U.S.-China Economic & Security Review Commission

Release of the Commission’s 2004 Report to Congress

Good morning.  On behalf of the U.S.-China Economic and Security Review Commission, it is my pleasure to welcome you all to the release of the Commission’s 2004 Report to Congress, a report that I am especially proud to note received the unanimous approval of our bipartisan Commission.  At the outset, I’d like to commend the exceptional efforts of our Vice-Chairman Richard D’Amato and the steady, high-quality work of my fellow Commissioners.  This was, indeed, an intensive group undertaking.

Our report caps off a busy and comprehensive reporting cycle for the Commission.  Over the past year, we held eleven public hearings on an array of topics ranging from China’s industrial, investment, and exchange rate policies, China’s role in the North Korea nuclear crisis, Beijing’s WTO compliance record, and China’s military modernization programs to name just a few.  All told, the Commission took testimony from more than 130 witnesses from government, business, labor, academia, media, think tanks and other research institutes. 

Out of this rich mix of hearings, travel and research we have compiled a report that presents a unanimous, bipartisan assessment of the challenges and downside risks the United States faces in its relations with China.  In addition to our analysis, we provide nearly 40 recommendations to Congress for addressing these challenges and risks.

The report is comprised of nine chapters that track the specific areas of inquiry the Congress mandated us to investigate.  They cover the economic side of the relationship, regional and geopolitical dimensions – including cross-Strait relations – and China’s technology and military advances.

Along with detailed topics for analysis, Congress gave us the overarching mission of evaluating on an annual basis “the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China.”  In answering this question, our research has led us to conclude that: “a number of the current trends in U.S.-China relations have negative implications for our long-term economic and national security interests, and therefore that U.S. policies in these areas are in need of urgent attention and course corrections.”

Let me highlight just a few of our key findings: 

U.S.-China Trade and Investment

The U.S.-China economic relationship is heavily imbalanced and undermining our long-term economic health.  The U.S. trade deficit with China reached $124 billion in 2003, with Chinese imports into the United States outpacing U.S. exports to China by more than five to one.  While the sheer size of this deficit alone should be of concern, it is the various underlying causes that demonstrate the problem.  China has artificially suppressed the value of its currency by as much as 40 percent and continues to heavily subsidize its manufacturing sector – in the form of tax incentives, preferential access to credit and capital from state-owned financial institutions, subsidized utilities, and other measures.  Lastly, China’s adherence to the market access commitments it made as part of its World Trade Organization (WTO) agreement has been, at best, mixed, with many U.S. producers continuing to face steep hurdles.  Our report makes specific policy recommendations to Congress concerning how to redress the imbalances in our trade relationship. 

Regional and Cross-Strait Developments

China is in the midst of a diplomatic offensive in Asia to reassure its neighbors of its long-term peaceful intentions.  These efforts are buying time and space for China to pursue its economic development and offensive military buildup.  But it is the recent developments in China’s relations with Hong Kong and Taiwan that are of particular concern. 

In Hong Kong, China has shown a troubling aversion to the development of democracy, and to its commitment to preserve Hong Kong’s autonomy under the “one country, two systems” formula. 

With regard to Taiwan, China continues to build up its offensive military capabilities targeted at the island – including a missile force of over 500 – and to make clear its intention to use force to forestall what it views as Taiwan’s movements toward independence.  At the same time, it is undertaking a campaign to politically and economically isolate Taiwan in the region.  This situation calls for a fresh assessment of U.S. cross-Strait policy, with the United States reinvigorating its commitments to Taiwan and using its leverage to more actively facilitate dialogue between the two sides aimed at reducing tensions and seeking longer-term cross-Strait stability.  

Military and Technology Advancements

The pace of China’s development as a platform for high-technology manufacturing and R&D – fueled by foreign investment and technical cooperation – has exceeded many outside observers’ expectations.  The extent to which China uses its enhanced technology capabilities to accelerate its military modernization programs is of direct national security concern to the United States.  The extent to which these advances allow China to challenge U.S. competitiveness in technology development is a vital matter for U.S. economic security.  China’s military modernization program continues at a robust pace, aided in large part by acquisitions of advanced foreign weapons systems and technologies, primarily from Russia.  We make recommendations for the U.S. government to develop a more coordinated strategy for its own technological competitiveness, and to more closely monitor and take action against the flow of foreign military technologies to China.

Within the context of these broader areas of focus, I’d like to draw attention to two issues that I believe demonstrate the cutting-edge and critical nature of our work:

First, our Commission is the only government body I know that has examined the growing presence of Chinese firms in the U.S. and global capital markets.  China’s corporate governance standards remain weak, with inadequate disclosure to investors concerning the financial and operational profile of its companies and the nature of their global activities.  Without such information, U.S. investors may be unwittingly pouring money into these “black box” firms, with worrisome implications for investor protection and, in some cases, U.S. national security.  We make recommendations in our report to have the appropriate U.S. government agencies monitor Chinese listings more closely, and to bar U.S. investors from funding Chinese firms that are sanctioned for proliferation-related activities.

Second, arguably the most important test of the U.S.-China relationship will unfold in the coming months on the Korean Peninsula.  It will involve China’s willingness or unwillingness to use its extensive economic and political leverage to persuade Pyongyang to dismantle irreversibly its nuclear weapons and ballistic missile programs in the near-term.  Time is decidedly not on our side in this crisis.  We believe China must step up to this crucial task and quickly.

Let me conclude by noting that Congress recognized the importance of making this Commission a permanent body.  Since passage of our founding legislation in 2000, subsequent events have only reinforced the critical need for a sustained, measurable, and annual investigation of the security implications of our ever-expanding economic relationship with China. 

Thank you.