Order Code IB91121
Issue Brief for Congress
Received through the CRS Web
China-U.S. Trade Issues
Updated July 22, 2002
Wayne M. Morrison
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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CONTENTS
SUMMARY
MOST RECENT DEVELOPMENTS
BACKGROUND AND ANALYSIS
U.S. Trade with China
Major U.S. Exports to China
Major U.S. Imports from China
China’s Economy
Major U.S.-China Trade Issues
Violations of U.S. Intellectual Property Rights
Major Chinese Trade Barriers
Prison Labor Exports
China and the World Trade Organization
Background on U.S.-China WTO Negotiations
The U.S.-China WTO Agreement
China Joins the WTO
Implementation Issues
China’s NTR Status and WTO Accession
Outlook for U.S.-China Trade Relations

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China-U.S. Trade Issues
SUMMARY
U.S.-China economic ties have expanded
November 10, 2001, and on December 11,
substantially over the past several years; total
2001, it formally became a WTO member.
U.S.-China trade rose from $5 billion in 1980
to $122 billion in 2001; China is now the
China’s entry into the WTO requires it to
fourth-largest U.S. trading partner. Yet, U.S.-
significantly reform its trade regime by elimi-
China commercial relations have been strain-
nating or reducing an extensive array of tariff
ed by a number of issues, including a surging
and non-tariff barriers on goods, services, and
U.S. trade deficit with China (which totaled
foreign investment. The removal of these
$83 billion in 2001), China’s restrictive trade
barriers could result in significant new oppor-
and investment practices, and its failure to
tunities for U.S. exporters.
provide adequate protection for U.S. intellec-
tual property rights (IPR).
In order to ensure that the WTO agree-

ments would fully apply between the United
During the 1990s, the United States
States and China (once China joined the
actively pressed China to liberalize its trade
WTO), the 106th Congress passed legislation
regime and improve protection of U.S. IPR.
(H.R. 4444, P.L. 106-286) authorizing the
Under the threat of U.S. trade sanctions, China
President to grant China permanent normal
signed bilateral trade agreements with the
trade relations (PNTR) status after it joined
United States on market access (1992) and
the WTO (the President extended PNTR
IPR protection (1992 and 1995). These agree-
status to China on December 27, 2001). The
ments produced mixed results: market access
Act also requires the U.S. Trade Representa-
and IPR protection have significantly im-
tive (USTR) to annually issue a report assess-
proved in China, but U.S. firms continue to
ing China’s compliance with its WTO trade
face numerous trade barriers, and IPR piracy
obligations. Finally, the Act and established a
remains a serious problem in China.
special Congressional-Executive Commission
to examine China’s human rights policies.
In recent years, the United States has
sought to use China’s application to join the
The 107th Congress will likely press the
World Trade Organization (WTO) as a means
Bush Administration to closely monitor Chi-
to gain greater market access in China. The
na’s compliance with its WTO commitments.
United States insisted that China could join
A number of issues regarding China’s compli-
the WTO only if it substantially cut trade and
ance have already arisen. The required annual
investment barriers. After many years of
report by the USTR on China’s WTO imple-
tough negotiations, a consensus in the WTO
mentation (due in December) will likely
on the terms of China’s membership was
become the focal point of potential congres-
reached in September 2001. China’s acces-
sional concerns over China’s compliance.
sion was formally approved by the WTO on
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MOST RECENT DEVELOPMENTS
On July 15, 2002, the U.S.-China Security Review Commission released its first annual
report analyzing the security implications of U.S.-China economic relations.
On May 27, 2002, China formally requested the WTO to establish a dispute resolution
panel to examine U.S. safeguard measures on certain steel imports.
BACKGROUND AND ANALYSIS
U.S. Trade with China
U.S.-China trade rose rapidly after the two nations established diplomatic relations
(January 1979), signed a bilateral trade agreement (July 1979), and provided mutual MFN
treatment beginning in 1980. Total trade (exports plus imports) between the two nations rose
from $4.8 billion in 1980 to $121.5 billion in 2001 — making China the 4th largest U.S.
trading partner (see Table 1). The U.S. trade deficit with China has grown significantly in
recent years, due largely to a surge in U.S. imports of Chinese goods relative to U.S. exports
to China. That deficit rose from $3.5 billion in 1988 to $83.8 billion in 2000, but dropped
slightly to $83.0 billion in 2001. The U.S. trade deficit with China is now larger than that
of any other U.S. trading partner, including Japan.
Table 1. U.S. Merchandise Trade with China: 1988-2001
($ in billions)
Year
U.S. Exports
U.S. Imports
U.S. Trade Balance
1988 5.0
8.5
-3.5
1989 5.8
12.0
-6.2
1990 4.8
15.2
-10.4
1991 6.3
19.0
-12.7
1992 7.5
25.7
-18.2
1993 8.8
31.5
-22.8
1994 9.3
38.8
-29.5
1995 11.7
45.6
-33.8
1996
12.0 51.5
-39.5
1997 12.8

62.6
-49.7
1998
14.3 71.2
-56.9
1999 13.1
81.8
-68.7
2000 16.3
100.1
-83.8
2001 19.2
102.3
-83.0
Source: U.S. Department of Commerce.
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Major U.S. Exports to China
U.S. exports to China in 2001 totaled $19.2 billion, accounting for 2.8% of total U.S.
exports to the world, and making China the ninth largest market for U.S. exports (see Table
2). The top five U.S. exports to China in 2001 were transport equipment (mainly aircraft and
parts), electrical machinery, office machines (e.g., computers), telecommunications
equipment, and general industrial machinery and equipment. Together, these five
commodities accounted for about 44% of total U.S. exports to China in 2001. U.S. exports
to China in 2001 were 18.3% higher than 2000 levels. Much of that increase was accounted
for by a surge in U.S. exports of transport equipment.
Table 2. Top 5 U.S. Exports to China: 1998-2001
($ in millions)
SITC Commodity
2000/2001 %
Groupings
1998
1999
2000
2001
Change
Total All Commodities
14,258
13,118
16,253
19,235
18.3
Transport equipment (mainly
3,605
2,326
1,698
2,471
45.5
aircraft and parts)
Electrical machinery,
1,014
1,381
1,747
2,110
20.8
apparatus and appliances, and
parts
Office machines and
879
843
1,498
1,602
7.0
automatic data processing
machines
Telecommunications
655
573
817
1,205
47.4
Equipment
General industrial machinery
674
685
839
1,081
28.8
& equipment and parts
Total Top 5
4,400
6,460
5,589
21.7
Commodities sorted by top 5 exports in 2001.
Source: U.S. Department of Commerce.
Many trade analysts argue that China could prove to be a significant market for U.S.
exports in the future. China is one of the world’s fastest growing economies, and rapid
economic growth is likely to continue in the near future, provided that economic reforms are
continued. China’s goal of modernizing its infrastructure and upgrading its industries is
predicted to generate substantial demand for foreign goods and services. Chinese officials
predict that such needs will generate $1.5 trillion in increased imports from 1999-2005.
According to a U.S. Department of Commerce report: “China’s unmet infrastructural needs
are staggering. Foreign capital, expertise, and equipment will have to be brought in if China
is to build all the ports, roads, bridges, airports, power plants, telecommunications networks
and rail lines that it needs.” Finally, economic growth has substantially improved the
purchasing power of Chinese citizens, especially those living in urban areas along the east
coast of China. It is projected that by the year 2005, China will have more than 230 million
middle-income consumers (i.e., those earning $1,000 or more annually), whose combined
retail spending will exceed $900 billion.
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Major U.S. Imports from China
China is a relatively large source of many U.S. imports, especially labor-intensive
products. In 2001, imports from China totaled $102.3 billion, accounting for 10.0% of total
U.S. imports, and making China the 4th largest supplier of U.S. imports. U.S. imports from
China in 2001 rose by only 2.2% over 2000 levels, due largely to the slowdown in the U.S.
economy. The top five U.S. imports from China in 2001 were miscellaneous manufactured
articles (such as toys, games, etc.); office machines; telecommunications equipment, sound
recording, and reproducing equipment (such as telephone answering machines, radios, tape
recorders and players, televisions, VCRs, etc.); footwear; and electrical machinery (see Table
3). Together, imports of these five commodities accounted for nearly 58.2% of total U.S.
imports from China in 2001.
Table 3. Top 5 U.S. Imports from China: 1998-2001
($ in millions)
2000/2001
SITC Commodity
1998
1999
2000
2001
% Change
Total All Commodities
71,156
81,786
100,063
102,280
2.2
Miscellaneous manufactured arti-
15,543
17,273
19,441
19,764
1.7
cles (e.g., toys, games, etc.)
Office machines and automatic
6,360
8,259
11,000
10,764
-2.1
data processing machines
Telecommunication & sound
6,546
7,502
9,935
10,118
1.8
record & reproduce app. & equip.
Footwear
8,008
8,434
9,195
9,758
6.1
Electrical machinery, apparatus
5,776
7,062
9,119
9,111
-0.1
and appliances, and parts
Total Top 5
42,534
48,529
58,690
59,515
1.4
Commodities sorted by top 5 imports in 2001.
Source: U.S. Department of Commerce.
China’s Economy
China’s economic reforms and open investment policies (which were begun in 1978)
have contributed to a surge in economic growth. From 1979 to 2001, China’s real GDP grew
at an average annual rate of 9.4%, making it one of the world’s fastest growing economies;
real GDP grew by 7.2% in 2001. Many economists predict that, if China continues to
implement economic reforms, its annual real GDP growth will likely average at least 7%
over the next two decades. If such growth is achieved, China will be able to double the size
of its economy every 10 years (see CRS Issue Brief IB98014, China’s Economic Conditions).
China has quickly become a major recipient of foreign direct investment (FDI), a key
factor in its rapid economic growth. Much of that investment has gone into export-oriented
production facilities. Annual utilized FDI in China grew from $636 million in 1983 to about
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$47 billion 2001. There are now over 390,000 foreign-invested firms in China; the
cumulative level of FDI in China at the end of 2001 totaled $395.5 billion. A significant
share of FDI in China has come from overseas Chinese, especially Hong Kong and Taiwan.
The United States is the second largest investor in China. Major U.S. corporate investors in
China include Motorola, Atlantic Richfield, Coca Cola, Amoco, United Technologies, Pepsi
Cola, Lucent Technologies, General Electric, General Motors, and Ford Motor Company.
China has quickly become a major world trading power. Total Chinese trade (exports
plus imports) rose from $21 billion in 1978 to $509 billion in 2001. Chinese exports in 2001
were $266 billion, imports were $244 billion, producing a $22 billion trade surplus. Large
foreign investment and the surging exports have enabled China to accumulate a significant
level of foreign exchange reserves, which reached $243 billion in June 2002.
Major U.S.-China Trade Issues
While China’s economic reforms and rapid economic growth have expanded U.S.-
China commercial relations in recent years, disputes have arisen over a wide variety of
issues, including, China’s failure to provide adequate protection of U.S. intellectual property
rights (IPR), the widespread and pervasive use by China of trade and investment barriers,
China’s alleged use of prison labor for various exported products to the United States, and
China’s implementation of its obligations under its accession to the World Trade
Organization (WTO).
Violations of U.S. Intellectual Property Rights
Section 182 of the Trade Act of 1974 as amended (also known as “Special 301”),
requires the USTR to identify “priority foreign countries” that fail to provide adequate and
effective protection of U.S. intellectual property rights (IPR), such as patents, copyrights,
trademarks, and trade secrets, or deny fair and equitable market access to U.S. firms that rely
on IPR protection. The USTR is directed to seek negotiations with the priority foreign
countries to end such violations and, if necessary, to impose trade sanctions if such
negotiations fail to produce an agreement.
In April 1991, China (along with India and Thailand) was named as a “priority foreign
country” under Special 301. The USTR began a Section 301 investigation in May 1991,
claiming China’s laws failed to provide adequate protection of patents, copyrights, and trade
secrets. In November 1991, the USTR threatened to impose $1.5 billion in trade sanctions
if an IPR agreement was not reached by January 1992. Last-minute negotiations yielded an
agreement on January 16, 1992. China promised to strengthen its patent, copyright, and trade
secret laws, and to improve protection of U.S. intellectual property, especially computer
software, sound recordings, chemicals, and pharmaceuticals.
In June 1994, the USTR again designated China as a Special 301 “priority foreign
country,” because it had failed to enforce recently enacted IPR laws. In particular, the USTR
cited the establishment of several factories in China producing pirated compact and laser
disks, as an example of China’s “egregious” violation of U.S. IPR. In addition, the USTR
stated that trade barriers had restricted access to China’s market for U.S. movies, videos, and
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sound recordings, and that such restrictions encouraged piracy of such products in China.
On February 4, 1995, the USTR announced that insufficient progress had been made in talks
with Chinese officials and issued a list of Chinese products, with an estimated value of $1.1
billion, which would be subject to 100% import tariffs. However, a preliminary agreement
was reached on February 26, 1995, and a formal agreement was signed on March 11, 1995.
The new agreement pledged China to substantially beef up its IPR enforcement regime and
to remove various import and investment barriers to IPR-related products. Specifically,
China agreed to:
Take immediate steps to stem IPR piracy in China over the course of the next 3 months
by taking action against large-scale producers and distributors of pirated materials, and
prohibiting the export of pirated products.
Establish mechanisms to ensure long-term enforcement of IPR laws, such as banning the
use of pirated materials by the Chinese government, establishing a coordinated IPR
enforcement policy among each level of government, beefing up IPR enforcement agencies,
creating an effective customs enforcement system, establishing a title verification system in
China to ensure that U.S. audio visual works are protected against unauthorized use,
reforming China’s judicial system to ensure that U.S. firms can obtain access to effective
judicial relief, establishing a system of maintaining statistics concerning China’s enforcement
efforts and meeting with U.S. officials on a regular basis to discuss those efforts, improving
transparency in Chinese laws concerning IPR, and strictly enforcing IPR laws.
Provide greater market access to U.S. products by removing import quotas on U.S. audio
visual products, allowing U.S. record companies to market their entire works in China
(subject to Chinese censorship concerns), and allowing U.S. intellectual property-related
industries to enter into joint production arrangements with Chinese firms in certain cities.
Several U.S. firms charged that IPR piracy in China worsened in 1995, despite the 1995
IPR agreement, and pressed the USTR to take tougher action against China. The
International Intellectual Property Alliance (IIPA), an association of major U.S.
copyright-based industries, estimated that IPR piracy by Chinese firms cost U.S. firms $2.3
billion in lost trade during 1995.
On April 30, 1996, the USTR again designated China as a Special 301 “priority foreign
country” for not fully complying with the February 1995 IPR agreement. According to the
USTR, while China had cracked down on piracy at the retail level (launching raids and
destroying millions of pirated CDs and hundreds of thousands of pirated books, sound
recordings, and computer software), it had failed to take effective action against an estimated
30 or so factories in China that were mass-producing and exporting pirated products. U.S.
officials called on the Chinese government to close such factories, prosecute violators, and
destroy equipment used in the production of pirated products. Further, the USTR stated that
China failed to establish an effective border enforcement mechanism within its customs
service to prevent the export of pirated products. Finally, The USTR indicated that China
failed to provide sufficient market access to U.S. firms, due to high tariffs, quotas, and
regulatory restrictions. Shortly after, the USTR indicated it would impose U.S. sanctions on
$2 billion worth of Chinese products by June 17, 1996, unless China took more effective
action to fully implement the IPR agreement. On June 17, 1996, USTR Charlene Barshefsky
announced that the United States was satisfied that China was taking steps to fulfill the 1995
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IPR agreement. Barshefsky cited the Chinese government’s recent closing of 15 plants
producing illegal CDs and China’s pledge to extend a period of focused enforcement of
anti-piracy regulations against regions of particularly rampant piracy, such as Guangdong
Province. The Chinese government also promised to improve border enforcement to halt
exports of pirated products as well as illegal imports of presses used to manufacture CDs.
Further, the Chinese government reaffirmed its pledge to open up its market to imports of
IPR-related products. Finally, Chinese officials promised to improve monitoring and
verification efforts to ensure that products made by Chinese CD plants and publishing houses
are properly licensed.
The USTR has stated that China has made great strides in improving its IPR protection
regime, noting that it has passed several new IPR-related laws, closed or fined several
assembly operations for illegal production lines, seized millions of illegal audio-visual
products, curtailed exports of pirated products, expanded training of judges and law
enforcement officials on IPR protection, and has expanded legitimate licensing of film and
music production in China.
U.S. business groups continue to experience significant IPR problems in China,
especially in terms of illegal reproduction of software, retail piracy, and trademark
counterfeiting. Chinese enforcement agencies and judicial system often lack the resources
(or the will) needed to vigorously enforce IPR laws; convicted IPR offenders generally face
minor penalties. In addition, while market access for IPR-related products has improved,
high tariffs, quotas, and other barriers continue to hamper U.S. exports; such trade barriers
are believed to be partly responsible for illegal IPR-related smuggling and counterfeiting in
China. The IIPA estimated that IPR piracy in China cost U.S. firms $1.5 billion in lost sales
in 2001. The piracy rate for IPR-related products in China (such as motion pictures, software,
and sound recordings) is estimated at around 90%. Under the terms of China’s WTO
accession (see below), China agreed to immediately bring its IPR laws in compliance with
the WTO agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
However, the USTR stated in April 2002, that China is still in the process of implementing
new IPR regulations.
Major Chinese Trade Barriers
For many U.S. firms, China remains a difficult market to penetrate, due largely to
Chinese government policies, which attempt to protect and promote domestic industries.
Chinese trade policies generally attempt to encourage imports of products which are deemed
beneficial to China’s economic development and growth (and which are generally are not
produced in China), such as high technology, as well as machinery and raw materials used
in the manufacture of products for export. In many cases, preferential trade policies are used
to encourage these priority imports. Goods and services not considered to be high priority,
or which compete directly with domestic Chinese firms, often face an extensive array of tariff
and non-tariff barriers. Such policies make it difficult to export products directly to China.
As a result, many U.S. firms have established production facilities in China to gain access
to the China market. However, foreign-invested firms in China face a wide variety of
barriers as well. U.S. government officials maintain that China’s restrictive trade and
investment policies are a leading cause of the surging U.S.-China trade imbalance. Major
Chinese barriers of concern include:
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! High tariffs. The simple average Chinese tariff rate is currently 12% (down
from an average rate of 42% in 1992), but tariffs on selected items, such as
autos and various agricultural products, can rise to 100% or more.
! Pervasive non-tariff barriers are arbitrarily used to control the level of
certain imports into China, including quotas, import licenses, registration
and certification requirements, and restrictive technical and sanitary
standards (especially in respect to agricultural products).
! Non-transparent trade rules and regulations. China’s trade laws and
regulations are often secretly formulated, unpublished, unevenly enforced,
and may vary across provinces, making it difficult for exporters to determine
what rules and regulations apply to their products. In addition, foreign firms
find it difficult to gain access to government trade rule-making agencies to
appeal new trade rules and regulations.
! Trading rights. China restricts the number and types of entities in China
that are allowed to import products into China, which limits the ability of
both Chinese and foreign firms in China to obtain imported products.
Foreign companies are not permitted to directly engage in trad in China. In
addition, trading rights for many agricultural products are given exclusively
to Chinese state trading companies, which are directed to import only if
there is a domestic shortfall of certain products.
! Distribution rights. Most foreign companies are prohibited from selling
their products directly to Chinese consumers.
! Investment restrictions. Chinese officials pressure foreign investors to agree
to contract provisions which stipulate technology transfers, exporting a
certain share of production, and commitments on local content. Other
problems faced by foreign firms in China include the denial of national
treatment (i.e., foreign firms are treated less favorably than domestic firms),
foreign exchange controls, distribution and marketing restrictions, and the
lack of rule of law.
In October 1991, the Bush Administration initiated a Section 301 case against four
significant unfair trading practices affecting U.S. exports to China: tariff and non-tariff
barriers to certain products, restrictive import license requirements, technical barriers to trade
(such as discriminatory standards for agricultural products), and non-transparency in Chinese
trade laws. The Section 301 case was the most sweeping market access investigation in the
USTR’s history; it was essentially aimed at reforming China’s entire trade regime.
On August 21, 1992, the USTR determined that negotiations had failed to resolve the
trade dispute and threatened to impose $3.9 billion in U.S. trade sanctions unless an
agreement was reached by October 10, 1992. The proposed sanctions were (at that time) the
highest level ever issued by the USTR under a Section 301 case. On October 10, 1992, the
United States and China reached an agreement settling the Section 301 case. China pledged
to reduce or eliminate a wide variety of trade barriers over the next five years (according to
specific timetables), including tariffs, quotas, import controls, import licenses, and import
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substitution laws. In addition, China agreed to make its trade regime more transparent by
publishing trade laws and regulations. Finally, China agreed to eliminate scientific standards
and testing barriers to agricultural imports.
The market access agreement was supposed to have been fully implemented by the end
of 1997. USTR officials noted that China made significant reforms to its trade regime as
specified under the trade agreement. However, in some cases, China eliminated certain trade
barriers, only to impose new barriers (such as certification requirements for certain products).
In addition, China failed to fully eliminate discriminatory sanitary regulations on several
imported food products. Finally, while China began to more regularly publish its trade laws
and regulations, lack of transparency remained a problem for many foreign firms. For
example, China has not published many of its quota levels.
Prison Labor Exports
Some analysts charge that the use of forced labor is widespread and a long-standing
practice in China, and that such labor is used to produce exports, a large portion of which
may be targeted to the United States. The importation from any country of commodities
produced through the use of forced labor is prohibited by U.S. law, although obtaining proof
of actual violations for specific imported products is often extremely difficult.
On August 7, 1992, the United States and China signed a Memorandum of
Understanding (MOU) to ensure that prison labor products were not exported to the United
States. However, U.S. disputes with China over its implementation of the MOU led to the
signing of a “statement of cooperation” (SOC) on March 14, 1994, which included
provisions which clarify procedures for U.S. officials to gain access to Chinese production
facilities suspected of exporting prison labor products. President Clinton’s May 1994 report
to Congress on renewing China’s MFN status stated that China had generally abided by the
agreements on prison labor. However, the U.S. Department of State’s China Country Report
on Human Rights Practices for 1998 states that: “Although the signing of the SOC initially
helped foster a more productive relationship between the U.S. Customs and Chinese
authorities, cooperation overall has been inadequate.” According to the 2001 State
Department Human Rights report, between 1997 and 2001, the Chinese government allowed
U.S. officials to conduct only one visit to a prison labor facility, and that eight other prison
visit requests (some dating back to 1992), were still pending. The Chinese government
contends that these facilities are reeducation-through-labor camps, not prisons and has denied
access to them under the prison labor. On February 28, 2001, the U.S. Customs Service
announced that it had seized and destroyed 24 million binder clips (valued at $2 million) that
were documented as having been made in China using prison labor. In May 2002, the U.S.-
China Security Review Commission recommended that Congress enact legislation requiring
firms to certify that goods imported into the U.S. do not utilize prison labor.
China and the World Trade Organization
Negotiations for China’s accession to the General Agreement on Tariffs and Trade
(GATT) and its successor organization, the World Trade Organization (WTO), 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
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regime. In the end, a compromise agreement was reached that requires China to make
immediate and extensive reductions in various trade and investment barriers, but allowing
it to maintain some level of protection (or a transitionary period of protection) for certain
sensitive sectors.
Background on U.S.-China WTO Negotiations. China and the United States
reportedly made significant progress towards resolving major differences in their bilateral
WTO negotiations during Chinese Premier Zhu Rongji’s meeting with President Clinton on
April 8, 1999. According to U.S. officials, China offered to cut tariffs significantly and
remove non-tariff barriers on U.S. trade in agriculture, industrial goods, and services, and to
eliminate various restrictions on foreign investment, trading rights, and distribution for U.S.
firms in China. Separately, China agreed to eliminate unjustified sanitary and phytosanitary
(SPS) bans on wheat, citrus, and beef immediately.
Although the Clinton Administration stated that China’s market access offer would
bring China into the WTO at above existing WTO standards on issues and sectors of major
concern to the U.S., it concluded that an agreement could not be finalized until certain
outstanding issues could be resolved, namely market access in China for banking, securities,
and audio visual services, and safeguard provisions on potential import surges. However,
the United States and China did reach an agreement (the Bilateral Agricultural Cooperation
Agreement) under which China agreed to remove technical barriers to trade (such SPS
restrictions) on U.S. meat, citrus, and wheat exports to China.
On April 13, 1999, the two sides agreed to intensify negotiations towards reaching a
final agreement. However, following the accidental NATO bombing of the Chinese embassy
in Belgrade on May 7, 1999, China suspended the WTO talks (as well as its implementation
of the bilateral agreements on wheat, citrus, and beef). These talks were officially resumed
on September 11, 1999, during a meeting between President Clinton and Chinese President
Jiang Zemin in New Zealand.
The U.S.-China WTO Agreement. On November 15, 1999, U.S. and Chinese
officials announced that a bilateral agreement relating to China’s WTO bid was reached. The
Clinton Administration released the full text of the agreement on March 14, 2000. Under the
agreement, China promised that after gaining WTO membership it would take the following
steps (some on accession and others over specified phase-in periods):
! Provide full trading and distribution rights (including the ability to provide
services auxiliary to distribution) for U.S. firms in China.
! Cut average tariffs for U.S. priority agriculture products (beef, grapes, wine,
cheese, poultry, and pork) from 31.5% to 14.5% by 2004. Overall industrial
tariffs would fall from an average of 24.6% to 9.4% by 2005 (tariffs on U.S.
“priority products,” such as wood, paper, chemicals, and capital and medical
equipment, would fall even further). Tariffs on information technology
products, such as computers, semiconductors, and telecommunications
equipment, would be cut from an average level of 13.3% to zero by 2005.
! Establish a tariff-rate quota system for imports of agricultural bulk
commodities (such as wheat, corn, cotton, barley, and rice), i.e., imports up
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to a specified quota level would be assessed a low tariff (1-3%), while
imports above a certain level would be assessed a much higher tariff rate.
Private trade in agricultural products would be permitted for the first time.
! Phase out quotas and other quantitative restrictions (some upon accession,
many within two years, and most within five years). Quota levels for many
products would expand by 15% each year until the elimination of the quota.
! Eliminate unscientifically based SPS restrictions on agricultural products
and end export subsidies.
! Open service sectors (many of which are currently closed to foreign firms),
including distribution, value-added telecommunications, insurance, banking,
securities, and professional services (including legal, accountancy, taxation,
management consultancy, architecture, engineering, urban planning, medical
and dental, and computer-related services). China would expand (over
various transitional periods) the scope of allowed services and gradually
remove geographical restrictions on foreign service providers. The amount
of permitted foreign ownership in service industries would vary (and in
some cases expand over time) from sector to sector.
! Reduce restrictions on auto trade. Tariffs on autos would fall from 80-100%
to 25% (tariffs on auto parts reduced to an average rate of 10%) by 2006.
Auto quotas would be eliminated by 2005. U.S. financial firms would be
allowed to provide financing for the purchase of cars in China.
! Provide fair treatment for foreign firms operating in China by removing
government rules requiring technology transfer, local content, and export
performance conditions.
! Provide that Chinese state-owned firms make purchases and sales based on
commercial considerations and give U.S. firms the opportunity to compete
for sales on a non-discriminatory basis.
! Accept the use by the United States of certain safeguard, countervailing, and
antidumping provisions (over transitionary periods) to respond to possible
surges in U.S. imports from China of various products, such as textiles, that
might cause or threaten to cause market disruption to a U.S. industry.
China Joins the WTO. On September 13, 2001, China concluded a WTO bilateral
trade agreement with Mexico, the last of the original 37 WTO members that had requested
such an accord. On September 17, 2001, the WTO Working Party handling China’s WTO
application announced that it had resolved all outstanding issues regarding China’s WTO
accession. On November 10, 2001, China’s WTO membership was formally approved at the
WTO Ministerial Conference in Doha, Qatar on November 10, 2001 (Taiwan’s WTO
membership was approved the next day). On November 11, 2001, China notified the WTO
that it had formally ratified the WTO agreements, which enabled China to enter the WTO
on December 11, 2001.
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Major aspects of China’s WTO accession agreement include the following:
! China will bind all tariffs. The average tariff for industrial goods will fall
to 8.9% (and range from 0 to 47%) and to 15% for agriculture (and range
from 0 to 65%). Most tariff cuts will be made by 2004; all cuts will occur
by 2010.
! China will limit subsidies for agricultural production to 8.5% of the value
of farm output and will not maintain export subsidies on agricultural
exports.
! Within three years of accession, China will grant full trade and distribution
rights to foreign enterprises (with some exceptions, such as for certain
agricultural products, minerals, and fuels).
! China will provide non-discriminatory treatment to all WTO members.
Foreign firms will be treated no less favorably than Chinese firms for trade
purposes. Duel pricing practices will be eliminated as well as differences
in the treatment of goods produced in China for the domestic market as
oppose to those goods produced for export. Price controls will not be used
to provide protection to Chinese firms.
! China will fully implement the Trade-Related Aspects of Intellectual
Property Rights (TRIPs) Agreement upon accession.
! A 12-year safeguard mechanism will be available to other WTO members
in cases where a surge in Chinese exports cause or threaten to cause market
disruption to domestic producers.
! China’s banking system will be fully open to foreign financial institutions
withing five years. Joint ventures in insurance and telecommunication will
be permitted (with various degrees of foreign ownership allowed).
Implementation Issues. Many analysts have raised concern over the ability of the
Chinese government to fully implement its WTO commitments once it obtains membership.
Corruption and local protectionism are rampant in China, and gaining the cooperation of
local officials and government bureaucrats that oversee various affected industries could
prove difficult in the short run. In addition, economic reforms required under WTO
commitments could lead to significant employment disruptions, especially among farmers
and employees of inefficient state-owned enterprises. Some analysts warn that such
disruptions might erode the government’s determination to fully implement its WTO
commitments, especially if it fears social stability is threatened. A number of disputes have
already arisen. For example, in June 2001, China announced it would soon implement new
rules on bio-engineered foods. China did not provide details of these rules and reportedly
tightened inspection and quarantine procedures, which led to a disruption in U.S. soybean
exports to China. President Bush raised the issue with Chinese President Jiang Zemin in
October 2001 and in March 2002, which led China to agree to the interim use of U.S. and
foreign certificates until China implements its new biotechnology regulations. Some analysts
charge that China may be attempting to use such regulations to limit soybean imports in
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order to protect its domestic producers. Another dispute arose in November 2001, when the
Chinese government reportedly developed new rules on tariff rate quotas on certain
agricultural products that the U.S. charged were discriminatory and violated WTO rules
because they created two categories of import quota licenses. The U.S. further charged that
China has failed to provide adequate information on the administration of its TRQs for farm
commodities. The U.S. Department of Agriculture (USDA) reported in July 2002 that
China’s TRQ licenses have authorized relatively small levels of imports, making their use
impractical. The USDA report further stated that China continues to maintain discriminatory
taxes on grain imports and that it may be using export subsidies on grain exports, contrary
to its WTO commitments. Additionally, U.S. officials have charged that China has failed
to fully comply with its commitment to eliminate tariffs for all products covered under the
WTO’s Information Technology Agreement. Finally, some U.S. businesses claim that China
has failed to fully implement its commitments on autos (such as on quota allocations, trading
rights for foreign firms, local content requirements, and auto financing).
China’s NTR Status and WTO Accession
Prior to January 2002, U.S. law required China’s normal trade relations (NTR) status
(formally referred to in U.S. law as most-favored-nation, or MFN, status) to be renewed on
an annual basis, based on the freedom-of-emigration requirements under the so-called
Jackson-Vanik amendment, and was subject to possible congressional disapproval through
passage and enactment of a joint resolution. From 1980 (when NTR status was restored to
China after being suspended in 1951) to 1989, the renewal of China’s NTR status was
relatively noncontroversial and was relatively unopposed by Congress. However,
congressional concern over the Tiananmen Square incident in 1989 and subsequent
crackdown on human rights led many Members to support legislation terminating the
extension of China’s NTR status or to condition that status on additional requirements,
mainly dealing with human rights. Although none of these measures were enacted, many
Members sought to use the annual renewal of China’s NTR status as a focal point to express
concerns, as well as to pressure the executive branch, over a wide range of Chinese trade
(e.g., trade barriers and failure to protect IPR) and non-trade (e.g., human rights, prison labor,
Taiwan security, and weapons proliferation) issues. Several members opposed such linkage,
arguing that it had little effect on Chinese policies and that the often rancourous
congressional debate over China’s trade status undermined long-term U.S.-Chinese relations
and added uncertainty to the trade relationship.
During its negotiations with China over the terms of its WTO accession, the Clinton
Administration pledged that, in return for significant market opening commitments on the
part of China, it would press the Congress to enact PNTR legislation. Once a satisfactory
bilateral agreement was reached with China in November 1999, the Clinton Administration
began to push for PNTR legislation.
The Clinton Administration and its supporters argued that China would get into the
WTO with or without congressional approval of PNTR status for China, and that failure to
pass such legislation would prevent the United States and China from having an official trade
relationship in the WTO. As a result, it was contended, U.S. firms would be excluded from
the trade concessions made by China to gain entry into the WTO, while U.S. competitors in
the WTO would be able to take full advantage of new business opportunities in China, and
the United States would be unable to use the WTO dispute resolution process to resolve trade
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disputes with China. The Clinton Administration further maintained that China’s accession
to the WTO would promote U.S. economic and strategic interests, namely by inducing China
to deepen market reforms, promote the rule of law, reduce the government’s role in the
economy, and further integrate China into the world economy, making it a more reliable and
stable partner. Finally, the Administration contended that congressional rejection of PNTR
would be viewed by the Chinese as an attempt to isolate China economically; such a move
would seriously damage U.S.-China commercial relations and undermine the political
position of economic reformers in China.

Despite these arguments and strong lobbying by various U.S. business interests, passage
of China PNTR was highly uncertain when Congress began consideration of legislation in
May 2000. Many Members raised concerns over the effects China’s WTO membership
would have on U.S. import sensitive industries, while others expressed reservations over
giving up what they perceived as leverage over China’s human rights policies. The Clinton
Administration and congressional supporters of PNTR legislation sought to craft a
compromise that would gain support of undecided members without alienating members who
wanted a “clean” PNTR bill.
H.R. 4444, as originally introduced by Representative Bill Archer, would have granted
PNTR status to China upon its accession to the WTO as long as the President certified that
the terms of its accession were at least equivalent to the November 1999 U.S.-China trade
agreement. Several provisions were added by the House to H.R. 4444 in response to various
congressional concerns. In addition to the provisions contained in the original version of
H.R. 4444, the final bill (which passed in the House on May 24, 2000, in the Senate on
September 19, 2000, and signed into law on October 10, 2000):
! established a special Congressional-Executive commission to monitor, and
report on, various aspects of China’s policies on human rights, including
labor practices and religious freedom;
! requires the USTR to issue a report annually assessing China’s compliance
with its WTO trade obligations;
! codified the anti-surge mechanism established under the November 1999
U.S.-China trade agreement and establishes procedures for obtaining relief
from import surges;
! authorized additional funding for various U.S. government agencies to
monitor and seek enforcement of China’s compliance with its WTO trade
commitments;
! set up a special government task force to halt U.S. imports from China of
products suspected of using prison labor; and
! authorized funding for programs to promote the development of the rule of
law in China.
On November 10, 2001, President Bush certified that the terms of China’s WTO
accession agreement were at least equivalent to the November 1999 U.S.-China trade
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agreement, and on December 27, 2001, he issued a proclamation extending PNTR status to
China, effective January 1, 2002.
Outlook for U.S.-China Trade Relations
China’s entry into the WTO and the U.S. extension of PNTR to China are likely to have
important ramifications for U.S.-China economic relations. First, Congress will no longer
vote annually on China’s trade status, which could help bring greater stability and
predictability to the relationship than has been the case over the past several years. Second,
the United States (as well as China) will be able to use the WTO dispute resolution process
to resolve trade disputes. Many analysts believe China would more likely comply with a
ruling from a multilateral institution than from a threat of unilateral U.S. sanctions. Third,
subjecting China’s trade regime to multilateral rules and agreements will mean that the
United States would no longer have to “go it alone” in trying to get China to open its
markets; other WTO members would have an equally strong stake in ensuring China’s
compliance with its WTO commitments. Finally, China’s accession to the WTO will likely
improve the business climate in China, leading to greater trade and investment opportunities
for U.S. firms. A sizable increase in U.S. exports to China would help reduce tensions over
trade issues. On the other hand, China can use the WTO to deal with its trade disputes with
the United States. For example, on May 27, 2002, China formally requested the WTO to
establish a dispute resolution panel to examine U.S. safeguard measures implemented in
March 2002 that raised tariffs on certain steel imports.
Congress will likely continue to play an active role in U.S.-China commercial relations.
For example, it will likely press the Bush Administration to ensure China’s trade compliance
with its WTO commitments after its accession. The required annual report by the USTR on
China’s WTO implementation will likely become the focal point of potential Congressional
concerns over China’s compliance. If U.S. exports fail to increase significantly, and the
USTR’s report finds serious problems with China’s compliance, Congress may press the
Administration to file dispute resolution cases against China in the WTO.
Congressional Members concerned with China’s human rights conditions will likely
focus their attention on the Congressional-Executive Commission on China, which will
monitor China’s human rights policies and maintain a “victim’s list” of citizens suffering
from various abuses. The commission will issue annual reports to Congress, including
findings and recommendations. The House International Relations Committee will be
required to hold hearings on the content of the report. Members may seek to use this process
to focus attention on China’s human rights abuses, and possibly to develop legislative
responses to such abuses. The Chinese government would likely respond negatively to the
findings of the commission (and any subsequent action by Congress); it has tended to
condemn foreign pressure over its human rights policies as interference into its internal
affairs.
Congressional concerns over U.S. national security could also affect U.S.-China
commercial relations. In 2000, Congress established the U.S.-China Security Review
Commission to examine the national security aspects of growing U.S.-China economic
relations. In July 2002, the commission issued its first annual report to Congress. The
commission recommended that Congress renew the Super 301 provision of U.S. trade law
to deal with unfair Chinese trade practices, toughen U.S. enforcement of laws and regulations
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to stop prison labor imports, increase funding for U.S. government programs in China that
promote compliance with WTO rules and strengthen the rule of law, and deny access to U.S.
capital markets of foreign firms engaged in weapons proliferation.
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