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China Backtracking on Trade Liberalization, Report States

Thursday, November 17, 2016
Sandler, Travis & Rosenberg Trade Report

The U.S.-China Economic and Security Review Commission’s annual report to Congress, which typically paints a fairly negative picture of China’s economic, foreign policy, and military actions in relation to the U.S., adopts a noticeably more ominous tone this year. The report comes just after the election as U.S. president of Donald Trump, who has vowed to take a harder line against China on economic and security issues.

The report accuses China of continuing to violate the spirit and the letter of its international trade obligations by pursuing import substitution policies, imposing forced technology transfers, engaging in cyber-enabled theft of intellectual property, and obstructing the free flow of information and commerce. The report asserts that China is also becoming a less welcoming market for foreign investors with a host of restrictions and anticompetitive laws that proscribe foreign participation in broad swaths of the economy and promote domestic companies. At the same time, the report adds, the extensive subsidization of and policy support for favored companies and sectors puts international competitors wishing to export to China at a distinct disadvantage. “It has become all too apparent,” the report states, “that the CCP [Chinese Communist Party] has no intention of opening up what it considers key sectors of its economy to significant U.S. or foreign competition and control.”

With respect to the U.S., the report describes the bilateral relationship as strained based on China’s “ongoing failure to uphold its World Trade Organization commitments, ineffective efforts to cut industrial overcapacity, and unfair treatment of U.S. companies.” U.S. companies are finding it increasingly difficult to operate in China, the report notes, citing unclear laws and inconsistent regulatory enforcement, policies that favor domestic competitors, and industrial overcapacity. According to the American Chamber of Commerce in China’s 2016 Business Climate Survey, more than three-fourths of surveyed U.S. companies reported that they felt foreign businesses are less welcome in China than in years past.

Meanwhile, the report adds, Chinese investment in the U.S. is growing rapidly, driven by the Chinese government’s “going out” strategy, a generally more open policy environment for outbound investment, and capital flight. The increased acquisition of U.S. assets by Chinese companies, which often receive state funding, has led to growing concern over the economic and national security implications of such acquisitions. The report indicates that these acquisitions are being aided by a campaign of commercial espionage whereby Chinese agents systematically penetrate the information systems of U.S. companies to steal their intellectual property, devalue them, and acquire them at dramatically reduced prices.

These and other factors lead the report to surmise that China’s leaders appear to “have decided the time has come for China to leave behind its long-held strategy, espoused by Deng Xiaoping, of ‘hide your strength, bide your time.’” Instead, the report states, “China is showing itself to the world now, and the outcome is not what many had hoped for 15 years ago when the country was welcomed into the WTO and the global economic system.”

Given these findings, the Commission recommends that Congress take the following actions.

- amend the statute authorizing the Committee on Foreign Investment in the United States to bar Chinese state-owned enterprises from acquiring or otherwise gaining effective control of U.S. companies

- direct the Government Accountability Office to prepare a report examining the extent to which large-scale outsourcing of manufacturing activities to China is leading to the hollowing out of the U.S. defense industrial base

- require that under antidumping and countervailing duty laws, Chinese state-owned and state-controlled enterprises are presumed to be operating on behalf of the state and, as a result, do not have standing under U.S. laws against unfair trade to block a case from proceeding

- create an office within the International Trade Administration whose sole purpose is to identify and initiate AD and CV duty cases to ensure a more effective and timely response to China’s unfair trade practices

- enact legislation requiring congressional approval before China—either the country as a whole or individual sectors or entities—is granted status as a market economy by the U.S.

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