The U.S.-China Economic and Security Review Commission released Nov. 15 its 2007 annual report to Congress, which examines how China approaches its responsibilities as a growing economic and military power. As in previous years, the report is critical of China in a number of areas, including trade and economic policies, military modernization, proliferation, energy and environmental activities, and media and information controls. However, the commission emphasizes that “none of these problems is insurmountable” and that “both governments must work diligently to build … trust and understanding.”
The commission states that this year’s report focuses on identifying the specific commitments China has made and the laws its government has consequently promulgated while evaluating the extent to which China has fulfilled or failed to fulfill those commitments. Highlights of the trade-related aspects of the report include the following.
Economic Reform. The commission expressed disappointment that “Beijing’s efforts to move in the direction of a market economy appear to be slackening” and that China is instead moving to retain state ownership or control of a large block of the economy, including industries such as telecommunications, civil aviation and information technology. China employs a range of tools to aid state-owned enterprises, including subsidies and state-funded research and development centers, promoting foreign direct investment from Western high-tech firms, maximizing technology transfers from more-developed economies, and protecting infant industries. In addition, the report alleges that China continues to supplement its acquisition of new technologies from commercial transfers and direct production partnerships with a large-scale industrial espionage campaign.
Investment. China’s growing trade surplus with the U.S., which was up 14 percent over the first eight months of 2007, has helped create the world’s largest single pool of foreign currency. U.S. policymakers are concerned about the new China Investment Corporation, which will use a new sovereign wealth fund to manage a portion of China’s $1.43 trillion in foreign currency reserves. Those reserves have been invested mostly in dollar-denominated bonds thus far, but the record size and rapid growth of China’s foreign fund holdings are raising concerns about the direction of future investments and the impact they could have on the U.S. economy.
Import Safety. The commission argued that China’s “continuing harassment of journalists” and others who “attempt to disseminate non-official versions of events within China” has exacerbated the recent problems with food and consumer product safety. “Allowing the Chinese news media to fully report on such domestic scandals earlier,” the commission said, “might have led to more effective solutions to the problem within China, and controls on exporting tainted products out of China.”
Industrial Policies. China has done little to address repeated complaints from the U.S. and the European Union about its extensive subsidies to manufacturers, which include discounts on loans and land, electricity, water, waste treatment and roads. Lax enforcement of environmental and labor laws, as well as tax holidays and rebates on exports, are often available to favored industries.
Defense. Elements of the U.S. defense industrial base are being moved overseas, which lengthens the supply chains of U.S. weapons and defense equipment and diminishes the number of domestic sources of defense components. There could be substantial security risks from using foreign-made parts and components in weapons systems or other defense equipment, including tampering, inadequate quality and supply chain interruption. Despite these risks, the report states, U.S. officials are not (a) methodically tracking what parts and components of important defense systems are obtained from China, (b) identifying, based on specific national security considerations, particular parts and components that should be prohibited from use in such systems if they are obtained from China, or (c) developing effective means to implement, monitor adherence to and enforce such policies and restrictions.
In response to these and other concerns, the report makes 42 separate recommendations for congressional action, including:
• endorsing the Department of Commerce’s decision that it has the authority to bring CV duty cases against non-market economies;
• requiring the Department of Defense to prepare a complete list of the country of origin of each component in every U.S. weapon system to the bottom tier;
• requiring U.S. companies to report to the DOC their receipt of any economic subsidy from China;
• revising the requirements to achieve standing in AD cases, particularly when continuing sales losses in U.S. industries have driven producers into a minority status and they are therefore ineligible for standing;
• assessing the adequacy of and, if needed, providing additional funding for U.S. export control enforcement and counterintelligence efforts, specifically those tasked with detecting and preventing illicit technology transfers to China and Chinese state-sponsored industrial espionage operations;
• urging the Bush administration to provide expanded technical assistance to China in strengthening its export control and border control programs and capabilities, particularly including enforcement of export controls, to prevent proliferation; and
• directing the DOC to report periodically on the general R&D expenditures of U.S. companies in China, based on the protected business proprietary data the DOC currently collects.
