China-U.S. Trade Issues

China-U.S. Trade Issues Wayne M. Morrison Specialist in Asian Trade and Finance September 30, 2011May 21, 2012 Congressional Research Service 7-5700 www.crs.gov RL33536 CRS Report for Congress Prepared for Members and Committees of Congress China-U.S. Trade Issues Summary U.S.-China economic ties have expanded substantially over the past three decades. Total U.S.China trade rose from $25 billion in 19791981 to $457503 billion in 20102011. China is currently the secondlargest U.S.United States’ second-largest trading partner, its third-largest export market, and its biggest source of imports. Because U.S. imports from China have risen much more rapidly than U.S. exports to China, the U.S. merchandise trade deficit has surged, risinggrown from $10 billion in 1990 to $273296 billion in 2010. 2011. The rapid pace of economic integration between China and the United States, while benefiting benefiting both sides overall, has made the trade relationship increasingly complex. On the one hand, China’s large population and booming economy have made it a large and growing market for U.S. exporters. Over the past decade, China has been the fastest-growing market for U.S. exports. U.S. exporters and investors. According to one estimate, China is currently a $200 billion market for U.S. firms. U.S. imports of low-cost goods from China greatly benefit U.S. consumers by increasing their purchasing power., and U.S. firms that use China as the final point of assembly for their products, or use Chinese-made inputs for production in the United States, are able to lower costs and become more globally competitive. China’s purchases of U.S. Treasury securities (which stood at nearly $1.2 trillion as of July 2011total nearly $1.2 trillion) help keep U.S. interest rates relatively low. On the other hand, many analysts argue that growing economic ties commercial ties with China have exposed many U.S. firms to greater competition from low-cost Chinese firms, which they contend has negatively affected wages and employment in a number of U.S. industries. However, U.S. manufacturing firms to greater, and what is often perceived to be “unfair” competition from low-cost Chinese firms. They argue that this has induced many U.S. production facilities to relocate to China, resulting in the loss of thousands of U.S. manufacturing jobs. Some policymakers have also raised concerns that China’s large holdings of U.S. government debt may give it leverage over the United States. China’s incomplete transition to a free market economy and its use of distortive economic policies have contributed to growing trade friction with the United States over a number of issues, including China’s refusal to allow its currency to appreciate to market levels, its mixed record on economic policies have increasingly strained commercial relations with the United States. Major concerns raised by U.S. policymakers and stakeholders include China’s efforts to maintain an undervalued currency, its mixed record on implementing its World Trade Organization (WTO) obligations, its relatively poor record on protecting intellectual property rights (IPR), and its extensive use of industrial policies and discriminatory government procurement policies to subsidize and protect domestic Chinese firms at the expense of foreign companies. The United States initiated three WTO trade dispute resolutions against China in 2010, dealing with such issues as China’s use of subsidies to promote its wind power industries, its use of trade remedy laws to protect domestic industries, and restrictions on electronic payment services. Some Members of Congress have argued that, given the slow rate of U.S. economic growth and the high rate of unemployment, China’s distortive trade policies can no longer be tolerated and have called for tougher action to be taken against China to induce it to eliminate policies that are deemed damaging to U.S. economic interests. These trade frictions may intensify in the future as China attempts to implement policies to increase the output of more advanced products. Opinions differ as to the most effective way of dealing with China on major economic issues. Some support a policy of engagement with China using various forums, such as the U.S.-China Strategic and Economic Dialogue (S&ED). Others support a somewhat mixed policy of using engagement when possible, coupled with a more aggressive use of WTO dispute settlement procedures to address China’s unfair trade policies. Still others, who see China as a growing threat to the U.S. economy and the global trading system, advocate a policy of trying to contain China’s economic power and using punitive measures when needed to force China to “play by the rules.” This report provides an overview of U.S.-China trade relations. It describes the trends in commercial ties, identifies major trade issues, and lists major legislation in the 112th Congress. Congressional Research Service China-U.S. Trade Issues Contents U.S. Trade with China ..................................................................................................................... 1 U.S. Merchandise Exports to China .......................................................................................... 3 Major U.S. Imports from China................................................................................................. 7 Advanced Technology Trade With China.................................................................................. 8 China as a Major Center for Global Supply Chains .................................................................. 8 U.S.-China Investment Ties and Issues ......................................................................................... 11 China’s Holdings of U.S. Securities ........................................................................................ 12 Bilateral FDI Flows ................................................................................................................. 14 Other Investment Indicators .................................................................................................... 16 Investment Issues..................................................................................................................... 16 U.S. Concerns over China’s Investment Regime .............................................................. 19 Major U.S.-China Trade Issues...................................................................................................... 20 China’s Currency Policy.......................................................................................................... 21 Currency Legislation in the 112th Congress............................................................................. 22 China’s Obligations in the World Trade Organization............................................................. 23 WTO Implementation Issues ................................................................................................... 24 Pending U.S. Cases Against China.................................................................................... 25 Resolved Cases or a WTO Panel Has Issued a Ruling...................................................... 25 Violations of U.S. Intellectual Property Rights ....................................................................... 29 The U.S. WTO Cases Against China on IPR .................................................................... 30 Indigenous Innovation and Government Procurement Policies .............................................. 32 Indigenous Innovation Policies ......................................................................................... 33 Chinese Government Procurement Issues......................................................................... 33 China and U.S. Trade Remedy Laws....................................................................................... 35 The Chinese Tire Case....................................................................................................... 35 The U.S.-China Strategic and Economic Dialogue ................................................................. 36 The July 2009 Economic Track Session............................................................................ 36 May 2010 Economic Track Session .................................................................................. 37 The May 2011 Economic Track ........................................................................................ 38 Concluding Observations ........................................................................................................ 38 Figures Figure 1. U.S. Trade With China: 2000-2010 .................................................................................. 2 Figure 2. U.S. Trade Balances with the World and Various Trading Partners: 2010 ....................... 3 Figure 3. Major U.S. Export Markets: 2010 .................................................................................... 4 Figure 4. U.S. Manufactures Imports from Pacific Rim Countries as a Percent of Total U.S. Manufactures Imports 1990, 2000, and 2010 ....................................................................... 9 Figure 5. Share of U.S. Computer Imports from China: 2000-2010 ............................................. 10 Figure 6. China’s Holdings of U.S. Treasury Securities: 2002-2010 (year-end) ........................... 13 Congressional Research Service China-U.S. Trade Issues Tables Table 1. U.S. Merchandise Trade with China: 1980-2010 and Projections for 2011....................... 2 Table 2. Major U.S. Exports to China: 2005-2010 .......................................................................... 4 Table 3. U.S. Merchandise Exports to Major Trading Partners: 2001 and 2010 ............................. 5 Table 4. Major U.S. Imports From China: 2005-2010..................................................................... 7 Table 5. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2010.................. 10 Table 6. China’s Holdings of U.S. Treasury Securities: 2002-2010 .............................................. 12 Table 7. U.S. Data on U.S. –China Bilateral FDI Flows: 2003-2009 and Cumulative Value at Year-End 2009 .............................................................................................................. 15 Contacts Author Contact Information........................................................................................................... 38 Congressional Research Service China-U.S. Trade Issues E conomic and trade reforms (begun in 1979) extensive use of industrial policies (such as financial support of state-owned firms, discriminatory government regulations, pressure on foreign-invested firms in China to transfer technology, and export restrictions on raw materials). Many analysts argue that such policies are harmful to U.S. economic interests and have contributed to U.S job losses. For example, one U.S. government study estimated that IPR infringement in China cost U.S. IPR-intensive firms $48 billion in 2009. Some Members of Congress advocate a more aggressive U.S. trade policy towards China, such as increasing the number of dispute settlement cases brought against China in the WTO, where the United States has prevailed on a number of issues. During his State of the Union Address in January 2012, President Obama announced plans to create a new Trade Enforcement Unit “charged with investigating unfair trade practices in countries like China.” Some analysts caution that taking a more aggressive stance against China over its trade policies could induce it to retaliate against U.S. exports to, and investment in, China. They further contend that major economic disputes should be dealt with through established high-level bilateral dialogues, such as the Strategic & Economic Dialogue (S&ED) and the U.S.-China Joint Commission on Commerce and Trade (JCCT). They note, for example, that under talks held under these forums, China agreed to eliminate discriminatory government procurement practices linked to the development of “indigenous innovation.” Many trade observers contend that the United States should also continue to press China to rebalance its economic growth model by boosting domestic consumption and decreasing the country’s reliance on exporting for its economic growth. This report provides an overview of U.S.-China trade ties and major issues. Congressional Research Service China-U.S. Trade Issues Contents Most Recent Developments ............................................................................................................. 1 U.S. Trade with China ..................................................................................................................... 2 U.S. Merchandise Exports to China .......................................................................................... 4 Major U.S. Imports from China................................................................................................. 8 China as a Major Center for Global Supply Chains ................................................................ 10 China’s Tariff Schedule ........................................................................................................... 13 U.S.-China Investment Ties........................................................................................................... 14 China’s Holdings of U.S. Securities ........................................................................................ 15 Bilateral Foreign Direct Investment Flows ............................................................................. 17 Issues Raised by Chinese FDI in the United States................................................................. 20 Chinese Restrictions on U.S. FDI in China....................................................................... 23 Major U.S.-China Trade Issues...................................................................................................... 25 Chinese “State Capitalism” ..................................................................................................... 25 China’s Plan to Modernize the Economy and Promote Indigenous Innovation................ 26 Intellectual Property Rights (IPR) ........................................................................................... 29 Technology Transfer Issues............................................................................................... 32 Cyber Security Issues ........................................................................................................ 33 China’s Obligations in the World Trade Organization............................................................. 34 WTO Implementation Issues ................................................................................................... 35 Pending U.S. Cases Against China.................................................................................... 36 Resolved Cases or a WTO Panel Has Issued a Ruling...................................................... 36 China’s Accession to the WTO Government Procurement Agreement (GPA) ................. 39 China’s Currency Policy.......................................................................................................... 40 Currency Legislation in the 112th Congress............................................................................. 41 The U.S.-China Strategic and Economic Dialogue........................................................................ 43 The July 2009 Economic Track Session............................................................................ 43 May 2010 Economic Track Session .................................................................................. 44 The May 2011 Economic Track ........................................................................................ 45 The May 2012 Economic Track ........................................................................................ 45 Concluding Observations............................................................................................................... 46 Figures Figure 1. U.S. Merchandise Trade With China: 2002-2011............................................................. 3 Figure 2. U.S. Trade Balances with Trading Partners: 2011............................................................ 4 Figure 3. Top 5 U.S. Export Markets: 2011..................................................................................... 5 Figure 4. U.S. Manufactured Imports from Pacific Rim Countries as a Percent of Total U.S. Manufactured Imports: 1990, 2000, and 2011.................................................................... 10 Figure 5. U.S. Computer Imports from China as a Percent of U.S. Total Computer Imports: 2000-2011..................................................................................................................... 12 Figure 6. China’s Holdings of U.S. Treasury Securities: 2002-2011 (year-end) ........................... 16 Congressional Research Service China-U.S. Trade Issues Tables Table 1. U.S. Merchandise Trade with China: 1980-2011............................................................... 3 Table 2. Major U.S. Exports to China: 2007-2011 .......................................................................... 6 Table 3. Major U.S. Merchandise Export Markets in 2011 ............................................................. 6 Table 4. Major U.S. Imports From China: 2007-2011..................................................................... 9 Table 5. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-2011.................. 11 Table 6. Comparison of Chinese and U.S. Simple Average MFN Tariff Rates in 2010 ................ 14 Table 7. China’s Holdings of U.S. Treasury Securities: 2002-2011 .............................................. 16 Table 8. U.S. Data on Annual U.S.–China Bilateral FDI Flows: 2005-2010 and Cumulative Value of FDI at Year-End 2010 ............................................................................... 18 Contacts Author Contact Information........................................................................................................... 47 Congressional Research Service China-U.S. Trade Issues E conomic 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 commercial ties. Yet, bilateral trade relations have become increasingly strained in recent years over a number of issues, including a large and growing U.S. trade deficit with China, resistance by China to reform reforming its currency policy, U.S. concerns over China’s mixed record on implementing its WTO WTO obligations, and numerous Chinese industrial policies that appear to impose new restrictions on foreign firms. Several Members of Congress have called on the Obama Administration to take a tougher stance against China to induce it to eliminate economic policies deemed harmful to U.S. economic interests and/or inconsistent with WTO rules. This report provides an overview of U.S.-China economictrade relations, surveys major trade disputes, and lists bills introduced in Congress that could affect bilateral commercial ties. could affect bilateral commercial ties. Most Recent Developments On May 4, 2012, the United States and China concluded the fourth round of discussions held under the Strategic and Economic Dialogue (S&ED). China pledged to continue its efforts to rebalance its economy and to increase foreign access to certain financial services. On April 14, 2012, China announced that it had widened the daily trading limit of its currency, the renminbi (RMB) against the dollar from 0.5% to 1%, a move many analysts contend could enhance the RMB’s flexibility. On March 13, 2012, the United States, Japan, and the European Union jointly initiated a WTO dispute resolution case against China over its export restrictions on rare earths (as well as tungsten and molybdenum). During the visit to the United States by Chinese Vice President Xi Jinping (February 13-17, 2012), China agreed that it would expand market access for American movies, open up its mandatory third-party liability insurance sector for autos to foreign firms, and hold bilateral talks on establishing international guidelines for export financing. On January 30, 2012, a WTO Appellate Body ruled that China’s export quotas and duties on certain raw materials were inconsistent with its WTO obligations. The case was originally brought by the United States in 2009. During his State of the Union Address on January 24, 2012, President Obama announced that he would create a new federal Trade Enforcement Unit “charged with investigating unfair trade practices in countries like China.” On February 28, 2012, President Obama issued an executive order establishing an Interagency Trade Enforcement Center within the USTR’s office. Congressional Research Service 1 China-U.S. Trade Issues U.S. Trade with China1 U.S.-China trade rose rapidly after the two nations reestablished diplomatic relations (in January 1979), signed a bilateral trade agreement (July 1979), and provided mutual most-favored-nation (MFN) treatment beginning in 1980.2 In 1979 (when China’s economic reforms began), total U.S.-China trade (exports plus imports) was $2 billion; China ranked as the 23rd-largest U.S.United States’ 23rdlargest export market and its 45th-largest source of U.S. imports. In 20102011, bilateral merchandise trade was $457503 billion; China was the second-largest U.S. trading partner (after Canada), the third-largestthirdlargest U.S. export market (after Canada and Mexico), and the largest source of U.S. imports. In recent years, China has been one of the fastest-growing U.S. export markets, and the importance of this market is expected to grow even further, given the pace of China’s economic growth, and as Chinese living standards continue to improve and a sizable Chinese middle class emerges. The U.S. trade deficit with China has surged over the past two decades, as U.S. imports from China have grown much faster than U.S. exports to China. That deficit rose from $10 billion in 1990 to $266 billion in 2008, fell to $227 billion in 2009, and3 then rose to $273 billion in 2010 and to $296 billion in 2011 (see Table 1 and Figure 1).4 As can be seen in Figure 2, the U.S. trade deficit with China in 2010 2011 was significantly larger than that with any other U.S. trading partner and several trading groups. For example, it was larger than the combined U.S. trade deficits with the Organization of the Petroleum Exporting Countries (OPEC), the 27 nations that make up the European Union (EU27), Mexico, Japan, and Canada (together they totaled $235 billion). During the first seven months of 2011, the U.S. trade deficit with China was up 10.3% over the same period in 2010. If this trend continued, the total U.S. trade deficit for the full year in 2011 could top $301 billion (EU27), and the 10 nations that make up the Association of Southeast Asian Nations (ASEAN). Some Members contend that the large U.S. trade deficit is an indicator that the trade relationship is unbalanced, unfair, and damaging to the U.S. economy. In the 112th Congress, H.R. 2909 (Sherman) would terminate China’s normal trade relations status and would direct the President to negotiate a new trade agreement with China in order to achieve a balance of trade in four years. 1 For more information on China’s economy, see CRS Report RL33534, China’s Economic Conditions, by Wayne M. Morrison. For general information on U.S.-China political ties, see CRS Report R41108, U.S.-China Relations: Policy Issues, by Susan V. Lawrence and Thomas Lum. 2 The United States suspended China’s MFN status in 1951, which cut off most bilateral trade. China’s MFN status was conditionally restored in 1980 under the provisions set forth under Title IV of the 1974 Trade Act, as amended (including the Jackson-Vanik freedom-of-emigration provisions). China’s MFN status (which was re-designated under U.S. trade law as normal trade relations status, or NTR) was renewed on an annual basis until January 2002, when permanent NTR was extended to China (after it joined the WTO in December 2001). 3 The decline in the U.S. trade deficit with China was largely due to the effects of the global economic downturn that began in 2008. 4 The U.S. trade deficit for January-March 2012 was up 11.5% over the same period in 2011. If this trend continues, the total U.S. trade deficit with China in 2012 could rise to around $340 billion. Congressional Research Service 2 Congressional Research Service 1 China-U.S. Trade Issues Table 1. U.S. Merchandise Trade with China: 1980-2010 and Projections for 2011 ($ billions) Year U.S. Exports U.S. Imports U.S. Trade Balance 1980 3.8 1.1 2.7 1985 3.9 3.9 0.0 1990 4.8 15.2 -10.4 1995 11.7 45.6 -33.8 2000 16.3 100.1 -83.8 2005 41.8 243.5 -201.6 2006 55.2 287.8 -232.5 2007 65.2 321.5 -256.3 2008 71.5 337.8 -266.3 2009 69.6 296.4 -226.8 2010 91.9 364.9 -273.1 Projected 2011 109.2 410.64 -301.4 Source: U.S. International Trade Commission DataWeb. Note: 2011 projections based on actual data for January to July 2011. Figure 1. U.S. Trade With China: 2000-2010 400 $billions 300 200 100 0 -100 -200 -300 2000 2005 2006 US Export 2007 US Import 2008 2009 2010 US 2011 103.9 393.3 -295.5 Source: U.S. International Trade Commission (USITC) DataWeb. Figure 1. U.S. Merchandise Trade With China: 2002-2011 400 300 200 100 0 -100 -200 -300 2002 2003 2004 2005 Exports 2006 2007 Imports 2008 2009 2010 2011 Trade Balance Source: U. S. International Trade Commission DataWeb. Congressional Research Service 23 China-U.S. Trade Issues Figure 2. U.S. Trade Balances with the World and Various Trading Partners: 20102011 ($ billions) World China OPEC EU27 Mexico Japan ASEAN -79.8 -66.3 -59.8 -66.3 Canada 0 -100 -95.6 -28.3 -200 -300 -273.1 -400 -500 -600 -700 $billions -634.6 ASEAN Canada 0 -100 -138.6 -200 -300 -99.2 -65.6 -62.6 -41.8 -35.7 -295.5 -400 -500 -600 -700 -800 -726.4 Source: U.S. International Trade Commission DataWeb. U.S. Merchandise Exports to China U.S. merchandise exports to China in 20102011 were $91103.9 billion, up 13.1% over 2010 levels.5 (up 32.1% from 2009 levels).3 China replaced Japan as the third-largest U.S. merchandise export market in 2007 and has remained so through 2010 (see Figure 3). U.S. exports to China in 2010 accounted for 7.2% of total U.S. exports, compared to 2.1% in 2000.2011 (see Figure 3). From 2000 to 2011, the share of total U.S. exports going to China rose from 2.1% to 7.0%.6 The top five merchandise U.S. exports to China in 2010 were oilseeds and grains, 2011 were waste and scrap, semiconductors and electronic components, aircraft and parts, and resins and synthetic rubber and fibers (see Table 2).4 During the first seven months of 2011, U.S. exports to China were up 18,9% on a year-on-year basis. 3 China isoilseeds and grains, aircraft and parts, semiconductors and other electronic components, and motor vehicles (see Table 2). China is also a significant market for U.S. exports of private services; these, which totaled $15.621.1 billion in 20092010 (the most recent year available), which was a 35.3% increase over 2009 levels, making China the ninthseventh-largest export market for U.S. private services. 44 Based on the North American Industry Classification system (NAIC) system on a 4-digit level. Note, rankings and descriptions of major traded commodities (exports and imports) will differ according to which trade classification system is used as well as the level digit-level that is applied. NAIC categories can be aggregated from two to five digit levels. Congressional Research Service 3 China-U.S. Trade Issues Figure 3. Major U.S. Export Markets: 2010 $billions 300 248.2 250 200 163.3 150 91.8 100 60.5 48.5 50 0 Canada Mexico China Japan United Kingdom Source: U.S. International Trade Commission DataWeb. Over the past few years, China has been among the fastest-growing U.S. export markets, as can be seen in Table 3. In 2010, China was the second-fastest-growing export market (after South Korea). From 2001 to 2010, U.S. exports to China increased by about 379%, which was significantly faster than U.S. exports to other major U.S. exports markets. Table 2. Major U.S. Exports to China: 2005-2010 ($ millions and percent change) Description 2005 2006 2007 2008 2009 Percent Change 2009– 2010 (%) 2010 Oilseeds and grains (mainly soybeans) 2,339 2,593 4,145 7,316 9,376 11,208 19.5 Waste and scrap 3,670 6,071 7,331 7,562 7,142 8,561 19.9 Semiconductors and other electronic components 4,015 6,830 7,435 7,475 6,042 7,555 25.1 Aerospace products and parts (mainly aircraft) 4,535 6,309 7,447 5,471 5,344 5,766 7.9 Resin, synthetic rubber, and artificial & synthetic fibers & filament 2,127 2,548 3,290 3,524 4,036 4,336 7.4 41,837 55,224 65,238 71,457 69,576 91,878 32.1 Total U.S. Exports to China Source: USITC DataWeb. Top five U.S. exports to China in 2010. Note: North American Industry Classification (NAIC) system, 4-digit level. Congressional Research Service 4 China-U.S. Trade Issues Table 3. U.S. Merchandise Exports to Major Trading Partners: 2001 and 2010 ($ billions and percent change) 2001 2010 Percent Change from 2009-2010 (%) Percent Change from 2001-2010 (%) Canada 163.7 248.2 21.2 51.6 Mexico 101.5 163.3 26.6 60.9 China 19.2 91.9 32.1 378.6 Japan 57.6 60.5 18.3 5.0 United Kingdom 40.8 48.5 6.1 18.9 Germany 30.1 48.2 11.3 60.1 South Korea 22.2 38.8 35.6 74.8 Brazil 15.9 35.4 35.1 122.6 Netherlands 19.5 35.0 8.2 79.5 Singapore 17.8 29.2 30.8 64.0 731.0 1,277.5 20.9 74.8 World Source: U.S. International Trade Commission DataWeb. Note: Ranked by top 10 U.S. export markets in 2010. private services. According to the U.S.-China Business Council, the total market for the sale of U.S. goods and services in China (i.e., U.S. exports and sales by U.S.-invested firms in China) could be as high as $200 billion annually.7 5 This was a slowdown from 2010 when U.S. exports to China increased by 32.1% over the previous year. However, China’s share of U.S. exports in 2011 was lower than the 7.2% level that occurred in 201. 7 The U.S. China Business, The President’s 2012 Trade Agenda, Testimony by John Frisibie, President, U.S.-China Business Council to the Senate Finance Committee, March 7, 2012. 6 Congressional Research Service 4 China-U.S. Trade Issues Figure 3.Top 5 U.S. Export Markets: 2011 ($ billions) 300 281 250 198 200 150 104 100 66 56 Japan United Kingdom 50 0 Canada Mexico China Source: U.S. International Trade Commission DataWeb. Although U.S. exports to China slowed somewhat in 2011 relative to previous years (and compared with the growth in U.S. exports to other major trading partners), when measured over a 10-year period, China has been by far one of the fastest-growing U.S. export markets, as seen in Table 3. From 2002 to 2011, U.S. exports to China increased by about 471% (the overall growth in U.S. exports over this period was 213.6%).8 8 During the first three months of 2012, U.S. merchandise exports to China were up by 3.6% over the same period in 2011, which was slower than the rise of total U.S. exports (at 8.7%). Congressional Research Service 5 China-U.S. Trade Issues Table 2. Major U.S. Exports to China: 2007-2011 ($ millions and percent change) NAIC Commodity 2010-2011 Percent Change 2007 2008 2009 2010 65,238 71,457 69,576 91,878 103,879 13.1% Waste and scrap 7,331 7,562 7,142 8,561 11,540 34.8% Oilseeds and grains 4,145 7,316 9,376 11,208 11,500 2.6% Aerospace products and parts 7,447 5,471 5,344 5,766 6,392 10.9% Semiconductors and other electronic components 7,435 7,475 6,041 7,555 5,668 -25.0% Motor vehicles 908 1,194 1,134 3,515 5,369 52.7% Basic chemicals 2,914 3,090 3,433 4,202 4,658 10.8% Resin, synthetic rubber, & artificial & synthetic fibers & filament 3,290 3,524 4,036 4,336 4,476 3.2% Navigational, measuring ,electromedical, and control instruments 2,444 2,886 2,917 3,782 4,275 13.0% Other general purpose machinery 1,885 2,273 1,890 2,445 3,113 27.3% Other agricultural products 1,558 1,786 1,008 2,328 2,825 21.4% Total Exports to China 2011 Source: USITC DataWeb. Note: Top 10 U.S. exports to China in 2011using the North American Industry Classification (NAIC) System on a 4-digit level. Table 3. Major U.S. Merchandise Export Markets in 2011 ($ billions and percent change) 2002 2010 2011 2010-2011 Percent Change 2002-2011 Percent Change Total Global U.S. Exports 693.3 1,277.5 1,480.6 15.9% 213.6% Canada 160.8 248.2 280.8 13.1% 174.6% Mexico 97.5 163.3 197.5 21.0% 202.5% China 22.1 91.9 103.9 13.1% 471.0% Japan 51.4 60.5 66.2 9.3% 128.6% United Kingdom 33.3 48.5 56.0 15.4% 168.3% Germany 26.6 48.2 49.1 1.9% 184.5% Korea 22.6 38.8 43.5 12.0% 192.5% Brazil 12.4 35.4 42.9 21.5% 346.1% Netherlands 18.3 35.0 42.8 22.4% 233.6% Hong Kong 12.6 26.6 36.5 37.4% 289.5% Source: U.S. International Trade Commission DataWeb. Congressional Research Service 6 China-U.S. Trade Issues 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.9 China’s goals of modernizing its infrastructure, upgrading its industries, and improving rural living standards could 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, large foreign exchange reserves (at over $2.853.2 trillion as of December 20102011), and large population of over 1.3 billion people make it a potentially enormous market. To illustrate: • According to a report by the Boston Consulting Group, in 2009, China had 148 million “middle class and affluent” consumers, defined as those whose annual household income was 60,000 RMB ($9,160) or higher, and that level is projected to rise to 415 million by 2020.5 In a separate report. the Boston Consulting Group estimated that China had10 According to Bloomberg News, China had an estimated 1.1 million millionaires (converted to U.S. dollars) in 2010. 611 • Although Chinese private consumption as a percent of GDP is much lower than that of most other major economies, the rate of growth of Chinese private consumption has been rising rapidly. For example, private consumption as a percent of GDP in China in 20102011 was 3534.0%, compared to 71.1% in the United % in the United 5 Boston Consulting Group, Big Prizes in Small Places: China’s Rapidly Multiplying Pockets of Growth, November 2010, p. 10. 6 Bloomberg, “China’s Millionaires Jump Past 1 Million on Savings, Expansion of Economy,” June 1, 2011. Congressional Research Service 5 China-U.S. Trade Issues States. However, the annual rate of growth in Chinese private consumption from 2001 to 20102002 to 2011 averaged 8.20%, while the U.S. annual average was 2.1%. 1.9%. • China’s government has indicated that it plans to step up efforts to boost domestic spending to help lessen its dependence on exports as the major contributor to China’s economic growth. In 2008, China began the implementation of a $586 billion economic stimulus package, largely focused on infrastructure projects. China’s goals of developing its western regions, expanding improvingand modernizing its infrastructure, boosting its social safety net (such as as health care and pensions), modernizing and developing key industries, reducing reducing pollution, and raising incomes of the rural poor will likely result in large-scale government spending levels. The Chinese government’s ability to fund these projects is enhanced by the fact that its debt levels are much smaller relatively to those of other major economies. For example, China’s central government budget deficit as a percent of GDP in 2010 was 1.6% versus 8.9% for the United States. China’s public debt as a percent of GDP at the end of 2010 was 16.3% versus 62.3% for the United States.7 • China currently has the world’s largest mobile phone network and one of the fastest-growing markets, with an estimated 889 million mobile phone subscribers as of March 2011, up from 87 million subscribers in 2000.812 China’s 12th Five-Year Plan (20112015) reportedly will allocate $1 trillion in infrastructure spending. • China currently has the world’s largest mobile phone network and one of the fastest-growing markets, with over 1 billion mobile phone subscribers as of March 2012, up from 87 million subscribers in 2000.13 9 China’s real GDP growth from 2008 to 2011 averaged 9.6%. Boston Consulting Group, Big Prizes in Small Places: China’s Rapidly Multiplying Pockets of Growth, November 2010, p. 10. 11 Bloomberg, “China’s Millionaires Jump Past 1 Million on Savings, Expansion of Economy,” June 1, 2011. 12 The Chinese government’s ability to fund these projects is enhanced by the fact that its debt levels are much smaller relatively to those of other major economies. For example, China’s central government budget deficit as a percent of GDP in 2011 was 1.6% versus 8.7% for the United States. China’s public debt as a percent of GDP at the end of 2011 was 16.1% versus 66.1% for the United States. Source: Economist Intelligence Unit, Country Data, database. 13 China Daily, “China Mobile phone users exceed 1 billion,” March 20, 2012, at http://www.chinadaily.com.cn/china/2012-03/30/content_14954435.htm. 10 Congressional Research Service 7 China-U.S. Trade Issues • Boeing Corporation predicts that over the next 20 years (2011-2030), China will buy 5,000 new commercial airplanes valued at $600 billion and will be Boeing'’s largest commercial airplane customer outside the United States. On January 19, 2011, Boeing Corporation announced that the Chinese government had agreed to purchase 200 planes valued at $19 billion.914 • China replaced the United States as the world’s largest Internet user in 2008. At the end 2010of December 2011, China had an estimated 457 million Internet (up 73 million over the previous year) 513 million users versus 240 245 million in the United States.1015 Yet, the percentage of the Chinese population using the Internet is small relative to the United States: 3238.4% versus 77%, 78.3%, respectively. • According to Global Insight, China reportedly overtook Japan in 2009 to become the largest producer of light vehicles (cars and light trucks) at 16.512.9 million units and overtook the United States as the global leader in sales of light vehicles at 13.0 million units.1116 China’s light vehicle sales nearly doubled from 2008 to 2010, 2010 (due largely to government tax subsidies and incentives that were implemented in response to the global economic slowdown). By 20202021, sales of light vehicles in China are projected to reach 29.131.5 million units, which would be 70.2% higher than the nearly double the projected sales in the United States. The number of cars on the road in China rose from 14 million units in 2005 to 40.8 million units 2010, 7 Economist Intelligence Unit, Country Data, database. In comparison, the United States has 303 million mobile phone subscribers. Source: PC World, “China Approaches 900 Million Mobile Phone Users,” April 25, 2011, available at: http://www.pcworld.com/businesscenter/article/226159/china_approaches_900_million_mobile_phone_users.html. 9 Boeing Media, Statement on Chinese Approval of 200 Boeing Aircraft, January 19, 2011. 10 Internet World Stats, at http://www.internetworldstats.com/top20.htm. 11 HIS Global Insight, World Car Industry Forecast Report, December 2010, p. 46. 8 Congressional Research Service 6 China-U.S. Trade Issues and is projected to reach 93.6 million by 2015 from 14 million units in 2005 to an estimated 55.9 million units 2011, and is projected to reach 131.6 million by 2016, a level that would equal 69% of the 96.1% of the projected number of cars on the road in the United States.12 17 • For the first time in its history, General Motors (GM) in 2010 sold more cars and trucks in China (at 2.35 million units) than it did in the United States (2.21 million units).13 According to GM’s website, it operates seven joint ventures and two wholly owned foreign enterprises and has more than 32,000 employees in China. GM sales in China rose by 29% in 2010 while Ford (the second-largest U.S. producer in China) sales increased by 40%.18 In 2011, GM sold 2.55 million vehicles in China (up 8.3% over 2010 levels) versus 2.50 million in the United States. GM in China currently has 11 joint ventures and two wholly owned foreign enterprises and employs more than 35,000 workers.19 Major U.S. Imports from China China was the largest source of U.S. merchandise imports in 20102011, at $365399.3 billion. U.S. imports from China increased by 9.4% in 2011 (compared to 23.1% rise23.1% in 2010) over the previous year.14 China accounted for 19.1% of U.S. imports in 2010 (compared to 8.2% in 2000) China’s share of total U.S. imports rose from 8.2% in 2000 to 19.1% in 2010, but dropped to 18.1% in 2011. The importance (ranking) of China as a source of U.S. imports has risen dramatically, sharply, from eighth- largest in 1990, to fourth in 2000, to second in 200420062004-2006, to first in 2007-20102012. The top five U.S. imports from China in 20010 were computers and parts, 2011 were computer equipment, communications equipment, miscellaneous manufactured articles (such as toys, games, etc.), communications equipment and partsproducts (such as toys and games), apparel, and audio and video equipment (see Table 4). U.S. imports from China from January-July 2011 rose by 12.5% on a year-on-year basis. Table 4. Major U.S. Imports From China: 2005-2010 ($ millions and percent change) 2010 Percent Change 2009–2010 (%) Commodity Description 2005 2006 2007 2008 2009 Computer equipment and parts 35,467 40,046 44,462 45,820 44,818 59,800 33.4 Misc. manufactured commodities (toys, 26,449 games, etc.) 28,888 34,827 35,835 30,668 34,168 11.4 Communications equipment and parts 14,121 17,977 23,192 26,618 26,362 33,464 26.9 Apparel 16,362 19,228 22,955 22,583 22,669 26,603 17.4 Audio and video equipment and parts 15,287 18,789 19,075 19,715 18,243 19,493 6.8 Source: U.S. International Trade Commission DataWeb. Note: North American Industry Classification system, 4-digit level. 12 For additional information on the U.S. auto industry in China, see CRS Report R40924, The Rise of China’s Auto Industry and Its Impact on the U.S. Motor Vehicle Industry, by Rachel Tang. 13 USA Today, GM sells more vehicles in China than in U.S, January 21, 2011, available at: http://www.usatoday.com/money/autos/2011-01-24-gm-china-sales_N.htm. 14 In 2009, U.S. imports fell by 12.4% over the previous year because of the effects of the global economic slowdown. Congressional Research Service 7 China-U.S. Trade Issues Advanced Technology Trade With China Throughout the 1980s and 1990s, nearly all of semiconductors and other electronic parts (see Table 4).20 From January to March 2012, U.S. imports from China were up 9.0% over the same period in 2011. 14 Boeing Corporation, Current Market Outlook: 2011-2030, June 2011. Internet World Stats, at http://www.internetworldstats.com/stats.htm. 16 HIS Global Insight, World Car Industry Forecast Report, September 2011. 17 For additional information on the U.S. auto industry in China, see CRS Report R40924, The Rise of China’s Auto Industry and Its Impact on the U.S. Motor Vehicle Industry, by Rachel Tang. 18 USA Today, GM sells more vehicles in China than in U.S, January 21, 2011. 19 According to GM’s website, it currently has 11 joint ventures and two wholly owned foreign enterprises in China where it employees more than 35,000 workers. 20 China has become a growing source of U.S. private services imports; these totaled $10 billion in 2010, making China (continued...) 15 Congressional Research Service 8 China-U.S. Trade Issues Table 4. Major U.S. Imports From China: 2007-2011 ($ millions and percent change) NAIC Commodity 2007 2008 2009 2010 2011 2010-2011 Percent Change Computer equipment 44,462 45,820 44,818 59,800 68,276 14.2% Communications equipment 23,192 26,618 26,362 33,464 39,806 19.0% Miscellaneous manufactured commodities 34,827 35,835 30,668 34,168 32,672 -4.4% Apparel 22,955 22,583 22,669 26,603 27,554 3.6% Semiconductors and other electronic components 15,353 13,645 12,363 18,263 19,835 8.6% Footwear 13,929 14,230 13,119 15,673 16,482 5.2% Audio and video equipment 19,075 19,715 18,253 19,493 15,853 -18.7% Household and institutional furniture and kitchen cabinets 11,872 11,086 9,128 11,123 11,398 2.5% Household appliances and miscellaneous machines 8,266 8,520 7,724 9,090 9,569 5.3% Other fabricated metal products 6,781 7,242 5,690 7,228 8,638 19.5% 321,508 337,790 296,402 364,944 399,335 9.4% Total imports from China Source: U.S. International Trade Commission DataWeb. Notes: Top 10 U.S. imports from China in 2011 using the North American Industry Classification (NAIC) System on a 4-digit level. Throughout the 1980s and 1990s, nearly all U.S. imports from China were low-value, laborintensive 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 have been comprised of more technologically advanced products. For example, according (see text box below). U.S.-China Trade in Advance Technology Products According to the U.S. Census Bureau, U.S. imports of “advanced technology products” (ATP) from China in 2010 totaled $115.7 2011 totaled $129.5 billion. ATP products accounted for 31.332.4% of total U.S. imports from China, compared with 19.2% ($29.3 billion) in 2003.15 In addition, China in 2010ATP imports from China accounted for 38.5% 33.5% of total U.S ATP imports, compared (compared with 14.1% in 2003). U.S. ATP exports to China in 20102011 were $21.54 billion; these accounted for 23.420.6% of total U.S. exports to China and 8.87.5% of U.S. global ATP exports. In comparison, U.S. ATP exports to China in 2003 were $8.3 billion, which accounted for 29.2% of U.S. exports to China and 4.6% of total U.S. ATP exports to the world. The United States ran a $94.2108.1 billion deficit in its ATP trade with China in 20102011, up from a $21.0 billion deficit in 2003. Some see the large and growing U.S. trade deficit in ATP with China as a source of concern, contending that it signifies the growing international competitiveness of China in high technology. Others dispute this, noting that a large share of the ATP imports from China are in fact relatively low-end technology products and parts, such as notebook computers, or are products that are assembled in China using imported high technology parts that are largely developed and/or made elsewhere. developed and/or made elsewhere. (...continued) the seventh-largest source of private services imports. Congressional Research Service 9 China-U.S. Trade Issues China as a Major Center for Global Supply Chains Many analysts contend that the sharp increase in U.S. imports from China (and hence the growing bilateral trade imbalance) is largely the result of movement in production facilities from other (primarily Asian) countries to China. That is, various products that used to be made in such places as 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. To illustrate, in 1990, 47.1 % of the value of U.S. manufactured imports came from Pacific Rim countries (including China).16 In 201021 In 2011, Pacific Rim countries accounted for 42.746.1% of total U.S. manufactured imports. Over the same period, the share of total U.S. manufactured imports that came from China increased from 3.6% to 21.425.3%. In other words, while China was becoming an increasingly important source for U.S. manufactured imports, the relative importance of the rest of the Pacific Rim (as a whole) as a source of U.S. importsas a whole was declining, in part because many Pacific Rimmultinational firms were shifting their export-oriented manufacturing facilities to China (see Figure 4).17 15 Census broadly defines ATP as products whose technology is from a recognized high technology field and represent leading edge technology in that field. Broad product categories include biotechnology, life sciences, opto-electronics, information and communications, electronics, flexible manufacturing (e.g., robots), advanced materials, aerospace, weapons, and nuclear technology. 16 Pacific Rim countries include Australia, Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, South Korea, Laos, Macao, Malaysia, New Zealand, North Korea, Papua New Guinea, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and several small island nations. 17 U.S. manufactured imports from Pacific Rim countries minus China as a percent of total U.S. manufactured imports fell from 43.5% in 1990 to 21.3% in 2010. Congressional Research Service 8 China-U.S. Trade Issues Figure 4. U.S. Manufacturesexportoriented manufacturing facilities to China (see Figure 4).22 Figure 4. U.S. Manufactured Imports from Pacific Rim Countries as a Percent of Total U.S. Manufactures Imports Total U.S. Manufactured Imports: 1990, 2000, and 2010 %2011 50 40 30 20 10 0 1990 2000 China 2011 Pacific Rim Minus China 2010 China Source: U.S. International Trade Commission DataWeb. Notes: Standard International Trade Classification (SITC) definition of manufactured imports. Another illustration of the shift in production can be seen in the case of U.S. computer imports, which currently areequipment imports, which constitute the largest category of U.S. imports from China (on an NAIC basis, 4-digit level4digit level). Table 5 lists U.S. imports of computer equipment and parts from 2000-20102011. In 2000, Japan was the largest foreign supplier of U.S. computer equipment (with a 19.6% share of total 21 Pacific Rim countries include Australia, Brunei, Cambodia, China, Hong Kong, Indonesia, Japan, South Korea, Laos, Macao, Malaysia, New Zealand, North Korea, Papua New Guinea, the Philippines, Singapore, Taiwan, Thailand, Vietnam, and several small island nations. 22 U.S. manufactured imports from Pacific Rim countries minus China as a percent of total U.S. manufactured imports fell from 43.5% in 1990 to 20.8% in 2011. Congressional Research Service 10 China-U.S. Trade Issues U.S. imports), while China ranked fourth (with a 12.1% share). By 20102011, Japan’s ranking had fallen to third; the value of its shipments dropped by 61.9% over 2000 levels, and its share of U.S. computer imports declined to 5.3% (20104.8% (2011). China was by far the largest foreign supplier of computer equipment in 20102011 with a 61.564.4% share of total U.S. computer equipment imports, imports, compared to 12.0% in 2000 (see Figure 5). While U.S. imports of computer equipment from China from 2000-2010 2011 rose by 620.5722.9%, the total value of U.S. computer imports worldwide rose by 41.9%.18 by 57.7%.23 A study by the U.S. International Trade Commission (USITC) estimated that in 2002 over 99% of computer exports in China were from foreign-invested firms in China19China.24 Taiwan, one of the world’s leaders in sales of information technology, produces over 90% its information hardware equipment (such as computers) in China. 18 China’s accession to the WTO (with the reduction of trade and investment barriers) appears to have been a major factor behind the migration of computer production from other countries to China. 19 USITC, How Much of Chinese Exports Is Really Made In China? Assessing Foreign and Domestic Value-Added in Gross Exports, report number 2008-03-B, March 2008, p. 21. Congressional Research Service 9 China-U.S. Trade Issues as computers) in China. Computer equipment, like many other globally traded products, often involves many stages of production, using parts and other inputs made by numerous multinational firms throughout the world, a significant share of which is assembled in China. The globalization of supply chains makes it increasingly difficult to interpret conventional U.S. trade statistics (see text box). Table 5. Major Foreign Suppliers of U.S. Computer Equipment Imports: 2000-20102011 ($ billions and percent change) 2000 Total 2002 2004 2006 2008 2010 2011 2000-2011 2000-2010 % change 2010 68.5 62.3 73.9 83.8 85.4 97.2 41.9106.0 57.7% China 8.3 12.0 29.5 40.0 45.8 59.8 620.568.3 722.9% Mexico 6.9 7.9 7.4 6.6 6.2 13.6 97.114.5 110.1% 13.4 8.1 6.3 6.3 6.6 5.2 5.1 -61.9%-61.2 Singapore 8.7 7.1 6.6 5.6 4.0 3.6 -58.63.2 -63.2% Thailand 2.4 2.1 2.3 3.2 3.7 3.5 45.83.0 25.0% Japan Source: U.S. International Trade Commission Trade DataWeb. Note: Ranked according to top five foreign suppliers of computer equipment imports in 2011. 23 China’s accession to the WTO (with the reduction of trade and investment barriers) appears to have been a major factor behind the migration of computer production from other countries to China. 24 USITC, How Much of Chinese Exports Is Really Made In China? Assessing Foreign and Domestic Value-Added in Gross Exports, report number 2008-03-B, March 2008, p. 21. Congressional Research Service 11 China-U.S. Trade Issues Figure 5. U.S. Computer Imports from China as a Percent of U.S. Total Computer Imports: 2000-2011 (percent) 70 60 45.2 50 57.5 64.4 39.8 40 29.1 30 20 47.8 51.5 53.7 61.5 19.1 12.0 13.8 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 suppliers in 2010. Figure 5. Share of U.S. Computer Imports from China: 2000-2010 (percent) % 70 61.5 57.5 60 51.5 50 45.2 53.7 47.8 39.8 40 29.1 30 19.1 20 12.0 13.8 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: U.S. International Trade Commission DataWeb. Congressional Research Service 1012 China-U.S. Trade Issues Global Supply Chains, China, and the Apple iPod: Who Benefits? Many U.S. companies sign contracts with Taiwanese firms to have their products manufactured (mainly in China), and then shipped to the United States where they are sold by U.S. firms under their own brand name. In many instances, the level of value-added that occurs in China (often it simply involves assemblage) can be quite small relative to the overall cost/price of the final product. One study by researchers at the University of California looked at the production of a 2005 Apple 30 gigabyte video iPod, which is made in China by Foxconn, a Taiwanese company, using parts produced globally (mainly in Asia). The study estimated that it cost about $144 to make each iPod unit. Of this amount, only about $4, or 2.8% of the total cost, was attributable to the Chinese workers who assembled it; the rest of the costs were attributable to the numerous firms involved in making the parts (for example, Japanese firms provided the highest-value components—the hard drive and the display).2025 From a trade aspect, U.S. trade data would have recorded the full value of each iPod unit imported from China at $144 (excluding shipping costs) as originating from China, even though the value added in China was quite small. The retail price of the iPod sold in the United States was $299, meaning that there was a mark-up of about $155 per unit, which was attributable to transportation costs, retail and distributor margins, and Apple’s profits. The study estimated that Apple earned at least $80 on each unit it sold in its stores, making it the single largest beneficiary (in terms of gross profit) of the sale of the iPod. The study concluded that Apple’s innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries, such as China, has helped enable it to become a highly competitive and profitable firm (as well as a source for high-paying jobs in the United States). The iPod example illustrates that the rapidly changing nature of global supply chains has made it increasing difficult to interpret the implications of U.S. trade data. Such data may show where products are being imported from, but they often fail to reflect who benefits from that trade. Chinese trade data indicate that over 50% of its exports are generated by foreign-invested firms in China. Thus, in many instances, U.S. imports from China are really imports from many countries. U.S.-China Investment Ties and Issues21 Investment plays a major role in U.S.-China commercial ties.22 China’s investment in U.S. assets can be broken down into several categories, including holdings of U.S. securities, foreign direct investment (FDI), and other non-bond investments. A significant share of China’s investment in the United States is comprised of U.S. securities, while FDI constitutes the bulk of U.S. investment in China. The Treasury Department defines foreign holdings of U.S. securities as “U.S. securities owned by foreign residents (including banks and other institutions) except where the owner has a direct investment relationship with the U.S. issuer of the securities.” U.S. statutes define FDI as “the ownership or control, directly or indirectly, by one foreign resident of 10 percent or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise, including a branch.”23 The U.S. Bureau of Economic Analysis (BEA) reports data on FDI flows to and from the United States.24 20 Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple’s iPod, March 2009. 21 U.S. data on FDI flows to and from China differ sharply from Chinese data on FDI flows to and from the United States. This section uses U.S. data only. 22China’s Tariff Schedule China has significantly reduced its tariffs over the past three decades. China’s simple average most-favored nation (MFN) applied tariff rate fell from around 50% in the early 1980s, to 15.6% in 2001, and to 9.6% in 2010.26 However, some U.S. policymakers complain that U.S. exporters to China face much higher tariff rates than do Chinese exporters to the United States. For example, as indicated in Table 6, China’s simple average MFN applied tariff rate in 2010 was 174% higher than the U.S. rate of 3.5%. Such large differences in tariff rates exist across broad product categories. For example, China’s tariff rate on passenger vehicles (25%) was 10 times higher than the U.S. level (2.5%). Imported products into China are also subject to a value-added tax, which ranges from 5% to 17%.27 25 Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple’s iPod, March 2009. 26 In comparison, the simple average MFN applied tariff rate for other major emerging markets was as follows: Russia (9.5%), India (13.0%), and Brazil (13.7%). 27 USTR,2012 National Trade Estimate of Foreign Trade Barriers, March 2012, p. 68. Congressional Research Service 13 China-U.S. Trade Issues Table 6. Comparison of Chinese and U.S. Simple Average MFN Tariff Rates in 2010 (%) China Overall Average Applied MFN Rate U.S. 9.6 3.5 Animal products 14.8 2.3 Dairy products 12.0 20.3 Fruit, vegetables, plants 14.8 4.9 Coffee, tea 14.7 3.2 Cereals & preparations 24.3 3.5 Oilseeds, fats & oils 11.0 4.6 Sugars and confectionery 27.4 10.3 Beverages & tobacco 22.3 15.6 Cotton 15.2 4.1 Other agricultural products 11.4 1.1 Fish & fish products 10.9 1.0 Minerals & metals 7.4 1.7 Petroleum 4.8 1.4 Chemicals 6.6 2.8 Wood, paper, etc. 4.4 0.5 Textiles 9.6 7.9 Clothing 16.0 11.7 Leather, footwear, etc. 13.2 3.9 Non-electrical machinery 8.0 1.2 Electrical machinery 8.3 1.7 Transport equipment 11.5 3.0 Passenger Vehicles 25.0 2.5 Other Manufactures 11.9 2.4 Source: WTO World Tariff Profiles, 2011. Note: Imports into China are also subject to a value-added tax; the standard rate is 17%. U.S.-China Investment Ties28 Investment plays a large and growing role in U.S.-China commercial ties.29 China’s investment in U.S. assets can be broken down into several categories, including holdings of U.S. securities, foreign direct investment (FDI), and other non-bond investments. A significant share of China’s investment in the United States is comprised of U.S. securities, while FDI constitutes the bulk of 28 U.S. data on FDI flows to and from China differ from Chinese data on FDI flows to and from the United States. This section examines only U.S. data. 29 Investment is often a major factor behind trade flows. Firms that invest overseas often import machinery, parts, and other inputs from the parent company to manufacture products for export or sale locally. Other such invested overseas firms may produce inputs and ship them to their parent company for final production. 23 15 CFRS 806.15(a)(1). The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise. See BEA, International Economic Accounts, BEA Series Definitions, available at http://www.bea.gov/international 24 BEA also reports FDI data according to broad industrial sections, including mining; utilities; wholesale trade; information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical services; non-bank holding companies; manufacturing (including food, chemicals, primary and fabricated metals, machinery, computers and electronic products, electrical equipment, appliances and components, transportation equipment, and other manufacturing); and other industries. Congressional Research Service 11 China-U.S. Trade Issues China has Congressional Research Service 14 China-U.S. Trade Issues U.S. investment in China. The Treasury Department defines foreign holdings of U.S. securities as “U.S. securities owned by foreign residents (including banks and other institutions) except where the owner has a direct investment relationship with the U.S. issuer of the securities.” U.S. statutes define FDI as “the ownership or control, directly or indirectly, by one foreign resident of 10% or more of the voting securities of an incorporated U.S. business enterprise or the equivalent interest in an unincorporated U.S. business enterprise, including a branch.”30 The U.S. Bureau of Economic Analysis (BEA) reports data on FDI flows to and from the United States.31 China has also invested in a number of U.S. companies, projects, and various ventures which do meet the U.S. definition of FDI, but which, when added up, are significantand thus, are not reflected in BEA’s data. China’s Holdings of U.S. Securities25Securities32 China’s holdings of U.S. public and private securities are significant.2633 These include U.S. Treasury securities, U.S. government agency (such as Freddie Mac and Fannie Mae) securities, corporate securities, and equities (such as stocks). U.S. Treasury securities, which help the federal government finance its budget deficit, are the largest category of U.S. securities held by China.2734 As indicated in Table 67 and Figure 6, China’s holdings of U.S. Treasury securities increased from from $118 billion in 2002 to nearly $1,160 billion in 2010 (year-end), and its share of total foreign holdings$1.15 trillion in 2011 (year-end), making China the largest foreign holder of U.S. Treasury securities increased from 9.6% to 26.1%., making China the largest foreign holder(it overtook Japan in 2008). China’s holdings of U.S. Treasury securities (it overtook Japan in 2008). The Department of the Treasury reported in September that China’s Treasury securities holdings were $1,174 billion as of May 2011.28 However, this figure likely understates China’s actual holdings by a significant amount.29 securities in 2011 were down 0.7% over the previous year. Because of China’s capital controls and restrictions on foreign investment in China’s equity and bond markets, U.S. holdings of Chinese securities are relatively small compared to U.S. holdings in other countries.35 U.S. holdings of Chinese securities totaled $102.2 billion in 2010 at year end (98.4% of which were in equities), up from $12.7 billion in 1994 year-end.36 China’s large holdings of U.S. securities can be largely attributed to its policy of intervening in exchange rate markets to limit the appreciation of its currency, the renminbi (RMB), to the U.S. dollar (discussed in more detail below). For example, the Chinese government requires Chinese exporters (who are often paid in dollars) to turn over their dollars in exchange for RMB. As a result, the Chinese government has accumulated a significant amount of dollars. Rather than hold onto U.S. dollars, which earn no interest, the Chinese government has chosen to invest many of them into U.S. Treasury securities because they are seen as a relatively safe investment. Table 6. China’s Holdings of U.S. Treasury Securities: 2002-2010 ($ billions and as a percent of total foreign holdings) 2002 China’s Holdings ($ billions) China’s Holdings as a Percent of Total Foreign Holdings 2003 2004 2005 2006 2007 2008 2009 2010 118.0 159.0 222.9 310.0 396.9 477.6 727.4 894.8 1,160.1 9.6% 10.4% 12.1% 15.2% 18.9% 20.3% 23.6% 24.2% 26.1% Source: U.S. Treasury Department, year end data. 25 30 15 CFRS 806.15(a)(1). The 10% ownership share is the threshold considered to represent an effective voice or lasting influence in the management of an enterprise. See BEA, International Economic Accounts, BEA Series Definitions, available at http://www.bea.gov/international. 31 BEA also reports FDI data according to broad industrial sections, including mining; utilities; wholesale trade; information; depository institutions; finance (excluding depository institutions); professional, scientific, and technical services; non-bank holding companies; manufacturing (including food, chemicals, primary and fabricated metals, machinery, computers and electronic products, electrical equipment, appliances and components, transportation equipment, and other manufacturing); and other industries. 32 For additional information on this issue, see CRS Report RL34314, China’s Holdings of U.S. Securities: Implications for the U.S. Economy, by Wayne M. Morrison and Marc Labonte. 26 It is estimated33 The Treasury Department estimates that China’s total holdings of U.S. securities were nearly $1.9 trillion at the end of 2010. 27government and private securities were $1.7 trillion as of June 2011, of which, 76% ($1.3 trillion) were in U.S. Treasury securities. 34 Some observers characterize foreign holdings of U.S. Treasury securities as “foreign ownership of U.S. government debt.” 28 U.S. Department of the Treasury, Major Foreign Holders of U.S. Treasury Securities, May 16, 2011. 29 The Department of the Treasury reports foreign holdings of U.S. Treasury securities on a monthly basis. These monthly data generally reflect the country where the purchase was made. Treasury makes revisions to its monthly data at least once a year, based on a department survey which attempts to determine the country of origin of the purchaser of the security, rather than where it was purchased. Treasury’s revisions usually show a significant increase in the estimated level of China’s Treasury holdings for that year. For example, on February 15, 2011, Treasury reported that China’s holdings of U.S. Treasury securities totaled about $892 billion at the end of 2010. But on February 23, 2011, it revised this number upward by 30% to $1,160 billion, based on the result of its survey of actual holders. Congressional Research Service 12 China-U.S. Trade Issues Figure 6. China’s Holdings of U.S. Treasury Securities: 2002-2010 (year-end) ($ billions) 1,160 $billions 1,200 1,000 895 800 727 600 478 397 400 310 223 200 118 159 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 35 China was the 16th-largest market for U.S. holdings of foreign securities. In terms of U.S. investment in foreign equities, China was the 15th-largest market. 36 U.S. Department of the Treasury, Report on U.S. Portfolio Holdings of Foreign Securities as of December 31, 2010, October 2011. Congressional Research Service 15 China-U.S. Trade Issues holding onto U.S. dollars, which earn no interest, the Chinese government has chosen to invest many of them into U.S. Treasury securities because they are seen as a relatively safe investment.37 Table 7. China’s Holdings of U.S. Treasury Securities: 2002-2011 2002 China’s Holdings ($ billions) China’s Holdings as a Percent of Total Foreign Holdings 2003 2004 2005 2006 2007 2008 2009 2010 2011 118.0 159.0 222.9 310.0 396.9 477.6 727.4 894.8 1,160.1 1,151.9 9.6% 10.4% 12.1% 15.2% 18.9% 20.3% 23.6% 24.2% 26.1% 23.0% Source: U.S. Treasury Department, year-end data. Figure 6. China’s Holdings of U.S. Treasury Securities: 2002-2011 (year-end) ($ billions) 1,400 1,160 1,152 1,200 1,000 895 727 800 600 400 200 118 159 223 310 397 478 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: U.S. Department of the Treasury. Legislation has been introduced in the 112th Congress that would seek to assess the implications for the United States of China’s ownership of U.S. debt. • H.R. 2166 (Sam Johnson) and S. 1028 (Cornyn), both titled “Foreign-Held Debt Transparency and Threat Assessment Act,” would seek to increase the transparency of foreign ownership of U.S. debt instruments, especially in regardsregard to China, in order to better assess the potential risks such holdings could pose for the United States. The bills state, for example, that under certain circumstances, 37 However, over the past years, Chinese officials have expressed concern over the “safety” of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings.37 Some Chinese officials have called for replacing the dollar as the world’s major reserve currency with some other currency arrangement, such as through the International Monetary Fund’s special drawing rights system, although many economists question whether this would be a feasible alternative in the short run. Congressional Research Service 16 China-U.S. Trade Issues China’s holdings of U.S. debt could give it a tool with which it can try to manipulate U.S. domestic and foreign policymaking, including the U.S. relationship with Taiwan; and that China could attempt to destabilize the U.S. economy by rapidly divesting large portions of its holdings of U.S. debt instruments. The bills would require the President to issue a quarterly report on foreign holders of U.S. debt instruments, which would include a breakdown of foreign ownership by country of domicile and by the type of creditor (i.e., public, quasi-public, private); an analysis of the country’s purpose and long-term intentions in regard to its U.S. debt holdings; an analysis of the current and foreseeable risks to U.S. national security and economic stability of each nation’s U.S. debt holdings; and a determination whether such risks are “acceptable or unacceptable.” If the President determined that a foreign country’s holdings of U.S. debt instruments waswere an unacceptable risk, he would be required to formulate an action plan to reduce that risk. Congressional Research Service 13 China-U.S. Trade Issues • H.R. 1540 (McKeon), would, among other things, require the Secretary of Defense to conduct a national security risk assessment of U.S. federal debt held by China.3038 In addition, the Director of the Congressional Budget Office would be required to determine, and make publicly available, the amount of accrued interest on U.S. federal debt paid to China during the past five years. Some analysts contendcounter that China’s holdings of U.S. debt gives it very little practical leverage over the United States. They argue that, given China’s economic dependency on a stable and growing U.S. economy, and its substantial holdings of U.S. securities, any attempt to try to sell a large share of those holdings would likely damage both the U.S. and Chinese economies.3139 Such a move could also cause the U.S. dollar to sharply depreciate against global currencies, which could reduce the value of China’s remaining holdings of U.S. dollar assets. Analysts also note that, while China is the largest foreign owner of U.S. Treasury Securities, those holdings are equal to only 8% of total U.S. public debt (2010)..32 Finally, it is argued that, as long as China continues continues to largely peg the RMB to the U.S. dollar, it has little choice but to purchase U.S. dollar assets in order to maintain that peg, which, it is argued, gives China very little leverage over the United States. Over the past years, Chinese officials have expressed concern over the “safety” of their large holdings of U.S. debt. They worry that growing U.S. government debt and expansive monetary policies will eventually spark inflation in the United States, resulting in a sharp depreciation of the dollar. This would diminish the value of China’s dollar asset holdings.33 Several Chinese officials have publicly called for replacing the dollar as the world’s major reserve currency with some other currency arrangement, such as through the International Monetary Fund’s special drawing rights system. Most mainstream economists do not think this would be a feasible alternative in the short run. Bilateral FDI Flows China’s FDI in the United States is quite small relative to its investments in U.S. securities.34 According to the U.S. Bureau of Economic Affairs (BEA), the cumulative level of Chinese FDI in the United States through the end of 2009 was $791 million on a historical-cost (or book value) basis, while China’s investments in U.S. securities were an estimated $1.6 trillion at year-end 2009.35 According to the BEA, in 2009, China ranked as the 34th-largest source of cumulative FDI in the United States.36 Several analysts note that China often uses offshore locations (such as Hong Kong) to invest in other countries. BEA also reports cumulative FDI data according to the 30 The bill, titled the National Defense Authorization Act for Fiscal Year 2012, was passed by the House on May 26, 2011. 31 Some analysts counter that the ability of China to possibly disrupt the U.S. economy through selling off U.S. government debt (despite the potential costs to the Chinese economy) potentially puts the United States in a vulnerable position. 32 The U.S. federal debt at the end of 2010 was $14.0 trillion. Of this amount, 40.3% was publicly-owned and 59.7% was privately-owned. Foreign investors held 53.5% of privately-owned U.S. federal debt and 31.9% of total U.S. federal debt. 33 See China View, “U.S. stimulus-related debt could hurt investors, China warns,” February 18, 2009. 34 U.S. and Chinese data on FDI flows between each other differ significantly. 35 However, according to Chinese data, its cumulative FDI in the United States from 2003 to 2009 totaled $3.3 billion. 36 BEA data on bilateral investment flows can be found at http://www.bea.gov/international/index.htm#iip. Congressional Research Service 14 China-U.S. Trade Issues country of ultimate beneficial owner (UBO). Those data indicate that Chinese FDI in the United States through 2009 was actually $2.3 billion.37 U.S. FDI in China is significantly higher than China’s FDI in the United States, according to BEA data,. Cumulative U.S. FDI in China through 2009 was $49.4 billion (roughly the size of cumulative U.S. FDI in Spain), making it the 17th-largest overall destination of U.S. FDI. U.S. FDI flows to China fell by about $7 billion in 2009, due largely to the effects of the global economic slowdown (see Table 7). According to BEA, U.S. majority-owned nonbank affiliates in China employed 774,000 workers in China in 2008.38 Table 7. U.S. Data on U.S. –China Bilateral FDI Flows: 2003-2009 and Cumulative Value at Year-End 2009 ($ millions) 2003 2004 2005 2006 2007 2008 2009 Cumulative: Value of FDI in 2009 Year-End China’s FDI in the U.S.* -62 150 146 315 137 368 -271 791 U.S. FDI in China 1,273 4,499 1,955 4,226 5,331 15,726 -6,997 49,403 Source: U.S. Bureau of Economic Analysis. Notes: Cumulative data are on a historical-cost basis. *Excludes Chinese FDI in the United States that may have made through other countries. 37 See BEA UBO tables at http://www.bea.gov/international/di1fdibal.htm. BEA, U.S. Direct Investment Abroad: Financial and Operating Data for U.S. Multinational Companies, available at http://www.bea.gov/international/di1usdop.htm. 38 Congressional Research Service 15 order to maintain that peg. Bilateral Foreign Direct Investment Flows The level of foreign direct investment (FDI) flows between China and the United States are relatively small given the large volume of trade between the two countries.40 Many analysts contend that an expansion of bilateral FDI could greatly improve commercial ties. The U.S. Bureau of Economic Affairs (BEA) reports data on FDI flows to and from the United States.41 It estimates the cumulative level of Chinese FDI in the United States through the end of 2010 at $3.2 billion on a historical-cost (or book value) basis (see Table 8). However, these data 38 The bill, titled the National Defense Authorization Act for Fiscal Year 2012, passed the House on May 26, 2011. Some analysts counter that the ability of China to possibly disrupt the U.S. economy through selling off U.S. government debt (despite the potential costs to the Chinese economy) puts the United States in a vulnerable position. 40 Note, U.S. and Chinese data on FDI flows between each other differ. 41 According the BEA, direct investment implies that a person in one country has a lasting interest in, and a degree of influence over the management of, a business enterprise in another. As such, it defines FDI as ownership or control of 10% or more of an enterprise’s voting securities, or the equivalent, is considered evidence of such a lasting interest or degree of influence over management. 39 Congressional Research Service 17 China-U.S. Trade Issues do not reflect FDI that Chinese investors may have made through offshore locations (such as Hong Kong) to invest in the United States. To reflect this, the BEA attempts to measure the level of FDI inflows according to the country of “ultimate beneficial owner” (UBO). These measurements raise the estimate of China’s cumulative FDI flows to the United States through 2010 by 86% to $5.8 billion.42 The UBO measurement would rank China as the 30th-largest source of total FDI in the United States through 2010. Some analysts contend that the BEA’s data on China’s FDI in the United States do not fully capture all investments. For example, the Rhodium Group (a private research consultancy and advisory company) estimates cumulative Chinese FDI flows to the United States through the end of 2010 at $11.7 billion and that the amount of new Chinese FDI in the United States in 2010 was $5.2 billion.43 U.S. FDI in China is significantly higher than China’s FDI in the United States, according to BEA data.44 Cumulative U.S. FDI in China through 2010 was $60.5 billion, which accounted for nearly 10% of total U.S. FDI in Asia and the Pacific. U.S. FDI flows to China fell by about $7.9 billion in 2009, due largely to the effects of the global economic slowdown, but grew by $9.6 billion in 2010. BEA estimates that U.S. majority-owned non-bank affiliates in China employed 774,000 workers in China in 2008.45 Table 8. U.S. Data on Annual U.S.–China Bilateral FDI Flows: 2005-2010 and Cumulative Value of FDI at Year-End 2010 ($ millions) 2005 China’s FDI in the United States U.S. FDI in China 2006 2007 2008 2009 2010 Cumulative: Value of FDI at 2010 Year-End 146 315 8 500 35 1,364 3,150 1,955 4,226 5,243 15,971 -7,853 9,565 60,452 Source: U.S. Bureau of Economic Analysis. Notes: Cumulative data are on a historical-cost basis. Excludes Chinese FDI in the United States that may have been made through other countries. Using the country of ultimate beneficial owner would raise China’s cumulative FDI in the United States through 2010 at $5,845 million. 42 See BEA UBO tables at http://www.bea.gov/international/di1fdibal.htm. They estimate cumulative Chinese FDI in the United States through 2011 at $15.9 billion, and the flow of new FDI to the United States in 2011 at $4.2 billion. See Rhodium Group, China Investment Monitor, Tracking Chinese Direct Investment in the U.S. at http://rhgroup.net/interactive/china-investment-monitor. 44 The United States is a relatively large source of FDI in China, ranking fourth in cumulative FDI through 2010. 45 BEA, U.S. Direct Investment Abroad: Financial and Operating Data for U.S. Multinational Companies, available at http://www.bea.gov/international/di1usdop.htm. 43 Congressional Research Service 18 China-U.S. Trade Issues Chinese Companies in the United States Although the level of Chinese FDI in the United States is relatively small, many Chinese firms view the United States as a key part of their efforts to become more globally competitive companies, move closer to their U.S. customers, and to circumvent perceived trade and investment barriers (such as the Buy American Act), and to avoid U.S. trade remedy measures (such as antidumping duties). Some examples of Chinese FDI in the United States include the following: Suntech Power Holdings Co., Ltd, the world's largest producer of solar panels, opened a solar plant in Goodyear, AZ, in October 2010 and plans to employ 150 workers by the end of 2011. Pacific Century Automotive Systems Co., Ltd (an entity formed by the Tempo Group and an affiliate of the Beijing Municipal Government), acquired U.S. auto parts supplier Nexteer Automotive from General Motors Co. for $420 million in November 2010. Under the agreement, Saginaw, MI, will remain as Nexteer’s global headquarters, where it reportedly employs 3,000 workers.39 Chinese FDI in the United States include the following: The Dalian Wanda Group Corporation Ltd. on May 21, 2011, announced that it had signed a merger and acquisition agreement to acquire AMC Entertainment (the world’s second-largest theater chain) for $2.6 billion. Suntech Power Holdings Co., Ltd., the world’s largest producer of solar panels, opened a solar plant in Goodyear, AZ, in October 2010, employing 100 workers. Sany Group, a global producer of construction equipment, founded Sany America Inc. in 2006, headquartered in Peachtree City, GA. In 2007, it announced it would invest $100 million to create and establish a manufacturing facility for constructing and engineering Sany products, with expected employment of 300 workers by the time the project is completed.40 Wanxing46 Wanxiang Group, an automotive parts manufacturer, established Wanxiang America Corporation in 1994, based in Illinois. Over the past decade, Wangxing America reportedly has purchased or invested in more than 20 U.S. firms and employs 5,000 U.S. workers—more than any other Chinese company.41 Other Investment Indicators In addition to China’s FDI in the United States and its holdings in U.S. Treasury securities, China (as of June 2010) held to $127 billion in U.S. equities (such as stocks), up from $3 billion in June 2005. It also held $360 billion in U.S. agency securities, many of which are asset-backed (such as Fannie Mae and Freddie Mac securities).42 The China Investment Corporation (CIC), a sovereign wealth fund established by the Chinese government in 2007 with $200 billion in registered capital to help better manage China’s foreign exchange reserves, has been one of the largest Chinese purchasers of U.S. equities and other U.S. assets; it has stakes in such firms as Morgan Stanley, the Blackstone Group, and J.C. Flowers & Co.43 It appears that many of the investments by the CIC and other Chinese entities has attempted to avoid political controversy in the United States by limiting its ownership shares to less than 10%. Investment Issues Many U.S. analysts contend that greater Chinese FDI in the United States, especially in “greenfield” projects (new ventures) that manufacture products or provide services in the United States and create new jobs for U.S. workers,44 could help improve bilateral economic relations 39 New York Times, “G.M. Sells Parts Maker to a Chinese Company,” November 29, 2010, available at http://www.nytimes.com/2010/11/30/business/30gm.html. 40 Sany America website at http://www.sanyamerica.com/about-sany-america.php#ribbon. 41 Washington Post, “Job creation seen as key to China's investment in U.S,” January 19, 2011, .available at http://www.washingtonpost.com/wp-dyn/content/article/2011/01/18/AR2011011806676.html. U.S. Department of the Treasury, Report on Foreign Portfolio Holdings of U.S. Securities as of June 30, 2010, April 2011. 43 For more information on the CIC, see CRS Report R41441, China’s Sovereign Wealth Fund: Developments and Policy Implications, by Michael F. Martin. 44 According to the BEA, Chinese majority-owned nonbank affiliates in the United States employed only 1,700 U.S. (continued...) Congressional Research Service 16 China-U.S. Trade Issues and might lessen perceptions among some critics in the United States that growing U.S.-China trade undermines U.S. employment and harms U.S. economic interests.45 A number of analysts note that China’s outward FDI has been growing rapidly since around 2004 and this is likely to continue in the years ahead.46 Such analysts contend that greater efforts should be made by U.S. policymakers to encourage Chinese firms to invest in the United States rather than block them for political reasons.47 Pacific Centuries Motor (now a subsidiary of AVIC Automobile Industry Co., Ltd, a state-owned firm) purchased Nexteer Automotive, a Michigan-based firm that producers steering and driveline systems, for an estimated $450 million.48 Tianjin Pipe Corporation, China’s largest steel pipe-maker, announced in 2009 that it planned to spend $1 billion to construct a mini-mill facility in Gregory, TX, that will manufacture steel products from recycled scrap steel. Over the first 10 years of operation, the project is projected to boost the local economy by $2.7 billion and generate $327 million in direct employee salaries.49 Haier Group, a major global appliance and electronics firm, maintains its corporate headquarters for Haier America in New York City, has sales offices in 13 U.S. states, and operates a $40 million refrigerator plant in Camden, SC, reportedly the first U.S. manufacturing facility built by a Chinese firm (2000). ZTE Corporation, one of China's largest telecommunications manufacturers, established a U.S. presence in 1995. ZTE USA is headquartered in Dallas, TX, and maintains R&D facilities in five U.S. states. Huawei Technologies is a leading global information and communications technology solutions provider. Since gaining a U.S. presence in 2011, Huawei has reportedly partnered with 280 U.S. technology providers, with total procurement contracts exceeding $30 billion, covering such items as software, components, chipsets, and services. In February, Huawei announced procurement contracts with U.S. firms worth $6 billion.50 Golden Dragon Precise Copper Tube Group Inc., (one of the world’s largest precise copper tube manufacturers) announced in February 2012 that it planned to build a $100 million manufacturing facility in Alabama. In addition to China’s FDI in the United States and its holdings in U.S. Treasury securities, China (as of June 2011) held $159 billion in U.S. equities (such as stocks), up from $3 billion in June 2005. It also held $241 billion in U.S. agency securities, many of which are asset-backed (such as 46 Sany America website at http://www.sanyamerica.com/about-sany-america.php#ribbon. Washington Post, “Job creation seen as key to China’s investment in U.S,” January 19, 2011,available at http://www.washingtonpost.com/wp-dyn/content/article/2011/01/18/AR2011011806676.html. 48 The purchase reportedly represents China’s biggest single investment in the global auto parts-making industry and will make the Chinese company the largest private employer in Saginaw, Michigan at nearly 3,000 (Source: New York Times, G.M. Sells Parts Maker to a Chinese Company, November 29, 2010). The firm owns 20 manufacturing plants worldwide, 5 regional engineering and test centers, and 14 local customer support centers. 49 Xinhua News Agency, “U.S official hails Chinese Project in Texas, October 11, 2011.” 50 http://www.prnewswire.com/news-releases/huawei-poised-to-sustain-tens-of-thousands-of-job-opportunities-for-usbusinesses-139525078.html. 47 Congressional Research Service 19 China-U.S. Trade Issues Fannie Mae and Freddie Mac securities),51 and $16 billion in corporate bonds. The China Investment Corporation (CIC), a sovereign wealth fund established by the Chinese government in 2007 with $200 billion in registered capital to help better manage China’s foreign exchange reserves, has been one of the largest Chinese purchasers of U.S. equities and other U.S. assets; it has stakes in such firms as Morgan Stanley, the Blackstone Group, and J.C. Flowers & Co.52 It appears that many of the investments by the CIC and other Chinese entities have attempted to avoid political controversy in the United States by limiting its ownership shares to less than 10%. Issues Raised by Chinese FDI in the United States Many U.S. analysts contend that greater Chinese FDI in the United States, especially in “greenfield” projects (new ventures) that manufacture products or provide services in the United States and create new jobs for U.S. workers,53 could help improve bilateral economic relations and might lessen perceptions among some critics in the United States that growing U.S.-China trade undermines U.S. employment and harms U.S. economic interests.54 A number of analysts note that China’s outward FDI has been growing rapidly since 2004 and is likely to continue in the years ahead.55 Such analysts contend that greater efforts should be made by U.S. policymakers to encourage Chinese firms to invest in the United States rather than block them for political reasons. In June 2011, President Obama issued an executive order establishing the “SelectUSA Initiative” to coordinate federal efforts to promote and retain investment in the United States. According to a White House factsheet issued during the U.S. visit of Chinese Vice President Xi Jinping in February 2012, China was already one of SwlectUSA top 10 focus markets and that the Administration was planning a significant expansion of the initiative, including with resources dedicated to attracting Chinese investors and facilitating their investment. The two sides further pledged to deepen cooperation on infrastructure financing.56 Some critics of China’s current FDI policies and practices contend that they are largely focused on mergers and acquisitions that are geared toward boosting the competitive position of Chinese firms and enterprises favored by the Chinese government for development (some of which also may be receiving government subsidies as well). In some instances, it is argued, such investment is done largely to transferobtain technology and know-how tofor Chinese firms, but dodoes little to help the U.S. boost the U.S. economy. Another major problemissue relating to Chinese FDI in the United States is the relative lack of transparency of Chinese firms, especially in terms of their connections to the central government. Whenever Chinese state-owned enterprises (SOEs) attempt to purchase U.S. company assets, many U.S. analysts begin to ask what role hasgovernment officials in Beijing played in that decision. Many U.S. policymakers are troubled by the possibility that efforts by Chinese SOEs to acquire U.S. company assets could be part of thea Chinese central governmentgovernment’s strategy to develop global Chinese firms that may one day threaten the economic viability of U.S. firms. Chinese officials contend that investment decisions by Chinese companies, including SOEs and publicly held firms (where the government is the largest shareholder), are Chinese 51 U.S. Department of the Treasury, Preliminary Report on Foreign Portfolio Holdings of U.S. Securities at End-June 2011, February, 29, 2012. 52 For more information on the CIC, see CRS Report R41441, China’s Sovereign Wealth Fund: Developments and Policy Implications, by Michael F. Martin. 53 According to the BEA, Chinese majority-owned nonbank affiliates in the United States employed 1,700 U.S. workers in 2006 (most recent data available). 54 During the 1980s, Japanese firms significantly boosted their FDI in the United States, such as in automobile manufacturing, in part to help to alleviate bilateral trade tensions. 55 China reports that its overseas FDI in 2010 was $68.8 billion, ranking it fifth in the world. China’s accumulated through 2010 overseas FDI was $317.2 billion. 56 The White House, Joint Fact Sheet on Strengthening U.S.-China Economic Relations, February 14, 2012. Congressional Research Service 20 China-U.S. Trade Issues firms that may one day threaten the economic viability of U.S. firms. Chinese officials contend that investment decisions by Chinese companies, including SOEs and publicly held firms (where the government is the largest shareholder), are solely based on commercial considerations, and have criticized U.S. investment policies as “protectionist.” According to the Foreign Investment and National Security Act (FINSA) of 2007 (P.L. 110-149), the Committee on Foreign Investment in the United States (CFIUS) is required tomay conduct an investigation investigation on the effect of thean investment transaction on national security if the covered transaction is a foreign government-controlled transaction (in addition to if the transaction threatens to impair national security, or results in the control of a critical piece of U.S. infrastructure by a foreign person).4757 The House report on the bill (H.Rept. 110-24, H.R. 556) noted: “The Committee believes that acquisitions by certain government-owned companies do create heightened national security concerns, particularly where government-owned companies make decisions for inherently governmental—as opposed to commercial—reasons.” In some instances, efforts by Chinese firms to acquire U.S. companies (or major parts of those companies) have raised concerns or generated controversy in the United States. To illustrateThere have been several instances in which efforts by Chinese firms (oftentimes these have been SOEs or state-favored firms) have raised concerns of some U.S. policymakers and/or U.S. stakeholders: • In 2004, Lenovo Group Limited, a computer company primarily owned by the Chinese government, signed an agreement with IBM CorporationsCorporation to purchase IBM’s personal computer division for $1.75 billion. Some U.S. officials raised national security concerns over potential espionage activities that could occur in (...continued) workers in 2006 (most recent data available). 45 During the 1980s, Japanese firms significantly boosted their FDI in the United States, such as in automobile manufacturing, in part to help to alleviate bilateral trade tensions. 46 China reports that its overseas FDI in 2009 was $56.3 billion and accumulated overseas FDI was $245.8 billion through 2009. 47 CFIUS is an interagency committee that serves the President in overseeing the national security implications of foreign investment in the U.S. economy. See CRS Report RL33388, The Committee on Foreign Investment in the United States (CFIUS), by James K. Jackson. Congressional Research Service 17 China-U.S. Trade Issues the United States at IBM research facilities by Lenovo employees if the deal went through. A review of the agreement by CFIUS took place in which IBM and Lenovo were able to address certain national security concerns and, as a result, the acquisition was completed in April 2005.48 58 • In 2005, the China National Offshore Oil Corporation (CNOOC), a Chinese SOE, made a bid to buy UNOCAL, a U.S. energy company, for $18.5 billion, but widespread opposition in Congress led CNOOC to withdraw its bid. Some Members argued at the time that the proposed takeover represented a clear threat to the energy and national security of the United States, would put vital oil assets in the Gulf of Mexico and Alaska into the hands of a Chinese state-controlled company, could transfer a host of highly advanced technologies to China, and that CNOOC’s bid to take over UNOCAL would be heavily subsidized by the Chinese government. Some Members contendedargued that “vital” U.S. energy assets should never sold to the Chinese government. CNOOC officials referred to U.S. political opposition to the sale as “regrettable and unjustified.”49 • In September 2007, the Chinese firm, Huawei Technologies Co., Ltd, a leading global telecommunications equipment supplier , announced plans, along with its partner, Bain Capital Partners, to buy the U.S. firm 3Com Corporation, a provider of data networking equipment, for $2.2 billion. However, the proposed merger was withdrawn in February 2008 following a review of the deal by CFIUS when Huawei and its partner failed to adequately address U.S. national security concerns raised by CFIUS members.59 57 CFIUS is an interagency committee that serves the President in overseeing the national security implications of foreign investment in the U.S. economy. See CRS Report RL33388, The Committee on Foreign Investment in the United States (CFIUS), by James K. Jackson. 58 IBM and Lenovo reportedly agreed to address national security concerns by CFIUS. For example, it was agreed that 1,900 employees from a North Carolina research facility, which IBM had shared with other technology companies, would move to another building. See the Financial Times, “US State Department limits use of Chinese PCs,” May 18, 2006. 59 The Senate report of its version of FINSA (S.Rept. 110-80, S. 1610) noted that CNOOC’s attempt to acquire UNOCAL “led many members of Congress to raise questions about the transfer of ownership or control of certain sectors of the U.S. economy to foreign companies, especially to foreign companies located within or controlled by countries the governments of which might not be sympathetic to U.S. regional security interests.” Congressional Research Service 21 China-U.S. Trade Issues • In September 2007, Huawei announced plans, along with its partner, Bain Capital Partners, to buy the U.S. firm 3Com Corporation, a provider of data networking equipment, for $2.2 billion. However, the proposed merger was withdrawn in February 2008 following a review of the deal by CFIUS when Huawei and its partner failed to adequately address U.S. national security concerns raised by CFIUS members.60 • In July 2009, China’s Northwest Nonferrous International Investment Company, a Chinese SOE, made a $26 million offer to purchase a 51% stake in the Firstgold Corporation, a U.S. exploration-stage company. However, the deal reportedly raised national concerns within CFUIS because some of the mines controlled by Firstgold were near U.S. military installations. As a result, the Chinese firm withdrew its bid in December 2009.5061 • In February 2010, Emcore Corporatation, a provider of compound semiconductor-based components, subsystems, and systems for the fiber optics and solar power markets, announced it had agreed to sell 60% interest in its fiber optics business (excluding its satellite communications and specialty photonics fiber optics businesses) to China’s Tangshan Caofeidian Investment Corporation (TCIC) for $27.8 million. However, Emcore announced in June 2010 that the deal had been ended because of concerns by CFIUS.51 48 IBM and Lenovo reportedly agreed to address national security concerns by CFIUS. For example, it was agreed that 1,900 employees from a North Carolina research facility, which IBM had shared with other technology companies, would move to another building. See the Financial Times, “US State Department limits use of Chinese PCs,” May 18, 2006. 49 The Senate report of its version of FINSA (S.Rept. 110-80, S. 1610) noted that CNOOC’s attempt to acquire UNOCAL “led many members of Congress to raise questions about the transfer of ownership or control of certain sectors of the U.S. economy to foreign companies, especially to foreign companies located within or controlled by countries the governments of which might not be sympathetic to U.S. regional security interests.” 50 New York Times, “Chinese Withdraw Offer for Nevada Gold Concern,” December 21, 2009. 51 Emcore Press Release, June 28, 2010, available at http://www.emcore.com/news_events/release?y=2010&news=249. Congressional Research Service 18 China-U.S. Trade Issues • In May 2010, Anshan Iron and Steel Group Corporation (Ansteel), a major Chinese state-owned steel producer, announced plans to form a joint venture with the U.S. firm Steel Development Company in Mississippi to build and operate four mills to produce reinforcing bar and other bar products used in infrastructure applications, and one mill that would be capable of producing electrical and silicon grades of steel used in energy applications.52 In July 2010, the Congressional Steel Caucus sent a letter signed by 50 Members to Secretary of the Treasury Tim Geithner, expressing concerns over the effect the investment would have “on American jobs and our national security.”53 • In May 2010, Huawei bought certain intellectual property assets of 3Leaf Systems (an insolvent U.S. technology firm) for $2 million. A February 2011 letter by issued62 • In May 2010, Anshan Iron and Steel Group Corporation (Ansteel), a major Chinese state-owned steel producer, announced plans to form a joint venture with Steel Development Company, a U.S. firm in Mississippi, to build and operate four mills to produce reinforcing bar and other bar products used in infrastructure applications, and one mill that would be capable of producing electrical and silicon grades of steel used in energy applications.63 In July 2010, the Congressional Steel Caucus sent a letter signed by 50 Members to Secretary of the Treasury Tim Geithner, expressing concerns over the effect the investment would have “on American jobs and our national security.”64At a February 2012 hearing on China’s SOEs, Representative Visclosky, chairman of the Congressional Steel Caucus stated: “As a Caucus, we were concerned that the investment would allow a Chinese state-owned enterprise to pursue the government of China’s aims, and not the aims of the employer, the American worker, or the market. We were concerned that this investment would allow the full force and financing of the Chinese government to exploit the American steel market from American soil. We also were concerned that China would have access to new steel production technologies and information regarding American national security infrastructure projects.”65 60 Although Huawei states that it is a private company wholly owned by its employees, many analysts contend that the company has close connections to the Chinese military. In addition, Huawei has also reportedly received extensive financial support from the Chinese government, including a $30 billion line of credit from China Development Bank. 61 New York Times, “Chinese Withdraw Offer for Nevada Gold Concern,” December 21, 2009. 62 Emcore Press Release, June 28, 2010, available at http://www.emcore.com/news_events/release?y=2010&news=249. 63 A press release by Ansteel stated that its intensions are “to capitalize on the opportunity to enter into an overseas joint venture with a company that is focused on utilizing advanced technology in an environmentally friendly and highly profitable manner.” See, http://www.steeldevelopment.com/documents/ansteel2010.pdf. 64 See letter at http://visclosky.house.gov/SC_Geithner_CFIUS_7.2.10.pdf. 65 Testimony of Congressman Peter J. Visclosky before the U.S.-China Economic and Security Review Commission on (continued...) Congressional Research Service 22 China-U.S. Trade Issues • In May 2010, Huawei bought certain intellectual property assets of 3Leaf Systems (an insolvent U.S. technology firm) for $2 million. A February 2011 letter issued by Senators Jim Webb and Jon Kyl to Commerce Secretary Gary Locke and Treasury Secretary Tim Geithner stated: “We are convinced that any attempt Huawei makes to expand its presence in the U.S. or acquire U.S. companies warrants thorough scrutiny. Moreover, the 3Leaf acquisition appears certain to generate transfer to China by Huawei of advanced U.S. computing technology. Allowing Huawei and, by extension, communist China to have access to this core technology could pose a serious risk as U.S. computer networks come to further rely on and integrate this technology.”5466 In February 2011, Huawei stated that CFIUS hadit been formally notified Huaweiby CFIUS that it should withdraw its application to acquire 3Leaf’s assets, which it later did55did.67 In an “Open Letter,” Huawei invited the U.S. government to carry out a formal investigation on any concerns it may have about Huawei.56 U.S. Concerns over China’s Investment Regime U.S. trade officials have urged China to liberalize its investment regime as part of their efforts to expand U.S. exports to China. Although China is one of the world’s top recipients of FDI, the Chinese central government imposes numerous restrictions on the level and of types of FDI allowed in China. To a great extent, China’s investment policies appear to be linked to industrial policies that seek to promote the development of key industries in China. FDI inflows are viewed by the government as a method to help Chinese domestic firms gain access to capital, technology, and know-how, which, it is hoped, will help speed up their development. In many cases, the level and scope of FDI in China is restricted in order to prevent foreign firms from dominating any one sector. For example, the Chinese government has made the development of its domestic auto industry a top priority. To that end, the government has encouraged foreign auto companies to invest in China, but limits FDI in that sector to 50-50 joint venture. Many critics contend that the Chinese government often requires foreign firms to transfer technology to their China partners, 52 A press release by Ansteel stated that its intensions are “to capitalize on the opportunity to enter into an overseas joint venture with a company that is focused on utilizing advanced technology in an environmentally friendly and highly profitable manner.” See, http://www.steeldevelopment.com/documents/ansteel2010.pdf. 53 See letter at http://visclosky.house.gov/7.29.10%20sc_letter_to_white_house.pdf. 5468 • On May 9, 2012, the Federal Reserve announced that it had approved (1) the application by Industrial and Commercial Bank of China Limited, China Investment Corporation, and Central Huijin Investment Ltd., to become bank holding companies by acquiring up to 80% of the voting shares of the Bank of East Asia (USA) National Association; (2) the Bank of China’s application to establish a branch in Chicago, IL; and (3) the application by the Agricultural Bank of China Limited to establish a state-licensed branch in New York City.69 In a letter to Federal Reserve Chairman Ben Bernanke, Senator Robert Casey noted that each of entities approved by the Federal Reserve was state-owned, and he expressed concern that “these banks and their U.S. subsidiaries will use their state-support as a way to underprice U.S. banks that abide by U.S. law and do not have the support of a sovereign country behind them.”70 Chinese Restrictions on U.S. FDI in China U.S. trade officials have urged China to liberalize its FDI regime in order to boost U.S. business opportunities in, and expand U.S. exports to China. Although China is one of the world’s top recipients of FDI, the Chinese central government imposes numerous restrictions on the level and of types of FDI allowed in China. To a great extent, China’s investment policies appear to be linked to industrial policies that seek to promote the development of sectors identified by the government as critical to future economic development. For example, since the early 1980s, the Chinese government has encouraged foreign auto companies to invest in China, but has limited (...continued) China’s State-Owned and State-Controlled Enterprises, February 15, 2012. 66 The letter also raised concerns over allegations that Huawei had ties to the Iranian government, had received substantial subsidies from the Chinese government, and had a poor record of protecting intellectual property rights. 5567 Huawei initially stated that it would decline CFIUS’s recommendation with the intent of going through all of the procedures of the CFIUS process (including a potential decision by the President) interin order to “reveal the truth about Huawei.” 5668 Huawei, Open Letter, February 25, 2011, available at http://www.huawei.com/huawei_open_letter.do. 69 Senator Robert Casey, Press Release, May 10, 2012, available at http://www.federalreserve.gov. 70 The letter is available at http://www.casey.senate.gov/newsroom/press/release/?id=b940fb00-0a69-42d6-bcff6ac72c8ce0c1. Congressional Research Service 23 China-U.S. Trade Issues FDI in that sector to 50-50 joint ventures with domestic Chinese partners.71 In addition, the central government maintains a “Guideline Catalogue for Foreign Investment” (the latest revision was issued in January 2012), which lists FDI categories that are encouraged, restricted, or prohibited.72 Many of the sectors under the “encouraged” category include high technology, green technology, and energy conservation, and pollution control.73 Several of the sectors under the “restricted” category limit FDI to joint ventures (such as for rare earth smelting) or where the Chinese parties are the controlling shareholders (such as railway passenger transport companies). “Prohibited” sectors are those that fall under “national security” concerns (such as manufacturing of ammunition and weapons) or are categories where the government seeks to preserve state monopolies (such as postal companies) or protect Chinese firms from foreign competition (such as mining of rare earth elements). The Chinese government also sets restrictions on FDI inflows during the investment screening process, or through its mergers and acquisition regulations, especially when seeking to protect pillar or strategic industries that the central government (as well as many provincial and local governments) seeks to promote. Many critics of China’s investment policies contend that the Chinese government often requires foreign firms to transfer technology to their China partners, and sometimes to set up research and development facilities in China, in exchange for access to China’s markets.74 Foreign-invested firms in China face a number of challenges, including local protectionism, lack of regulatory transparency, IPR theft, and discriminatory license practices. The United States and China have held negotiations on reaching a bilateral investment treaty (BIT) with the Congressional Research Service 19 China-U.S. Trade Issues and sometimes to set up research and development facilities in China, in exchange for access to China’s markets. The United States and China are currently negotiating a bilateral investment treaty (BIT) with the goal of expanding bilateral investment opportunities. U.S. negotiators hope such a treaty would improve the investment climate for U.S. firms in China by enhancing legal protections and dispute resolution procedures, and by obtaining a commitment from the Chinese government that it would treat U.S. investors no less favorably than Chinese investors. However, some U.S. groups have expressed reservations concerning a China-U.S. BIT, arguing that it would encourage U.S. firms to relocate to China.57 some groups have argued that a BIT with China could hurt U.S. workers by encouraging more U.S. firms to relocate to China.75 In April 2012, the Obama Administration released a “Model Bilateral Investment Treaty” that was developed to enhance U.S. objectives in the negotiation of new BITs.76 The new BIT model establishes mechanisms to promote greater transparency, labor and environment requirements, disciplines to prevent parties from imposing domestic technology requirements, and measures to boost the ability of investors to participate in the development of standards and technical regulations on a nondiscriminatory basis. 71 The automotive industry was designated a “pillar industry” by the Chinese government in 1991. China also maintains a permitted category which represents a neutral position by the government that FDI is neither encouraged or discouraged. Prior to 2012, FDI in the manufacture of complete automobiles was listed as an encouraged category. 73 One major function of the Guideline Catalogue for Foreign Investment is to promote FDI in sectors that the government has targeted for growth in its five-year macro-economic plans. 74 USTR, 2011 Report to Congress On China’s WTO Compliance, December 2011, p.7. 75 Inside U.S.-China Trade, April 28, 2010. 76 The Administration began efforts to review and revise the U.S. BIT model in 2009. The previous BIT model dated to 2004. The Administration’s review process likely meant that negotiations with China for a BIT were someone limited. 72 Congressional Research Service 24 China-U.S. Trade Issues Major U.S.-China Trade Issues China’s economic reforms and rapid economic growth, along with the effects of globalization, have caused the economies of the United States and China to become increasingly integrated.5877 Although growing U.S.-China economic ties are considered by most analysts to be mutually beneficial overall, tensions have risen over a number of Chinese economic and trade policies that many U.S. critics charge are protectionist, economically distortive, and damaging to U.S. economic interests. These include China’s resistance to adopting a market-based currency; its mixed record on implementing its obligations in the World Trade Organization (WTO), including its failure to provide adequate protection of U.S. intellectual property rights (IPR); and its use of industrial policies, including discriminatory government procurement policies, to promote and protect various Chinese domestic industries. Some Members have argued that, given the high rate of U.S. unemployment, China’s “unfair” economic and trade policies can no longer be tolerated, and have urged the Obama Administration to more aggressively use the trade tools at its disposal to challenge such policies whenever possible, such as U.S. trade remedy laws and the WTO’s dispute resolution mechanism. A 2011 survey by the American Chamber of Commerce of its members in China illustrates China’s opportunities and challenges for U.S. firms. It reported that 78% of those surveyed said that they made a profit in China in 2010, and 85% said they would boost investment in their Chinese operations in 2010. However, 35% of respondents stated that it has become more difficult to obtain businesses licenses in recent years and 25% said that China’s indigenous innovation policies (discussed below) were hurting their businesses.59 57 Inside U.S.-China Trade, April 28, 2010. A 2012 survey by the American Chamber of Commerce in China (AmCham China) of its members in China illustrates the complex nature of the bilateral trade relationship. The survey found that 76% of respondents said that they made a profit in China in 2011, and 86% said they would boost investment in their Chinese operations in 2012. However, 37% of respondents stated that it has become more difficult to obtain business licenses in recent years and 51% said license requirements put them at a competitive disadvantage vis-a-vis domestic Chinese firms.78 According to the USTR, most U.S. trade disputes with China stem from the consequences of its incomplete transition to a free market economy. Major areas of concern for U.S. stakeholders include • China’s web of industrial policies that seek to promote and protect domestic sectors and firms, especially SOEs, deemed by the government to be critical to the country’s future economic growth; • its failure to provide adequate protection of U.S. intellectual property rights (IPR); • its mixed record on implementing its obligations in the World Trade Organization (WTO) and its failure to join the WTO’s Government Procurement Agreement (GPA); and • its managed currency policy in which the government intervenes to limit the appreciation of the renminbi (RMB) against the dollar and other major currencies in order to make China’s export industries more globally competitive. Chinese “State Capitalism” Currently, a significant share of China’s economy is thought to be driven by market forces. According to a 2010 WTO report, the private sector now accounts for more than 60% of China’s gross domestic product (GDP).79 However, the Chinese government continues to play a major role in economic decision-making. For example, at the macroeconomic level, the Chinese government maintains policies that induce households to save a high level of their income, much 77 The impact of globalization has been a controversial topic in the United States. Some argue that it has made it easier for U.S. firms to shift production overseas, resulting in lost jobs in the United States (especially in manufacturing) and lower wages for U.S. workers. Others contend that globalization has induced U.S. firms to become more efficient and to focus a greater share of their domestic manufacturing on higher-end or more technologically advanced production (while sourcing lower-end production abroad), making such firms more globally competitive. The result has been that the United States continues to be a major global manufacturer in terms of value-added, but there are fewer U.S. workers in manufacturing. 59 The American Chamber of Commerce, People’s Republic of China, China’s Business Climate Survey, 2011, March 19, 2011. 58 Congressional Research Service 20 China-U.S. Trade Issues China’s Currency Policy60 Unlike most advanced economies (such as the United States), China does not maintain a marketbased floating exchange rate. Between 1994 and July 2005, China pegged its currency, the renminbi (RMB) or yuan, to the U.S. dollar at about 8.28 yuan to the dollar.61 In July 2005, China appreciated the RMB to the dollar by 2.1% and moved to a “managed float,” based on a basket of major foreign currencies, including the U.S. dollar. In order to maintain a target rate of exchange with the dollar (and other currencies), the Chinese government has maintained restrictions and controls over capital transactions and has made large-scale purchases of U.S. dollars (and dollar assets).62 According to the Bank of China, from July 2005 to July 2009, the dollar-yuan exchange rate went from 8.27 to 6.83 yuan per dollar, an appreciation of 21.1%.63 However, once the effects of the global financial crisis became apparent, the Chinese government halted its appreciation of the RMB and subsequently kept the yuan/dollar exchange rate relatively constant at 6.83 from July 2009 to June 2010 in order to help limit the impact of the sharp decline in global demand for Chinese products. Many U.S. policymakers, labor groups, and business representatives of import-sensitive industries have charged that, despite minor reforms, the Chinese government continues to manipulate its currency in order to keep the value of its currency artificially low against the dollar (with estimates of undervaluation ranging from 15% to 50%). They claim that this policy constitutes a de facto subsidy for Chinese exports to the United States, and acts as a de facto tariff on Chinese imported U.S. goods. They complain that this policy has particularly hurt several U.S. manufacturing sectors that are forced to compete against low-cost Chinese products, and has led to the loss of hundreds of thousands of U.S. jobs. Critics further charge that China’s currency policy has been a major factor in the size and growth of the U.S. trade deficit with China. Some Members of Congress contend that, given the current high rate of unemployment in the United States, Chinese “currency manipulation” can no longer be tolerated. Chinese officials have insisted that the current currency policy is not meant to favor exports over imports, but instead to foster domestic economic stability.64 They have expressed concern that abandoning the currency policy, especially given the current state of the global economy, could further weaken its export industries and cause wide-scale layoffs. Chinese officials view economic stability as critical to sustaining political stability. However, on June 19, 2010, the Chinese central bank, the People’s Bank of China (PBC) stated that, based on current economic conditions, it had decided to “proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.” It ruled out any large one-time revaluations, stating “it is important to avoid any sharp and massive fluctuations of the RMB exchange rate,” in part so that Chinese corporations could more easily adjust (such as through upgrading) to an 60 For additional information on this issue, see CRS Report RS21625, China’s Currency: An Analysis of the Economic Issues, by Wayne M. Morrison and Marc Labonte. 61 The official name of China’s currency is the renminbi, which is denominated in units of yuan. 62 Much of China’s trade is believed to be in U.S. dollars (e.g., exporters are often paid in dollars). The central government requires firms to exchange most of their dollars for RMB. 63 Calculated from Bank of China data using the official middle rate. 64 A fixed exchange rate is a relatively common practice among developing countries, especially those that want to attract foreign investment and expand exports. A constant exchange rate, such as one tied to the U.S. dollar, attempts to signal foreign investors that the value of their investments will not be affected by the type of large swings in exchange rates that can occur under a floating exchange rate regime. Given the current size of China’s economy and trade flows, most economists question whether the continuation of China’s currency policy is appropriate. Congressional Research Service 21 China-U.S. Trade Issues appreciation of the currency. Many observers contend the timing of the RMB announcement was intended in part to prevent China’s currency policy from being a central focus of the G-20 summit in Toronto from June 26-27, 2010, and possibly to head off threatened congressional action over the issue. From June 19, 2010 to September 28, 2011, the RMB appreciated by 7.4% against the dollar, a pace that has been criticized by U.S. officials as far too slow.65 Numerous bills have been introduced in Congress over the past few years that would seek to induce China to reform its currency policy or would attempt to address the perceived effects that policy has on the U.S. economy. For example, one bill in the 108th Congress (S. 1586) would have imposed an additional duty of 27.5% on imported Chinese products unless China appreciated its currency to near market levels. In the 111th Congress, the House passed an amended version of H.R. 2378, which would have made certain misaligned currencies (such as the RMB) actionable under U.S. countervailing duty cases on foreign government export subsidies (although the Senate did not take up the bill); the bill has been re-introduced in the 112th Congress (H.R. 639 and S. 328). In addition, Currency Legislation in the 112th Congress • H.R. 639 (Sander Levin) and S. 328 (Sherrod Brown) would make a “fundamentally undervalued currency” an actionable subsidy under U.S. countervailing duty law (dealing with government export subsidies).66 The bills would seek to clarify that a fundamentally undervalued currency could be treated by the Department of Commerce as a benefit conferred by a foreign government to its exports.67 In addition, the bill seeks to clarify that, in the case of a subsidy relating to a fundamentally undervalued currency, the fact that the subsidy (i.e., the undervalued currency) may have also benefitted non-exporting firms (in addition to exporting firms), would not, for that reason alone, mean that the subsidy could not be considered to be a measure that is contingent upon export performance. The bill directs the Commerce Department to use, if possible, data and methodologies utilized by the IMF to estimate the real effective exchange rate undervaluation of the currency for the purposes of assessing countervailing duties.68 Factors used to determine a fundamentally undervalued currency would include (over an 18-month period): protracted and large-scale intervention in currency markets; a real effective exchange rate estimated to be undervalued by at least 5%; and foreign asset reserves held by the government that are (1) greater than the amount needed to repay its debt obligations over the next year, (2) 20% of the nation’s money supply, and (3) the value of the country’s imports over the previous four months. • S. 1619 would provide for the identification of fundamentally misaligned currencies and require action to correct the misalignment for certain “priority” 65 China’s official middle rate over this period went from 6.83 yuan per dollar to 6.49. These bills are identical and are the same legislation passed by the House (H.R. 2378) in September 2010. The Senate did not take up the bill 67 The benefit would be defined the difference between the amount of foreign currency received by the exporter from the transaction and the amount that would have been received if the currency was not undervalued. 68 For a summary of U.S. trade remedy laws, see CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones. 66 Congressional Research Service 22 China-U.S. Trade Issues countries. The bill would require the Treasury Department to issue a semiannual report to Congress on international monetary policy and currency exchange rates, determine which major global currencies are in fundamental misalignment, and to designate certain misaligned currencies for priority action. Treasury would be required to seek negotiations with countries designated for priority action. If efforts are not made to correct the currency misalignment, the following actions in regards to that country: (1) The Commerce Department would be required to factor in the estimated level of currency undervaluation when determining antidumping duties; (2) the President would be required to prohibit the procurement by the federal government of products or services from the country unless it is a party to the WTO’s Government Procurement Agreement; (3) the Overseas Private Investment Corporation (OPIC) would not be able to approve any new financing (including insurance, reinsurance, or guarantee) with respect to a project located within the country;69 (4) the U.S. Executive Director at each multilateral bank would be told to oppose the approval of any new financing to the government of a country, or for a project located within a country, that issues a currency designated for priority action. If a country that has a currency designated for priority action fails to take steps to eliminate the fundamental misalignment within 360 days after its designation by Treasury, the following would occur: (1) the USTR would be required to initiate a dispute resolution case against the priority country, and (2) Treasury would be required to consult with the Federal Reserve System to consider undertaking remedial intervention in international currency markets. The bill would also amend U.S. countervailing duty law to require the Commerce Department to initiate an investigation to determine whether currency undervaluation is providing, directly or indirectly, a countervailing subsidy and makes clarifications to U.S. countervailing law similar to provision in H.R. 639 and S. 328. • S. 1130 and S. 1267 (John Rockefeller) would, among other things, treat “exchange rate manipulation” as an actionable subsidy under U.S. countervailing duty cases. Exchange rate manipulation would be defined as protracted largescale intervention by a country to undervalue the country's currency in the exchange market that prevents effective balance-of-payments adjustment or that gains an unfair competitive advantage over any other country. • S. 1238 (Olympia Snowe) would require that, before Congress approves any bill implementing a free trade agreement or extending permanent normal trade relations status to another country, the President would have to first certify that the government of the potential trading partner has not, in the ten years preceding the certification, manipulated its currency for the purposes of gaining an unfair advantage in international trade. China’s Obligations in 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 69 This provision would not affect China because OPIC is already prohibited by U.S. law from operating in China. Congressional Research Service 23 China-U.S. Trade Issues 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 required China to make immediate and extensive reductions in various trade and investment barriers, while allowing it to maintain some level of protection (or a transitional 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. 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.70 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 would 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 for enforcement.) • Fully open the banking system to foreign financial institutions within five years (by the end of 2006). Joint ventures in insurance and telecommunication would be permitted (with various degrees of foreign ownership allowed). WTO Implementation Issues Getting China into the WTO under a comprehensive trade liberalization agreement was a major U.S. trade objective during the late 1990s. Many U.S. policymakers at the time maintained that China’s WTO membership would encourage the Chinese government to deepen market reforms, promote the rule of law, reduce the government’s role in the economy, further integrate China into the world economy, and enable the United States to use the WTO’s dispute resolution mechanism to address major trade issues. As a result, it was hoped, China would become a more reliable and stable U.S. trading partner. U.S. trade officials contend that in the first years after it joined the WTO in 2001, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy and increased its openness to trade and FDI. However, beginning in 2006, progress toward further market liberalization appeared to slow. By 2008, U.S. 70 Following China’s WTO accession, the United States, in January 2002, granted China permanent normal trade relations (PNTR) status (prior to that time, that status was on a conditional basis) to ensure that the United States and China had a formal trade relationship under the rules of the WTO. Congressional Research Service 24 China-U.S. Trade Issues government and business officials noted evidence of trends toward a more restrictive trade regime.71 The USTR’s ninth annual report to China on WTO compliance (issued in December 2010) identified several areas of concern, including: • failure by the Chinese government to maintain an effective IPR enforcement regime (discussed below); • industrial policies and national standards that attempt to promote Chinese firms (while discriminating against foreign firms); • restrictions on trading and distribution rights (especially in regards to IPR-related products, such as movies, books, and music); • discriminatory and unpredictable health and safety rules on imports (especially agricultural products); and • burdensome regulations and restrictions on services, and failure to provide adequate transparency of trade laws and regulations.72 As of April 2011, the United States has brought 11 trade complaints against China to the WTO’s Dispute Resolution Board (DSB), several of which have been resolved or ruled upon. China has brought WTO cases against the United States as well.73 The U.S. cases are summarized below. Pending U.S. Cases Against China • On September 15, 2010, the USTR’s office announced it was bringing a WTO case against China over its improper application of antidumping duties and countervailing duties on imports of grain oriented flat-rolled electrical steel from the United States. • On September 15, 2010, the USTR’s office announced it was bringing a WTO case against China over its discrimination against U.S. suppliers of electronic payment services. Resolved Cases or a WTO Panel Has Issued a Ruling74 • On June 23, 2009, the United States brought a case against China’s export restrictions (such as export quotas and taxes) on raw materials (bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). The United States charges that such policies are intended to lower prices for Chinese firms (steel, aluminum, and chemical sectors) in order to help them obtain an unfair competitive advantage. China claims that these 71 China generally implemented its tariff reductions on time. Its average overall tariff dropped from 15.6% in 2001 to 9.8% as of January 2010 (the tariff rate on industrial goods and agricultural products in 2010 was 8.9% and 15.2%, respectively) and a number of non-tariff measures were eliminated. 72 USTR, 2010 Report to Congress on China’s WTO Compliance, December 2010, available at http://www.ustr.gov/ webfm_send/2460. 73 China has brought five cases against the United States. These have included challenges to U.S. applications of antidumping and countervailing measures, restrictions on imports of Chinese poultry, and U.S. safeguard measures restricting imports of Chinese tires. 74 Often cases are resolved through consultations before the case goes to a panel. Congressional Research Service 25 China-U.S. Trade Issues restraints are intended to conserve the environment and exhaustible natural resources. In July 2011, a WTO panel issued a report that ruled that many of China’s export restraints on raw materials violated WTO rules. In particular the panel rejected China’s argument that that some of its export duties and quotas were justified because they related to the conservation of exhaustible natural resources for some of the raw materials. But China was not able to demonstrate that it imposed these restrictions in conjunction with restrictions on domestic production or consumption of the raw materials so as to conserve the raw materials, protect the health of its citizens, or to reduce pollution.75 • On December 22, 2010, the USTR’s office announced that it would bring a WTO case against China over a government program that extended subsidies to Chinese wind power equipment manufacturers that use parts and components made in China rather than foreign-made parts and components. On June 7, 2011, the USTR’s office announced that China had agreed to end these subsidies. However, the USTR noted that it had taken significant investigatory efforts by the U.S. Government, working with industry and workers, to uncover China’s wind subsidies because of the lack of transparency in China. The USTR further noted that under the terms of China’s WTO accession, it was required to report on all of its subsidy programs, which, to date, it has failed to do.76 • On December 19, 2008, the USTR filed a WTO case against China over its support for “Famous Chinese” brand programs, charging that such programs utilize various export subsidies (including cash grant rewards, preferential loans, research and development funding to develop new products, and payments to lower the cost of export credit insurance) at the central and local government level to promote the recognition and sale of Chinese brand products overseas. On December 18, 2009, the USTR announced that China had agreed to eliminate these programs. • On March 3, 2008, the USTR requested WTO dispute resolution consultations with China regarding its discriminatory treatment of U.S. suppliers of financial information services in China. On November 13, 2008, the USTR announced that China had agreed to eliminate discriminatory restrictions on how U.S. and other foreign suppliers of financial information services do business in China. • On April 10, 2007, the USTR filed a WTO case against China, charging that it failed to comply with the TRIPS agreement (namely in terms of its enforcement of IPR laws). On January 26, 2009, the WTO ruled that many of China’s IPR enforcement policies failed to fulfill its WTO obligations. On June 29, 2009, China announced that it would implement the WTO ruling by March 2010. On the same day the USTR filed another WTO case against China, charging that it failed to provide sufficient market access to IPR-related products, namely in terms of trading rights and distribution services. In August 2009, the WTO ruled that many of China’s regulations on trading rights and distribution that were raised by the U.S. case were WTO-inconsistent. China appealed the decision, but 75 A summary of the WTO panel report can be found at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ds394_e.htm#bkmk394r. 76 USTR Press Release, June 7, 2011, available at http://www.ustr.gov/about-us/press-office/pressreleases/2011/june/china-ends-wind-power-equipment-subsidies-challenged Congressional Research Service 26 China-U.S. Trade Issues lost, and in February 2010 stated that it would implement the WTO panel decisions (see section on “Violations of U.S. Intellectual Property Rights”). • On February 5, 2007, the USTR announced it had requested WTO dispute consultations with China over government regulations that give illegal (WTOinconsistent) import and export subsidies to various industries in China (such as steel, wood, and paper) that distort trade and discriminate against imports.77 China’s WTO accession agreement required it to immediately eliminate such subsidies. On November 29, 2007, China formally agreed to eliminate the subsidies in question by January 1, 2008. • On March 30, 2006, the USTR initiated a WTO case against China for its use of discriminatory regulations on imported auto parts (which often applied the high tariff rate on finished autos to certain auto parts), stating that the purpose of these rules was to discourage domestic producers from using imported parts and to encourage foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China’s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panel’s decision. • 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% valueadded tax (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 industry. U.S. officials contend that China’s incomplete transition to a free market economy is a major factor behind China’s failure to fully implement its WTO obligations as well as the source for many U.S. trade disputes with China. Although market forces (and the private sector) play a major role in China’s economy, the government continues to play an import role. For example, the banking system is mostly controlled by the government, while SOES are allowed to dominate certain sectors. Many analysts contend that the main function of China’s banking system is to provide low-cost (subsidized) loans to SOEs to promote their development, especially for industries deemed by the government as important to China’s future economic development. Some analysts contend that the global economic slowdown has induced the Chinese government to slow or even reverse its long-term movement toward market-based economic reforms, and instead rely more on state intervention in markets to give China a competitive advantage.78 For example: 77 Some programs gave tax preferences, tariff exemptions, discounted loans, or other benefits to firms that met certain export performance requirements, while others gave tax breaks for purchasing Chinese-made equipment and accessories over imports. 78 Some analysts refer to this as state capitalism, a condition where free markets exist globally, but competitive outcomes are heavily influenced by direct intervention by a foreign government. Congressional Research Service 27 China-U.S. Trade Issues • In July 2010, China announced that it would reduce its export quota of rare earth elements (which are used in a wide variety of consumer electronics, green technology products, such as wind turbines, and a number of defense weapon systems) by 70% during the second half of 2010 over the previous year’s level (or a 40% drop for the full year over 2009 levels).79 In December 2010, China announced that quotas on rare earth would be cut further in 2011. China is estimated to produce 97% of the world’s rare earth elements. Many analysts have raised concerns that the sharp cuts in China’s rare earth exports substantially raised prices of products that use rare earth elements. Some have argued that China’s intention is to ensure that its own electronic and high technology industries have access to rare earth elements (and to boost their competitiveness by helping to keep prices low) and to induce foreign technology firms that use rare earth to move their production facilities to China. The USTR has indicated that it may bring a WTO case against China over its restrictions of rare earth elements. • In March 2010, Google Inc. announced that it would redirect users of its Internet engine, Google.cn in China, to Google.com.hk in Hong Kong. Google said it was taking this step because of cyber attacks on its system believed to have originated inside China, the hacking of Gmail accounts of Chinese human rights activists, and because Google decided that it would no longer comply with the Chinese government’s censorship requirements. On July 9, 2010, Google announced that the Chinese government had renewed its Internet Content Provider license, but stated it would provide limited services in China. A number of analysts contend that Chinese government Internet censorship and cyber attacks have gotten worse recently, and that such trends have undermined the business environment in China. On June 1, 2011, Google reported that it had uncovered a campaign (which appears to have originated from Jinan, China) to gain access to the personal Gmail accounts of hundreds of users including, senior U.S. government officials, Chinese political activists, officials in several Asian countries military personnel, and journalists.80 Some groups have urged the U.S. government to file a WTO case against China over these activities. • In November 2009, the Chinese government released a “Circular on Launching the 2009 National Indigenous Innovation Product Accreditation Work,” requiring companies to file applications by December 2009 for their products to be considered for accreditation as “indigenous innovation products.” The proposal would, in effect, extend preferential treatment for government procurement to domestic firms that developed and owned intellectual property in China projects (discussed in more detail below). • In February 2009, the Chinese government announced plans to provide financial support to 10 sectors, including autos, steel, shipbuilding, machinery, textiles, electronics and information (e.g., computers), light industry, petrochemicals, metals, and logistics. Financial support would include tax cuts and incentives, subsidies, directives to banks to provide financing, direct funds to support 79 For addition information on this issue, see CRS Report R41347, Rare Earth Elements: The Global Supply Chain, by Marc Humphries. 80 Google Blog, June 1, 2011, available at http://googleblog.blogspot.com. Congressional Research Service 28 China-U.S. Trade Issues technology upgrades and the development of domestic brands, favorable government procurement policies, the extension of export credits, and funding to help firms invest overseas. Violations of U.S. Intellectual Property Rights Lack of effective and consistent protection in China of IPR has been cited by U.S. firms as one of the most significant problems they face in doing business in China. Although China has improved significantly its IPR protection regime over the past few years by beefing up its IPR laws and conducting periodic focused campaigns (such as raids) against major IPR infringers, U.S. industries complain that piracy rates in China remain unacceptably high. The U.S. International Trade Commission (USITC) estimates that U.S. intellectual property-intensive firms that conducted business in China lost $48.2 billion in sales, royalties, and license fees in 2009 because of IPR violations in China.81 The International Intellectual Property Alliance (IIPA) estimated that business software piracy in China alone cost U.S. firms $3.4 billion in lost trade in 2009.82 The Business Software Alliance (BSA) estimates the commercial value of illegally used software in China in 2009 was $7.6 billion, a $900 million increase over 2008 levels.83 Critics of China’s IPR regime note that, even when the Chinese government enforces its IPR laws, the resulting fines, seizures, and other punishments are often not significant enough to act as an effective deterrence against piracy. The U.S. Customs and Border Protection reported that China accounted for 66% of pirated goods seized by the agency in FY2010 (based on domestic value). Piracy also has a number of negative effects on China’s economy. For example: • 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).84 It also found that about half of pirated films in China are Chinese movies. • A BSA study estimates that a 10 percentage point reduction in China’s PC software piracy rates within two years would raise Chinese GDP by up to $20.1 billion and create an additional 250,000 jobs.85 Opinions differ as to why the Chinese government has been unable (or unwilling) to make a significant reduction in the level of piracy in China. Some explanations put forward by various analysts include the following: 81 The United States International Trade Commission, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, USITC Publication 4226, May 2011, p. xiv. 82 IIPA, IIPA 2010 ‘Special 301 Recommendations,’ 2010. Available at http://www.iipa.com/rbc/2010/2010SPEC301LOSSLEVEL.pdf. 83 BSA, Seventh Annual Global Software Piracy Study, 2010, p.5. Available at http://portal.bsa.org/globalpiracy2009/studies/09_Piracy_Study_Report_A4_final_111010.pdf. 84 Reuters, “China Piracy Costs Film Industry $2.7 Billion in 2005,” June 19, 2006. 85 BSA, 2010 Piracy Impact Study: the Economic Benefits of Reducing Software Piracy, available at http://portal.bsa.org/piracyimpact2010/studies/piracyimpactstudy2010.pdf. Congressional Research Service 29 China-U.S. Trade Issues • China’s transformation from a command economy, in which the government owned and controlled nearly every aspect of the economic life, to one that has become more market-based is a relatively recent occurrence in China’s history. Thus, IPR is a somewhat alien or unfamiliar concept for most people in China and consequently it is difficult for the government to convince the public that IPR piracy is wrong. • Chinese leaders want to make China a major producer of capital-intensive and high-technology products, and thus, they are tolerant of IPR piracy if it helps Chinese firms become more technologically advanced. A 2010 report by the International Intellectual Property Alliance (IIPA) contends that “China appears to have adopted an industrial policy in which such theft is a component driving Chinese competitiveness, or at a minimum, permitting free access to American content through unapproved pirate channels which simply ignore censorship controls but to which legitimate rights holders must adhere.”86 • Although the central government may be committed to protecting 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 lacks the resources and a sophisticated legal system to go after and punish IPR violators, and hence, establishing an effective enforcement regime will take time. • As a practical matter, IPR enforcement in China will be problematic until Chinese-owned companies begin to put pressure on the government to protect their own brands and other IPR-related products. U.S. trade officials note that the Chinese government took aggressive action during the 2008 summer Olympics in Beijing to stop infringement activities. • Chinese trade barriers and restrictive regulations 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.87 The U.S. WTO Cases Against China on IPR On April 10, 2007, the USTR brought two IPR cases against China in the WTO involving a number of complaints.88 • The thresholds for criminal prosecutions of IPR violations in China 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 86 IIPA, 2010 Special 301 Report on Copyright Protection and Enforcement, People’s Republic of China, February 18, 2010. 87 For example, China only allows 20 foreign movies to be imported each year (in part to protect China’s domestic movie industry), and these must undergo inspection for content before they can be released for distribution in China. Such restrictions do not effectively stop U.S. movies from entering China, but instead seem to ensure that most of these are pirated versions because of the high Chinese demand for foreign movies. 88 See USTR April 9, 2007, Press Release and related documents at http://www.ustr.gov/index.html. Congressional Research Service 30 China-U.S. Trade Issues 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. • The Chinese government often allows seized imported pirated goods to reenter 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 products. • 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 market access barriers in China, which drive up the price of legitimate products, making them unaffordable for the average Chinese citizen, which in turn encourages high rates of piracy. On January 26, 2009, a WTO panel ruled on the case dealing with IPR enforcement issues, finding that China failed to protect IPR works under review by the government for content and in regards to the disposal of seized pirated products. However, the panel determined that it needed more evidence on the issue of thresholds for criminal prosecutions of IPR piracy before a determination could be made. The USTR, while admitting disappointment on the WTO findings on thresholds, noted that, right before it filed the WTO case on China’s IPR enforcement, China lowered its threshold criminal copyright threshold from 1,000 to 500 infringing copies. China has agreed to implement the WTO ruling. On August 12, 2009, a WTO panel ruled that a number of China’s restrictions on trading rights and distribution of IPR-related products (including reading material, audiovisual home entertainment products, sound recordings, and films for theatrical release) were inconsistent with WTO rules, namely discriminatory regulations on distribution services in China (where foreign firms are treated less favorably than domestic firms) and rules that designate only state-owned monopolies as entities that can import such products. However, the WTO panel did not address whether China’s censorship policies, or its limits on the number of foreign films that can be imported, violated WTO rules. China appealed the panel’s decision, but lost. Although China agreed to implement the WTO DSB’s ruling by March 2011, the United States charges that China has not brought all of its measures in compliance with the WTO ruling.89 The USTR’s 2010 Special 301 report stated that China continued to be a major focus of U.S. IPR concerns. It noted that, although China had made considerable progress in improving its IPR enforcement regime, IPR piracy rates remained at “unacceptable levels.” In addition, USTR head Ron Kirk stated 89 If China fails to comply, the United States could request the WTO to authorize it to impose sanctions against China. Congressional Research Service 31 China-U.S. Trade Issues we are seriously concerned about China’s implementation of “indigenous innovation” policies that may unfairly disadvantage U.S. IPR holders. Procurement preferences and other measures favoring ‘indigenous innovation’ could severely restrict market access for American technology and products. Creating an environment that nurtures innovation and entrepreneurship is a worthy goal, but China must maintain a level playing field. During the December 2010 U.S.-China Joint Commission on Commerce and Trade (JCCT),90 the Chinese government announced several new initiatives to improve its IPR protection regime, including boosting purchases of legitimate software by government agencies and 30 large stateowned enterprises. The USTR’s 2011 Special 301 report noted that China had launched the “Program for Special Campaign on Combating IPR Infringement and Manufacture and Sales of Counterfeiting and Shoddy Commodities” (Special Campaign) in October 2010 aimed at a broad ranges of IPR violations, and involving 26 member agencies (led by a Chinese vice premier), which reportedly has improved government coordination of IPR enforcement. The USTR stated that: “If China makes permanent the temporary leadership structure created to manage the Special Campaign, including the key role of the Vice Premier, it could drive lasting improvements in IPR enforcement.”91 However, the USTR noted that it appears that the Special Campaign has not yet had a positive affect on U.S. IPR stakeholders in terms of lowering piracy rates and boosting demand for legitimate products. The report noted U.S. concerns over a May 2010 decision by the Chinese government to triple the threshold for investigating and prosecuting trade in counterfeit products, which, the USTR contends, will further undermine China’s IPR enforcement environment. The 2011 China Business Climate Survey found that respondents that rated China’s IPR enforcement as effective or very effective had risen from 16% in 2002 to 30% in 2011. Over the same period, respondents who found China’s IPR enforcement to be ineffective or totally ineffective went from 84% to 70%, indicating that, while China’s IPR enforcement regime has shown improvement, it still has an long way to go to be effective at halting widespread IPR piracy in China.92 Indigenous Innovation and Government Procurement Policies Numerous policies have been implemented in China to promote the development of industries deemed critical for future economic growth. The Chinese government’s 11th Five-Year Plan (2006-2010) states that a central goal is to, within 15 years, change China from a major manufacturing center to a major global source of innovation. As a result of the plan, China has focused a large share of its research and development (R&D) on its space programs, aerospace development and manufacturing, renewable energy, computer science, and life sciences.93 Nearly 70% of the performance (as well as funding) of China’s R&D comes from the government and about 21% from industry. 90 The JCCT was established in 1983 to serve as a forum for high-level dialogue on major bilateral trade issues. USTR, 2011 Special 301 Report, April 2011, p. 19. See, http://www.ustr.gov/webfm_send/2841. 92 The American Chamber of Commerce, People’s Republic of China, China’s Business Climate Survey, 2011, March 19, 2011. 93 R&D Magazine, December 22, 2009. 91 Congressional Research Service 32 China-U.S. Trade Issues Indigenous Innovation Policies Several U.S. companies have complained about a number of Chinese government (from the central government as well as provincial and local government) circulars that would establish an “Indigenous Innovation Product Accreditation” system; this would give preferential treatment to locally developed technologies in government procurement. U.S. business representatives have sharply criticized the policy, which they contend is “protectionist” because it would require that public procurement projects provide preference to suppliers who have been accredited by the government as having developed their intellectual property in China. A letter written by the U.S. Chamber of Commerce and 33 business associations to the Chinese government on December 10, 2009, stated that the circulars would “make it virtually impossible for any non-Chinese companies to participate in China’s government procurement market—even those that have made substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the Chinese government.” U.S. firms note that a large share of their technology is developed globally and thus it would be difficult to attribute the share of technology developed in China needed to obtain accreditation.94 China’s proposed indigenous innovation policies were one of the top U.S. priorities at the May 2010 U.S.-China Strategic and Economic Dialogue (S&ED) (discussed below). The two sides reaffirmed that their innovation policies would be consistently based on non-discrimination; support for market competition and open international trade and investment; strong enforcement of IPR; and leaving the terms and conditions of technology transfer, production processes, and other proprietary information to agreement between individual enterprises. The two sides further agreed to conduct “intensive expert and high-level discussions” as early as the summer of 2010 on innovation issues and pledged to take into account the results of these talks in formulating and implementing their innovation measures.95 During the December 2010 U.S.-China JCCT meeting, China stated that it will give equal treatment to all innovation products produced in China by foreign-invested enterprises and Chinese-invested enterprises alike. Chinese Government Procurement Issues Estimates of the value of annual Chinese public procurement differ significantly. The USITC estimated the amount could range from $88 billion to $200 billion.96 China has established a number of restrictive government procurement practices and policies. For example, in November 2008, China announced that it would implement a $586 billion stimulus package, largely focused on infrastructure projects, in order to boost economic growth in the wake of the global economic slowdown. In June 2009, the government reportedly issued a circular with “Buy China” provisions requiring that projects funded by the stimulus package give preferences to domestic firms. 94 Some analysts contend that one motive for the circulars is to force foreign companies to do more of their research and development in China in order to gain accreditation, thus enhancing China’s access to technology, which the Chinese government will utilize the enhance its own technologic advancement. 95 U.S. Treasury Department Press Release, Second Meeting of the U.S.-China Strategic & Economic Dialogue, Joint U.S. China Economic Track Fact Sheet, May 25, 2010. 96 Testimony of Karen Laney, Acting Director of Operations, U.S. International Trade Commission before the Subcommittee on Terrorism, Nonproliferation, and Trade, Committee on Foreign Affairs on China’s Indigenous Innovation, Trade, and Investment Policies, March 9, 2011. Congressional Research Service 33 China-U.S. Trade Issues Government procurement policies are largely exempt from WTO rules, except for those members which have signed the WTO Government Procurement Agreement (GPA). The GPA is a plurilateral agreement among 41 WTO members (including the United States, Japan, and the 27 members of the European Union) that effectively provides market access for various non-defense government procurement projects to signatories to the agreement. Each member of the Agreement submits lists of government entities and goods and services (with thresholds and limitations) that are open to bidding by firms of the other GPA members.97 WTO members that are not signatories to the GPA, including those that are GPA observers (such as China), do not enjoy any rights under the GPA. Nor are non-GPA signatories in the WTO generally obligated to provide access to their government procurement markets. China formally entered negotiations to join the GPA in 2007 and made an official offer, but it was deemed unacceptable by the other WTO GPA parties. China promised to revise its GPA offer, but in October 2008, it notified the GPA parties that it was unable to provide a new offer.98 During the October 2009 U.S.-China JCCT, China pledged that it would issue a new WTO GPA offer in 2010 and stated that it was the policy of China to treat products produced in China by foreign-invested enterprises the same as domestic products (and promised to issue new rules to clarify this point). At the May 2010 S&ED meeting, China pledged it would submit its revised GPA offer by July 2010, which it did on July 9, 2010. Although some analysts viewed China’s latest GPA offer as an improvement over its previous offer, they contend that it fell far short of being acceptable to all the current GPA members. For example, the offer excluded purchases by local and provincial governments as well as state-owned enterprises. During the December 2010 U.S.-China JCCT meeting, China agreed to submit a robust, new offer to the WTO Government Procurement committee before the Committee’s final meeting in 2011, which many expect will cover some local governments and SOEs. Congressional concerns over China’s failure to join the GPA resulted in the introduction of legislation in the 111th Congress which would have imposed restrictions on U.S. government procurement of Chinese goods until China joined the GPA. In the 112th Congress, H.R. 375 would limit the total value of Chinese goods that could be procured by the U.S. government to the same value of U.S. goods procured by the Chinese government in the previous year. Under the bill, the U.S. Department of Commerce would be required to determine whether China had maintained restrictions on public procurement of U.S. goods in the previous year. If a determination was made that China maintained such prohibitions, U.S. government agencies would be barred from awarding contracts for the procurement of Chinese goods.99 If the Commerce Department determined that no prohibition existed, it would be required to estimate the value of U.S. goods procured by Chinese government agencies (in the previous year), and U.S. public procurement of Chinese goods would be limited to this figure (for the current year). 97 GPA members are generally obligated to afford each other fair and non-discriminatory treatment for the covered procurement items and to maintain transparency in procurement practices. 98 A Chinese official claimed they were having difficulties revising their offer due to potential conflicts with current Chinese procurement laws and the lack of consensus over which non-central government entities would be covered. 99 In addition, the Secretary of Transportation would be required to prohibit States or other entities from using funds from the Highway Trust Fund or the Airport and Airway Trust Fund for the award of a contract for the procurement of Chinese goods. Congressional Research Service 34 China-U.S. Trade Issues China and U.S. Trade Remedy Laws When China entered the WTO in 2001, it agreed to allow the United States to continue to treat it as a non-market economy for 12 years (codified in U.S. law under Sections 421of the 1974 Trade Act, as amended) for the purpose of U.S. safeguards.100 This provision enables the United States (and other WTO members) to impose restrictions (such as quotas and/or increased tariffs) on Chinese products when imports of those products have sharply increased and have caused, or threaten to cause, market disruption to U.S. domestic producers.101 The Bush Administration on six different occasions chose not to extend relief to various industries under the China-specific safeguard, even though in four cases the U.S. International Trade Commission (USITC) recommended relief. A number of U.S. industries and labor groups have called on the Obama Administration to utilize the China safeguard provision, especially in the face of the current U.S. recession and because of “unfair” Chinese trade practices. The Chinese Tire Case On April 24, 2009, the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (USW) filed a petition with the USITC contending that U.S. imports of passenger vehicle and light truck tires from China caused or threatened to cause market disruption to U.S. domestic producers of like or directly competitive products. In June 2009, the USITC announced that it had determined such imports did in fact cause or threaten to cause market disruption, and recommended the imposition of additional tariffs over three years (55% in the first year, 45% in the second, and 35% in the third) and to provide expedited consideration of Trade Adjustment Assistance for firms and/or workers that are affected by such imports.102 The USW argued that the “extraordinary increase in imports” of tires from China had hurt tire producers in the United States and contributed to the loss of 5,100 U.S. tire-related jobs from 2004-2008, and that 3,000 more jobs would be lost in 2009. Producers of tires in the United States, many of whom have joint venture operations in China, did not express support for the safeguard case, and some actively opposed it.103 Some industry representatives argued that a large share of U.S. tire imports from China were low-end products, that the USITC’s proposed increase in tariffs were excessive and punitive, and that such tariffs would hurt U.S. consumers and do little to boost employment in the U.S. tire industry. On September 11, 2009, President Obama announced that he would impose additional tariffs on certain Chinese tires for three years (35% in the first year, 30% in the second year, and 25% in the final year); these levels were less than the 100 China also agreed that the United States (and other WTO members) could continue to treat it as a nonmarket economy for antidumping cases for 15 years after accession. This provision enables WTO members to use thirdcountry data to determine fair market prices when determining antidumping duties. 101 Normally, safeguard provisions apply to all imported products. The China safeguard in U.S. trade law applies only to China. Unlike antidumping and countervailing cases, safeguard cases do not involve a contention that an unfair trade practice is being used. 102 The USITC determined that the U.S. tire industry had suffered a continuous decline from 2004-2008 in employment, hours worked, and earnings, and that producers’ domestic capacity, production, and shipments had fallen as well. It concluded that the sharp increase in tire imports from China was a major factor in this decline. See USITC Publication 4085, Certain Passenger Vehicle and Light Truck Tires From China, Investigation No. TA-431-7, July 2009. 103 The USITC identified 10 tire producers in the United States, some of which are foreign-owned. Congressional Research Service 35 China-U.S. Trade Issues USITC’s recommendations.104 China called the move protectionist and initiated a WTO trade dispute resolution case against the United States on September 14. In addition, on November 11, 2009, China launched antidumping and countervailing cases against U.S. autos and poultry, seen by many analysts as a retaliatory move over the U.S. safeguard measure on tires. The U.S.-China Strategic and Economic Dialogue On September 29, 2006, President George W. Bush and Chinese President Hu Jintao 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 was 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.105 The first meeting was held in December 2006. Four subsequent rounds of talks were held (the last was in December 2008). While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and Chinese President Hu agreed to continue the high-level forum, renaming it the U.S.-China Strategic and Economic Dialogue (S&ED). The new dialogue is based on two tracks. The first (the “Strategic Track”) is headed by the Secretary of State on the U.S. side and focuses on political and strategic issues, while the second track (the “Economic Track”) is headed by the U.S. Treasury Secretary on the U.S. side and focuses on financial and economic issues. Areas of discussion include economic and trade issues, counterterrorism, law enforcement, science and technology, education, culture, health, energy, the environment (including climate change), non-proliferation, and human rights. The July 2009 Economic Track Session The first round of the S&ED was held in Washington, DC, on July 27-28, 2009, and involved 12 U.S. Cabinet officials and agency heads and 15 Chinese ministers, vice ministers, and agency heads. The session was focused heavily on issues relating to the global economic crisis. Secretary of Treasury Timothy Geithner stated: “Recognizing that cooperation between China and the United States will remain vital not only to the well being of our two nations but also the health of the global economy, we agreed to undertake policies to bring about sustainable, balanced global growth once economic recovery is firmly in place.” The two sides agreed to establish a framework of cooperation based on four pillars: • advancing macroeconomic and structural policies to achieve sustainable and balanced growth; • promoting more resilient, open, and market-oriented financial systems; • strengthening trade and investment ties; and • strengthening the international financial architecture. 104 Some analysts have speculated that the President’s decision was partly motivated by the belief that strong “enforcement” of U.S. trade laws would help induce lawmakers to support U.S. free trade agreements. See Inside U.S. Trade, “Reid, USTR See Tire Relief As Essential For Support Of Future Trade Deals,” September 10, 2009. 105 U.S. Treasury Department press release, December 15, 2006. Congressional Research Service 36 China-U.S. Trade Issues These pillars appear to have been aimed at by deepening bilateral cooperation in response to the global economic crisis, continuing commitments both sides to promote policies that seek to achieve more balanced economic growth, encouraging China to continue economic and financial reforms, expanding China’s role and/or participation in international economic forums,106 and attempting to avoid new forms of protection. May 2010 Economic Track Session The May 24-25 S&ED economic session focused heavily on the continuing efforts relating to the four pillars indentified in the July 2009 session. Although few concrete accomplishments were announced at the end of the meetings (such as on China’s currency policy), the two agreed to intensify talks on a number of bilateral economic and trade issues. The two sides pledged to • sign a cooperation protocol on small and medium-sized firms (SMEs); • boost economic cooperation at the central and local government level, such as promoting the establishment of state-to-province and city-to-city partnerships; • conduct “intensive expert and high-level discussions” as early as the summer of 2010 on innovation issues (such as China’s indigenous innovation proposals) and to take into account the results of these talks in formulating and implementing their innovation measures;107 • improve cooperation to address health and safety issues relating to U.S. sales of soybeans to China; • establish a cooperative mechanism between the U.S. Export-Import Bank and the Export-Import Bank of China on trade finance, and to develop initiatives to promote exports by SMEs; • explore the possibility of cooperating to enable the United States to treat China as a market economy, and to treat certain Chinese firms as market-oriented industries, for the purpose of U.S. trade remedy laws; and • boost investment opportunities and transparency.108 106 The United States is seeking to broaden China’s participation in international economic institutions in order to promote the goal of helping to make China a “responsible stakeholder” in the global economy. This implies that, since China’s greatly benefits from the global trading system and is a major global economy, it should shoulder a greater responsibility in maintaining and promoting that system (rather than just enjoying the benefits of that system). U.S. policymakers contend that if China accepts a greater leadership role in global economic affairs, it will induce Chinese leaders to consider how domestic economic policies can affect the global economy. 107 The United States also pledged that it would review Chinese concerns relating to U.S. restrictions on high technology exports to China resulting from the current U.S. export control regime. 108 The United States pledged that it welcomed investment from China and confirmed that reviews foreign investment by the Committee on Foreign Investment in the United States ensures the consistent and fair treatment of all foreign investment without prejudice to the place of origin. China promised to revise its Catalogue Guiding Foreign Investment in Industries and encourage and expand areas open to foreign investment, including those relating to high-technology, energy, and the environment. China also pledged to streamline the process for investment approval. Congressional Research Service 37 China-U.S. Trade Issues The May 2011 Economic Track The third round of the S&ED was held in Washington, DC, on May 9-10, 2011. Prior to the meeting, U.S. officials identified several U.S. goals for the economic track of the S&ED, including ensuring that China followed through on previous economic and trade commitments (such as on IPR protection and indigenous innovation policies) and encouraging China to make a number of reforms to its financial sector (such as adopting market-based interest rates on bank deposits and expanding market access in China for U.S. financial firms). China pledged to continue to promote domestic consumption, improve IPR enforcement, eliminate all of its indigenous innovation products catalogues, improve transparency of its economic and trade policies, and provide significant new opportunities for U.S. financial services firms in China. Concluding Observations China’s rapid economic growth and emergence as a major economic power have given China’s leadership increased confidence in its economic model. The key challenges for the United States are to convince China (1) that it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and to take a more active leadership role in maintaining that system; and (2) that further economic and trade reforms are the surest way for China to expand and modernize its economy. For example, by boosting domestic spending and allowing its currency to appreciate, China would import more, which would help speed economic recovery in other countries, promote more stable and balanced economic growth in China, and lessen trade protectionist pressures around the world. Boosting IPR protection in China would boost innovation and attract more FDI in high technology. Lowering trade barriers on imports would increase competition in China, lower costs for consumers, and boost economic efficiency. Opinions differ as to the most effective way of dealing with China on major economic issues. Some support a policy of engagement with China using various forums, such as the U.S.-China Strategic and Economic Dialogue (which holds discussions on major issues at the highest government level). Others support a somewhat mixed policy of using engagement when possible, coupled with a more aggressive use of WTO dispute settlement procedures to address China’s unfair trade policies. Still others, who see China as a growing threat to the U.S. economy and the global trading system, advocate a policy of trying to contain China’s economic power and using punitive measures when needed to force China to “play by the rules.” Author Contact Information Wayne M. Morrison Specialist in Asian Trade and Finance wmorrison@crs.loc.gov, 7-7767 Congressional Research Service 3878 AmCham China. 2012 China Business Climate Survey Report, March 2012, available at http://www.amchamchina.org/businessclimate2012. 79 World Trade Organization, Trade Policy Review Body, Trade Policy Review, Report by the Secretariat, China, Revision, 2010, Part 2, p.1. Congressional Research Service 25 China-U.S. Trade Issues of which is deposited in state-controlled Chinese banks. This enables the government to provide low-cost financing to Chinese firms, especially SOEs. At the microeconomic level, the Chinese government (at the central and local government level) seeks to promote the development of industries that are deemed critical to the country’s future economic development by using various policies, such as subsidies, tax breaks, preferential loans, trade barriers, FDI restrictions, discriminatory regulations and standards, export restrictions on raw materials (such as rare earths) technology transfer requirements imposed on foreign firms, public procurement rules that give preferences to domestic firms, and weak enforcement of IPR laws. Many analysts contend that the Chinese government’s intervention in various sectors through industrial policies has intensified in recent years. The December 2011 U.S. Trade Representative’s (USTR’s) report on China’s WTO trade compliance states that since 2006 there has been a “troubling trend in China toward intensified state intervention” and that China seems to be “embracing state capitalism more strongly.”80 China’s Plan to Modernize the Economy and Promote Indigenous Innovation Many of the industrial policies that China has implemented or formulated since 2006 appear to stem largely from a comprehensive document issued by China’s State Council (the highest executive organ of state power) in 1996 titled the National Medium-and Long-Term Program for Science and Technology Development (2006-2020), often referred to as the MLP. The MLP appears to represent an ambitious plan to modernize the structure of China’s economy by transforming it from a global center of low-tech manufacturing to a major center of innovation (by the year 2020) and a global innovation leader by 2050.81 It also seeks to sharply reduce the country’s dependence on foreign technology. The MLP includes the stated goals of “indigenous innovation, leapfrogging in priority fields, enabling development, and leading the future.”82 Some of the broad goals of the MLP state that by 2020: • The progress of science and technology will contribute 60% or above to China’s development. • The country's reliance on foreign technology will decline to 30% or below (from an estimated current level of 50%). • Gross expenditures for research and development (R&D) would rise to 2.5% of gross domestic product (from 1.3% in 2005). Priority areas for increased R&D include space programs, aerospace development and manufacturing, renewable energy, computer science, and life sciences.83 The document states that “China must place the strengthening of indigenous innovative capability at the core of economic restructuring, growth model change, and national competitiveness enhancement. Building an innovation-oriented country is therefore a major strategic choice for 80 U.S. Trade Representative, 2011 USTR Report to Congress on China’s WTO Compliance, December 2011, p.2. As some observers describe it, China wants to go from a model of “made in China” to “innovated in China.” 82 The MLP identifies main areas and priority topics, including energy, water and mineral resources, the environment, agriculture, manufacturing, communications and transport, information industry and modern service industries, population and health, urbanization and urban development, public security, and national defense. The report also identifies 16 major special projects and 8 “pioneer technologies.” 83 R&D Magazine, December 22, 2009. 81 Congressional Research Service 26 China-U.S. Trade Issues China’s future development.” This goal, according to the document, is to be achieved by formulating and implementing regulations in the country’s government procurement law to “encourage and protect indigenous innovation,” establishing a coordination mechanism for government procurement of indigenous innovative products, requiring a first-buy policy for major domestically made high-tech equipment and products that possess proprietary intellectual property rights, providing policy support to enterprises in procuring domestic high-tech equipment, and developing “relevant technology standards” through government procurement. Reaction by U.S. Stakeholders Beginning in 2009, several U.S. companies began to raise concerns over a number of Chinese government circulars that would establish an “Indigenous Innovation Product Accreditation” system. For example, in November 2009, the Chinese government released a “Circular on Launching the 2009 National Indigenous Innovation Product Accreditation Work,” requiring companies to file applications by December 2009 for their products to be considered for accreditation as “indigenous innovation products.” U.S. business representatives expressed deep concern over the circulars, arguing that they were protectionist in nature because they extended preferential treatment for Chinese government procurement to domestic Chinese firms that developed and owned intellectual property (IP) and thus largely excluded foreign firms.84 AmCham China described China’s attempt to link IP ownership with market access as “unprecedented worldwide.”85 A letter written by the U.S. Chamber of Commerce and 33 business associations to the Chinese government on December 10, 2009, stated that the indigenous innovations circulars would “make it virtually impossible for any non-Chinese companies to participate in China’s government procurement market—even those that have made substantial and long-term investments in China, employ Chinese citizens, and pay taxes to the Chinese government.”86 Such groups contend that a large share of their technology is developed globally and thus it would be difficult to attribute the share of technology developed in China needed to obtain accreditation.87 A 2011 AmCham China survey found that 40% of respondents believed that China’s indigenous innovation policies would hurt their businesses and 26% said their businesses were already being hurt by such policies.88 At a November 2011 WTO review of China’s IPR policies, the U.S. WTO representative stated that China’s policies of adopting indigenous innovation had “created a troubling trend toward increased discriminatory policies which were aimed at coercing technology transfer.” He stated that “Chinese regulations, rules and other regulatory measures frequently called for technology transfer, and in certain cases, conditioned, or proposed to 84 U.S. business representatives also claim that the Chinese government is using tax incentives, standards setting and requirements, security regulations, subsidies, technology transfer requirements, and other measures to promote the goals of indigenous innovation. 85 AmCham China,2011 White Paper, April 26, 2011, p. 66. 86 A copy of the letter can be found at http://online.wsj.com/public/resources/documents/chinaprocurementletter1210.pdf. 87 Some U.S. business representatives argue that one of the main goals of China’s indigenous innovation regulations is to induce foreign firms to boost their R&D activities in China in order to qualify for government contracts. 88 However 68% of the respondents stated that they were unaffected by indigenous innovation policies and 6% said they had benefited. See AmCham China, 2011 China Business Climate Survey. Congressional Research Service 27 China-U.S. Trade Issues condition, the eligibility for government benefits or preferences on intellectual property being owned or developed in China, or being licensed, in some cases exclusively, to a Chinese party.”89 China’s Response to U.S. Concerns The Chinese government responded to U.S. concerns over its indigenous innovation policies by arguing that they did not discriminate against foreign firms or violate global trade rules.90 However, during the visit of Chinese President Hu Jianto to the United States in January 2011, the Chinese government stated that it would not link its innovation policies to the provision of government procurement preferences.91 During the May 2011 session of the U.S.-China Strategic and Economic Dialogue (S&ED), China pledged that it would eliminate all of its indigenous innovation products catalogs.92 During the November 2011 talks held under the U.S.-China Joint Commission on Commerce and Trade (JCCT), the Chinese government announced that the State Council had issued a measure requiring governments of provinces, municipalities, and autonomous regions to eliminate by December 1, 2011, any catalogues or other measures linking innovation policies to government procurement preferences.93 This occurred after foreign business groups raised concerns that discriminatory indigenous innovation policies might continue to be implemented at the local level even after Hu Jintao’s commitment.94 Remaining U.S. Concerns While many U.S. business leaders have applauded China’s pledge to delink indigenous innovation from government procurement, some remain wary that China will implement new policies that attempt to provide preferences to local Chinese firms over foreign firms. According to Adam Segal with the Council of Foreign Relations: “Even if China reverses certain policies under U.S. pressure, it will remain dedicated to those goals. U.S. policy is likely to become a game of Whac-a-Mole, beating down one Chinese initiative on indigenous innovation only to see another pop up.”95 U.S. business groups are also concerned with how the MLP blueprint will affect China’s commitment to enforcing foreign IPR. They note, for example, that the MLP states: “Indigenous innovation refers to enhancing original innovation, integrated innovation, and reinnovation based on assimilation and absorption of imported technology, in order to improve our 89 Transitional Review Under Section 18 of the Protocol on the Accession of the People's Republic of China, Report to the General Council by the Chair, November 17, 2011, p.4. 90 Wall Street Journal, China Defends Rule On 'Indigenous' Tech, December 15, 2009. 91 The White House, U.S. - China Joint Statement, January 19, 2011. 92 According to a U.S. fact sheet on the meeting “China pledged to eliminate all of its government procurement indigenous innovation products catalogues and revise Article 9 of the draft Government Procurement Law Implementing Regulations (which have preferences in government procurement to national indigenous innovation products), in fulfillment of President Hu's January 2011 commitment not to link Chinese innovation policies to government procurement preferences. See U.S. Department of the Treasury, The 2011 U.S.-China Strategic and Economic Dialogue U.S. Fact Sheet – Economic Track, May 10, 2011. 93 U.S. Department of Commerce, 22nd U.S.-China Joint Commission on Commerce and Trade Fact Sheet, November 21, 2011. 94 The U.S.-China Business Council reported in February 2011 that it had identified 22 municipal and provincial governments that had issued at least 61 indigenous innovation catalogues. U.S. business representatives sought to ensure that Beijing’s pledge on indigenous innovation would apply at all levels of government in China. See U.S.China Business Council, Provincial and Local Government Indigenous Innovation Catalogues, February 2011. 95 Foreign Affairs, China's Innovation Wall: Beijing's Push for Homegrown Technology, September 28, 2010. Congressional Research Service 28 China-U.S. Trade Issues national innovation capability.” To some, this seems to indicate that China intends to take existing technology, make some changes and improvements on it, and then claim it as its own without acknowledging or compensating the original IPR holders. A 2011 report by the U.S. Chamber of Commerce stated that China’s indigenous innovation policies led many international technology companies to conclude that the MLP is a “blueprint for technology theft on a scale the world has never seen before.”96 U.S. officials have attempted to convince Beijing that, while its desire to increase innovation in China is a commendable goal, its efforts to limit the participation of foreign firms in such efforts, or attempting to condition market access in China to the development of IPR by foreign firms in China will hinder, not promote, the advancement of innovation in China. The direction China takes on this issue could have a significant impact on U.S. economic interests as noted by a study by the U.S. International Trade Commission (USITC): To the extent that China’s policies succeed in accelerating technological progress, productivity, and innovation in the Chinese economy, they could provide spillover benefits for other countries. But if indigenous innovation policies act as a form of technological import substitution, systematically favoring Chinese domestic firms over foreign firms in relevant industries, they would be expected to have a negative effect on foreign firms and economies roughly analogous to what would occur if China simply imposed a protective tariff on imports of goods in the relevant sectors or levied a discriminatory excise tax on the sales of FIEs in the Chinese market.97 Intellectual Property Rights (IPR) U.S. business and government representatives have voiced growing concern over economic losses suffered by U.S. firms as a result of IPR infringement in China (and elsewhere), including those that have resulted from cyber attacks. U.S. innovation and the intellectual property that is generated by such activities have been cited by various economists as a critical source of U.S. economic growth and global competitiveness.98 For example, according to the Department of Commerce, in 2010, U.S. IP-intensive industries supported at least 40 million jobs and contributed $5.1 trillion (or 34.8%) to U.S. gross domestic product (GDP). A study by NDP Consulting estimated that in 2008, workers in IP-intensive production earned 60% more than workers at similar levels in non-IP industries.99 A study on the Apple iPod concluded that Apple's innovation in developing and engineering the iPod and its ability to source most of its production to low-cost countries, such as China, have helped enable it to become a highly competitive and profitable firm as well as a creator of high-paying jobs (such as engineers engaged in the design of Apple products) in the United States.100 96 U.S. Chamber of Commerce, China’s Drive for 'Indigenous Innovation' - A Web of Industrial Policies, February 2011, p.4. 97 USITC, China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy (Investigation No. 332-514, USITC Publication 4199, November 2010, p.6-7. 98 See CRS Report RL34292, Intellectual Property Rights and International Trade, by Shayerah Ilias and Ian F. Fergusson. 99 Nam Pham, The Impact of Innovation and the Role of Intellectual Property Rights on U.S. Productivity, Competitiveness, Jobs, Wages and Exports, 2010, NDP Consulting. 100 Communications of the ACM, Who Captures Value in a Global Innovation Network? The Case of Apple's iPod, March 2009. Congressional Research Service 29 China-U.S. Trade Issues Lack of effective and consistent protection of IPR has been cited by U.S. firms as one of the most significant problems they face in doing business in China. Other U.S. firms have expressed concern over pressures they often face from Chinese government entities to share technology and IPR with a Chinese partner. Although China has significantly improved its IPR protection regime over the past few years, U.S. IP industries complain that piracy rates in China continue to remain unacceptably high and economic losses are significant, as illustrated by studies and estimates made by several stakeholders: • A 2012 AmCham China survey found that 79% of respondents in 2012 felt that China’s IPR enforcement was ineffective.101 • The USITC estimated that U.S. intellectual property-intensive firms that conducted business in China lost $48.2 billion in sales, royalties, and license fees in 2009 because of IPR violations in China. It also estimated that an effective IPR enforcement regime in China that was comparable to U.S. levels, could increase employment by IP-intensive firms in the United States by 923,000 jobs102 • The Business Software Alliance (BSA) estimates the commercial value of illegally used software in China at $7.8 billion in 2010 and that the software piracy rate in China was 78%.103 • The U.S. Customs and Border Protection reported that China accounted for 62% of pirated goods seized by the agency in FY2011 (based on domestic value).104 The value of seized goods originating from China was $110 million.105 Chinese officials contend that they have significantly improved their IPR protection regime, but argue that the country lacks the resources and a sophisticated legal system to effectively deal with IPR violations. They also contend that IPR infringement is a serious problem for domestic Chinese firms as well. However, some analysts contend that China’s relatively poor record on IPR enforcement can be partially explained by the fact that Chinese leaders want to make China a major producer of capital-intensive and high-technology products, and thus, they are tolerant of IPR piracy if it helps Chinese firms become more technologically advanced. According to an official at the U.S. Chamber of Commerce: The newer and emerging challenge to U.S. IPR is not a function of China’s lack of political will to crackdown on infringers. Rather, it is a manifestation of a coherent, and governmentdirected, or at least government-motivated, strategy to lessen China’s perceived reliance on foreign innovations and IP. China is actively working to create a legal environment that enables it to intervene in the market for IP, help its own companies to “re-innovate” competing IPR as a substitute to American and other foreign technologies, and potentially 101 AmCham China, 2012 China Business Climate Survey Report, March 2012, available at http://www.amchamchina.org/businessclimate2012. 102 The United States International Trade Commission, China: Effects of Intellectual Property Infringement and Indigenous Innovation Policies on the U.S. Economy, USITC Publication 4226, May 2011, p. xiv. 103 BSA, Eighth Annual Global Software Piracy Study, May 2011, available at http://portal.bsa.org/globalpiracy2010/downloads/study_pdf/2010_BSA_Piracy_Study-Standard.pdf. 104 This rate goes up to 80% if seizures of goods from Hong Kong is included. 105 U.S. Customs and Border Protection, Intellectual Property Rights, Fiscal Year 2011 Seizure Statistics, February 2012, available at http://www.cbp.gov/linkhandler/cgov/trade/priority_trade/ipr/ipr_communications/seizure/ipr_seizures_fy2011.ctt/ipr_ seizure_fy2011.pdf. Congressional Research Service 30 China-U.S. Trade Issues misappropriate U.S. and other foreign IP as components of its industrial policies and internal market regulation.... The common themes throughout these policies are: 1) undermine and displace foreign IP; 2) leverage China’s large domestic market to development national champions and promote its own IP, displacing foreign competitors in China; and 3) building on China’s domestic successes by displacing competitors in foreign markets.106 A recent illustration of alleged IPR theft in China involves American Superconductor Corporation (AMSC). On September 14, 2011, AMSC announced that it was filing criminal and civil complaints in China against Sinovel Wind Group Co. Ltd. (Sinovel), China’s largest wind turbine producer, and other parties, alleging the illegal use of AMSC's intellectual property. According to an AMSC press release, Sinovel illegally obtained and used AMSC's wind turbine control software code to upgrade its 1.5 megawatt wind turbines in the field to meet proposed Chinese grid codes and to potentially allow for the use of core electrical components from other manufacturers.107 In addition, AMSC claimed that Sinovel had refused to pay for past shipments from AMSC and was now refusing to honor contracts for future shipments of components and spare parts as well.108 According to a specialist in intellectual property at Tufts University, “Chinese companies, once they acquire the needed technology, will often abandon their Western partners on the pretext the technology or product failed to meet Chinese governmental regulations. This is yet another example of a Chinese industrial policy aimed at procuring, by virtually any means, technology in order to provide Chinese domestic industries with a competitive advantage.”109 During the December 2010 U.S.-China Joint Commission on Commerce and Trade (JCCT),110 the Chinese government announced several new initiatives to improve its IPR protection regime, including boosting purchases of legitimate software by government agencies and 30 large SOEs. The USTR’s 2011 Special 301 report noted that China had launched the “Program for Special Campaign on Combating IPR Infringement and Manufacture and Sales of Counterfeiting and Shoddy Commodities” (Special Campaign) in October 2010, aimed at a broad range of IPR violations. The Special Campaign involved 26 member agencies (led by a Chinese vice premier), and reportedly led to improved government coordination of IPR enforcement by the Chinese government. The USTR’s 2012 Special 301 report stated that, while China had made some notable improvements to its IPR enforcement regime (in particular by making the Special Campaign on IPR enforcement permanent), serious problems remain. These include very high levels of trademark counterfeiting and copyright piracy, the persistence of “notorious” physical and online markets selling IPR-infringing goods, the manufacturing and sale of counterfeit pharmaceuticals, export of counterfeit goods, and discriminatory policies seeking to promote indigenous innovation in China by coercing foreign firms to transfer IPR to Chinese domestic firms. The USTR further noted a “recent alarming increase” in thefts of trade secrets (both in China and outside China) for the benefit of Chinese entities. Many of these problems, according to the 106 Testimony of Jeremie Waterman, Senior Director, Greater China, U.S. Chamber of Commerce, before the U.S. International Trade Commission, Hearing on China: Intellectual Property Infringement, Indigenous Innovation Policies, and Frameworks for Measuring the Effects on the U.S. Economy, June 15, 2010. 107 AMSC claims Sinovel had obtained the intellectual property from a former AMSC employee who was now under arrest in Austria for economic espionage and fraudulent manipulation of data. 108 AMSC Press Release, “AMSC Filing Criminal and Civil Complaints Against Sinovel,” September 14, 2011. 109 “Data Theft Case May Test U.S. China Ties,” Boston Globe, September 19, 2011. 110 The JCCT was established in 1983 to serve as a forum for high-level dialogue on major bilateral trade issues. Congressional Research Service 31 China-U.S. Trade Issues USTR, stemmed from the lack of an effective government deterrent to such activities. In addition, while China’s campaign to require central and provincial governments to use legitimate software produced a “modest increase” in U.S. software to the Chinese government, piracy rates by Chinese SOEs remained high.111 Market access in China remains a significant problem for many U.S. IP industries (such as music and films) and is considered to be a significant cause of high IPR piracy rates. For example, until recently, China limited imports of foreign films to 20 per year. During the visit to the United States by Chinese Vice President Xi Jinping (February 13-17, 2012), China agreed that it would allow more American exports to China of 3D, IMAX, and similar enhanced format movies on favorable commercial terms; strengthen the opportunities to distribute films through private enterprises rather than the state film monopoly; and ensure fairer compensation levels for U.S. blockbuster films distributed by Chinese SOEs.112 In the 112th Congress, H.R. 3375 (Steve King) would direct the President to impose duties on imports from China equivalent to the estimated annual loss of revenue to U.S. IPR holders resulted from IPR infringement in China. (The United States has challenged China’s IPR policies in the WTO, which are discussed later in the report.) Technology Transfer Issues When China entered the WTO in 2011, it agreed that foreign firms would not be pressured by government entities to transfer technology to a Chinese partner as part of the cost of doing business in China. However, many U.S. firms argue that this is a common Chinese practice, although this is difficult to quantify because, oftentimes, U.S. business representatives appear to try to avoid negative publicity regarding the difficulties they encounter doing business in China out of concern over retaliation by the Chinese government.113 In 2011, U.S. Treasury Secretary Timothy Geithner charged that “we're seeing China continue to be very, very aggressive in a strategy they started several decades ago, which goes like this: you want to sell to our country, we want you to come produce here. If you want to come produce here, you need to transfer your technology to us."114 The 2012 survey by AmCham China reported that 33% of its respondents stated that technology transfer requirements were negatively affecting their businesses.115 A 2010 study by the U.S. Chamber of Commerce stated that growing pressure on foreign firms to share technology in exchange for market access in China was forcing such firms to “anguish over balancing today’s profits with tomorrow’s survival.”116 111 USTR, 2012 Special 301 Report, April 2012, available at http://www.ustr.gov/sites/default/files/2012%20Special%20301%20Report_0.pdf. 112 The White House, Press Release, February 17, 2012, at http://www.whitehouse.gov/the-pressoffice/2012/02/17/united-states-achieves-breakthrough-movies-dispute-china. 113 China denies that public officials exert such pressure and that any technology transfers that do occur in China are the result of commercial agreements between companies. 114 Reuters, September 23, 2011. 115 AmCham China, 2012 China Business Climate Survey Report, March 2012, available at http://www.amchamchina.org/businessclimate2012 116 U.S. Chamber of Commerce, China’s Drive for 'Indigenous Innovation' - A Web of Industrial Policies, July 29, 2010. Congressional Research Service 32 China-U.S. Trade Issues However, a 2011 survey by the U.S.-China Business Council found that technology transfer requirements by Chinese entities (both government and private) did not rank among the top 10 challenges faced by the Council’s members in 2010. Among U.S. firms where technology was an issue, when asked if their company had been asked to transfer technology to China over the past three years, 18% answered yes. Among the respondents that had been asked to transfer technology, 20% said the pressure came from a government entity, while 80% said that it came from a Chinese company.117 Of the respondents who said they were asked to transfer technology, 40% stated that they found the requests acceptable, 30% refused the requests, 15% negotiated to mitigate the amount of technology transfer, and 10% said they had to transfer the technology requested in order to gain access to the Chinese market.118 As noted by the U.S.-China Business Council, China has a long-term strategy to bring in foreign technology. But technology is not simply “given to China.” Instead, technology is typically licensed to a China-based entity in which the foreign company has an ownership stake. In many cases the foreign company owns 100 percent of the entity in China; in some cases, the foreign company must form a joint venture with a Chinese partner. In exchange, the company determines a value of the technology to be transferred and negotiates a payment--the technology is rarely “given” for free.119 Press reports indicate that the USTR’s office is currently seeking information from U.S. manufacturers on examples of efforts by the Chinese government to force the transfer of technology from U.S. companies operating in China. This issue was discussed during President Obama’s meeting with Chinese Vice President Xi Jinping on February 14, 2012.120 A White House Factsheet of the meeting stated: “China reiterates that technology transfer and technological cooperation shall be decided by businesses independently and will not be used by the Chinese government as a pre-condition for market access.” In the 112th Congress, S. 2063 (Webb) would prohibit the transfer by a U.S. commercial entity of any proprietary technology or intellectual property that was researched, developed, or commercialized using a contract, grant, loan, loan guarantee, or other financial assistance provided or awarded by the U.S. government to certain foreign entities (such as those that are owned or controlled by a foreign government) unless the Secretary of Commerce determined (and issued a waiver) that the transfer would not compromise the U.S. economic interests or competitiveness. Cyber Security Issues Cyber attacks against U.S. firms have raised concerns over the potential large-scale theft of U.S. IPR and its economic implications for the United States. A 2011 report by McAfee stated that its investigation had identified targeted intrusions into more than 70 global companies and warned that “every conceivable industry with significant size and valuable intellectual property has been 117 However, the Council notes that since the Chinese government maintains approval authority for investment decisions, which may be used by Chinese firms as leverage when attempting to negotiate technology transfer agreements with U.S. firms. 118 Ibid. 119 U.S. China Business Council, USCBC 2011 China Business Environment Survey Results: Market Growth Continues, Companies Expand, But Full Access Elusive for Many, November 2011, p.20. 120 Inside Trade, USTR Seeks Info From Manufacturers On Forced Technology Transfer To China, January 31, 2012. Congressional Research Service 33 China-U.S. Trade Issues compromised (or will be shortly), with the great majority of the victims rarely discovering the intrusion or its impact.”121 Many U.S. analysts and policymakers contend that the Chinese government is a major source of cyber-economic espionage against U.S. firms. For example, Representative Mike Rogers, chairman of the House Permanent Select Committee on Intelligence, stated at an October 4, 2011, hearing that attributing this espionage isn’t easy, but talk to any private sector cyber analyst, and they will tell you there is little doubt that this is a massive campaign being conducted by the Chinese government. I don’t believe that there is a precedent in history for such a massive and sustained intelligence effort by a government to blatantly steal commercial data and intellectual property. China’s economic espionage has reached an intolerable level and I believe that the United States and our allies in Europe and Asia have an obligation to confront Beijing and demand that they put a stop to this piracy.122 According to a report by the U.S. Office of the Director of National Intelligence (DNI): “Chinese actors are the world’s most active and persistent perpetrators of economic espionage. U.S. private sector firms and cyber security specialists have reported an onslaught of computer network intrusions that have originated in China, but the IC (Intelligence Community) cannot confirm who was responsible.” The report goes on to warn that China will continue to be driven by its longstanding policy of “catching up fast and surpassing” Western powers. The growing interrelationships between Chinese and U.S. companies—such as the employment of Chinese-national technical experts at U.S. facilities and the off-shoring of U.S. production and R&D to facilities in China—will offer Chinese government agencies and businesses increasing opportunities to collect sensitive US economic information.123 China’s Obligations in 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 required China to make immediate and extensive reductions in various trade and investment barriers, while allowing it to maintain some level of protection (or a transitional 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. 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.124 121 The report did not indentify China (or any country) as the source of the intrusions. McAfee, Revealed: Operation Shady Rat, An Investigation of Targeted Intrusions Into More Than 70 Global Companies, Governments, and NonProfit Organizations During the Last Five Years, 2011. 122 House Permanent Select Committee on Intelligence, Chairman Mike Rogers Opening Statement at the Hearing on Cyber Threats and Ongoing Efforts to Protect the Nation, October 4, 2011. 123 DNI, Office of the National Counterintelligence Executive, Foreign Spies Stealing U.S. Economic Secrets in Cyberspace, Report to Congress on Foreign Economic Collection and Industrial Espionage: 2009-2011, October 2011. 124 Following China’s WTO accession, the United States, in January 2002, granted China permanent normal trade relations (PNTR) status (prior to that time, that status was on a conditional basis) to ensure that the United States and (continued...) Congressional Research Service 34 China-U.S. Trade Issues Under the WTO accession agreement, China agreed to • reduce the average tariff for industrial goods from 17% to 8.9%, and average tariffs on U.S. priority agricultural products from 31% to 14%; • limit subsidies for agricultural production to 8.5% of the value of farm output, eliminate export subsidies on agricultural exports, and notify the WTO of all government subsidies on a regular basis; • 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, such as treating foreign firms in China 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 (which sets basic standards on IPR protection and rules for enforcement); • fully open the banking system to foreign financial institutions within five years (by the end of 2006); and • allow joint ventures in insurance and telecommunication (with various degrees of foreign ownership allowed); WTO Implementation Issues Getting China into the WTO under a comprehensive trade liberalization agreement was a major U.S. trade objective during the late 1990s. Many U.S. policymakers at the time maintained that China’s WTO membership would encourage the Chinese government to deepen market reforms, promote the rule of law, reduce the government’s role in the economy, further integrate China into the world economy, and enable the United States to use the WTO’s dispute resolution mechanism to address major trade issues. As a result, it was hoped, China would become a more reliable and stable U.S. trading partner. U.S. trade officials contend that in the first years after it joined the WTO, China made noteworthy progress in adopting economic reforms that facilitated its transition toward a market economy and increased its openness to trade and FDI. However, beginning in 2006, progress toward further market liberalization appeared to slow. By 2008, U.S. government and business officials noted evidence of trends toward a more restrictive trade regime.125 The USTR’s 10th annual report to China on WTO compliance (issued in December 2011) identified several areas of concern, including126 • failure by the Chinese government to maintain an effective IPR enforcement regime (discussed below); (...continued) China had a formal trade relationship under the rules of the WTO. 125 China generally implemented its tariff reductions on schedule. 126 USTR, 2011 Report to Congress on China’s WTO Compliance, December 2011. Congressional Research Service 35 China-U.S. Trade Issues • industrial policies and national standards that attempt to promote Chinese firms (while discriminating against foreign firms); • restrictions on trading and distribution rights; • discriminatory and unpredictable health and safety rules on imports (especially agricultural products); and • burdensome regulations and restrictions on services, and failure to provide adequate transparency of trade laws and regulations. As of May 2012, the United States has brought 12 dispute settlement cases against China, several of which have been resolved or ruled upon.127 China has brought six WTO cases against the United States as well.128 The U.S. cases are summarized below. Pending U.S. Cases Against China • On March 13, 2012, the United States, Japan, and the European Union jointly initiated a dispute settlement case against China’s restrictive export policies (such as quotas, tariffs, and minimum export prices) on rare earths and two other minerals.129 • On September 15, 2010, the USTR’s office announced it was bringing a WTO case against China over its improper application of antidumping duties and countervailing duties on imports of grain oriented flat-rolled electrical steel from the United States. • On September 15, 2010, the USTR’s office announced it was bringing a WTO case against China over its discrimination against U.S. suppliers of electronic payment services. Resolved Cases or a WTO Panel Has Issued a Ruling130 • On June 23, 2009, the United States brought a case against China’s export restrictions (such as export quotas and taxes) on raw materials (bauxite, coke, fluorspar, magnesium, manganese, silicon metal, silicon carbide, yellow phosphorus, and zinc). The United States charges that such policies are intended to lower prices for Chinese firms (steel, aluminum, and chemical sectors) in order to help them obtain an unfair competitive advantage. China claims that these restraints are intended to conserve the environment and exhaustible natural resources. In July 2011, a WTO panel issued a report that China’s export taxes and quotas on raw materials violated its WTO commitments. It further found that 127 For an overview of the WTO’s dispute settlement process, see CRS Report RS20088, Dispute Settlement in the World Trade Organization (WTO): An Overview, by Jeanne J. Grimmett 128 China has brought five cases against the United States. These have included challenges to U.S. applications of antidumping and countervailing measures, restrictions on imports of Chinese poultry, and U.S. safeguard measures restricting imports of Chinese tires. 129 For additional information on China’s restrictions on rare earths, see CRS Report R42510, China’s Rare Earth Industry and Export Regime: Economic and Trade Implications for the United States, by Wayne M. Morrison and Rachel Tang. 130 Often, cases are resolved through consultations before a case goes to a panel. Congressional Research Service 36 China-U.S. Trade Issues China failed to show that restrictions were linked to conservation of exhaustible natural resources for some of the raw materials or to protect the health of its citizens (by reducing pollution).131 China appealed the WTO panel’s ruling. However, on January 30, 2012, a WTO Appellate Body affirmed that China’s export quotas and export taxes on certain raw materials violated its WTO commitments.132 U.S. Trade Representative Ron Kirk called the decision a “tremendous victory for the United States,” and said that it would ensure that “core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field.”133 • On December 22, 2010, the USTR’s office announced that it would bring a WTO case against China over a government program that extended subsidies to Chinese wind power equipment manufacturers that use parts and components made in China rather than foreign-made parts and components. On June 7, 2011, the USTR’s office announced that China had agreed to end these subsidies. However, the USTR noted that it had taken significant investigatory efforts by the U.S. government, working with industry and workers, to uncover China’s wind subsidies because of the lack of transparency in China. The USTR further noted that under the terms of China’s WTO accession, it was required to report on all of its subsidy programs, which, to date, it has failed to do.134 • On December 19, 2008, the USTR filed a WTO case against China over its support for “Famous Chinese” brand programs, charging that such programs utilize various export subsidies (including cash grant rewards, preferential loans, research and development funding to develop new products, and payments to lower the cost of export credit insurance) at the central and local government level to promote the recognition and sale of Chinese brand products overseas. On December 18, 2009, the USTR announced that China had agreed to eliminate these programs. • On March 3, 2008, the USTR requested WTO dispute resolution consultations with China regarding its discriminatory treatment of U.S. suppliers of financial information services in China. On November 13, 2008, the USTR announced that China had agreed to eliminate discriminatory restrictions on how U.S. and other foreign suppliers of financial information services do business in China. • On April 10, 2007, the USTR filed a WTO case against China, charging that it failed to comply with the TRIPS agreement (namely in terms of its enforcement of IPR laws). On January 26, 2009, the WTO ruled that many of China’s IPR enforcement policies failed to fulfill its WTO obligations. On June 29, 2009, China announced that it would implement the WTO ruling by March 2010. 131 A summary of the WTO panel report can be found at http://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds394_e.htm#bkmk394r. 132 The Appellate Body declared moot and of no legal effect the Panel's findings regarding China’s export licensing requirements, minimum export price requirements, administration and allocation of export quotas, and fees and formalities in connection with exportation because of inadequacies in the complainants’ panel requests involving these measures. 133 USTR, Press Release, January 31, 2012. 134 USTR Press Release, June 7, 2011, available at http://www.ustr.gov/about-us/press-office/press-releases/2011/june/ china-ends-wind-power-equipment-subsidies-challenged. Congressional Research Service 37 China-U.S. Trade Issues • On April 10, 2007, the USTR filed a WTO case against China charging that it failed to provide sufficient market access to IPR-related products, namely in terms of trading rights and distribution services. In August 2009, a WTO panel ruled that many of China’s regulations on trading rights and distribution of films for theatrical release, DVDs, music, and books and journals were inconsistent with China’s WTO obligation. China appealed the decision, but lost, and in February 2010 stated that it would implement the WTO’s ruling. • On February 5, 2007, the USTR announced it had requested WTO dispute consultations with China over government regulations that give illegal (WTOinconsistent) import and export subsidies to various industries in China (such as steel, wood, and paper) that distort trade and discriminate against imports.135 China’s WTO accession agreement required it to immediately eliminate such subsidies. On November 29, 2007, China formally agreed to eliminate the subsidies in question by January 1, 2008. • On March 30, 2006, the USTR initiated a WTO case against China over its use of discriminatory regulations on imported auto parts, which often applied the high tariff rate on finished autos (25%) to certain auto parts (which generally average 10%). The USTR charged that that the purpose of China’s policy was to discourage domestic producers from using imported parts and to encourage foreign firms to move production to China. On February 13, 2008, a WTO panel ruled that China’s discriminatory tariff policy was inconsistent with its WTO obligations (stating that the auto tariffs constituted an internal charge rather than ordinary customs duties, which violated WTO rules on national treatment). China appealed the decision, but a WTO Appellate Body largely upheld the WTO panel’s decision. • 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% valueadded tax (VAT) 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 industry. During his State of the Union Address in January 2012, President Obama announced plans to create a new Trade Enforcement Unit “charged with investigating unfair trade practices in countries like China.” On February 28, 2012, President Obama issued an executive order establishing the Interagency Trade Enforcement Center within the USTR’s office. Many analysts contend that the new enforcement unit could result in a sharp increase in the number of WTO dispute settlement cases brought by the United States against China. 135 Some programs gave tax preferences, tariff exemptions, discounted loans, or other benefits to firms that met certain export performance requirements, while others gave tax breaks for purchasing Chinese-made equipment and accessories over imports. Congressional Research Service 38 China-U.S. Trade Issues China’s Accession to the WTO Government Procurement Agreement (GPA) Government procurement policies are largely exempt from WTO rules, except for those members which have signed the GPA.136 When China joined the WTO, it indicated its intention to become a member of WTO’s GPA as soon as possible, but, to date, has failed to submit an offer acceptable to current GPA members. China’s accession to the GPA is a major U.S. priority. Estimates of the value of annual Chinese public procurement range from $88 billion to $200 billion.137 However, China has established a number of restrictive government procurement practices and policies that favor domestic Chinese firms. Because of China’s rapidly growing economy and significant infrastructure needs, China’s accession to the GPA could result in significant new opportunities for U.S. firms China did not formally enter into negotiations to join the GPA until 2007, and its initial offer was deemed unacceptable by the other WTO GPA parties. China promised to revise its GPA offer, but did not do so until July 2010. That offer was deemed an improvement over the previous offer but was not accepted, in part because it excluded purchases by local and provincial governments as well as SOEs. A revised offer in December 2011 only covered public entities in three cities and two provinces.138 Commenting on China’s latest offer, the USTR’s office stated: China began its negotiations to join the GPA four years ago this month. Since that time, China has submitted three offers, each an improvement over the last. But China still has some distance to go before the procurement that it is offering is comparable to the extensive procurement that the United States and other Parties cover under the GPA. For example, we are urging China to cover state-owned enterprises, add more sub-central entities and services, reduce its thresholds for the size of covered contracts, and remove other broad exclusions.139 Congressional concerns over China’s restrictions on public procurement and failure to join the GPA have resulted in the introduction of legislation in 112th Congress. H.R. 375 (Kildee) would limit the total value of Chinese goods that could be procured by the U.S. government to the same value of U.S. goods procured by the Chinese government in the previous year, while H.R. 2271 (Royce) would prohibit the federal government from awarding contracts to Chinese entities until China signs the GPA. China pledged in May 2012 to make a new GPA offer sometime in 2012. 136 The GPA is a plurilateral agreement among 41 WTO members (including the United States, Japan, and the 27 members of the European Union) that effectively provides market access for various non-defense government procurement projects to signatories to the agreement. Each member of the Agreement submits lists of government entities and goods and services (with thresholds and limitations) that are open to bidding by firms of the other GPA members. WTO members that are not signatories to the GPA, including those that are GPA observers (such as China), do not enjoy any rights under the GPA. Nor are non-GPA signatories in the WTO generally obligated to provide access to their government procurement markets. 137 Testimony of Karen Laney, Acting Director of Operations, U.S. International Trade Commission before the Subcommittee on Terrorism, Nonproliferation, and Trade, Committee on Foreign Affairs, on China’s Indigenous Innovation, Trade, and Investment Policies, March 9, 2011. 138 Inside U.S. Trade, December 8, 2011. 139 USTR Press Release, December 2011. Congressional Research Service 39 China-U.S. Trade Issues China’s Currency Policy140 Unlike most advanced economies (such as the United States), China does not maintain a marketbased floating exchange rate. Between 1994 and July 2005, China pegged its currency, the renminbi (RMB) or yuan, to the U.S. dollar at about 8.28 yuan to the dollar.141 In July 2005, China appreciated the RMB to the dollar by 2.1% and moved to a “managed float,” based on a basket of major foreign currencies, including the U.S. dollar. In order to maintain a target rate of exchange with the dollar (and other currencies), the Chinese government has maintained restrictions and controls over capital transactions and has made large-scale purchases of U.S. dollars (and dollar assets).142 According to the Bank of China, from July 2005 to July 2009, the dollar-yuan exchange rate went from 8.27 to 6.83 yuan per dollar, an appreciation of 21.1%.143 However, once the effects of the global financial crisis became apparent, the Chinese government halted its appreciation of the RMB and subsequently kept the yuan/dollar exchange rate relatively constant at 6.83 from July 2009 to June 2010 in order to help limit the impact of the sharp decline in global demand for Chinese products. Many U.S. policymakers, labor groups, and business representatives of import-sensitive industries have charged that, despite minor reforms, the Chinese government continues to actively intervene in currency markets to keep the value of the RMB artificially low against the dollar. They claim that this policy provides an indirect subsidy to Chinese exporters (which makes Chinese goods less expensive in the United States), while acting as a de facto tariff on U.S. goods imported into China (which makes them more expensive). They argue that this policy has particularly hurt several U.S. manufacturing sectors that are forced to compete against low-cost Chinese products and has led to significant job losses in the United States, especially in manufacturing. Critics further charge that China’s currency policy has been a major factor in the size and growth of the U.S. trade deficit with China. Some Members of Congress contend that, given the current high rate of unemployment in the United States, Chinese “currency manipulation” can no longer be tolerated. Chinese officials have insisted that the current currency policy is not meant to favor exports over imports, but instead to foster domestic economic stability.144 They have expressed concern that abandoning the currency policy, especially given the current state of the global economy, could further weaken its export industries and cause wide-scale layoffs of Chinese workers. Chinese officials view economic stability as critical to sustaining political stability. They further note that China’s global trade surplus has declined sharply over the past few years. On June 19, 2010, the Chinese central bank, the People’s Bank of China (PBC) stated that, based on current economic conditions, it had decided to “proceed further with reform of the RMB 140 For additional information on this issue, see CRS Report RS21625, China's Currency Policy: An Analysis of the Economic Issues, by Wayne M. Morrison and Marc Labonte. 141 The official name of China’s currency is the renminbi, which is denominated in units of yuan. 142 Much of China’s trade is believed to be in U.S. dollars (e.g., exporters are often paid in dollars). The central government requires firms to exchange most of their dollars for RMB. 143 Calculated from Bank of China data using the official middle rate. 144 A fixed (or pegged) exchange rate is a relatively common practice among developing countries, especially those that want to attract foreign investment and expand exports. A constant exchange rate, such as one tied to the U.S. dollar, attempts to signal foreign investors that the value of their investments will not be affected by the type of large swings in exchange rates that can occur under a floating exchange rate regime. Given the current size of China’s economy and trade flows, most economists question whether the continuation of China’s currency policy is appropriate. Congressional Research Service 40 China-U.S. Trade Issues exchange rate regime and to enhance the RMB exchange rate flexibility.” Since that time, according to Treasury Secretary Timothy Geithner, the RMB has risen by 13% in real terms against the dollar and by 40% (in real terms) overall since 2005. U.S. officials have urged China to continue to appreciate its currency, but at a more rapid pace. Numerous bills have been introduced in Congress over the past few years that would seek to induce China to reform its currency policy or would attempt to address the perceived effects that policy has on the U.S. economy. For example, one bill in the 108th Congress would have imposed an additional duty of 27.5% on imported Chinese products unless China appreciated its currency to near market levels. In the 111th Congress, the House passed an amended version of H.R. 2378 (Tim Ryan), which would have made certain misaligned currencies (such as the RMB) actionable under U.S. countervailing duty cases on foreign government export subsidies (although the Senate did not take up the bill). The bill was re-introduced in the 112th Congress in the House and Senate (see H.R. 639 and S. 328, discussed below). Currency Legislation in the 112th Congress • 145 S. 1619 (Sherrod Brown) which passed the Senate on October 11, 2011, by a vote of 63 to 35, would provide for the identification of fundamentally misaligned currencies and require action to correct the misalignment for certain “priority” countries. The bill would require the Treasury Department to issue a semiannual report to Congress on international monetary policy and currency exchange rates, determine which major global currencies are in fundamental misalignment, and designate certain misaligned currencies for priority action. Treasury would be required to seek negotiations with countries designated for priority action. If efforts were not made to correct the currency misalignment, the following actions would be taken in regard to that country: (1) The Commerce Department would be required to factor in the estimated level of currency undervaluation when determining antidumping duties; (2) the President would be required to prohibit the procurement by the federal government of products or services from the country unless it is a party to the WTO’s GPA; (3) the Overseas Private Investment Corporation (OPIC) would not be able to approve any new financing (including insurance, reinsurance, or guarantee) with respect to a project located within the country;145 (4) the U.S. Executive Director at each multilateral bank would be told to oppose the approval of any new financing to the government of a country, or for a project located within a country, that issues a currency designated for priority action. If a country that has a currency designated for priority action failed to take steps to eliminate the fundamental misalignment within 360 days after its designation by the Treasury Department, the following would occur: (1) the USTR would be required to initiate a dispute resolution case against the priority country, and (2) the Treasury Department would be required to consult with the Federal Reserve System to consider undertaking remedial intervention in international currency markets. The bill would also amend U.S. countervailing duty law to require the Commerce Department to initiate an investigation to determine whether currency undervaluation is providing, directly This provision would not affect China because OPIC is already prohibited by U.S. law from operating in China. Congressional Research Service 41 China-U.S. Trade Issues or indirectly, a countervailing subsidy and makes clarifications to U.S. countervailing law similar to provisions in H.R. 639 and S. 328. • H.R. 639 (Sander Levin) and S. 328 (Sherrod Brown) would make a “fundamentally undervalued currency” an actionable subsidy under U.S. countervailing duty law (dealing with government export subsidies).146 The bills would seek to clarify that a fundamentally undervalued currency could be treated by the Department of Commerce as a benefit conferred by a foreign government to its exports.147 In addition, the bill seeks to clarify that, in the case of a subsidy relating to a fundamentally undervalued currency, the fact that the subsidy (i.e., the undervalued currency) may have also benefitted non-exporting firms (in addition to exporting firms), would not, for that reason alone, mean that the subsidy could not be considered to be a measure that is contingent upon export performance. The bill directs the Commerce Department to use, if possible, data and methodologies utilized by the IMF to estimate the real effective exchange rate undervaluation of the currency for the purposes of assessing countervailing duties.148 Factors used to determine a fundamentally undervalued currency would include (over an 18-month period): protracted and large-scale intervention in currency markets; a real effective exchange rate estimated to be undervalued by at least 5%; and foreign asset reserves held by the government that are (1) greater than the amount needed to repay its debt obligations over the next year, (2) 20% of the nation’s money supply, and (3) the value of the country’s imports over the previous four months. • S. 1130 and S. 1267 (both by Rockefeller) would, among other things, treat “exchange rate manipulation” as an actionable subsidy under U.S. countervailing duty cases. Exchange rate manipulation would be defined as protracted largescale intervention by a country to undervalue the country’s currency in the exchange market that prevents effective balance-of-payments adjustment or that gains an unfair competitive advantage over any other country. • S. 1238 (Olympia Snowe) would require that, before Congress approves any bill implementing a free trade agreement or extending permanent normal trade relations status to another country, the President would have to first certify that the government of the potential trading partner has not, in the 10 years preceding the certification, manipulated its currency for the purposes of gaining an unfair advantage in international trade. Some Members has expressed opposition to various currency bills, arguing that they violate U.S. obligations in the WTO. Other Members have argued that while inducing China to adopt a market-based exchange rate is an important goal, the United States should give higher priority to addressing China’s industrial policies and IPR infringement, which some view as more damaging to U.S. economic interests. 146 These bills are identical and are the same legislation passed by the House (H.R. 2378) in September 2010. The Senate did not take up the bill. 147 The benefit would be defined as the difference between the amount of foreign currency received by the exporter from the transaction and the amount that would have been received if the currency was not undervalued. 148 For a summary of U.S. trade remedy laws, see CRS Report RL32371, Trade Remedies: A Primer, by Vivian C. Jones. Congressional Research Service 42 China-U.S. Trade Issues The U.S.-China Strategic and Economic Dialogue On September 29, 2006, President George W. Bush and Chinese President Hu Jintao agreed to establish a Strategic Economic Dialogue (SED) 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 was 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.149 The first meeting was held in December 2006. Four subsequent rounds of talks were held (the last was in December 2008). While attending the G-20 summit in London on the global financial crisis on April 1, 2009, President Obama and Chinese President Hu agreed to continue the high-level forum, renaming it the U.S.-China Strategic and Economic Dialogue (S&ED). The new dialogue is based on two tracks. The first (the “Strategic Track”) is headed by the Secretary of State on the U.S. side and focuses on political and strategic issues, while the second track (the “Economic Track”) is headed by the U.S. Treasury Secretary on the U.S. side and focuses on financial and economic issues. Areas of discussion include economic and trade issues, counterterrorism, law enforcement, science and technology, education, culture, health, energy, the environment (including climate change), non-proliferation, and human rights. One of the reported benefits of the S&ED process is that it brings together top economic officials from both sides, as well as U.S. cabinet officials and Chinese heads of ministries, on a regular basis, which enables both sides to identify their major positions and priorities on various issues and to develop long-term working relationships. Some in Congress have criticized the S&ED forum, arguing that it produces few concrete results, and that many of the results described in subsequent fact sheets that are jointly issued simply re-state agreements or pledges China has already made. Others counter that U.S. engagement with China occurs on multiple levels throughout the year and that the S&ED meetings are in part a cumulative result of this process. The July 2009 Economic Track Session The first round of the S&ED was held in Washington, DC, on July 27-28, 2009, and involved 12 U.S. Cabinet officials and agency heads and 15 Chinese ministers, vice ministers, and agency heads. The session was focused heavily on issues relating to the global economic crisis. Secretary of the Treasury Timothy Geithner stated: “Recognizing that cooperation between China and the United States will remain vital not only to the well being of our two nations but also the health of the global economy, we agreed to undertake policies to bring about sustainable, balanced global growth once economic recovery is firmly in place.” The two sides agreed to establish a framework of cooperation based on four pillars: 149 • Advancing macroeconomic and structural policies to achieve sustainable and balanced growth; • Promoting more resilient, open, and market-oriented financial systems; • Strengthening trade and investment ties; and U.S. Treasury Department press release, December 15, 2006. Congressional Research Service 43 China-U.S. Trade Issues • Strengthening the international financial architecture. These pillars appear to have been aimed at deepening bilateral cooperation in response to the global economic crisis, continuing commitments on both sides to promote policies that seek to achieve more balanced economic growth, encouraging China to continue economic and financial reforms, expanding China’s role and/or participation in international economic forums,150 and attempting to avoid new forms of trade protection. May 2010 Economic Track Session The May 24-25, 2010, S&ED economic session focused heavily on the continuing efforts relating to the four pillars indentified in the July 2009 session. Although few concrete accomplishments were announced at the end of the meetings, the two agreed to intensify talks on a number of bilateral economic and trade issues. The two sides pledged to • Sign a cooperation protocol on small and medium-sized firms (SMEs); • Boost economic cooperation at the central and local government level, such as promoting the establishment of state-to-province and city-to-city partnerships; • Conduct “intensive expert and high-level discussions” as early as the summer of 2010 on innovation issues (such as China’s indigenous innovation proposals) and to take into account the results of these talks in formulating and implementing their innovation measures;151 • Improve cooperation to address health and safety issues relating to U.S. sales of soybeans to China; • Establish a cooperative mechanism between the U.S. Export-Import Bank and the Export-Import Bank of China on trade finance, and to develop initiatives to promote exports by SMEs; • Explore the possibility of cooperating to enable the United States to treat China as a market economy, and to treat certain Chinese firms as market-oriented industries, for the purpose of U.S. trade remedy laws; and • Boost investment opportunities and transparency.152 150 The United States is seeking to broaden China’s participation in international economic institutions in order to promote the goal of helping to make China a “responsible stakeholder” in the global economy. This implies that, since China greatly benefits from the global trading system and is a major global economy, it should shoulder a greater responsibility in maintaining and promoting that system (rather than just enjoying the benefits of that system 151 The United States also pledged that it would review Chinese concerns relating to U.S. restrictions on high technology exports to China resulting from the current U.S. export control regime. 152 The United States pledged that it welcomed investment from China and confirmed that review of foreign investment by the Committee on Foreign Investment in the United States ensures the consistent and fair treatment of all foreign investment without prejudice to the place of origin. China promised to revise its Catalogue Guiding Foreign Investment in Industries and encourage and expand areas open to foreign investment, including those relating to high-technology, energy, and the environment. China also pledged to streamline the process for investment approval. Congressional Research Service 44 China-U.S. Trade Issues The May 2011 Economic Track The third round of the S&ED was held in Washington, DC, on May 9-10, 2011. Prior to the meeting, U.S. officials identified several goals for the economic track of the S&ED, including ensuring that China followed through on previous economic and trade commitments (such as on IPR protection and indigenous innovation policies) and encouraging China to make a number of reforms to its financial sector (such as adopting market-based interest rates on bank deposits and expanding market access in China for U.S. financial firms). China pledged to continue to promote domestic consumption, improve IPR enforcement, eliminate all of its indigenous innovation products catalogues, improve transparency of its economic and trade policies, and provide significant new opportunities for U.S. financial services firms in China. The May 2012 Economic Track The fourth S&ED round was held in Beijing on May 3 and 4, 2012, and focused largely on economic rebalancing and boosting foreign access to China’s financial services sector.153 China pledged that it would: • Increase the number of SOEs that pay dividends; • Participate in negotiations (beginning in the summer of 2012) for new rules on official export financing with the United States and other major exporters; • Provide non-discriminatory treatment to all enterprises, regardless of type of ownership, in terms of credit, taxation, and regulatory policies so that U.S. firms can more easily compete against Chinese SOEs; • Submit a new robust offer in 2012 to join the WTO’s GPA and to intensify efforts to negotiate a BIT with the United States; • Open up more sectors to FDI and improve the transparency of its investment approval process; • Prioritize the protection of trade secrets, extend efforts to promote the use of legal software by Chinese enterprises, treat IPR owned or developed in other countries the same as IPR owned or developed in China, and hold discussions with U.S. officials on the implementation of China’s commitment not to make technology transfer a pre-condition for doing business in China; • Take steps to raise household income and lower prices of consumer goods, such as cutting import tariffs, reducing taxes on services, and raising deposit rates; • Expand market access to domestic financial markets by boosting the permitted level of foreign investment in its stock and bond markets, raising the permitted foreign equity stake in domestic securities joint ventures from 33% to 49%, and allowing foreign investors to establish joint venture brokerages to trade commodity and financial futures (with up to a 49% equity stake). 153 The session was somewhat overshadowed by events relating to Chinese human rights advocate Chen Guangcheng who had been temporarily sheltered at the U.S. embassy in Beijing prior to the session. Congressional Research Service 45 China-U.S. Trade Issues Concluding Observations China’s rapid economic growth and emergence as a major economic power have given China’s leadership increased confidence in its economic model. The key challenges for the United States are to convince China that (1) it has a stake in maintaining the international trading system, which is largely responsible for its economic rise, and to take a more active leadership role in maintaining that system; and (2) further economic and trade reforms are the surest way for China to expand and modernize its economy. For example, by boosting domestic spending and allowing its currency to appreciate, China would likely import more, which would help speed economic recovery in other countries, promote more stable and balanced economic growth in China, and lessen trade protectionist pressures around the world. Improving IPR protection in China and providing non-discriminatory treatment to foreign IP firms would likely foster greater innovation in China and attract more FDI in high technology than under what has occurred under current policies. Lowering trade barriers on imports would increase competition in China, lower costs for consumers, and boost economic efficiency. Some observers contend that reformist-minded officials in China will continue to push for greater free-market reforms, while others argue that vested interests in China (such as SOEs and export-oriented firms) who benefit from the statusquo will make further economic reforms more difficult to realize. Opinions differ as to the most effective way of dealing with China on major economic issues: • Some support a policy of high-level engagement with China using various forums, such as the U.S.-China S&ED, in order to try to resolve complex and long-term issues and prevent either side from imposing new protectionist measures. • Others support a somewhat mixed policy of using engagement with China when possible, coupled with greater use of WTO dispute settlement procedures to address China’s unfair trade policies. Some Members contend that the S&ED forum has failed to produce many tangible results and have advocated using the S&ED to induce China to agree to measurable targets or goals for reducing trade and investment barriers and improving IPR measures that can be used in future meetings to determine China’s progress. • Still others, who see China’s economic policies as damaging to U.S. economic interests, advocate a more aggressive U.S. trade policy towards China that uses all available tools available to U.S. policies, including multilateral institutions (such as the WTO and International Monetary Fund), as well as U.S. trade remedy laws (such as antidumping and countervailing measures) to counter the negative effects of China‘s “unfair trade practices.”154 Some Members have 154 On March 13, 2012, President Obama signed into law H.R. 4105 (P.L. 112-99), which clarifies that U.S. countervailing duty law can be applied to subsidized goods from nonmarket economy countries (such as China), and that the Department of Commerce can adjust antidumping duties applied to goods from nonmarket economy countries when countervailing duties are applied to the same goods. The measure was enacted in response to a December 2011 Court of Appeals decision that held that U.S. law prohibits the Department of Commerce from applying countervailing duties to non-market economies and to comply with a WTO ruling over applying both countervailing and antidumping measures on imports. See CRS Report RL33976, U.S. Trade Remedy Laws and Nonmarket Economies: A Legal Overview, by Jeanne J. Grimmett. Congressional Research Service 46 China-U.S. Trade Issues argued that the United States should insist on trade and investment reciprocity with China to ensure a more “balanced” economic relationship. Author Contact Information Wayne M. Morrison Specialist in Asian Trade and Finance wmorrison@crs.loc.gov, 7-7767 Congressional Research Service 47