The China Challenge

With Holly Hart

Mike Wessel Roy Houseman

One Slide to Understand the Problem

How Did We Get Here? Modern History of US-China Trade Relations in One

Slide • 1971 “Ping-Pong” Diplomacy

• U.S. recognizes Mainland China as a Country in 1979 and a bilateral trade agreement was completed

• Tiananmen Square protests of 1989 led to cooling of trade relations.

• Congress passed and the President signed Permanent Trade Normal Trade Relations Oct 10, 2000.

Understanding the Chinese Economy

Understanding China’s Economy 101 on the Chinese Government and 5 year plans

All power within the government of the

People's Republic of China is divided among several bodies all run by the

Communist party of China.

5 Year Plans

13th five-year plan since the Communist Party took charge of China. Current plan is

from 2016 to 2020

Results of Overcapacity Count of AD and CVD orders by Country

Country AD CVD Grand Total

China 98 32 130

India 15 8 23

Taiwan 21 1 22

Korea 15 3 18

Japan 15 15

Vietnam 9 3 12

Indonesia 8 3 11

Turkey 5 5 10

Mexico 10 10

Brazil 7 2 9

Thailand 7 1 8

Italy 6 1 7

Russia 6 6

Ukraine 5 5

South Africa 3 1 4

Germany 4 4

Malaysia 4 4

Iran 1 2 3

Spain 3 3

United Arab Emirates 2 2

Issues in China China Recession

• Rapid Growth has led to Overcapacity issues (Zombie Factories) and “Ghost Cities”

• Yuan devaluation (aka Currency Manipulation)

• Kyle Bass, a US hedge fund manager who predicted the 2008 subprime mortgage crisis. – “The problems China faces have no precedent…

They are so large that it will take every ounce of commitment by the Chinese government to rectify the imbalances.”

Issues in China Environmental Issues

• Losing 6.5 percent of GDP to pollution-rated costs.

• More than 1.6 million people per year die in China from breathing toxic air.

• About 29% of San Francisco’s pollution comes from China.

Issues in China Worker Rights

• Workers cannot freely choose their collective bargaining representatives and lack laws requiring employers to collectively bargain with employees.

• Government Run Unions

• The right to strike was removed from the Constitution in 1982. – Strikes have been organically increasing

though in China.

Issues With China: Hacking Recent Cyber Intrusions from China Year Target Source of Attack

PLA Espionage 2014 Six U.S. entities involved in nuclear

power, metals, and solar power

Five PLA officers indicted in May

2014

USPS Espionage 2014 Personal data of 800,000 employees

of the U.S. Postal Service,

including Social Security numbers

and addresses.

China

Anthem Hack 2015 Social Security numbers and health

information of 80 million

Anthem users

“Deep Panda” (according to

CrowdStrike’s

analysis)

The Great Cannon Attack 2015 Chinese cyber weapon executed

distributed denial of service

(DDoS) attacks against U.S. websites

GitHub and GreatFire

Chinese government (according to

University

of Toronto’s Citizen Lab)

Mysterious Eagle Attack 2015 Journalists, dissidents, economic

data, and military organizations that

have a relation to China

Chinese government (according to

FireEye report)

OPM Hack 2015 Millions of sensitive and classified

documents, as well as

personally identifiable information

of over 22 million Americans

China is officially the “leading

suspect”

Engineering Universities Hacks 2015 Penn State University’s engineering

school, along with the school’s

500 research partners. Other U.S.

engineering schools hacked

include Johns Hopkins University,

Carnegie Mellon University, the

University of California-Berkeley,

and the Massachusetts Institute

of Technology

Chinese hackers (according to

FireEye’s

analysis)

United Airlines Hack 2015 Personal and flight information of

United Airlines passengers

Same group as the OPM hack

Issues With China National Security

• Each aircraft carrier requires 50,000 tons of steel plate

• Every Abrams tank needs 22 tons of steel plate

Infrastructure

• Bay Bridge

The Future U.S. China Bilateral Investment Treaty

US-China Bilateral Investment Treaty – the US-China BIT will allow Chinese investors to be treated the

same as US investors and will allow investors access to investor-state dispute settlement.

• 24th Round of Negotiations. • Close to agreement

U.S. companies had invested nearly $77.5 billion in China, and China had invested $46.6 billion in the

U.S. by the end of 2015. Bilateral investment increased by 0.6 percent year-on-year, reaching

$558.39 billion last year.

The Future China Non-Market Economy Status

China when it became a member of the World Trade Organization (WTO) agreed to certain restrictions regarding anti-dumping and countervailing duty laws because so much of the country is state

controlled.

One Provision in China’s Protocol of Accession to the WTO is set to expire.

WTO members are still allowed to base antidumping comparisons

involving Chinese products on something other than Chinese prices or costs unless individual Chinese producers can show that they operate

under market economy conditions.

75,000 SOEs in “strategic” sectors—e.g. telecom, oil, power, aviation and banking—from private competition. Another 80,000 SOEs

operating in unprotected sectors like hotels and real estate also benefit from easy access to cheap loans and land.