2010 Report to Congress on Security Implications of U.S.-China Trade

Currency, Market Access, and SEC Identification of Communist Party Affiliation

USCC states that China maintains an export-driven economy through policies such as undervaluation of its currency, the renminbi (RMB), and support for domestic companies to the detriment of foreign competitors.

They recommend that Congress urge the Administration to respond to China’s currency undervaluation both multilaterally and unilaterally, and that Congress develop new tools, as necessary, to address China’s market access barriers.

In addition, USCC recommends that Congress direct the Securities and Exchange Commission to require that disclosure documents filed by companies seeking to list on the U.S. exchanges identify the Chinese Communist Party affiliation of board members and senior corporate officials. (See report for all of the Commission's recommendations.)

Other highlights of the USCC report include the following:

Currency. China manipulates the value of the RMB by requiring its citizens, businesses, and exporters to trade their dollars for RMB. By limiting the dollars in circulation within China, the government can then set a daily exchange rate between the RMB and the dollar.

20-40% undervalued. China maintains an artificially low value for the RMB that is estimated to be between 20 percent and 40 percent lower than it would otherwise be, if it were allowed to respond to market forces.

Largest purchaser of U.S. debt. In order to support its export-promoting economic policies and suppress the value of the RMB, the Chinese government has continued channeling its foreign exchange earnings into U.S. government debt, becoming the single largest foreign purchaser of U.S. Treasuries.

Unlikely to stop buying. The lack of alternatives and the potential detrimental impacts on China’s economy make it unlikely that China would stop buying U.S. government debt, or liquidate its holdings altogether.

Deficit worse since China joined WTO. Since China joined the WTO in 2001, trade between the U.S. and China has grown rapidly, but this growth has been very unbalanced, with the U.S. running record trade deficits. Many U.S. companies have taken advantage of investment incentives, subsidies, and lower labor costs to shift production to China.

More than tripled. The annual U.S. current account deficit with China has grown from $89 billion in 2001 to $264 billion in 2009. Since China’s entry into the WTO in 2001, the U.S. has run a cumulative deficit in goods with China of over $1.76 trillion.

Recent growth of imports. For the first eight months of 2010, China’s goods exports to the U.S. were $229.2 billion, while U.S. goods exports to China were $55.8 billion, with the U.S. trade deficit in goods at $173.4 billion, an increase of 20.6 percent over the same period in 2009 ($143.8 billion). This constitutes a four-to-one ratio of Chinese exports to its imports from the U.S.

WTO action by U.S. To resolve its trade imbalances with China, the U.S. has sought remedial action through the World Trade Organization, but the lengthy process has at times done irreparable harm to U.S. companies before relief has been granted. WTO dispute resolution may be a poor tool for addressing such issues as China’s currency manipulation and the trade-distorting aspects of China’s industrial policy.

Indigenous innovation policy. Within the last year, the Chinese government has initiated new industrial policies, such as "indigenous innovation," which have further slowed the pace of economic reform and affected the ability of U.S. companies to operate and compete in China. Such policies have also harmed U.S. exporters and import-sensitive domestic firms.

Rare earth policy. China, the biggest producer of rare earth elements in the world, has introduced measures aimed at restricting exports to foreign markets, to the detriment of foreign producers of a variety of cutting-edge technologies, including green and clean technologies and weapons systems. Such export restrictions provide an unfair advantage to Chinese technology producers.

Military activities. As a component of its overall desire to field a modern military, China is modernizing its air and missile forces and improving its capabilities to conduct offensive air and missile operations. These improvements have expanded China’s ability to operate outside its borders and reach U.S. regional allies, such as Japan, as well as U.S. forces in the region.

Guaranteed access for China’s aviation firms. In order to improve its military aircraft, as well as to develop a globally competitive aviation manufacturing industry, China is providing strong fiscal and political support and guaranteed market access to domestic aviation manufacturing firms. Foreign aviation manufacturing firms, such as Boeing and Airbus, are compelled to provide technology and know-how offsets in return for market access.

¹The USCC was created by Congress to report on the national security implications of the bilateral trade and economic relationship between the U.S. and China.

(See ITT’s Online Archives or 10/18/10 news, 10101821, for BP summary on Treasury's delay in issuing currency manipulation report in light of China’s progress.

See ITT’s Online Archives or 10/29/10 news, 10102906, for BP summary on China’s 5-year plan to develop seven industries, upgrade its indigenous innovation policy.

See ITT’s Online Archives or 11/18/10 news, 10111860, for BP summary of Proclamation on electronic waste recycling to recover rare earth minerals.)

11/17/10 press release on 2010 USCC Report available here

Executive Summary of 2010 USCC Report (12 pp) available here.

Complete 2010 USCC Report (324 pp) available here.