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AIM Report: Time to Recognize the China Threat – March A

Everyone is in favor of free trade. But when trading practices erode the U.S. industrial and manufacturing base, which enables the U.S. to maintain a superior national defense, our ability to defend freedom is itself in jeopardy. The shocking facts, buried mostly in the business pages of our major papers, are unmistakable. The U.S. industrial base has become dangerously dependent on imports, and industries that provide materials critical to our national defense have been in serious decline.

For several years, with very little media coverage, a body called the U.S.-China Economic and Security Review Commission has been holding hearings and issuing reports on the national security implications of the bilateral trade and economic relationship between the U.S. and China. The commission members are Democrats and Republicans, conservatives and liberals. Yet they all agree that China’s trading practices have resulted in the erosion, some say the decimation, of U.S. manufacturing capacity.

One official of the commission told AIM they have received more coverage from the communist Chinese media than the U.S. press. The Chinese fear that the work and findings of the commission could spark outrage over the pro-China policy that has been pursued by successive U.S. administrations, from Clinton to Bush.

Such concern is starting to emerge. Saying that China is fast becoming the manufacturing center of the world, at the expense of millions of jobs here at home, a bipartisan group of members of Congress announced on February 9 that they are opposing “normal trading relations” with China, which used to be known as Most Favored Nation status. 

Continued U.S. dependence on foreign oil is an obvious problem that gets regular attention. But oil is just one aspect of the global resource war that pits the U.S. against China and even the European Union (EU). When he was president of the EU, Jacques Delor put his cards on the table in declaring that Europe had to be prepared to “fight the resource wars of the 21st century.” The EU has emerged as a major competitor to the U.S. and it could now enter into an alliance with China and become a major threat.

A controversy is starting to emerge in the press over the EU’s decision to lift its embargo later this year on arms sales to China. This will enable China to get access to advanced military technology to use against the Republic of China on Taiwan and the U.S. The embargo was imposed after the bloody 1989 communist crackdown on the democracy movement in Tiananmen Square.

Having used espionage agents to steal our most advanced nuclear secrets from U.S. nuclear laboratories, China is already in the process of developing and deploying modern nuclear weapons that can destroy the U.S. While the media focus on North Korea’s announcement that it may have a few nuclear weapons, Bill Gertz and Rowan Scarborough of the Washington Times cite a new report from the National Air and Space Intelligence Center that China will have 75-100 nuclear-capable ICBMs capable of hitting the U.S. in 15 years’ time.

While the press also focuses on events in the Middle East, the U.S. and China are engaged in a heated battle for resources from Latin America, traditionally regarded as America’s back yard. Anti-American President Hugo Chavez of oil-rich Venezuela has recently touted oil and gas deals he signed with the Chinese, part of a strategy designed to boost trade with the communist country to nearly $3 billion next year. China and Brazil, China’s largest trading partner in Latin America, have already declared a “strategic partnership” between them. China’s President Hu Jintao visited Argentina, Brazil, Chile and Cuba in November.

In a surprising development, China National Offshore Oil Corp., China’s dominant offshore oil and gas producer, is reportedly eyeing purchase of part or all of U.S. oil firm Unocal Corp. The Wall Street Journal noted that the notion of a Chinese state-owned company considering bidding for a 115-year-old publicly traded U.S. firm would have been largely unthinkable five years ago. “But the booming Chinese economy?and natural resources needed to sustain it?have sent the country on an acquisition binge,” the paper said.

Such developments are being regularly covered by the Journal, a business-oriented paper, and the business pages of many papers. But this has become a story that deserves front-page treatment because it has emerged as a national security threat.

Chinese Advance

In a little-noticed statement made at the World Economic Forum in Davos, Switzerland, in late January, William Parrett, chief executive of Deloitte Touche Tohmatsu, was reported by AP to have said that Chinese companies are making significant progress in becoming global giants.

China’s gross domestic product (GDP) grew by 9.7 percent annually between 1990 and 2003.

The U.S. trade deficit with the rest of the world, especially China, gets attention, but its national security implications are usually not highlighted.

The trade deficit, which reached a record $618 billion in 2004, has been considered manageable as long as dollars received for goods from foreign countries are invested in U.S. assets such as Treasury bonds. But as the trade deficit and indebtedness rise, foreign investors, led by China, may become more reluctant to buy dollars. This, too, has national security implications.

In another little-noticed statement delivered at the Davos event, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, was reported by the AP to have said that China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar “to a more flexible basket of currencies.”

China, in other words, has acquired the ability to disrupt our entire economy. While the U.S. wel-comes foreign investment in our economy, Chinese investment is a potential threat. That was demonstrated a few years ago when the Bush administration allowed a Chinese company to purchase GM’s Magnequench, the sole U.S. manufacturer of innovative “quenched” magnets used in the guidance system of “smart bombs,” and the factory was then moved to China.

Today, the U.S. no longer has a domestic producer of the rare-earth element neodymium, critical in the composition of the magnets. A spokesman for the Pentagon told AIM that “Seventy-five percent of the raw material used to make rare-earth magnets is currently supplied by China?China remains the most cost-effective source at this time.”

The 1988 Exon-Florio Amendment to the United States’ Defense Production Act of 1950 was passed to enable the president to block foreign acquisition of industries critical to our national defense. But President Bush didn’t use the law to block the Chinese acquisition of Magnequench.

The controversy over “out-sourcing” has generated some media attention because it involves corporations going abroad for workers and services. U.S. firms defend the practice as vital to maintaining their own global competitiveness and keeping the cost of goods and services low. But when outsourcing affects our industrial base, the U.S. ability to wage war and safeguard our freedom is at risk. 

AIM discovered that the U.S. currently has a foreign dependency ranging from 50 to 100 percent for natural materials such as beryllium, aluminum, copper, magnesium, cobalt, chromium, rare-earth elements, tin, platinum, tungsten, titanium (sponge), yttrium, strontium and more. Aluminum, beryllium, nickel-base super alloys, and titanium are critical for U.S. military aircraft and space systems. They are used to create metals used in everything from “smart bombs” to reconnaissance satellites, jet-engine turbines, telecommunications, electronics, electrical transmissions, and critical applications in the civilian transportation and medical infrastructure. 

In 1990, there were three U.S. producers of titanium sponge. Today, there is only one.

At the same time, the Chinese have also become the dominant global supplier of rare-earth elements, also called lanthanides. But in the U.S., owners of the Mountain Pass mine in California, one of the finest rare earth deposits in the world, have been spending millions of dollars over many years to resolve an environmental complaint that processing the element threatens the habitat of the desert tortoise.

The Mountain Pass example demonstrates how professional environmental organizations have played a critical role in making the U.S. more dependent on foreign resources other than oil.

We are so dependent on sources abroad that defense contractors are currently required to produce equipment with only 50 percent of components being American-made. When Rep. Duncan Hunter, R-California, pushed for an increase to 65 percent, defense contractors said it would drive them out of business.

The situation is alarming. Foreign dependence in time of war can result in disruptions to supply lines. During the current Iraq war, the government of Switzerland halted shipment of grenades to Britain and “smart-bomb” components to the U.S. because of its opposition to the U.S./British role in the invasion of Iraq.

William R. Hawkins, Senior Fellow for National Security Studies at the U.S. Business and Industry Council, says the plight of U.S. industry is in sharp contrast to the days of industrial complexes like Ford’s River Rouge complex in Michigan, where everything needed to manufacture an automobile was basically in one place. “Henry Ford wanted to oversee production of all the parts and components that went into one of his cars,” he said. “The result was an integrated operation: ships unloaded iron ore at one end of the complex while employees drove finished automobiles onto railroad cars at the other.”

The problem of dependence on foreign sources is illustrated in the civilian sector by what happened to Dell computer. Hawkins notes that while the computers are assembled in Austin, Texas, the parts come from hundreds of suppliers scattered around the world, from Malaysia to Korea, but clustered especially in Taiwan and China. When an earthquake struck Taiwan in 1999, Dell’s stock price fell, reflecting the company’s dependence on Taiwan for computer parts. When China threatened Taiwan with war over the island’s possible election of a candidate China did not favor, a similar stock decline happened.

Information technology (IT) jobs are also moving off-shore, and China is once again, along with India, a big winner. John Chambers, the CEO of CISCO, says, “China will become the IT center of the world, and we can have a healthy discussion about whether that’s in 2020 or 2040. What we’re trying to do is outline an entire strategy of becoming a Chinese company.”

Ironically, the U.S. is rich in natural resources and the U.S. was once the most favored region for investing in mining operations. Today, however, the U.S. is considered near the bottom of the scale in terms of accommodating such investments.         

Between 1997 and 2002, there was a 66 percent decline in U.S. mining exploration spending. One reason for this: obtaining a permit for copper mining in the U.S. can take from 4-8 years compared with 18 months for Chile.

“A CEO has to make the decision to stay in the U.S. and not get a return for those years, or go offshore,” says Luke Popovich, spokesman for the National Mining Association. “The permitting requirements are so onerous they are driving investment away off shore where there can be a much quicker return.” Popovich cites environmental pressures as the single biggest detriment to U.S. mining.

Making the permitting issue more vexing is the lack of any process to allow interested parties to track progress of the permit through the labyrinthine bureaucratic pathways. In addition, state agencies operate on the basis of different rules and regulations.

While the permitting issue remains obscure to the U.S. public, environmental groups get considerable and favorable media play by appearing to protect the natural environment and threatened or endangered plants and animals.

Bush administration officials recognize the problem. In his 1990 Annual Report to the President and Congress, then-Secretary of Defense Dick Cheney stated that the Pentagon was concerned with an alarming erosion in the U.S. industrial base. The report cited multiple factors, including the flooding of U.S. markets with cheaply made foreign goods. But when AIM recently contacted the Office of the Vice President and asked what he had done about it, we received no response.

Another issue in the U.S.-China relationship is human rights. President Bush said in his State of the Union address that the U.S. stands for freedom and democracy around the world. But reports of systematic human rights violations continue to emerge from China, with one of the latest cases involving 34-year old Jiang Zongxiu, who was arrested and then beaten to death by Communist police for passing out Bibles and Christian literature. Reports out of China clearly indicate that the regime is increasing its persecution and torture of Christians. What will the President, a fellow Christian, do about this?


While the newspaper headlines about Senate confirmation hearings for Condoleezza Rice involved exchanges over Iraq, Senate Foreign Relations Committee chairman Senator Richard Lugar had a headline of his own. He issued a release highlighting that Rice, who was confirmed as Secretary of State, had endorsed Senate approval of the controversial Law of the Sea Treaty (LOST), perhaps the most comprehensive treaty ever drafted.

The treaty, strongly backed by radical environmental groups, gives a U.N. body jurisdiction over the oceans and seas of the world, outside of a 200-mile national limit, and provisions in the pact outlawing marine pollution from “any source” would appear to mandate regulations over the land areas of the world that are supposed to be covered by the U.N.’s global-warming treaty. That treaty, known as the Kyoto Protocol, has never been ratified by the U.S. Senate because it would raise the cost of producing our energy, the worst violators are exempt from compliance, and the U.S. bears almost the entire cost, while doing nothing measurable regarding global temperatures. Patrick Michaels of Cato calls it “an economic weapon aimed at the U.S.”  

AIM has been told that Vice President Cheney, acting on advice from a friend, State Department official John Turner, has been the key official pushing ratification of the treaty. Some U.S. military officials also back it, thinking that it will guarantee freedom of navigation on the seas.

What has been ignored is how the treaty creates a U.N. agency, the International Seabed Authority (ISA), to collect taxes on U.S. mining firms and distribute the revenue to the  rest of the world. It is a scheme that some U.N. observers, citing the U.N.’s corrupt oil-for-food program, say the world body should not be trusted with.

In a 1995 study, the pro-U.N. lobby group, the U.N. Association of the United States of America, admitted that, “Only the Seabed Authority created by the U.N. Convention on the Law of the Sea, which entered into force in late 1994, has authority today to directly collect international revenue to finance its activities.”

The bureaucratic language in the treaty’s Agreement Annex, Section I (6)(a)(ii), specifically requires a fee of $250,000 for exploration permits. The language of the treaty also authorizes some revenue from mining operations to be diverted to the parties to the treaty. 

On his website, Lugar, a favorite of the media because of his “moderate” stance on issues, insists that the ISA “has no authority to levy taxes.” However, he goes on to say that, “The Convention does contemplate the elaboration of rules for payments of royalties to the ISA from revenues generated from deep seabed mining. Under the Convention’s rules, such royalty payments would be used to cover the ISA’s expenses?Should any surplus revenues be generated, they could be used in certain cases to provide economic assistance to developing countries.”

So not only would the mandatory payments go to the ISA but the “surplus revenues” would be transformed into another form of foreign aid for the Third World.

Lugar’s misleading language is reminiscent of the book, Doublespeak, documenting how politicians and others sometimes conceal the real facts. Few politicians want to openly propose new taxes on the American people. So taxes become “royalties” or “revenue.” 

Lugar held hearings on LOST and his committee unanimously approved the treaty in late February 2004. But that was before the Wall Street Journal’s editorial page and other publications had subjected it to scrutiny.

Majority Leader Bill Frist, who could have scheduled the treaty for a full Senate vote (requiring 67 votes for passage), said that the schedule was tight last year and there wasn’t enough time. With a new Congress now in session, the measure has to once again be voted out of the Lugar committee. Then it will be up to Frist to decide what to do.  

Led by the New York Times, liberal publications and news-papers have been pressuring Frist to bring it up for a vote and have been using name-calling against treaty opponents.

The Chattanooga Times Free Press in Frist’s home state of Tennessee, for example, claimed that Frist was yielding to the “far right” by failing to act on the treaty. In Lugar’s home state of Indiana, the Ft. Wayne Journal-Gazette ran a story by Washington editor Sylvia A. Smith that referred to opponents of the treaty as “conservatives and isolationists.”

Smearing Conservatives

The term “isolationists” is really a left-over from the days before the U.S. confronted Hitler in World War II, when some were arguing that the U.S. should not get involved in European wars.  As such, the term “isolationist” has a connotation of being na?ve or ignorant about foreign affairs.

The media have an obligation to report the facts, not smear treaty opponents. They also have the duty to report the truth when politicians try to avoid it.

What You Can Do

Send the enclosed cards or cards and letters of your own choosing to NBC News President Neal Shapiro [1], U.N. Correspondents Association President Jim Wurst [2], and CNN News Group President Jim Walton [3].