2011 report to congress - U.S.-China Economic and Security Review ...

dkrause on DSKHT7XVN1PROD with $$_JOBEXECUTIVE SUMMARYThe U.S.-China Trade and Economic RelationshipChina is now the second-largest economy in the world and theworld’s largest manufacturer. Its market exceeds that of the UnitedStates in industries such as automobiles, mobile handsets, and personalcomputers. Although Chinese leaders acknowledge the needto balance their economy by increasing domestic consumption,China continues to maintain an export-driven economy with policiesthat subsidize Chinese companies and undervalue therenminbi (RMB). While the RMB rose by roughly 6 percent innominal terms over the last year, it is still widely believed to besubstantially undervalued. For the first eight months of 2011, theU.S. trade deficit with China increased 9 percent over the same periodin 2010. The U.S. trade deficit with China is now more thanhalf of the total U.S. trade deficit with the world. In the year todate ending August 2011, the United States exported about $13.4billion in advanced technology products to China, but importedover $81.1 billion in advanced technology products from China, fora deficit of about $67.7 billion. This is a 17 percent increase in theadvanced technology products deficit for the same period over theprevious year, ending in August 2010.The Chinese government’s special treatment of state-owned enterprises(SOEs) is of particular concern to U.S. businesses, as itcan overcome comparative advantages of competitors, therebyharming American economic interests. China’s SOEs are also anissue of contention in government procurement, as China seeks towall off a large portion of its economy from foreign competition.In 2010, the amount of foreign direct investment (FDI) flowinginto China jumped to $105.7 billion, up from $90 billion in 2009.Foreign-invested enterprises were responsible for 55 percent of China’sexports and 68 percent of its trade surplus in 2010. Whilesome Chinese sectors are now open to foreign sales, huge swathesof the economy are reserved for Chinese firms. Despite Chineseclaims that U.S. inward investment policies are protectionist, forthe past two years there has been a more than 100 percent yearon-yeargrowth of Chinese investment in the United States. Chineseinvestments have focused on manufacturing and technology,with an emphasis on brand acquisition. Some critics of China’s foreigndirect investment in the United States contend that Beijing’sefforts are focused on acquiring and transferring technology to Chinesefirms.In March 2011, China ratified its 12th Five-Year Plan (2011–2015), a government-directed industrial policy that focuses on thedevelopment and expansion of seven ‘‘strategic emerging industries.’’The central and local governments will likely continue tocombine targeted investment with preferential tax and procure-(1)VerDate Nov 24 2008 13:46 Nov 10, 2011 Jkt 067464 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 G:\GSDD\USCC\2011\067464.XXX 067464