China – The New Imperium

The Hon. C. Richard D’Amato

Commissioner and Former Chairman, US-China Economic and Security Review Commission

I would like to thank the Canadian Coalition for Democracies for inviting the US  China Economic and Security Review Commission to participate in this symposium on China. America’s relations with China are extensive, complicated and present a variety of opportunities for cooperation as well as challenges, as you placard reads, “risk” to US interests.  It has been our job to try to distinguish the opportunities from the challenges for the use of the US Congress, and I am sure that Canada, which also has extensive relations with China, is in many ways in a very similar position.

First, let me explain the nature, creation and activities of the US China Commission, created in October of 2000 and now approaching its 8^th birthday – and the only permanent Congressional Commission tasked with reviewing and recommending upon an international bilateral relationship.

U.S.-China Congressional Economic and Security Review Commission formation

Prior to 2000, there was an annual debate on China’s Annual Most Favored Nation Treatment, which usually emphasized human rights, linking human rights to trade preferences.

But with China’s accession to the  WTO, and US agreement to its doing so, we were obliged to give China permanent most favored nation treatment, meaning an end to the annual debate and annual leverage, modest as it might be.

So, in fact, two Commissions were created to sustain annual attention to US-China relations, but in this case not just human rights,  with a new emphasis on the nexus between national security and economic flows.  For the first time this nexus was articulated through an independent but wholly congressional commission, whose mission was given to 12 commissioners, 6 Democratic and 6 Republicans, to make detailed annual determinations to the congress of the national security implications of the economic trade, investment and other aspects of the bilateral relationship .

-no other bilateral Commission

-it is permanent

-it has worked successfully at being bipartisan

-we also produce a classified report to the Congress

-annual extensive unclassified report to Congress

-wholly congressional in Senate with no Executive nominees or internal influences

A second commission was created by the House of Representative which continued the traditional of examining human rights, but it includes Executive branch and elected congressional  nominees.

The result was success in Senate, modest utility in the House (because of poor attendance as nominees were members, and as it was diluted with Executive nominees).

Both commissions remain in power, get annual funding, report annually, testify before committees regularly, and are a permanent element on the Congressional scene.

The Senate Commission’s internal rules helped establish high attendance and near- unanimous results annually, i.e.

-independent commissioners

-rotating Chairmanship

-bipartisan hearing co-chairs

-the long term result has been a noticeable lack of partisanship in a very partisan town.

The Commission produces an extensive annual report to the Congress, and we have sent you copies of our latest, 2007 report.  The creation of the Commission is a reflection of growth of Chinese power, confidence, organizational and operational activities vis-à-vis the rest of the world.  Is China a threat or an opportunity for the US and Canada?

On the eve of the 2008 summer Olympics, China has worked at producing an image of a confident and benevolent power, but the growth in its economy, military power and international diplomacy and operations results in challenges.  The hoped for political reforms when we supported her entry into the WTO have not materialized.  This his been a major disappointment, at variance with the expectation of the Clinton administration when it supported entry into the WTO and permanent access to our market.

 The Chinese leadership is nervous over further market based reforms, has avoided political reform and strengthened its authoritarian powers internally.  The surge of free media coverage of the earthquakes over the last couple of weeks has now been replaced by a backsliding on such coverage.

Conclusions of most recent report

The Commissions conclusions are a mixture of good news and bad -- let me summarize the salient conclusions of our latest report:

China has taken a constructive role in the attempt to bring a new agreement with North Korea on its nuclear program and has strengthened its export control system to limit the proliferation of nuclear technologies and weapons materials and equipment. Most notably, China’s economic policies have lifted 200 million people substantially out of poverty and begun the creation of a real Chinese middle class.  China’s leaders acknowledge the extensive environmental devastation caused throughout China and increasingly the world of its rapid growth and energy policies, and want to do something about it.

On the less favorable side, there is continued suffocation of civic action by any organization except the Communist party, and extensive media controls, including over the internet.  Second, China’s performance in complying with its obligations in the World Trade Organization has been disappointing in a number of very important respects.  For instance, it is not enforcing its own laws against intellectual property theft – a problem which the U.S. shares with Canada and all of our allies in addressing China’s performance.

Chinese violations of intellectual property protections and rights reflect the inadequacies of a Chinese system lacking the enforcement of an adequate rule of law. 

Even more important is an open question as to whether disregard for intellectual property rights in a broad sense is important to sustain China’s rapid growth and technological progress.

It remains unclear whether the Chinese government is committed to engaging the IPR infringement issue or whether Chinese development is dependent on such infringement.  The rampant piracy of everything from movies, to auto brakes to machine tools to the full range of imported industrial and commercial products should logically limit the level of foreign investment in china, it has not.  While it is often reported than foreign companies attempt to protect their most valued IP from Chinese pirates, they continue to invest and expose their IP.  At the same time, it is clear the Chinese government seeks foreign investment as a means of technology transfer for its own development.  Can we realistically expect advancement in the protection of intellectual property rights in China?  In the 8 years since China joined the WTO there has been little improvement in the protection of IP.  .  The U.S. Trade Representative has begun bringing cases in the WTO to start curtailing various aspects of China’s IP violations.  The congress strongly supports this route as preferable to trade retaliation measures, and it is a test of the WTO as to whether such cases will succeed in changing this practice.

The third problem area we have addressed is our disappointment in China’s efforts to continue moving in the direction of a market economy.  These efforts are slackening in that the government has decided to retain state ownership or control of a large block of the economy, designating a dozen key industries (such as telecommunications, aviation, and steel) as pillar industries to retain state ownership and control.  Subsidies of many kinds to these key industries violate the WTO obligations China engaged in and pose a challenge to our policies, as they are unfair in the global competitive field.

Further, on energy, China appears to show a growing reliance on acquiring oil at the wellhead rather than relying on international market practices.  In doing so, it has chosen to develop close relationships with countries such as Iran, Sudan and Burma, and this makes it more difficult to for China to cooperate in multilateral efforts to address human rights issues in those nations.

 Fifth we have become increasingly concerned over the rapid pace of China’s militarization, and particularly its emphasis on cyber warfare and anti--space technologies.  China is keying on defeating the capabilities of US Carrier battle groups, for instance, a key element of American power in the Pacific. 

Sixth, in a related concern, we are concerned about China’s growing reliance on industrial espionage, and an overlarge spy program.

Seventh, we are concerned over the growing trade surplus China is sustaining with the US, resulting in the acquisition of very large dollar holdings, and the apparent planned investment of such dollars in acquisitions of key American companies.  This is the result, in part, of China’s emphasis on export-led growth, which relies on large trade surpluses, and the importation of U.S. and other big manufacturers, and relies on WTO-illegal subsidies and government control of over 150 of the largest Chinese enterprises in so-called “pillar” industries.

Congress has supported the close review of such acquisitions of American companies, through an institution created for this purpose known as CFIUS (Committee for Foreign Investment in the US), and this resulted in the denial of a Chinese acquisition off an American oil company, Chevron, several years ago - an event extensively debated and publicized and which greatly angered the Chinese government.

In this regard, China’s unwillingness to move its currency valuation to a realistic level , we believe, gives it an unfair advantage in the trade relations area, making its goods artificially cheap, and ours expensive, effecting the balance of trade

Reciting this litany of complaints risks our being branded as just that – complainers.  We believe we are obliged to bring problems to the attention of the Congress, and try to balance these issues with what progress we can discern in the relationship.  It is clear that China listens to us, even if it is slow to reform many practices we feel are unfair or need reform for a healthy international system.  So in the areas of trade, environment and security there are clusters of issues which we as a nation have created a network of initiatives and joint Committees with the Chinese, in order to have a dialogue and try to fashion joint understandings and solutions.  We think a robust series of such diplomatic initiatives are required, and a true understanding of the Chinese in the face of these problems has been apparent.  It is another matter for the Chinese government to change its economy and environmental, energy and other practices throughout its society.  A mixture of carrots and sticks, with the sticks focusing on international multilateral action – particularly through the WTO – and in cooperation with our allies is the preferable long term solution.  In general we need to avoid vituperation; retaliation and actions which tend to close down the global economic system since that in the long run will have the impact of cutting off our noses to spite our face.

Perhaps the most dangerous issue which we face, and which demands more aggressive solution, certainly from the American and Chinese governments alike, is in the area of environmental degradation and climate.  If the developing science of climate change is correct we have little time left to curtail our greenhouse gas emissions – but both US and China’s energy policies, focusing on increased coal use, are defeating our ability to head off disasters in the coming decades.  There is increasing restlessness in the congress on this issue, and it is subject of debate in the developing Presidential campaign.  It would be helpful for Canada to weigh in on this issue, since it inevitably affects the environment here as elsewhere.    The rapid development of new technologies and new regimes of emission controls is needed  in the near term, and is particularly important because of the delaying affects of emissions now gong into the atmosphere which linger there for many years, steadily accumulating for future effects.

In sum, China behaves in many ways as a mercantilist power economically, and will comply with its international obligations only reluctantly if those obligations have an undesirable impact on its growth practices and goals.  It is therefore necessary for the international community, through the institutions that are available to us, and if necessary bilaterally, to exert pressure to reform those practices.  We in many ways we are asking China to reform practices that we ourselves engaged in for many decades while we developed.  Nevertheless the present understanding of the impacts of such practices are more clearly understood by everyone, and obligations have been entered into which underpin the modern international system and its viability.  We certainly encourage Canadian institutions to work with us in advancing the positive aspects of that system, and we look forward to working with you on specific issues in the future.

Thank you.

Presented at the Canadian Coalition for Democracies Symposium

The People’s Republic of China: Foreign Policy Risks and Opportunities

Tuesday, June 10, 2008
Room 200, West Block, Parliament Hill, Ottawa, Canada

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