U.S.-China Economic and Security Review Commission, "Hearing: China's Growth as a Regional Economic Power: Impact and Implications for the U.S.," December 4, 2003

December 4, 2003
Room 124, Dirksen Senate Office Building
First & Constitution Ave.,
NE, Washington, DC

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 hearing held December 4, 2003, on ‘‘China’s Growth as a Regional Economic Power: Impacts and Implications.’’

As you know, the Commission is mandated by law (P.L. 108–7, Division P) to assess, among other areas, ‘‘the extent of China’s ‘hollowing out’ of Asian manufacturing economies, and the impact on United States economic and security interests in the region; [and] review the triangular economic and security relationship among the United States, Taipei and Beijing.’’ Our hearing was focused on exploring trends in these areas and in the broader spectrum of China’s regional relations.

The December 4th hearing examined from several perspectives the regional impacts of China’s rapid growth as an economic power. Asian governments, the international media, and academic experts have increasingly noted China’s growing importance to trade and investment patterns in Asia. They also note China’s more assertive regional economic diplomacy, including proposals to enter into liberalized trading arrangements with members of the Association of Southeast Asian Nations (ASEAN) and the Shanghai Cooperation Organization (SCO) as well as the countries of Northeast Asia. We asked expert panelists to provide their perspectives on these dynamics and on appropriate U.S. policy responses.

Based on the hearing, we present the following preliminary findings:

• In recent years, China has adopted a softer yet more confident and proactive posture in its relations with its Asian neighbors. China’s various bilateral ‘‘partnership’’ relationships—that once seemed largely symbolic—have gradually taken on greater substance.
• In contrast to fairly passive advocacy in the past, China is now actively promoting the establishment or strengthening of regional multilateral institutions, such as the Shanghai Cooperation Organization in Central Asia and the ASEAN ‘‘Plus One’’ (China) and ‘‘Plus Three’’ (China, Japan, South Korea) partnership fora.
• Some observers conclude that China is filling a void in the region left by U.S. preoccupation with Iraq and the global war on terrorism. China touts its policy of ‘‘non-interference’’ in the internal affairs of other states and contrasts its hands-off approach to that of the U.S., which actively pursues an agenda to combat terrorism and to promote human rights and democratic governance. Aside from reiterating the importance of partners accepting its ‘‘One China principle,’’ China makes few political demands on its Asian neighbors. China does not push human rights, labor or environmental standards in its diplomacy.
• China’s regional strategy appears to be subordinate to its global economic strategy, which is to maintain access to the open multilateral trading system on which its rapid export-driven growth now depends.
• China’s regional strategies are in part driven by its energy security needs, a topic the Commission explored during a hearing on October 30, 2003. For example, major pipeline projects are being planned to connect China to oil and gas fields in Central Asia and the Russian Far East and to establish liquefied natural gas terminals to receive shipments from Australia and Indonesia.
• China’s export-driven economic boom has been fueled by a high volume of inward Foreign Direct Investment (FDI), particularly in the wake of China’s entry into the World Trade Organization (WTO). In the view of one witness, China’s membership in the WTO has sharply reduced the perceived ‘‘risk premium’’ for FDI in China and intensified the trend. This has implications for all regional economies, but especially for the countries of Southeast Asia, which have already experienced a relative decline in FDI flows and could lag behind China in technological progress.
• One panelist noted that ‘‘hollowing out’’ of some industrial sectors in the region was taking place due to China’s export drive, attraction of FDI, and development as a major manufacturing power. This was particularly true in Taiwan, which of all the Asian industrial economies has the heaviest ‘‘trade dependence’’ on China, but it also has affected Northeast and Southeast Asian nations. At the same time, panelists acknowledged that for now the high growth in exports from the rest of Asia to ‘‘feed’’ China’s manufacturing sector was taking some of the sting out of ‘‘hollowing out.’’ The question is whether China will move up the technology ladder to such an extent that its current imports from the rest of Asia will slow or change in composition. Several of our panelists concluded that Japan, South Korea, Taiwan and the ASEAN nations have no choice but to rise to China’s challenge by advancing their own technological base, if they want to remain competitive and improve their standards of living.
• In the region there is a disquieting perception that the U.S. was largely indifferent to Asia’s fate during the 1997–98 regional financial crisis and has ignored a number of Asia’s developmental concerns in its preoccupation with the global war on terrorism and the North Korean nuclear threat.

Some of these dynamics were apparent at the recent APEC meeting in Bangkok where China projected itself as a more attentive and profitable alternative to the U.S., depicting the latter as preoccupied with terrorism and security relations. Many Asian leaders left Bangkok praising Chinese President Hu’s economic initiatives and wondering why President Bush seemingly downplayed economic concerns. Likewise, after visits by Presidents Bush and Hu to Australia, the Asian press reviewed Hu’s performance more favorably. Such perceptions can limit the U.S. Government’s ability to secure the cooperation of Asian nations in achieving our priority objectives.

The implications of China’s economic rise vis-a-vis the U.S. are significant. Chinese economic and political practices represent a troublesome alternative to U.S. norms. International labor standards are essentially ignored in the rush for production, transparency is clouded by corruption and insider deals, environmental protection takes a back seat, and democratic principles are suppressed by authoritarian ‘‘realism.’’ Yet, the ‘‘success’’ of China’s model is no doubt making a strong impression on its Asian neighbors. An important multilateral vehicle that the U.S. could use to reassure Asian partners is APEC—the Asia-Pacific Economic Cooperation forum. APEC should be strengthened by more active American participation, innovation, and high-level political support for its regional economic agenda. Our long-term economic and security interests in Asia are too important to fall victim to a distracted America.

As the Congress deliberates on issues concerning U.S. interests in Asia and considers how to strengthen American diplomacy in the region, the economic rise of China is a key factor to assess. Through its economic success, China is exercising a more effective and assertive regional diplomacy and exercising enhanced political influence in Asia.

Yours truly,

Roger W. Robinson, Jr.
Chairman

C. Richard D’Amato
Vice Chairman

OPENING REMARKS
Opening Statement By Hearing Chairman Roger W. Robinson, Jr.
Opening Statement By Vice Chairman C. Richard D’Amato

PARTICIPANTS and TESTIMONY
Wing Thye Woo,PhD, Professor of Economics, UC Davis
Bates Gill, PhD, Freeman Chair, CSIS
John J. Tkacik, Jr., Research Fellow, The Heritage Foundation
Peter C.Y. Chow, PhD, Professor, University of New York
Merritt Todd Cooke, Managing Director, GC3 Strategy Inc.
Edward J. Lincoln, PhD, Senior Fellow, Council on Foreign
L. Gordon Flake, Executive Director, The Maureen and Mike Mansfield Foundation.
Naoko Munakata, SigurCenter, GeorgeWashingtonUniversity

Attachment
Wang Gungwu, PhD, East Asian Institute, National University Singapore
David Steinberg, PhD, Dir. Asian Studies, GeorgetownUniversity
Martha Blaxall, PhD, School of Advanced International Studies
Rollie Lal, PhD, Political Scientist, RAND Corporation