Posted by: mulrickillion | December 14, 2011

U.S.-China Commission Releases 2011 Annual Report to Congress

Hong Kong Trader, 9 Dec 2011 —

On 9 November, the U.S.-China Economic and Security Review Commission released its 2011 annual report to Congress, which examines how mainland China approaches its responsibilities as a growing economic and military power. As in previous years, the commission sees progress in some areas but continues to exhibit a great deal of wariness regarding Beijing’s intentions and urges Congress to take a number of actions to protect U.S. interests. Many of the issues identified in the report are already on the radar of both Congress and Obama administration officials and may be addressed within the framework of bi-lateral mechanisms like the JCCT or the Strategic and Economic Dialogue.

The commission believes that mainland China has continued to pursue its own narrow interests without much regard for international rules and norms. The report also highlights Beijing’s adoption of a more aggressive trade agenda and a push for a larger role in international institutions, which the commission indicates are both a reflection and consequence of mainland China’s growing economic prominence and resource needs as well as the perception that the mainland is on the rise while the United States is in decline. In addition, the report describes mainland China’s strong desire to move up the manufacturing value chain as well as the policies the Chinese government is pursuing policies to fulfil that goal, including practices that may harm U.S. companies such as forced technology transfer and the creation of joint venture companies as a condition to obtaining access to the mainland Chinese market; the adoption of unique, mainland Chinese-specific standards for high-tech equipment; and extensive intellectual property rights violations.

The most relevant findings and recommendations included in the report are listed below.

Findings

  • The U.S. trade deficit with mainland China has continued to grow, setting a record high of US$273 billion in 2010 and accounting for more than 50 percent of the total U.S. trade deficit with the world. Notably, the United States currently imports approximately 560 percent more advanced technology products from mainland China than it exports to the mainland. 
  • The renminbi has appreciated by six percent over the past 12 months but economists estimate that China’s currency remains substantially undervalued. There is increasing grassroots pressure in mainland China to widen the renminbi’s trading band and increase the path of appreciation, however.
  • Mainland China’s foreign currency reserves currently exceed US$3 trillion, three times higher than the next largest holder of foreign currency reserves (Japan). At the same time, China’s domestic money supply is growing out of control and is now ten times greater than the U.S. money supply despite the fact that mainland China’s gross domestic product is only one-third as large. This has resulted in strong inflationary pressures and has helped create a real estate bubble.
  • The mainland Chinese economy in general and mainland Chinese exports in particular are moving up the value chain. Exports of low-cost, labour-intensive manufactured goods as a share of mainland China’s total exports decreased from 37 percent in 2000 to 14 percent in 2010.
  • Mainland China has grown more assertive and creative in using WTO procedures to alleviate, eliminate and avoid certain restrictions in its protocol of accession. At the same time, the WTO has ruled that mainland China’s existing system of state monopoly over imports of cultural products is inconsistent with WTO obligations. Beijing has not yet complied fully with that WTO ruling and the U.S. has the right to initiate further proceedings to compel mainland Chinese authorities to do so.
  • Mainland China’s privatisation reforms during the past two decades appear in some cases to have been reversed, with a renewed use of industrial policies aimed at creating state-owned enterprises that dominate important portions of the economy, especially in the industrial sectors, reserved for the state’s control. The mainland Chinese government promotes the state-owned sector with a variety of industrial policy tools, including a wide range of direct and indirect subsidies, preferential access to capital, forced technology transfer from foreign firms, and domestic procurement requirements, all intended to favour SOEs over foreign competitors.
  • Mainland Chinese authorities guide foreign direct investment 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 mainland China’s market. Meanwhile, large swathes of the mainland Chinese economy are closed to foreign investors. China’s investment policies are part of the government’s plan to promote the development of key industries in the mainland through access to foreign technology and capital.
  • Due to the considerable government ownership of the mainland Chinese economy, provision by mainland Chinese companies of critical infrastructure to U.S. government or acquisition by mainland Chinese companies of U.S. firms with sensitive technology or intellectual property could be harmful to U.S. national interests. The Committee on Foreign Investment in the United States investigates the national security implications of mergers and acquisitions by foreign investors of U.S. assets.
  • Mainland Chinese authorities have recently introduced a national security investment review mechanism similar to the CFIUS, although there are concerns among foreign companies that the government may use the mechanism to derail investment by foreigners in those companies and sectors it wants to remain under government control.
  • Mainland China’s indigenous innovation policy is an outgrowth of the government’s broad industrial policy and has been openly developed and documented through public plans and pronouncements, particularly the National Medium- and Long-Term Plan for the Development of Science and Technology (2006–2020). The indigenous innovation policy seeks to nurture certain high-wage, high value-added industries designated by the government by favouring mainland Chinese firms over foreign firms or mainland China-based foreign affiliates in government procurement contracts. Mainland Chinese officials, including President Hu, have pledged to modify mainland China’s indigenous innovation policy in response to protests from U.S. business leaders and top officials. Notably, the State Council recently issued a measure requiring governments of provinces, municipalities and autonomous regions to eliminate by 1 December any catalogues or other measures linking innovation policies to government procurement preferences.
  • Foreign-invested enterprises seeking to be considered for government procurement contracts or public works projects are expected to file for patents and copyrights within mainland China in order to qualify for preferential treatment in government contracting. Foreign affiliates risk the unintended transfer of their technology to mainland Chinese firms if they do so because of the nature of the mainland Chinese intellectual property system and the lax enforcement of intellectual property laws and regulations in the mainland.
  • Although mainland Chinese authorities agreed in 2001 to stop explicitly requiring foreign companies to surrender their technology to China in return for market access and investment opportunities, the government in Beijing still employs several tactics to coerce foreign firms to share trade secrets with mainland Chinese competitors.
  • One of the main objectives of the 12th Five-Year Plan is to redirect mainland China’s economy to be more focused on domestic consumption and less on exports and investment. The plan assumes that mainland China’s growth would therefore be more balanced and sustainable. The plan also emphasises higher value-added production and increased government support for domestic high-tech industries.
  • There is cause for scepticism about mainland China’s prospects for carrying out the rebalancing goals of the 12th Five-Year Plan. The mainland Chinese government had similar goals in previous plans but their implementation was sidelined in favour of pursuing higher export and investment growth.
  • 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.
  • Mainland Chinese government requirements that foreign corporations transfer technology to mainland Chinese joint venture partners in exchange for market access violate written WTO prohibitions on forced technology transfers. The new requirements for technology transfer from foreign partners are often made in implicit rather than explicit terms, which may make challenging them in the WTO dispute procedure more difficult.

Recommendations

  • Congress should require the president to assign the National Security Council to conduct an agency-wide comprehensive review of the U.S. economic and security policies toward mainland China to determine the need for changes to address the increasingly complicated and serious challenges posed by the mainland to U.S. international and domestic interests. Such a review should be examined and debated as appropriate by congressional committees.
  • Congress should urge the administration to employ all necessary remedies authorised by WTO rules to counter the anti-competitive and trade-distorting effects of the mainland Chinese government’s extensive subsidies for Chinese companies operating in the mainland and abroad.
  • Congress should direct the DOC to report annually on mainland Chinese investment in the United States, including data on investment in the U.S. by mainland Chinese SOEs and other state-affiliated entities.
  • Congress should direct the U.S. 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 develop country-specific data to address unique country risks to assure that U.S. investors have sufficient information to make investment decisions. The commission should focus, in particular, on state-owned and -affiliated companies and subsidies and pricing mechanisms that may have material bearing on the investment.
  • Congress should assess the reauthorisation of Super 301 to assist in the identification of mainland Chinese policies and practices that create the greatest impediment to U.S. exports entering the mainland Chinese market and the most important policies or practices that unfairly or unjustifiably harm U.S. producers and workers in the U.S. market. Priority should be given to addressing such practices by the USTR under such legislation.
  • Congress should direct the U.S. Government Accountability Office to undertake an evaluation of investments and operations of U.S. firms in the mainland Chinese market and identify what federally supported research and development is being utilised in such facilities and the extent to which, and on what terms, such R&D has been shared with mainland Chinese actors in the last ten years.
  • Congress should investigate whether U.S. sanctions have been imposed on all mainland Chinese firms that have violated the sanction laws by investing in Iran’s petroleum industry or providing Iran with refined petroleum products or advanced conventional weapons.

hktdc.com – U.S.-China Commission Releases 2011 Annual Report to Congress

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