Investing in the Nation - China that is

You've probably never heard of the United States-China Economic and Security Review Commission, or USCC. Created in 2000, they research and review economic and security ties with China. Yes, someone, somewhere is trying to monitor the situation.

Today this commission held a hearing, " Research and Development, Technological Advances in Key Industries, and Changing Trade Flows with China".

Guess what folks! China doesn't want those low end jobs or even manufacturing as a long term economic strategy. Nope, they are going for high end research and development in key technical areas!

Walsh open statement:

China has moved into a new phase in its long-term development strategy that now prioritizes science and technology (S&T) as the main driver of China’s continued modernization drive

From Bringing R&D to China:

  • China's research and development (R&D) spending has been growing about 17 percent annually over the past 12 years.
  • By the end of 2007, multinational corporations had established 1,160 R&D centers in China.
  • Human resources and intellectual property protection are the main operational challenges facing R&D centers.

Charles McMillion testified and his 2007 report is listed in the studies page.

Here are some key points from his statement:

China’s real annual GDP growth accelerated sharply after China gained admission to the World Trade Organization in January 2002, averaging 10.5% growth per year with growth of 11.9% in 2007. This is more than twice the growth rate of the global economy and four times the average 2.6% GDP growth in the US.

Consumer, investor and government spending growth in China also has been spectacular. Growth in industrial production since 2002 averaged 15.5% per year in China compared with US growth of 1.8%.

McMillion is backed up by this KPMG report, Global Corporate Capital Flows, where KPMG states China will exceed the United States in investments in five years.

Director, Program on Science, Technology, America, and the Global Economy, Kent Hughes, answered 5 questions in written testimony. It's so damning, I am listing them all here (heavily edited, go to the link to read the full testimony):

  • Question 1: Is Chinese R&D becoming more focused on basic, rather than applied, research?

    China is intent on becoming an innovative power and has moved to increase its focus on basic R&D, almost all of which is state-funded. Rather than focusing on well-defined frontiers of knowledge, they are seeking to become a force in newer, less well-developed fields such as nanotechnology.

    They are investing in education, encouraging the return of Chinese who have studied and worked overseas, and, generally, working to expand their talent pool.

    They have, however, a long way to go. Research is still heavily concentrated on applied research that will support key industrial and other national goals.

  • Question 2: Is China able to capitalize on the R&D undertaken in China by foreign-invested companies?

    China is able to capitalize on much of the foreign R&D taking place in China -- directly or indirectly through the circulation of personnel.

    Early R&D investments by multinational corporations (MNCs) were focused on adapting products to the Chinese market and were often linked to their manufacturing facilities in China. In the last few years, however, MNCs have shifted toward establishing R&D facilities that can be part of their global R&D strategy.(10) For the most part, these investments have been concentrated in the information technology (IT) or computer fields. But, by 2006, a number of pharmaceutical and chemical companies had indicated their intent to undertake R&D investment in China as well.(11)

  • Question 3: Does China's government dictate the nature and scope of R&D projects?

    The Chinese government funds almost all the basic research in China and sets broad areas for R&D research toward the fulfillment of national goals.

  • Question 4: What do China's R&D activities reveal about its economic and national security goals?

    China's R&D activities indicate a three-fold strategy: first, use applied research and incentives for foreign direct investment to strengthen industry, foster rural development, and close the technology gap that exists between China and the advanced industrial nations.

    Second, concentrate research on a few areas of science and technology that are not yet well-defined. Nanotechnology and aspects of biotechnology would be prime examples.

    Third, China intends to become an innovative power with reliance, to a considerable degree, on home-grown technologies.

  • Question 5: What ties exist between the military, the universities, and the state-owned companies cooperating on R&D?

    National security -- including access to hydrocarbons and other key commodities -- is a clear Chinese priority. Dependence on imported petroleum and the concern over secure supply lines has dictated the global reach of Chinese investments and diplomacy. Logically, it should also require modernization of the Chinese Naval Fleet.

    The extensive contribution of MNCs in building the Chinese IT, electronics, and aerospace sectors creates the potential for strengthening the Chinese military.

Focusing in on the auto industry, Lehigh University Professor, Dr. Qingjiu Tao stated

A typical Chinese auto worker earns $1.95 an hour against a German counterpart making $49.50 an hour.

So, along with heavily state backed R&D initiatives we have cheap labor to back up results in manufacturing.

Another issue raised are offsets. Offsets are defined as either direct or indirect requirement of investment, production, purchase from the customer in order to make a sale to that customer. In other words, it's kickbacks or paybacks packaged up to sound nice and at the national level.

Owen Herrnstadt, Director of the Department of Trade and Globalization, International Association of Machinists and Aerospace Workers, AFL-CIO, discussed offsets:

Far from embracing any sort of effective industrial policy when it comes to aerospace, the U.S. government continues to relegate policy development in this area to private parties. One activity that dominates the aerospace industry and that is sorely in need of regulation is the use of offsets. Offsets occur when one country demands a transfer of technology and/or production in return for a sale.
Despite their prevalence in the aerospace industry, very little is known about offset deals. Most of the very limited information that is reported is anecdotal and concerns offsets in the defense industry. Much less is known about offset deals in the commercial industry and even less is known about indirect offset deals.

Little is known about offsets, in part, because much of the activity is carried on in private under few government regulations. The inherent weakness in leaving the use of offsets virtually unregulated is obvious — private U.S. companies must compete with foreign companies that have the full support of their governments. If a sale means transferring production and/or technology, private companies are in a difficult position. Given that their interests do not always align with the national interest, they can be expected to maximize corporate returns, even though the use of offsets, which can deeply affect an industry as essential to the nation’s economy and security as aerospace, can be detrimental to U.S. national interests

Get that? Herrnstadt is saying no one is monitoring, knows, is regulating the sell out of US national interests and jobs that multinational corporations are doing in order to make a sale.

How many of you have heard about offsets in the main stream press? How many of us are even aware these are totally unregulated? How many other assets and American interests have been sold out in order to get a fast buck, to land a multibillion dollar contract? Do we even know if the total payout is worth the deal?

What is more foreboding is the testimony of Dr. Ernest H. Preeg, Senior Fellow, The Manufacturers Alliance.

What becomes clear is not any debate if China is encouraging multinational corporations to transfer knowledge and technology to China for the purposes of boosting their own indigenous R&D agenda, but when China will ebb in incentives to foreign multinational corporations to obtain knowledge and technology transfer, upon which their own companies will originate R&D as Chinese owned in total R&D facilities and businesses.

McMillion concludes with:

The enormous external imbalances in China’s rapid economic and trade modernization now adversely threaten not only the US but the EU as well. This would seem to be an opportune time for bold, cooperative policies in the common interest.

I'd say so!