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The U.S. and China This Week

Week of July 11, 2003

The U.S. and China This Week

Domestic: Victory Gives Impetus to Pro-democracy Parties in Hong Kong

Hong Kong's chief executive, Tung Chee-hwa postponed his efforts to pass controversial security legislation known as Article 23 following the defection from his cabinet of Liberal Party chairman James Tien. Mr. Tien said his party could not support Tung's demands for immediate consideration of the bill. Tien referred to the July 1 popular demonstrations against the legislation in explaining his actions, stating: "We have to take into consideration that there were close to half a million people who protested peacefully." The Liberal Party's defection, along with the defection of other political independents, gave Hong Kong's pro-democracy parties the votes necessary to force postponement of the bill regardless of Tung's wishes. The defeated chief executive said that he would shift his focus to the economy, but gave every indication that he intends to take up the bill later, under more favorable conditions.

Many observers point out that this is the second time in only a few months that the Chinese government has been forced to backpedal in response to public pressure-the first time was when Beijing acknowledged it underestimated the seriousness of the SARS epidemic. There is every indication that Beijing takes this matter seriously. Beijing has dispatched dozens of mainland officials to Hong Kong for consultations with opinion leaders since last week's demonstrations, and will likely continue to monitor the situation in Hong Kong very closely. Analysts say Beijing is wary that giving into the demands of Hong Kong citizens, or allowing Tung to do so, too often, could spark more demonstrations on the mainland.

Meanwhile, encouraged by their initial success at forcing the postponement of Article 23, tens of thousands of demonstrators encircled the Legislative Council on Thursday, July 9 to demand Tung's resignation and to reassert their call for direct elections. Organizers reported a turnout of 50,000 participants, which although significant, constituted a mere fraction of last week's turnout. More moderate voices are calling for Tung to reshuffle his unpopular ministers.




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International: ROK President Visits China

Republic of Korea President Roh Moo-hyun met with Chinese leaders in Beijing this week for discussions on a wide array of regional and international issues. Officials from the ROK's relevant finance and economic departments and a delegation of businessmen from over 30 major companies accompanied Roh to China, indicating the emphasis placed on the two countries' deepening economic relationship in the talks. Since normalization of relations in 1992, the volume of trade between the two countries has increased from US$5 billion to US$44 billion. Roh expressed his opinion that China's rapid economic growth, far from being a threat, constitutes an opportunity for regional prosperity and cooperation. Roh said the two sides should intensify their economic cooperation, and that "the ROK and China should become a regional economic community."

Also high on the agenda was an exchange of views regarding the DPRK's nuclear program, a current focal point of the international community. Chinese president Hu Jintao and visiting ROK president Roh Moo-hyun took the opportunity to jointly reiterate their commitment to maintaining a nuclear-free Korean Peninsula through peaceful means. Both sides also agreed to work for an early resumption of direct talks aimed at resolving the nuclear issue. Progress on the matter has been stalled since largely ceremonial three-way talks took place between Pyongyang, Beijing, and Washington in April, at which time little headway was made in the talks, save for all three countries agreeing that further talks would be useful.

Roh's visit to China follows in the wake of visits to the United stated and Japan, and precedes his upcoming visit to Russia. Roh is expected to finalize his country's foreign policy agenda after visiting all four countries.



 

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U.S.-China Relations: On-Going Debate Over Outsourcing High-tech R&D to China

In June, Senator Joe Lieberman's office weighed in on what is becoming an increasingly front-page-worthy issue: the national security implications of outsourcing high-tech R&D to the PRC. The white paper his office published, entitled National Security Aspects of the Global Migration of the U.S. Semiconductor Industry, explains that "East Asian countries are leveraging market forces through their national trade and industrial policies to drive a migration of semiconductor manufacturing to that region, particularly China." The implication is that China is leveraging access to its market to obtain sensitive high-tech know-how so it can improve its defense capability vis-à-vis the United States. The paper also asserts that "relying on integrated circuits fabricated outside the U.S. is not an acceptable national security option."

For major IT firms the debate centers much less on matters of national security and more on matters of national prosperity. From their perspective, whoever wins the Chinese market wins the world. This is why throughout the 1990's U.S. companies were willing to accept the risks involved in entering into joint ventures with Chinese partners in exchange for market access. They had no choice, as the joint venture requirement was codified in Chinese law. So imperative was it to gain market access, multinationals were willing to expose themselves to the rampant corruption, overstaffing, management headaches, and other risks inherent in Chinese business culture. They were even willing to accept technology transfer requirements, i.e. less control over their intellectual property.

Today, this debate is taking on new life following China's accession to the WTO. Under WTO rules and regulations, China must discontinue requiring technology transfer as a prerequisite for market access. Under the new system, multinationals can opt to set up wholly foreign owned enterprises that will allow them to covet their intellectual property and minimize their investment risks while still gaining market share. By implication, China's ability to leverage market share for dual-use technological know-how will be reduced.




 

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