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Not Enough Progress on Irritants in U.S.-China Economic Relations, Report States

Monday, November 23, 2015
Sandler, Travis & Rosenberg Trade Report

The U.S.-China Economic and Security Review Commission’s 13th annual report to Congress indicates that Beijing has yet to sufficiently address longstanding U.S. economic concerns and that U.S. businesses are suffering as a result. Among the trade and economic issues examined in this year’s report are the foreign investment climate in China, China’s agenda for market reform and competiveness, digital trade barriers in China, and China’s commercial cyber espionage efforts. The report also covers developments in the U.S.-China security dynamic and China’s evolving relationships with other nations.

Overall, the report finds little to praise in the bilateral economic relationship and faults both sides. The U.S. goods trade deficit with China rose 7.5 percent in 2014 to a record $342.6 billion and was up a further 9.7 percent year-on-year in the first eight months of 2015. The Chinese government continues to intervene in foreign exchange markets a decade after moving its currency to a managed float, including an unexpected devaluation in August. In addition, China’s adherence to World Trade Organization rules and principles “remains spotty.” U.S. efforts to address these and other problems through bilateral dialogue continue to have limited results, the report states, citing recent high-level meetings that failed to yield meaningful progress on “fundamental strategic and economic issues” such as cybersecurity, anticorruption cooperation, and investment barriers to foreign firms in many industries.

The report lists a number of shortcomings with China’s foreign investment climate, including inconsistent and unclear legal and regulatory enforcement, increasing protectionism and other preferential policies benefitting domestic companies. For example, the report identifies a pattern of fluctuation in China’s foreign investment restrictions whereby the government first welcomes foreign direct investment into sectors deemed strategic for China’s national economic development in order to extract technology, intellectual property and know-how from foreign firms and then, once the domestic industry is deemed sufficiently developed, gradually withdraws those policies and imposes restrictions. Another example is that China’s Anti-Monopoly Law enforcement agencies have failed to treat identical or similar violations of the law equally, resulting in more leniency toward state-owned enterprises and more rigorous enforcement against foreign companies. Some aspects of China’s proposed foreign investment law are encouraging and signal a move toward converging with international practices, the report states, but there are still troubling provisions such as a broadly discretionary and expanded national security review mechanism and targeting of foreign companies using particular investment structures to access the market.

One of the report’s most strident complaints is that the Chinese government “conducts and sponsors a massive cyber espionage operation aimed at stealing personally identifiable information and trade secrets from U.S. corporations and the U.S. government” and that some of this stolen information is provided to Chinese state-owned businesses that compete with U.S. firms as well as sectors of the Chinese economy that the central government has designated as strategic emerging industries that it intends to nurture into global competitors. This behavior is damaging the U.S. economy in the form of lost trade secrets such as copyrights, patents and manufacturing processes, foregone royalties, the costs of cyber defense, the loss of business and jobs, and the expense of remediating and repairing the damage to computer networks. The report notes that the U.S. response so far has been minimal and that as a result “the Chinese government “appears to believe that it has more to gain than to lose from its cyber espionage and attack campaign.”

The report recommends that Congress consider some potentially significant actions in response to these and other problems. For example, lawmakers could condition access to the U.S. market for Chinese investors on a reciprocal, sector-by-sector basis to provide a level playing field for U.S. investors in China. Another possibility would be allowing U.S.-based companies that have been hacked to engage in counterintrusions for the purpose of recovering, erasing or altering stolen data or allowing the U.S. government to take such measures on their behalf.

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