U.S.- China Economic and Security Review Commission, "2011 Annual Report to Congress," August 14, 2011

EXECUTIVE SUMMARY
The U.S.-China Trade and Economic Relationship

China is now the second-largest economy in the world and the world’s largest manufacturer. Its market exceeds that of the United States in industries such as automobiles, mobile handsets, and personal computers. Although Chinese leaders acknowledge the need to balance their economy by increasing domestic consumption, China continues to maintain an export-driven economy with policies that subsidize Chinese companies and undervalue the renminbi (RMB). While the RMB rose by roughly 6 percent in nominal terms over the last year, it is still widely believed to be substantially undervalued. For the first eight months of 2011, the U.S. trade deficit with China increased 9 percent over the same period in 2010. The U.S. trade deficit with China is now more than half of the total U.S. trade deficit with the world. In the year to date ending August 2011, the United States exported about $13.4 billion in advanced technology products to China, but imported over $81.1 billion in advanced technology products from China, for a deficit of about $67.7 billion. This is a 17 percent increase in the advanced technology products deficit for the same period over the previous year, ending in August 2010.

The Chinese government’s special treatment of state-owned enterprises (SOEs) is of particular concern to U.S. businesses, as it can overcome comparative advantages of competitors, thereby harming American economic interests. China’s SOEs are also an issue of contention in government procurement, as China seeks to wall off a large portion of its economy from foreign competition.

In 2010, the amount of foreign direct investment (FDI) flowing into China jumped to $105.7 billion, up from $90 billion in 2009. Foreign-invested enterprises were responsible for 55 percent of China’s exports and 68 percent of its trade surplus in 2010. While some Chinese sectors are now open to foreign sales, huge swathes of the economy are reserved for Chinese firms. Despite Chinese claims that U.S. inward investment policies are protectionist, for the past two years there has been a more than 100 percent year-on-year growth of Chinese investment in the United States. Chinese investments have focused on manufacturing and technology, with an emphasis on brand acquisition. Some critics of China’s foreign direct investment in the United States contend that Beijing’s efforts are focused on acquiring and transferring technology to Chinese firms.

In March 2011, China ratified its 12th Five-Year Plan (2011–2015), a government-directed industrial policy that focuses on the development and expansion of seven ‘‘strategic emerging industries.’’ The central and local governments will likely continue to combine targeted investment with preferential tax and procurement policies to ensure that Chinese firms emerge as global leaders, or ‘‘national champions,’’ in these industries within the next five years.

China’s indigenous innovation plans that limit government procurement to Chinese companies and China’s continuing lack of enforcement of intellectual property rights are both problematic. In addition, China maintains policies of forced technology transfer in violation of international trade agreements and requires the creation of joint venture companies as a condition of obtaining access to the Chinese market. While the publication of national indigenous innovation product catalogues that favor procurement of Chinese goods over foreign competitors appears to have slowed, local-level catalogues are still in circulation. China continues to be one of the largest sources of counterfeit and pirated goods in the world. The Chinese government itself estimates that counterfeits constitute between 15 and 20 percent of all products made in China and are equivalent to about 8 percent of China’s gross domestic product (GDP). Chinese goods accounted for 53 percent of seizures of counterfeits at U.S. ports of entry in 2010, and the U.S. International Trade Commission estimates that employment in the United States would increase by up to 2.1 million jobs if China were to adopt an intellectual property system equivalent to that of the United States.

The Chinese Communist Party (CCP) relies on economic growth and strict authoritarian rule to maintain control over a factious and geographically vast nation. Socioeconomic issues have been a large driver of protests in China. The party is particularly concerned about inflation, including a 10 percent increase in food prices over the past year, as well as such catalysts of protests as corruption, pollution, and income inequality. In order to maintain control more effectively, the party has created an extensive police and surveillance network to monitor its citizens and react to any potential threat to stability. In 2010, China invested $83.5 billion in domestic security, which surpassed China’s published military budget of $81.2 billion for the same year. In early 2011, the central government responded forcefully to the possibility that the unrest in the Middle East might lead to unrest in China. The Chinese government expanded restrictions on online information and access to communication services, reported government propaganda in domestic news outlets, restricted the freedom of foreign journalists, and arrested dissidents with little or no cause.