endeavor to expand to meet the needs of these Chinese markets. 74
Chinese Holdings of US Securities
As noted above, China remains a large foreign holder of US Treasury secur-
ities, and thus a large foreign financier of the US federal budget deficit. It
held $1.17 trillion in US Treasury securities in May 2012 and $1.11 trillion
in October 2016; its share as part of foreign holdings of US Treasury secur-
ities has declined recently, representing 18.5 percent in October 2016. On
one hand, US government leaders and other Americans encourage Chinese
investment in such US securities as a means for the United States to meet its
investment needs and to fund the large US federal budget deficit. On the
other hand, US policy makers at times have raised concerns that the Chinese
investment could give China increased leverage over the United States on
major economic or other issues. For example, some Chinese officials have
been reported to suggest that China could dump (or threaten to dump) a large
share of its holdings in order to prevent the United States from imposing
trade sanctions against China. Other Chinese officials judged that China
should diversify its investments of its foreign exchange reserves away from
dollar-denominated assets to those that offer higher rates of return. The glo-
bal economic crisis beginning in 2008 heightened US concerns that China
might reduce its US assets holdings. 75
Practices a few years later seemed to support the arguments of those who
judged that China’s holdings of US debt didn’t provide much practical lever-
age over the United States. They argued that, given China’s economic depen-
dency on a stable and growing US economy, and its substantial holdings of
US securities, any attempt to try to sell a large share of those holdings would likely damage both the US and Chinese economies. Such a move could also
cause the US dollar to sharply depreciate against global currencies, which
could reduce the value of China’s remaining holdings of US dollar assets.
Responding to a congressional reporting requirement, the Department of
Defense in 2012 came down strongly in favor of this skeptical view of
Chinese leverage that would result from holding US government securities. It
said, “Attempting to use US Treasury securities as a coercive tool would
have limited effect and likely would do more harm to China than to the
United States. As the threat is not credible and the effect would be limited
even if carried out, it does not offer China deterrence options, whether in the diplomatic, military, or economic realms, and this would remain true both in
peacetime and in scenarios of crisis or war.” 76
Economic and Environmental Issues in Contemporary US-China Relations
207
Growing Chinese Investment in the United States and Restricted
US Investment in China
With Chinese investment in the United States on the rise, the American
debate on the perceived pros and cons of the investment has intensified. On
one side are many US specialists and advocates who judge that greater Chi-
nese FDI in the United States will create new jobs for US workers and have
an overall beneficial economic impact on US interests. As Chinese invest-
ment abroad is growing rapidly, they urge more efforts in order to attract
increased foreign investment in the United States. On the other side are
American specialists and critics who assess that Chinese investment is geared
toward unfair, state-directed industrial policies designed to improve the com-
petitive position of Chinese firms through mergers and acquisition of US
technology. They see Chinese firms as directly or indirectly controlled by
Chinese officials bent on acquiring US economic assets in a drive to outper-
form the United States in higher-valued industries and services. There also is
a growing concern of China using investment to gain access to secret US
national security technology. 77
Reinforcing these arguments are rising American concerns over growing
restrictions on American and other foreign investments in China. The restric-
tions especially involve the many highly protected sectors of the Chinese
economy that are being developed by the state as “national champions,”
which are seen as designed to dominate the Chinese and international mar-
kets at the expense of America’s leading firms in advanced production and
technology. Such practice reinforces the view that China’s growing acquisi-
tions of high-technology American and other foreign firms are part of an
overall industrial strategy that comes at the expense of the United States. 78
OPTIONS FOR US POLICY ON TRADE AND INVESTMENT
Whether the rising American concerns over trade and investment issues will
result in significant change in American policy remains uncertain. One clear
result of the overall hardening of American attitudes on economic issues with
China has been to weaken the US-China convergence on economic interests
that served as an important positive ballast for the relationship in the past. 79
Although the Chinese government obviously sees China benefiting great-
ly from the development of US-China economic relations in recent decades,
it also has numerous complaints about American trade and economic prac-
tices. They include US restrictions on Chinese acquisition of US high tech-
nology, US refusal to treat China as a market economy under WTO rules, the
complications posed by what is seen as the United States politicizing and
exaggerating various economic disputes with China, and the faulty American
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Chapter 9
leadership that resulted in the massive international financial crisis and recession beginning in 2008. 80
Going forward, it is quite possible that US administration leaders—as in
previous US governments—will see overall US interests with China best
served through a process that deals with economic disputes through high-
level dialogue that avoids sharp negative changes in policy. The Trump
administration has a number of senior officials who favor a tougher stance
toward China on trade issues than seen in previous governments, but they
may be offset by administration leaders who are less inclined to take negative
economic actions for reasons related to US economic interests or to Ameri-
ca’s broader need for a cooperative policy with China.
If tougher American measures toward China are supported, they are likely
to follow paths that will involve such steps as increasing the number of
dispute settlement cases brought against China in the WTO, threatening to
impose trade sanctions against China unless it addresses policies (such as
cyber theft of US trade secrets) that hurt US economic interests, and making
greater use of US trade remedy laws (such as antidumping and countervailing
measures) to address China’s “unfair” trade practices. Restrictions on Chi-
nese acquisitions of high-technology US firms are probable parts of this
mix. 81 The wide range of experts contributing to the 2017 Asia Society report on China policy saw major weaknesses in existing US economic policies toward China and called for across-the-board efforts involving the Unit-
; ed States and allied countries to pressure China for needed changes through
direct application of sanctions, tougher application of existing laws, and
bilateral and multilateral negotiations with China. 82
ENVIRONMENT AND CLIMATE CHANGE ISSUES
The George W. Bush administration was notorious among environmental
activists concerned with global warming and climate change. Under the lead-
ership of President Bush, the US government took the lion’s share of domes-
tic and international criticism for policies and practice seen as at odds with
growing international efforts supported by various developed and developing
nations to curb environmental pollution, greenhouse gas emissions, and glo-
bal climate change. Emblematic of Bush administration policies and of the
reasons for international and domestic criticism of those policies was the US
government’s refusal to support the Kyoto Protocol on climate change. 83
China’s rapid economic development has been accompanied by massive
air and water pollution and greenhouse gas emissions; the country has
emerged as the number-one emitter of greenhouse gases. China’s poor record
in reversing environmental degradation associated with its rapid economic
development and in curbing the rapid growth of greenhouse gas emissions
Economic and Environmental Issues in Contemporary US-China Relations
209
from Chinese power plants, factories, and other sources has been widely
acknowledged even by Chinese leaders. But for many years, Chinese policies
and practices failed to generate much friction between the Chinese govern-
ment and a US administration under constant international and domestic
attack for its alleged passive or even hostile approach to key aspects of
international efforts to curb global warming, climate change, and related
environmental degradation. 84
This situation began to change dramatically with the approach of the US
presidential and congressional elections of November 2008. All the US presi-
dential candidates and the vast majority of congressional contenders prom-
ised to shift US policy regarding environmental degradation and climate
change. In fact, the shift began in earnest in 2009, setting the stage for
Americans and others concerned with environmental pollution and climate
change to view Chinese policies and practices in a new, more attentive, and
more critical light. 85
The incoming Obama government chose to build on mechanisms inherit-
ed from the outgoing Bush administration and engaged in bilateral dialogues
with Chinese counterparts seeking forward movement on environmental and
climate change issues. Others, in Congress, the US media, and among a wide
range of American activists associated with global warming and environmen-
tal issues, tended to be more vocal and critical regarding China’s environ-
mental record. As the United States moved to take action on environmental
protection and climate change, American officials, especially in Congress,
and public opinion were often explicit in expecting no less of China. 86
Against the backdrop of prominent policies and efforts by senior Chinese
leaders beginning in the 1990s to curb environmental damage and limit ad-
verse consequences of economic development such as greenhouse gas emis-
sions and climate change, the Chinese government over the past ten years
undertook a new series of steps in order to improve efficiency in the use of
energy, curb environmental damage, and check possible damage to China’s
international standing as a responsible actor in world affairs. During that time frame, it remained hard to gauge how well these steps would work in actually
curbing environmental damage associated with Chinese development, in off-
setting international attention to China’s negative record in areas of pollution and climate change, and in avoiding serious disputes with the Obama government more sensitive than the previous US government to issues of environ-
mental degradation and to China’s important role in those matters. 87
The Obama government seemed to seek to avoid major friction with
China as it sought common ground on important issues like global economic
revival, North Korea’s nuclear weapons development, and terrorist threats
and instability in Southwest Asia. And China’s recent emphasis on improv-
ing the efficiency of China’s energy use reduced to some degree the gross
waste involved in Chinese consumption of coal and other resources. Never-
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Chapter 9
theless, Chinese carbon emissions continued to rise dramatically. In 2010
China’s total carbon dioxide emissions rose by 10 percent, marking a dou-
bling of the country’s CO emissions since 2003.
2
Moreover, the United States and China continued to stress different ap-
proaches to international climate change negotiations, producing frequent
frictions, notably in the international climate change summit at Copenhagen
in December 2009. Disagreements centered on the relative responsibilities of
developed and developing countries for addressing climate change. China,
along with many other developing countries, long argued that developed
nations bear the major share of the historical responsibility for climate
change and continue to have far higher levels of emissions per capita, so they
alone should be subject to legally binding commitments to reduce emissions.
Developing countries’ reductions should be voluntary. Chinese officials
viewed attempts to force developing countries to accept legally binding emis-
sions targets as an attempt to restrict those countries’ rights to develop. In the United States, the Congress and the Obama administration indicated that the
United States would not accept legally binding commitments, such as the
Kyoto Protocol, to reduce US emissions, without binding commitments from
other major emitters, starting with the world’s current leading emitter, Chi-
na. 88
While the US and Chinese governments cooperated on energy efficiency
and clean energy projects, the trajectory of rapidly growing CO emissions
2
and other pollution and resource use in China posed problems for Sino-
American cooperation on the environment. China’s growing negative impact
on the environment still involved a massively wasteful use of energy in the
production of goods and services and the associated burgeoning greenhouse
gases coming from China. 89 In China, the vast majority of greenhouse gas emissions come from power generation and other support for industrial production. That production has focused more on heavy industry and high ener-
gy-consuming products. The situation is worsened because Chinese industri-
al production remains much more inefficient than more developed econo-
mies, despite gains in efficiency in recent years. 90
As noted above, Chinese leaders since the 1990s have shown sensitivity
to environmental practices in China and the consequences of China’s rapid
growth for the Chinese and world environment. On the one hand, they have
worked hard to avoid being considered an international laggard on environ-
mental practices while, on the other, they have tried to avoid environmental
obstacles
to the rapid development of China’s economy. On the positive side,
Chinese leaders have taken serious steps to deal with worsening environmen-
tal conditions in China. Premier Li Peng, a political hard-liner who played a
key role in the Tiananmen crackdown of 1989, was particularly instrumental
in putting ecology on the political map in China. Laws were passed on air,
water, solid waste, and noise pollution. Enforcement mechanisms were bol-
Economic and Environmental Issues in Contemporary US-China Relations
211
stered, and funds for cleanup, inspection, education, and enforcement in-
creased repeatedly in the 1990s. 91
In January 1999, a top environmental official announced that China
would boost spending on “green” projects to 1.5 percent of GDP between
1997 and 2000. Altogether, in 1996 to 2000, plans called for investing almost
$60 billion in environmental programs. State-owned banks and the State
Environmental Protection Agency (SEPA) in 1997 announced that no loans
would be issued to seriously polluting firms; in 1996 some sixty thousand
enterprises—mostly rural factories with no environmental safeguards—were
shut down. In January 1997, Beijing set up a national center to disseminate
environmentally sound technology; and on March 1, 1997, the government
announced the adoption of five new sets of international environmental pro-
tection standards.
Despite good intentions at the top, Beijing had serious problems, espe-
cially compliance and follow-through with funding and implementation of
promised programs. In the late 1990s, China had only about twenty thousand
enforcement officials nationwide to inspect industrial firms throughout the
country; enforcement authority remained weak and fragmented; and penal-
ties were anemic. Local officials tended to judge proposed projects by the
number of jobs they created and the revenue they generated rather than by
the environmental damage or good they did. 92
With close to 10 percent annual growth and massive foreign investment
focused on manufacturing, China faced enormous environmental problems in
the twenty-first century. Demand for electric power grew rapidly and was
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