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Annual Report Identifies Trade Issues with China

Thursday, November 17, 2011
Sandler, Travis & Rosenberg Trade Report

The U.S.-China Economic and Security Review Commission has released its 2011 report to Congress on the national security implications of the trade and economic relationship between the U.S. and China. The Commission uses a broad interpretation of “national security” in evaluating how this relationship affects the economic health and industrial base of the U.S. and the state of U.S. economic and security interests and influence in Asia. As a result, this report covers issues such as China’s proliferation practices, the qualitative and quantitative nature of economic transfers of U.S. production activities to China, the effect of China’s development on world energy supplies, the access to and use of U.S. capital markets by China, China’s regional economic and security impacts, U.S.-China bilateral programs and agreements, China’s compliance with its World Trade Organization accession commitments, and the implications of China’s restrictions on freedom of expression.

As has typically been the case, the report casts a critical eye on Chinese policies and practices and makes a number of recommendations for responsive action by the U.S. government.

Advanced Technology. On a monthly basis, the U.S. now imports roughly 560% more advanced technology products from China than it exports to China. Exports of low-cost, labor-intensive manufactured goods as a share of China’s total exports decreased from 37% in 2000 to 14% in 2010.

State-Owned Enterprises. China’s privatization reforms during the past two decades appear in some cases to have been reversed, with a renewed use of industrial policies aimed at creating SOEs that dominate important portions of the economy, especially in the industrial sectors reserved for the state’s control. In addition, the Chinese government promotes the state-owned sector with a variety of industrial policy tools, including direct and indirect subsidies, preferential access to capital, forced technology transfer from foreign firms, and domestic procurement requirements.

Foreign Direct Investment. While the value and scope of bilateral investment flows have expanded significantly in the past ten years, U.S. direct investment in China is more than 12 times greater than Chinese direct investment in the United States. U.S. cumulative FDI in China was estimated at $60.5 billion in 2010, while cumulative Chinese FDI in the United States totaled just $4.9 billion.

The Chinese government guides FDI into those sectors it wishes to see grow and develop with the help of foreign technology and capital. Foreign investors are frequently forced into joint ventures or other technology-sharing arrangements, such as setting up research and development facilities, in exchange for access to China’s market. Meanwhile, large portions of the Chinese economy are closed to foreign investors.

Finally, China has recently introduced a national security investment review mechanism similar to the Committee on Foreign Investment in the United States, although there are concerns among foreign companies that the Chinese government may use this mechanism to derail investment by foreigners in those companies and sectors it wants to remain under government control.

Industrial Policy. Chinese officials have pledged to modify China’s indigenous innovation policy in response to protests from U.S. business leaders and top officials, but those promises have not been implemented at the local and provincial levels. “China has a history of making promises and delivering little, particularly when doing as little as possible benefits the Chinese economy,” the report asserts, “as has been the case with China’s promises to bring its intellectual property protections up to international standards and to cease requiring technology transfers from foreign firms.” The report also claims that although China agreed in 2001 to stop explicitly requiring foreign companies to surrender their technology in return for market access and investment opportunities, it still employs several tactics to coerce foreign firms to share trade secrets with Chinese competitors in violation of WTO rules.

Emerging Industries. China’s 12th Five-Year Plan advocates a move up the manufacturing value chain with the explicit mention of seven strategic emerging industries: new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, energy conservation and environmental protection, alternative energy, and biotechnology. Analysts and foreign business leaders fear that the emphasis on industrial upgrading will lead to the introduction of new government subsidies, which in turn will disadvantage foreign competitors.


The Commission makes a total of 43 recommendations in this report but believes the following to be among those of particular significance.

• Congress should pass legislation requiring the president to assign the National Security Council to conduct an agency-wide comprehensive review of U.S. economic and security policies toward China to determine the need for changes to address the increasingly complicated and serious challenges posed by China to U.S. international and domestic interests.

• Congress should urge the administration to employ all necessary remedies authorized by WTO rules to counter the anticompetitive and trade-distorting effects of the Chinese government’s extensive subsidies for Chinese companies operating in China and abroad.

• Congress should direct the Department of Commerce to report annually on Chinese investment in the United States, including by Chinese SOEs and other state-affiliated entities.

• Congress should direct the Securities and Exchange Commission to revise its protocols for reviewing filings by foreign entities listed on or seeking to be listed on the U.S. stock exchanges. The SEC should also develop country-specific data to address unique country risks to assure that U.S. investors have sufficient information to make investment decisions.

• Congress should assess the reauthorization of Super 301 to assist in the identification of the policies and practices that China pursues that create the greatest impediment to U.S. exports entering the Chinese market and the most important policies or practices that unfairly or unjustifiably harm U.S. producers and workers in the U.S. market.

• Congress should direct the Government Accountability Office to undertake an evaluation of investments and operations of U.S. firms in the Chinese market and identify what federally supported R&D is being utilized in such facilities and the extent to which, and on what terms, such R&D has been shared with Chinese actors in the last ten years.

• Congress should investigate whether U.S. sanctions have been imposed on all Chinese firms that have violated sanctions laws by investing in Iran’s petroleum industry or providing Iran with refined petroleum products or advanced conventional weapons.

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