U.S.-China Economic and Security Review Commission, "Hearing: China as an Emerging Regional and Technology Power - Implications for U.S. Economic and Security Interests," February 12-13, 2004

February 12 - 13, 2004
University of California at San Diego
Great Hall - International House
UCSD Eleanor Roosevelt College
Corner of Pangea Street and Scholars Drive
La Jolla, California

DEAR SENATOR STEVENS AND SPEAKER HASTERT:

On behalf of the U.S.-China Economic and Security Review Commission, we are pleased to transmit the record of our San Diego, CA field hearing on February 12 and 13, 2004 examining ‘‘China as an Emerging Regional and Technological Power: Implications for U.S. Economic and Security Interests.’’ China’s technology development, and the pivotal role it plays in the global supply chain for high-tech goods and services, has important implications for U.S. economic and security interests.

The Commission is mandated (P.L. 108–7) to assess the qualitative and quantitative nature of the shift of United States production activities to China, including the relocation of high-technology, manufacturing and research and development facilities. Additionally the Commission is directed to examine China’s performance in protecting intellectual property rights, a key area of concern in U.S.-China high-tech trade.

During this field hearing, held on the campus of the University of California, San Diego, the Commission heard testimony from a number of scholars and representatives of California’s technology industry. During the discussion, panelists highlighted several important themes:

China’s High-Tech Development. The Chinese government has a coordinated, sustainable vision for science and technology development. Many Chinese high-technology developments have been spurred by policies the Chinese government has instituted to accelerate the growth of industries in this sector, which the government believes can help lift the whole economy.

The Chinese government uses foreign investment, technology standards, and industry regulation to catalyze the nation’s technological growth. Government procurement remains a lever for technology policy, as do proprietary technology standards. If foreign companies adopt Chinese promulgated standards to get access to the growing Chinese market, they help build economies of scale, which then encourages the growth of exports out of China with these new standards. An example of this is China’s new wireless LAN standard. The Chinese government also uses its power over state corporations, and over companies that require licenses to produce or provide services, to organize bargaining cartels with foreign corporations to encourage technology transfers into China.

Several hearing panelists noted the importance of China’s high-tech development to U.S. computer and electronics firms who are using it as a production base. One panelist noted that American computer and electronics firms had a rate of return in China of over 20 percent in 2002. Such profits encourage them to go along with Chinese ground rules for technology transfer. China is already the second largest computer manufacturer in the world, and it is expected that higher valued jobs in design, development and engineering will follow manufacturing to China.

China is also making strides in the advanced fields of pharmaceutical and biotechnology production. Products manufactured by China’s pharmaceutical companies have to date principally been generic, but foreign investment and the transfers of technology and management systems that accompany this investment are accelerating the growth of a more sophisticated pharmaceutical industry. Foreign manufacturers of pharmaceuticals are beginning to establish R&D facilities in China. The biotech industry in China is also growing. According to one hearing panelist from the U.S. biotech industry, the Chinese government is supporting its development through the annual investment of over $600 million into universities, research centers, and labs. The Chinese government is encouraging Chinese nationals who have obtained Ph.D.’s in the life sciences field in the United States to return to China and is offering them incentives to do so.

China’s Role in the Global Supply Chain. Global production networks dominate China’s high-tech export environment. Foreign investment into China has provided capital, management and technology to Chinese production in various technology sectors. Taiwan firms are key investors and intermediaries in China’s high-tech production networks.

Maintaining the U.S. Technological Edge. The U.S. role in global high-tech production chains is in the more skill and technology intensive activities, particularly in the R&D stage of production. American-developed technology advances and innovation has generally maintained the United States’ status as a global economic leader. The Commission heard testimony from almost every panelist concerning the need for the United States to reinvest in its long-term human capital in order to maintain this technological edge. China currently graduates three times as many engineers as the United States at the bachelor’s degree level. There is a great need for the U.S. Government to explore policies aimed at expanding educational opportunities in the mathematics and sciences fields, and for upgrading the U.S. technology infrastructure.

China’s Regional Outreach. China has become more receptive toward working in a multilateral format, particularly groupings in which it can exercise a leadership role—such as the Asia Pacific Economic Cooperation (APEC) and the Shanghai Cooperation Organization (SCO). Moreover, China’s growing economic influence in the region has enhanced its political leverage as well. This poses a challenge to ensure the United States is not excluded from the Asian region’s economic and security forums and that China’s role in these forums does not compromise U.S. goals in the region.

China’s emergence as a center for high-tech manufacturing and R&D is one of the most significant dynamics of China’s economic growth and an area the Commission will continue to follow closely as it poses significant economic and security challenges for the United States.

Yours truly,

Roger W. Robinson, Jr.
Chairman

C. Richard D’Amato
Vice Chairman

OPENING REMARKS
OPENING STATEMENT BY CHAIRMAN ROGER W. ROBINSON, JR.
OPENING STATEMENT BY CHAIRMAN RICHARD D’AMATO
OPENING STATEMENT BY COMMISSIONER ROBERT ELLSWORTH
Dean Peter Cowhey, Graduate School of International Relations and Pacific Studies, University of California, San Diego, Director of Institute on Global Conflict and Cooperation

Panel I: The Chinese Economy: Current Trends and Future Challenges
Dr. Barry Naughtonauthority on the Chinese economy Graduate School of International Relations and Pacific Studies, University of California, San Diego
Scott Rozelle, Professor and Chancellor's Fellow Department of Agricultural and Resource Economics University of California, Davis
K.C. Fung Professor of Economics, University of California, Santa Cruz

Panel II: China's Trade and Investment with its Neighbors
Gordon Hanson, Ph.D., Professor of Economics, Graduate School of International Relations and Pacific Studies, University of California, San Diego
Stephan Haggard, Ph.D., Professor of Political Science and Director of Korea-Pacific Program, Graduate School of International Relations and Pacific Studies, University of California, San Diego
Richard Feinberg and Stephan Haggard Graduate School of International Relations and Pacific Studies University of California, San Diego

Panel III: Biotechnology Panel
Dr. Xiang Zhang, director of the Micro and Nanofabrication Lab at UCLA
Greg Lucier President & CEO, Invitrogen Corporation
Joseph Panetta, President/CEO, BIOCOM
Kerry Dance, Ph.D., Managing Partner, Hamilton Apex Technology Ventures, LP

Panel IV: China as a High-Tech Leader: Technological Capabilities: Intellectual Property Protection and Market Access and Chinese Overseas Investment
William Bold, Vice President, Government Affairs, QUALCOMM, Inc.
Jason Dedrick Senior Research Fellow Center for Research on Information Technology and Organizations (CRITO) University of California, Irvine
Dr. Francine Berman, Director, San Diego Supercomputer Center Professor and High Performance Computing Endowed Chair, U.C. San Diego

Energy and Aerospace
Michael MayCenter for International Security And Cooperation Stanford University, Stanford, CA

Panel I: China's Role in Asia
Susan L. Shirk China's Multilateral Diplomacy in the Asia-Pacific
Ellis S. Krauss, Professor Graduate School of International Relations and Pacific Studies University of California, San Diego
David M. Lampton, director of Chinese Studies at The Nixon Center, George and Sadie Hyman Professor of China Studies- Johns Hopkins School of Advanced International Studies in Washington, D.C.