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A point by point rebuttal to the 2010 USCC Annual Report

November 23rd, 2010 Leave a comment Go to comments

In my prior post, “The 2010 USCC Annual Report is ‘truthless, prejudicial’,” I ranted about the 2010 USCC Annual Report and reiterated Chinese Foreign Ministry call that the report was “truthless” and “prejudicial.” Some of you expressed privately that I should address the report seriously, especially, as this is an “official” position taken by a branch of the U.S. government.

Some of you also responded, since the U.S. is not interested in addressing the systemic problems locally and rather blame foreigners (China especially in this report), then let the U.S. march forward with her madness. In the long run, it will only result in America’s decline. Let it be, so the argument goes.

After giving it some thought, I think China and the rest of the world have a vested interest in America seeing our world for what it is, not to be cloaked in lies and prejudices.

The reason is fairly simple. Within any country, we know it is critical that power transitions peacefully from one generation of leaders to the next. If not, there is always a bigger chance for disaster, civil war included. That same idea applies to the world at large. The existing dominant hegemonic power has to learn to step aside peacefully and the rising new power has to ascend peacefully, otherwise the chance for war is likely. Nobody wants war.  But changes in status quo may also be inevitable: history tells us civilizations rise and decline.

That said, the current political climate between the Democrats and the Republicans are such that they cannot agree on anything. The only thing they seem to agree is to blame foreigners for the current difficulties of the United States. Lacking intellectual vigor, chasing after the same demographic demand, the U.S. media has fallen to singing the same tune. The American public, blinded by a lackluster leadership and lazy media, have mindlessly hopped onto the same bandwagon.  But if the U.S. must stagnate, and if the baton of leadership of the world is to pass from the U.S. to China or some other country, this make-believe victim culture makes any peaceful transition difficult.

With that in mind, I (with editing help from Allen) will now rebuke each of the conclusion reached by the 2010 USCC Annual Report as outlined in the Executive Summary (in PDF). I would like Americans to see the issues for what they are.

The U.S.-China Trade and Economic Relationship’s Current Status and Significant Changes During 2010

• 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.

U.S.’s trade deficit with China is indeed large. But the U.S. deficit with the rest of the world is more staggering still. (Here is a chart showing U.S. global trade deficit over the last few decades.)

The U.S. has fashioned its problems with trade deficit into a foreign policy problem when it is really a domestic one. Consider this simpler scenario. Think about our personal trade deficits and surpluses within our community. For most of us, we have a large trade deficit with our local grocery stores and restaurants. We enjoy a trade surplus with our employers. Fundamentally, there is nothing wrong with our trade deficits with the grocery stores. On the aggregate, as long as we are “balanced” in totality with our community, we are fine.

We certainly can control how much we spend at the grocery store. It is dishonest and disengenious to blame the grocery store for us eating too much. We may be lucky to be able to force a grocery store to raise its prices to “check” our consumption habits, but it is impossible to force all grocery stores to do the same.

• The U.S. trade deficit with China is a major drag on the U.S. economy. Despite the global financial crisis, China gained an even greater share of the U.S. trade deficit, while the overall U.S. trade deficit declined. The deficit in goods with China is by far the largest among U.S. trading partners: 45 percent of the total in 2009 and 41.5 percent of the total for the first eight months of 2010.

Putting aside the fact that trade deficit figures against China are often exaggerated, blaming China for U.S. economic woes is myopic. The deficit the U.S. has is not only with China, but rest of the world. At the root of the problem is the U.S. consuming more than she can afford (see this chart of U.S. over-consumption over the last five decades), both at the government and individual level. It is the consumption beyond the means that is the “drag” on the U.S. economy.

Consider the U.S. deficit with Saudi Arabia. The U.S. imports $55billion, mostly in oil, from Saudi Arabia. The U.S. could force Saudi Arabia to re-valuate their currency. That might temporarily cause a surge in U.S. export, but over the long term, without U.S. becoming substantively more productive and changing its net consumption – savings rate, the U.S. net deficit with Saudi Arabia in real terms would not change. (In fact, in the late 1980’s, the U.S. did force Japan to revaluate the Yen by 200% through the Plaza Accord. That resulted in Japan’s 1990s “lost decade.” Yet, the U.S. trade deficit with Japan continued to climb. (See Professor Jiang Ruiping: Revaluation of Japanese Yen, a historical lesson to draw: analysis)). The U.S. might be be able to export more, but would not be able to make more, unless the U.S. changes its net savings rate.

While the way out of the current economic crisis is global cooperation, China cannot all of a sudden consume more and exert a bigger demand on American goods. China becoming a consumption power has to come gradually as ordinary Chinese move up the economic ladder and as China structurally shifts into a more advance economy. (See “Michael Spence on China, U.S., and growth of the developing vs. developed economies in coming decades“)

Fortunately, the trend for global rebalancing appears to be headed in the right direction (note the 45% drop to 41.5% so far in 2010). As China grows gradually, it will naturally demand more exports from the U.S. As long as China continues to consume more and as long as Americans continue to save, the future looks bright for all. (See Bureau of Economic Analysis, U.S. Department of Commerce, report on U.S. savings rate. The U.S. has finally had five quarters where personal savings rate remained above 5%. For this to translate into real lasting effects in reduced U.S. trade deficits with the world, the U.S. must start to be careful about its government debts.)

The rise of the developing nations should not alarm Americans. Americans should recognize that everything being equal, the poorer nations will work for less pay. This labor “advantage” (or lifestyle “disadvantage,” depending how you look at it) will continue until everyone is at the same standard of living. For those who care about true “human rights,” this is a desirable result of globalization.

• 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.

In my opinion, this paints a one-sided and distorted picture of reality. Look at the U.S.’s footprint in China: Intel, Microsoft, Proctor and Gamble, Caterpillar, McDonalds, Star Bucks, and so forth. Have you heard of Huawei and CNOOC, and how consistently the U.S. government has been blocking their access to U.S. markets? If we must attribute global imbalance due to government restrictions, we must also discuss U.S. “none”-government policies which limit Chinese investments in America. The U.S. has blocked investments after investments from China based on “security” or other similar concerns. In our view, a big cause of the trade imbalance is of the U.S.’s own making: by blocking “technological” exports to China and limiting Chinese investment in this country, the U.S. has no one else but itself to blame.

• 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.

As China’s competitiveness grows, the value of its RMB will inevitably grow.  But to ask China to quickly re-value is neither fair nor responsible. No nation ever want to voluntarily devalue its currency; no pauper become rich by deflating his own assets and income. But every nation has a right to set the value of its currency at whatever level it deems acceptable. If China want to work for the world for cheap, let them. The U.S. does not compete with China: the U.S. does not want to assemble iPads, it wants to make the most valuable parts of the iPad value chain.

• China continues to pursue a long-term goal of making the RMB a more international currency, starting with the introduction of several policies designed to make trade and bond issuance in the RMB easier, particularly among China’s Asian neighbors. China’s reforms thus far have had little effect on the RMB’s use in international trade.

Being an international currency has many benefits. That is a goal of every country – including China – if they can attain it. But without more reforms in the financial sector and domestic market, China cannot make Yuan a freely convertible, world reserve currency. As McKinsey has noted, until China accomplishes many other basic reforms in its economy (land reform, reform of the energy sector, state-owned-enterprise reform, social welfare, among others), the price of many goods and services in China will be inherently unconvertible.

Having the reserve currency has allowed the U.S. to borrow cheaply over the years. But being a reserve currency issuer also brings responsibilities. And embarking on a currency war is not one of them. This is why so many in the most recent G-20 have expressed disappointment with the U.S. irresponsible embarking of “quantitative easing.”

• As in previous years, the United States engaged China at several bilateral and multilateral negotiations, including the Strategic and Economic Dialogue and meetings of the Group of 20, to address China’s discriminatory trade policies, but again failed in 2010 to secure any significant agreements or Chinese policy changes.

During the 2009 Strategic Economics Forum, China agreed to spur domestic consumption. China has been widely acknowledged to be the engine of global economic growth since the financial crisis exported by the U.S. If China has been discriminatory, it is at least still able to spread the benefit of growth more widely around the world than any other power at this time. (U.S. charges of discriminatory practices sound especially disingenuous in face of the above discussion on “indigenous innovation”.)

The Implications and Repercussions of China’s Holdings 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.

The U.S. treasury is still considered a good investment. China’s sovereign ratings firm, Dagong, still rates the U.S. an “AA-.” China holding of U.S. debt is a sign of China’s trust in America and should be lauded, not derided. Here then the logic is again backwards. The borrower is blaming the lender for lending him money? Imagine if China refuses to lend to the U.S.! There would probably be war!!!

• Over the past decade, the government of the People’s Republic of China has become the largest purchaser of U.S. debt. China implements a deliberate economic policy that relies on exports and foreign investment capital to amass a large current account surplus with the United States. That trade surplus is loaned back to the United States as part of China’s deliberate policy.

• 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. China’s currency policy harms U.S. exporters and import sensitive manufacturers in the United States, though the policy aids consumers in the United States by keeping interest rates and prices low.

Part of the shrill we hear pitting exporter vs. importer countries now is caused by simple mis-accounting. In a world where there is multilateral trade, we over-count trade deficit against countries that assemble components into products (see Allen’s post on iPad value chain).  This has unnecessarily caused people to believe that exporter countries are taking over the world. But over the long term, no economy ever wants to be a net exporter economy. Over the long term, that would be suicidal – it would be akin to large segments of entire countries voluntarily working for free.

But over the short term, many factors can explain a nation’s net currency imbalance with the rest of the world. Take China for example.  A lot of the currency imbalance to China is caused by Western companies transferring capital to China to do business in China, invest in China and help China to build up its economy.  A currency imbalance is not a devilish plan by China to take over the world, but the a natural result of China opening up and partnering with Western companies to build a more prosperous China. Most of the U.S. company’s profits and growth in China are not counted in the U.S. trade deficit with China. If we must count this way, trade imbalance with China at this stage of China’s development is thus a good – not bad – thing. China can decrease Western currency deficit by by limiting Western participation in China’s economic development, but imagine the raucousness that would create! (It’s really damned if you do, and damned if you don’t!!!)

• 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.

While there are no winners in a trade or currency war, it is within every country’s sovereign right to control the value of their currency. Unlike Japan, which can be arm-twisted by the U.S. to devalue because Japan is an occupied country, China is an independent, soverign nation. To the extent the Chinese government is “artificially depressing” (whatever that means) its currency, let them do so. They would only be setting a tax on their citizens for the benefit of the global economy.  To the extent China is willing to do that, the rest of the world should gladly accept China’s discount (see our Politicization of the Yuan article, linked above) and leverage that discount to build their own economies.

• A relaxation of China’s currency policy would require China to end its capital controls. Easing China’s capital controls would help to rebalance the economic relationship between the two countries.

If the U.S. can guarantee it does not itself “manipulate” her own currency or force others to “manipulate” theirs by submitting to a Wall-Street or Central Bank Soros type “market valuation” of their currencies, then perhaps China and the rest of the world may consider giving up their capital controls. To rebalance the economic relationship, the U.S. needs to cut back on spending (and increase savings rate), and the Chinese needs to spend more (and reduce savings rate). That will come through structural changes not currency changes.

Evaluating China’s Past and Future Role in the World Trade Organization
• 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.

The U.S. has not only run a trade deficit with China, but with the rest of the World. The deficit against China is a systemic problem the U.S. has with the world, not a bilateral problem with China. It is also unfair for the U.S. to view China as a leach but no contributor to the U.S. economy from 2001 to 2010. This sort of revisionist and narrow-minded smearing is dangerous and should be avoided – especially for a “democratic” and advanced nation such as the U.S.

• Predictions that China’s WTO accession would lead to the transformation of China’s authoritarian government and enhance U.S. national security have not been borne out.

The Chinese government is transforming towards one that is more transparent and accountable. China as a society is becoming a much more law-based society. There is an order of development, as argued by Deng Xiaoping’s interpreter, Zhang Weiwei, “Can you provide an example to refute this senior fellow?

But, do not expect China to merely mimick the form of government the U.S. practices. China’s leader like to refer to the scientific development of society. One take on that approach is discussed by William Hooper, in his essay, ““The Scientific Development Concept”.

• Though China’s implementation of its WTO commitments has led to a reduction in tariffs, the elimination of some nontariff barriers, and improved market access for some U.S. companies, in other areas significant problems persist. These can be traced to China’s pursuit of policies that rely on trade-distorting government intervention intended to promote China’s domestic industries and protect them from international competition.

The WTO specifically did not cover labor, environment, and other policy levers (most government subsidies) available to sovereign governments to govern. Nations can still pursue independent policies even as they trade with each other. No nation – including the U.S. – would have joined the WTO with agreements that impinge on national sovereignty.

China’s accession into WTO was partially under “developing nation” terms. U.S. media often criticize China being more “protectionist” in her laws. That criticism is done deliberately ignoring China’s accession terms and state of development. That criticism also ignores benefits U.S. corporations are enjoying in China at the detriment of Chinese workers as many State Owned Enterprises were dismantled in the last two decades to accommodate WTO.

• 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.

This is a lie and a propaganda. Dan Harris from the China Law blog has written an article explaining what this is all about. See “China’s Rare Earths. We Called This One.” Asia Times have an article by Peter Lee dispelling this propaganda as well: “Rare Earth Rebalancing.”

• China’s progress toward market liberalization has slowed in some sectors and has been reversed in others, such as government procurement and financial services.
• 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.

The first thing that comes to mind is – when the rules applying to everyone is no longer convenient, let’s find ways to bend the rules. Frankly, that’s the U.S. reputation around the world.

China’s Growing Air and Conventional Missile Capabilities
• Over the past decade, as part of its overall military modernization, China has significantly modernized its air and missile capabilities. This modernization process is across the board, to include foreign purchases and indigenous production of aircraft, weapons, and equipment. In addition, institutional changes such as organizational, personnel, and training reforms continue to improve the People’s Liberation Army (PLA) Air Force’s capacity to conduct operations.

• Augmenting its modernization efforts, Beijing has expanded the PLA Air Force’s focus in recent years from solely concentrating on territorial defense operations to now include extraterritorial offensive operations.

• Simultaneous with the modernization of China’s Air Force, Beijing has also strengthened the PLA’s ability to conduct conventional missile strikes. Improvements include fielding increased numbers and types of more accurate conventional ballistic and land-attack cruise missiles.

• 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.

U.S. military expenditures continue to be more than the rest of the world combined.

Developments in China’s Commercial and Military Aviation Industry
• Given the close integration of China’s commercial and military aviation sectors, advances in China’s commercial aviation industry gained through interactions with western aviation manufacturers directly benefit China’s defense aviation industry. As China’s commercial aircraft manufacturing capabilities improve, newly acquired technology and know-how, such as composite materials production, are directly transferred to the defense aviation sector.

• Over the past decade, China’s aviation industrial base, with the strong support of the Chinese government, has improved substantially. China currently is capable of developing and producing both advanced commercial and military aircraft and seeks to compete with foreign aviation manufacturing companies in the near future. Despite these advances, however, the industry continues to experience some problems, most notably in producing advanced engines.

• China’s aviation industrial base benefits from several practices that bear watching. In particular, the industry enjoys strong government support that favors domestic firms over foreign firms and also benefits from technology and know-how offsets from western aviation firms in exchange for market access.

• Developments in China’s aviation industry pose both benefits and challenges to the United States. In the near term, U.S. aviation manufacturing firms stand to benefit from increased aviation exports to China. However, as China’s aviation manufacturing firms improve, U.S. aircraft and aviation component manufacturing companies will likely face increased competition from these aviation firms in China’s domestic, third country, and U.S. markets.

The commercial aviation and military aviation industries are always inter-mingled between government and the private sector. Look at Boeing. It makes jetliners as well as weapons. In fact, look at all the suppliers into the aviation industries. When technologies can be applied, they get applied.

The U.S. may decide to block Boeing from selling planes in China, but that would be childish. The U.S. government actually assists Boeing whenever it can in pushing Boeing’s planes in China.

The U.S. cannot expect the Chinese to never participate in advanced industries. Such expectations are really borne out of prejudice.

China in Southeast Asia
• 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.
• Tensions in the South China Sea and East China Sea, dam construction along the Mekong River, and Southeast Asian historical mistrust may limit China’s influence in the region.
• 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.

Under the Bush administration, the U.S. completely ignored Southeast Asia. The U.S. has sufficient power to be a player in that region. While each of these statements may be true, the U.S. should try to position itself as a problem solver and not a meddler to make the situation in that region worse.The U.S. should be a responsible stakeholder, not a troublemaker. China has started a Free Trade Agreement with the ASEAN nations. That’s something the U.S. will not be able to achieve for a long time. See my prior post, “China – ASEAN trade increased 55%, expected to top $250billion in 2010.”

• Over the past year, China and Taiwan have continued to improve their overall bilateral relationship. This improvement builds upon a trend begun at least in May 2008, with the inauguration of Taiwan President Ma Ying-jeou.
• The improvements in the cross-Strait relationship are not even across the board. Most improved are the bilateral economic ties, as demonstrated by the recent signing of a cross-Strait free trade agreement between China and Taiwan. Diplomatic relations, while less improved than the economic relationship, have also seen progress over the past year. Periodic meetings and negotiations between Taipei and Beijing have become the norm.
• The cross-Strait security situation is still of serious concern. China’s continued military buildup across from Taiwan is increasing the gap in military capabilities between the two sides. In particular, Taiwan’s air defense capabilities are degrading as its air force ages and the PLA’s air and missile capabilities improve.

I don’t have too many qualms with these statements. On the U.S. selling of weapons to Taiwan, it is a U.S. geopolitical move. If the U.S. wants the Russians and the Chinese to cooperate in restricting arms sales to Iran or elsewhere around the globe, it ought to constrain itself. (See “U.S. Senator, Dianne Feinstein, on the recent $6.4billion arms sale to Taiwan: “I believe that’s a mistake on our part.”).

The U.S. is powerful, so it can do what it pleases in this area. Americans should at least be aware of how the Chinese view such behavior. (See “Open Letter to President Obama from Chinese netizen, LTML.”)

Hong Kong
• In 2010, efforts to transition elections for Hong Kong’s Legislative Council to universal suffrage, agreed to in the Joint Declaration, were once again delayed, which was met with controversy among Hong Kong’s democracy supporters. Also in 2010, the freedom of the press in Hong Kong remains an ongoing struggle.
• Hong Kong is facing a number of environmental problems due to its proximity to the manufacturing hub of the Pearl River Delta.
• Hong Kong’s economy has noticeably recovered from the 2009 downturn due to a targeted economic stimulus that focused on small- and medium-sized enterprises.

Hong Kong is a paradise compared to the political turmoil that exists in the U.S.. These statements sound more like some “democracy” activist still having axe to grind with China. How is this a security impact to the U.S.?

China’s Environmental and Green Energy Policies
• China has devoted a significant amount of money and has developed legislation in an effort to find alternative sources for energy, improve energy efficiency, protect the environment in the country, and build sectors of its economy.

I think China is finally putting money where her mouth is. She has damaged her environment for far too long being the factory of the world.

• Despite progress in reducing pollutants and increasing green energy over the short term, significant problems such as lack of compliance at the local level and China’s economic development plans may make it harder to sustain this progress over the long term.
• China’s domestic legislation on green energy has been more substantive than its commitments in international climate change negotiations. Despite the fact that China believes it is in its domestic interest to curb energy inefficiency and carbon emissions, Beijing is reluctant to be held accountable for reductions on the international stage.
• The United States and China share many similar challenges in their quest for green energy and could have much to gain from cooperation on these issues.

U.S. and Chinese Efforts to Promote Alternative Energy Manufacturing
• China is developing a leading wind turbine and solar panel manufacturing sector. These sectors are intended to become the dominant world suppliers while serving China’s growing domestic market.
• China has set ambitious goals for the level of solar, wind, and nuclear power generation through its Renewable Energy Law and 11th Five Year Plan. This effort includes a substantial renewable portfolio standard, requiring that China’s power supply further diversify by 2020 to emphasize noncoal and nonnuclear power sources.
• China has a well-developed, long-term strategy for investment in the green technology manufacturing sector, which gives it a competitive advantage.
• Ohio is one of 30 states that have adopted renewable portfolio standards designed to spur the deployment of renewable energy projects.

I agree with these points with one exception. The reason Beijing is reluctant to be “held accountable” is because she sees such “need” from the U.S. as another leverage into China’s internal affairs. As the report said, China’s domestic policy is actually more substantive than her international commitments. The U.S. on the other hand simply does not want to be held accountable and refuses to play a role comensurate with the amount of pollution she pumps into our planet.

China’s Domestic Internet Censorship Practices
• Chinese authorities have managed skillfully to balance their perceived need to limit speech on the Internet with the Chinese public’s need to feel a part of an ongoing and participatory discourse about the country’s social conditions. The Chinese government has used all available means to bind the content and scope of this conversation. At the same time, the government has been selectively responsive and has attempted to remediate some of the nation’s most serious irritants in order for the Chinese Communist Party to maintain power. This confluence of conditions might be termed ‘‘network authoritarianism.’’

• China’s leadership views information and communications technologies as presenting opportunities for economic development and enabling the distribution of propaganda at home and abroad in support of Chinese Communist Party interests. Conversely, the Chinese government views these technologies as a threat to regime stability and the Party’s ability to control the flow of information and freedom of expression.

• Beijing continues to institutionalize and promote strict Internet governance through numerous laws and regulations as well as rigorous oversight and enforcement from government organizations. Chinese authorities also influence and guide the nature and tone of discussions online.

• The Chinese government outsources much of its censorship activities to the private sector. The popular search engine Baidu serves as a useful case study of this dynamic. The firm, established in part with the help of U.S. capital, plays a key role in China’s censorship regime. With Google’s smaller presence in China, Baidu and its American investors stand to reap greater profits.

• China’s Internet censorship activities have broad implications for the United States. Impeded information flows are destabilizing, particularly in the context of a crisis. Moreover, censorship in some respects is actually a barrier to trade, thereby undermining U.S. businesses’ ability to operate in China. External Implications of China’s Internet-related Activities

• 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.

• In 2010, China’s ‘‘Great Firewall’’ affected select U.S. Internet users, and a state-owned Chinese Internet Service Provider ‘‘hijacked,’’ or inappropriately gained access to, select U.S. Internet traffic. Other nations were also affected in these incidents.

• Chinese authorities are tightening restrictions on foreign hightechnology 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.

Censorship is a question of values. Chinese and Americans do not value the same things. See a discussion by Allen in his post, “Google vs. China – Good vs. Evil?

As I have said in the past, the modern Chinese history is one of exploitation by foreigners, and thus a strong enough central government to protect them is paramount. The American experience is one of distrust for the government. While Americans view their government with distrust, the Chinese are supportive. There is no way to graft this American value unto the Chinese and vise versa.

Regarding the alleged hacking. I think the report has to do much better than that. U.S. media has played up this 15% of traffic inadvertently diverted through servers in China to “Chinese government sponsored hacking.” Americans should know that the U.S. actually controls all the traffic on the Internet at the highest level! This is a source of contention between the U.S. and the rest of the world. The Chinese firm responsible has publicly stated is was a mistake. Where is the U.S. proof of hacking? Where is the U.S. proof of “Chinese government sponsorship?”

Information Control
• The Chinese government refined its state and trade secrets regime in 2010. This effort yielded some clarifications, but several laws and regulations still contain broad language that allows for ambiguous interpretation and arbitrary enforcement. In recent years, Chinese authorities have enforced these provisions on U.S. citizens doing business in China.

• For U.S.-listed Chinese firms, China’s state secrets laws could conceivably conflict with U.S. disclosure requirements. If the firms defer to the Chinese laws, U.S. investments could be at increased risk.

• Official filings from U.S.-listed Chinese companies may not adequately disclose material information that relates specifically to China, such as the pervasiveness of Chinese Communist Party influence in the day-to-day operations of state-owned enterprises and their subsidiaries.

On these points, my only thought is to beef up WTO rules and regulations governing these matters. Resist unilateralism as that will only serve to alienate.


Certainly, there are few points in this report which I agreed with. For the most part, it is however truthless and prejudiced.  The “drag” on the current U.S. economy is a domestic issue of U.S. over-consumption.  The sooner the U.S. addresses this problem systematically at home, the better off and healthier the U.S. will re-emerge from the current global financial crisis.

The authors of this 2010 USCC Annual Report took an arrogant position that their views about censorship and form of government as the truth.  China has her own vision.  The report’s insinuation that the Chinese government is sponsoring cyber-attacks on such circumstantial evidence further shows how unprofessional the report itself is.

As I said previously, this report is equally ridiculous like the other annual report – “The Country Reports on Human Rights Practices”.  Both reports’ penchant for propaganda and hypocrisy are second to none.

  1. November 23rd, 2010 at 16:58 | #1

    On Quantitative Easing:


    Gary Becker (a professor at the University of Chicago and a Nobel Laureate) wrote:

    Fed Chairman Bernanke wrote in an article in the Washington Post on November 4th, “The Federal Reserve cannot solve all the economy’s problems on its own.” The slowdown in the recovery of the American economy is not the result of Fed policy, and cannot be cured by yet another bout of open market operations. This is why the Fed should curtail, and better yet, eliminate its plans for QE2.

  2. xian
    November 26th, 2010 at 17:11 | #2

    Good analysis. Westerners like to push the fair/free trade thing either out of ulterior motives or naive outlook. As far as I can tell every measure China takes to protect its own economy is perfectly justified. Both Korea and Japan do the same things, that is what keeps Asian economies from being overrun by foreign takeovers.

  3. Thorun
    February 4th, 2011 at 22:50 | #3

    I agree mostly, not all the chips are added up though…

    My point is that the U.S. has sunk it’s own ship because it is a spending machine. And nothing can stop this until it’s run off the cliff, like a bunch of lemmings.

    No one seems to save money in the U.S. when:

    one: their employment market is saturated with low waged jobs;

    two: innovations and new product created in the U.S. can be replicated and reproduced faster and for less money in another country;

    three: the dominant politicians have split the country in two with what’s the reasons Middle Class Americans have disappeared, and what policies and laws will help return Middle Class America.

    Four: The common actions which Americans are doing to Adapt to their plight is, instead of consuming less, their thought process is to have less children or none at all. That is what is happening now. The latest U.S. census has statistically proven that immigrants have produced over 80% of child births since 2001.

    In conclusion, without the return of the middle class, the U.S. will eventually brake apart. The middle class of the U.S., historically were the part of the economy which would save or invest at least as one third of their income. They were the insurance and buffer from foreign economies influential tides from becoming too overwhelming.

    Financial disasters, corporate corruption, political corruption, and politics have stopped any return of the middle class, and the effects of those problems continues to keep the middle class from gaining ground to this day and years down the road.


    Certainly, there are few points in this report which I agreed with. For the most part, it is however truthless and prejudiced. The “drag” on the current U.S. economy is a domestic issue of U.S. over-consumption. The sooner the U.S. addresses this problem systematically at home, the better off and healthier the U.S. will re-emerge from the current global financial crisis.

    The authors of this 2010 USCC Annual Report took an arrogant position that their views about censorship and form of government as the truth. China has her own vision. The report’s insinuation that the Chinese government is sponsoring cyber-attacks on such circumstantial evidence further shows how unprofessional the report itself is.

    As I said previously, this report is equally ridiculous like the other annual report – “The Country Reports on Human Rights Practices”. Both reports’ penchant for propaganda and hypocrisy are second to none.”

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