JULY 2002 - REPORT TO CONGRESS OF THE U.S. - CHINA SECURITY REVIEW COMMISSION - THE NATIONAL SECURITY IMPLICATIONS OF THE ECONOMIC RELATIONSHIP BETWEEN THE UNITED STATES AND CHINA
Additional Views of Commissioner Kenneth Lewis (Commissioners Arthur Waldron and June Teufel Dreyer Concur)
There are two subjects discussed in the Report that should be emphasized:
Sale and Export of Dual-Use Items
There is an inherent conflict between the desire of business to sell and export and the need to restrict or ban such sales and exports when national security could be jeopardized. Accordingly, we believe the U.S. should prohibit the sale and export of dual-use items (items covered under the Export Administration Act) that have clear military applications, when the U.S. has a unique technological and manufacturing capability, and where there is no foreign availability, except in very rare cases and only to our most trusted allies under restricted conditions. Therefore, such dual-use items should not be sold to China.
U.S. Trade and Investment Relationships with China
U.S. trade and investment relationships with China confound normal trade and investment theories. The most developed country in the world (U.S.) is increasingly purchasing manufactured goods from a country (China) less developed than we are, and the developed country (U.S.) is selling large quantities of raw materials and agricultural goods, as well as manufactured goods, to the less developed country (China).
Trade between nations can be reciprocal and mutually advantageous, but our trade with China is not. When we buy $103 billion but only sell $16 billion (as in the year 2000) this is not reciprocal and it is not mutually advantageous. Yes, our exports to China create jobs but our imports from China lose jobs, and it is clear, with movement of U.S. manufacturers to China and the purchases made in China for the U.S. consumer market, many more jobs have been lost to imports from China than have been gained from exports to China.
The U.S.-China trade and investment relationship was succinctly and well covered in a statement presented to us by Senator Paul Sarbanes, Chairman of the Banking Committees. His statement reads in part:
"Some observers have argued that the prospects for opening the Chinese market may actually be better than those of opening the Japanese or Korean markets at a comparable stage of development. These observers point out that China is much more open to foreign investment than Japan or Korea were. In fact, China has actively sought foreign direct investment as sources of western capital and technology. Foreign direct investment has been a key element of China’s development strategy.
"China’s receptiveness to foreign investment does not necessarily mean, however, openness to imports. In fact, trade barriers in sectors such as automobiles have been part of China’s strategy to encourage foreign investment. Since the Chinese market could not be accessed easily through exports, western automakers that wanted a portion of the Chinese market were effectively forced to invest. Once inside the market, many western companies took a different view of Chinese trade barriers because they now also protected them from competition from outside China.
"The unstated assumption is that openness to foreign investment will eventually lead to openness to foreign trade. It is not clear, however, that reforms undertaken to encourage foreign investment will inevitably lead to lower trade barriers and more imports. In fact, China’s increasing demands for domestic production and transfer of technology suggest that the opposite may be true.
"An article in the Wall Street Journal on May 25, 2000 the day after the House voted on PNTR, focused on the investment htmect of the China WTO agreement. The article stated:
‘Even before the first vote was cast yesterday in Congress’s decision to permanently normalize U.S. trade with China, Corporate America was making plans to revolutionize the way it does business on the mainland. And while the debate in Washington focused mainly on the probable lift for U.S. exports to China, many U.S. multinationals have something different in mind. "This deal is about investment, not exports," says Joseph Quinlan, an economist with Morgan Stanley Dean Witter & Co. "U.S. foreign investment is about to overtake U.S. exports as the primary means by which U.S. companies deliver goods to China."’
"A comparison of U.S. trade with China and U.S. investment in China over the past decade is instructive. From 1991 to 1999, U.S. exports to China increased on an annual basis from $6.2 billion to $13.1 billion, slightly more than doubling. Imports from China during that same period rose from $20.3 billion to $81.7 billion, more than a four-fold increase. During that same period U.S. foreign direct investment in China rose from $323 million in 1991 to $4.3 billion in 1999, a thirteen-fold increase. Whereas the U.S. ranked behind Japan, the European Union, and Taiwan as a source of exports to China, it ranked ahead of all of them as a source of foreign direct investment in China.
"Rather than expanding exports and reducing the U.S. trade deficit with China, China’s purpose in encouraging U.S. investment in China may be the opposite."
We totally agree with these views.
It has been a pleasure to study, analyze and discuss these issues with such a divergent group as this Commission, and for eleven of the twelve of us to reach near unanimity would seem to indicate the need for policymakers to deal with the subject of China in a comprehensive way.
Additional Views of Commissioner Patrick A. Mulloy
This Report discusses a full range of issues that affect America's relations with China including htmects of policies presently being pursued by both countries that do not serve our Nation's long term national security interests. It states that it is not clear, at this time, how our relations with China will evolve, as that will depend on future policies pursued by both nations. I agree.
One key issue discussed in the Report is how to keep America’s industrial, scientific, and technological base from eroding as a result of our economic relations with a China whose government has adopted policies to expand its own base, even at our expense. Decisions about such matters cannot be left solely to our business community, as they are too important to the future standard of living of our people and to our long-term national security and well-being. Our elected leaders must play a greater role in guiding such decisions.
It is my hope that China will continue to find ways, consistent with our own economic well-being, to raise the standard of living of its people while at the same time establishing greater political and human rights for its own populace. Whether China achieves either of these stated objectives, it is still clear that the two countries will have to build new structures to resolve the inevitable problems and differences that will arise as China’s world political and economic profile increases. It would be a tragedy for both countries if we evolved toward a new cold war marked by a spiraling arms race involving weapons of mass destruction. That is why, in my view, we should develop policies toward China that protect our interests but do not demonize a country with whom we will have to work in building structures of peace that will make mankind’s future brighter.
President Kennedy, in addressing the United Nation’s General Assembly in September 1963, pointed out that resolving international problems and building peaceful relations in the world is not a dramatic process but rather "a daily, a weekly, a monthly process, gradually changing opinions, slowly eroding old barriers, quietly building new structures." That advice is as true today as it was at the height of the Cold War.
We have attempted in this Report to be balanced in recognizing that we need to put new programs in place to build a much wider expertise about China both in our society and among our policymakers. At the same time, we recommend that we take new measures to protect our own economic interests and also work to build new structures and confidence-building measures to guide U.S.-China relations.
Reaching consensus on a Report such as this requires that each Commissioner not insist on his or her preferred wording for every paragraph and phrase. By working together, and with the help of able staff, we have achieved a near unanimous bipartisan consensus on the complex matters we were charged by Congress to address. It is an honor to have been part of the effort.
Additional Views of Commissioner Arthur Waldron (Commissioners Kenneth Lewis and June Teufel Dreyer Concur)
We sign the Commission’s report with the following additional comments:
- The wide-ranging purpose of China’s current military buildup must be recognized. It is not a response, as is sometimes suggested, to U.S. support for Taiwan and other Asian friends. Rather, the buildup should be understood as aimed at excluding the U.S. from Asia, and establishing the ability to threaten and coerce neighboring states ranging from Mongolia to Japan to India. This conclusion is supported not only by evidence of China’s capabilities, but also by widely available statements of Chinese intent. If Taiwan did not exist, today’s China would still pose serious security issues to all Asian states.
- Money gained through trade with the U.S. must not be permitted to strengthen China’s military and security apparatus. Current measures are entirely inadequate. A massive strengthening of counter-intelligence is required; scrutiny must be imposed on Chinese access to U.S. capital markets, with real sanctions. U.S. companies should be forbidden to do business with army and security related Chinese entities. Chinese attempts to circumvent such regulations must be punished severely, with measures including denial of access to U.S. markets. Foreign companies helping China’s military and security apparatus (e.g., with military technology, computers, internet monitoring, etc.) should be denied any participation in U.S. Government procurement or development programs. This provision would affect England, France, Italy and other NATO countries, it would affect Israel, it would affect Russia, Ukraine and other members of the former Soviet Union, as well as other states.
- With respect to China’s proliferation behavior, we have all the evidence we need: China is a major source of advanced weapons to terrorist-sponsoring and other dangerous states. What is required is firm action.
- Far more work is required, both from the Commission and from government, on China’s role (or lack of role) in international terrorism. Beijing’s close connections to terrorist-sponsoring states provide ample reason for concern.
- We must not assume that China is engaged, as is sometimes stated, in a "transition to a market based economy." In fact China’s government has repeatedly stated that it is rather creating "Socialism with Chinese characteristics." Current evidence does not support the idea that the Chinese government (the Party) has any intention whatsoever of turning over its economic powers to a free market. We must not blandly assume that it will.
- U.S. intelligence operations with respect to China are inadequate and often misguided. Thorough reform is required, along the lines suggested by the Congressionally-mandated Tilelli Report which the CIA did not implement.
- Only democratic change can transform China into a genuine friend of the United States and her allies. U.S. policy should further that goal, and avoid propping up the current regime. In particular, we must distinguish the broad long-term interests of the United States and its friends and allies from the short-term interests of American business. The business relationship must not be permitted to drive or affect the political and security relationship.
Additional Views of Commissioner Larry M. Wortzel
Free trade creates jobs. That said, there are prudent reasons for a nation to withhold certain goods from the marketplace or to restrict trade. If a nation poses a direct military threat to the United States, or because its international behavior and security policies pose a latent or potential threat to the United States, as is the case with China, it is prudent to restrict the sale of military goods. By this I mean items controlled by the Arms Export Control Act. Given the use of the People’s Liberation Army (PLA) against innocent demonstrators in the Tiananmen Massacre in June 1989, there is no reason to make the PLA a more effective force by selling it weapons. Given the explicit threats by China against Taiwan, and its actions towards U.S. forces, the United States should not make the PLA a more effective fighting force through the sale of military goods or military technologies. In my view, the Tiananmen Sanctions of 1989 should be maintained, at the very least, until such time as the Chinese Communist Party reverses its own decision on the Tiananmen Massacre and Chinese leaders renounce the threat of force against Taiwan. The United States should use diplomacy to convince its allies to adopt this position.
Dual-use items, that is, those goods and technologies regulated under the Export Administration Act, are a more difficult problem. In general, the existing licensing process is sound and permits departments of government and industry to make the case for or against a sale in a fair, albeit sometimes adversarial, process. I strongly endorse the Report’s recommendations in favor of pre-license checks and post-license, end-user verification. The U.S. Embassy in Beijing and U.S. Consulates in China should be staffed to permit adequate pre- and post-license checks. In those cases where the United States has a unique technological or manufacturing capability with clear military application there are prudent reasons to control the licensing of such capabilities or processes. This is particularly important where there is no foreign availability for such technologies or manufacturing capabilities.
It is also prudent for a major power to maintain a defense industrial base on which it can depend in case of war. The United States should do so and, in limited cases, this may require that special industries be protected.
I find some of the recommendations in this Report to be protectionist for the wrong reasons. Trade and competition create jobs and create an environment in which industries must innovate. Corporations and whole sectors of industry revitalize themselves in the face of fair competition. Changes in manufacturing techniques and the availability of new materials may create conditions where there is some labor dislocation; i.e., workers may have to learn new skills or shift to other industrial sectors. But that is not the reason to restrict trade; instead it means that opportunities must be provided to American workers to learn new skills that permit them to compete in the job market.
Trade promotes American values and goals in China. It creates conditions where people are free from the direct dependence on the Communist Party and the government by promoting economic freedom.