U.S. and Hong Kong (1998)

Prepared Remarks of Ambassador David L. Aaron
Under Secretary of Commerce for International Trade
American Chamber of Commerce, Hong Kong
April 17, 1998

Introduction

Thank you Jeff. It is always a pleasure to be back in Hong Kong.

Let me thank Jeff Muir, the Chairman of the Chamber, Frank Martin, its President, and the board of governors, with whom I just met, for making this event possible. We greatly value our relationship with Amcham Hong Kong, the largest Amcham in the world.

I am joined today by a distinguished delegation of 13 members of the business community representing many of America's most competitive industries -- information technologies, airport design, machine tools, engineering, design, and construction, project finance, and insurance.

In addition to advancing their business efforts, I am visiting Hong Kong to reaffirm our interest in, and support for, Hong Kong's autonomy.

This afternoon I want to briefly discuss two ways in which Hong Kong's economic leadership is critical to the region's future prosperity; First, in regards to the Asia Crisis and second as it relates to China's reform efforts. And I also want to report on the discussions I held this week in China preparing the ground for the June Presidential Summit.

Hong Kong and the Crisis

Hong Kong is in a unique position to encourage other Asian countries to weather the current storm. Because of its relative financial stability and its open markets, Hong Kong has a special responsibility. Hong Kong can both lead by example and respond effectively to its neighbors need for guidance.

Ten months after the hand-over, Hong Kong has changed remarkably little. Faced with one of the greatest economic challenges in its history, Hong Kong is responding to the fallout of the crisis with amazing agility. There has of course been some economic pain, but overall Hong Kong's economic situation is strong and outlook is good. Hong Kong's success has always been in embracing market openness, governance without corruption, and, most importantly, the rule of law.

These basic values, for which Hong Kong was known throughout Asia before the hand-over, are precisely the same qualities that have enabled it to keep afloat in recent months. Hong Kong's unwaivering faith in open markets has been reaffirmed. Its experience has proven to the world that sound economic and fiscal policies are the only path to continued prosperity, even in times of regional turmoil.

Hong Kong is leading the rest of Asia by proving that free markets, free capital and information flows, the rule of law, and a non-interventionist government are fundamental to continued growth and prosperity. It is only by recognizing and adopting these principles that the rest of Asia will be able to recover from the crisis and sustain growth over time.

Keep in mind that intra-Asian trade counts for almost 55 percent of the region's global trade. While Asian exports to the United States grew by $120 billion since 1990, Asian exports to Asia swelled by $430 billion ? three times as fast as to the United States. Even if our market could absorb a huge increase in imports, it could not make up for the drop in intra-Asian trade. Hong Kong can support the region's efforts to restore this trade dynamism by urging APEC members to honor their November 1997 commitments on early sectoral liberalization.

In line with its long history of open and transparent trade, and growing interest in electronic commerce and information technology, Hong Kong can also take a leadership role in promoting our duty-free electronic commerce proposal in the WTO. Hong Kong also needs to take the lead in opening up its local and international telecom markets in light of its accelerated review of the telecommunication and broadcasting sectors -- a step that we welcome and support.

Hong Kong is an exemplar to the rest of Asia in this time of trial. By pointing to Hong Kong's open economic model, regional leaders will be able to sustain greater openness and liberalization of their own trade regimes. Hong Kong's example will help them spurn calls to protectionism and retreat from openness. Hong Kong could also set an important precedent by acceding to the OECD Anti Bribery Convention -- already signed by South Korea and Japan.

But Hong Kong, as regional leader, is doing even more than helping its neighbors out of the current turmoil; it is serving as a beacon for China, the second largest economy in the world, to move towards market openness and trade liberalization.

Hong Kong and China's Reforms

As it pursues reform China faces a critical strategic choice. There are two paths to reform. On the one hand, China can implement economic reforms domestically but resist further opening its economy to the world.

This is the system that Japan, Korea and other countries in the region were following until recently. This system enjoyed a thirty year reign in Asia but has left many economies in shambles. In this approach, openness is seen as antithetical to reform. But this option will slow reforms as it has done throughout Asia, not hasten them. It is driven by fear that competition from imports and foreign investment will exacerbate dislocation, particularly unemployment.

On the other hand, China could make openness the ally of reform and learn from Hong Kong's and other open economies? success. China's reform program is based on the realization that Government control and direction of economic enterprise is inimical to growth and progress. It is prompted by the recognition that competition is the antidote to bureaucratic inefficiency.

But is this only true for the domestic economy? Clearly not. Imports and foreign investment are essential stimulants for China to achieve the domestic restructuring, efficiency, and growth it seeks from reform. Drawing from principles that have made Hong Kong's economy so successful is essential for China's future.

Of course, to continue to serve as an example Hong Kong's autonomy must be preserved. The way to do that is by ensuring Hong Kong's special status continues. Above all this means the rule of law and the free flow of information. This is a message I have carried in my meetings this morning and that I will repeat this afternoon with Chief Executive Tung.

In my discussions throughout the day I will also be sharing with my counterparts a preliminary report on my week long trip to Beijing and Shanghai. Let me also do that with you.

Deficit, Reforms and IPR

My most important mission in China was to place American commercial interests more squarely in the sights of China's economic leadership. The reason for this is simple; and it is the deficit.

Secretary Daley and President Clinton both support ever increasing commercial ties with China because this buttresses the broader Sino-US relationship that is essential for peace, stability and the welfare of both great nations.

Indeed, U.S. commercial relations with China have often been one of the few rays of sunshine on a sometimes clouded horizon. However, the increasing deficit -- since 1990 a more than a fivefold increase -- has cast a growing shadow on an otherwise brighter future.

The deficit cannot continue on its current path. It is unsustainable. In all of my meetings in China, I noted that the deficit is being observed very closely by the Administration, the Congress and the American people. If left unattended the growing imbalance in our trade relationship could even have a somber impact on the Summit.

During my discussions with Chinese leaders, there was mercifully little argument over the surge of the US/China trade deficit. No matter how much we might haggle about the data, certain basic observations can be made using either side's numbers.

China's trade data shows that since 1985, China's exports to the United States have grown at an average annual rate of 25 percent, while China's imports from the United States have grown at an average annual rate of only 10 percent. U.S. data shows almost exactly the same trends. From this perspective alone the trend is unsustainable.

There are indications that the Chinese economic leadership has begun to appreciate that increasing imports from the United States is in both our countries? interest. This is an encouraging change in sentiment, but we must see real, concrete, progress.

My Chinese counterparts made clear to me that economic reform is their principal preoccupation. Overhauling debt-ridden industries, introducing sweeping banking reforms, slashing the government bureaucracy, and creating an adequate safety net for the many millions left unemployed are monumental tasks of unprecedented proportions.

I stressed that the United States supports this reform effort, because we believe it will create a China that is a stronger partner for both peace and prosperity. But closing the trade gap is not antithetical to reform. I urged China to make openness the ally of reform.

Unfortunately, there are still formidable barriers to trade and investment -- transparency, limits on the scope of business, arbitrary regulations, high tariffs, excessive taxations to mention a few. Therefore, I do not think it is entirely coincidental that foreign direct investment has been declining since 1993, and that the value of new FDI contracts fell sharply last year -- down a hefty 29.3 percent.

What American business wants, and what I advocated with Chinese officials, will further support reform. Through foreign investment and reform, China can spur its economic growth, create new jobs, and improve the business climate. Through opening its market to more imports, China can have cheaper access to vital goods and services, improve the efficiency of its economy, and create more competition.

Services are a good example of how to stimulate growth and investment. Services are a vital part of an economy. To attract more investments and joint ventures, which would absorb some of the state sector's growing jobless, China must provide new to market companies with dependable services such as lawyers, accountants, telecom and transportation services.

The availability and quality of services weigh heavily in any company's decision to invest in a market. Once in the market, companies also rely on these services to help support decisions to expand their presence. Moreover, former state owned enterprises will need world-class professional services to rationalize their operations and create successful businesses.

Throughout my trip I tried to show that China cannot afford not to open its market, and that such opening is the only way to bring about both progress in reforms and the competition that China's industry needs in order to shape itself as a global player.

Finally, during my conversation with Shanghai Mayor XU, I also raised the issue of intellectual property rights, especially as it relates to retail sales. Mayor Xu assured me that Shanghai would continue its enforcement efforts and pointed to Hong Kong and Macau as being major sources of pirated material.

While I urged Mayor XU to redouble his efforts to combat piracy and the violation of intellectual property rights, I told him that I would convey his concerns to Hong Kong's leadership. I welcome Hong Kong's stepped-up piracy efforts, particularly recent raids on major distributors and the passage of the new factory registration law. However, we believe more effort is needed to assure enforcement of these laws.

We also have growing concerns about piracy of IPR in Macao. Indeed it is on the brink of becoming an outlaw economy. I hope the visit of the Portuguese Prime Minister will strengthen the rule of law there.

Conclusion

Hong Kong's success in weathering the storm of the Asia crisis provides us with a clear example of the enduring benefits of open and free economies. This is an important message for China as it deals with its own domestic reforms and decides which path to follow. Clearly the path that leads to greater economic openness also leads to continued growth and prosperity.

I end my trip encouraged by the very positive dialogue I and my delegation had in China and with the hope that China will take additional steps to further open its economy as it deepens reforms.

I also come away convinced that Hong Kong will continue to serve as an agent of change for greater freedom, openness, and democracy throughout the Asia Pacific region.

Thank you.

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