14 December 2012 10:02 [Source: ICB]
A special US commission set up to monitor China's compliance with trade laws has urged Congress to bar some Chinese companies, products and investments in retaliation for what it describes as persistent and pervasive unfair business practices and industrial espionage by Beijing.
In its 10th annual report to Congress, the US-China Economic and Security Review Commission (USCC) said that a wide range of Chinese unfair trade practices, banking and currency policies and outright espionage are flagrant violations of Beijing's obligations under World Trade Organization (WTO) rules.
China has violated trade rules, US group claims
As part of the deal in being granted WTO membership, China agreed to a schedule of trade liberalisation. In return, the US agreed to give China most favoured nation status, as it does for all WTO members.
Many in Congress were deeply suspicious of China's commitment to fair trade, so the commission was set up to closely follow China's implementation of and adherence to WTO rules on open global trade and to monitor China's impact on US security interests.
But according to the commission, 10 years after being granted WTO membership - a critical achievement for Beijing and its global trading goals - the Middle Kingdom has done little to comply with WTO rules and essentially flouts the law.
The panel blamed Beijing's noncompliance for much of the mounting trade deficit between the US and China, noting that the deficit "is by far the largest among US trading partners and 40.6% of the total in 2011".
In 2011, the US trade deficit with China reached $295bn (€224bn), an increase of 8% from 2010. The 2012 deficit is on course to top that.
And while China initially made a feint towards allowing its undervalued and government-manipulated currency to appreciate, the commission said that even that modest effort has faded.
"Currency appreciation levelled out in 2012," the commission said, adding: "The renminbi (RMB) did not appreciate as much as in 2011, and there are even signs that the Chinese government may devalue the RMB to boost exports."
Although Beijing pursues predatory policies to gain market share abroad for its government-backed firms, the commission said that China continues to make it all but impossible for US and other foreign firms to gain a meaningful foothold in China.
"Because China's state-owned enterprises (SOEs) are the preferred supplier for all levels of government in China, US companies face a variety of discriminatory barriers to sales there," the report said.
"The same subsidies and preferences enjoyed by the state sector in China when competing with foreign companies in China also make Chinese SOEs strong competitors in the US market and third-country markets," the report added.
USCC noted that 2011 was the 28th straight year in which the US has registered a trade deficit with China, and there is a laundry-list of unfair practices that perpetuate that imbalance.
"China's state-directed financial system and export-driven growth model; its market barriers to various US exports; its discriminatory policies that favour domestic companies over foreign investors; rampant Chinese theft of intellectual property; and China's unreliable rule of law and its inconsistent adherence to WTO commitments continue to disadvantage American competitors," the commission said.
For example, the commission noted that the banking system in China is almost entirely state owned and is dominated by five banks that account for nearly all lending.
"SOEs are the principal borrowers, while entrepreneurs and private companies find it hard to obtain loans, even at higher rates," the report said, calling the situation "financial repression".
In addition to a variety of unfair trading and financial practices, the commission charged Beijing with military and industrial espionage against the US.
The report noted that China has begun flight testing for its next-generation jet fighter, the J-20, a warplane with stealth technology that bears an uncanny resemblance in many respects to the US Air Force's F-22 fighter. Those strong similarities, right down to the J-20's cockpit configuration, said USCC, "revives concerns that espionage may have played a role in the jet's development".
In addition, said the commission, China continues a wide-scale cyber assault on US government and private networks.
"US industry and a range of government and military targets face repeated exploitation attempts by Chinese hackers as do international organisations and nongovernmental groups including Chinese dissident groups, activists, religious organisations, rights groups and media institutions," the report said.
The commission also reminded Congress that the US "is heavily dependent on China for much of its mineral imports", noting that Beijing is the principal source for so-called rare earth elements "upon which the US is 100% dependent".
The report further pointed out that "Beijing demonstrated during a diplomatic row with Japan that it was willing to use its dominant role in the rare earths supply chain as leverage against Tokyo".
To help level the playing field, the commission urged Congress to require a mandatory review of transactions by Chinese state-owned and state-controlled companies investing in the US and prohibit investment in a US industry by a foreign company whose host government bars foreign investment in that same sector.
The report's recommendations also call for an annual Commerce Department report on Chinese investment in the US, including data on acquisitions by Chinese SOEs.
On the rare earths front, the commission urged Congress to establish an interagency task force to develop a government-wide definition and list of foreign-sourced minerals critical to US industry.
USCC said that the interagency task force should include the departments of Defense, Commerce, Energy, Interior and State, among others.
The US, said the panel, also should require federal agencies to use existing statutory and regulatory tools to encourage domestic extraction and manufacture of those critical materials.
The goal, said USCC, is to "develop a plan regarding those minerals to reduce the vulnerability of the US to pressure from China or any other country for political or economic advantage".
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