China continues to boom - yet another year of ten percent growth seems certain - and U.S. business with China is booming, too. Washington state's exports to China rose 259 percent between 2000 and 2006, making it the second largest exporter among the fifty states. The optimism of American companies doing business in China is palpable - and contagious.

But trade with China continues to be mixed up with complex political and economic issues. Companies need to watch for new challenges from an increasingly sophisticated and powerful Chinese economy as well as from political forces at home.

Our burgeoning trade deficit with China and charges of unfair trade practices, for example, may result in one or more Congressional bills seeking to punish China for its alleged misconduct. The United States may soon impose new export restrictions on hightech products to China, underscoring concerns about the Pacific giant's military intentions. And history tells us that having one party controlling the White House while the other party controls Congress tends to result in more partisan mud-slinging over China.

This fall, China's Communist Party Congress is expected to re-elect General Secretary Hu Jintao for five more years. Hu, along with Premier Wen Jiabao, have presided over four years of blazing growth while trying to nudge China toward more sustainable and equitable development. But severe social and economic strains have emerged in recent years. Wealth and income disparities have widened, environmental damage has reached epic proportions, and activists have fought abuses of power by government officials. The lead-up to party congresses is always a politically sensitive time, and the impending 2008 Beijing Olympics simply adds to the political delicacy of the coming year.

Two new trends in China bear watching. The first is China's quest for what it calls "independent innovation." While China has emerged as a world-shaking manufacturing powerhouse, the domestic value-added component of China's industrial production and exports remains low. The high-value components going into a "Made in China" product often have to be imported from the United States, Japan, Taiwan, Korea or elsewhere.

Now China seeks to achieve a much higher level of indigenous scientific and technical research. The country wants to generate its own intellectual property, and to set technical standards applicable to the world's products.

China has made great progress. Some observers believe it is on the brink of a qualitative change in its technological capability. Hundreds of international firms have established research and development facilities in China, drawn by China's huge supply of technically educated and motivated individuals.

Although some analysts argue that China's educational systems inhibit creativity and originality, China has already begun to show its power. The country is hoping to combine "independent innovation" with the creation of powerful, globally competitive corporate conglomerates capable of producing and marketing globally competitive, innovation-based products. Meanwhile, further expansion of international firms' R&D work in China is a certainty.

Another trend that bears watching is growing concern in China that the foreign presence in its economy has grown too large. Chinese voices can be heard, particularly in the media, complaining about foreign acquisitions of Chinese companies. Consequently, three decades after Deng Xiaoping inaugurated China's "Open Door Policy," in spite of the country's entry into the World Trade Organization, China is likely to become tougher in determining who should be allowed to set up operations in China.

These signs of increasing "economic nationalism" in China do not suggest China is turning its back on international economic engagement. On the contrary, the enthusiasm of provincial and local governments for employment-generating foreign investment remains strong. National-level authorities firmly proclaim that there will be no retreat from China's policies of openness to foreign business activity. But the drumbeat of concern over excessive foreign economic influence in China continues.