Order Code IB91121
Issue Brief for Congress
Received through the CRS Web
China-U.S. Trade Issues
Updated January 3, 2003
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
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
Violations of U.S. Intellectual Property Rights
Prison Labor Exports
Outlook for U.S.-China Trade Relations

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China-U.S. Trade Issues
SUMMARY
U.S.-China economic ties have expanded
China’s entry into the WTO requires it to
substantially over the past several years; total
significantly reform its trade regime by elimi-
U.S.-China trade rose from $5 billion in 1980
nating or reducing an extensive array of tariff
to an estimated $142.1 billion in 2002; China
and non-tariff barriers on goods, services, and
is now the fourth-largest U.S. trading partner.
foreign investment. The removal of these
Yet, U.S.-China commercial relations have
barriers could result in significant new oppor-
been strained by a number of issues, including
tunities for U.S. exporters.
a surging U.S. trade deficit with China (which
likely exceeded $98 billion in 2002), China’s
In order to ensure that the WTO agree-
restrictive trade and investment practices, and
ments would fully apply between the United
its failure to provide adequate protection for
States and China (once China joined the
U.S. intellectual property rights (IPR).
WTO), the 106th Congress passed legislation

(H.R. 4444, P.L. 106-286) authorizing the
During the 1990s, the United States
President to grant China permanent normal
actively pressed China to liberalize its trade
trade relations (PNTR) status after it joined
regime and improve protection of U.S. IPR.
the WTO (the President extended PNTR
Under the threat of U.S. trade sanctions, China
status to China on December 27, 2001). The
signed bilateral trade agreements with the
Act also requires the U.S. Trade Representa-
United States on market access (1992) and
tive (USTR) to annually issue a report assess-
IPR protection (1992 and 1995). These agree-
ing China’s compliance with its WTO trade
ments produced mixed results: market access
obligations. Finally, the Act and established a
and IPR protection have significantly im-
special Congressional-Executive Commission
proved in China, but U.S. firms continue to
to examine China’s human rights policies.
face numerous trade barriers, and IPR piracy
remains a serious problem in China.
Many Members of Congress have called
on the Bush Administration to closely moni-
In recent years, the United States has
tor China’s compliance with its WTO com-
sought to use China’s application to join the
mitments. In December 2002, the USTR
World Trade Organization (WTO) as a means
issued its first annual China WTO compliance
to gain greater market access in China. The
report, finding that, although China had made
United States insisted that China could join
significant progress in meeting its WTO
the WTO only if it substantially cut trade and
obligations, a number of major problems
investment barriers. After many years of
remained, especially in regards to agriculture,
tough negotiations, a consensus in the WTO
services, IPR protection, and transparency of
on the terms of China’s membership was
trade laws and regulations.
reached in September 2001. China’s acces-
sion was formally approved by the WTO on
November 10, 2001, and on December 11,
2001, it formally became a WTO member.
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MOST RECENT DEVELOPMENTS
On December 11, 2002, the USTR released its first annual China WTO compliance
report, finding that, although China had made significant overall progress in meeting its
WTO obligations, a number of problems remained, especially in regards to China’s
commitments on agriculture, services, IPR protection, and transparency of trade laws and
regulations.
On October 18, 2002, U.S. government officials announced that China had issued a
regulation extending an interim rule (for an additional nine months) governing the treatment
of imported genetically modified products, such as soybeans. U.S. officials stated that the
new regulation “should remove the threat of an interruption of U.S. soybean sales to
China.”
On October 2, 2002, the Congressional Executive Commission on China issued its first
annual report on human rights and the rule of law in China; 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. Both studies recommended increased
technical U.S. assistance to China to help it implement its WTO obligations and to promote
the rule of law in China.
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 $142.1 billion in 2002 (note, all 2002 data are estimates based
on actual data for January-October 2002), making China the 4th largest U.S. trading partner.
The U.S. trade deficit with China has grown significantly in recent years, due largely to a
surge in U.S. imports of Chinese goods relative to U.S. exports to China. That deficit rose
from $10.4 billion in 1990 to $98.1 billion in 2002 (see Table 1). The U.S. trade deficit with
China is now larger than that of any other U.S. trading partner, including Japan.
Table 1. U.S. Merchandise Trade with China: 1988-2002*
($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
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Year
U.S. Exports
U.S. Imports
U.S. Trade Balance
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
2002 (projection)
22.0
120.1
-98.1
*Projection, based on actual data for January-October 2002.
Source: U.S. Department of Commerce.
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 9th largest market for U.S. exports. (It is
estimated that U.S. exports to China in 2002 totaled $22.0 billion, making China the 7th
largest U.S. export market). The top five U.S. exports to China in 2001 were transport
equipment (mainly aircraft and parts), electrical machinery, office machines (e.g.,
computers), telecommunications equipment, and general industrial machinery and
equipment. Together, these five commodities accounted for about 44% of total U.S. exports
to China in 2001. U.S. exports to China in 2001 were 18.3% higher than 2000 levels. Much
of that increase was accounted for by a surge in U.S. exports of transport equipment.
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Table 2. Top 5 U.S. Exports to China: 1998-2001
($ 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.
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 $102.3 billion, accounting for 10.0% of total
U.S. imports, and making China the 4th largest supplier of U.S. imports. (It is estimated that
U.S. imports from China in 2002 totaled 120.1 billion, making China the 3rd largest supplier
of U.S. imports). The top five U.S. imports from China in 2001 were miscellaneous
manufactured articles (such as toys, games, etc.); office machines; telecommunications
equipment, sound recording, and reproducing equipment (such as telephone answering
machines, radios, tape recorders and players, televisions, VCRs, etc.); footwear; and
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electrical machinery (see Table 3). Together, imports of these five commodities accounted
for nearly 58.2% of total U.S. imports from China in 2001.
Table 3. Top 5 U.S. Imports from China: 1998-2001
($ 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 gross
domestic product (GDP) grew at an average annual rate of 9.4%, making it one of the
world’s fastest growing economies; real GDP grew by about 8.0% in 2002. 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
$47 billion 2001 (and may have reached nearly $54 billion in 2002). 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.
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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 at the end of 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,
and China’s alleged use of prison labor for various exported products to the United States.
Current U.S. concerns over trade and IPR issues have focused on China’s implementation
of its obligations under its accession to the World Trade Organization (WTO).
China and the World Trade Organization
The rapid rise of China as an economic and trade power during the 1980s led U.S. trade
officials to take a greater interest in China’s trade regime. U.S. officials complained that,
while U.S. markets were generally open to Chinese products, Chinese markets were largely
closed to U.S. products, due to China’s extensive use of tariff and non-tariff barriers. In
1991, the United States threatened to impose $3.9 billion in trade sanctions against China
unless it removed specific trade barriers. In October 1992, the United States and China
settled the trade dispute after China agreed to reduce or eliminate a wide variety of trade
barriers, make its trade regime more transparent, and to eliminate scientific standards and
testing barriers to agricultural imports. The 1992 accord was somewhat successful in getting
China to liberalize its trade regime. Thereafter, U.S. officials sought to use China’s desire
to join the World Trade Organization (WTO) as a means to negotiate even greater access to
China’s markets.
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 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.
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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
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.
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! 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.
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.
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! 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:
! Soybeans. In June 2001, China announced it would implement new rules
on bio-engineered foods, effective in 2002. However, China did not
provide details of these rules which led to a disruption in U.S. soybean
exports to China from January-March 2002. 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 safety
certificates until China implements its new biotechnology regulations. On
October 18, 2002, China issued regulations applying this policy through
September 2003. U.S. officials indicated the regulation “should remove the
threat of an interruption of U.S. soybean sales to China.” Some analysts
charge that China may be attempting to use such regulations to limit soybean
imports in order to protect its domestic producers.
! Tariff-rate quotas and subsidies. In November 2001, the Chinese
government reportedly developed new rules on tariff- rate-quotas on certain
agricultural products that the U.S. charged were discriminatory and violated
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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 tariff-rate quotas (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.
! Tariffs. 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.
! Autos. Some U.S. businesses claim that China has failed to fully implement
its commitments on autos (especially in regards to quota allocations, trading
rights for foreign firms, local content requirements, and auto financing).
! Services. U.S. firms have complained that Chinese regulations on services
are confusing and often discriminatory.
! IPR. While China has enacted a variety of new IPR laws, enforcement of
those laws remains relatively weak (see section on IPR below).
The USTR released its first annual China WTO compliance report on December 11,
2002. The report stated that, although China had made significant overall progress in
meeting its WTO obligations, a number of problems remained, especially in regards to
China’s commitments on agriculture, services, IPR protection, and transparency of trade laws
and regulations. Some Members have urged the Administration to seek resolution of these
issues in the WTO.
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
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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
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;
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! 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
agreement, and on December 27, 2001, he issued a proclamation extending PNTR status to
China, effective January 1, 2002.
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
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
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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
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
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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. It is estimated that counterfeits account for 15 to 20% of all products made
in China and totals and accounts for about 8% of China’s GDP. Chinese enforcement
agencies and judicial system often lack the resources (or the will) needed to vigorously
enforce IPR laws; convicted IPR offenders generally face minor penalties. In addition, while
market access for IPR-related products has improved, high tariffs, quotas, and other barriers
continue to hamper U.S. exports; such trade barriers are believed to be partly responsible for
illegal IPR-related smuggling and counterfeiting in China. 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 above), 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.
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
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contends that these facilities are reeducation-through-labor camps, not prisons, and has
denied access to them under the prison labor MOU. 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.
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. If U.S. exports fail to increase significantly,
and the USTR 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. The Commission will issue annual reports to
Congress, including findings and recommendations. The first report was issued on October
2, 2002 (see [http://www.cecc.gov]). The House International Relations Committee is
required to hold hearings on the content of the Commission’s 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. (For further information on this issue, see CRS Issue Brief IB98019, China-
U.S. Relations.)
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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
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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