to our federal, state, and local

8 8 environmental, health, safety, and related laws under any contemplated Bilateral Investment Treaty (BIT) risks that the USTR must protect against. 5 Question to Pose: 1) Will China establish an information system to publish all payments, loans, loan guarantees or other preferential practices between governments (including local governments) and state-owned enterprises? Export Controls China has also been engaging in anti-competitive restrictions on raw materials important to steel and chemical production. In July, a WTO Dispute Settlement Panel found that Chinese export duties on bauxite, coke, fluorspar, magnesium, manganese, silicon metal, and zinc violate China's commitments under Paragraph 11.3 of its Accession Protocol. The victory (still subject to appeal) represents simply one more confirmation that China continues to pursue a strategy to benefits its national interests at the expense of the American worker. Victories of this nature, while important, do not necessarily bring jobs back. Even now, China has policies in place that restrict export of so-called rare earth elements (REEs), which are critical components in such high tech products as computers, LCD screens, fiber optic cable, and advanced batteries used in hybrid and electric cars as well as numerous critical defense applications. The USTR must continue to act aggressively against China s attempts to artificially corner the market on critical raw materials in order to drive competitors out of businesses. We urge you to ask China to immediately eliminate export restrictions on REEs. Further, we recommend that the USTR ask China to commit to engaging with its WTO partners before imposing any other export tariffs or quotas on these or other important industrial raw materials. Stopping such destructive policies is far preferable to claiming victory in a WTO case. Other Anticompetitive Practices China engages in a broad array of practices which advantage their industries at the expense of production and employment here in the US. These policies are designed to continue China s export-led growth policies. Recommendations: 1) The WTO should require China to identify existing selective Value Added Tax rebate policies and the WTO should examine these rebates to determine if they have a trade distortive effect. 2) The WTO should require China to provide a catalogue of productive capacity in major industries for which sufficient existing worldwide productive capacity already exists; and to identify the benefits available to firms in these industries from the 5 Note that the LAC believes that, in addition to the risks of SOEs, the contemplated BIT with China, either under the current model or some updated model, poses numerous risks a full discussion of which is beyond the scope of this letter.

9 9 national and sub-national levels of government and also the state-owned or invested entities (if any) involved in these sectors. Workers Rights While the TRM will not include a committee or council addressing labor issues, we would be remiss if we failed to address labor rights, which are important on their own merits, and as they relate to trade. Simply put, China fails to guarantee the core labor standards as delineated in the ILO Declaration of Fundamental Principles and Rights at Work. China shirks its duties to its own people, as well as to the international community, by failing to uphold fundamental labor rights for its citizens. Last year, in analyzing China s progress toward ensuring its citizens enjoy fundamental labor rights, the International Trade Union Confederation (ITUC) wrote: In view of severe restrictions on trade union rights and the prevalence of child labour and forced labour as well as discrimination, determined measures are needed to comply with the commitments WTO members accepted at Singapore, Geneva and Doha in the WTO Ministerial Declarations over , and in the ILO Declaration on Fundamental Principles and Rights at Work. (ITUC, Internationally Recognised Core Labour Standards in the People s Republic of China, Report for the WTO General Council Review of the Trade Policies of the People s Republic of China, May 10, ) The ILO concluded that in China, workers do not have the right to organize in trade unions of their choice; that their right to bargain collectively and strike is severely restricted; that wage and other types of discrimination are prevalent in practice, even if prohibited in law; that child labor is a serious problem; and that forced labor occurs in commercial enterprises, prisons, and re-education camps. Moreover, our own State Department has documented numerous instances of the use of forced labor, disappearances and soft detentions of political activists, and restrictions on and denials of rights to free speech, association, and assembly. (See, e.g., the State Department s 2010 Human Rights Report on China.) Multi-national employers and brands, their Chinese contractors, and even Chinese employers outside international supply chains have frequently adopted business models premised on this relative lack of human rights and labor standards. Taking advantage of, and acquiescing to, the government s failure to secure fundamental rights means firms operating in China, whether in private hands or state-supported, operate with an unfair advantage over US competitors: it is not just that labor costs less in China, it is that government policies ensure 6 The ITUC produced the report as part of an ongoing series in accordance with the Ministerial Declaration adopted at the first Ministerial Conference of the WTO (December 13-16, 1996), at which Ministers stated, [w]e renew our commitment to the observance of internationally recognized core labor standards, as well as the fourth Ministerial Conference (2001), which reaffirmed this commitment.

10 10 low costs and a submissive workforce by severely restricting workers ability to act collectively to better their wages, benefits, and conditions of employment. Given that the Bipartisan Trade Promotion Authority Act of 2002 included the goals, among others, to foster economic growth, raise living standards, and promote full employment in the United States, and to promote respect for worker rights and the rights of children consistent with core labor standards of the ILO, we urge the USTR to address this issue in no uncertain terms. A violation of labor rights anywhere is a violation of labor rights everywhere. China s current labor policies hurt not only Chinese workers, but American workers who must compete economically with forced and child labor; discriminatory pay and conditions of employment; and a lack of opportunity to freely associate and collectively bargain. Question to Pose: 1) Will China support the creation of a Working Party at the WTO on Workers Rights to identify what policies and actions China is taking that limit internationally recognized workers rights from being freely exercised in China? In sum, the Labor Advisory Committee believes that China s approach to international trade and investment since its accession to the WTO demonstrates that China was an inappropriate candidate for WTO membership. China has shown little commitment to the rules-based system. Its strategies have wreaked havoc on the American manufacturing sector. Anything the US can do to hold China accountable and to ensure that American workers do not bear the brunt of this policy mistake will be welcome. Sincerely, R. Thomas Buffenbarger Chair, Labor Advisory Committee for Trade Negotiations and Trade Policy (President, International Association of Machinists and Aerospace Workers)