Order Code RL33536
CRS Report for Congress
Received through the CRS Web
China-U.S. Trade Issues
July 12, 2006
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress
China-U.S. Trade Issues
U.S.-China economic ties have expanded substantially over the past several
years. Total U.S.-China trade, which totaled only $5 billion in 1980, rose to $ 285
billion in 2005. China is now the third largest U.S. trading partner, its second largest
source of imports, and its fourth largest export market. With a huge population and
a rapidly expanding economy, China is becoming a large market for U.S. exporters.
Yet, U.S.-China commercial ties have been strained by a number of issues, including
a surging U.S. trade deficit with China (which totaled $202 billion in 2005), China’s
refusal to float its currency, and failure to fully comply with its World Trade
Organization (WTO) commitments, especially its failure to provide protection for
U.S. intellectual property rights (IPR).
The continued rise in the U.S.-China trade imbalance, complaints from several
U.S. manufacturing firms over the competitive challenges posed by cheap Chinese
imports, and concerns that U.S. manufacturing jobs are being lost due to unfair
Chinese trade practices have led several Members to call on the Bush Administration
to take a more aggressive stance against certain Chinese trade policies deemed to be
unfair. For example, some Members argue that China manipulates its currency vis-avis the dollar to make its exports cheaper, and imports more expensive, than they
would be under a floating system. The threat of congressional legislation led China
in July 2005 to appreciate its currency by 2.1% and to switch to an exchange rate
system based on a basket of currencies (including the dollar). However, many U.S.
policymakers charge that these reforms have not gone far and have warned of
potential congressional action if China fails to make further reforms.
China joined the WTO in 2001, and U.S. officials continue to closely monitor
China’s compliance with its WTO commitments. A major concern to U.S.
policymakers regarding China’s WTO commitments has been its failure to
implement an effective strategy to combat widespread IPR piracy in China. Although
China has enacted a number of strict IPR laws and regulations, U.S. firms charge that
enforcement is lax and ineffective and costs U.S. firms billions of dollars in lost sales
annually. On October 26, 2005, the United States initiated a special process under
WTO rules to obtain detailed information on China’s IPR enforcement efforts. If
China fails to comply with this request, the United States might choose to bring a
dispute resolution case against it in the WTO. In addition, on March 30, 2006, the
United States initiated a WTO case against China over its discriminatory tax
treatment of imported auto parts.
This report replaces IB91121, U.S.-China Trade Issues, by Wayne M. Morrison,
and will be update as events warrant.
U.S. Trade with China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Major U.S. Exports to China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Major U.S. Imports from China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Major U.S.-China Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
China’s Currency Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Bush Administration’s Response . . . . . . . . . . . . . . . . . . . . . . . . . . 7
China Changes its Currency Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
China and the World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
WTO Implementation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Most Recent Developments on Market Access . . . . . . . . . . . . . . . . . . 11
Violations of U.S. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . 12
Most Recent Action on IPR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Chinese Acquisition of U.S. Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Congressional Concern Over the CNOOC Bid . . . . . . . . . . . . . . . . . . 15
Textile and Apparel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
U.S.-China Trade Legislation in the 109th Congress . . . . . . . . . . . . . . . . . . . . . . 16
Comprehensive China Trade Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Bills Addressing China’s Currency Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Other Bills . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Most Recent Developments in U.S.-China Trade Relations . . . . . . . . . . . . . . . . 19
List of Tables
Table 1. U.S. Merchandise Trade with China: 1980-2005 . . . . . . . . . . . . . . . . . 2
Table 2. Major U.S. Exports to China: 2001-2005 . . . . . . . . . . . . . . . . . . . . . . . . 2
Table 3. U.S. Merchandise Exports to Major Trading Partners in 2001,
2005, and January-March 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table 4. Top Five U.S. Imports from China: 2001-2005 . . . . . . . . . . . . . . . . . . . 5
Table 5. Major Foreign Suppliers of U.S. Computer Equipment Imports:
2000- 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
China-U.S. Trade Issues
Economic and trade reforms begun in 1979 have helped transform China into
one of the world’s fastest growing economies. China’s economic growth and trade
liberalization, including comprehensive trade commitments made upon entering the
World Trade Organization (WTO) in 2001, have led to a sharp expansion in U.S.China economic ties. In 1978 China was the 32nd largest U.S. export market and its
57th largest source of its imports , but by 2005, these rankings rose to 2nd and 4th
respectively. In recent years, China has been the fastest growing U.S. export market
and the importance of this market is expected to grow even further as living
standards continue to improve in China and a sizable middle class begins to emerge.
Yet, bilateral trade relations have grown increasingly strained in recent years
over a number of issues, including a large and growing U.S. trade deficit with China
( $202 billion in 2005), China’s policy of pegging its currency to the dollar and
refusal to adopt a floating currency, its poor record of protecting U.S. intellectual
property rights (IPR), failure to fully implement its WTO commitments, and use of
a number of unfair trade practices (such as use of subsidies and dumping) that are
perceived by many Members as negatively various U.S. manufacturing sectors.
Numerous bills have been introduced in the 109th Congress that would address these
issues, including some that impose significant sanctions against China.
This report provides an overview of U.S.-China trade relations, surveys major
trade disputes, and lists congressional legislation that would address these issues.
U.S. Trade with China1
U.S.-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. Total trade
(exports plus imports) between the two nations rose from $5 billion in 1980 to $20
billion in 1990 to $ 285 billion in 2005. China is now the third-largest U.S. trading
partner. Over the past few years, U.S. trade with China has grown at a faster pace
than that of any other major U.S. trading partner.
The U.S. trade deficit with China has grown significantly in recent years, due
largely to a surge in U.S. imports of Chinese goods relative to U.S. exports to China.
That deficit rose from $30 billion in 1994 to $202 billion in 2005 (see Table 1). The
U.S. trade deficit with China is now larger than that of any other U.S. trading partner,
For additional statistics on U.S.-China trade, see CRS Report RL31403, China’s Trade
with the United States and the World, by Thomas Lum and Dick K. Nanto. For general
information on U.S. China ties, see CRS Report RL32804, China-U.S. Relations: Current
Issues and Implications for U.S. Policy, by Kerry Dumbaugh.
and in 2005 it was nearly equal to the combined U.S. trade deficits with Japan,
Canada, and Mexico ($209 billion).
Table 1. U.S. Merchandise Trade with China: 1980-2005
($ in billions)
Source: USITC DataWeb.
Major U.S. Exports to China
U.S. exports to China in 2005 were $41.8 billion, up 20.5% over 2004 levels
(compared with the rise of total exports to the world at 10.8%) , making China the
4th largest U.S. export market (it was 5th in 2004). U.S. exports to China in 2005
accounted for 4.6% of total U.S. exports (compared to 3.9% in 2003). The top five
U.S. exports to China in 2005 were aerospace products, semiconductors and
electronic components, waste and scrap, soybeans, and resins and plastic materials
(see Table 2).
Table 2. Major U.S. Exports to China: 2001-2005
($ in billions and % change)
2001 2002 2003 2004 2005 % Change % Change
Total all commodities
19.2 22.1 28.4 34.7 41.8
Aerospace products and parts
Semiconductors and other
Waste and scrap
Oilseeds and grains (mainly
Resin, synthetic rubber, &
artificial & synthetic fibers &
Source: U.S. International Trade Commission Database.
Note: Commodities sorted by top five exports in 2005 using NAIC classification, four-digit level.
Over the past few years, China has been the fastest growing U.S. export market
as can be seen in table 3. U.S. exports to China rose by 20.5% in 2005 over the
previous year, and by 117.7% from 2001 to 2005. These were much faster increases
than with any other top 10 U.S. export market (2005) or the world as a whole. U.S.
exports to China during January-March 2006 were up by 39.3% over the same period
Table 3. U.S. Merchandise Exports to Major Trading Partners in
2001, 2005, and January-March 2006
($billions and % Change)
Ranking based on top 10 U.S. export markets in 2005.
Source: USITC DataWeb.
Many trade analysts argue that China could prove to be a much more significant
market for U.S. exports in the future. China is one of the world’s fastest-growing
economies, and rapid economic growth is likely to continue in the near future,
provided that economic reforms are continued. China’s goal of modernizing its
infrastructure and upgrading its industries is predicted to generate substantial demand
for foreign goods and services. According to a U.S. Department of Commerce
report: “China’s unmet infrastructural needs are staggering. Foreign capital,
expertise, and equipment will have to be brought in if China is to build all the ports,
roads, bridges, airports, power plants, telecommunications networks and rail lines
that it needs.” Finally, economic growth has substantially improved the purchasing
power of Chinese citizens, especially those living in urban areas along the east coast
of China. 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 377 million cellular phone
users as of 2005 (48 million new subscribers were projected to be
added in 2006).
Boeing Corporation predicts that China will be the largest market for
commercial air travel outside the U.S. for the next 20 years; during
this period, China will buy 2,300 aircraft valued at $183 billion. By
2023, Chinese carriers are expected to be flying more than 2,801
airplanes, making China the largest commercial aviation market
outside the United States. On April 11, 2006, Boeing announced it
had signed a general purchase agreement with China for 80 Boeing
In 2002, China replaced Japan as the world’s second-largest PC
market. China also became the world’s second-largest Internet user
(after the United States) with 111 million users at the end of 2005.
The Chinese government projects that by the year 2020, there will
be 140 million cars in China (seven times the current level), and that
the number of cars sold annually will rise from 4.4 million units to
20.7 million units.
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 are raw materials, parts, and components
used to produce finished goods for export.
Major U.S. Imports from China
China is a relatively large source of many U.S. imports, especially laborintensive products. In 2005, imports from China totaled $ 243 billion, accounting for
14.6% of total U.S. imports in 2005 (up from 6.5% in 1996). U.S. imports from
China rose by 23.8% in 2005 over the previous year. The importance (ranking) of
China as a source of U.S. imports has risen dramatically, from 8th largest in 1990,
to 4th in 2000, to 2nd in 2004 (and 2005).
As indicated in Table 4, the top five U.S. imports from China in 2005 were
computers and parts, miscellaneous manufactured articles (such as toys, games, etc.),
apparel, audio and video equipment, and communications equipment . Throughout
the 1980s and 1990s, nearly all of U.S. imports from China were low-value, laborintensive products such as toys and games, footwear, and textiles. 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, which rose by 20.3%
Table 4. Top Five U.S. Imports from China: 2001-2005
($billions and % change)
2001 2002 2003 2004 2005
Total All Commodities
102.3 125.2 152.4 196.7 243.5
Audio and video
commodities (e.g., toys,
Source: U.S. International Trade Commission Trade Data Web.
Note: Commodities sorted by top five imports in 2005 using NAIC classification, four-digit level.
Many analysts contend that the sharp increase in U.S. imports from China is
largely the result of movement in production facilities from other Asian countries to
China. 2 That is, various products that used to be made in Japan, Taiwan, Hong Kong,
etc., and then exported to the United States are now being made in China (in many
cases, by foreign firms in China) and exported to the United States. An illustration
of this shift can be seen in Table 5 on U.S. imports of computer equipment and parts
from 2000- 2005. In 2000, Japan was the largest foreign supplier of U.S. computer
equipment (with a 19.6% share of total shipments), while China ranked 4th ( at 12.1%
share). In just five years, Japan’s ranking fell to 4th, the value of its shipments
dropped by over half, and its share of shipments declined to 7. 8% (2005); Singapore
and Taiwan also experienced significant declines in their computer equipment
shipments to the United States over this period. In 2005, China was by far the largest
foreign supplier of computer equipment with a 45.4% share of total imports. While
U.S. imports of computer equipment from China rose by 327.7% over the past six
years, the total value of U.S. imports from the world of these commodities rose by
only 14.2%. Many analysts contend that a large share of the increase in Chinese
computer production has come from foreign computer companies who have
manufacturing facilities to China.
Chinese data indicate that the share of China’s exports produced by foreign-invested
enterprises (FIEs) in China rose from 1.9% in 1986 to 58% in 2005.
Table 5. Major Foreign Suppliers of U.S. Computer Equipment
Imports: 2000- 2005
($billions and % change)
Source: U.S. International Trade Commission Trade Data Web.
Note: Ranked according to top 6 suppliers in 2005.
Major U.S.-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, including the growth and size of the U.S. trade deficit with China
(which many Members contend is an indicator that the trade relationship is unfair),
China’s currency policy (which many Members blame for the size of the U.S. trade
deficit with China and the loss of manufacturing jobs in the United States), China’s
mixed record on implementing its obligations in the WTO, failure to provide
adequate protection of U.S. intellectual property rights (IPR), and over the challenges
posed by China’s rising economic power Several bills have been introduced to
respond to several of these issues (see section on legislation).
China’s Currency Policy3
Between 1994 and July 2005, China pegged its currency , the yuan, to the U.S.
dollar at about 8.28 yuan to the dollar. In order to maintain the rate of exchange with
the dollar, the government has maintained restrictions and controls over capital
transactions and through large scale purchases of U.S. dollars. For example, most
firms in China are required to exchange a large share of their hard currency earnings
to the central government in exchange for yuan.
Many U.S. policymakers and business representatives have charged that China’s
currency is significantly undervalued vis-à-vis the U.S. dollar (with estimates ranging
from 15 to 40%) , making Chinese exports to the United States cheaper, and U.S.
For additional information on this issue, see CRS Report RS21625, China’s Currency Peg:
A Summary of the Economic Issues, by Wayne Morrison and Marc Labonte; and CRS
Report RL32165, China’s Exchange Rate Peg: Economic Issues and Options for U.S. Trade
Policy, by Wayne Morrison and Marc Labonte.
exports to China more expensive, than they would be if exchange rates were
determined by market forces. They complain that this policy has particularly hurt
several U.S. manufacturing sectors (such as textiles and apparel, furniture, plastics,
machine tools, and tool and dye), which are forced to compete against low-cost
imports from China, and has contributed to the growing U.S. trade deficit with China.
They have called on the Bush Administration to pressure China either to appreciate
its currency or to allow it to float freely in international markets.
Chinese officials argue that its currency policy is not meant to favor exports
over imports, but instead to foster economic stability. They have expressed concern
that abandoning its currency policy could cause an economic crisis in China and
would especially hurt its export industries sectors at a time when painful economic
reforms (such as closing down inefficient state-owned enterprises and restructuring
the banking system) are being implemented. 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 low visà-vis 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 ( $819 billion at end of 2005) 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. Several bills have been introduced in Congress to address this issue (see
legislation section below). 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 ($265
billion at end of February 2006).
The Bush Administration’s Response. President Bush has criticized
China’s currency peg, stating that exchange rates should be determined by market
forces, and he has raised the issue during meetings with high level Chinese officials
(including Chinese President Hu Jintao. Initially, the Bush Administration rejected
calls from several Members to apply direct pressure on China to force it to abandon
its currency peg. Instead, the Administration sought to encourage China to reform
its financial system under the auspices of a joint technical cooperation program,
agreed to on October 14, 2003.
The Administration’s position on China’s currency peg appears to have
toughened in April 2005, when (then) U.S. Treasury Secretary John Snow stated at
a G-7 meeting that “China is ready now to adopt a more flexible exchange rate.” In
its May 17, 2005 report on exchange rate policies, the Treasury Department stated
that China’s currency peg policy “is a substantial distortion to world markets” and
that “China is now ready to move to a more flexible exchange rate and should move
now.” The report warned that the Treasury Department would closely monitor
China’s progress over the next six months.
China Changes its Currency Policy. On July 21, 2005, the Chinese
government announced that the yuan’s exchange rate would become “adjustable,
based on market supply and demand with reference to exchange rate movements of
currencies in a basket,” (which include the U.S. dollar, the Japanese yen, the euro,
the South Korean won, and a number of other currencies), and that the exchange rate
of the yuan to the U.S. dollar would be immediately adjusted from 8.28 to 8.11, an
appreciation of about 2.1%. Congressional reaction to China’s announcement was
mixed — many welcomed the move, but some referred to it as merely a good first
step and called on China to further appreciate the yuan. However, on July 26, 2005,
China’s Central Bank stated it had no immediate plans for further revaluations and
that reforms would be done in a “gradual” way.
In its November 28, 2005 report to Congress on exchange rate policies, the
Treasury Department did not cite China as a country that manipulates its currency,
but concluded that it had failed to fully implement its commitment to make its new
exchange rate mechanism more flexible and to increase the roll of market forces.
Instead, the report stated that China’s new currency appears to strongly resemble the
previous mechanism of pegging the yuan to the dollar. However, the report stated
that Treasury would not cite China as a manipulator because of China’s assurances
that it was committed to “enhanced, market-determined currency flexibility” and that
it would put greater emphasis on promoting domestic sources of growth, including
financial reform. Many Members of Congress have expressed disappointment with
China’s July 2005 reforms, as well as the conclusions of the November 2005 U.S.
Treasury report. On April 17, 2006, Deputy U.S. Secretary of State Robert Zoellick
complained that China was moving “agonizingly slow” in making its currency more
On May 10, 2006, the Treasury Department issued its semi-annual exchange
rate report, which stated that, while China had moved too slowly in making its
exchange rate regime more flexible, it would not be designated as a country that
manipulates its currency.
A number of bills have been introduced Generally speaking three major
approaches have been suggested. One approach would raise U.S. tariffs on Chinese
imports by a rate comparable to the estimated level of the yuan’s undervaluation
(27.5% is the most common estimate used by sponsors of such legislation. A second
approach would change U.S. law to redefine, or more clearly define, what constitutes
currency manipulation and therefore pressure the Administration to utilize U.S. trade
law and international finance bodies (such as the WTO and International Monetary
Fund) to address China’s currency policy. A third approach would change U.S. trade
law to enable U.S. firms to utilize U.S. countervailing laws (dealing with government
subsidies) against nonmarket economies (these proposals are described in the
legislation section below).
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, Chinese officials insisted that
China was a developing country and should be allowed to enter under fairly lenient
terms. The United States insisted that China could enter the WTO only if it
substantially liberalized its trade regime. In the end, a compromise was reached
that requires China to make immediate and extensive reductions in various trade and
investment barriers, while allowing it to maintain some level of protection (or a
transitionary period of protection) for certain sensitive sectors. China’s WTO
membership was formally approved at the WTO Ministerial Conference in Doha,
Qatar on November 10, 2001 (Taiwan’s WTO membership was approved the next
day). On November 11, 2001, China notified the WTO that it had formally ratified
the WTO agreements, and on December 11, 2001, it formally joined the WTO.
Under the WTO accession agreement, China agreed to —
Reduce the average tariff for industrial goods and agriculture
products to 8.9% and 15%, respectively (with most cuts made by
2004 and all cuts completed by 2010).
Limit subsidies for agricultural production to 8.5% of the value of
farm output and eliminate export subsidies on agricultural exports.
Within three years of accession, grant full trade and distribution
rights to foreign enterprises (with some exceptions, such as for
certain agricultural products, minerals, and fuels).
Provide non-discriminatory treatment to all WTO members. Foreign
firms in China will be treated no less favorably than Chinese firms
for trade purposes. End discriminatory trade policies against foreign
invested firms in China, such as domestic content rules and
technology transfer requirements.
Implement the WTO’s Trade-Related Aspects of Intellectual
Property Rights (TRIPS) Agreement upon accession. That
agreement establishes basic standards on IPR protection and rules
Accept a 12-year safeguard mechanism (available to other WTO
members as well) in cases where a surge in Chinese exports cause
or threaten to cause market disruption to domestic producers.
Fully open the banking system to foreign financial institutions
withing five years .
Joint ventures in insurance and
telecommunication will be permitted (with various degrees of
foreign ownership allowed).
WTO Implementation Issues
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 . However, there have been several areas where China’s
implementation is considered to be incomplete. The USTR’s fourth annual China
WTO compliance report (issued in December 2005 identified several areas of
concern, including failure by the Chinese government to maintain an effective IPR
enforcement regime (discussed below), discriminatory import policies, burdensome
regulations and restrictions on services, discriminatory health and safety rules on
imports (especially agricultural products), restrictions on trading rights and
distribution, failure to provide adequate transparency of trade laws and regulations,
and industrial policies that discriminate against foreign companies.
The USTR’s report stated that China’s failure to comply with key areas of its
WTO commitments largely stemmed from its incomplete transition to a market based
economy. A significant part of the economy, including the banking system and state
owned enterprises (SOEs), are controlled by the central government — remnants of
the old command economy that existed before reforms began in 1979. Although
China agreed to make SOEs operate according to free market principles when it
joined the WTO, U.S. officials contend that SOEs are still being subsidized,
especially through the banking system. A large share of China’s exports come from
SOEs, therefore, the Chinese government use of subsidies is seen as damaging to
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 guidance from the central government.
Finally, China agreed to end various policies used to promote the development of
domestic industries (such as domestic content rules, technology transfer
requirements, and discriminatory policies on imported products), but these practices
continue: For example:
In July 2005, the Chinese government issued new guidelines on steel
production, which reportedly includes provisions for the preferential
use of domestically produced steel-manufacturing equipment and
domestic technologies; extensive government involvement in
determining the number, size, location, and production quantities of
steel producers in China; technology transfer requirements on
foreign investment, and restrictions on foreign majority ownership.
On June 14, 2006, Assistant U.S. Trade Representative for China
Tim Stratford stated that China’s steel guidelines were “troubling,
because it attempts to dictate industry outcomes and involves the
government in making decisions that should be left to the
marketplace. 4“ The U.S. steel industry has expressed growing fears
that Chinese government policies have led to overinvestment and
overcapacity in China’s domestic steel industry, which could lead it
to flood world markets with cheap steel. 5 Such concerns led the
Statement of Timothy, Stratford, Assistant U.S. Trade Representative for China Affairs,
before the Congressional Steel Caucus, June 14, 2006.
China is now the world’s largest steel producer, accounting for 31% of the world’s steel
production. Its steel production levels rose by 25% over the previous year. According to
U.S. officials, China’s excess steel capacity in 2006 could be larger than total U.S. steel
USTR to begin a Steel Dialogue with China (which first met in
March 2006) to discuss issues of concern to the U.S. steel industry.
China’s Automotive Industrial Policy, issued by the government in
May 2004 includes provisions discouraging the importation of auto
parts and encouraging the use of domestic technology, while
requiring new automobile and automobile engine plants to include
substantial investment in research and development facilities. New
auto parts regulations that went into effect in April 2005
discriminate against imported auto parts by assessing an additional
charge on imported parts if they are incorporated into a vehicle that
does not meet minimum levels of domestic content.6 On March 30,
2006, the USTR initiated a WTO case against China for its use of
discriminatory regulations on imported auto parts, stating that the
purpose of these rules was to discourage domestic producers from
using imported parts and encouraging foreign firms to move
production to China.
On March 18, 2004, the USTR announced it had filed a WTO
dispute resolution case against China over its discriminatory tax
treatment of imported semiconductors. The United States claimed
that China applied a 17% VAT rate on semiconductor chips that
were designed and made outside China, but gave VAT rebates to
domestic producers. Following consultations with the Chinese
government, the USTR announced on July 8, 2004, that China
agreed to end its preferential tax policy by April 2005. However, the
USTR has expressed concern over new forms of financial assistance
given by the Chinese government to its domestic semiconductor
Most Recent Developments on Market Access. A number of market
access issues were discussed during the latest round of meetings held under the
auspices of the U.S.-China Joint Commission on Commerce and Trade (JCCT) held
on April 11, 2006.7 China pledged to expand market access for U.S. beef (by
conditionally resuming imports that were suspended in December 2003),
telecommunications services, and medical equipment and to begin negotiations to
join the WTO Government Procurement Agreement. On June 30th, 2006, China
announced a partial opening of its beef market to U.S. boneless beef under 30 months
of age. However, U.S. officials have expressed disappointment that China has failed
China applies higher tariffs on imported auto parts when a specific combination of parts
is used to produce cars in China, or if the value of these parts amounts to 60 percent or more
of the cost of a car made in China. This policy increases tariffs on some auto parts from a
range of 10 to 15 percent to 28 percent, which is the tariff China currently applies to imports
of completed autos. (Source: Inside U.S.-China Trade, April 6, 2006).
The JCCT was established in 1983 to provide a forum for high level bilateral economic and
to develop a science-based trading protocol for importing beef from the United
States, which would enable the United States to resume all beef trade with China.
Violations of U.S. Intellectual Property Rights
The United States has pressed China to improve its IPR protection regime since
the late 1980s. In 1991, the United States (under a Section 301 case) threatened to
impose $1.5 billion in trade sanctions against China if it failed to strengthen its IPR
laws. Although China later implemented a number of new IPR laws, it often failed
to enforce them, which led the United States to once again threaten China with trade
sanctions. The two sides reached a trade agreement in 1995, which pledged China
to take immediate steps to stem IPR piracy by cracking down on large-scale
producers and distributors of pirated materials and prohibiting the export of pirated
products, establishing mechanisms to ensure long-term enforcement of IPR laws and
providing greater market access to U.S. IPR-related products.
Under the terms of China’s WTO accession (see above), China agreed to
immediately bring its IPR laws in compliance with the WTO agreement on Trade
Related Aspects of Intellectual Property Rights (TRIP). The USTR has stated on a
number of occasions that China has made great strides in improving its IPR
protection regime, noting that it has passed several new IPR-related laws, closed or
fined several assembly operations for illegal production lines, seized millions of
illegal audio-visual products, curtailed exports of pirated products, expanded training
of judges and law enforcement officials on IPR protection, and expanded legitimate
licensing of film and music production in China. However, the USTR has indicated
that much work needs to be done to improve China’s IPR protection regime.
U.S. business groups continue to complain about significant IPR problems in
China, especially of illegal reproduction of software, retail piracy, and trademark
counterfeiting. It is estimated that counterfeits constitute between 15 and 20% of all
products made in China and totals and accounts for about 8% of China’s GDP.
Chinese enforcement agencies and judicial system often lack the resources (or the
will) needed to vigorously enforce IPR laws; convicted IPR offenders generally face
minor penalties. In addition, while market access for IPR-related products has
improved, high tariffs, quotas, and other barriers continue to hamper U.S. exports;
such trade barriers are believed to be partly responsible for illegal IPR-related
smuggling and counterfeiting in China. Industry analysts estimate that IPR piracy in
China cost U.S. copyright firms $2.3 billion in lost sales in 2005.8 The piracy rate for
IPR-related products in China (such as motion pictures, software, and sound
recordings) is estimated at around 90%.9 In addition, China accounts for a significant
share of imported counterfeit products seized by U.S. Customs and Border
Protection: $64 million, or 69% of total goods seized, in FY2005.
International Intellectual Property Alliance(IIPA), 2006 Special 301 Report: People’s
Republic of China, February 2006 (available at [http://www.iipa.com]).
The IIPA estimated China’s piracy rates in 2005 in the following areas : motion pictures
(93%), records and music (85%), business software (88%), and entertainment software
IPR protection has become one of the most important bilateral trade issues
between the United States and China in recent years:
In April 2004, the Chinese government pledged to “significantly
reduce” IPR infringement levels by increasing efforts to halt
production, imports, and sales of counterfeit goods and lowering the
threshold for criminal prosecution of IPR violations.
On November 19, 2004, eight members of the House Ways and
Means Committee sent a letter to the Chinese Ambassador to the
United States (Yang Jiechi) expressing concern that proposed
Chinese regulations on government procurement of software would
virtually lock out U.S. software companies due to requirements for
local content and technology transfer.
On December 16, 2004, General Motors Daewoo Auto &
Technology Company (a division of General Motors) filed a case in
China against Chery Automobile Co. Ltd. (a Chinese firm) for
allegedly violating its IPR by copying one of its car models (the
Chevrolet Spark) to produce the Chery QQ. The two companies
reportedly settled the issue in November 2005. 10 However, case has
raised concern in the United States because Chery is planning to
export its vehicles to the United States beginning in 2007.
On February 9, 2005, the International Intellectual Property Alliance
and the U.S. Chamber of Commerce urged the USTR to initiate
WTO consultations with China for its poor record on IPR
On April 29, 2005, the USTR announced that it had placed China on
the Special 301 “Priority Watch List,” due to “serious concerns”over
China’s compliance with its WTO IPR obligations and China’s
failure to fully implement its pledges on IPR made in April 2004 to
make a significant reduction in IPR piracy. The USTR urged China
to launch more criminal piracy cases and to improve market access
for IPR-related products, and warned that it was considering taking
a case to the WTO if IPR enforcement did not soon show significant
During the JCCT July 2005 meeting, China agreed to boost
enforcement of IPR, such as increasing criminal prosecutions of IPR
offenders, improving cooperation among Chinese enforcement
officials and between U.S. and Chinese IPR officials, and taking
special steps to halt movie and internet piracy. It also pledged to
improve government coordination of enforcement efforts, and to
ensure the use by all levels of the Chinese government (including
state-owned firms) of legitimate software products. In addition, the
Asia Wall Street Journal, November 21, 2005.
Chinese government agreed to delay implementing proposed
regulations restricting government purchases of foreign-made
Most Recent Action on IPR. On October 26, 2005, the United States
initiated a special process under WTO rules to obtain detailed information on China’s
IPR enforcement efforts. On December 22, 2005, China responded by challenging
the legal basis for such a request in the WTO. U.S. officials have stated, that failure
by China to provide the requested information could lead the United States to bring
a trade dispute resolution case against China in the WTO over its lack if IPR
protection. During the JCCT meeting on April 11, 2006, China pledged to improve
IPR protection by requiring computers manufactured in China to contain legitimate
software. On April 19, 2006, Chinese president Hu asserted that licensed computer
software was being introduced in all levels of government and that in 2006 , this
would be extended to include large enterprises.
Chinese Acquisition of U.S. Companies
China’s rise as an economic power has raised a number of concerns among U.S.
policymakers. Of particular concern over the past year has been efforts by Chinese
companies with substantial state ownership to make bids to take over major U.S.
companies. Many Members believe these takeovers could pose risks to U.S.
economic and national security interests. Some of these major takeover bids include:
On December 8, 2004, Lenovo Group Limited, a computer company
primarily owned by the Chinese government, signed an agreement
with IBM Corporations to purchase IBM’s personal computer
division for $1.75 billion. On April 30, 2005, the acquisition was
On June 20, 2005, Haier Group, a major Chinese home appliances
manufacturer, made a $1.28 billion bid to take over Maytag
Corporation. The bid was withdrawn on July 19, 2005.
On June 23, 2005, the China National Offshore Oil Corporation
(CNOOC), through its Hong Kong subsidiary (CNOOC Ltd.), made
a bid to buy a U.S. energy company, UNOCAL, for $18.5 billion.
On August 2, 2005, CNOOC withdrew its bid.
Congressional concern over Chinese efforts to purchase U.S. concerns is driven
in part by the perception that China does not play by the rules in international trade
policy. For example, most of China’s major companies are state-owned or are
largely owned by the state.11 Many U.S. analysts believe that Chinese state firms are
heavily subsidized by the government (primarily through the banking system where
loans often go unpaid) and that the government has a plan to direct companies under
its control to purchase major international companies to obtain their brand names and
thus become global companies. Some analysts believe that the Chinese government
CNOOC, for example, is 70% owned by the Chinese government.
may also be involved in financing takeover bids. Finally, many Members contend
that Chinese firms should not be allowed to take over U.S. firms because, in most
cases, China does not allow foreign firms to take over major Chinese companies
(rather it sometimes permits minority ownership in some companies).
Congressional Concern Over the CNOOC Bid. CNOOC’s bid to take
over Unocal was particularly troublesome to many Members of Congress. On June
27, 2005, Representative Joe Barton, Chairman of the House Energy and Commerce
Committee, and Representative Ralph Hall, chairman of the House Energy and
Commerce Subcommittee on Energy and Air Quality sent a letter to President Bush
expressing “deep concern” over CNOOC’s bid to take over Unocal, describing it “a
clear threat to the energy and national security of the United States.” The letter went
on to state that the transaction would put vital oil assets in the Gulf of Mexico and
Alaska into the hands of a Chinese state controlled company, contrary to the goal of
enhanced energy independence embodied in the House-passed energy bill (H.R. 6).
Finally, the letter stated that the deal could transfer “a host of highly advanced
technologies” to China. The letter concluded by urging the President to ensure that
“vital U.S. energy assets are never sold to the Chinese government.” In the Senate,
letters written by Senators Conrad, Portman, and Grassley expressed concerns that
CNOOC’s bid to take over Unocal would be heavily subsidized by the Chinese
government and urged the Administration to determine whether the CNOOC bid
would be a violation of China’s WTO commitments. Several bills were introduced
on CNOOC’s bid, including some that would have blocked the sale had it gone
CNOOC made a number of pledges to allay concerns, including promising that
most of the oil and gas produced by UNOCAL in the United States would still be
sold in the United States and that most Unocal jobs in the United States would be
retained. The chairman of CNOOC stated that his company’s main interest in
UNOCAL was its large holdings of oil and gas in Asia, not the United States.
However, on August 2, 2005, CNOOC announced it was withdrawing its bid, citing
significant political opposition to the sale in the United States, which the company
termed as “regrettable and unjustified.”12
Textile and Apparel Products
Various U.S. industry groups have called on the Administration to invoke
special safeguard provisions (included in China’s WTO accession package) that
would enable the United States to restrict imports of certain Chinese products
deemed harmful to U.S. industries. U.S. producers of textile and apparel products
have been particularly vocal over the competitive pressures they face from China,
especially since U.S. textile and apparel quotas on Chinese goods were eliminated
in January 2005.13 According to the U.S. Commerce Department, China is the United
For an overview of this issue, see CRS Report RL33093, China and the CNOOC Bid for
Unocal: Issues for Congress, by Dick K. Nanto, James K. Jackson, and Wayne M.
For additional information on U.S.-China textile issues, see CRS Report RL32168,
States’ largest foreign supplier of textiles and apparel, accounting for one-third of
total imports in 2005 (or $16.8 billion). U.S. textile and apparel imports from China
were 43.7% higher than they were in 2004 (compared with an 8.3% growth in total
U.S. imports of these products from the world). The sharp rise in textile and apparel
imports from China led the Administration to seek an agreement with China to limit
the level of its textile and apparel exports to the United States. On November 8,
2005, China agreed to restrict various textile and apparel exports to the United States
(according to specified quota levels) from January 2006 through the end of 2008.
U.S.-China Trade Legislation in the 109th Congress
A number of bills that would affect U.S.-China trade relations have been
introduced in the 109th Congress. This section lists major bills and congressional
Comprehensive China Trade Legislation
Legislation has been introduced that seeks to address a wide number of trade
disputes in U.S.-China relations:
H.R. 3283 (English) would apply U.S. countervailing laws (dealing
with foreign government subsidies) to non-market economies;
establish a comprehensive monitoring system to track China’s
compliance with specific WTO commitments and pledges made at
JCCT meetings (such as on market access, IPR protection, and
reporting subsidies), and to require reports to Congress on China’s
progress on meeting these commitments; tighten rules on antidumping duties to prevent non-payment; require the Treasury
Department to define “currency manipulation,” describe actions that
would be considered to constitute manipulation, and report on
China’s new currency regime; increase funding for the USTR to
improve monitoring and enforcement of U.S. trade agreements; and
require the U.S. International Trade Commission to conduct a
comprehensive study on U.S.-China trade and economic relations.
The bill passed (255 to 168) on July 27, 2005. A similar bill has
been introduced in the Senate, S.1421 (Collins).
S. 2467 (Grassley) would require the Treasury Department to engage
the International Monetary Fund (IMF) and other countries to
resolve major currency imbalances with the dollar and would take
specific action against countries that refuse to promote the fair
valuation of their currency; require the Secretary of Treasury to
identify “fundamentally misaligned currencies” that adversely affect
the U.S. economy; and require the USTR’s office to work more
Safeguards on Textile and Apparel Imports from China, by Vivian C. Jones.
closely with Congress in identifying and resolving the most serious
trade and investment barriers faced by U.S. firms.
H.R. 3306 (Rangel) would apply U.S. countervailing laws to nonmarket economies; require the USTR to bring a case against China
in the WTO over its currency practices; define currency
manipulation in U.S. trade law as “protracted large-scale
intervention by an authority to undervalue its currency in the
exchange market;” narrow the discretion of the USTR and the
President to deny relief for U.S. industries that are injured due to
import surges from China; tighten rules on anti-dumping duties to
prevent non-payment; and would reinstate “Super 301” to require the
President to identify trade expansion priorities and to take action
against countries that maintain the most significant barriers to U.S.
H.R. 4186 (Camp) would create a Chief Trade Prosecutor to ensure
compliance with trade agreements. (The sponsors of the bill named
China and Japan as the prime targets of their bill).
S. 2317 (Baucus) would require the USTR to identify trade
enforcement priorities and to take action with respect to priority
foreign country trade practices, establishes within the USTR’s office
a Chief Enforcement Officer and a Trade Enforcement Working
Bills Addressing China’s Currency Policy
In addition to H.R. 3283, S. 2467, and H.R. 3306, the following bills would
address China’s currency policy:
S. 14 (Stabenow), S. 295 (Schumer), and H.R. 1575 (Myrick) direct
the Secretary of the Treasury to negotiate with China to accept a
market-based system of currency valuation, and imposes an
additional duty of 27.5% on Chinese goods imported into the United
States unless the President submits a certification to Congress that
China is no longer manipulating the rate of exchange and is
complying with accepted market-based trading policies. H.R. 3004
(English) would require the Treasury Department to determine if
China manipulated its currency and to impose additional tariffs on
Chinese goods comparable to the rate of currency manipulation.
S.Amdt. 309 (Schumer) to S. 600 would impose a 27.5% tariff on
Chinese goods if China failed to substantially appreciate its currency
to market levels. (The amendment contained the same language as
On April 6, 2005, the Senate failed (by a vote of 33 to
67) to reject the amendment, In response to the vote, the Senate
leadership moved to allow a vote on S. 295 no later than July 27,
2005, as long as the sponsors of the amendment agree not to sponsor
similar amendments for the duration of the 109th Congress. On June
30, 2006, the sponsors of S. 295 agreed to delay consideration of the
bill after they received a briefing from Administration officials and
were told that China was expected to make significant progress on
reforming its currency over the next few months (which it did in
July). On March 28, 2006, Senators Schumer and Graham stated
that they would move to further delay taking up S. 295, based on
their assessment during a trip to China that the Chinese government
was serious about reforming its currency policy.
H.R. 3157 (Dingell) and S. 377 (Lieberman) direct the President to
negotiate with those countries determined to be engaged most
egregiously in currency manipulation and to seek an end to such
manipulation. If an agreement is not reached, the President is
directed to institute proceedings under the relevant U.S. and
international trade laws (such as the WTO) and to seek appropriate
damages and remedies for affected parties.
H.R. 2208 (Manzullo), S. 984 (Snowe), and S. 1048 (Schumer) adds
changes to the criteria that the U.S. Treasury Department is required
to consider when making a determination on currency manipulation
(including a protracted large-scale intervention in one direction in
the exchange markets) in its report to Congress on exchange rate
H.R. 2414 (Rogers, Mike) would require the Treasury Department
to make a determination whether China’s currency policy interferes
with effective balance of payments adjustments or confers a
competitive advantage in international trade that would not exist if
the currency value were set by market forces. If such a
determination were made, the President would be required to bring
a WTO case against China to seek across-the-board tariffs on
Chinese goods in order to offset the subsidy effects of
H.R. 1216 (English) and S. 593 (Collins) would apply U.S.
countervailing laws to nonmarket economies. H.R. 1498 (Tim Ryan)
would apply U.S. countervailing laws to countries that manipulate
S.Res. 270 (Bayh) expresses the sense of the Senate that the IMF
should investigate whether China is manipulating its currency.
H.Amdt. 381 (Sanders) to H.R. 3057 would prohibit the U.S.
Export-Import Bank from financing the sale of U.S. nuclear power
equipment to China. The amendment passed on June 28, 2005, by
a vote of 313 to 114. A similar measure in the Senate (S.Amdt.1242
to H.R. 3057) failed to pass, by a margin of 37 to 62, on July 19,
H.Con.Res. 203 (Rangel) expresses the sense of the Congress that
the United States should seek a commitment from China to join the
WTO Agreement on Government Procurement.
H.Con.Res. 303 (DeFazio) urges the USTR to take action to ensure
that the China complies with its IPR obligations to protect IPR.
H.R. 738 (Sanders) would terminate NTR status for China, while S.
2267 (Dorgan) would revoke China’s PNTR status.
H.R. 4808 (Walter Jones) would prohibit imports of Chinese autos
unless China maintained the same tariff rate on such vehicles as the
H.R. 4780 (Christopher Smith) would attempt to promote freedom
of expression on the Internet in certain countries (including China).
H.R. 4741 (Ros-Lehtinen) would promote the development and
deployment of technologies to prevent internet jamming by various
countries (such as China).
Most Recent Developments in U.S.-China Trade
On June 30th, 2006, China announced a partial opening of its beef market to U.S.
boneless beef under 30 months of age. However, U.S. officials expressed
disappointment that China had not yet developed a science-based trading protocol for
importing beef from the United States, which would enable the United States to
resume all beef trade with China.
On May 10, 2006, the Treasury Department issued its semi-annual report on
exchange rate policies. The report stated that, while China had moved too slowly in
making its exchange rate regime more flexible, it would not be designated as a
country that manipulates its currency.
On April 13, 2006, Chinese Vice Premier Wu Yi stated that Chinese companies
had signed contracts to purchase $16.2 billion worth of American goods and services,
including airplanes, electronics, auto parts, heavy equipment, software, cotton, and
On April 11, 2006, the 17th session of the U.S.-China Joint Commission on
Commerce and Trade (JCCT) began. China pledged to expand market access for
U.S. beef (by conditionally resuming imports that were suspended in December
2003), telecommunications services, and medical equipment; to improve IPR
protection (such as requiring computers manufactured in China to use legitimate
software); and to begin negotiations to join the WTO Government Procurement
On March 30, 2006, the United States and European Union initiated a WTO
case against China over its discriminatory tax treatment of imported auto parts.
On March 28, 2006, Senators Schumer and Graham stated that they would move
to delay taking up S. 295 (a bill that would impose 27.5% tariffs on Chinese goods
unless China appreciated its currency to market levels) in the Senate, based on their
assessment during a trip to China that the Chinese government was serious about
reforming its currency policy.
On February 14, 2006, the USTR issued a report describing the results of its
“top-to-bottom” examination of U.S. trade policy towards China and outlining steps
that would be taken to strengthen efforts to ensure China’s compliance with its trade
commitments. USTR Rob Portman stated that “overall, our U.S.-China trade
relationship today lacks equity, durability, and balance in the opportunities it