The Pentagon has released its annual report on China's military power highlighting the Bush administration's categorization of China as a strategic competitor. In 2000, the US Congress instituted its annual assessment of China's military-technological development and evolution of China's grand strategy. The Pentagon was tasked with evaluating China's military strategy and doctrine, the technological input - both imported and indigenously developed - available for China's force modernisation, and its modernization goals. Evaluating security concerns in the Taiwan Straits forms a major part of this report.

The 2005 report notes that, while China's capability to project power beyond its periphery is currently limited, China is "generating military capabilities that go beyond a Taiwan scenario" by developing new medium range missile systems that can strike targets in Southeast Asia and the Asia-Pacific. In addition, China is improving its existing ballistic missile capabilities by developing more survivable missiles. These include improved versions of its SLBMs and ICBMs, SLBM JL2 and ICBM DF-31, and its long range variant DF-31A. DF-31A, a solid propellant, road mobile missile, with a range of 11,200 kilometres is capable of reaching targets in the US.

After Operation "Iraqi Freedom", China recognised the need for improving its military capabilities, especially its ballistic missiles. The Chinese Defence White Paper released in 2004 addressed these concerns. The Chinese leadership decided that China needed to "leapfrog" its military modernization programme for national defence to protect its economic modernization program. Gaining energy security is crucial, and Beijing's attempts to forge special economic and foreign relations with oil-bearing states like Sudan, Venezuela and Iran is not going down well with the US. The Pentagon report also mentions the possibility of China going in for a blue water navy to protect its oil supply route from West Asia through the Malacca Straits. Nearly 80 per cent of Chinese oil imports transit through the Malacca Straits and China's stakes in ensuring the security of this region is very high. The Chinese have ensured their presence along this route by establishing a series of listening stations and gaining access to friendly ports referred to as a "string of pearls". Chinese investments in developing the Pakistani port of Gwadar are part of this strategy.

The Pentagon report expresses concern about the changed balance of power in the Taiwan Straits if the EU lifts its arms embargo on China. Last month, the US House of Representatives rejected a bill that sought to impose penalties on European firms selling weapons to China. It is becoming increasingly clear that international business groups are not supporting this, and with the EU not sharing Washington's strategic concerns about China, the lifting of the EU arms embargo cannot be deferred indefinitely. American fears are not restricted to China accessing state-of-the-art military hardware and dual use technology from Europe. The Pentagon is concerned about Russia offering China a more sophisticated range of weapon systems to retain its competitive edge as the primary military supplier to China. This would include aircraft and naval vessels that could significantly improve Chinese power projection capabilities. Arguably, Russia might be forced into doing this even before the ban on the EU arms supplies is lifted.

The Pentagon has also expressed concern over lifting the embargo as this could facilitate greater interaction between the PLA and European militaries and allow China access to "critical military 'software' such as modern military management practices, operational doctrine and training and logistics and expertise." The US is concerned that these are crucial inputs for China's force modernization. Further access to critical military technologies from Europe would help China improve its defence industry, which supplies arms to countries like Burma, Sudan and Zimbabwe. These countries are currently under EU arms embargo. Clearly, US concerns regarding the lifting of the EU arms embargo on China go beyond the changing military balance in the Taiwan Straits. There are concerns that China's military capability over the long run will present a challenge to global US interests.

The Pentagon report estimates that the balance of military power in the Taiwan Strait is already shifting in Beijing's favour given China's military and economic growth, coupled with its greater diplomatic leverage vis-à-vis Taiwan. Stagnant Taiwanese defence spending has eroded Taiwan's military capability. The US arms package for Taiwan approved in 2001 is still pending in the Taiwan legislature, mired in domestic political wrangling. The US wishes to augment Taiwan's defence capability to scale down its own involvement in the Taiwan Straits. However, neither China nor the US wants an armed conflict. The report makes clear that both sides are only taking steps to deter the other.