The United States relationship with China is complex and includes military, diplomatic, financial, environmental, political and moral htmects. U.S. policies in these areas have been disjointed, and not necessarily based on a uniform view of what is in our national interest. We believe that our relationship with China, which can be of great potential benefit to our country or result in harm to our country, must be viewed in its totality. We do not believe that trade and economic issues can be separated from security and military issues.

In the past, the Executive Branch has provided Congress with periodic reviews of U.S.-PRC strategic relations, but this requirement lapsed with the passage of legislation granting China Permanent Normal Trade Relations. Shortly after passage of that legislation, Congress in October 2000, created the bipartisan United States-China Security Review Commission to "monitor, investigate and report to Congress on the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China." As Senator Robert C. Byrd, one of the founders of the Commission, stated, "this Commission was created to ensure that in opening the door to expanded trade with China we do not close our eyes to our national security concerns."

The Commission is required to file an annual report in both classified and unclassified versions, so that legislators are kept fully informed about this strategic relationship. The annual report to the Congress, with an independent assessment of this complicated relationship, is the sole purpose of the Commission and was the reason for the extensive hearings and research program pursued.

As part of the process of preparing this first Report, the Commission, over the past year, held nine hearings, heard testimony from 115 witnesses, including policy officials from most of the relevant Executive Branch departments, including State, Defense and Commerce, independent scholars, military and economic experts, and business and labor leaders. The hearings included discussions of those matters we were charged by Congress to examine:

• Chinese leaders’ perceptions of the U.S. and the image of the United States promoted through the official Chinese media;
• The significance of China’s World Trade Organization (WTO) entry, and such related matters as compliance and capacity building;
• The impact of our trade and investment policies with China on key U.S. civilian and defense sectors, including telecommunications and computers, steel, electronics, agriculture, energy, financial services, motion pictures, Internet, TV broadcasting, intellectual property, aerospace, and automotive;
• The effects of our trade and investments in China on the U.S. trade deficit, plant closures, employment, wages, and overall standard of living;
• China’s access to, and use of U.S. capital markets to raise billions of dollars;
• China’s proliferation of technologies needed to make weapons of mass destruction and their delivery systems;
• The triangular relationship among the U.S., Taiwan and the PRC;
• The Chinese budget and the economic role of the People’s Liberation Army in the Chinese economy;
• U.S. export control policies and practices; and
• Chinese cooperation in the war against terrorism.

In addition, the Commissioners received numerous briefings from the Central Intelligence Agency (CIA), the Defense Intelligence Agency (DIA), the Federal Bureau of Investigation (FBI), and other Executive Branch agencies, and hosted many meetings and seminars with scholars and representatives of non-governmental organizations.

The Commission also contracted independent research, including:

• A team of Chinese researchers to surf PRC web sites daily for current information, which was then translated and posted on the Commission’s website;
• Research and analysis of corruption in China, and its impact on the Chinese economy, conducted by a newly-emigrated Chinese scholar; and
• Translations of articles from Chinese military and intelligence journals. These materials were not otherwise available in the United States.

The Commission also supported original research on:

• The pattern of U.S. trade and investment with China;
• China’s capital requirements;
• China’s fundraising activities in U.S. capital markets;
• China’s compliance with its WTO requirements;
• The growing dependence of U.S. defense industries on Chinese manufactures;
• The patterns of U.S. trade and investment with China; and
• Chinese strategic perceptions of the United States.

In addition, the Commission initiated a three-month survey of major Chinese newspapers by scholars at the University of Maryland in order to observe perceptions over time of how the United States was presented in the Chinese Media.

Commission members visited China, Japan, Taiwan, and the World Trade Organization (WTO) in Geneva.

The Commission’s website (www.uscc.gov) posts the transcripts of all public hearings, its research products, and other activities. In addition, hearing transcripts are available in hard copy.

The year 2002 is an important one for China. It has entered the WTO, and it is undergoing a major political transition. The Sixteenth Party Congress will be held this fall, at which more than half the Politburo is expected to be replaced, and the occupants of the three top leadership positions are expected to change.

This Report deals with several elements we believe American policy makers should consider in formulating national strategy:

• Chapter One examines Chinese leaders’ perceptions of the United States, which underlie their international strategies at all levels.
• Chapter Two assesses our current trade and investment policies with China, and asks whether they threaten the loss of strategically vital industries important to our defense industrial base. It also discusses the economic security concerns relating to the ‘hollowing out" of our economic base, the differing trading patterns China has developed with the United States and with other leading commercial partners, and the effects on our economy.
• Chapter Three assesses the contrasting American and Chinese goals for China’s economic integration into the world’s trading system, with specific emphasis on the challenges to China and to China’s leaders presented by its WTO accession. It also discusses problems and issues dealing with market access to China under the WTO.
• Chapter Four discusses whether trade and economic reforms in China have led to political liberalization and how that affects U.S. national interests.
• Chapter Five discusses China’s growth as a regional economic power and its implications on U.S. national interests in Asia.
• Chapter Six analyzes China’s presence in, and access to, U.S. and global capital markets and the security dimensions of these activities.
• Chapter Seven deals with China’s relations with terrorist-sponsoring states, China’s proliferation policies, and other direct conflicts with American national security concerns.
• Chapter Eight assesses cross-strait security issues and the implications for the United States.
• Chapter Nine analyzes the Chinese defense budget and the effects of Chinese economic reforms on the PLA.
• Chapter Ten discusses U.S. technology transfers to China and the military acquisition policies of the Chinese military.

Future Commission Reports will measure and analyze the evolution of the issues discussed in this Report. Not all of these issues lend themselves to easy quantification. We found the accuracy of Chinese statistics to be questionable, for example, but we believe it is worthwhile to measure them as accurately and carefully as possible.

As also required by statute, we are making recommendations for legislative and/or executive Branch action. These recommendations are based on the Commission’s conviction that U.S. policy toward China must seek to achieve:

• A China that will become a responsible regional power and that will work with us to combat terrorism and control the proliferation of weapons of mass destruction;
• Ensuring that U.S.-Chinese economic interdependence does not have an adverse impact on our national security by eroding our defense industrial base and our technological capacity;
• Ensuring that U.S. investment and trade, in particular technology and capital transfers, do not contribute to a dangerous Chinese military buildup; and
• Ensuring that China fulfills its WTO commitments by carefully monitoring its compliance and by helping it develop a commercial rule of law.