Today, the Congressionally-created, bipartisan U.S.-China Economic and Security Review Commission (USCC) released its 2011 Annual Report to Congress.

Said Scott Paul, Executive Director of the Alliance for American Manufacturing (AAM):

“This morning’s annual report from the USCC is the latest wake-up call for Washington regarding China’s impact on our national and economic security. The Commission has done an exceptional job of reporting incidents of security intrusion and computer hacking, as well as the forced transfer of U.S. technology to China’s state-owned enterprises. 

“This is a serious indictment of our massively flawed relationship with Beijing, and both Congress and the Administration urgently need to address these issues. As a unanimous report from a bipartisan group that includes representatives from business and labor, as well as conservatives and liberals, it is particularly striking that they agreed on the threat our nation faces, and how it must be addressed.

“We can only hope that the President, every Member of Congress, and all the Republican presidential candidates study this report thoroughly. Otherwise, they will be ill-prepared for some of the growing security challenges we face from China’s extraordinary economic and military progress.”

Ten Points to Consider from the New USCC Report

1.    Even a cursory read of the report yields a wide array of pressing concerns over China’s economic and military interaction with the U.S. The opening sentence on China’s “Foreign Policy” makes clear that, “Despite Beijing’s attempts to emphasize its peaceful rise, China continues to support countries that undermine international security.” Additionally, China “appeared to sponsor numerous computer network intrusions throughout 2011.” These attacks are consistent with China’s military strategy, which “envisions the use of computer network exploitation and attack” in order to “critically disrupt the U.S. military’s ability to deploy and operate during a military contingency.”

2.    China’s ongoing military expansion is funded by tremendous export-led growth. The Commission reports that China’s foreign currency reserves are “skyrocketing,” thanks in large part to a “policy of maintaining closed capital accounts.” China now holds foreign currency reserves in excess of $3 trillion, three times higher than the next largest holder of foreign currency reserves, Japan.

3.    The United States is a prime funder of China’s growing wealth, with the Commission citing a record $273 billion U.S. trade deficit with China in 2010. This trade deficit “now accounts for more than 50 percent of the total U.S. trade deficit with the world.”

4.    One key factor in China’s booming trade surplus is its policy of currency undervaluation. The Commission found that over the preceding 12 months, its currency, the Yuan, has appreciated by 6 percent, but economists estimate that it “remains substantially undervalued.”

5.    Along with a widening trade surplus, the Chinese economy and its exports are “moving up the value chain.” A critical indicator, “advanced technology products,” shows that on a monthly basis, the U.S. “now imports roughly 560 percent more advanced technology products from China than it exports to China.”  Conversely, China is shedding its low-cost, labor-intensive manufactured goods. As a share of China’s total exports, these lower-tier items have “decreased from 37 percent in 2000 to 14 percent in 2010.”

6.    Beijing continues to employ a wide array of questionable practices to boost its exports. At the same time, the Commission reports that China has grown “more assertive and creative in using WTO procedures to alleviate, eliminate, and avoid certain restrictions in the Accession Protocol.”  And even though the WTO has ruled that “China’s existing system of state monopoly over imports of cultural products is inconsistent with WTO obligations,” China has “not yet complied fully with the WTO ruling, and the United States has the right to initiate further proceedings to compel China to do so.”

7.    Chinese state-owned enterprises (SOEs) continue to “dominate important portions of the economy.” These SOEs benefit from a variety of industrial policy tools, including “a wide range of direct and indirect subsidies, preferential access to capital, forced technology transfer from foreign firms, and domestic procurement requirements.” 

8.    As the U.S. continues to face enormous domestic economic problems, and faces a web of protectionist barriers in China that limit market access for U.S. exports, the Commission wants to know what Chinese firms have been able to successfully bid for federal contracts. Specifically, the Commission believes Congress should urge the Administration to “review federally subsidized contracts provided under the American Recovery and Reinvestment Act of 2009 and report on the extent to which Chinese-produced goods and services were procured” with U.S. taxpayer funds. 

9.    An additional concern is the transfer of sensitive U.S. technology to Chinese firms, with foreign investors “frequently forced into joint ventures or other technology-sharing arrangements.” Although China agreed in 2001 to stop explicitly requiring foreign companies to surrender their technology to China in return for market access and investment opportunities, Beijing “still employs several tactics to coerce foreign firms to share trade secrets with Chinese competitors.” This includes an industrial policy that seeks to “circumvent accepted intellectual property protections and to extort technology from U.S. companies.”

10.    Among the Commission’s key recommendations to Congress and the Administration are the use of “all necessary remedies authorized by WTO rules” to counter Beijing’s extensive, “trade-distorting” subsidies. Additionally, the President should direct the USTR to move aggressively to “bring cases to the WTO to enforce intellectual property rights.”

A full list of specific recommendations begins on page 355 of the report.  Read the full report.