U.S.-China Economic and Security Review Commission Issues 2010 Annual Report

The U.S.-China Economic and Security Review Commission released its 2010 Annual Report this morning, issuing stark findings that the Chinese government continues to pursue a mercantilist-based export-led economic growth strategy, with an intentionally undervalued currency at its core, while continuing to fail to meet the promises made as part of its accession to the WTO. The Commission’s report echoes many of the arguments ITIF made about China’s and other countries’ mercantilist technology export-led economic growth strategies in a report called The Good, The Bad, The Ugly, and The Self-Destructive of Innovation Policy.

The Commission reports that continuing problems with China’s implementations of its WTO commitments, “Can be traced to China’s pursuit of trade-distorting government intervention intended to promote China’s domestic industries and protect them from international competition.”  The report continues, “China has failed in some notable areas to fulfill the promises it made nine years ago when it joined the WTO. Specifically, China is adopting a highly discriminatory policy of favoring domestic producers over foreign manufacturers. Under the guise of fostering ‘indigenous innovation’ in its economy, the government of China appears determined to exclude foreigners from bidding on government contracts at the central, provincial, and local levels. In addition, China has proposed that its many state-owned corporations be exempt from WTO rules on procurement. The Chinese government quite simply intends to wall off a majority of its economy from international competition.” With regard to China’s state-directed efforts to ramp up green technology industries, the report argues that, “China may be more interested in developing a world class green technology export sector rather than cleaning up its environment.”

The report brings particular attention to the mechanisms through which China maintains an artificially low value for its currency, the renminbi, at levels 20 to 40 percent below its value if it were allowed to respond to market forces. China’s government does this by requiring its citizens, businesses, and exporters to trade their dollars for renminbi in state-owned banks. Further, the report notes that China’s economic policy deliberately relies on exports and foreign investment capital to amass a large current account surplus with the United States, that is then intentionally loaned back to the U.S. Moreover, continuing to recycle its accumulated dollars through the purchase of U.S. dollar-denominated securities helps China maintain the artificially low-value of the RMB, thereby harming U.S. exporters and import-sensitive manufacturers. The report notes that since China’s 2001 accession to the WTO, the U.S. has run a cumulative trade deficit in goods with China of over $1.76 trillion, and that for every $1 of goods it imports from the U.S., China exports $4 worth to the U.S. The report also notes that China has implemented a deliberate strategy to corner markets for rare earth metals, including by introducing measures aimed to restrict their export to foreign markets, to the detriment of foreign producers of a variety of cutting-edge technologies, including green, clean, consumer electronics technologies and weapons systems.

The Commission’s report recommends that Congress urge the Department of Treasury to designate China as a currency manipulator in its semiannual report. It further recommends that Congress urge the Administration to respond to China’s currency undervaluation by: a) Working with U.S. trading partners to bring to bear on China the enforcement provisions of all relevant international institutions; and b) Using the unilateral tools available to the U.S. government to encourage China to help correct global imbalances and to shift its economy to more consumption-driven growth. It also recommends that Congress examine the efficacy of the tools available to the U.S. government to address market access-limiting practices by China not covered by its WTO obligations, and to develop new tools if necessary.

The report is a major step forward for the United States. For too long, the U.S. has been blinded by a market fundamentalism, grounded in neoclassical economic doctrines, that refused to even countenance the possibility that governments could intervene in markets to gain unfair advantage and shift the location of global productive activity to their shores. China’s (and other countries’) mercantilist, beggar-thy-neighbor technology export-led growth strategies have been a major contributing factor (though certainly not the only one) explaining the evisceration of U.S. manufacturing sectors, including the loss of 42,400 U.S. factories over the past decade, millions of job losses, and an unemployment rate stubbornly persisting over 9 percent. It is high time the United States recognize that the mercantilist trade policies of certain nations are having a directly deleterious impact on our economy, and insist that those countries fully meet the obligations they committed to in joining trade liberalizing regimes such as the WTO, for, in doing so, these nations joined a trading system, not an exporting system.