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U.S.- China Economic and Security Review Commission, "2012 Annual Report to Congress," August 13, 2012

The U.S.-China Economic and Security Review Commission was created by the United States Congress in October 2000 to monitor, investigate, and submit to Congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China.
August 13, 2012
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China is undergoing a period of intense political transition and economic challenge that will test the ability of the Chinese Communist Party (CCP) to maintain its control over the country. The CCP has staked its legitimacy on continued economic growth in order to maintain the support of its middle class and its restive rural population of 700 million. To keep Chinese factories full and provide jobs to the rural millions seeking a better life in the cities, the party recognizes that the Chinese economy must continue economic growth and expand the social safety net. If growth is to continue, however, it will be necessary to implement politically difficult reform.

China’s 12th Five-Year Plan (2011–2015) calls for the government to rebalance the economy toward domestic consumption and away from its historic reliance on export-led growth and vast infrastructure investments. The plan also encourages more government services, health care, education and pension reform, and a shift from resource-intensive manufacturing to the production of higher value-added goods. These reforms would benefit the American economy by further opening China to U.S. goods. The United States has long encouraged such market reform in China and has welcomed China’s first steps to expand government services, particularly in rural areas.

Unfortunately, in recent years China has been backsliding from market reforms in favor of an increased role of the state in the economy. China’s response to the global financial crisis also had the effect of strengthening its state sector by disproportionately benefitting state-owned companies. To date, China has failed to make significant moves to rebalance its economy, reduce export dependence, and increase domestic consumption. While such widespread economic reforms are difficult to implement, and while vested interests, such as exporters, are likely to oppose reforms that make it more difficult for their sectors to thrive, China is faced with a stark choice. As its economic growth slows and its export markets shrink, China can either transition to a new, rebalanced economy or face stagnation and even decline.

While China must resist the temptation to stay the comfortable but unsustainable course of the export-led economy it has nurtured over the past two decades, it faces a different dilemma in foreign affairs. Since 1989, China has maintained a long-standing policy following Deng Xiaoping’s admonition to ‘‘hide your capacities, bide your time, accomplish things where possible.’’ However, China’s continuing military modernization is strengthening its confidence and ability to advance Chinese government interests, especially in the Asia Pacific. For example, China has been relentless in upholding what it insists is the legitimacy of its territorial claims in the East and South China seas. China’s increased assertiveness has escalated regional tensions, prompting other countries to bolster their own defense capabilities and form or strengthen security partnerships. The United States has responded to China’s muscular naval posture in the Pacific by planning to deploy more warships to the Pacific over the coming years. China is faced with another choice: either adhere to internationally recognized norms of behavior for freedom of navigation and the resolution of territorial disputes or face growing opposition from its neighbors and other members of the international community.

China and the United States are growing increasingly interdependent. The United States looks to China to rebalance its economy, and China needs to increase imports and domestic consumption. What the United States wants from the relationship with China is clear: the reciprocal and balanced trade relationship that we should have with a World Trade Organization partner and for China to respect the rule of law both domestically and abroad.

In the middle of a once-in-a-decade change in the top leadership of the Chinese Communist Party, Chinese and international observers are looking toward the next generation of leaders to determine how China will manage this important period of transition. Much has been said about the personalities of Xi Jinping, the expected future general secretary of the CCP and president of China, and Li Keqiang, the expected future premier of China. Due to the opacity of Chinese politics, it is difficult to assess how these two individuals will influence the CCP and the Chinese government. However, a few things are clear. First, internal political struggles in the CCP will likely continue, and retired leaders Jiang Zemin and Hu Jintao, and their supporters, will continue to exercise significant influence. Second, the Politburo Standing Committee, China’s top leadership body, is unlikely to be dominated entirely by any particular individual or political faction, which will necessitate compromise among China’s leaders. Third, China’s state-owned enterprises will likely continue to operate in the interest of the party as well as in their own self-interest. Fourth, the People’s Liberation Army is likely to remain a powerful political force, both taking direction from and influencing CCP and Chinese government leadership. Finally, public security organs and the People’s Armed Police will probably increase surveillance and control of the populace.

These developments suggest that the United States will continue to face a range of challenges when dealing with China. The United States should demand reciprocity and seek mutual benefit in its relationship with China, and both nations should remain mindful of our interdependence. Our nations would both be better off as partners rather than competitors; however, this will depend on whether China is willing to make the reforms necessary for it to transition into a responsible actor on the global stage.