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Remarks by Ambassador Michael Froman to AmCham China and the U.S. Chamber of Commerce

Remarks by Ambassador Michael Froman to AmCham China and the U.S. Chamber of Commerce

Washington, D.C.
April 27, 2015

*As Delivered*

“Thanks Peter, and thanks for having me. I do apologize for the delay, but let’s say, it’s for a good cause. One vote at a time. And thank you all for being here, and thank you Chamber and AmCham China for all you’re doing and have been doing for years to help build this relationship.

“We’ve gathered at an interesting time because there is a robust debate about trade in this town and around the country. And even though China is not part of TPP or T-TIP, it is the proverbial elephant in the room because so much of the American public’s perception of globalization reflects their perception of China and the impact on manufacturing, jobs, and wages in the United States. There is a sense that the global economy isn’t operating fairly, that we face an uneven playing field, and that China lies at the heart of the problem.

“That’s why it’s so important that we use our trade agreements to shape globalization, and not just sit idly by and be shaped by it. And that’s why it’s so important we get this relationship right, the U.S.-China economic relationship – truly one of the defining relationships of the 21st century.

“You all know the numbers, that relationship has grown dramatically. In the past three decades, in 1979, just as China’s economic reforms were beginning, trade was about $2 billion per year. At the time, China was our 23rd largest export market, and basically had no investment here in the United States. Last year, our total bilateral trade in goods reached $591 billion. China is our third-largest export market, its imports of U.S. services have doubled since 2010, and it’s a rapidly growing source of direct investment here in the United States.

“Looking forward, there’s great potential for our economic relationship. China’s plans to modernize its infrastructure, upgrade its industries, and promote domestic consumption could drive demand for foreign goods and services. And right now, while their percentage of consumption is relatively low compared to other countries, it is growing rapidly. According to one estimate, China could have 630 million middle class households by 2022. As more Chinese join the global consuming middle class, they’ll want more of the high-quality products that Americans excel at making – everything from agricultural goods to autos, to entertainment to airplanes. 

“Alongside that incredible potential for growth, there’s an equally important responsibility that our two nations share. As the world’s two largest economies, the decisions we make reverberate well beyond our own borders. When we cooperate to strengthen the rules-based system, the world wins. Conversely, when openness is restricted and fairness is challenged, we constrain not only our own economic potential, but also that of the broader global economy as well. 

“We’ve got a lot of issues to work through with China, but stepping back from individual issues, what we’re really trying to do is to ensure that the global trade and investment system itself is working. When that system is strong, it means that trade is supporting more good jobs here at home, strengthening the middle class, and unlocking opportunity for more Americans.

“Let me start with some of the tougher issues we’re facing today with China. One of our major concerns is China’s continued efforts to force the transfer or localization of American technology.

“Recently, for example, China announced that it was pursuing new banking regulations for ICT equipment which would require companies to turn over their source code, get pre-approval by encryption authorities to sell their products to China’s large commercial banks, and to use indigenous Chinese IPR – something that President Xi specifically promised us that China would not require when he visited the United States as Vice President back in February 2012. Meanwhile, China’s draft counterterrorism law would require foreign companies to locate their servers in China, contrary to the principle that there should be the free flow of data across borders and contrary to China’s Third Plenum objective of a more open attitude to trade and investment.

“We engage robustly with China, and we appreciate China’s willingness to engage with us on these issues, including earlier this month, when China issued a suspension notice on its banking regulations. This may be more of a pause than a resolution, and we will still need to be vigilant and engaged. Concerns remain about how these regulations and the anti-terror law might be implemented, but the key metric as to whether this issue is resolved ultimately will be whether our companies are beginning to see orders for their products flow again.

“I cite this as just one example. There are serious issues in IPR, trade secrets, in China’s industry development plans, government procurement and agricultural market access to address. There are issues around overcapacity and the non-discriminatory application of China’s laws, including in the area of competition. We’re committed to using every forum for dialogue we have available to us, from the Strategic & Economic Dialogue in June, to President Xi’s visit this fall, to the Joint Commission on Commerce and Trade later this year to try and resolve these issues.

“But when we have not been able to address issues through dialogue, we have not been particularly shy about pursuing enforcement actions. Of the 20 enforcement actions taken by this Administration, half have been vis-à-vis China, and we have won every case that has gone to conclusion.  

“For one of those cases, regarding electronic payment services, China recently announced a new set of regulations, which we welcome, and we are in the process of evaluating those regulations to determine whether they bring China into conformity with its WTO obligations, and we look forward to working with China on this and other WTO concerns.

“In the meantime, we continue to make progress in the U.S.-China BIT negotiations. 

“A high-standard U.S.-China BIT could have broad economic and political significance. These negotiations offer a major opportunity to engage on China’s domestic economic reforms and to pursue greater market access, a more level playing field, and a substantially improved investment environment for U.S. firms in China.

“As many of you know firsthand, the overall investment atmosphere is not yet improving for our companies, despite very promising statements from China’s leaders, including at the Third Plenum. One U.S. trade association recently did a comprehensive catalog of specific Chinese policies, and found the impact of economic reform in China on foreign companies was somewhere between “limited” and “none.” Also troubling is China’s recent proposal for a national security review mechanism that’s very broad and could block investments on a broader basis than pure national security concerns.

“In this context, it’s all the more important that the Bilateral Investment Treaty address not only market access but also the kinds of actions that create an uneven playing field or undermine the rules-based system, such as unfair competition by SOEs, the discriminatory enforcement of key laws like China’s competition law, and forced technology transfer or localization policies. For a BIT to be effective, we need to make progress on these issues as well.

“The United States and China expect to begin the negative list phase of the BIT negotiations soon, and we are working closely together to finalize the time for the exchange of offers and the next BIT round. 

“We’ve emphasized to China the importance of its initial offer being of a very high quality and reflecting significant liberalization beyond its current regime in a broad range of sectors, with only limited, narrow, and transparent exceptions to the treaty’s potential coverage. A negative list that echoes the lists of the Shanghai Free Trade Zone or the most recent revision of China’s foreign investment catalog would be a major disappointment and a departure from China’s stated ambition to use the BIT as a vehicle for economic reform and opening.

“Of course, we have always recognized that, even in the best case scenario, this will be the most challenging BIT negotiation that either country has ever undertaken.

“I would say that we’ve had very good dialogue with China over the last year on the Bilateral Investment Treaty and actually made quite good workmanlike progress on the basis of the text, and it’s very clear that from President Xi on down, the Chinese leadership and ministries are taking this very seriously, and we welcome that kind of engagement in the negotiations.

“Beyond these bilateral issues, a number of important global issues that depend on the ability of the United States and China to work together. China is the second largest economy in the world and, at times, the top trading economy in the world. As its role in the global trading system increases, so do its responsibilities. We count on China to take on greater responsibility for maintaining the openness and strengthening the rules of the global trading system – commensurate with the considerable benefits it derives from that system.

“Take the expansion of the Information and Technology Agreement. Last November, our bilateral breakthrough with China allowed for the resumption of plurilateral negotiations, which had been suspended for more than a year. To bring a final deal across the finish line, we’re now focused on helping participants bridge the last remaining differences, and that will require leadership not just by the United States, but also by China. China stands to benefit enormously from this agreement, and it needs to step up and help lead the talks to a successful conclusion. We stand ready to work together with China in that endeavor.

“Similarly, take the Environmental Goods Agreement, which offers a historic opportunity for the U.S. and China to demonstrate leadership on trade and the environment – a tangible commitment we can build on last year’s historic announcement on climate. An ambitious Environmental Goods Agreement would help lower the costs of clean energy and environmental technologies through tariff elimination, supporting green businesses while making it cheaper to address urgent environmental challenges.

“And, of course, there is the Doha Development Agenda itself. We worked well together to secure the conclusion of the Trade Facilitation Agreement in Bali and are now working to encourage others to ratify the agreement so that it can go into effect by the end of the year. In Geneva, the WTO members are finally beginning to have an honest conversation about the reality of global trading challenges and what is achievable. For example, U.S. and EU trade-distorting agricultural subsidies have declined, while China’s and India’s have increased, and in some cases exceed those of the U.S. and EU. The reality is that we would accomplish little in addressing global agricultural trade distortions if the United States would agree to reduce its agricultural subsidies, while China and India are unwilling to cap and reduce their own. If these two large producers and subsidizers are unwilling to join in committing to reforms, then other WTO members have no choice but to recalibrate their expectations around Doha accordingly.

“Of course, we’re both active in a series of regional trade negotiations. While we’re pursuing TPP and T-TIP, China signed an FTA with Australia last year, continues to negotiate a trilateral FTA with Japan and Korea and FTAs with Pakistan and Sri Lanka, and of course is pursuing RCEP, an agreement that spans India to Japan. Now, it’s no secret that we approach our regional initiatives somewhat differently.

“We believe that a high-standard agreement is not only in the interest of our workers and businesses, but also in the interest of advancing the rules-based trading system itself. That vision includes:

  • Comprehensive market access that creates real opportunities for workers, farmers, ranchers, service providers and businesses of all sizes – especially small and medium-sized businesses;
  • It includes strong and enforceable labor and environmental obligations;
  • It includes robust intellectual property rights commitments and enforcement that promote innovation and access to the fruits of that innovation; 
  • It includes disciplines on state-owned enterprises that ensure they compete on a commercial basis when they compete against private firms;
  • It includes commitments to a free and open Internet and the free flow of data and information across borders; 
  • It includes obligations to engage in good regulatory practices, based on science and evidence; and
  • It includes obligations to enhance good governance, including transparency and public participation. 

“This is part of what President Obama has called doing trade right, and we hope it will not only set a new standard for those who are currently in TPP or who might be part of it in the future, but raise the game of all countries and encourage the kind of economic reform that supports a more open, stronger rules-based trading system.

“For the United States, the next step in this process is for Congress to pass trade promotion authority. Since President Franklin Roosevelt signed the first Congressional trade negotiating legislation into law over eight decades ago, Congresses of both parties have revised and renewed that legislation 18 different times under Democratic and Republican Presidents alike. 

“But TPA hasn’t been updated since 2002, while the global economy has changed significantly. The digital economy has taken off, state-owned enterprises are playing an increasingly important role globally, and there’s an emerging consensus around labor and environment, plus new and higher standards for transparency and Congressional oversight. Congress now has the opportunity to account for these changes and write those views into law. We commend the Senate Finance Committee and House Ways & Means Committee for taking important steps in that direction last week in that direction, and we encourage Congress to move forward with final approval as soon as possible.

“As leaders in the business community, your voices will be critical in the public conversation we’ll continue to have in the coming weeks about TPA and TPP. You appreciate as well as anyone the opportunity that exists beyond our borders – for increasing our exports, strengthening our middle class, and supporting more good jobs here at home. You’ve experienced firsthand the barriers our workers and businesses face abroad. You understand the importance of setting high standards, of launching a race to the top in this critically important region and more generally. And you know the competition isn’t standing still. 

“So I hope you’ll speak up more and more in the coming weeks and months. There are a lot of myths out there, and you’re uniquely qualified to draw attention to the facts and put this in context that the public can understand, digest, and support. 

“I look forward to working with you on that, and thank you for your efforts.”