U.S.-CHINA TRADE AND INVESTMENT: IMPACT ON PACIFIC NORTHWEST INDUSTRIES: FIELD HEARING IN SEATTLE, WASHINGTON HEARING BEFORE THE U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION ONE HUNDRED NINTH CONGRESS FIRST SESSION JANUARY 13, 2005 Printed for the use of the U.S.-China Economic and Security Review Commission Available via the World Wide Web: http://www.uscc.gov ( U.S. GOVERNMENT PRINTING OFFICE WASHINGTON : 2005 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800 Fax: (202) 512–2250 Mail: Stop SSOP, Washington, DC 20402–0001 U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION C. RICHARD D’AMATO, Chairman ROGER W. ROBINSON, Jr., Vice Chairman CAROLYN BARTHOLOMEW, Commissioner PATRICK A. MULLOY, Commissioner GEORGE BECKER, Commissioner WILLIAM A. REINSCH, Commissioner STEPHEN D. BRYEN, Commissioner MICHAEL R. WESSEL, Commissioner JUNE TEUFEL DREYER, Commissioner LARRY M. WORTZEL, Commissioner DAVID J. OHRENSTEIN, Executive Director KATHLEEN J. MICHELS, Associate Director The Commission was created in October 2000 by the Floyd D. Spence Na- tional Defense Authorization Act for 2001 sec. 1238, Public Law 106– 398, 114 STAT. 1654A–334 (2000) (codified at 22 U.S.C. sec. 7002 (2001)), as amended, and the ‘‘Consolidated Appropriations Resolution of 2003,’’ Public Law 108–7, dated February 20, 2003. Public Law 108–7 changed the Commission’s title to U.S.-China Economic and Security Review Com- mission. The Commission’s full charter is available via the World Wide Web: http:// www.uscc.gov. The Commission’s Statutory Mandate begins on page 206. (II) U.S.-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION MARCH 4, 2005 The Honorable TED STEVENS, President Pro Tempore of the U.S. Senate, Washington, D.C. 20510 The Honorable J. DENNIS HASTERT, Speaker of the House of Representatives, Washington, D.C. 20515 DEAR SENATOR STEVENS AND SPEAKER HASTERT: On behalf of the U.S.-China Economic and Security Review Commission, we are pleased to transmit the record of our field hearing in Seattle, Washington on Janu- ary 13, 2005. The hearing on ‘‘The Impact of U.S.-China Trade and Investment on Pacific Northwest Industries’’ gave the Commission revealing insights into the chal- lenges and pressures facing key U.S. producers in this region that are generated by China’s trade and economic development policies. The Commission heard testimony from U.S. Representative Jim McDermott, busi- ness leaders, labor representatives, industry experts, and research policy analysts. The hearing began with a consideration of the broad economic trends in the North- west and then moved on to focus on specific industries. Individual panels addressed the civilian aerospace industry, software and high technology, horticulture, forest products, and maritime and shipping issues. Representatives from all these diverse industries identified China’s policies and commercial practices as major challenges for their industries and the regional economy. Surprising Challenges Facing the Northwest The Pacific Northwest region has numerous economic strengths. It is rich in nat- ural resources and is home to several world-leading companies. These include Boe- ing, Microsoft, and Weyerhauser. Boeing is one of the world’s two leading large civil aircraft producers and a major contributor to U.S. exports. Microsoft is the world’s largest software company, and Washington State has 10,000 companies in the tech- nology sector employing 138,000 employees. The Port of Seattle is the U.S. mainland port closest to Asia and it is a leading export and import terminal. This cluster of economic assets has resulted in the region being a major exporter, and Washington State has historically run a trade surplus. With this rich and varied economic endowment, the Pacific Northwest region should be a leading recipient of economic gains from international trade and greater international economic integration. Yet, the Commission heard that despite this strong position, the Northwest region faces many of the same challenges facing other regions of the U.S. economy. In the Northwest these challenges are not as visi- ble because the region starts from such an advantaged position, but there are dis- turbing similarities of trend. If these trends are not confronted and reversed, the region could find its economic advantages severely eroded a decade from now. As has been the case in the rest of the country, Washington State has experienced a deterioration in its trading position. Between 1999 and 2003, the state’s exports fell 6.8 percent while its imports rose 28 percent. As a result, the state’s trade is now barely in balance, while trade with China will likely show an overall deficit for 2004. Employment trends in Washington State also resemble the national picture. Though the state had a milder-than-average recession and recovered its pre-reces- sion employment level sooner than the nation as a whole, the recession in manufac- turing employment was deeper. The loss of jobs has been concentrated in higher paying jobs, while job creation has tilted toward lower paying jobs. These are fea- tures that are shared with other regions. Aerospace The panel on aerospace highlighted the challenges facing the Boeing Company. The sources of these challenges are multiple and include insufficient investment in research and development and new products, and intense competition from Airbus. However, China plays a role too. In particular, China unfairly exploits the competi- tion between Boeing and Airbus to win concessions when it purchases aircraft. The Chinese government coordinates aircraft purchases and requires production transfer (‘‘offsets’’) to China as a condition of sale. In certain circumstances, these require- ments may be WTO-illegal, and longer term they pose a danger to U.S. global lead- ership in aircraft manufacture by helping to create what might become a foreign rival. They also result in the displacement of high-paying aerospace jobs in the United States. iii Software The panel on software and high-technology products revealed similar concerns. The industry is subject to strong incentives to outsource offshore, driven by cheaper labor costs in China and India. Moreover, offshoring stands to expand in scale, scope, and skill level as companies become more adept at it. Complicating the issue, software companies have been known to abuse the H–1B and L–1 visa programs re- sulting in underpaid foreign technology workers. Witnesses testified that some com- panies hire highly qualified foreign workers for general positions at low wages, but assign them high-level tasks. China’s failure to enforce intellectual property rights is a continuing concern of business, as is the use of procurement restrictions that limit government purchases of foreign company software. Longer-term, off-shoring high-tech jobs and research and development capability may erode future U.S. tech- nological innovation and leadership. Ports The ports of Seattle and Portland handle heavy traffic to and from Asia and, par- ticularly, China. The Commission heard testimony on the continuing threats to na- tional security that result from inadequate security at our nation’s ports. Indeed, the Commission learned that, despite the fact that waterborne trade continues to rise at dramatic rates, fewer inspections of certain categories of containers entering through our nation’s ports occur now than prior to the terrorist attacks of 9/11. Horticulture/Forest Products China continues to use an array of non-tariff barriers to prevent imports in both the horticulture and forest products industries. With regard to forest products, the Chinese government is heavily subsidizing the development of domestic forest prod- ucts capacity and this promises to reduce future U.S. exports. The Northwest’s large and successful horticulture industry is threatened by growing imports from China and lack of reciprocal access to the Chinese market. Finally, witnesses expressed dismay at the U.S. Government’s failure to use effec- tively trade law safeguard measures against Chinese imports that were negotiated as part of China’s WTO accession agreement. These safeguards were intended to miti- gate the damaging effect of near-term surges in imports from China. Bringing safe- guard cases is difficult, expensive, and risky for small companies, and the current Administration’s categorical rejection of several Section 421 safeguard cases approved for relief by the International Trade Commission has undermined confidence in the process. This, in turn, stands to deter companies from seeking relief that they deserve. Based on these findings and the Commission’s other work on these issues to date, we present the following preliminary recommendations to the Congress for consider- ation. Recommendations: • Congress should establish and fund a federally mandated corporate reporting system to gather sufficient data to provide a comprehensive understanding of the trade and investment relationship with China. Within such a system, com- panies should be required to report to the Commerce Department their initial investments in China and the shift of production capacity and job relocations resulting from these investments, both from within the United States to over- seas and from one overseas location to another, and their contracting relation- ships with Chinese firms.1 • As part of any mandated corporate reporting system, Congress should require the Commerce Department to maintain an authoritative account of U.S. firms’ investment in R&D centers in China and a comprehensive assessment of their activities, including any technology transfer, offset, or R&D cooperation agreed to as part of the investment.2 • Congress should amend and tighten the legislation governing the H–1B and L–1 visa programs. These programs were intended to make available foreign workers to fill only those jobs for which there is a shortage of appropriately qualified American workers. Under this program, foreign workers are supposed to be paid the prevailing wage. In practice, companies have filled low-wage generic positions with over-qualified foreign workers who then are assigned high-level tasks.