WASHINGTON—China has not lived up to its commitments made 10 years ago when the United States granted Most Favored Nation status to China and it officially became a member of the World Trade Organization (WTO). This is the general conclusion of the 2011 report to Congress of the U.S.-China Economic and Security Review Commission (USCC) that was released on Nov. 16, along with a specific recommendation for a new National Security Council review of U.S. policy toward China.
The year 2011 marks a milestone between the United States and China, said USCC Chairman William Reinsch. He said China agreed in December 2001 to a process of trade liberalization. The idea behind U.S. policy during the Clinton years was that by “engaging” China, it would be encouraged to become a “responsible stakeholder,” using the words of World Bank President Robert Zoellick.
When the decision was made, there was concern that China’s state capitalism would be incompatible with the free market premises of the WTO. But it was hoped that with time, China would adjust and adhere to WTO requirements. The commission was created by Congress in 2011 to monitor China’s economic progress as well as China’s threat to U.S. national security.
“Ten years later, China’s state-directed financial system and industrial policy continue to contribute to trade imbalances, asset bubbles, misallocation of capital, and dangerous inflationary pressures,” says the report.
The USCC is mandated by Congress to report on the national security implications of the bilateral trade and economic relationship between the United States and China. The bipartisan commission, composed of 12 members, who are appointed by leaders of the House and Senate, unanimously approved the 2011 annual report. The commission held eight public hearings and took testimony from 65 witnesses.
This year’s 400 plus page report finds much troubling behavior by China, both in its trade policies and opaque military expansion.
Reinsch took special note of two areas, which especially affect the United States adversely: violations of intellectual property (IP) protection and discrimination against foreign companies.
“China has yet to create a system that effectively protects intellectual property; something that is required of all WTO members. … About 8 of 10 computers in China still run counterfeit operating system software,” Reinsch said.
Reinsch found even more troubling that China not only has failed to live up to its promise to lower trade barriers but is also moving backward on this key issue. In 2009, China began aggressively to promote indigenous Innovation, a policy that bans foreign goods and services from government procurement contracts. Notwithstanding that Chinese leader Hu Jintao responded to Western pressure in January 2011 by promising to ease discrimination against foreign companies in state procurement, “real change remains elusive, particularly among the provincial and local governments,” says the report.
“These policies, along with China’s failure to provide adequate IP protection, strike at the heart of America’s greatest economic strength—its ability to innovate,” said Reinsch.
The report further notes the backsliding from market reforms to more state dominance in 2011. “China subsidizes its state-owned enterprises to the detriment of both private Chinese firms and international competitors,” says the report. The report cites a survey by the American Chamber of Commerce in China that found 71 percent of American businesses operating in China perceived that “foreign businesses are subject to more onerous licensing procedures than Chinese businesses.”
While the Chinese regime allowed the yuan to rise approximately 6 percent this year, the U.S. Treasury Department reports that the yuan remains “substantially undervalued,” which is the predominant view of economists. The consequence of a deeply undervalued currency is that U.S. goods are subjected to a de facto tariff, Chinese exports are underpriced, and Chinese household consumption is suppressed.
“This contributes to a persistent pattern of massive and dangerous trade distortions, unnatural pools of capital, and dangerous inflationary pressures that threaten the stability of the global economy,” says the report.
Over the past year, the Chinese regime’s massive military modernization included three firsts: test flights of its first stealth fighter (J-20), a sea test of its first aircraft carrier, and the possible deployment of “the world’s first ballistic missile capable of hitting moving ships at sea,” says the report.
The report describes the J-20 stealth fighter. This year, a former military expert from Croatia said that possibly the stealth technology for J-20 came from a U.S. F-117 stealth bomber shot down over Serbia in 1999, according to the report.
While suspected for a long time, China in July revealed it was developing an aircraft carrier.
“Possession of an aircraft carrier would allow China to project force throughout the region, especially in the far reaches of the South China Sea, something it currently cannot fully do,” says the report. It will be several years before China’s aircraft carrier is fully operational.
The development of China’s anti-ship ballistic missile, the DF-21D, was officially confirmed this year in July.
With its increasing economic and military might, “Beijing increasingly acts with greater assertiveness on the international stage,” said Reinsch. In 2011, China pursued a policy of intimidation and provocation in the South China Sea. China harassed Indian, Philippine, and Vietnamese fishing and oil exploration vessels, said Reinsch.
China uses its maritime security advantage for bullying other claimants to accept its “excessive territorial claims in the region,” said Reinsch. It appears that China may not be willing to cede any of its claims, says the report.
Many of China’s deeds in the region may be in violation of international law, says the report.
The report discusses the development of China’s cybercapabilities, citing numerous computer network intrusions throughout 2011. The report concluded that evidence surfaced this year that indicates the Chinese military engages in computer network attacks.
Calling for Change in US-China Policy
Taken as a whole, the past decade has shown that the Chinese Communist Party has steered “policy in its own narrow self-interest at home and abroad, often without regard for international rules and norms,” says the report.
Until China complies with international norms, the United States needs to become more forceful in insisting on reciprocity in our economic relationship and respect for international laws and norms. Because of the serious challenges China poses to U.S. interests, the commission advises Congress to require the president to assign the National Security Council to conduct a thorough review of U.S. policies toward China to determine the need for changes.
President Obama, whose administration has been more forceful in challenging China for not abiding by the WTO, said Beijing must live up to the norms of accepted international behavior. Obama announced on Wednesday that American troops will be stationed in Australia under a new security agreement, and their numbers will expand to 2,500. This is meant to send a signal to China that the United States is going to be a force in Southeast Asia.
President Obama said, “Where China is playing by those rules, recognizing its new role, I think this is a win-win situation. There are going to be times where they’re not, and we will send a clear message to them that we think that they need to be on track in terms of accepting the rules and responsibilities that come with being a world power.”