This morning, the U.S.-China Economic and Security Review Commission (USCC) is holding a hearing on “Chinese State-Owned Enterprises and U.S.-China Bilateral Investment.” Various elected officials, economists, and policymakers will testify on the nature and activities of state-owned enterprises in China as well as the implications for bilateral investment between the U.S. and China.

Rep. Maurice Hinchey (D-NY): China is cheating on clean energy technology, hurting U.S. manufacturers.

Robert Scott of the Economic Policy Institute (EPI) is among those testifying at the hearing.  Having previously authored a study on U.S. jobs lost due to the ongoing trade deficit with China, Scott sees problems resulting from U.S. investment in China.

LISTEN TO A WEBCAST OF THE USCC HEARING

SCOTT: Foreign Direct investment has played a key role in the growth of China’s manufacturing sector.  China is the largest recipient of FDI of all developing countries and is the third largest recipient of FDI over the past three decades, trailing only the United States and the United Kingdom.  Foreign Invested Enterprises (both joint ventures and wholly owned subsidiaries) were responsible for 55% of China’s exports and 68% of its trade surplus in 2010, as reported by China.   While FDI in China slowed in 2009 as a consequence of the global recession, it recovered strongly in 2010, increasing $27.5 billion (35.2%)...Four main conclusions:

1. FDI from the U.S. and other developed countries has played a disproportionately large role in the rapid growth of China’s GDP, productivity and exports.   
2. China has used a number of activist policies to attract and retain FDI, and to maximize exports and other benefits received from these facilities.  China’s currency manipulation is illegal under the GATT/WTO agreements and the IMF charter, as well as U.S. law.  Currency manipulation dramatically lowers Chinese production costs and provides an effective subsidy to Chinese exports; it also acts as a barrier to imports from other countries.  Second, China provided tax holidays and has offered FIEs preferential tax rates for corporate profits, and reduced value added tax rates.   China has provided tens of billions of dollars of illegal subsidies to firms in industries such as steel, glass, paper and new green technology industries.   Most of these incentives and subsidies are illegal under the terms of the WTO and U.S. fair trade laws.
3. China’s FDI promotion regime has provided massive, illegal subsidies to MNEs from the United States and other countries.  These subsidies have encouraged firms to outsource production from the United States and other developed countries to China; they have contributed to the rapid growth of China’s exports to the U.S. and the world; and they have severely suppressed U.S. exports to China, and to the world (China is now the most important competitor for U.S. exports on world markets).  
4. The United States can and should adopt new policies to level the playing field between the U.S. and China.  Trade and manufacturing policies should be used to defend and recover production in the United States, and to maximize production and employment in U.S. manufacturing establishments.  These policies should emphasize the benefits of U.S. production and employment.  Support for the headquarters operations of domestic or foreign MNEs should be, at most, a secondary concern of domestic trade policies. 

SCOTT: As U.S. industries have offshored production, and become increasingly dependent on low-cost foreign suppliers, their interest in filing fair trade complaints has declined.  U.S. firms investing in China such as GM, Motorola, Johnson & Johnson, and the Blackstone Group, and large retailers such as Walmart, Target and CVS benefit directly or indirectly from China’s currency manipulation and subsidies.  

Also testifying is Rep. Rosa DeLauro (D-CT), who recently expressed concerns about the Presidential helicopter fleet potentially being procured from China.

DELAURO: In 1990, our trade deficit with China stood at just $10 billion. In the two decades since, it has risen astronomically, and is now estimated at $273 billion.  That trade deficit is a large driver of the crisis in domestic manufacturing we now face here at home. 

The erosion of our manufacturing base has, in fact, risen to such dangerous proportions that the Director of National Intelligence has reportedly launched a National Intelligence Estimate to examine the implications of the U.S. decline in manufacturing for our national security. 

I believe the most direct cause for concern is clear. The more that well-subsidized foreign entities are allowed to take advantage of our open market-oriented procurement policies, the greater the likelihood that our Defense Department will one day find that no domestic manufacturer exists for a critical piece of material. In other words, as our vital defense jobs and technology continue to be outsourced, our very national security is put at risk.