U.S.–China Economic and Security Review Commission Issues 2009 Annual Report to U.S. Congress

Introduction

On November 19, 2009, the U.S.–China Economic and Security Review Commission (“Commission”) issued its 2009 Annual Report to Congress (“2009 Annual Report”).  In it, the Commission describes its view of the status of the U.S.–China bilateral trade and economic relationship, identifies related developments and their impact on U.S. national security interests and makes specific recommendations to Congress to address identified areas of concern.

While the 2009 Annual Report echoes the Commission’s concerns of prior years, this year’s report is being submitted to a new Congress, during the tenure of a new presidential administration and in the midst of lingering concerns about the American and global economy.   

At a minimum, the 2009 Annual Report will continue to nurture certain negative perceptions of the U.S.–China bilateral relationship both within the U.S. executive and legislative branches and within the larger U.S. policy and regulatory community.  Moreover, were one or more of the Commission’s recommendations to be adopted by Congress, the 2009 Annual Report could have immediate and significant policy, regulatory and commercial impacts.

Background: The Commission

An independent advisory body, the Commission was created in 2000 to “monitor, investigate, and report” annually to Congress on the national security implications of the U.S.–China bilateral trade and economic relationship.  The Commission is composed of 12 members appointed by the majority and ranking leaders of the U.S. Congress.  By law, the Commission is required to focus its work on eight specific areas:  proliferation practices, economic transfers, energy, U.S. capital markets, Taiwan-related issues, U.S.–China bilateral programs, WTO compliance and the implications of China’s domestic restrictions on freedom of speech and access to information. 

The Commission conducts its work primarily through its research staff, fact-finding missions, hearings and consultations with the U.S. intelligence community.  Although the Commission has no formal legislative or executive authority, its findings and recommendations carry some measure of influence, largely because of its policy expertise, bipartisan composition and independent view of the U.S.–China bilateral relationship.

2009 Annual Report Synopsis

Two key themes emerge from the 2009 Annual Report that have commercial, as well as policy and regulatory, significance.

First, the Commission is concerned that China has implemented a wide array of trade-related practices that, it contends, both place U.S. competitors at a significant competitive disadvantage, and require a broader response than WTO proceedings allow.  According to the Commission, these anticompetitive practices include currency manipulation; the provision of subsidies to domestic industries in a range of forms including free land and reduced utility costs, loans, domestic sourcing requirements; and value-added tax (VAT) rebates on domestic firm exports. 

Second, the Commission views China’s national industrial policy as integrally related to its broader national security agenda.  Specifically, the Commission notes Chinese efforts to close the technology gap with the United States, including by increasingly requiring companies outsourcing manufacturing operations to China to relocate research and design activities there, and by the increased incidence of cyber and human intelligence-gathering against U.S. national security and commercial targets. 

The 2009 Annual Report makes 42 discrete recommendations to Congress.  Of these, the Commission highlights 10 in particular for congressional action: 

(1) Employ World Trade Organization trade remedies more aggressively.  The Commission recommends that Congress urge the administration to employ more aggressively all trade remedies authorized by WTO rules to counteract the Chinese government’s unfair trade practices.

(2) Respond effectively to China’s currency manipulation.  The Commission recommends that Congress urge the administration to press China to allow the RMB to become flexible and responsive to market forces in order to help correct global economic imbalances.  The Commission further recommends that Congress consider legislation that would have the effect of offsetting the impact on the U.S. economy of China’s currency manipulation.

(3) Evaluate the impact of China’s VAT.  The Commission recommends that Congress urge the United States Trade Representative to evaluate the use—and trade-distorting effect—of selective VAT rebates by China and determine what steps, if any, should be taken to address the issue.

(4) Report on the effects of Chinese subsidies on the U.S. clean energy sector.  The Commission recommends that Congress urge the Department of Energy to report to Congress on the impact of Chinese subsidies and other elements of China’s industrial policy on U.S.-based companies that manufacture clean energy products.

(5) Ensure adequate funding to limit China’s anti-access capabilities.  The Commission recommends that Congress assess the adequacy of planning and resourcing of Department of Defense programs that would limit China’s anti-access capabilities, with a focus on antisubmarine warfare and ballistic missile defense programs, and assess the adequacy of funding and resources for the Department of Defense’s Pacific Command.

(6) Encourage China to draw down the number of forces opposite Taiwan.  The Commission recommends that Congress urge the administration to take additional steps to encourage China to demonstrate the sincerity of its desire for improved cross-strait relations by drawing down the number of forces, including missiles, opposite Taiwan.

(7) Ensure adequate funding to respond to computer exploitation and computer attacks. The Commission recommends that Congress assess the effectiveness of, and resourcing for, law enforcement, defense and intelligence community initiatives that aim to develop effective and reliable attribution techniques for computer exploitation and computer attacks.

(8) Meet the rising challenge of Chinese espionage.  The Commission recommends that Congress assess the adequacy of resources available for intelligence, counterintelligence and export control enforcement programs to ensure that U.S. government agencies are able to meet the rising challenge of Chinese human intelligence and illicit technology collection.

(9) Assess the adequacy of U.S. export control policy in Hong Kong.  The Commission recommends that Congress examine and assess the adequacy of U.S. dual-use export control policy with respect to Hong Kong SAR.  The Commission further recommends that Congress urge the administration to consider ways to collaborate more closely with the authorities in Hong Kong in order to prevent the transshipment of controlled technologies from Hong Kong into China.

(10) Monitor the role of U.S. companies in Internet censorship.  The Commission recommends that Congress continue to monitor and assess efforts by U.S. high-technology firms to implement an effective code of ethics related to their operations in China.

Conclusion

While the Commission has no formal legislative or executive authority, its expertise and stature will ensure that the 2009 Annual Report will help shape related U.S. policy and regulatory decision-making in a number of important areas of the bilateral relationship, especially international trade and U.S. foreign direct investment.

At a practical level, our clients and friends would be well-advised to seek specific advice with respect to how their U.S.–China-related trade and investment activities may be impacted by this and other related policy developments.