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Current Trade Deficit:    
U.S. China Economic and Security Review Commission Highlights Beijing's Unfair Trade Practices and Military Build-up
William R. Hawkins
Friday, December 01, 2006
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William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.

On November 16, the U.S.-China Economic and Security Review Commission (USCC) released its 2006 Annual Report to Congress.  The USCC is a bipartisan group of outside experts from business, labor, think tanks and universities established by Congress in 2000 to investigate, analyze, and provide recommendations regarding the impact of China’s rapid economic rise on the national security of the United States.  The Commission “takes a broad view of ‘national security’ in making its assessment and has attempted to evaluate how the U.S.  relationship with China affects the economic health of the United States and its industrial base, the military and weapons proliferation dangers China poses to the United States, and the United States’ political standing and influence in Asia.” It does some of the best work in Washington on this critical subject.

The principle conclusions are much the same as last year, but the framework is different.  This time,  the USCC looks at the notion used by those who remain wedded to the view of a new world order of global norms and international harmony, a view mainly useful for the conduct of business.  In such an imagined world, governments are “stakeholders” whose prime directive is to maintain peace and order so that trade and investment will only have mutually beneficial results and not have an impact on national security or the balance of power.  

The USCC does not identify where this concept originated, but former Deputy Secretary of State Robert Zoellick had been the principle exponent of the “stakeholder” terminology.  He first used this term in a speech to the National Committee on U.S.-China Relations in September, 2005 claiming, “All nations conduct diplomacy to promote their national interests.  Responsible stakeholders go further: They recognize that the international system sustains their peaceful prosperity, so they work to sustain the system.”  In the same speech, Zoellick rejected any policy to “contain” China; “promote other powers in Asia at its expense;” or invoke “the distant balance-of-power politics of the 19th century.”  Zoellick has since left government to take a job with the Goldman Sachs international banking concern, which has major financial interests in China, including ties to state-owned corporations and the Beijing regime itself.

The USCC asked whether China is “a state that not only observes international norms but works to strengthen those norm” and found the answer to be in the negative.  Beijing’s policies are the opposite of Zoellick’s hopes.  It conducts diplomacy solely to promote its own national interests, including in its conduct of trade and investment.  And rather than consider balance of power politics to be a distant practice of past centuries, the USCC finds that “China’s regional activities in Latin America, Africa, and the Middle East and around East Asia are beginning to assume the character of a counterbalancing strategy vis-a-vis the United States.  That is, China’s support for rogue regimes and anti-American governments and groups in vital regions serves an international purpose: to balance American power, create an alternative model of governance, and frustrate the ability of the international community to uphold its norms.”

In other words, Beijing is playing the Great Game of world politics the way it has always been played by those who want to win.  It is those who think the world has changed who have blundered, leaving America vulnerable and unprepared the wage the international struggle, which will only intensify in the coming years.

China’s economic policies cannot be in any way construed as “free trade.” The USCC finds, “China has a centralized industrial policy that employs a wide variety of tools to promote favored industries.  In particular, China has used a range of subsidies to encourage the manufacture of goods meant for export over the manufacture of goods meant for domestic consumption, and to secure foreign investment in the manufacturing sector.” It is about to enter the world auto competition, as Chinese “automobile production capacity already exceeds domestic demand by 10 percent to 20 percent.” This means that American auto companies, which have looked to the China market for future growth, are going to be disappointed, while facing even more import competition in the United States– assuming either Ford or General Motors survives the current level of imports from Japan, South Korea, Europe, and elsewhere.  

In auto parts, “Chinese regulations currently require automakers to exceed a 40
percent domestic content requirement or face higher tariffs on the imported auto parts.  These discriminatory tariffs pressure China-based auto assembly companies to use parts manufactured in China rather than U.S.-manufactured parts.” Meanwhile, “auto parts are being counterfeited, intentionally misrepresented, and sold as genuine—all in direct violation of both China’s trademark laws, which clearly are not being enforced, and China’s World Trade Organization (WTO) obligations.  American citizens are being put at risk as inferior Chinese counterfeit auto parts find their way under the hoods of vehicles driven on our streets, while U.S. companies lose significant market share and brand reputation to such counterfeit goods.”

Counterfeit auto parts are only the tip of the rampant Chinese stealing of intellectual property.  The U.S. Chamber of Commerce estimates that the global intellectual property industry loses $650 billion annually in sales due to counterfeit goods.  And testimony given before USCC hearings indicate that China is responsible for as much as 70 percent of this counterfeit goods market.  The World Health Organization reports that counterfeit pharmaceuticals of Chinese origin cost legitimate drug producers $32 billion a year.

The economic threat that Beijing’s mercantilism presents to American industry is bad enough, but what makes China different from other trading states, many of whom use similar tactics to win commercial advantages, is that China uses its economic gains to support foreign policies that threaten American security interests.  

In regard to Beijing’s rapid military buildup, the USCC concludes, “The pace of PLA modernization continues to exceed U.S. estimates.  The Commission believes that the military balance in East Asia is increasingly favorable to China and increasingly challenging
to U.S. interests and allies.  The Chinese military’s ability to deny access and freedom of operation to U.S. forces, and its further ambitions to project its own military power, are accelerating.” The USCC also believes, “The PLA [People’s Liberation Army] understands itself to be in an extended military competition with the United States.”

What is needed is for more Americans, especially in the business community, to understand the true nature of the U.S.-China rivalry, and support stronger measures to protect American economic and security interests.  A wide circulation of the USCC  report can make an important contribution to improving public awareness of the strategic challenge facing the country.

William R. Hawkins is Senior Fellow for National Security Studies at the U.S. Business and Industry Council.