China encourages foreign manufacturing to relocate to China and uses strict capital controls to keep the value of the RMB artificially low.

China’s industrial policy is also aimed at promoting the manufacture of higher-technology products, replacing lower valued-added and labor-intensive products.

Indeed, Beijing’s industrial policy was a contributing factor to the imbalances that led to the global financial crisis that affected the economies of rich and poor nations alike.

• The policies that China adopted generated a huge flow of liquidity—or money that can be easily lent to borrowers—into U.S. markets. This excess liquidity created perverse incentives in the United States that encouraged banks to make risky loans to U.S. households, which in turn grew ever more indebted. High U.S. demand for imports allowed China to save even more, creating a vicious cycle and laying the foundation for the current crisis.
• In response to the crisis, China introduced a fiscal stimulus package, raised rebates to exporters, and introduced other measres supporting the manufacturers in the export sector. This will only exacerbate overcapacity, aggravating the overall problem. China has also taken some steps to increase domestic consumption, but they are far outweighed by measures supporting exports.

China’s Industrial Policy and its Impact on U.S. Companies, Workers, and the American Economy

• China’s economic reforms were not based on traditional free market principles. China’s policy during the past 30 years has instead relied on a government-directed industrial policy to promote certain segments of the economy over others and to bolster export-led growth.
• China’s more recent Five-Year Plans have shifted the emphasis away from labor-intensive operations and toward increasing the production of high-technology goods. China has matured as a manufacturer and assembler of advanced technology products and as a consumer of electronics and information technology products. The low cost of labor along with government investment in high-tech industrial parks—and a variety of direct and indirect subsidies—created an attractive environment for foreign companies to invest in China, particularly after China joined the WTO in 2001.
• China provides subsidized land, energy, and water to many foreign manufacturers who relocate their operations in China. By providing these benefits, along with a cheap labor force without the ability to bargain collectively or join independent unions, the Chinese government has created a low-cost haven for foreign manufacturers. China’s subsidies have grown over the years and now include tax incentives and preferential loans, which further reduce the cost of investing in China.
• China has consistently used a 17 percent value added tax (VAT) as an instrument of industrial policy. China selectively rebates the VAT when a domestic manufacturer exports but imposes it on imports. The United States, on the other hand, does not use the VAT and is not allowed by WTO rules to rebate income taxes on exports. China’s VAT policy therefore places U.S. exports at a distinct disadvantage.

• Employing World Trade Organization trade remedies more aggressively. The Commission recommends that Congress urge the administration to employ more aggressively all trade remedies authorized by World Trade Organization rules to counteract the Chinese government’s practices. The Commission further recommends that Congress urge the administration to ensure that U.S. trade remedy laws are preserved and effectively implemented to respond to China’s unfair or predatory trade activities.
• Responding effectively to China’s currency manipulation. The Commission recommends that Congress urge the administration to press China to allow the RMB to become flexible and responsive to market forces, thereby contributing to the correction of global economic imbalances. The Commission further recommends that Congress consider legislation that has the effect of offsetting the impact on the U.S. economy of China’s currency manipulation.
• Evaluating the impact of China’s value added tax. The Commission recommends that Congress urge the United States Trade Representative to evaluate the use of selective value added tax rebates by China and their trade-distorting effect and determine what steps, if any, should be taken to address the issue.
• Reporting on the implications of Chinese subsidies to the U.S. clean energy sector. The Commission recommends that Congress urge the Department of Energy, in consultation with other appropriate agencies, to report to Congress on the impact of Chinese subsidies and other elements of China’s industrial policy on U.S.-based companies manufacturing clean energy products.
• Ensuring adequate funding to limit China’s antiaccess capabilities. The Commission recommends that Congress assess the adequacy of planning and resourcing of Department of Defense programs that would limit China’s antiaccess capabilities. In particular, Congress should focus on antisubmarine warfare and ballistic missile defense programs. Congress should also assess the adequacy of funding and resources for the Department of Defense’s Pacific Command. of Defense’s Pacific Command.
• Meeting the rising challenge of Chinese espionage. The Commission recommends that Congress assess the adequacy of resources available for intelligence, counterintelligence, and export control enforcement programs to ensure that U.S. government agencies are able to meet the rising challenge of Chinese human intelligence and illicit technology collection.
• Ensuring adequate funding to respond to computer exploitation and computer attack. The Commission recommends that Congress assess the effectiveness of and resourcing for law enforcement, defense, and intelligence community initiatives that aim to develop effective and reliable attribution techniques for computer exploitation and computer attacks.