Order Code RL33536
China-U.S. Trade Issues
July 11, 2007
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
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 $343
billion in 2006. China is also now the 2nd largest U.S. trading partner, its 2nd largest
source of U.S. imports, and its 4th largest export market. With a huge population and
a rapidly expanding economy, China is a potentially huge market for U.S. exporters.
However, economic relations have become strained over a number of issues,
including China’s large and growing trade surpluses with the United States; its failure
to fully implement its World Trade Organization (WTO) commitments, especially
in regards to intellectual property rights (IPR); its refusal to adopt a floating currency
system; and its maintenance of industrial policies and other practices deemed unfair
and/or harmful to various U.S. economic sectors.
The Bush Administration has come under increasing pressure from Congress to
take a more aggressive stance against various Chinese economic and trade practices.
It has recently filed a number of trade dispute resolution cases against China in the
WTO, including over China’s failure to protect IPR and afford market access for
IPR-related products, discriminatory regulations on imported auto parts, and import
and export subsidies to various industries in China. In addition, the Administration
recently reversed a long-standing policy that countervailing cases (dealing with
government subsidies) could not be brought against non-market economies (such as
China) when it brought against certain imported Chinese glossy paper products.
Finally, in December 2006, the Administration began a “Strategic Economic
Dialogue” (SED) with China to discuss major long-term economic issues between
the two countries . The latest SED talks were held in May 2007.
Several bills have been introduced in Congress that would impact U.S.-China
economic relations. H.R. 321, H.R. 782, H.R. 1002, H.R. 2942, S. 364, S. 796, and
S. 1607 seek to address China’s currency policy. H.R. 388 would prohibit U.S.
imports of Chinese autos as long as Chinese tariffs on autos are higher than U.S.
tariffs. H.R. 708, H.R. 1229, and S. 974 would clarify that countervailing laws can
apply non-market economies. H.R. 571 would raise tariffs on countries classified
as non-market economies (including China). H.R. 1958 and S. 571 would terminate
China’s permanent normal trade relations (PNTR) status. H.R. 275 attempts to
promote free expression and a free flow of information on the Internet by preventing
U.S. companies from aiding regimes that restrict access to the Internet.
China’s rise as a major economic power has raised a number of concerns over
its impact on the U.S. economy. For example, China is attempting to become a
major producer and exporter of autos and high technology products, which could
increasingly pose competitive challenges to many U.S. firms (especially if China
continues to subsidize its firms). In addition, massive piracy rates in China have not
only cost U.S. firms billions of dollars in lost sales in China, but also in third markets
and in the United States. Finally, imports of certain contaminated food and defective
consumer products from China have raised a number of health and safety concerns.
This report examines major U.S.-China trade issues and will be updated as events
U.S. Trade with China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Major U.S. Exports to China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Major U.S. Imports from China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Major U.S.-China Trade Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Health and Safety Concerns over Certain Imports from China . . . . . . . . . . . 8
U.S. Imports of Recently Identified Tainted or Defective
Products from China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Causes Behind China’s Poor Regulatory System and Implications . . . 10
China’s Currency Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
The Bush Administration’s Response . . . . . . . . . . . . . . . . . . . . . . . . . 13
China Changes its Currency Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
China and the World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . 14
WTO Implementation Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
U.S. WTO Cases Against China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Violations of U.S. Intellectual Property Rights . . . . . . . . . . . . . . . . . . . . . . 18
History of U.S. Efforts to Improve China’s IPR Regime . . . . . . . . . . . 18
The Scope of the IPR Piracy Problem in China . . . . . . . . . . . . . . . . . . 20
The U.S. Files Two WTO Cases Against China on IPR . . . . . . . . . . . 22
Applying U.S. Countervailing Laws to China . . . . . . . . . . . . . . . . . . . . . . . 24
Textile and Apparel Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The U.S.-China Strategic Economic Dialogue (SED) . . . . . . . . . . . . . . . . . 25
U.S.-China Trade Legislation in the 110th Congress . . . . . . . . . . . . . . . . . . . . . . 26
Currency Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Other Legislation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
List of Tables
Table 1. U.S. Merchandise Trade with China: 1980-2006 . . . . . . . . . . . . . . . . . 2
Table 2. U.S. Merchandise Trade Balances with Major Trading Partners: 2006 . 3
Table 3. Major U.S. Exports to China: 2002-2006 . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 4. U.S. Merchandise Exports to Major Trading Partners in
2001 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 5. Top Five U.S. Imports from China: 2002-2006 . . . . . . . . . . . . . . . . . . . 6
Table 6. Major Foreign Suppliers of U.S. Computer Equipment Imports:
2000-2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Table 7. U.S. Imports of Selected Products from China: 2006 . . . . . . . . . . . . . . . 9
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; in 2006, China ranked as the 4th largest export
market and its 2nd largest source of imports. 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
(at $233 billion in 2006), China’s refusal to adopt a floating currency, and failure to
fully implement its WTO obligations, especially in regards to IPR protection.
Several Members have called on the Administration to take a tougher stance against
China to induce it to eliminate economic policies deemed harmful to U.S. economic
interests and/or are inconsistent with WTO rules. In addition, there has been growing
concern over the health and safety of effects of certain contaminated food products
and defective consumer goods , such as tires.
This report provides an overview of U.S.-China economic relations, surveys
major trade disputes, and lists major legislation in the 110th that seeks to address
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 $343 billion in 2006, making China the 2nd largest U.S. trading
partner. Over the past few years, U.S. trade with China has grown at a faster pace
than that with any other major 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. For more information on
China’s economy, see CRS Report RL33534, China’s Economic Conditions, by Wayne M.
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 an estimated $232 billion in 2006 (see
Table 1). The U.S. trade deficit with China is now larger than that of any other U.S.
trading partner. It was more than two and a half times larger than the U.S. deficit
with Japan (the second largest U.S. bilateral trade deficit), and nearly twice as large
as that with the 27 countries that make up the European Union (see Table 2). U.S.
trade data for January to April 2007, indicate that the U.S.-China trade imbalance
rose by 18.6% over the previous period in 2006, indicating that the full year’s
imbalance could rise to around $ 276 billion.
Table 1. U.S. Merchandise Trade with China: 1980-2006
($ in billions)
Source: USITC DataWeb.
Table 2. U.S. Merchandise Trade Balances with Major Trading
($ in billions)
Country or Trading Group
U.S. Trade Balance
European Union (EU27)
Organization of Petroleum Exporting Countries
Association of Southeast Asian Nations
Source: USITC DataWeb.
Major U.S. Exports to China
U.S. merchandise exports to China in 2006 were an estimated $55.2 billion, up
32% over 2005 levels, making China the 4th largest U.S. export market (it was 5th in
2004).2 It could overtake Japan to become the 3rd largest export market in 2007.
U.S. exports to China in 2006 accounted for 5.3% of total U.S. exports (compared
to 3.9% in 2003). The top five U.S. exports to China in 2006 semiconductors and
electronic components, aircraft and parts, waste and scrap, oilseeds and grain, and
resins and synthetic rubber and fibers (see Table 3).
Over the past few years, China has been the fastest growing U.S. export market
among major U.S. export markets as can be seen in Table 4. U.S. exports to China
rose by nearly 188% over the past six years (2001-2006). If these trends continue,
China could replace Japan as the third largest U.S. export market in 2007. Data for
January- April 2007 indicate that the growth in U.S. exports to China rose by 14.5%
over the same period in 2006, indicating that the growth in U.S. exports to China in
2007 may be slower than it was in 2006.
The United States also exports a significant level of private services to China; these totaled
$9.1 billion in 2005.
Table 3. Major U.S. Exports to China: 2002-2006
($ in billions and % change)
NAIC Commodity Groupings
Total all commodities
Semiconductors and other
Aerospace products and parts
(mainly aircraft and parts)
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 2006 using NAIC classification, four-digit level.
Table 4. U.S. Merchandise Exports to Major Trading Partners in
2001 and 2006
($ in billions and % change)
Source: USITC DataWeb.
Note: Ranked by top 10 U.S. export markets in 2006.
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. 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 an estimated 432 million
cellular phone users (as of August 2006), compared to 87 million
users in 2000.
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,
and that figure rose to 136 million users in 2006.
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 7.2 million units
(2006) to 20.7 million units.3 According to some estimates, China
is now the world’s second largest market for new cars. General
Motors (GM) announced that it sold 877 thousand vehicles in China
in 2006, up 32% from 2005, while Ford stated its Chinese sales were
167 thousand vehicles, up 87%. According to China Daily, GM
expects to produce over 1 million vehicles in China in 2007 and
plans to invest $1 billion in China each year through 2010 to expand
production facilities, engineering and design capability, and new
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.
China Daily, September 9, 2004.
China Daily, April 19, 2007. For additional information on China’s auto industry, see
CRS Report RL33317,China’s Impact on the U.S. Automotive Industry, by Stephen Cooney.
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 major source of many U.S. imports, especially labor-intensive
products. In 2006, imports from China totaled $288 billion, accounting for 15.5%
of total U.S. imports in 2006 (up from 6.5% in 1996). U.S. imports from China rose
by 18.2% in 2006 over the previous year. The importance (ranking) of China as a
source of U.S. imports has risen dramatically, from 8th largest in 1990, to 4th in 2000,
to 2nd in 2004 through 2006. During the first four months of 2007, U.S. imports from
China were up by 17.7% over the same period in 2006. At this rate, China could
replace Canada as the largest source for U.S. imports in 2007. The top five U.S.
imports from China in 2006 were computers and parts, miscellaneous manufactured
articles (such as toys, games, etc.), apparel, audio and video equipment, and
communications equipment (see Table 5).
Table 5. Top Five U.S. Imports from China: 2002-2006
($ in billions and % change)
Total All Commodities
commodities (e.g., toys,
Audio and video equipment
Source: U.S. International Trade Commission Trade Data Web.
Note: Commodities sorted by top five imports in 2006 using NAIC classification, four-digit level.
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. According to the U.S. Census
Bureau, in 2006 U.S. imports from China of advanced technology products totaled
$72.7 billion (25.2% of total U.S. imports from China), compared with $29.3 billion
in 2003 (19.2% of total U.S. imports from China).5
Many analysts contend that the sharp increase in U.S. imports from China is
largely the result of movement in production facilities from other (primarily) Asian
countries to China.6 That is, various products that used to be made in Japan, Taiwan,
Hong Kong, etc., and then exported to the United States are now being made in
China (in many cases, by foreign firms in China) and exported to the United States.
An illustration of this shift can be seen in Table 6 on U.S. imports of computer
equipment and parts from 2000-2006. In 2000, Japan was the largest foreign supplier
of U.S. computer equipment (with a 19.6% share of total shipments), while China
ranked 4th (with a 12.1% share). In just six years, Japan’s ranking fell to 4th, the value
of its shipments dropped by over half, and its share of shipments declined to 7.5%
(2006). China was by far the largest foreign supplier of computer equipment in 2006
with a 47.8% share of total U.S. imports. While U.S. imports of computer equipment
from China rose by 382% over the past six years, the total value of U.S. imports from
the world of these commodities rose by only 22%. Many analysts contend that a
large share of the increase in Chinese computer production has come from foreign
computer companies that have manufacturing facilities in China.
Table 6. Major Foreign Suppliers of U.S. Computer Equipment
($ in billions and % change)
Source: U.S. International Trade Commission Trade Data Web.
Note: Ranked according to top 6 suppliers in 2006.
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),
U.S. Census Bureau, Foreign Trade Division.
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 2006.
concerns over unsafe Chinese food and consumer products, 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 Chinese industrial policies used to
promote and protect domestic industries. Several bills have been introduced to
respond to several of these issues (see section on legislation).
Health and Safety Concerns over Certain Imports from China
During the past year, a number of concerns have been raised over the health and
safety of imported Chinese products after U.S. federal agencies took the following
In March 2007 The Food and Drug Administration (FDA) issued
warnings and recalls on certain pet foods (or products such as rice
protein concentrate and wheat gluten used to manufacture pet food
and animal feed) believed to have caused the sickness and deaths of
numerous pets in the United States.7
In May 2007 the FDA issued warnings on certain toothpaste
products (some of which were found to be counterfeit) found to
contain poisonous chemicals.
In June 2007, the Consumer Product Safety Commission announced
a voluntary recall of certain Chinese-made toy trains containing lead
In June 2007, the National Highway Traffic Safety Administration
ordered a recall of 450,000 tires made in China that are suspected to
have a major safety defect (i.e., missing or insufficient gum strip
inside the tire).
In June 2007, the FDA announced import controls on all farm-raised
catfish, basa, shrimp, dace (related to carp), and eel from China due
to chemical residues that have been found. Such products will be
detained until the shipments are proven to be free of the banned
U.S. Imports of Recently Identified Tainted or Defective Products
from China. Table 7 lists U.S. 2006 imports from China of products that have
For an overview of issues concerning U.S. food imports from China, see CRS Report
RL34080, Food and Agricultural Imports from China, by Geoffrey S. Becker.
In addition to the incidents noted above, on June 28, 2007, the FDA reported in a press
release that Robert’s American Gourmet, Inc., was conducting a nationwide recall of various
snack foods after it was discovered that Salmonella had been detected in some of these
foods. The company attributed the cause of the Salmonella to a seasoning that is primarily
made in China.
been the subject of recent U.S. health and safety concerns, such as toys, fish, tires,
animal foods, and toothpaste.9 It indicates that in 2006, China was a major source
of imports for most of these products:
China was the dominant supplier of imported dolls, toys, and games.
These totaled $14.6 billion and accounted for 86% of total U.S.
imports of these products.
China was the largest foreign supplier of fresh, chilled, or frozen fish
and other marine product at nearly $1.7 billion, or 19.8% of total
imports of this category.
China was the largest foreign supplier of tires at $1.9 billion, or
22.0% of total.
China was the second largest foreign supplier of animal food
products at $135 million, or 23.8% of total .10
China was the sixth largest supplier of U.S. toothpaste at $3.3
million, or 3.5% of total.11
Table 7. U.S. Imports of Selected Products from China: 2006
Dolls, toys, and games
as a Source of
As a % of
Fish and other marine products
(fresh, chilled, or frozen,
Source: USITC DataWeb.
Note: Commodities sorted by top five imports in 2006 using NAIC classification, five-digit level.
These are generally broad categories of the products in question rather than the value of
tainted or defective products. Data obtained from the U.S. International Trade Commission
(USITC) DataWeb using the North American Industrial Classification System (NAICS) on
a 5-digit level.
This figure likely does not include tainted ingredients (such as rice protein concentrate
and wheat gluten) from China used to make pet food in the United States.
Counterfeit toothpaste products (some of which have been falsely packaged and labeled
as being manufactured in South Africa) are believed to have been brought into the United
States from China.
Causes Behind 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 poorly enforced regulations, lack
of inspections, ineffective penalties for code violators, the proliferation of fake
goods, the existence of numerous unlicensed producers, falsified export documents,
extensive pollution,12 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,13 and extensive government corruption and lack of accountability,
especially at the local government level. The Chinese state controlled media has
reported numerous incidents involving unsafe/unhealthy products:
In June 2004, the Chinese People’s Daily reported that fake baby
formula had killed 50 to 60 infants in China.14
In June 2006, the China Daily reported that 11 people had died from
a tainted injection used to treat gall bladders. The drug reportedly
contained a toxic chemical. Some reports stated the toxic chemical
was sold to the Chinese pharmaceutical manufacturer without its
knowledge, while others stated that the company used the chemical
to cut costs.
In August 2006, Xinhua News Agency reported that a defective
antibiotic drug killed seven people and sickened many others.
In March 2007, the People’s Daily reported that in 2006 China
experienced a string of food safety problems, including
steroid-tainted pork, parasite-infested snails, turbots (fish) that
contain excessive amount of carcinogens, and ducks that were fed
cancer-causing dye to make their egg yolks red.
In May 2007, the Xinhua News Agency reported that former director
of China’s State Food and Drug Administration had been sentenced
to death for taking bribes (equivalent to $850,000) in return for
approving untested and/or fake medicines; he was executed on July
For example, many fish farmers in China are believed to feed various drugs to help keep
their fish alive in polluted waters. See Washington Post, Farmed in China’s Foul Waters,
Imported Fish Treated with Drugs; Traditional Medicine, Banned Chemicals Both Used,
July 6, 2007, p. A1
China’s media often reports on health and safety problems, but rarely criticizes the central
government for such problems.
People’s Daily, June 25, 2004.
Two other former high level officials from the same agency have been convicted on
In June 2007, the China Daily reported that a nationwide inspection
of the food production industry had found that industrial raw
materials, such as dyes, mineral oils, paraffin wax, formaldehyde
and the carcinogenic malachite green, have been used in the
production of flour, candy, pickles, biscuits, black fungus, melon
seeds, bean curd, and seafood. In addition, some processors use
recycled or expired food in their operations. As a result, the
government reportedly closed 180 food factories found to be
producing unsafe products and/or making fake commodities.
In June 2007, the China Daily reported that in 2006, the government
had conducted 10.4 million inspections, uncovering problems in
360,000 food businesses (including food processors, distributors,
sellers, and eateries) and had closed 152,000 unlicensed food
In July 2007, the China Daily reported that half of the water coolers
sold in Beijing may be using “fake water” (i.e., tap water or purified
water of miscellaneous small brands that are poured into empty
barrels and then are sealed with quality standard marks).
In July 2007, the Xinhua News Agency reported that the government
had conducted an extensive survey of 7,200 different products from
6,362 enterprises, with an emphasis on food, everyday commodities,
and farming machinery and fertilizers. The survey found that 19.1%
of products made in China for domestic consumption in first half of
2007 were substandard (although the government stated this was an
improvement over last year’s figure of 21.6%).
Although China has criticized the United States 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. 16
In May 2007, the government reported that it would, by the end of 2007, complete
regulations for setting up up a national food recall system. 17 It also reported that it
would ban the sale of toys that fail to pass a national compulsory safety certification.
In July 2007, the China Daily reported that the government had finished making
amendments to all food safety standards and had established an emergency response
mechanism among several ministries to deal with major problems regarding food
For example, the government has announced rules banning the holding of drug company
shares by drug supervision officials or their families, and officials may not accept lecture
fees, consultant fees, or expensive gifts offered by drug companies and intermediate
Xinhua News Agency, May 29, 2007.
China Daily, July 4, 2007.
China’s Currency Policy19
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 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).
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%). They charge that China’s currency policy makes Chinese exports
to the United States cheaper, and U.S. 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 steel), which are forced to
compete against low-cost imports from China, and that this has contributed to the
growing U.S. trade deficit with China. They have called on the Bush Administration
to pressure China either to significantly appreciate its currency or to let it 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 (estimated to have reached nearly $1. 2 trillion at the end
of March 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 $ 414
billion at the end of April 2007.
For additional information on this issue, see CRS Report RS21625, China’s Currency: A
Summary of the Economic Issues, by Wayne Morrison and Marc Labonte; and CRS Report
RL32165, China’s Exchange Rate: Economic Issues and Options for U.S. Trade Policy, by
Wayne Morrison and Marc Labonte.
The Bush Administration’s Response. President Bush has criticized
China’s currency policy on a number of occasions, 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 policy 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 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, marketdetermined 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, then
Deputy U.S. Secretary of State Robert Zoellick complained that China was moving
“agonizingly slow” in making its currency more flexible. In September 2006,
Senators Schumer and Graham stated that they were disappointed with the results of
China’s move to make its currency more flexible, and threatened to bring up their bill
(S. 295) on China’s currency. However, the two Senators later announced that they
had been persuaded by the Bush Administration not to pursue a vote on the bill in
order to give Secretary of Treasury Henry Paulson more time to negotiate with China
on its currency policy. Later, they announced that they would not re-introduce the
bill in the 110th Congress, but instead would attempt to develop a bill on China’s
currency that would be consistent with WTO rules.
On December 19, 2006, the Treasury Department’s report on exchange rate
policies called China’s currency policy “a core issue” in the U.S.-China relationship.
The report noted that China had made progress in 2006 with making its currency
more flexible, but that reforms were cautious and “considerably less than needed.” 20
During an April 14, 2007 International Monetary (IMF) meeting, Secretary of
Treasury Paulson strongly urged the IMF to adopt reforms to strengthen its
surveillance of international exchange rate policies, and to sharpen the focus on
fundamental exchange rate misalignment and inflexible exchange regimes. China’s
currency was a major topic of discussion during the two high level government
meetings held in December 2006 and May 2007 under the newly-created Strategic
Economic Dialogue (SED), discussed in more detail below.
The Treasury Department’s June 2007 exchange rate policy stated that although
China’s central bank continued to heavily intervene in currency markets and that
China’s currency was significantly undervalued, it did not meet the technical
requirements under U.S. law regarding currency manipulation. 21
According to the Bank of China, from July 21, 2005, to June 28, 2007, the
dollar-yuan exchange rate went from 8.11 to 7.57, an appreciation of about 6.7%. 22
Numerous bills have been introduced in Congress to respond to China’s currency
policy (see section on legislation).
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
U.S. Treasury Department, Report to Congress on International Economic and Exchange
Rate Policies, December 19, 2006, p. 2.
The 1988 Omnibus Trade and Competitiveness Act requires the Treasury Department to
determine whether countries manipulate the rate of exchange between their currency and the
United States dollar for purposes of preventing effective balance of payments adjustment
or gaining an unfair competitive advantage in international trade.
Source: Calculated from Bank of China data using the official middle rate.
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 (i.e., by the end of 2006). 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 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. The USTR’s fifth annual China WTO compliance report (issued
in December 2006) 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 imports.
The USTR’s 2006 China WTO report stated that China’s failure to comply with
key areas of its WTO commitments largely stemmed in part 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. In addition, China is
attempting to promote the development of several industries (such as autos, steel,
telecommunications, and high technology products) deemed by the government as
important to China’s future economic development and has implemented policies to
promote and protect them.
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. Some major issues of concern to
the United States include the following:
In December 2006, the Chinese government designated seven
industries (military equipment, power generation and distribution,
oil, telecommunications, coal, civil aviation, and shipping) as critical
to the nation’s economic security and stated it must retain “absolute
control” and limit foreign participation. 23
On June 30, 2006, China announced a partial opening of its beef
market (which had been completely closed to U.S. imports in 2003
due to concerns over mad cow disease). However, U.S. officials
have expressed disappointment that China has failed 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
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. 24“ The U.S. steel industry has expressed growing fears
China Daily, “Nation Lists Sectors Critical to National Economy,” December 19, 2006.
Statement of Timothy Stratford, Assistant U.S. Trade Representative for China Affairs,
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. 25 Such concerns led the
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. 26
U.S. WTO Cases Against China. To date, the United States has initiated
five WTO dispute resolution cases against China:
On April 10, 2007, the USTR filed two IPR-related cases against
China: the first case charges that China has failed to comply with the
TRIPS agreement (namely in terms of its enforcement of IPR laws)
and the second case charges that China has failed to provide
sufficient market access to IPR-related products, namely in terms of
trading rights and distribution services (see below).
On February 5, 2007, the USTR announced it had requested WTO
dispute consultations with China over government regulations that
give illegal (WTO-inconsistent) import and export subsidies to
various industries in China (such as steel, wood, and paper) that
distort trade and discriminate against imports. 27 China’s WTO
accession agreement required it to immediately eliminate such
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
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% 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% to 28% (which is the tariff China currently applies to imports of completed
autos). Source: Inside U.S.-China Trade, April 6, 2006.
Some programs give tax preferences, tariff exemptions, discounted loans, or other benefits
to firms that meet certain export performance requirements, while others give tax breaks
for purchasing Chinese-made equipment and accessories over imports.
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
Violations of U.S. Intellectual Property Rights
History of U.S. Efforts to Improve China’s IPR Regime. 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 TRIPS agreement. The U.S.
Trade Representative’s (USTR) office 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.
IPR protection has become one of the most important bilateral trade issues
between the United States and China in recent years:
During the April 2004 U.S.-China Joint Commission on Commerce
and Trade (established in 1983) meeting, 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 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
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. 28
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 over 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 July 2005 U.S.-China Joint Commission on Commerce
and Trade (JCCT) 29 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 Chinese
government agreed to delay implementing proposed regulations
restricting government purchases of foreign-made software.
Asia Wall Street Journal, November 21, 2005.
The JCCT was established in 1983 to serve as a government-to-government consultative
mechanism to resolve trade concerns and promote bilateral commercial opportunities.
On October 26, 2005, the United States initiated a special process
under WTO rules to obtain detailed information on China’s IPR
enforcement efforts. However, on December 22, 2005, China
responded by challenging the legal basis for such a request in the
WTO and subsequently refused to provide the data.
During the JCCT meeting on April 11, 2006, China pledged to
improve IPR protection by requiring that computers manufactured
in China 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 state enterprises.
On April 28, 2006, the USTR listed China as a Priority Foreign
Country in its Special 301 report, and stated that, based on China’s
limited progress in improving its IPR enforcement regime, the
USTR was close to filing a WTO dispute case against China. In
addition, the USTR indicated that next year’s Special 301 report
would include a survey of China’s IPR protection practices at the
provincial level. 30 The 2006 report identified Guangdong Province,
Beijing City, Zhejiang Province, and Fujian Province as “hot spots”
that required additional attention and resources for IPR enforcement.
The report stated that, despite some improvements, China had failed
to meet its April 2004 commitments to substantially reduce the level
of IPR piracy.
The Scope of the IPR Piracy Problem in China. 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. 31 Many business groups contend that poor IPR protection is one of the most
significant obstacles for doing business in China. According to a representative of
the Motion Picture Association of America, “China is the most difficult market to
crack for the U.S. motion picture industry.” Nine out of ten movie DVDs are fake,
and 2005 losses from piracy in China were estimated at $244 million. 32 Major causes
of the high piracy levels in China are attributed to be the Chinese government’s tight
This appears to be motivated by the belief that since IPR enforcement is particularly bad
at the local level, the designation or description of specific provinces might prompt officials
there to boost their enforcement efforts.
Often the Chinese government will announce a major campaign to crack down on piracy,
conducting widespread raids, shutting down illegal factories, and destroying pirated
products. However, once the campaign period is over, enforcement becomes lax, and the
illegal activity resurfaces. As a result, the long term result of the government’s anti-piracy
campaign is negligible.
Statement by Dan Glickman, Chairman and Chief Executive Officer, Motion Picture
Association of America before the House Ways & Means Committee, Subcommittee on
Trade, hearing on Trade With China, February 15, 2007.
restrictions on the number of foreign movies allowed to be imported (20 per year),
extensive periods of government review and censure requirements before a foreign
movie can be legitimately shown, tight limits on distribution of films by foreign
companies, and government pressure on movie houses to show only Chinese-made
movies. American music producers have faced similar problems in terms of high
piracy rates in China (estimated at 85%), trade and investment barriers on legitimate
products, and large-scale exports of pirated music CDs by illegal Chinese firms.
Piracy of music and recordings is estimated to have cost U.S. firms $206 million in
2006, according to the IIPA.33 Pirated music, music videos, and movies are also
widely distributed over the Internet in China.34
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
gross domestic product. A study by the Motion Picture Association of America
estimated that China’s domestic film industry lost about $1.5 billion in revenue to
piracy in 2005 (and that the combined losses of both foreign and Chinese film makers
totaled $2.7 billion). 35 It also found that about half of pirated films in China are
Chinese movies. The Chinese government estimates that 500 million pirated books
are produced each year. 36 Press reports indicate a number of health and safety
problems resulting from counterfeit products in China. For example, in 2004, 13
infants in China reportedly died, and hundreds were sickened, from drinking fake
baby formula. 37 Many observers contend that, without a solid IPR enforcement
regime, innovation and growth of IPR-related industries in China will likely be
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 the following:
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. 38
The International Federation of the Phono-graphic Industry (IFPI) estimates that more
than 350 million illegal discs were sold in China in 2005.
IPR piracy has become so prevalent in China that it has produced a number of humorous
quips, such as “if you did not see a fake DVD, you were not in China,” and (in Shanghai)
“we can copy everything except your mother.”
Reuters, “China Piracy Costs Film Industry $2.7 Billion in 2005,” June 19, 2006.
Xinhua News Agency, March 19, 2007.
New York Times, “China: Prison for Two in Baby Formula Scandal,” August 6, 2004, p.
Some Chinese officials have noted that some individuals who were arrested for IPR piracy
Chinese leaders want to make China a major producer of capitalintensive and high-technology products and thus they are tolerant of
IPR piracy if its helps Chinese firms become more technologically
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. 40
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
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.
The U.S. Files Two WTO Cases Against China on IPR. U.S. trade
officials were reportedly on the verge of filing a WTO dispute resolution case against
China in the fall of 2006 over its inadequate IPR enforcement, but were convinced
by the Chinese government to give them more time to implement new IPR
enforcement policies. In addition, U.S. officials indicated that they were are in the
process of building a WTO case on IPR that would also include Chinese trade
barriers to IPR-related products (which is seen as a major factor in the high piracy
rates in China). 41 Despite various efforts on the part of the Chinese government to
violations expressed shock at their arrest because in their minds they were not harming
On the other hand, IPR piracy may prevent foreign firms from investing in high-tech
production in China.
Some critics of this argument note that China seems to be very efficient at going after
political dissenters and others deemed to be “threats” to social stability.
Inside U.S. Trade, February 21, 2007.
improve IPR enforcement, the USTR decided to file two WTO cases against China
on April 10, 2007. 42
The U.S. WTO cases on China’s IPR regime represent the most comprehensive
and complex cases the United States has filed against any WTO to date. Most WTO
cases involve specific restrictions on specific products; however these two cases
challenge a broad range of China’s IPR policies, and could potentially lead the WTO
to authorize the United States to impose a significant level of sanctions against
China.43 Specifically, the U.S. WTO complaints against China’s IPR regime involve
the following issues: 44
The thresholds for criminal prosecutions of IPR violations are too
high, meaning the government will only pursue cases it considers to
be serious or excessively large, creating a safe harbor for smaller
producers or violators. In addition, the thresholds for prosecuting
IPR violations are based on the value of the pirated products rather
than the value such legitimate products would fetch in the
marketplace. Such thresholds make it very difficult to pursue cases
against many commercial producers of illegal IPR-related products.
China often allows seized imported pirated goods to re-enter the
market rather than disposing of them.
China’s copyright laws fail to protect imported works (such as
movies) that are under review by Chinese censorship authorities (and
must be approved before the works can be distributed in China). As
a result, pirated copies of the works can be widely distributed
without violating copyright law and thus do not face prosecution.
Chinese IPR laws do not appear to allow producers of pirated
products to be prosecuted unless they also illegally distribute such
China has not abided by its 2001 WTO accession agreement to
liberalize its rules on trading rights and distribution services. As a
result, U.S. IPR-related products face significant trade barriers in
China, and such barriers are a major factor for causing the high rate
of piracy in China.
For example, the Chinese government claimed it seized 73 million pirated products in
2006, made improvements to its legal system and increased prosecutions, and that it
developed a national comprehensive strategy to deal with piracy.
If the cases go to a WTO dispute resolution panel, and that panel ruled in favor of the
United States, the panel would seek to estimate that level of trade losses suffered by the
United States due to China’s failure to enforce its IPR laws or to provide market access to
IPR-related products. This figure could potentially be over a billion dollars (based on U.S.
industry estimates of trade losses from IPR piracy in China).
For a full description of these issues, see USTR April 9, 2007 Press Release and related
documents at [http://www.ustr.gov/index.html].
The USTR’s 2007 Special 301 Report (issued on April 30, 2007) stated that its
top IPR protection and enforcement priorities were China (along with Russia). The
report stated that Chinese counterfeit products, such as pharmaceuticals, electronics,
batteries, auto parts, industrial equipment, and toys “pose a direct threat to the health
and safety of consumers in the United States, China and elsewhere.” The report also
included a special province-by-province assessment of IPR protection, the first time
such a assessment has been made of any country.
Applying U.S. Countervailing Laws to China45
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. 46 In addition,
some analysts charge that China’s currency policy constitutes a form of government
export subsidy. 47 Such critics contend that U.S. countervailing laws, which seek to
address the negative impact foreign government subsides on exported products may
have on U.S. producers in the United States, should be applied to nonmarket
economies such as China. 48
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.
Commerce contends that, while China was still a non-market economy for the
purposes of U.S. trade laws, economic reforms in China have made several sectors
of the economy relatively market based, and therefore it is possible to identify the
level of government subsidies given to the Chinese paper firms in question.
Many Members of Congress have called on the Administration to expand its use
of countervailing measures against other Chinese products (as well to apply the law
to the products of other nonmarket economies), and some have argued that
For additional information on this issue, see CRS Report RL33550, Trade Remedy
Legislation: Applying Countervailing Action to Nonmarket Economy Countries, by Vivian
See USTR 2007 National Trade Estimates of Foreign Trade Barriers, April 2, 2007.
They charge that government intervention in currency markets to keep the value of the
yuan low vis-a-vis the dollar, keeps the price of Chinese exports low.
The relief comes in the form of additional duties that are imposed on the imported
products in question after a determination is made that a foreign government subsidized
export to the United States has harmed a U.S. producer. The additional duties are intended
to offset the impact of the subsidy.
Commerce should consider China’s undervalued currency as a factor in determining
the level of countervailing duties.49
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. 50 According to the U.S. Commerce Department, China is the largest
foreign supplier of textiles and apparel to the United States at $27.1 billion,
accounting for 29% of total imports. U.S. textile and apparel imports from China rose
by 20.8% in 2006 over the previous year, and by 211.5% over the past five years. 51
The sharp rise in textile and apparel imports from China, and U.S. industry
contention that these imports were disrupting U.S. markets, led the Administration
to seek an agreement with China to limit its 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.
The U.S.-China Strategic Economic Dialogue (SED)
On September 29, 2006, President Bush and Chinese President Hu agreed to
establish a Strategic Economic Dialogue (SED) in order to have discussions on major
economic issues at the “highest official level.” According to a U.S. Treasury
Department press release, the intent of the SED is to “discuss long-term strategic
challenges, rather than seeking immediate solutions to the issues of the day,” in order
to provide a stronger foundation for pursuing concrete results through existing
bilateral economic dialogues. 52 The first meeting (chaired by Secretary of Treasury
Paulson and Chinese Vice Premier Wu Yi) was held on December 14-15, 2006. The
two sides have focused on four main topics: macroeconomic policy (including
China’s currency policy), innovation and IPR protection, energy and the
environment, and services trade and investment. The United States has sought to use
the talks to induce China to: quicken the pace of its currency reforms, expand market
access for financial and non-financial services (beyond its WTO accession
Legislation has been introduced in the 110th Congress that would clarify U.S. law to
indicate that countervailing laws can apply to nonmarket economies. Other proposed
legislation make “currency manipulation” or “currency misalignment” actionable under U.S.
countervailing laws (see section on legislation).
For additional information on U.S.-China textile issues, see CRS Report RL32168,
Safeguards on Textile and Apparel Imports from China, by Vivian C. Jones.
For more detailed data on U.S. imports of textile and apparel products from China, see
Department of Commerce, Office of Textiles and Apparel Office website at
U.S. Treasury Department press release, December 15, 2006.
commitments), take steps to boost domestic consumption (including developing a
social safety net), improve the business climate in China (such as transparency), and
to address U.S. high priority trade issues (such as Chinese restrictions on U.S. beef,
IPR protection, and health and safety issues regarding Chinese food products).
The second round of SED talks were held on May 22-23, 2007, in Washington,
DC. The Chinese delegation was led by Chinese Vice Premier Wu Yi and included
representatives from 15 ministries. According to the Treasury Department, China
Resume licensing for qualified joint ventures with foreign securities
firms in China and expand the scope of their operations (such as in
securities brokerages, propriety trading, and asset management),
increase the level of permitted foreign investment (by qualified
entities) in China’s securities markets (e.g., stocks, bonds, etc.), and
expand the scope of overseas equity investments that Chinese
nationals are allowed to make through domestic entities.
Allow foreign banks in China to issue RMB bank cards.
Double the number of daily U.S. passenger flights to China by 2012
and provide full liberalization for cargo providers by 2011.
Expand cooperation with the United States on sharing data on
seizures of pirated goods in order to track violators.
Increase cooperation and lower barriers for bilateral trade in
environmental goods and services.
Some Members have expressed disappointment that the two rounds of SED
talks failed to persuade China to make specific commitments on reforming its
currency or to re-open its markets to U.S. beef products, and some have complained
that China’s promises for expanded market access for various services are somewhat
U.S.-China Trade Legislation in the 110th Congress
Several bills have been introduced in the 110th Congress to address various
concerns over China’s economic policies, especially its currency policy.
Currency Legislation. A significant share of trade legislation aimed at China
involves efforts to change China’s currency policy. The bills reflect various
approaches. Some would impose tariffs against Chinese products (equal to the
estimated undervaluation of China’s currency) if China does not appreciate its
currency to market levels. Another approach would apply U.S. countervailing laws
to China’s currency policy in the belief that such a policy constitutes a government
subsidy. Some bills would change U.S. law regarding the Treasury Department’s
bi-annual determination of countries that manipulate their currencies. For example,
some would replace the term currency “manipulation” with currency “misalignment”
and would change factors Treasury would have to consider when determining which
countries to cite, thus increasingly the likelihood that Treasury would have to
designate China. 53 A final approach would make China’s undervalued currency a
factor in U.S. antidumping cases. Major currency legislation includes:
H.R. 321 (English) would require the Treasury Department to
determine if China manipulated its currency and to estimate the rate
of that manipulation (if such a determination were made), which
then would require the imposition of additional tariffs on Chinese
products (equal to the estimated rate of manipulation). The bill also
calls on the United States to file a WTO case against China over its
currency policy and to work within the WTO to modify and clarify
rules regarding currency manipulation.
H.R. 782 (Tim Ryan) and S. 796 (Bunning) would make exchange
rate “misalignment” actionable under U.S. countervailing duty laws,
require the Treasury Department to determine whether a currency is
misaligned in its semi-annual reports to Congress on exchange rates,
prohibit the Department of Defense from purchasing certain
products imported from China if it is determined that China’s
currency misalignment has disrupted U.S. defense industries, and
would include currency misalignment as a factor in determining
safeguard measures on imports of Chinese products that cause
H.R. 1002 (Spratt) would impose 27.5% in additional tariffs on
Chinese goods unless the President certifies that China is no longer
manipulating its currency.
H.R. 708 (English), H.R. 1229 (Davis) and S. 974 (Collins) would
apply U.S. countervailing laws to non-market economies. S. 364
(Rockefeller) would apply U.S. countervailing laws to non-market
economies and make exchange rate manipulation actionable under
H.R. 2942 (Tim Ryan) would apply countervailing laws to
nonmarket economies, make an undervalued currency a factor in
determining antidumping and countervailing duties, require Treasury
to identify fundamentally misaligned currencies and to list those
meeting the criteria for priority action. If consultations fail to
resolve the currency issues, the USTR would be required to take
action in the WTO.
Current U.S. law implies that there has to be intent to prevent an effective balance of
payments or to seek an unfair competitive advantage before a country can be designated as
a currency manipulator. Some of the proposed currency bills attempt to factor out this
“technicality” so that a designation would occur as long as if Treasury found that a currency
was fundamentally misaligned.
S. 1607 (Baucus) would require the Treasury Department to identify
currencies that are fundamentally misaligned and to designate such
currencies for priority action under certain circumstances in its semiannual reports to Congress on exchange. 54 If after consultations the
country maintaining the designated currency policy fails to adopt
appropriate policies, the U.S. would make currency undervaluation
a factor in determining antidumping duties, ban federal procurement
of products or services from the designated country, bar financing by
the U.S. Overseas Private Investment Corporation (OPIC), 55 and
would oppose multilateral financing for that country. If the
designated country failed to take appropriate measures, the USTR
would be required to file a case in the WTO.
S. 1677 (Dodd) would require the Treasury Department to identify
countries that manipulate their currencies regardless of their intent
and to submit an action plan for ending the manipulation; and gives
Treasury the authority to file a case in the WTO.
Other Legislation. Other proposed bills that would affect commercial
relations with China include:
H.R. 275 (Christopher Smith), the Global Online Freedom Act,
attempts to promote free expression and a free flow of information
on the Internet by preventing U.S. companies from aiding regimes
who restrict access to the Internet.
H.R. 388 (Kildee) would prohibit U.S. imports of Chinese autos as
long as Chinese tariffs on autos are higher than U.S. tariffs.
H.R. 571 (Tancredo) would raise tariffs on countries classified as
non-market economies (including China).
H.R. 1958 (Kaptur) and S. 571 (Dorgan) would terminate China’s
permanent normal trade relations (PNTR) status and instead would
re-apply provisions of U.S. trade law that would extend conditional
normal trade relations (NTR) status to China, renewable on an
annual basis, as specified under Title IV of the 1974 Trade Act, as
A designation would occur based on such factors as protracted large-scale currency
intervention, excessive reserve accumulation, restrictions on capital flows, or any other
policy the Treasury Department determines that would warrant such a designation.
OPIC has been banned from operating in China since 1989 under U.S. sanctions.