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    « Hamid Karzai: A Political Gamble By The US That Didn't Pay Off | Main | Big Tobacco's New Frontier: Developing World »

    2010 US-China Report: How Beijing's Policies Threaten The US Economy & Security 

    Today the U.S.-China Economic and Security Review Commission released it's 2010 report to the US Congress. The Commission has been given the task by the US Congress to review annually "‘the national security implications of the bilateral trade and economic relationship between the United States and the People’s Republic of China". The report slams China on many fronts but especially on it's artificially undervalued currency (Renminbi or RMB or yuan) and it's negative impact on the US trade and economy. 

    Pres Obama With Chinese Premier Wen Jiabao, Image Source:Wiki

    Here are some highlights from the 2010 U.S.- China report:  

    • For the first eight months of 2010, China’s goods exports to the United States 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 United States. The U.S. trade deficit with China is a major drag on the U.S. economy.  
    • China’s government policies limit the ability of foreign companies to obtain Chinese government procurement contracts and to make sales to China’s state-owned enterprises, most recently through China’s new ‘‘indigenous innovation’’ policy. Companies in the United States and Europe have protested this discriminatory treatment.  
    • Since June 19, 2010, the RMB appreciated by just 2.3 percent against the dollar (as of October 2010). The RMB remains substantially undervalued against the dollar, which subsidizes Chinese exporters to the detriment of U.S. domestic producers. China’s undervalued currency also helps attract foreign companies to locate production in China. 
    • China manipulates the value of its currency, 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. 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.  
    • Over the past decade, the government of the People’s Republic of China has become the largest purchaser of U.S. debt. The United States need not fear a large sale of U.S. bonds by China nor a wholesale switch by China to investing in the bonds of another country. Because China holds such a large amount of dollar-denominated investments, including the bonds of U.S.-government owned Fannie Mae and Freddie Mac, and because the alternative investments in the euro and the yen are so limited, China has few alternatives to the dollar for its foreign reserves.
    • China’s export-led growth strategy requires China to continue to run large trade surpluses with the United States and to recycle its accumulated dollars through the purchase of U.S. dollar-denominated securities. Recycling dollars back into the U.S. economy helps China to maintain the artificially low value of the RMB.  
    • Since China’s accession to the WTO in 2001, the annual U.S. current account deficit with China has grown from $89 billion in 2001 to $264 billion in 2009. Predictions of a more balanced trade relationship between the two countries as a result of China’s membership in the WTO have proven false. Since China’s entry into the WTO in 2001, the United States has run a cumulative deficit in goods with China of over $1.76 trillion. 
    • 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.  
    • The U.S. government has filed a variety of WTO cases against China’s barriers to trade. These WTO cases, while important, frequently fail to deal with the underlying causes of the U.S.-China trade deficit. 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. 

    Chinese President Hu Jintao, Image Source:WikiCommons

    • As China’s air and missile modernization efforts progress, Beijing’s ability to threaten U.S. forward deployed forces and bases in the region is improving. Any PLA missile strikes and air raids against U.S. bases, if successful, could force the temporary closure of regional U.S. bases and inhibit the U.S. military’s ability to operate effectively in East Asia. In addition, the future deployment of an antiship ballistic missile could seriously interfere with the U.S. military’s freedom of access to the region.  
    • China’s political, economic, energy, and security interactions with Southeast Asia have increased significantly in recent years and are expected to increase in the future. Many Southeast Asian nations are looking to increase their relationships with the United States in order to hedge against China’s growing presence in the region. China’s assertiveness in the South China Sea constitutes a potential threat to U.S. interests, including the freedom of navigation. 
    • China’s government, the Chinese Communist Party, and Chinese individuals and organizations continue to hack into American computer systems and networks as well as those of foreign entities and governments. The methods used during these activities are generally more sophisticated than techniques used in previous exploitations. Those responsible for these acts increasingly leverage social networking tools as well as malicious software tied to the criminal underground. Recent high-profile, China-based computer exploitations continue to suggest some level of state support. Indicators include the massive scale of these exploitations and the extensive intelligence and reconnaissance components.  
    • Chinese authorities are tightening restrictions on foreign high- technology firms’ ability to operate in China. Firms that fail to comply with the new regulations may be prohibited from doing business in Chinese markets. Firms that choose to comply may risk exposing their security measures or even their intellectual property to Chinese competitors." 

    The 2010 US-China report gives a disturbing example of how Chinese computers attacked Indian computers earlier this year, which clarifies the nature and scope of such threats from PRC for the cybersecurity of the rest of the world. The report says: "In April 2010, the Information Warfare Monitor and the Shadow- server Foundation released a detailed report called ‘‘Shadows in the Cloud’’ that describes an elaborate computer exploitation campaign.

    According to the report, a China-based computer espionage network targeted primarily Indian diplomatic missions and government entities; Indian national security and defense groups; Indian academics and journalists focused on China; and other political institutions in India, as well as the Office of His Holiness, the Dalai Lama.100 The network also compromised computers in at least 35 other countries, including the United States." The report says that the Chinese were able to obtain through this cyberattack some sensitive, classified documents that belonged to the Indian government. 

    The report further adds that China has actually censored the US Internet traffic as well. It says: "In early 2010, two incidents demonstrated that China has the ability to substantially manipulate data flows on the Internet. First, for several days in March, China’s Internet controls censored U.S. Internet users. Second, in April, a Chinese Internet service provider briefly hijacked a large volume of Internet traffic. Computer security researchers observed both incidents but were not able to say conclusively whether the actions were intentional. Nonetheless, each incident demonstrates a capability that could possibly be used for malicious purposes."

    The Commission concludes the report with 45 specific recommendations, which in a nutshell advocate use of any and all (legitimate) measures available to the US to protect it's interests and to keep Beijing contained.

    ~ Gauri

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