Current trade between the US and China

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Thirty years ago, China was a nation mostly closed to international commerce. Today, it is the world's third largest trading power. China's emergence over this period as a major international player has not only redefined the global trading system, but also has far-reaching economic and political impact on China, the US, East Asia and the world.

China's integration into the global economy and progressive embrace of market principles have been encouraged by more than 25 years of U.S. political and economic engagement, pursued on a largely bipartisan basis across administrations. These developments have helped broaden and deepen relationships between the US and China at all levels, to the benefit of both countries. In this context, a series of US-China trade and macroeconomic disputes have emerged, leading to new stresses in US-China trade relations and exacerbating some existing points of friction.

This report will identify the current trade friction between the US and China, as well as the nature, core principles and underlying causes of the dispute. Besides, this report will focus on establishing a preferred policy response for both parties from the perspective of maintaining a stable global business environment.

Current trade between the US and China

US Trade With China

US-China trade rose rapidly after the two nations established diplomatic relations (January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning in 1980. In recent years, China has been one of the fastest growing U.S. export markets and the importance of this market is expected to grow even further as living standards continue to improve and a sizable Chinese middle class emerges.

The U.S. trade deficit with China has surged in recent years as imports from China have grown much faster than U.S. exports to China. That deficit rose from $30 billion in 1994 to $256 billion in 2007. The U.S. trade deficit with China is significantly larger than that with any other U.S. trading partner. In 2007, it was more than twice as large as with OPEC, as well as the 27 countries that make up the European Union, and three times larger than the trade deficit with Japan.

Figure: U.S. Merchandise Trade with China: 1980-2007 ($ in billions)

Figure: U.S. Merchandise Trade Balances with Major Trading Partners 2007

($ in billions)

Major US Exports to China

U.S. merchandise exports to China in 2007 were $65.2 billion, up 18.1% over the previous year. China overtook Japan to become the third largest export market in 2007. U.S. exports to China in 2007 accounted for 5.6% of total U.S. exports. The top five U.S. exports to China in 2007 were aircraft and parts, semiconductors and electronic components, waste and scrap, oilseeds and grain, and resins and synthetic rubber and fibers. China is a significant market for U.S. agricultural products. It was the fourth largest destination for U.S. agricultural exports in 2007 at $8.3 billion. U.S. agricultural exports grew by 24% in 2007 over the previous year. Over the past few years, China has been one of the fastest growing U.S. export market among major U.S. trading partners, as can be seen in. U.S. exports to China rose by nearly 240% from 2001 to 2007, which was significantly higher than that of any other top 10-trading partner.

Figure: Major U.S. Exports to China: 2003-2007

($ in billions and % change)

Figure: U.S. Merchandise Exports to Major Trading Partners in 2001 and 2007

($ in billions and % change)

Many trade analysts argue that China could prove to be a much more significant market for U.S. exports in the future. China's goal of modernizing its infrastructure and upgrading its industries is predicted to generate substantial demand for foreign goods and services. China's growing economy and large population make it a potentially enormous market. To illustrate: China currently has the world's largest mobile phone network, and one of the fastest-growing markets, with an estimated 600 million cellular phone users (as of June 2007), compared to 87 million users in 2000.

However, some U.S. trade analysts contend that China continues to pursue industrial policies aimed at promoting the development of industries that have been deemed by the government as critical for Chinese future economic development. They claim such policies seek to restrict imports of finished products, thus forcing foreign firms to invest in China to gain access to the domestic market. They note a significant level of U.S. exports to China is raw materials, parts, and components used to produce finished goods for export.

Major US Imports from China

China in 2007 became, for the first time, the largest source of U.S. imports. In 2007, imports from China totaled $321.5 billion, accounting for 16.5% of total U.S. imports in 2007. The importance (ranking) of China as a source of U.S. imports has risen dramatically, from eighth largest in 1990, to first in 2007. The top five U.S. imports from China, in 2007, were computers and parts, miscellaneous manufactured articles (such as toys, games, etc.), communications equipment, apparel, and audio and video equipment.

Figure: Top Five U.S. Imports from China 2003-2007

($ in billions and % change)

Throughout the 1980s and 1990s, nearly all of U.S. imports from China were low-value, labor-intensive products such as toys and games, consumer electronic products, footwear, and textiles and apparel. However, over the past few years, an increasing proportion of U.S. imports from China has comprised of more technologically advanced products, such as computers. Many analysts contend that the sharp increase in U.S. imports from China is largely the result of movement in production facilities from other (primarily) Asian countries to China. That is, various products that used to be made in Japan, Taiwan, Hong Kong, etc., and then exported to the US are now being made in China (in many cases, by foreign firms in China) and exported to the US.

Figure: Major Foreign Suppliers of U.S. Computer Equipment Imports 2000-2007

($ in billions and % change)

Also, China is becoming a major supplier of U.S. agricultural products, including fish, vegetables and fruit, tea and spices, feeding stuff for animals, and sugar products.

Major US-China Trade Issues

Although China's economic reforms and rapid economic growth have expanded U.S.-China commercial relations in recent years, tensions have arisen over a wide variety of issues. Several bills have been introduced to respond to several of these issues.

Health and Safety Concerns Over Certain Imports from China

Reports throughout 2007 of tainted or unsafe food and consumer products (including seafood, pet food, toys, and tires) from China raised concerns in the US over the health, safety, and quality of imports from China. Some analysts contend that China maintains a poor regulatory framework for enforcing its health and safety regulations and standards, and that this is proving to be a growing problem for U.S. consumers.

In 2007 and early 2008, there were numerous recalls, warnings, and import restrictions involving Chinese products. For example, The Consumer Product Safety Commission (CPSC) has issued alerts and announced voluntary recalls by U.S. companies on numerous products made in China. From January-December 2007, over four-fifths of CPSC recall notices have involved Chinese products. Over this period, roughly 17.6 million toys were recalled because of excessive lead levels. Recalls were also issued on 9.5 million Chinese made toys (because of the danger of loose magnets), 4.2 million "Aqua Dots" toys (because beads contain a chemical that can turn toxic if ingested) and 1 million toy ovens (due to potential finger entrapment and burn hazzards).

China's Poor Regulatory System and Implications

China is believed to have a rather weak health and safety regime for manufactured goods and agricultural products. Problems include:

Weak consumer protection laws and poorly enforced regulations

Lack of inspections and ineffective penalties for code violators, underfunded and understaffed regulatory agencies and poor interagency cooperation

The proliferation of fake goods

The existence of numerous unlicensed producers

Falsified export documents

Extensive pollution

Intense competition that often induces firms to cut corners

The relative absence of consumer protection advocacy groups

Failure by Chinese companies to effectively monitor the quality of their suppliers' products

Restrictions on the media

Extensive government corruption and lack of accountability

Especially at the local government level

Although China has criticized the US for its recent actions against unsafe Chinese products, it has pledged to improve and strengthen food and drug safety supervision and standards, beef up inspections, require safety certificates before some products can be sold, and to crack down on government corruption. For example, On September 12, 2007, the NHTSA signed a Memorandum of Cooperation with its Chinese counterpart on enhanced cooperation and communication on vehicles and automotive equipment safety.

China's Currency Policy

Between 1994 and July 2005, China pegged its currency, the Renminbi (RMB) or Yuan, to the U.S. dollar at about 8.28 Yuan to the dollar. In order to maintain a target rate of exchange with the dollar, the government has maintained restrictions and controls over capital transactions and has made large-scale purchases of U.S. dollars (and dollar assets). Chinese officials view economic stability as critical to sustaining political stability; they fear an appreciated currency could reduce jobs and lower wages in several sectors and thus cause worker unrest.

U.S. critics of China's currency policy contend that the low value of the Yuan has forced other East Asian economies to keep the value of their currencies lower than the U.S. dollar in order to compete with Chinese products. They further note that while China is still a developing country, it has been able to accumulate massive foreign exchange reserves (estimated to have reached nearly $1.5 trillion at the end of 2007) and thus has the resources to maintain the stability of its currency if it were fully convertible. They also argue that appreciating the Yuan would greatly benefit China by lowering the cost of imports and by balancing economic growth to include greater domestic consumption. On the other hand, some analysts have indicated concern that pushing China to appreciate its currency could cause it to decrease purchases of U.S. Treasury securities, which might result in higher U.S. interest rates. China is the second largest foreign purchaser (after Japan) of U.S. Treasury securities, which totaled $406 billion at the end of 2007.

China and the World Trade Organization

Negotiations for China's accession to the General Agreement on Tariffs and Trade (GATT) and its successor organization, the WTO, began in 1986 and took over 15 years to complete. During the WTO negotiations, The US insisted that China could enter the WTO only if it substantially liberalized its trade regime. In the end, China's WTO membership was formally approved at the WTO Ministerial Conference in Doha, Qatar on November 10, 2001, and on December 11, 2001, it formally joined the WTO.

China has made great strides in implementing key aspects of its WTO commitments. For example, its average overall tariff has dropped to from 15.6% in 2001 to 9.9% in 2006 and a number of non-tariff measures have been eliminated. However, there have been several areas where China's implementation is considered to be incomplete, including:

Failure by the Chinese government to maintain an effective IPR enforcement regime

Industrial policies that attempt to promote Chinese firms (while discriminating against foreign firms)

Restrictions on trading and distribution rights (especially in regards to IPR products)

Discriminatory and unpredictable health and safety rules on imports (agricultural products)

Burdensome regulations and restrictions on services (including excessive capital requirements)

Failure to provide adequate transparency of trade laws and regulations

When China joined the WTO, it agreed to provide a full description of all its subsidy programs, but to date has failed to fully do so. In addition, China agreed to make its state-owned enterprises operate according to market principles; yet such firms continue to receive direction and subsidies.

Violations of U.S. Intellectual Property Rights

U.S. firms contend that IPR piracy in China has worsened in recent years, despite Chinese government promises to strengthen IPR enforcement by increasing criminal prosecutions of IPR offenders (and toughening penalties), improve coordination among IPR enforcement officials, and make a long term concentrated effort to stamp out major piracy centers. Nine out of ten movie DVDs are fake, and 2005 losses from piracy in China were estimated at $244 million. Pirated music, music videos, and movies are also widely distributed over the Internet in China. The Chinese government estimates that counterfeits constitute between 15% and 20% of all products made in China and are equivalent to about 8% of China's annual GDP.

Opinions differ as to why the Chinese government has been unable make a significant reduction in the level of piracy in China. Some explanations put forward by various analysts include:

China's transformation from a Soviet-style command economy (in which the government owned and controlled nearly every aspect of the economic life) to one that is becoming more market-based is a very recent occurrence. IPR is a relatively alien or unfamiliar concept for most people in China to grasp (as is the concept of private property rights) and thus it is difficult for the government to convince the public that piracy is wrong.

Chinese leaders want to make China a major producer of capital-intensive and high technology products and thus they are tolerant of IPR piracy if its helps Chinese firms become more technologically advanced.

While the central government may be fully committed to protection of IPR, local government officials are often less enthusiastic to do so because production of pirated products generates jobs and tax revenue, and some officials may be obtaining bribes or other benefits which prompts them to tolerate piracy.

As a developing country, China (like many other developing countries) lacks the resources and a sophisticated legal system to go after and punish IPR violators, and that establishing an effective enforcement regime will take time.

As a practical matter, IPR enforcement in China will always be problematic until Chinese-owned companies begin to put pressure on the government to protect their own brands and other IPR-related products.

Chinese trade barriers and regulatory restrictions on IPR-related products and their distribution are so onerous that they prevent legitimate products from entering the market, or raise costs so high that they are unaffordable to the average individual, thus creating a huge demand for low-cost pirated products.

Applying U.S. Countervailing Laws to China

Many critics of Chinese trade policies contend that the Chinese government provides a significant level of subsidies to many of its industries, such as preferential bank loans and grants, debt forgiveness, and tax breaks and rebates. In addition, some analysts charge that China's currency policy constitutes a form of government export subsidy. Such critics contend that U.S. countervailing laws, which seek to address the negative impact foreign government subsidies on exported products may have on U.S. producers in the US, should be applied to nonmarket economies such as China. Until very recently, the Commerce Department contended that U.S. countervailing laws could not be applied to a non-market economy because of the assumption that most production and prices in such an economy are determined by the government, and thus it would be impractical to determine the level of government subsidy that might be conveyed to various exported products. However, in November 2006, the Commerce Department decided to pursue a countervailing case against certain imported Chinese coated free sheet paper products. On March 30, 2007, the Commerce Department issued a preliminary ruling to impose countervailing duties (ranging from 11% to 20%) against the products in question.

Preferred policy response

To overcome challenges, there are a number of policies together with key actions items, which are able to maintain both countries fairly shared benefits and a stable global business environment:

Increase Coordination with Other Trading Partners: The US will work more closely with other trading partners on China trade issues of common interest, such as enforcement of intellectual property rights and China's implementation of its WTO obligations.

Deepen and Strengthen Regional Engagement: The US will pursue increased trade liberalization and expanded trade relations with other Asian economies and within APEC. This increased engagement will help to maintain and enhance U.S. commercial relationships with these economies, even as China also strengthens its commercial relationships with them. All together, it should help spur further market access and reform in China's trade regime, as well as increase momentum for multilateral trade liberalization within the WTO.

Increase Focus on Regulatory Reform in China: The US will step-up efforts to promote regulatory reform in China, in place of subsidies and administrative measures and policies that distort resource allocation and trade flows, including:

Deepening and expanding the State Department's high-level dialogue with China's economic planners regarding structural reform.

Broadening and intensifying assessment of subsidies in China and continuing pressure on the Chinese government to comply with its subsidy-related obligations under the WTO, including making a full WTO subsidy notification.

Expanding USDA-led initiatives to improve China's transparency and compliance with its SPS obligations under the WTO.

Giving intensive attention to China's development of standards and of an anti-monopoly law.

Increase Effectiveness of High-Level Meetings between the US and China's Leaders: should continue to hold annual, elevated meetings prior to presidential-level meetings, where possible, and conduct periodic reviews of goals and progress.

Strengthen and Expand Bilateral Dialogues on Numerous Current and Potential Problem Areas: Dialogue on Participation in Global Institutions, Dialogue on Services, Dialogue on Subsidies and Structural Issues, Dialogue on Standards, Labor Dialogue, Dialogue on Environmental Protection, Dialogue on China's Administration of Antidumping Laws.

Strengthen U.S. Government Interagency Coordination: The Trade Promotion Coordinating Committee (TPCC) will intensify its efforts to direct U.S. export promotion initiatives for China and ensure that they are optimally effective, and China trade and export promotion policies are complementary.

Strengthen the Executive-Congressional Partnership on China Trade: initiate a program of regular briefings for Congressional members and staff, to update them on progress in pursuing the objectives outlined in this report and to ensure that the Administration's China trade policy is informed by Congressional priorities.

The economic and geopolitical landscape of the 21st century will be greatly influenced by the way, in which the United States and China work together. That emerging future requires a distinct vision and effective mechanisms to achieve it. By establishing those policies, they will allow both the United States and China to begin to write the next chapter of our strategic economic relationship.

Conclusion

Whatever their geopolitical differences, both countries share an enormous stake in fostering open trade and investment. Both countries risk huge losses if their commercial relations are engulfed by a wave of protection and recrimination. However, both can share enormous gains if their joint policies ensure the continued expansion of world trade and investment.

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