Viewpoint: China Poses Increasing Threat to U.S. Economy and National Security

Last week the U.S.-China Economic and Security Review Commission submitted their annual report to Congress. The Commission was created on October 30, 2000, by the Floyd D. Spence National Defense Authorization Act of 2001. The 418-page unclassified report reveals the increasing threat that China poses to the U.S. economy and national security, so one can only imagine how much more serious threats were detailed in the separate classified report that was also submitted.

The report covers the following areas (abbreviated):

• Proliferation Practices -- The role of China in the proliferation of weapons of mass destruction and other weapons (including dual-use technologies)
• Economic Transfers -- The qualitative and quantitative nature of the transfer of U.S. production activities to China, including the relocation of high technology, manufacturing, and research and development facilities, the impact of such transfers on U.S. national security, the adequacy of U.S. export control laws, and the effect of such transfers on U.S. economic security and employment
• Energy -- The effect of the large and growing economy of China on world energy supplies and the role the U.S. can play (including joint research and development efforts and technological assistance), in influencing the energy policy of China.
• U.S. Capital Markets -- The extent of access to and use of U.S. capital markets by China, including whether or not existing disclosure and transparency rules are adequate to identify China companies engaged in harmful activities
• Regional Economic and Security Impacts -- The triangular economic and security relationship among the United States, [Taiwan] and China (including the military modernization and force deployments of China aimed at [Taiwan]
• U.S.China Bilateral Programs -- Science and technology programs, the degree of noncompliance by China with agreements between the U.S. and China on prison labor imports and intellectual property rights, and U.S. enforcement policies with respect to such agreements.
• World Trade Organization Compliance -- The compliance of China with its accession agreement to the World Trade Organization (WTO)
• Freedom of Expression -- The implications of restrictions on speech and access to information in China for its relations with the U.S. in the areas of economic and security policy

Since it would difficult to summarize the key points of the whole report, this article only highlights the areas posing a threat to the economy and national security of the U.S.

The report states that China is now the second-largest economy in the world and the worlds largest manufacturer, surpassing the U.S. in this ranking for the first time. Its market exceeds that of the U.S. in industries such as automobiles, mobile handsets, and personal computers. Chinas gross domestic product (GDP) has grown from $1.32 trillion in 2001 to a projected $5.87 trillion in 2011, representing an increase of more than 400%.

China continues to maintain an export-driven economy with policies that subsidize Chinese companies and undervalue their currency (renminbi or RMB). While the RMB rose by roughly 6% over the last year, it is still widely believed to be undervalued by as much as 30%-40%. "For the first eight months of 2011, the U.S. trade deficit with China increased 9% over the same period in 2010. The U.S. trade deficit with China is now more than half of the total U.S. trade deficit with the world. In the year to date ending August 2011, the United States exported about $13.4 billion in advanced technology products to China, but imported over $81.1 billion in advanced technology products from China, for a deficit of about $67.7 billion. This is a 17% increase in the advanced technology products deficit for the same period over the previous year, ending in August 2010."

The Chinese economy and its product exports are moving up the value chain. On a monthly basis, the U.S. now imports roughly 560% more advanced technology products from China than it exports to China. Exports of low-cost, labor-intensive manufactured goods as a share of Chinas total exports decreased from 37% in 2000 to 14% in 2010.

Chinas foreign currency reserves are skyrocketing. A major contributor to this phenomenon is Chinas continued policy of maintaining closed capital accounts. Chinas foreign currency reserves exceed $3 trillion, three times higher than the next largest holder of foreign currency reserves, Japan." Building currency reserves is one of the main goals of Chinas predatory mercantilism trade policies.

Chinas domestic money supply is becoming out of control. "Between 2000 and 2010, Chinas money supply grew by 434%. Chinas money supply is now ten times greater than the U.S. money supply, despite the fact that Chinas GDP is only one-third as large."

The Commission reported that China assumed a more assertive role on the global stage in 2011 as shown by a more aggressive trade agenda, a push for a larger role in international institutions, and provocative moves in the South and East China Seas. These actions are a result of Chinas growing economic prominence and resource needs, as well as Chinas view that the U.S. is in decline while China is ascendant.

"Chinese policies have had an impact on the U.S., ranging from a negative effect on the economy to increased pressure from some parts of the international community for the U.S. to ensure the security of the global commons."

Last year, the Commission highlighted Chinas backsliding from market reforms in favor of an increased role of the state in the economy, which continued in 2011."China subsidizes its state-owned enterprises to the detriment of both private Chinese firms and international competitors. The Chinese government's special treatment of state-owned enterprises (SOEs) is of particular concern to U.S. businesses, as it can overcome comparative advantages of competitors, harming American economic interests. Chinas SOEs are also an issue of contention in government procurement, as China seeks to wall off a large portion of its economy from foreign competition."

The Commission estimates the SOE sector accounts for nearly 40% of Chinas economy, but if the output of urban collective enterprises and government-run proportion of township and village enterprises are considered, the broadly defined state sector likely surpasses 50%.

China appears to be reversing the privatization reforms of the past two decades and renewing use of industrial policies aimed at creating SOEs that dominate important portions of the economy, especially in the industrial sectors reserved for the states control. "The 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 favor SOEs over foreign competitors."

In 2010, the amount of foreign direct investment (FDI) flowing into China jumped to $105.7 billion, up from $90 billion in 2009. Foreign-invested enterprises were responsible for 55% of Chinas exports and 68% of its trade surplus in 2010. The value and scope of U.S.-China bilateral investment flows have expanded significantly in the past ten years. However, U.S. direct investment in China is more than 12 times greater than Chinese direct investment in the United States. Official U.S. statistics show that U.S. cumulative FDI in China was $60.5 billion in 2010. What this means is that American companies and companies from other foreign countries are investing money in China through expanding, building or buying plants in China, buying equipment, and hiring workers.

On the other hand, there has been a more than 100% year-on-year growth of Chinese investment in the United States during the past two years. Chinese investments have focused on manufacturing and technology, with an emphasis on brand acquisition. The report notes that some critics of Chinas foreign direct investment in the U.S. contend that these investments are focused on acquiring and transferring technology to Chinese firms. The Chinese Ministry of Commerce estimated that in 2010, cumulative Chinese FDI in the United States was $4.9 billion.

Due to the considerable government ownership of the Chinese economy, Chinese companies supplying products to the U.S. government or acquisition by 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 U.S. investigates the national security implications of mergers and acquisitions by foreign investors of U.S. assets.

In March 2011, China ratified its 12th Five-Year Plan (2011 2015), a government-directed industrial policy that focuses on the development and expansion of seven strategic emerging industries: new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, energy conservation and environmental protection, alternative energy, and biotechnology. The report predicts that China will likely continue to combine targeted investment with preferential tax and procurement policies to ensure that Chinese firms emerge as global leaders, or national champions, in these industries within the next five years.

Chinas continuing lack of enforcement of intellectual property rights and indigenous innovation plans that limit government procurement to Chinese companies are problematic. In addition, China maintains policies of forced technology transfer in violation of international trade agreements and requires the creation of joint venture companies as a condition of obtaining access to the Chinese market.

"Foreign-invested enterprises seeking to be considered for government procurement contracts or public works projects are expected to file for patents and copyrights within China in order to qualify for preferential treatment in government contracting. Foreign affiliates risk the unintended transfer of their technology to Chinese firms if they do so, because of the nature of the Chinese intellectual property system and the lax enforcement of intellectual property laws and regulations in China." In 2001, China agreed to stop explicitly requiring foreign companies to surrender their technology in return for market access and investment opportunities, but the government still employs several tactics to coerce foreign firms to share trade secrets with Chinese competitors. Chinas industrial policy seeks to circumvent accepted intellectual property protections and to extort technology from U.S. companies.

China continues to be one of the largest sources of counterfeit and pirated goods in the world (confirmed by the recent Senate hearings on counterfeit parts in the defense and aerospace supply chain.) The Chinese government itself estimates that counterfeits constitute between 15% and 20% of all products made in China and are equivalent to about 8% of Chinas gross domestic product (GDP). Chinese goods accounted for 53% of seizures of counterfeits at U.S. ports of entry in 2010, and the U.S. International Trade Commission estimates that employment in the U.S. would increase by up to 2.1 million jobs if China were to adopt an intellectual property system equivalent to that of the U.S."

China progress in its military modernization efforts poses an increasing threat to U.S. national security. "The Peoples Liberation Army (PLA) is acquiring specific means to counter U.S. military capabilities and exploit U.S. weaknesses. Since January 2011, China has conducted a flight test of its next-generation fighter aircraft, continued development of its antiship ballistic missile, and conducted a sea trial of its first aircraft carrier. These developments, when operational, will allow China to better project force throughout the region, including the far reaches of the South China Sea."

The Commission reports that the PLAs military strategy is designed to provide the army with the means to defeat a technologically superior opponent, such as the U.S. military. It focuses on controlling the regions surrounding China, especially the western Pacific Ocean, degrading an opponents technological advantages, and striking first in order to gain surprise over an enemy in the event of a conflict. While U.S. bases in East Asia are vulnerable to PLA air and missile attacks, Japanese, Philippine, and Vietnamese bases are just as vulnerable, if not more so.

China has demonstrated progress in modernizing the PLA over the past year, and recent developments confirm that the PLA seeks to improve its capacity to project force throughout the region. Continued improvements in Chinas civil aviation capabilities, as first noted in the Commission's 2010 Annual Report, enhance Chinese military aviation capabilities because of the close integration of Chinas commercial and military aviation sectors.

Tensions continued in 2011 between China and other claimants in the South China Sea territorial disputes as well as with Japan over territory in the East China Sea. Chinas policy in the region appears driven by a desire to intimidate rather than cooperate. Despite intermittent statements of cooperation, Chinese assertiveness in the South China Sea indicates that China is unlikely to concede its sovereignty claims. Many of Chinas activities in the region may constitute violations of the United Nations Convention on the Law of the Sea and the Declaration on the Conduct of Parties in the South China Sea. An implication of Chinas growing assertiveness, especially its harassment and intimidation of foreign vessels, is the growing risk of escalation due to miscommunication and miscalculation. As chances of confrontation grow, so could the consequences for the U.S., especially with regard to the Philippines, with which the United States holds a mutual defense treaty.

In 2011, as in previous years, the U.S. government, foreign governments, defense contractors,
Commercial entities and various nongovernmental organizations experienced a substantial volume of actual and attempted network intrusions that appear to originate in China. "Of concern to U.S. military operations, China has identified the U.S. militarys reliance on information systems as a significant vulnerability and seeks to use Chinese cyber capabilities to achieve strategic objectives and significantly degrade U.S. forces' ability to operate."

The report identifies China as one of the top space powers in the world today, and the implications of Chinas civil and military space activities are dangerous to the U.S. Chinas leadership views all space activities through the prism of comprehensive national power, using civil space activities to promote its legitimacy in the eyes of its people, to produce spin-off benefits for other industries, and for military-related activities. The nations capabilities, which are state of the art in some areas, follow from decades of substantial investment and high prioritization by Chinas top leaders. The prestige of space exploration and the national security benefits of space systems serve as primary motivators for Chinese decision makers.

Chinas civil space programs have made impressive achievements over the past several decades. "If Chinese projections hold, these programs are poised for continued accomplishments over the next ten to 15 years, such as the development of a space laboratory and eventually a space station. As part of an active lunar exploration program, China may attempt to land a man on the moon by the mid-2020s."

China seeks new opportunities to sell satellites as well as satellite and launch services in international commercial space markets. Chinese firms' prospects for greater success remain uncertain over the near term. However, Chinas international space-related diplomatic initiatives and their firms ability to offer flexible terms on sales to developing countries may provide additional opportunities.

China views all space activities in the context of "comprehensive national power." This concept includes many dimensions, but military aspects are fundamental. "PLA's primacy in all of Chinas space programs, including nominally civil activities, illustrates this emphasis." For example, China appears to be making great strides toward fielding regional reconnaissance-strike capabilities. China has also continued to develop its anti- satellite capabilities, following up on its January 2007 demonstration that used a ballistic missile to destroy an obsolete Chinese weather satellite, creating thousands of pieces of space debris. "In addition, authoritative Chinese military writings advocate attacks on space-to-ground communications links and ground-based satellite control facilities in the event of a conflict."

"In the military sphere, China appears to seek 'space supremacy.' The PLA aims to implement this policy through two tracks. First, they increasingly utilize space for the purposes of force enhancement. The best example is Chinas integration of space-based sensors and guided weapons. Second, they seek the capabilities to deny an adversary the use of space in the event of a conflict. To this end, China has numerous, active, counterspace weapons programs with demonstrated capabilities."

These threats to Americas economy and national security need to be taken seriously. Perhaps if the executives of American manufacturing companies would read this report, or at least the executive summary, they would change their minds about sourcing their R&D and manufacturing in China and investing in expanding, building or buying manufacturing plants in China. China is no friend to the U.S., and Americans better wake up to that fact before its too late.

Michele Nash-Hoff is president of ElectroFab Sales. She is the author of "Can American Manufacturing Be Saved?"