Hunter Addresses U.S.-China Economic & Security Review Commission

Press Release

Hunter Addresses U.S.-China Economic & Security Review Commission

U.S. Rep. Duncan Hunter (R-CA), senior Republican on the House Armed Services Committee, today addressed the U.S.-China Economic and Security Review Commission regarding the impact of unfavorable trade policies on defense industries in the United States and China. The congressionally-created commission was established to "monitor, investigate, and submit to congress an annual report on the national security implications of the bilateral trade and economic relationship between the United States and the People's Republic of China, and to provide recommendations, where appropriate, to Congress for legislative and administrative action."

Hunter's prepared statement follows:

"Madam Chairman Carolyn Bartholomew, Vice Chairman Daniel Blumenthal, Commissioner Mike Wessel, and Commissioner Peter Brookes, thank you for the opportunity to offer my perspective and concerns regarding the impact of trade policy on defense industries in the United States and China.

"This is an important topic—one that I have considered as a Member of Congress, as the Chairman and now Ranking Member of the House Armed Services Committee and as an American. I commend you for your focus and commitment to addressing the ‘tough' issues. Your work is important to Congress' oversight role and informs the policy direction of this nation.

"I appear before you this morning to share my perspective on our current trade policy with China; the implications for the U.S. defense industrial base; and how China is using American greenbacks to modernize its military.

"This issue is complex and often viewed through different lenses—on one end of the spectrum, there are folks like myself who see a near-peer economic and military competitor and those on the other end who see China as a vast economic opportunity.

"Those who share my view have watched China expand the pace and scope of its economic and military modernization efforts, have focused on China's near and longer-term strategic aspirations in the region and around the world, and have likely asked the following questions and reached the same answers:

"First, is China's rapid economic growth, its devaluation of the yuan, and its military modernization efforts ‘gouging' the American defense industrial base? The answer is Yes.

"Second, is China using proceeds from its growing wealth and gains from trade with the United States to develop military power projection, anti-access and aerial denial capabilities? The answer is another Yes.

"Third, has the United States exported critical defense components and technologies to China, which increases our dependency on China for our own defense needs? The answer is another Yes.

"Lastly, by moving defense factories and businesses abroad to nations such as China, have we jeopardized America's domestic capability to rapidly increase defense production during a time of war? The answer is a final Yes.

"While I will likely address some of these questions today, my purpose this morning is to share my views and raise additional questions that I hope this Commission will consider in follow-on discussions.

China Is Cheating on Trade by Devaluing Its Currency

"In 2006, China's trade surplus rose from $30 billion in 1994 to $232 billion—almost an eight-fold increase—and is expected to increase this year. This trading deficit is now larger than that with any other U.S. trading partner. One element that contributes to this trade deficit—China is cheating. China's currency—the yuan—is significantly undervalued by 40%, making it difficult for American manufacturers to compete fairly in the global market. It is this uneven playing field that undercuts American markets and wipes American products off the world's shelves. We've lost high-paying manufacturing jobs in the U.S. to China.

"One example that I use to illustrate what I call ‘China's one street advantage' is the following: If this table was made in China, and cost $100, and it's exported from China to the U.S., when it goes to the water's edge to be exported, the government gives a check to that company, for all their taxes. They give their taxes back at about 17%. So if this table was $100, they give them back $17 in cash. When an American table arrives to be sold in China, they give our exporters a bill for $17.

"Recently, Democrat Congressman Tim Ryan and I introduced the Currency Reform for Fair Trade Act of 2007, legislation aimed at China's ‘one street advantage' and leveling the playing field for American companies. I think this an area that requires attention and I encourage the Commission to identify other opportunities to ensure a fair market playing field for American businesses to compete.

China Is Using American Greenbacks To Fund Its Military Modernization Efforts

"China is using billions of American trade dollars to modernize its military force—from purchasing foreign weapons systems and technologies to indigenously building its own ships, planes, and missiles. China's economic growth has enabled it to sustain a trend of double-digit increases in defense spending. In March 2007, China announced that it would increase its annual defense budget by 17.8% over the previous year to $45 billion.

"This figure is widely accepted as a low estimate of China's defense spending. The recent Department of Defense's Annual Report on The Military Power of the People's Republic of China estimated that China's total military-related defense spending is more likely in the range of $85 to $125 billion.

"What is China buying? Here is a short shopping list of how China is spending its U.S. trade dollars: Russian-made SOVREMENNY II guided missile destroyers fitted with anti-ship cruise missiles—providing China with a capability to challenge American aircraft carriers; submarines, such as the KILO-class diesel submarine; a battalion of S-300PMU-2 surface-to-air missile systems with an intercept range of 200 kilometers; AWACS aircraft with air-to-air refueling capability; and sophisticated communications equipment.

"On the other side of the military modernization equation—American trade dollars are facilitating China's ability to mature their domestic defense industrial base. During a June 2007 House Armed Services Committee hearing, I shared by concerns with then Deputy Under Secretary of Defense Richard Lawless regarding China's maturing and massive commercial industrial capability, especially in the area of its ship construction capacity which could likely be translated into a warship construction capability and could threaten our ability to maintain a naval dominance in the Pacific region. In response, Secretary Lawless noted that countries such as Japan and the Republic of Korea, currently the world's leaders in shipbuilding capacity and capability, are now readjusting their projections from a belief that China will be a top-rank ship-building competitor in the next six years rather than the fifteen originally projected.

"What are the Chinese building? The Z-10, which is their first domestically produced attack helicopter; the Su-27SMK/Flanker through a co-production agreement with Russia, which is a high performance aircraft capable of effective warfare against America's top-line fighters; second-generation nuclear submarines, such as the JIN-class nuclear-powered ballistic submarines; the LUYANG II class destroyer with a vertical launch air defense system; the JL-2 submarine-launched ballistic missile; and the road-mobile DF-31A intercontinental-range ballistic missile. China also continues to show interest in developing an indigenous aircraft carrier capability.

"It is clear that China's economic growth is fueling its capacity to purchase foreign weapons and technology while improving its indigenous capacity for a self-sufficient defense industrial base. In addition to the Pentagon's efforts to understand China's military modernization efforts, I believe that this Commission can provide a vital role in helping Congress and the American people better understand the linkage between China's economic growth, its expenditures of foreign military systems and technologies, and its intentions to develop a sophisticated domestic industrial base.

The Erosion of the U.S. Arsenal of Democracy

"A large portion of America's industrial base is now moving to China, including part of the industrial base that we rely on for the American security apparatus. This nation is at war and our brave military men and women are conducting missions around the world. But today we defend freedom in the absence of a robust U.S. ‘arsenal of democracy'. Beginning with my father's generation through the Cold War—we depended on an American manufacturing base to produce the tanks, armored vehicles, and rounds of ammunition to equip our troops, and depended on American research and development (R&D) to ensure our military technologies kept our forces on the cutting edge. Today, if you want to find where critical elements of our arsenal of democracy have gone, you must look beyond America's shores to places like China.

"The following are two examples of our dependence on foreign suppliers for critical components for U.S. weapons systems: First, is the migration of manufacturing plants of top quality semi-conductor materials and printed circuit boards. Because the U.S. military's most cutting-edge microelectronic components use technologies that are no longer widely available in trusted domestic industries—the U.S depends on Chinese and other foreign suppliers. In a 2006 Institute for Defense Analysis report, analysts found that several Chinese companies ‘openly advertise their availability to reverse engineer microcircuits and recover sensitive data and intellectual property.' The report also identifies a number of Pentagon programs that have been impacted by counterfeit microelectronics manufactured by China. The possible scenarios for inserting malicious content into the microelectronics that control our combat systems, communications equipment, or weapons are limitless.

"A second example is the neodymium or ‘rare-earth' magnet used in a number of military guidance systems. The last U.S. firm that produced this high performance magnet was bought in 2003 and moved to China in 2005.

"These examples are not exclusive but reflect a trend in which the United States has outsourced some of its arsenal of democracy to foreign lands—and this is a trend that concerns me. As Chairman of the Armed Services Committee, we established a Strategic Materials Protection Board, charging the Department of Defense to create a process to identify items that are critical to national security and to identify those materials, should they be unavailable domestically, that would severely impair our national security.

"Unfortunately, the Department has not met its statutory requirement to meet and identify a plan to protect such materials. I welcome the Commission's thoughts on this topic.

Conclusion

"Much of the public's attention is focused on the ongoing military operations in Iraq and Afghanistan, but it is also important that we remain focused on all U.S. security interests.

"Over sixty years ago, in March of 1941—it was a Member of Congress—Rep. Carl Anderson from Minnesota who warned America about the danger of arming potential adversaries. A few months later on December 7th at Pearl Harbor, American ships were sunk, hundreds of planes destroyed, and thousands of Americans killed and wounded by a Japanese fleet that was indeed built with American steel and fueled with American petroleum.

"While we are in an age of ‘economic globalization,' we must not forget the history lessons of America's past."

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