Conclusion

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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

Conclusion

This first annual report of the U.S.-China Security Review Commission has provided a comprehensive analysis of U.S.-China relations and a set of findings and recommendations on the effects of the expanding economic ties with China on U.S. national security, including our technological and industrial base. The ten chapter narratives represent the judgment of the Commission that the U.S.-China relationship contains both hopeful and troublesome elements. We have tried to address both, but have given greater emphasis to the problems and potential problem areas of the relationship in keeping with the matters we were charged by Congress to address.

The trend lines in China’s race to modernity bear close scrutiny. The Commission notes that many of the issues discussed in this Report — the growing trade deficit, unprecedented investment flows, recurring political tensions, technology transfers, restrictions on human rights, WTO compliance, proliferation of technologies associated with weapons of mass destruction, military modernization, and others — have been thorny issues in our relations with other countries from time to time.

China is unique for the U.S., in part, because the trade relationship and the trade deficit have grown so large so quickly and because foreign investment flows into China have been so massive, while, at the same time, political tensions over proliferation, trade and other issues continue. China’s military buildup continues and appears aimed at projecting its influence and interests in Asia, human rights abuses continue, and the Communist Party’s authoritarian regime remains in place. Because China is not a status-quo country, its size and rapid emergence as a magnet for foreign investment and advanced technologies and the growth of its military capabilities have sounded alarm bells in the U.S., and in other industrialized democracies. These concerns would not be as strong as they have been if these same trends had developed in a country with whom we have established a trusting relationship. Despite a decade of extensive economic interactions and cooperation with China, that sort of relationship has not developed and our efforts at confidence building measures (CBMs) have not materialized.

Our relations with China are complex, and in need of more careful study and understanding. There is both promise and danger in the relationship and neither should be ignored or minimized. In this fast-changing relationship, our policy, if unattended, will lag behind events on the ground, thereby increasing chances of miscalculation and damage to important U.S. interests.

Looking Forward

Congress created the U.S.-China Security Review Commission as a permanent bipartisan independent Commission because the issues involving Sino-U.S. relations are neither short-term, nor static, nor simple. Looking forward, the Commission believes that special emphasis should be paid to the following issues:

China’s Compliance with its World Trade Organization Obligations - The Commission should continue to monitor China’s record of compliance with its WTO obligations and assess if shortcoming in compliance show a lack of political will or institutional capacity. Because China’s adherence to its WTO commitments is in our national interest, the Commission will conduct its own independent analysis and compare it with analyses by others who will be addressing the same compliance issue. This could also include an assessment of official and public opinion in China on China’s first year in the WTO.

China’s Regional Influence - The Commission intends to evaluate shifts in manufacturing from other Asian countries to China and shifts in U.S. trade and investment patterns from other Asian nations to China, and the impact such relocations have on U.S. economic and security interests in the region. Of particular interest is the growing economic, demographic and communication linkages between Taiwan and the Mainland and the effects these expanding interactions may have in ameliorating political tensions in cross-strait relations.

China’s Economic Reforms - China is burdened with domestic problems inherent in a legacy of a centrally planned economy, its transition to a market-based economy and its integration into the global economy. The Commission should monitor China’s management of its difficult domestic problems, including social dislocations likely to emerge from WTO membership, a weak banking system burdened by huge debts, widespread official and party corruption, growing social and economic inequalities, an under-funded pension system and huge unemployment, local protectionism, growing environmental and natural resource problems, and much more. Students of China disagree on whether China can successfully manage its economy and survive these enormous challenges.

U.S. Economic Transfers - The Commission should assess trends in out-sourcing manufacturing to China by U.S. companies, including the shift of R&D facilities and capabilities and the adequacy of U.S. export control statutes and regulations in helping to manage this trend. We should continue to assess the degree to which the U.S. industrial base, including the defense industrial base, is reliant on Chinese imports, especially imports of advanced technologies. We should continue to assess the effects these transfers have on U.S. employment trends, wages, and standard of living. Finally, we should assess the validity of the so-called ‘hollowing out" phenomenon associated with the relocation of manufacturing capacity to China, and measures to deal with it.

Military Modernization - The Commission should continue to track the relationship between China’s trade surplus with the U.S., its access to U.S. capital markets and the inflow of U.S. foreign direct investment on China’s military modernization program, its defense budget and spending, and its strategy for challenging U.S. influence in Asia.

Access to U.S. Capital Markets - The Commission developed recommendations in this Report on Chinese and other foreign companies seeking access to or trading their securities in U.S. capital markets. We believe that more review and analysis should be conducted on the adequacy of existing disclosure and transparency requirements with respect to the identities, global activities and senior management of Chinese entities coming to or already in our markets. Specifically, the Commission should focus on the use of capital markets to advance Chinese military modernization programs, its proliferation activities, and its relations with terrorist-sponsoring governments.

Proliferation of Weapons and Technologies of Mass Destruction - The Commission believes that additional analysis is needed to assess China’s role in the proliferation of weapons of mass destruction and related technologies and know-how to terrorist-sponsoring states and the effectiveness of unilateral and multilateral sanctions or controls aimed at the Chinese government in limiting or eliminating this practice.

Bilateral Cooperation Programs - The Commission should assess China’s compliance with its existing U.S. bilateral cooperation agreements, including the l979 Agreement on Science and Technology, the agreement on exports of prison-made products, the Agreement on Intellectual Property Rights, and to consider measures that should be taken to increase compliance with them.

Chinese Perceptions in the Media and Education System - The Commission should evaluate Chinese government efforts to shape and influence Chinese perceptions of the United States through the control of the Internet and the print and electronic media in China. We believe this should be coupled with a review of how China’s educational system depicts the United States, our history, values and behavior.

Patterns of U.S. Investment and Trade in China - The Commission will continue to monitor and assess year-to-year U.S. trade and investment patterns with China and the incentives and others inducements China may be offering U.S. corporations to locate or relocate production facilities and R&D to China.

Energy - The Commission will assess China’s growing energy needs, how these needs shape its relations with other countries, particularly oil-producing, terrorist-sponsoring states. In addition, it will examine China’s plans to diversify its energy sources, the security-related inducements it employs to insure reliable sources and the plans it may have to secure maritime and other lines of commerce and communications to bring reliable supplies of energy to China’s expanding economy.

Trade Deficit and Chinese Military Spending - The Commission should assess the relationship between the U.S. trade deficit and China’s expanding economy and its military spending. Because China’s financial data are unreliable, we will devote special attention to this difficult but crucial issue in understanding China and Chinese military growth and modernization.

China’s Activities in the United States - The Commission should also devote attention to China’s activities in the U.S., including its drive to acquire U.S. technologies, the activities of PLA-affiliated companies operating in the United States, and the role that Chinese students, researchers and scholars studying and conducting research in the U.S. play in the transfer of U.S. technology and know-how to China.