Remarks by Ambassador Gary Locke to the American Chamber of Commerce in China and The U.S.-China Business Council
September 20, 2011
I am honored to be here today with all my good friends from AMCHAM and the U.S.-China Business Council and our special Chinese guests. Thank you for hosting me and facilitating the many meetings over the last month with dozens of American companies and industry groups.
I'm here to discuss the future of the U.S.-China economic and trade relationship. It’s a relationship of immense importance to our respective countries and to the world. Three years after the financial crisis, the global economy has yet to return to full strength. And too many people back home are still looking for jobs. It’s at times like these when leadership really matters – and as the two largest economies in the world, the United States and China must step up.
To say that China is a major economic power that must help lead the world sounds obvious to everyone in this audience. But just a quarter-century ago, China's economic success was hardly a sure thing. I remember well my first trip to China in the late 1980s. I came into Shanghai and was greeted by more bicycles than I’d ever seen in my life – young men with their dates balanced on handlebars, parents with young children clinging onto their backs, and grandparents pedaling to the market, bikes everywhere. Shanghai then was an industrial city filled with low-rise buildings. Today, Shanghai’s skyline is dotted by more than 400 skyscrapers. Those bike paths I saw on my first visit have been replaced by elevated freeways, trains and subways shuttling people and commerce at a frenetic pace. To see it is to be awed…and I am every time I come back to this country. The explosive growth in places like Shanghai has helped lift hundreds of millions of people out of poverty and into a thriving new middle class. What China has done is nothing short of an economic transformation, and the citizens of this country have every right to be proud about what they’ve accomplished.
And I'd like to state unequivocally that the United States welcomes this transformation. We welcome a strong, prosperous and successful China that plays a greater role in world affairs because:
- It’s good for the people of China and the United States;
- It's good for the global economy; and
- It's critical to creating jobs in America.
Earlier this month, President Obama went before the United States Congress to announce a new economic plan, and made one thing crystal clear: Creating more jobs for Americans is the foremost priority of the Obama administration. And given our economic interdependence, more jobs in America and a stronger American economy are also in the economic interest of the Chinese people.
That’s why my top priority here is to work with the American business community in China to support President Obama’s job-creating efforts:
- Helping to double American exports by 2015 – which will create jobs in the U.S. and provide high-quality, Made-in-America products and services which would be beneficial to China;
- Increasing Chinese investment in the U.S. – which will help Chinese companies prosper while at the same time creating jobs in America;
- And ensuring that U.S. companies can compete on a level playing field in China and operate in the same open and fair environment that Chinese companies enjoy in the U.S.
- Achieving these goals require a thriving China and a closer commercial relationship between our countries.
As we consider the future of the U.S.-China relationship and of China's place in the global economy, it’s important to figure out how exactly this country’s economic transformation happened. How did China grow so fast? And why did this growth occur when it did? The first answer to this question is simple. China prospered because it unleashed the drive, ingenuity and talent of its people. China’s history is marked by thousands of years of world-changing innovations: from the compass and gunpowder to acupuncture and the printing press. No one should be surprised that China has re-emerged as an economic superpower. But why now? Why these last 30 years and not the 30 years before that?
I believe that China’s explosive economic growth was sparked by its unprecedented economic and cultural opening up to the world. Beginning with economic reforms under Deng Xiaoping in 1979 and continuing through China joining the World Trade Organization in 2001, China has made its economy fairer, freer and more open to international competition. The reforms are far from complete. But the trend is clear: The more China has opened up, the more it has benefited from the rules-based, international trading system established in the post-World War II era. China has not only gained freer access to global markets. By opening up its economy, it has attracted foreign direct investment that has:
- Put Chinese people to work;
- Brought new management, organizational and technological skills to Chinese companies; and
- Given those Chinese companies enormous capacity to become major manufacturers and major exporters.
But the growth model China has relied on for the last 30 years – one predicated on low-cost exports to the rest of the world and investment in resource intensive heavy manufacturing - cannot serve it well in the next 30 years. Even Premier Wen Jiabao identified the problem as far back as 2007, observing that the Chinese economy is “unstable, unbalanced, uncoordinated, and unsustainable.” If anything, China’s challenges have accelerated in the past few years in the wake of the global financial crisis and the continued weakness in China’s overseas export markets.
And these realities are reflected in China’s latest five-year plan, with its focus on:
- Expanding domestic consumption;
- Reducing energy and carbon intensity;
- Expanding the service sector; and
- Fostering innovation in newly emerging industries
If China can meet these goals, it will redefine its economic position in the world as well as its partnership with the United States. It will be a relationship defined less by China making and U.S. consumers taking, and more by empowered Chinese consumers importing more goods and services and enjoying a higher living standard at lower costs….
But there is a gap between the goals China identified in its five-year plan and the steps it is taking to achieve them. Goals like expanding domestic consumption and fostering innovation require an acceleration and expansion of the economic reforms China has undertaken in the last few decades versus a return to the state planning and industrial policies of the past. China’s current business climate is causing growing frustrations among foreign business and government leaders, including my colleagues in Washington. Last week, I was speaking with students at Beijing Foreign Studies University. And I identified what I believed to be the single largest barrier to improved U.S.-China cooperation: A lack of openness in many areas of Chinese society – including many areas of the Chinese economy. And if this continues, it will mean:
- Less innovations from Chinese businesses;
- Fewer opportunities for the Chinese people; and
- Slower growth for the Chinese economy.
This is something neither China nor the global economy can afford. We want China to succeed. So I’d like to highlight a few areas where more opening could help create a more dynamic and prosperous Chinese economy. Take for example China’s foreign direct investment policies, where foreign businesses face substantial restrictions in participating in a variety of industries in China, ranging from healthcare to energy to financial services and several others. And in industries like mining, power generation and transportation, the government selects national champions and effectively shuts out foreign competition altogether. But these policies are ultimately counterproductive, preventing China from receiving the capital, technology, management expertise, and jobs that would come with a more open investment environment, limiting participation of innovative small and medium sized companies from around the world, and creating seeds of doubt in the minds of foreign investors as to whether they are truly welcomed in China.
These doubts could be eased by China:
- Eliminating its foreign investment catalogue.
- Abolishing a system that restricts foreign investment and requires joint ventures in so many fields.
- Allowing foreign and Chinese companies to make investment decisions without expansive government interference.
One specific area where China’s lack of openness has raised concerns is in the financial services sector. The OECD has reported that China has some of the world’s most restrictive barriers for entry in the financial services sector. Many of China's long-established banks are oriented to serve the needs of large state-owned enterprises. But China’s private, small- and medium-sized businesses have financial product and service needs quite different from larger companies. So do Chinese consumers, who require products and services that facilitate savings, investment, insurance, and retirement planning and everyday purchases. Opening up China’s financial services to more foreign companies and investment would create a more competitive market that provides better services to China’s small businesses and households. A perfect example of that is in the area of credit cards where China’s restrictions have created a domestic monopoly and have shut out foreign credit card companies that would offer competitive and customer responsive products. A more open and diverse Chinese financial system would help spur China’s economic reform efforts by helping finance the most dynamic firms in the economy and by putting more money in the pockets of the Chinese people through better savings options and ultimately better returns on their investments.
Such reforms could be further enhanced by allowing China’s exchange rate to appreciate more rapidly, both against the dollar and against the currencies of its other major trading partners. Almost all economists believe the renminbi remains substantially undervalued in relation to other currencies. Allowing the renminbi to appreciate more rapidly would help reduce inflation, including the price of goods and services coming into China, allowing Chinese consumers to buy more with their income.
Another area of great concern for the international business community is China’s poor protections and enforcement of intellectual property rights, which makes it difficult for innovative companies – both Chinese and foreign - to compete on a level playing field. Despite some progress, American and other foreign companies in industries ranging from pharmaceuticals to biotechnology to advanced manufacturing to entertainment still lose billions of dollars every year from IP theft in China. Take software for example: In the United States, for every $1 in computer hardware sales there is about 88 cents in software sales. But in China, for every dollar in hardware sales there is only eight cents in software sales. According to the Business Software Alliance, that discrepancy is largely explained by the fact that nearly 80 percent of the software used on computers in China is counterfeit. Software companies report that they earn more from legitimate sales of their products in Vietnam than in all of China, despite the fact that China’s economy is more than 50 times larger.
The lack of strong intellectual property rights enforcement is troubling not just to foreign firms, but to Chinese innovators as well. I have heard from so many Chinese-owned companies who have devoted significant resources to develop new products and technologies. And they complain they were almost wiped out by others illegally copying their ideas and technology. For every foreign company calling for stronger IP protection, there are many more Chinese companies demanding the same.
Stronger IPR enforcement is essential:
- To protect the work of Chinese writers and musicians;
- To provide incentives for Chinese firms to invest in research and development; and
- To help China reach its goals of fostering a more innovative and prosperous economy.
That is why we urge the Chinese government to strengthen the protection of intellectual property rights by:
- Establishing a permanent State Council-level leadership structure to lead and coordinate IPR enforcement efforts at all levels of government focused on serious IP theft, including the growing problem of theft on the internet;
- Achieving measurable results on software legalization both in government and in enterprises.
The Chinese economy is increasingly moving up the global economic value chain, where growth is created not just by the power of a country’s industrial might, but also by the power of its people’s ideas and their inventions. That means China’s economy is increasingly dependent on the ability of its citizens to freely access information and new technologies and expertise. If China’s businesses, entrepreneurs, academics, scientists and researchers, students, and even ordinary citizens aren’t able to fully participate in the international marketplace of ideas, then China as a country, and as an economy, will fail to realize its full potential. We want to see a China:
- Where the full talents of its people are unleashed; and
- Where its workers and businesses are competing vigorously on a level playing field with foreign workers and businesses.
We want to see success determined in the marketplace not by political factors but by the cost and quality of a company’s products. This openness is the ideal we strive for in the United States, and when we in America fall short of that ideal, we try to fix it.
That’s why President Obama has ordered a total reform of our export control system to enhance our national security, strengthening controls on our most critical technologies while eliminating unnecessary obstacles to the export of less critical technologies – especially those that are already readily available around the world. These reforms will:
- Enable U.S. firms to remain competitive and viable, which is also critical to our national security.
- And they will make many items easier to export to China and other countries by no longer requiring a license for their exports.
Even though there were strong voices pushing against this reform, we knew it was the right move for American security and prosperity.
And, we are also committed to improving our visa process. We know that if we want to strengthen our commercial relationship with China and create jobs in America, that we need to make it easier for Chinese business people and tourists to travel to the United States for business and leisure. Reducing the wait time to obtain visas to travel to the U.S. will be a top priority for me as Ambassador.
But as President Obama said, our number one priority in the United States is job creation. So I am proud to announce today a new Trade and Investment Initiative under which our embassy will work with U.S. and Chinese businesses and entrepreneurs and local governments to increase bilateral trade and ties between the U.S. and throughout China. We hope to build on the recent growth in U.S. exports which has been key to America’s economic recovery - worldwide exports in 2010 grew by 17% over 2009 and exports to China grew by 32%. The more U.S. companies export their Made in USA goods and services, the more they produce. And the more they produce the more workers they need. And that means jobs for Americans. And, of course, we’re talking about goods and services that are highly valued and in great demand - that can meet the needs of the Chinese people and improve their quality of life. U.S. governors, mayors and even high-level federal officials are already leading trade and investment missions here, but we at the Embassy will not wait for those missions to come to us.
Over the next year, I am committed to leading five trade and investment missions to China’s emerging cities. For these missions our Embassy will recruit trade delegations with a focus on specific high-growth sectors such as:
- Clean and renewable energy;
- Aviation; and
- Information and communication technologies.
Our missions will provide U.S. companies with better access to provincial and local governments introduce those companies to potential buyers and customers and help build their trading relationships with Chinese businesses. While on these missions, we will also help Chinese companies and entrepreneurs better understand the benefits and ease of investing in the U.S. by establishing factories, facilities, operations and offices.
More than five million Americans are directly employed by foreign companies in the United States, ranging from Japanese carmakers to Russian steel plants to Indian energy and industrial companies to Brazilian juice processors. And we’re welcoming more Chinese companies every day, as China’s foreign direct investment in America increased 400 percent between 2008 and 2010. These companies have come to our shores because they know the United States has:
- The largest consumer market in the world;
- An educated workforce;
- Strong intellectual-property protections; and
- Dynamic capital markets.
Although the U.S. has a strong investment climate overall, some businesses still have difficulty:
- Understanding the variety of tax structures and tax incentives among the 50 states;
- As well as navigating multiple federal agencies regarding permits and other requirements.
That’s why the Obama administration recently announced a new initiative called Select USA. It’s the first coordinated federal effort to aggressively pursue and win new business investment in the United States while cutting red tape and removing barriers to new investment. If Chinese companies want to establish businesses and operations in America, Select USA will help connect Chinese investors with U.S., state, and local governments that are eager to attract their investment.
Our embassy efforts to attract Chinese investment to the U.S. will extend beyond these five trade and investment missions. We will also partner with existing initiatives by such organizations as the U.S.-China Business Council, AmCham, and others.
The United States is doing everything it can to make our investment and commercial environment as open and appealing as possible. Unlocking the full potential of the U.S.-China relationship requires China to take similar steps.
America understands that China’s modernization and evolution towards a more market-oriented economy is a process that will take time. But it’s necessary to accelerate these efforts if China is to expand opportunity for its people and to meet the goals of its five-year plan, and to strengthen the global economy. When the United States speaks of openness, what we really mean is we want China to be open to letting the talents of its own people flourish. And open to competition, which fosters excellence. China's own recent history proves that when it opens itself, there is nothing its people cannot accomplish. A more open China will lead to a more prosperous and stable China. That’s good for China, the United States and, indeed, the entire world.
That is a prospect we welcome.
I look forward to working with all of you to accomplish that.