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Competing Interests Divide U.S. China Policy
William R. Hawkins, The Jamestown Foundation, China Brief
8/29/2006

The National Security Strategy of the United States (NSS) released in March states, "The United States will welcome the emergence of a China that is peaceful and prosperous and that cooperates with us to address common challenges and mutual interests." President George W. Bush used the same phrase when meeting with Chinese President Hu Jintao on April 20, adding that the two countries are "connected through a global economy that has created opportunity for both our peoples." In doing so, President Bush seemed to juxtapose economic cooperation with security concerns, a priority also mentioned in the NSS, which states, "Our strategy seeks to encourage China to make the right strategic choices for its people, while we hedge against other possibilities." These statements provided the impression of a unified concept animating U.S. policy. Events this spring, however, revealed the rivalry within the Bush administration between a "business wing" that favors increased trade and investment ties with China, and a "defense wing" that is very concerned that the capital and technology flowing to China is creating a dangerous rival with global ambitions.

The Office of the Secretary of Defense issued its annual report on the Military Power of the People's Republic of China on May 23. The first paragraph of the executive summary contained familiar phraseology: "U.S. policy encourages China to participate as a responsible international stakeholder by taking on a greater share of responsibility for the health and success of the global system from which China has derived great benefit." Interestingly, the "stakeholder" term did not appear elsewhere in the text of the Pentagon report; its sole appearance in the summary suggests that it was likely inserted during the interagency review process. The term was formulated by former Deputy Secretary of State Robert Zoellick in a speech to the National Committee on U.S.-China Relations last September. He contrasted the "stakeholder" concept and the "tightly woven" global economy to the Cold War and "the distant balance-of-power politics of 19th Century Europe," which he said no longer applied in the 21st century [1].

Yet, balance-of-power considerations are evident in other branches of the administration, including parts of the Department of State. In March, just before leaving for tripartite talks with Australia and Japan, Secretary of State Condoleezza Rice suggested that "those of us who are longstanding allies, have a joint responsibility and obligation to try and produce conditions in which the rise of China will be a positive force in international politics, not a negative force" (The Australian, March 11). In regard to the new agreement with India over civilian nuclear power cooperation, Under Secretary of State Nicholas Burns stated on March 22, "This deal is positive for United States national security interest because it will help us first cement our strategic partnership with India, which is very important for our global interests." The most important global security interests served by closer U.S. ties to both traditional allies and to India is the balancing of China's rising power in Asia.

The Pentagon's Military Power report challenges the arguments of the "business wing" that U.S.-China relations are primarily a function of "win-win" economic integration. China's military buildup supports a foreign policy at odds with the security interests of the United States on many fronts. This is summed up nicely on page 9 of the report: "China continues to dispute sovereignty claims in the South and East China Seas and is preparing for potential conflict over Taiwan. Chinese companies continue to play a negative role in the proliferation of advanced military capabilities, and continue to supply countries such as Iran with critical military technologies. Beijing has refused to join the Proliferation Security Initiative. China has not fully leveraged its close ties with Pyongyang to stem North Korean nuclear ambitions, and continues to maintain or strengthen political, economic and military ties with Iran, Sudan, Burma, Zimbabwe, Cuba and Venezuela, undercutting international efforts to influence those states."

The report continues by discussing the roles that businesses and economic growth have played in Beijing's rise to world power, noting, "The extraordinary economic success of the PRC is a central factor in its emergence as a regional and global power, and is the basis for China's increasingly capable military. The Party has also relied on the successful transformation of the economy as a primary source of legitimacy." This last sentence questions the claims of those who have argued that prosperity will promote liberalism and tame the Communist Party.

Rather than shifting toward political liberalization, states the report, Beijing has utilized foreign companies to build its strength: "Most of China's defense industries rely on foreign procurement and development. The exceptions are few, e.g., ballistic missiles and some space and aviation programs." The report continues, "Foreign investment in physical plants, management, technical and marketing expertise in some basic manufacturing sectors, such as strategic metals and electronics, has increased the prospect for spin-off with military and dual-use industries." Quoting Hu Jintao himself, the report documents China's strategy to "build an innovative system of defense science and technology...to create a good structure under which military and civilian high technologies are shared and mutually transferable."

To prevent Beijing from exploiting U.S. technology successfully to modernize its military, last year the Bush administration proposed new export controls to limit the transfer of "dual-use" technology that could be used to strengthen Chinese capabilities. Certain items would be prohibited, while special licenses would be needed for other products. In addition, there would be more stringent background checks and oversight of transactions. While the international business community has publicly stated its commitment to bolstering national security, its actual behavior has been to oppose any new barriers to trade or investment. As the U.S. Chamber of Commerce admits in its 2005-2006 Policy Priorities, it seeks to "contain the proliferation of counterproductive sanctions against incoming foreign investment, as well as new restrictions on U.S. exports, that may be miscast as homeland security or national security imperatives" [2].

While China has protested U.S. export controls, and President Hu raised the issue at the April summit, former U.S. Ambassador to Beijing James Sasser has pointed out that "The Chinese really don't do any lobbying." Instead, Sasser argues, "The heavy lifting is done by the American business community" (Bloomberg, December 9, 2003). The computer, aerospace and machinery industries have all lobbied the Commerce Department for less restrictive rules and a shorter list of controlled products. Among the items that were taken off the export control list were aircraft engines, ball bearings, machine tools and virtual-reality systems (Bloomberg, May 3). These new regulations were drafted in May and are currently being circulated through the interagency review process. Given these realities, it seems that the original concerns for national security have been lost. Acknowledging that the current draft restricts only approximately 40 items as opposed to the hundreds of items listed in earlier proposals, Under Secretary of Commerce for Industry and Security David McCormick told the Wall Street Journal, "The policy I've described is a very different approach than was being discussed just six months ago. There are some philosophical shifts here" (Wall Street Journal, May 23).

A report by the Government Accountability Office (GAO) disclosed that "the current export control system has not effectively slowed China's ability to obtain billions of dollars worth of advanced semiconductor equipment as part of its national strategy to modernize its semiconductor industry" (GAO, September 2005). The GAO found that licenses were routinely approved with inadequate, if any, follow up inspections by U.S. officials to verify promises by China's Commerce Ministry that items would not be used for military purposes.

In China, President Hu's system is already in place. In The Outline of the Development Program of Science and Technology for National Defense for 2006 to 2020, the Chinese government readily admits to their intent to share technology between military and civilian institutions and businesses (Xinhua, May 25). Furthermore, one-third of the economy is still in the hands of the government and much of the private sector is run by elites with direct ties to the Chinese Communist Party. Foreign firms are locked into joint ventures with Chinese partners [3]. The Commerce Department's notion of a large "legitimate" commercial sector to which technology can be safely sold seems mistaken. As the Pentagon's report declares, "China continues a systematic effort to obtain dual-use technologies through trade, commercial transactions and joint ventures, particularly in the areas of software and integrated circuits industries that are vital for information-based, network-centric warfare." A recent study by the RAND Corporation corroborates the Pentagon's suspicions over joint ventures and other commercial technology transfers aiding the Chinese military. The study stated that although not officially classified as part of the weapons industry, Beijing's IT establishment "is probably the most organizationally innovative and economically dynamic producer of equipment for China's military" [4].

In a separate report, the GAO also found that the Committee on Foreign Investment in the United States (CFIUS), the institution responsible for policing foreign acquisitions of U.S. assets that have security implications, has a "reluctance to initiate an investigation due in part to concerns about potential negative effects on the U.S. open investment policy" (GAO, September 2005). Last year, China's state-owned China National Offshore Oil Company (CNOOC) attempted to purchase the American-owned Unocal oil company, setting off a furor in Congress over whether CFIUS would sign off on the acquisition. The House of Representatives intervened in the process and passed a resolution that deterred the deal. The incident also spurred Senate action to strengthen the CFIUS process, as Beijing's enormous dollar reserves allow it to make strong bids for any number of U.S. firms. It is doubtful that CFIUS's performance will improve substantially, however, as the proposed "Foreign Investment and National Security Act of 2006" still leaves Treasury as the CFIUS chair, something strongly favored by corporate lobbyists (The Hill, October 18, 2005).

The recent appointment of Henry Paulson as secretary of the treasury could compound the problem. Paulson, the CEO of Goldman Sachs, led his firm in representing several of China's state-owned firms as well as the Beijing regime itself. Indeed, Goldman Sachs was involved in financing the aborted CNOOC-Unocal deal. Paulson will be a powerful new addition to the "business wing" of the Bush administration.

While its own policy has become more assertive, Beijing has capitalized upon the competing worldviews and interest group coalitions to play the two wings against one another and to prevent the formulation of a resolute U.S. policy. When a Chinese interceptor collided with a U.S. Navy EP-3 reconnaissance plane over international waters in April 2001, the Chamber of Commerce was in the middle of its own private diplomacy project, "A National Conversation with the Chinese Ambassador," a 10-city tour for Beijing's ambassador to the United States, Yang Jiechi. The tour's planned stop in Chicago on April 25 continued, giving Beijing another forum to explain its side of the dispute. After the crisis was resolved, the Chamber's president, Thomas Donahue, revealed his ranking of the issues, declaring, "We must strive to see the day when an occurrence like the spy plane incident last spring doesn't unravel our entire relationship" [5].

On his trip to the United States this April, President Hu did not get a state dinner at the White House. He did, however, have two lavish dinners held in his honor by the business community, first in Seattle before the summit, and then in Washington DC after the summit. The Chinese Foreign Ministry referred to the Washington dinner as an event hosted by "12 friendly organizations" led by the Chamber of Commerce and the U.S.-China Business Council (USCBC). As USCBC President John Frisbie remarked afterwards, "The high turnout for the dinner demonstrates the strength of support for advancing U.S.-China relations through engagement" [6].

Strategist Sun Tzu might see this situation and the opportunities it presented differently. As he advised, when making plans against an opponent, "if his men are harmonious, split them."

Notes

1. Robert B. Zoellick, "Whither China: From Membership to Responsibility?" Remarks to National Committee on U.S.-China Relations, New York City, September 21, 2005.
2. U.S. Chamber of Commerce, International Trade and Investment Priorities for 2005-2006.
3. For a study of how family, clan and cultural norms reinforce formal organization in the of spread technology across sectors in China see: George T. Haley, Usha C. V. Haley and Chin Tiong Tan, The Chinese Tao of Business: The Logic of Successful Business Strategy (John Wiley and Sons, 2004).
4. Evan Medeiros, Roger Cliff, Keith Crane and James Mulvenon, A New Direction for China's Defense Industry, (RAND Corporation, December, 2005), p. viii.
5. Statement by Thomas Donahue, July 2001.
6. Press Release, U.S.-China Business Council, April 20, 2006.

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