Where Industry and Security Intersect
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I. INTRODUCTION
I would like to thank CSIS and all of you for the opportunity to be here today. I'm delighted to be able to speak about U.S.-China policy, and more specifically, high technology trade.
The emergence of China as a major economic power is one of the most important developments of the 21st century, requiring review of many facets of U.S. policy. How the United States deals with China's growing influence is a central question not only for this Administration, but for future generations of Americans.
The Bush Administration has responded to China's rise by encouraging it to act as a responsible stakeholder – that is, to take greater responsibility for the health and success of the global system from which China has significantly benefited. Our goal is straightforward: that China's development be both peaceful and prosperous. U.S. export control policies that facilitate legitimate civilian technology trade while discouraging China's military buildup are critical to this objective.
Achieving this careful balance requires looking not only at what technologies are being sold, but for what purpose and to whom. The same product that is benign when used for civilian purposes could be problematic if used for military ones. For example, U.S. policy should facilitate sales of American-made semiconductors to companies in China for use in stereos or a child’s Game Boy, but not for advanced missile systems or submarines.
With this example in mind, my argument today is a simple one: we can do both. Strengthening our economic interests and our security interests in China need not be a zero sum game. Today I will describe an update to U.S. export control policy that advances both U.S. security and economic interests, and in doing so encourages China to be a responsible stakeholder now and in the future.
II. THE OPPORTUNITY
The rapid economic growth and expansion of U.S.–China cooperation presents enormous opportunities for both countries. Today, China is the United States' third largest trading partner, with overall U.S.-China trade reaching $285 billion in 2005. And by most relevant measures, China's GDP is roughly $2.3 trillion, the world’s fourth-largest economy after the US, Japan, and Germany .
Yet this new found prosperity is unevenly distributed. Although the World Bank recently found that the proportion of Chinese in poverty has fallen dramatically over the past 20 years, 160 million Chinese still live on less than $1 per day. This growing disparity in wealth has contributed to social tensions within China. Thus, with new wealth comes new obligations. Expanding the ring of prosperity from the wealthy coastal cities to Central and Western China is a critical step in China's development – and technology is a critical component of China's next phase in this transformation. From my discussions with Chinese officials on a recent visit to China, I can assure you that China's leadership recognizes these challenges.
To highlight the challenge but also the opportunity, consider one example, the ARJ21 Regional Jet Program. This is a consortium of Chinese aircraft manufacturers and ten American companies that are providing the majority of components for this project. This collaborative effort is no small feat - the program was created as a consequence of China's plan to build 100 new airports over the next decade in order to bind the country together in the absence of comprehensive road and rail connections. This strategy also requires, I’m told, hundreds of jets in the coming years.
U.S. technology is key to fulfilling this need and in helping to develop this project, a project critical to the continued development of China.
While important to China, programs like this are also important to the United States . This will benefit American companies with near term profits, but also more important, help the United States maintain its leadership - leadership critical to national security I might add - in the manufacture of high technology aerospace products.
Opportunities such as this in China are plentiful, and I’m happy to say American companies are capturing many of them. Since China became a member of the WTO in 2001, U.S. exports to China have grown five times faster than they have to the rest of the world, with technology exports being a key driver of this growth. Top exports to China from the United States range from electrical machinery and equipment to power generation equipment. In 2004 alone, the United States exported $2.9 billion worth of semiconductors to China . This, and related electronics markets in particular, are growing at a blistering pace. And these exports create jobs at home. As an example, Caterpillar has over the last few years increased its U.S. exports to China by 40%, helping to create some 5,000 new jobs here in the United States.
In short, a fair and growing U.S.-China trading relationship will be a critical factor in the economic and political successes of both countries, and we must find ways to encourage the growth in legitimate civilian technology trade.
III. THE CHALLENGES
Yet, there are real challenges. We must have a very careful and candid dialogue with China about areas of concern. Let me highlight several such issues.
Intellectual Property Rights remain a very important subject. The foundation of America's competitiveness is a knowledge-based, innovation-driven economy. And that economy depends not only on a well-educated and skilled workforce, but also global intellectual property protection. A responsible stakeholder should not tolerate widespread theft of intellectual property. Not only is piracy of ideas rampant in China, but also two-thirds of all the phony goods seized by U.S. Customs come from China . In addition, we know that 90 percent of the software sold within China was pirated.
IPR is also critical for the development of China's own indigenous technology industry. And China's most successful high tech companies recognize this. For example, the CTO of Huawei, a Chinese company with what many view as a mixed history on IP protection, recently expressed to me a real concern for IPR as they seek to go global. While I was in China, I also sat down with the Chairman of Lenovo, and he voiced his reservations about the protection of his company’s IP in China . President Bush and Commerce Secretary Gutierrez have made clear that rigorous intellectual property protection is a crucial building block for strengthening U.S.-China relations. This is - and will continue to be - an important component of our ongoing discussions with the Chinese government.
Human Rights is another issue of concern. Acting as a responsible stakeholder goes beyond economics, in particular it requires a renewed emphasis on human rights. We will continue to encourage China's leaders to implement a system based on the rule of law and to reform its judiciary not only for investment and economic reasons, but to protect human rights.
Although there is greater economic openness in China, the political system remains closed, and this is a feature of Chinese society that history and logic would suggest is unsustainable. As China continues to develop, more Chinese will seek a greater say in their future and push for improvements in China's weak protection of individual rights.
These issues are crystallized in the questions that you have perhaps seen recently in articles regarding internet censorship. How can one open a society to trade and maximize the flow of information that it requires, but also maintain the political restrictions that China has tried to impose? In the long run, you cannot. And finally, as President Bush has discussed with President Hu, the United States will also continue to urge China to open possibilities for greater religious freedom. Ultimately, it will be in China's interest to move toward a more open, rights-based society.
China's military modernization is a third area of concern, and one which is particularly central to export control policy. As documented in a recent RAND study, China has a clear strategy to strengthen its military capabilities by acquiring advanced dual use technologies and incorporating them into defense systems. And it is important to note that China's growing and nontransparent military budget has risen faster than its overall economy. From 1994 to 2004 China’s GDP grew at an average annual rate of almost 10%, while its declared military budget grew at an annual average rate of ~16% over the same period, meaning that it could be as high as $90 billion in 2005. This would place China third in defense spending after the United States and Russia.
As stated in a recent Defense Department report, China's “capabilities could pose a credible threat to other modern militaries operating in the region” if current trends persist. China has focused on obtaining high-tech military acquisitions, in order to build its missile capabilities and naval forces. And, also of concern, China's record on non-proliferation of WMD has been far from perfect.
As a consequence of this uncertainty in both capabilities and intentions, the United States and other countries in the region must, by necessity, hedge their bets. For example, the cutting edge composite technology that helps China build commercial aircraft must not also find its way into the Super-7 next generation fighter aircraft. Therefore, U.S. policy – export control policy in particular – must reflect this caution and this concern.
OUR PLAN
Our changes to China Export Control Policy will do just that by achieving these two complementary objectives – growth in civilian high tech trade and enhanced security. The Bureau of Industry and Security has made real progress in evolving our strategic trade controls in the past several years in ways that have been beneficial for both the United States and China . A most recent example is the announcement during the JCCT of the High-Tech Strategic Trade Working Group with the specific mission of improving the effectiveness of export controls and growing legitimate civilian technology trade. And we have an increasingly healthy high-tech trade relationship with China with over $12 Billion in U.S. high-tech exports to China last year.
For certain technologies, our new policy will free future trade of dual use items with certified importers in China for civilian purposes. U.S. exporters seeking to grow market share in critical sectors such as semiconductor equipment and electronics will be spared the need to apply for licenses for potentially hundreds of millions of dollars worth of sales to these companies in China.
This aspect of the policy, however, not only frees up legitimate trade, but also increases U.S. security by ensuring closer scrutiny of key technology purchasers in China . To become eligible, Chinese companies must demonstrate an established record of nonproliferation and responsible civilian use of U.S. imports. This process will require unprecedented openness and cooperation on the part of Chinese companies. And it will create incentives for them to demonstrate good faith and sound practices. In addition, it will allow U.S. government officials to focus on more complex cases with more severe implications for American security.
The new policy will also bolster U.S. security by preventing exports of technologies for incorporation into Chinese weapons systems. It is not a wide-ranging “catch-all regulation” that subjects everything from fountain pens to office furniture to government scrutiny. Rather, these changes carefully target certain technologies that, while unrestricted until now, have the potential to materially enhance China's military capabilities. The Administration will also urge others, particularly in Europe and Japan, to take similar steps. And we will continue to conduct on-the-ground spot checks in China to reduce the risk that civilian exports are diverted to third parties or to China's own military purposes.
Given the Chinese military’s appetite for cutting edge technology, this approach is prudent and fully consistent with America’s longstanding embargo of military sales to China. By denying only those exports destined for military use, the impact on industry will be lessened. The estimated cost in lost markets from this restriction is small while the gain in security substantial.
CONCLUSION
Ladies and Gentlemen, in conclusion, too often policies involving national security and economic objectives are portrayed as zero-sum, requiring tradeoffs that inevitably promote one at the expense of the other. These changes to technology export controls for China are a “win-win”. They enhance both U.S. economic and security interests while encouraging China to act as a responsible stakeholder now and in the future.
Thank you for your interest in this important topic, and at this time I’d be happy to answer your questions.